2.1 Parent-Entity Net Investment in the Carve-Out Entity

However, in many cases, carve-out financial statements reflect the combination of multiple legal entities or portions of one or more legal entities and, as a result, the typical equity line items may not be meaningful. In these circumstances, entities will often combine the net equity attributable to the parent (excluding accumulated other comprehensive income [AOCI]) into a single line item. This line item, often referred to as the “parent’s net investment,” reflects the parent company’s investment in the carved-out business.

In allocating assets and liabilities and items of income and expense to carve-out financial statements, preparers of carve-out financial statements should be cognizant of the possible disconnect between balance sheet and income statement allocations. Income statement allocations to carve-out financial statements should usually reflect all costs of doing business (see Chapter 3 for additional guidance), whereas the balance sheet of a carve-out entity should generally include the assets currently or formerly owned by the carve-out entity and those liabilities for which the carve-out entity was or is legally responsible. Differences between income statement and balance sheet allocations are typically reflected in equity in the carve-out financial statements as part of the parent’s net investment in the carve-out entity (as contributions to the carve-out entity or distributions from the carve-out entity) unless an arrangement between the parent and the carve-out entity requires cash settlement (in which case, differences would be reflected as a net payable to, or net receivable from, the parent). See Sections 3.2 and 4.1.1 for further discussion of intercompany balances.

In addition to the impact of allocations, the parent’s net investment would include contributions to fund the operations of the carve-out entity as well as the accumulated earnings or losses of the carve-out business(es).