1.1 Introduction
Carve-out financial statements are prepared to reflect a portion of a parent
entity’s balances and activities. Examples of transactions in which carve-out financial
statements may be requested or required include, but are not limited to, the following:
- Potential sale — An entity wishing to dispose of a portion of its assets and operations may prepare carve-out financial statements to help potential acquirers evaluate a prospective transaction.
- Completed sale — A public entity acquires, or it is probable that it will acquire, a portion of an entity’s business, and the acquisition is deemed “significant” to the acquirer under SEC Regulation S-X, Rule 3-05. Consequently, the acquiring entity may request (or need to have prepared) audited carve-out financial statements of the business acquired for inclusion in a Form 8-K filing, registration statement, or proxy statement of the acquirer.
- Spin-off — A public entity plans to distribute a portion of its assets that constitute a business by spinning the business off to its shareholders as a separate public company. Therefore, carve-out financial statements of the spinnee (i.e., the new legal entity spun-off) must be included in the SEC registration statement in connection with the spin-off.
- Split-off — A public entity plans to offer to its existing shareholders, in exchange for some or all of the existing shareholders' shares in the public entity, shares in a newly formed entity that represents a portion of its assets that constitute a business (the “splitee”). Therefore, carve-out financial statements of the new legal entity to be split off must be included in the SEC registration statement in connection with the exchange transaction.
- IPO and SPAC transactions — An entity wishes to segregate a portion of itself to effect an IPO of a newly created subsidiary or to enter into a transaction with a SPAC. Therefore, carve-out financial statements of the operations to be segregated and transferred to the newly created subsidiary or to a SPAC must be included in the SEC registration statement in connection with the transaction.
Typical SEC filing forms in which carve-out financial statements may be provided include:
- Form S-1 — Used to register shares of a carve-out entity as a new registrant through an IPO.
- Form S-4 — Used to register shares of (1) the registrant for the acquisition of a carve-out entity (e.g., if the carve-out entity is acquired by an SEC registrant or a SPAC) or (2) the splitee in a split-off transaction involving the exchange of shares of the splitee for shares of the parent.
- Form 8-K — Used to provide financial statements for an acquiree if the acquiree is significant to the registrant that acquired it.
- Form 10 — Used to register classes of securities for which no other form is prescribed, such as spin-off transactions in which shares are distributed to the parent company’s shareholders.
Also, the parent may be required to provide pro forma financial information reflecting the
disposition of a significant business or asset in either a current report on Form 8-K or
certain registration statements.
As noted above, there are numerous types of transactions for which carve-out
financial statements are warranted. The nature of the transaction will affect both the needs
of financial statement users and the applicability of regulatory requirements. In addition,
the nature and significance of the transaction may affect the form and content of the
carve-out financial statements (including the number of historical periods that need to be
presented in the financial statements) and the identification of the carve-out entity’s
operations.