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ABSTRACT: In the 1990s, the financial press has frequently announced corporate spin-offs and split-offs. Financial accounting textbooks, though, contain little or no coverage of spin-offs, split-offs and other types of divestitures. This paper discusses the reasons for divestitures, identifies four types of divestitures, describes the characteristics and common conditions associated with each type, reviews the accounting standards and federal income tax rules and regulations pertaining to each type, illustrates the application of the accounting standards for each type and discusses the potential impact of these accounting standards and tax rules and regulations on a corporation's choice of one type of divestiture over another. As such, this paper may be used as a supplement in an upper-division financial accounting course.
INTRODUCTION
Over the past few years, Wall Street Journal (WSJ) articles have increasingly announced such events as "Campbell to Spin Off Seven Businesses and Focus on Its More-Profitable Lines," "PepsiCo Announces Spinoff of Eateries and Stock Soars," "Westinghouse to Spin Off Industrial Operations," "Westinghouse Amends Plans On Split-Up," "Cognizant, a DB Spinoff, to Split in Two," and "ITT Plans to Split into Three Companies."
Such headlines may have caused some to wonder, among other things: What are spin-offs, split-offs and split-ups? Are these just different names for the same event or are these different events? What are the relevant accounting standards for recording and then reporting the effects of such events in a company's financial statements? Are spin-offs, split-offs and split-ups taxable or taxfree events? What conditions or drivers are commonly associated with such events?
This paper answers these questions. As such, it is designed to be used as a supplement in an upper-- level financial accounting course. The current textbooks for those courses contain little or no coverage of spinoffs, split-offs, split-ups and other types of divestitures.1 The increasing frequency and notoriety of such divestitures, however, provides a strong justification for including this topic somewhere in the accounting curriculum.
As a step in that direction, the first section of this paper discusses the principal reason for divestitures and identifies different types of such events. The remaining sections then discuss the characteristics and conditions, accounting standards and federal income tax treatments for each type of divestiture. Each section also discusses how management's choice of that...