3.3 Allocation of Cash-Based Compensation Expense

Management should consider its historical overhead allocations of cash-based compensation expense. Management’s allocation of cash-based compensation expense might take into account (1) the carve-out entity’s head count as a percentage of total head count, (2) the percentage of employees’ time spent working on the business of the carve-out entity, and (3) the carve-out entity’s sales (or earnings) as a percentage of total sales (or earnings). If the company had allocated a portion of overall compensation expense to the carve-out entity for previously prepared financial statements, a consistent portion of compensation should also be allocated to the carve-out financial statements.