Flushing – Usually companies keep on buying shares of other companies with the excess money they have in their balance sheet to increase non-sales and non-core revenues. When the company makes an investment by way of shares in other companies and if the bought percentage is not less than 20% in the investee company, the loss in the share value of the investee company is not to be reported in the investing company’s statement since it is considered as a passive investment. Even when the market value of the company changes, the resultant is reported in ‘other comprehensive income components’ and not in the operatig income statement. When the securities that have lost value are sold and when the securities have gained value, they are expected to be sold. They can sell the securities when they want to report a loss in the operating statement and sell the securities that have lost value, and they can sell the inflated securities when they want to report higher earnings in the reporting income statement. Sometime bonds are also bought to generate short term gains in trading are also considered as trading securities and bond investments for a longer period is classified in a different category.
Throw out a problem child – When a subsidiary of a company is not performing well and it about to report losses in the future, it is sold off using multiple techniques which can save them tax. One of the methods is the spin off method if there is a large loss to be considered and expected from the subsidiary. Secondly, all financial assets of the company can be transferred to a special purpose vehicle or entity and by doing this, the transferor company can report a gain or loss as it will appear to have sold the financial assets to another company. In addition, some companies also exchange their assets with equity and conduct a sale and lease back option or asset and equity swap method to throw out a problem child, the ailing subsidiary.