4.4 Accounting Policies of the Carve-Out Entity

If the carve-out entity is acquired in a business combination, the acquirer may choose to conform the accounting policies of the carve-out entity to its own. If acquisition accounting results in a new basis of accounting for the carve-out entity, the acquirer’s accounting policies would be applied without regard to the carve-out entity’s previous accounting policies and there would be no need to assess the preferability of the acquirer’s policies. See Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest for more information about adopting accounting policies in connection with a change in control.

If the carve-out entity is acquired in a business combination and pushdown accounting is not applied, the carve-out entity would continue to apply the policies it applied in its stand-alone financial statements before the acquisition, which may differ from the acquirer’s accounting policies. If the carve-out entity wanted to adopt the acquirer’s policies in its stand-alone financial statements in the absence of pushdown accounting, such a choice would typically represent a voluntary change in accounting principle under ASC 250-10.

If the carve-out entity is spun off, it would continue to apply the policies it applied before the spin-off in its stand-alone financial statements. If the carve-out entity’s management wants to adopt an accounting policy that differed from one it applied while part of the former parent entity, such a decision would typically represent a voluntary change in accounting principle under ASC 250-10.

Under ASC 250-10, voluntary changes in accounting principles are permitted only if the new accounting principle is preferable. Changes in accounting principles generally need to be applied retrospectively and disclosed in accordance with ASC 250-10. However, not all changes in accounting policies represent changes in accounting principle. For example, an entity may have a policy of expensing all purchases of fixed assets below a certain threshold. Such a policy represents a convention, not an accounting principle. Determining whether a change in accounting policy is a change in accounting principle involves judgment, and a carve-out entity should carefully consider the facts and circumstances.

For public carve-out entities, as indicated in SAB Topic 6.G.2(b), a registrant that makes a material change in its method of accounting is required under SEC Regulation S-X, Rule 10-01(b)(6), to (1) indicate “the date of and the reason for the change” and (2) obtain and file as an exhibit, in its first Form 10-Q after the change, a letter from its independent accountants stating that in their judgment, the change in method is preferable under the registrant’s circumstances.

For additional discussion and interpretations of SEC reporting requirements related to a change in accounting policy, see SAB Topic 6.G.2(b) and paragraph 4230.2(c) in the SEC Division of Corporation Finance’s Financial Reporting Manual (FRM).