Coke
Essay by 24 • January 2, 2011 • 576 Words (3 Pages) • 1,474 Views
After divesting 51% of Coca-Cola Enterprises, Coke did lose "economic control. However, they did not lose "effective control." At 49% ownership Coca-Cola retains effective control, but they are not required to consolidate CCE because Coca-Cola no longer has majority ownership, and has therefore lost economic control over CCE. Even though Coca-Cola and CCE are separate legal entities form an economic viewpoint, they are a single economic entity because Coca-Cola retain common control of CCE. In effect, the decision to divest CCE caused a significant difference in the legal form of the entity, while there was very little difference in substance. We found that the financial ratios were impacted dramatically after we consolidated the financial statements of the entity. The consolidated financial statements presented the results of the affiliated companies as if they were a single economic entity--emphasizing the substance rather than the legal form.
Given Coke's 49% ownership of CCE and the licenser/supplier relationship, clearly Coke is not a passive investor. As Coca-Cola Enterprises' single largest supplier of syrup, Coca-Cola exerts a tremendous amount of business influence over CCE. The operations of CCE are an integral part of Coke's operations. Purchases from Coke account for approximately 35% of Coca-Cola Enterprises' cost-of-goods-sold. If Coca-Cola were to terminate its relationship with CCE, CCE would be out of business. Conversely, if CCE were to go out of business, Coca-Cola would lose its largest bottler and distributor and suffer an immediate drop in revenues and earnings, not to mention a large component of its distribution channel. These close relationships suggest that consolidating the two entities would be a more appropriate method of accounting, reflecting the effective control by Coke.
Coke actual financial statements are less useful than the financial statements prepared assuming that Coke and CCE are consolidated. When CCE was created in 1986 as a spin-off from Coca- Cola, CCE displayed much lower profit margins and CCE had massive amounts of debt, which was no longer on the books of Coca-Cola. The difference between the methods is significant and equity method is inappropriate and misleading to the
...
...