What Is Equity Stripping?

Asset divestiture refers to the act of separating the assets and liabilities of the original enterprise that were not part of the proposed joint-stock enterprise from the original enterprise accounts during the process of corporate shareholding reform. Divestiture is not a sign of business failure, it is a reasonable choice for corporate development strategy. By divesting departments, product lines or individual assets that are not suitable for the company's long-term strategy, have no growth potential, or affect the overall business development of the enterprise, resources can be concentrated on business priorities, thereby becoming more competitive. At the same time, the divestiture can also enable corporate assets to be more effectively allocated, improve the quality of corporate assets and the market value of capital.

Divestiture

China

Involved in the restructuring process

Due to stripping

1. The accounting treatment of segment disposal is inappropriate. First of all, segment disposal is different from disposal of individual items or part of assets. It is not appropriate to treat segment disposal as fixed assets and current assets. Secondly, it is not appropriate to treat segment disposal as investment disposal. Segment disposal and investment disposal, especially the disposal of subsidiaries, have similarities, but there are obvious differences between the two: the subsidiary is an independent corporate legal person with independent The ability to sign agreements and bear debts externally, but a branch is a department within the enterprise and does not have legal personality.

2. The accounting treatment of asset divestiture gains and losses is unreasonable. In China's current accounting practice, the gains and losses arising from the divestiture of assets, including single asset disposal and segment disposal, are treated as "non-operating income and expenditure". In the income statement, many non-operating and extraordinary gains and losses of different nature are generalized. It is unreasonable to classify it as "net of non-operating income and expenditure." Because there are many non-operating and extraordinary gains and losses in listed companies in China, that is, non-operating income and expenditure items. In addition to asset divestiture gains and losses, it also includes non-monetary transaction income, net income from fines, fixed asset gains and losses, Asset liquidation gains and losses. If these non-operating and extraordinary profits and losses of different nature are included in the non-operating income and expenditure in the income statement, it will be difficult for investors to make a variety of non-operating and extraordinary profits and losses to the company according to the income statement provided by the company. The specific impact of net profit should be reasonably judged, so that the financial statements lack the due relevance.

3 Failure to separately disclose segment disposal information and continuing operations information makes it difficult to meet the information needs of investors and other users of financial statements. Segment disposal is a major asset disposal behavior of an enterprise, which will have a significant impact on the company's future operating results, financial position and cash flow. Therefore, as an enterprise's investor (including potential Investors) must understand the impact of this segment disposal on the company's future operating income, operating costs, operating taxes and operating profits, as well as the impact of changes in the company's financial position and net cash flow. The progress of disposal and the impact of segment disposal on the company's net profit or loss. However, in China's current financial statement system, segment disposition information and continuing operation information are not disclosed separately. Investors cannot understand the above-mentioned impact of segment disposition on enterprises and it is difficult to meet their information needs. ^[3]