Chapter 2 — Accounting Considerations Related to a Carve-Out Entity’s Statement of Financial Position
Before preparing carve-out financial statements, management must determine the
purpose of such financial statements and what
portion of the parent entity’s operations, assets,
and liabilities should be included in them.
Entities will often begin by going through the
balance sheet of the parent entity line by line
(e.g., cash; accounts receivable; property, plant,
and equipment [PP&E]). Balance sheet items
that are inherently related to the carve-out
entity, such as PP&E, can often be readily
attributed to the carve-out financial statements.
For many of the balances, however, balance sheet
items may not be easily identified (e.g., when the
balance sheet item is a mixture of the portion of
the operations to be included in the carve-out
transaction and the portion that is not to be
included). This chapter addresses some of the more
complex balance sheet items.
When determining whether to include an asset or
liability on the balance sheet of the carve-out
entity, entities may consider factors such as the
following (not all-inclusive):
- Whether the carve-out entity possesses the legal title to the asset or obligation to settle the liability.
- Whether the assets or liabilities were used in or created by the historical operations of the carve-out entity.
- Whether the assets or liabilities will be divested by the parent as a result of the transaction.
None of the above factors is determinative, and
entities should consider the specific facts and
circumstances and context of the transaction(s)
when determining the approach for certain balance
sheet items.
Entities must also use
judgment in allocating shared assets. While the
statement of operations may include allocations of
certain expenses on a pro rata basis in accordance
with a reasonable allocation method (as discussed
in Chapter 3),
dividing assets or liabilities that represent a
single unit of account between the parent and
carve-out entity is generally not appropriate. For
example, a piece of manufacturing equipment that
is used by both the parent and carve-out entity
should not be allocated to both entities. Instead,
on the basis of the factors described above, the
carve-out entity should determine whether the full
asset should be recognized in its entirety or not
at all. Regardless of the conclusion reached with
respect to the statement of financial position,
however, the income statement would reflect a
reasonable allocation of costs for use of the
equipment (as discussed in Sections 2.1 and
3.1).
In addition to discussing
these broad principles, this chapter addresses
some of the more complex balance sheet items.