(3 pages of text)
Case (Gen Exp)
Rawhide Brewery (Rawhide), a small Canadian brewery, is considering an opportunity to share its excess production capacity with another brewery, Tabby Cat Beer (Tabby). Three proposals are under consideration, each requiring a different accounting treatment by Rawhide. The first option is an arrangement under which Tabby would outsource its production to Rawhide. The second is a more complex arrangement under which both parties would invest in the common shares of a newly formed entity into which Rawhide would transfer its existing brewery operations and related debt. Because Rawhide would guarantee the debt of the new entity, it would make all key decisions. Under the third alternative, Rawhide would own 60 per cent of the common shares and Tabby would own the remaining 40 per cent, and all key decisions would be made jointly by both parties. The CFO of Rawhide has been asked to assess the accounting implications, advantages and disadvantages of the various options, taking into account the impact on Rawhide’s debt-to-equity ratio.
This case is ideal for use in a course on financial reporting for long-term inter-corporate investments. Rawhide Brewery is intended to demonstrate the accounting treatment of combined business operations when decision-making rights are held by an investor and risks and rewards are shared between two investors. The case demonstrates that decision-making rights and the sharing of risks and rewards can be established by means other than through ownership of common shares, such as through shareholder agreements. Students will learn to evaluate the impact of different accounting methods on the debt ratio. The case can also be used to illustrate the strategic consideration of the allocation of decision-making rights in combined operations.
Canada, Small, 2012
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