Chapter 4 — Other Accounting and Financial Reporting Items

4.7 Subsequent Events

A carve-out entity’s financial statements must include subsequent-event disclosures if applicable. Because the carve-out financial statements are derived from the previously issued parent-entity financial statements, the carve-out financial statement disclosures may simply be a subset of the previously issued parent-entity subsequent-event disclosures. Therefore, management would identify only subsequent events related to the carve-out entity and would include such disclosures in the carve-out financial statements. However, since carve-out financial statements are most likely subject to lower materiality thresholds for disclosure, previously immaterial subsequent events that may not have been disclosed in the parent-entity financial statements may be material to the carve-out entity and therefore may be subject to disclosure in the carve-out financial statements.

We believe that when management evaluates subsequent events in the carve-out financial statements, it should apply the same subsequent-event cutoff dates used for the previously issued parent-entity financial statements when considering potential “recognized” subsequent events. However, when evaluating potential disclosures in the carve-out financial statements, management should consider subsequent events through the date on which the financial statements are issued (for SEC filers) or are available to be issued. If new events are identified after the issuance of the parent-entity financial statements and before the issuance of the carve-out financial statements, the carve-out financial statements may include disclosure of additional subsequent events but typically would not include recognition of the impact of such events (excluding identified errors). This approach is based on a reissuance framework — the premise that carve-out financial statements represent a reissuance of financial statements for subsequent-event purposes. The reissuance guidance in ASC 855-10-25-4 states:

An entity may need to reissue financial statements, for example, in reports filed with the SEC or other regulatory agencies. After the original issuance of the financial statements, events or transactions may have occurred that require disclosure in the reissued financial statements to keep them from being misleading. An entity shall not recognize events occurring between the time the financial statements were issued or were available to be issued and the time the financial statements were reissued unless the adjustment is required by GAAP or regulatory requirements. Similarly, an entity shall not recognize events or transactions occurring after the financial statements were issued or were available to be issued in financial statements that are later reissued in comparative form along with financial statements of subsequent periods unless the adjustment meets the criteria stated in this paragraph.

We believe that under this framework, when management is preparing carve-out financial statements for the first time but their content was included in the consolidated results of a parent entity, it should generally not recognize amounts that differ from those that were previously recognized in the parent-entity financial statements on the basis of information that becomes available after the date on which the parent-entity financial statements were issued or were available to be issued. However, management should determine whether such currently available information represents information that management (1) was aware of and misapplied or (2) should have been aware of. Errors identified during the development of the carve-out financial statements that meet the criteria for the correction of an error or for a prior-period adjustment should be evaluated and accounted for in accordance with ASC 250. Management should use judgment in performing such an evaluation.

We understand that, when preparing carve-out financial statements, management of some entities has contemplated a framework under which the issuance of the carve-out entity’s financial statements is viewed as the initial issuance of those financial statements. Under this framework, the latest period presented in the carve-out financial statements is evaluated for recognized subsequent events through the date on which the carve-out financial statements are issued or are available to be issued. This approach, by not relying on the same subsequent-event cutoff dates used for the previously issued parent-entity financial statements, may result in the reporting of the accounting impacts of certain events that affect the carve-out entity in a financial statement reporting period that differs from that of the parent entity. An entity that contemplates such an approach is encouraged to consult with its professional advisers to ensure that it evaluates the potential effects of the approach on other judgments and assumptions used in the preparation of the carve-out financial statements (e.g., goodwill allocation [see Section 2.2] and goodwill impairment testing [see Section 2.2.2]).

4.7.1 Disclosure of Date Through Which Subsequent Events Were Evaluated — Initial Registration Statement

Under ASC 855, SEC filers are defined as including only entities that are required to file financial statements with the SEC (or with another appropriate agency in accordance with the Securities Exchange Act of 1934 [the “Exchange Act”]). Because an entity that files financial statements in an initial registration statement is not required to file its financial statements with the SEC until the registration statement is declared effective, it does not meet the definition of an SEC filer under ASC 855 and therefore must disclose the date through which management evaluated subsequent events in the financial statements. Similarly, the definition of an SEC filer in ASC 855 does not encompass an entity whose financial statements are included in an SEC registrant’s filing. Accordingly, when an SEC registrant’s filing includes financial statements of an entity that is not considered an SEC filer under ASC 855 (e.g., financial statements of a significant acquiree under Rule 3-05), the non-SEC filer must disclose the date through which subsequent events have been evaluated and whether that date was the date of issuance or the date on which the non-SEC filer’s financial statements were available to be issued.