I am not good at finance either. After the acquistion the parent company must write off all liabilites and assests of acquired company in its balance sheet. The acquired company might publish its own income statement, however the parent company must show its income statement  and balnce sheeet with the acquired comany.

I know only these things......

 

Good luck...

I think you are almost right. Company has to prepare consolidated as well as  seperate statemens. But they  can not write off liabilities only becasue of compay running in loss. If the company is in loss than show them loss. Probably external auditor will investigate why they acquired a firm that is in loss.

 

Simple- spin off the acquired company and write it off.

thats a very vague question. first of all u dont even know if the companies are public or private, u dont know how much liabilities the acquired company has...but basically the end process wud be to liquidate the company that ur not making off from....assuming no one else wud buy it...so u  liquidate it...and then u follow the bylaws of ur corporation and laws and if there are liabilities u pay it off.

I think the question has two parts. 1. Strategic 2. Financial Statements

The case clearly states that it would not make a dime from the acquisition but it does not state whether the venture is a loss making undertaking. Assuming there are better opportunities, the venture should be sold off and invest the proceeds in the those new opportunities. If there are no acquirers, then the company should liquidate it and unwind the operations. The reational behind getting rid of the operation is for the company to be able to focus on its core business and other opportunities.

Note that liquidation can be quite costly for the company. Such one time costs are charged off in the financial statements as restructuring costs. Large chunk of the restruring costs is the severance payments to the employees. If the compnay is sold off, then assets and equity/liabilities of the operaiton is taken off the book of the holding company. The gain or loss on the sale is recognized in the P/L accounts.

 

If this acquisition was a business combination (100% acquisition) then goodwill might have been recognized as a result of paying more than what the tangible assets (and intangibles such as patents and copyrights) were really worth. On a yearly basis, all companies conduct impairment tests, which means that the value of the parent company's assets (Goodwill recognized from the acquisition) will go down and an impairment loss will hit the Income Statement, thus reducing your earnings.

I am not sure if you were able to comprehend the simplicity of my statement.

In business strategy, acquisition comes to fruition because of synergy between the two firms. If the acquiring firm does not see a value/benefit after some time then one has to rethink whether marrying was a good idea-- and in most instances its about improving the bottom line, i.e. did earnings/sales/market share increase.

If it was decided that the marriage is over then there are a number of ways the acquirer could action to make oneself more leaner or better performer:

(i) if the business area of the acquiree is different then it could be spinned off as a separate company

(ii) or if there are overlaps in business areas it could handpick what should be kept and the others liquidated, and any loss from it could be wrote off

A struggling giant with underforming operations is hardly preferred over a lean company or market leader with outstanding performance. One of many examples is the marriage of AOL vs Time Warner in 2000-- the end result was that a divorce proved to be much more fruitful.

-JB