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Compact case
Published by: Allied Business Academies
Published in: "Journal of the International Academy for Case Studies", 2004

Abstract

Corporate structuring has provided management with many opportunities to shape earnings. This case involves the evaluation of a joint venture for funding motion picture production and provides a means for students to see the impact of such a creation on earnings, while staying within the bounds of existing accounting rules. It also provides the instructor with the opportunity to discuss the market and ethical considerations involved in earnings management for a publicly traded firm. Actual situations and accepted practices used in the entertainment industry were used in the case design. Alternative financing choices are demonstrated that impact on the corporate bottom line. Specifically, at issue is whether to set up a joint venture as a basis for improving short-term earnings. Instructors may use this case to provide students with a basic understanding of the use of special purpose entities as a precis for a discussion of the Enron situation. The primary subject matter of this case is an evaluation of the impact on earnings that can result from forming a separate subsidiary joint venture and the use of the equity accounting method. The main objective is to help students realize that there are various ways that management can adjust earnings to provide different outcomes with the same underlying business performance. Secondary objectives include helping students understand the nature and complexity of the structured finance decision and the various conflicting managerial motivations involved in such a decision. Students are also given an understanding of the market effects that may drive earnings management. The case provides a good example of the effects of the equity method of accounting and is suitable for use when presenting the equity method. This case is appropriate for an upper-division undergraduate financial accounting course, an accounting MBA or MAcc course or even a finance course. Level of difficulty would be four or five on a ten scale. The case is designed to be discussed in one and a half hours and should take students no more than two hours of outside preparation.

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Abstract

Corporate structuring has provided management with many opportunities to shape earnings. This case involves the evaluation of a joint venture for funding motion picture production and provides a means for students to see the impact of such a creation on earnings, while staying within the bounds of existing accounting rules. It also provides the instructor with the opportunity to discuss the market and ethical considerations involved in earnings management for a publicly traded firm. Actual situations and accepted practices used in the entertainment industry were used in the case design. Alternative financing choices are demonstrated that impact on the corporate bottom line. Specifically, at issue is whether to set up a joint venture as a basis for improving short-term earnings. Instructors may use this case to provide students with a basic understanding of the use of special purpose entities as a precis for a discussion of the Enron situation. The primary subject matter of this case is an evaluation of the impact on earnings that can result from forming a separate subsidiary joint venture and the use of the equity accounting method. The main objective is to help students realize that there are various ways that management can adjust earnings to provide different outcomes with the same underlying business performance. Secondary objectives include helping students understand the nature and complexity of the structured finance decision and the various conflicting managerial motivations involved in such a decision. Students are also given an understanding of the market effects that may drive earnings management. The case provides a good example of the effects of the equity method of accounting and is suitable for use when presenting the equity method. This case is appropriate for an upper-division undergraduate financial accounting course, an accounting MBA or MAcc course or even a finance course. Level of difficulty would be four or five on a ten scale. The case is designed to be discussed in one and a half hours and should take students no more than two hours of outside preparation.

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