Chapter 2 — Accounting Considerations Related to a Carve-Out Entity’s Statement of Financial Position
Before preparing the 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.
In addition to discussing
these broad principles, this chapter addresses
some of the more complex balance sheet items.