8.5 Valuation Allowance in Separate or Carve-Out Financial Statements
See Chapter
5 for a general discussion of valuation allowances under ASC 740. The
manner in which valuation allowances are accounted for in separate or carve-out
financial statements depends on whether income taxes are allocated by using the
separate-return or the parent-company-down method (see Section 8.3 for further discussion of each method):
8.5.1 Separate-Return Method
If the separate-return method is used to allocate taxes in separate or carve-out
financial statements, the separate or carve-out entity’s DTAs should be assessed for
realizability on the basis of available evidence related to only the
operations of the separate or carve-out entity. Therefore, if that entity has
negative evidence (e.g., cumulative losses in recent years), it would be difficult
to support a conclusion that a valuation allowance is not necessary, irrespective of
the available evidence at the consolidated group level (e.g., a history of
profitable operations of the consolidated filing group level).
If, however, an entity has modified the separate-return method for
realizability of its DTAs (as discussed in Section 8.3.1.1.1), the entity may consider
evidence at the consolidated group level when determining whether a valuation
allowance is needed. An entity that files separate or carve-out financial statements
with the SEC and modifies the separate-return method (in this manner or another way)
that is also required to provide pro forma financial statements would be required to
include, in its pro forma income statement, a tax provision (and valuation allowance
assessment) determined by using the separate-return method. See Section 4.4 of Deloitte’s
Roadmap Initial Public
Offerings for more information about pro forma financial
information and when it must be presented.
8.5.2 Parent-Company-Down Method
If the parent-company-down method is used to allocate taxes in separate or carve-out
financial statements, the determination of the need for a valuation allowance in the
separate or carve-out financial statements depends on whether a valuation allowance
was recognized in the consolidated financial statements. In other words, if a
valuation allowance is required at the parent-company level, a valuation allowance
is also required in the financial statements of the stand-alone group member. If no
valuation allowance is necessary at the parent-company level, no valuation allowance
should be provided in the separate or carve-out financial statements.