2.8 Other Assets and Liabilities
For assets and liabilities for which specific guidance does not exist, entities
should use a reasonable allocation method. However, because the facts and
circumstances vary depending on the types of assets or liabilities that need to be
presented in the carve-out financial statements, management must evaluate each of
these financial statement items individually to ensure that the allocation method is
reasonable. Sections 2.8.1 through 2.8.4
provide examples of such items as well as considerations related to developing an
appropriate allocation method.
2.8.1 Working Capital
Companies often have centralized cash management functions involving “sweep”
accounts or “cash pools.” The classification of any deposits by a carve-out
entity in a cash pool as cash or a cash equivalent depends on the terms of the
arrangement and whether the deposit represents a demand deposit in the carve-out
entity’s name at a bank or financial institution. See Section 4.3 of Deloitte’s Roadmap Statement of Cash Flows for more information.
2.8.2 Deferred Compensation
For deferred compensation plans, management must determine whether to allocate
those balances or a portion thereof to the carve-out entity. The deferred
compensation balances generally should “follow the employee” to whom they are
related. Management should consider where the employee provided services within
the consolidated entity as well as where the employee will be employed once the
carve-out transaction is completed. Often, these factors align (e.g., when the
carve-out entity represents a reportable segment of the parent, and the employee
for that reportable segment will be transferred with the carve-out entity).
Careful consideration is necessary to ensure that costs are properly reflected
in the carve-out financial statements in situations in which the employee
provided services to the carve-out entity but will not be transferred with
it.
2.8.3 Self-Insurance Accruals
Self-insurance accrual allocations can be complex and generally require the involvement of an actuary.
If the parent entity maintains sufficient claim detail, management may be able to identify the specific
claims attributable to the carve-out entity. For example, if a parent entity is carving out five plants,
management may be able to use “plant identifiers,” such as a company code, to identify the specific
claims associated with the five plants. However, if a parent entity does not have sufficient detail in
its claims data to identify the claims attributable to the carve-out entity, management would need to
determine an appropriate allocation method to estimate the amount. Allocation methods may take
into account such factors as payroll exposure data and percentage of head count associated with the
carve-out entity.
If management has previously allocated self-insurance expense and liabilities to the carve-out entity, it
should apply consistent allocation methods when it prepares the carve-out financial statements.
2.8.4 Right-of-Use Assets and Lease Liabilities
When preparing carve-out financial statements, entities should
consider whether to include the right-of-use (ROU) assets and lease liabilities
of the parent entity and, if so, in what amounts. Regardless of whether the
carve-out entity recognizes the ROU assets and lease liabilities, it should
include lease expense that clearly applies to it (see Section 3.1 for further discussion) in its
financial statements, which must reflect all of its costs of doing business.
Determining whether the ROU assets and lease liabilities should be included in
the carve-out financial statements may involve more complexities than
determining the lease expense attributable to the carve-out entity. There is no
authoritative guidance on attributing ROU assets and lease liabilities to the
carve-out financial statements, and entities will have to apply judgment when
determining whether these lease assets and liabilities should be recognized in
the carve-out financial statements.
In certain situations, entities may be able to readily attribute the ROU assets
and lease liabilities to the carve-out financial statements. For example, if the
carve-out entity is the primary obligor for the lease and primarily uses the
underlying asset in its operations, management should generally recognize the
ROU asset and lease liability in the carve-out financial statements. In other
situations, such as when the lease contract is entered into by the parent entity
but the underlying asset is used primarily in the carve-out entity’s operations,
questions arise about whether the ROU asset and lease liability should be
considered (1) part of the carve-out financial statements or (2) part of the
carve-out financial statements only if a legal agreement exists between the
parent entity and the carve-out entity. For example, the existence of an
intercompany sublease agreement would provide a basis for the premise that the
rights and obligations of the lease are attributable to the carve-out entity;
accordingly, management should recognize the lease liability and corresponding
ROU asset in the carve-out financial statements. If no contractual arrangement
exists between the parent entity and the carve-out entity or the third-party
lessor and the carve-out entity, management should apply judgment. In evaluating
their situations, entities should consider all facts and circumstances and are
encouraged to consult with accounting advisers.