2.7 Contingencies | DART – Deloitte Accounting Research Tool

If the carve-out entity is the primary obligor for a contingent liability (e.g., legal or environmental) as a result of its operations, the contingent liability should be recognized in the carve-out entity’s financial statements. If the parent entity is the primary obligor, the contingent liability might still be recognized in the carve-out entity’s financial statements when the liability is related to the carve-out entity’s operations and will be assumed by the carve-out entity as a result of the carve-out transaction.

Notwithstanding the inclusion of the liability, the historical carve-out financial statements should reflect all the carve-out entity’s costs of doing business, including costs incurred on the carve-out entity’s behalf by its parent (see Chapter 3 for additional guidance). Therefore, circumstances may occur in which the expenses related to a contingent liability are recorded in the carve-out entity’s income statement while the related liability is not. See Section 2.1 for discussion of the reporting of differences between income statement and balance sheet allocations.

When evaluating the disclosure requirements in ASC 450-20-50, management must take into account the fact that contingencies previously considered immaterial to the parent’s financial statements that are related to the carve-out entity may need to be disclosed on the basis of materiality thresholds applicable to the carve-out financial statements (see Section 1.3.3).