Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does 'arms length' transaction imply in divisionalisation?

1. Close communication between units

2. Interaction without dependency

3. Frequent joint ventures

4. Shared resources among divisions

The correct answer is: Interaction without dependency

An 'arms-length' transaction in the context of divisionalisation refers to interaction without dependency. This concept signifies that the divisions or business units operate independently from one another, engaging in transactions as if they were unrelated parties. This approach helps maintain objectivity and fairness in the evaluation of each segment's performance, as each division is held accountable for its own results without being influenced by the operations or outcomes of other divisions. This independence is crucial for accurately reflecting the financial performance of each division, as it discourages cross-subsidisation and allows for more transparent performance metrics. By treating transactions between divisions as if they were dealings with external entities, it ensures that each unit is incentivized to perform well on its own merits. In contrast, other options imply different forms of interaction that do not align with the principle of maintaining independence between divisions. For instance, close communication between units suggests a level of interdependence that could compromise the objectivity needed for arms-length transactions. Frequent joint ventures indicate collaborative efforts that blur the lines of responsibility between divisions, and shared resources imply a shared dependency, which contradicts the core idea of operating independently in an arms-length manner.