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
2.8.5 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 have arisen related to whether the ROU asset and
lease liability should be considered part of the carve-out financial statements
in every case or 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.
2.8.5 Expected Credit Losses
ASC 326-20 does not apply to loans and receivables between entities under common
control. However, if the carve-out entity and the parent entity are no longer
under common control because of the transaction structure, and the carve-out
entity and the former parent entity will continue to hold loans and receivables
with each other, such loans and receivables will be subject to ASC 326 when the
separation is completed. For information about the accounting for expected
credit losses, see Deloitte’s Roadmap Current
Expected Credit Losses