The functions and management mechanisms necessary to achieve the company's goals and mission

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Corporate Structure

Corporate structures describe the functions and management mechanism of a company that are necessary to achieve the goals and missions of the company, the corporate structures would includes all functional departments, such as marketing, operation, finance and etc., the management system of the company includes top executives like CEO, CFO and other management position and board of directors (Investopedia, 2018). The same applies to both parent company and subsidiaries.

From Amazon’s 2017 10K report, it shows that Amazon had operated and expanded its business through a series of merger and acquisition, especially for its international business segments. Amazon has been invested in over 100 companies, and among those companies Amazon had voting privileges in six companies, including Audible, Goodreads, CreateSpace, Woot, IMDb, and Zappos (Amazon, 2018). Amazon did not discuss and disclose its corporate structures for its business and subsidiaries in the 10K SEC report, while the “wholly- owned” business are also included in Amazon’s financial statements but the revenue were not separated from other Amazon’s business operation (Amazon, 2018). One of the examples is the newly acquired Whole Foods Market, which was acquired by Amazon on August 28, 2017, and in Amazon’s 2017 10K report it was stated in the disclosure notes that “the financial performance of Whole Food Market, Inc. after the date of acquisition have been included in Amazon’s consolidated financial statements” (Amazon, 2018).

From the purchase method of accounting, Amazon would add the fair value of Whole Food Market, Inc.’s assets to their balance sheet, which indicate the completion of this acquisition (Bragg, 2017). And from strategic alignment point of view, Amazon would acquire other business that fits with its mission and goal, which is: “to build a place where people can come to find and discover anything they might want to buy online” (Farfan, 2018).

Consolidated Financial Statements

The Amazon’s consolidated financial statements presented in its 10K reports included all of amazon’s subsidiaries and Amazon’s 2017 revenue are separated by three segments: North America, International, and Amazon Web Services (AWS) (Amazon, 2018). The financial statements are prepared separately by all Amazon’s subsidiaries, which later combined into the consolidated financial statements that included all revenue and expenses incurred in the fiscal year except the intercompany transactions, to avoid overstatement of revenue or expenses caused by intercompany transactions between all subsidiaries (Keyman, n.d.).

Adjustments are necessary for accurate presentation of company’s financial position, the acquisition transactions happened between parent company and subsidiaries will be initially reordered as “investment in subsidiary” and readjust to fail market value of the subsidiary, and in the process of readjustment the stockholder’s equity accounts will be eliminated from all subsidiaries books to avoid overstatement on balance sheet. These adjusting transactions will be done when creating consolidation journal entry (McBride, n.d). The steps of adjustment would be repeated if Amazon acquired more than one company in one fiscal year.

Income Tax Benefits

All business and their subsidiaries were required to prepare and file their consolidated financial statements by U.S. GAAP, the consolidated financial statements are considered a better representation of the business financial status as the parent company owns over 50% stake in the subsidiary. In IRC section 1501, it was stated that parent business could file a consolidated tax return for subsidiaries that they hold at least 80% of stocks with voting privileges in. As discussed above, Amazon had six “wholly owned subsidiaries” with 100% stocks with voting privileges, thus those subsidiaries can be included in Amazon’s consolidate income tax return. The benefits and advantages from Amazon to file consolidated corporate income tax returns are listed as follow:

· The profits and losses of all subsidiary companies can offset each other

· Gain and losses were netted out

· All inter business transactions will not taxed

· Parent company will handle all tax issues

In the case of file consolidated corporate income tax returns the parent company act as an agent and handle the tax issues for all subsidiaries, and subsidiaries can avoid complex tax process. Even through there are many benefits for consolidated tax report but there are disadvantages as well. Each company would hold income tax liability for the earnings and profits the business made when calculating the accumulated earnings tax liability. Even through intercompany transactions will not be taxed but those transactions will be tracked over a period of years. As Amazon would continue to grow through investment in international subsidiaries the advantages outweighed the disadvantages for consolidated tax files.

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