3.3 Allocation of Cash-Based Compensation Expense
Cash compensation (e.g., salary
or bonuses) of employees who provided services to the carve-out entity should be allocated
in the carve-out financial statements proportionally to the service provided. For example,
if all of an employee’s time is dedicated to the operations of a carve-out entity, all of
the employee’s compensation should be allocated to the carve-out financial statements.
However, if only part of the employee’s time is spent providing such services to the
carve-out entity, we would expect the employee’s compensation to be allocated
proportionately.
Management should consider its historical overhead allocations of compensation
expense. For example, management’s allocation of
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. Similar
considerations apply to share-based compensation,
as discussed in the next section.