Capstone Week 3 Assignment
Content
Running Head: EQUITY INVESTMENT AND IMPAIRMENT
Week 3: Equity Investment and Impairment
Leah M. Pasternak
Professor Edward Hastings
Accounting Capstone
October 26, 2014
1
Equity Investment and Impairment
2
Equity Investment and Impairment
Examine how at least three (3) growth strategy alternatives utilized by Amazon.com in the
global and domestic retail markets influenced profitability, and indicate if the strategies
were successful.
There are many growth strategies that companies utilize in order to grow and increase
their profits. Emerging from the bursting of the dot com bubble during 2000-2001, Amazon.com
has managed to pave their way through the mess and come out as one of the top companies in the
world. Even though Amazon.com’s sales have tripled, its profits have remained flat, because
their founder Jeff Bezos invests most profit back into the company in order to achieve his visions
of long term success. Founder Jeff Bezos has time and time again defended his investment
strategies, stating that “proactively delighting customers earns trust, which earns more business
from those customers, even in new business arenas,” (2010, April 12).
Some important growth strategies that Jeff Bezos and his team at Amazon.com
implement are market penetration, product expansion, diversification and acquisition. (2014,
January 1). Market penetration is a key growth strategy that smaller companies utilize when they
are going to market the same product within an already existing market. ; EBooks for example.
In 1994, when Jeff Bezos founded Amazon.com, he started out of his garage selling books
through the internet (2011, January 1). One of the most unique aspects of Amazon.com was that
buyers could write their own reviews on books that they had purchased and read. This helped
Amazon.com become one of the more successful online bookstores in the marketplace at that
time. When you want to compete in an already established marketplace, it is important that you
offer products that are unique.
Another important strategy that Jeff Bezos uses is product expansion. Once again, in
Equity Investment and Impairment
3
order to compete in an already saturated market, you have to offer more products that are more
diverse than your competitor’s. That’s what Amazon.com did when they started to expand their
selection of products being offered online. In 1997, Amazon.com decided to offer other products
such as CD’s and movies. This diversification of product as well as the ability to come back to
the site and write your own reviews of products kept the customers coming back again and again.
Amazon.com was now being viewed as a community of customers with similar interests, and the
company’s profits exploded.
Another very important strategy for business growth would be acquisition and
diversification. An acquisition is when one company purchases another company as a means to
expand their operations. Diversification is when a company decides to sell new products to new
markets, not previously sold in before. Time and time again a company will start up, struggle,
then do well, and then struggle again only to end up failing and closing their doors. Jeff Bezos
was able to recognize this fateful trend within his current marketplace, and devised a strategy
that would enable Amazon.com to thrive and flourish, and to grow and transform as the
marketplace does.
Jeff Bezos is continuously reviewing Amazon.com’s white space, that is, the place
where a company might be able to maneuver in a crowded playing field, and because of this keen
and intuitive thinking, Amazon.com has managed to always stay one step ahead of the
competition (2010, April 12). Of course, offering more diverse services and products as well as
acquiring some crucial pieces of the puzzle, such as Lab126, who was purchased in 2004 and
makes all of the Kindle e readers, has aided in the continuous transformation of this very
successful company (2010, April 12).
Equity Investment and Impairment
4
Assess the financial value of the acquisitions and investments made by Amazon.com, and
the influence of the acquisitions and investments on profitability during the accounting
period.
According to the financial statements, Amazon.com made cash payments, net of
acquired cash, related to acquisitions and other investment activity of $860 million and $1
million during Q3 of 2014 and Q3 of 2013, and $926 million and $252 million for the nine
months ended September 30, 2014 and 2013 (2014, September 30). There is a disclosure that
states Amazon.com could suffer if they are unsuccessful in making, integrating and maintaining
their acquisitions and investments. Certain disruptions that could occur are listed by bullet point
so that investors and shareholders are completely aware of the potential consequences that could
be suffered if Amazon.com were to fail. The acquisitions and investments that were recorded in
Q3 help to produce an end of period, Cash and Cash Equivalents amount of $5,258 million,
which has increased since Q3 of 2013 by $1,386 million, $860 million of this being directly
relating to acquisitions and investment activity (2014, September 30).
Analyze the effect of the equity investments and impairments resulting from the
acquisitions and investments by Amazon.com on the financial statements, and indicate
whether or not the strategy was a creatable one. Provide support for your rationale.
According to the financial statements, Amazon.com has disclosed that in order to be
successful with their current acquisitions and investments they may need to issue additional
equity securities, spend cash, or incur debt, contingent liabilities, or amortization expenses
related to intangible assets due to the risk of profitability reduction (2014, September 30).
Amazon.com continuously monitors any investments which are not being carried at fair value,
Equity Investment and Impairment
5
for potential other-than-temporary impairments. This is all located within Other Assets on their
consolidated balance sheets. As the market fluctuates so can certain acquisitions and investments
currently held by Amazon.com, and this creates a potential for impairments to occur. Currently
the strategy for monitoring the impairments created by any acquisitions and investments has
proven to work for Amazon.com. The company is always looking for any possible changes that
could be detrimental to the company and what their long-term goals are.
Create an argument that growth in the European market can have a significant impact on
current earnings and profit for Amazon.com. Provide support for your rationale.
Any growth in any market will obviously impact current earnings and profits, whether
on a positive or a negative aspect. Currently, Amazon.com is dealing with the European
commission as well as the French Tax Administration. The European commission has opened a
formal investigation to examine if corporate income taxes for all of Amazon.com’s foreign
subsidiaries are complying with the European Union rules on state aid. If they are found to be out
of compliance, then Luxembourg may very well have to pay additional amounts with respect to
current and prior periods and taxes in the future could be much higher than now, affecting the
earnings and profitability of the company (2014, September 30).
The FTA, has queried tax assessments between 2006 and 2010, and is looking to retain
$250 million which includes interest and penalties, stating that the allocation of income between
foreign jurisdictions is out of compliance; another factor that would impact earnings and
profitability of the company (2014, September 30). Amazon.com is contesting this allegation and
currently working towards a resolution with the FTA. If Amazon.com is interested in raising
their current earnings and turning more of a profit than growth in the European market would be
Equity Investment and Impairment
6
advantageous for them. Currently, lower than anticipated earnings in countries where the
company has lower statutory rates and higher than anticipated in counties where they have higher
statutory rates are affecting their current effective tax rates, ultimately affecting their current
earnings and profits (2014, September 30).
Equity Investment and Impairment
7
Resources
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. (2014, September 30). Retrieved October 24,
2014, from
http://www.sec.gov/Archives/edgar/data/1018724/000101872414000055/amzn20140930x10q.htm
Suttle, R. (2014, January 1). Growth Strategies in Business. Retrieved October 24, 2014,
from http://smallbusiness.chron.com/growth-strategies-business-4510.html
Johnson, M. (2010, April 12). Amazon's Smart Innovation Strategy. Retrieved October
24, 2014, from
http://www.businessweek.com/innovate/content/apr2010/id20100412_520351.htm
The History of Amazon.Com. (2011, January 1). Retrieved October 23, 2014, from
http://www.essortment.com/history-amazoncom-21180.html
Week 3: Equity Investment and Impairment
Leah M. Pasternak
Professor Edward Hastings
Accounting Capstone
October 26, 2014
1
Equity Investment and Impairment
2
Equity Investment and Impairment
Examine how at least three (3) growth strategy alternatives utilized by Amazon.com in the
global and domestic retail markets influenced profitability, and indicate if the strategies
were successful.
There are many growth strategies that companies utilize in order to grow and increase
their profits. Emerging from the bursting of the dot com bubble during 2000-2001, Amazon.com
has managed to pave their way through the mess and come out as one of the top companies in the
world. Even though Amazon.com’s sales have tripled, its profits have remained flat, because
their founder Jeff Bezos invests most profit back into the company in order to achieve his visions
of long term success. Founder Jeff Bezos has time and time again defended his investment
strategies, stating that “proactively delighting customers earns trust, which earns more business
from those customers, even in new business arenas,” (2010, April 12).
Some important growth strategies that Jeff Bezos and his team at Amazon.com
implement are market penetration, product expansion, diversification and acquisition. (2014,
January 1). Market penetration is a key growth strategy that smaller companies utilize when they
are going to market the same product within an already existing market. ; EBooks for example.
In 1994, when Jeff Bezos founded Amazon.com, he started out of his garage selling books
through the internet (2011, January 1). One of the most unique aspects of Amazon.com was that
buyers could write their own reviews on books that they had purchased and read. This helped
Amazon.com become one of the more successful online bookstores in the marketplace at that
time. When you want to compete in an already established marketplace, it is important that you
offer products that are unique.
Another important strategy that Jeff Bezos uses is product expansion. Once again, in
Equity Investment and Impairment
3
order to compete in an already saturated market, you have to offer more products that are more
diverse than your competitor’s. That’s what Amazon.com did when they started to expand their
selection of products being offered online. In 1997, Amazon.com decided to offer other products
such as CD’s and movies. This diversification of product as well as the ability to come back to
the site and write your own reviews of products kept the customers coming back again and again.
Amazon.com was now being viewed as a community of customers with similar interests, and the
company’s profits exploded.
Another very important strategy for business growth would be acquisition and
diversification. An acquisition is when one company purchases another company as a means to
expand their operations. Diversification is when a company decides to sell new products to new
markets, not previously sold in before. Time and time again a company will start up, struggle,
then do well, and then struggle again only to end up failing and closing their doors. Jeff Bezos
was able to recognize this fateful trend within his current marketplace, and devised a strategy
that would enable Amazon.com to thrive and flourish, and to grow and transform as the
marketplace does.
Jeff Bezos is continuously reviewing Amazon.com’s white space, that is, the place
where a company might be able to maneuver in a crowded playing field, and because of this keen
and intuitive thinking, Amazon.com has managed to always stay one step ahead of the
competition (2010, April 12). Of course, offering more diverse services and products as well as
acquiring some crucial pieces of the puzzle, such as Lab126, who was purchased in 2004 and
makes all of the Kindle e readers, has aided in the continuous transformation of this very
successful company (2010, April 12).
Equity Investment and Impairment
4
Assess the financial value of the acquisitions and investments made by Amazon.com, and
the influence of the acquisitions and investments on profitability during the accounting
period.
According to the financial statements, Amazon.com made cash payments, net of
acquired cash, related to acquisitions and other investment activity of $860 million and $1
million during Q3 of 2014 and Q3 of 2013, and $926 million and $252 million for the nine
months ended September 30, 2014 and 2013 (2014, September 30). There is a disclosure that
states Amazon.com could suffer if they are unsuccessful in making, integrating and maintaining
their acquisitions and investments. Certain disruptions that could occur are listed by bullet point
so that investors and shareholders are completely aware of the potential consequences that could
be suffered if Amazon.com were to fail. The acquisitions and investments that were recorded in
Q3 help to produce an end of period, Cash and Cash Equivalents amount of $5,258 million,
which has increased since Q3 of 2013 by $1,386 million, $860 million of this being directly
relating to acquisitions and investment activity (2014, September 30).
Analyze the effect of the equity investments and impairments resulting from the
acquisitions and investments by Amazon.com on the financial statements, and indicate
whether or not the strategy was a creatable one. Provide support for your rationale.
According to the financial statements, Amazon.com has disclosed that in order to be
successful with their current acquisitions and investments they may need to issue additional
equity securities, spend cash, or incur debt, contingent liabilities, or amortization expenses
related to intangible assets due to the risk of profitability reduction (2014, September 30).
Amazon.com continuously monitors any investments which are not being carried at fair value,
Equity Investment and Impairment
5
for potential other-than-temporary impairments. This is all located within Other Assets on their
consolidated balance sheets. As the market fluctuates so can certain acquisitions and investments
currently held by Amazon.com, and this creates a potential for impairments to occur. Currently
the strategy for monitoring the impairments created by any acquisitions and investments has
proven to work for Amazon.com. The company is always looking for any possible changes that
could be detrimental to the company and what their long-term goals are.
Create an argument that growth in the European market can have a significant impact on
current earnings and profit for Amazon.com. Provide support for your rationale.
Any growth in any market will obviously impact current earnings and profits, whether
on a positive or a negative aspect. Currently, Amazon.com is dealing with the European
commission as well as the French Tax Administration. The European commission has opened a
formal investigation to examine if corporate income taxes for all of Amazon.com’s foreign
subsidiaries are complying with the European Union rules on state aid. If they are found to be out
of compliance, then Luxembourg may very well have to pay additional amounts with respect to
current and prior periods and taxes in the future could be much higher than now, affecting the
earnings and profitability of the company (2014, September 30).
The FTA, has queried tax assessments between 2006 and 2010, and is looking to retain
$250 million which includes interest and penalties, stating that the allocation of income between
foreign jurisdictions is out of compliance; another factor that would impact earnings and
profitability of the company (2014, September 30). Amazon.com is contesting this allegation and
currently working towards a resolution with the FTA. If Amazon.com is interested in raising
their current earnings and turning more of a profit than growth in the European market would be
Equity Investment and Impairment
6
advantageous for them. Currently, lower than anticipated earnings in countries where the
company has lower statutory rates and higher than anticipated in counties where they have higher
statutory rates are affecting their current effective tax rates, ultimately affecting their current
earnings and profits (2014, September 30).
Equity Investment and Impairment
7
Resources
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. (2014, September 30). Retrieved October 24,
2014, from
http://www.sec.gov/Archives/edgar/data/1018724/000101872414000055/amzn20140930x10q.htm
Suttle, R. (2014, January 1). Growth Strategies in Business. Retrieved October 24, 2014,
from http://smallbusiness.chron.com/growth-strategies-business-4510.html
Johnson, M. (2010, April 12). Amazon's Smart Innovation Strategy. Retrieved October
24, 2014, from
http://www.businessweek.com/innovate/content/apr2010/id20100412_520351.htm
The History of Amazon.Com. (2011, January 1). Retrieved October 23, 2014, from
http://www.essortment.com/history-amazoncom-21180.html
