Research On The Profit Appropriation Between Parent-subsidiary Cross-share Holding Companies

The parent-subsidiary cross shareholding is a phenomenon that the parent company and the subsidiary company mutually hold each other’s stock share in order to achieve a certain purpose. Usually the share of the parent company which the sub-company hold is not sufficient enough to change the control relationship between them. This phenomenon is not frequently seen in domestic capital market. It appears sometimes, though. This kind of share structure plays an positive role in the reform of State-owned enterprises, industry structure integration and stabilizing the operation right of the company. But the harm of the concomitant negative effect, such as the virtual increasing of capital, internal control and connected transaction brings, is pretty clear, also, and lead to the borrowed prosperity of the capital market, misleading the investment decision-making of investors.From the perspective of accounting, the problem the parent-subsidiary cross-shareholding brings about is how to allocate the return of their investment, since both sides need to base the calculation of their return of investment on each other’s net profit. If accounting method of the equity or profit distribution methods differs, the return of investment will come out in different forms. Therefore, in accounting, profit distribution in the situation of parent-subsidiary cross-shareholding is rather important.Generally speaking, the profit appropriation in parent-subsidiary cross-shareholding mentioned in this paper mainly involves two aspects:on one hand, when it comes to the time it’s not necessary to provide consolidated statements (on other words, when each one of them need to give individual financial statements), each company in this circumstances have to recognize the return of the equity investment and then ascertain how to allocate the net profit of each other; on the other hand, as a whole, each one will also calculate the consolidated net profit and the benefit for the minor shareholders.Firstly, each company has to recognize the accounting method in accordance with the equity investment of its own before the identification of the net profit. According to<Accounting Standard for Enterprises Chapter2—Long term equity investment> and <Chapter22—recognition and measurement of financial instruments> the classification method adheres to both principles and flexibility, and the latter leads to much room of manipulation because it is mainly based on the professional judgment of accountants. Secondly, when listed companies are faced with the preparation of financial statements and the choice of methods, the result of each method may differ because each one possesses its own advantages and disadvantages and the Standard has not regulated or made better improvement. This paper mainly involves the accounting and profit allocation methods, makes comparisons between each method, summarizes dos and don’ts and gives improvement advisement.This paper includes5parts discussing the topic. Chapter Ⅰ introduction describes the background and significance, research methods, frameworks,, innovation and weak points of the research in this article. Chapter2mainly talks about the research situation of profit allocation both at home and abroad, and displays views of the author. Chapter3first briefly explains the concept and features of the issue, then defines the issue studied in this article, analyzes the factors impacting the profit allocation, and at last clarifies the result of the profit allocation deriving from the factors in terms of both the individual and consolidated statements. Chapter4provides a practical case between ST Tang Tao Tangshan huamei, including background introduction and analyses to testify the theory mentioned. And Chapter5summarizes the problems, and at meantime present some advice of improvement for the institution of parent-subsidiary cross-shareholding in China.