Question

What are diversified companies? What accounting problems are related to diversified companies? Give examples of diversified companies. What quantitative materiality test is applied to determine whether a segment is significant enough to warrant separate disclosure?

Answer 1

A diversified company is a type of company that oversees several lines of business – most of them being unrelated to each other. Creating a diversified company is beneficial, as it provides several different product lines and customers, resulting in the company being shielded from any economic downswings or business fluctuations.A company can diversify its operations by either acquiring another company or merging with a company with a different line of business. Typically, the merger process is very expensive, and the companies need to formulate a strong long-term strategy to ensure that the diversification is beneficial to the shareholders.

A common example of a diversified company is a conglomerate. Conglomerates are fairly large companies that are made up of separate independent entities. They operate in multiple industries and are, at times, spread across different geographies. Such companies are called multinational conglomerates. The subsidiaries or independent components of the company report to the parent company of the conglomerate