March 7, 2018

Divestitures: Carving Up “Carve-Out” Financials

If you’re doing a spin-off or divestiture involving a portion of your business, the rules surrounding “carve-out” financial statement requirements can add a significant degree of complexity to your process.  This PwC memo provides guidance on how to prepare these financial statements. This excerpt is from the intro:

Carve-out financial statements refer to separate financial statements that are derived or “carved-out” from the financial statements of a larger entity. They can be prepared for a variety of purposes; e.g.,—to comply with a buyer’s requirement to furnish audited financial statements of an acquired business under Rule 3-05 of Regulation S-X; as the predecessor to the registrant in an initial public offering (“IPO”) of securities or spin-off from a parent company; or to satisfy financing requirements of a buyer.

These financial statements should reflect the historical operations of the carve-out entity on a stand-alone basis.  Unfortunately, they frequently do not exist and need to be prepared for the specific objective. If financial statements do exist, they may not fully reflect the total cost of doing business.

As noted, there is very little authoritative guidance for preparing carve-out financial statements. As a result, judgment is needed in many areas, such as impairment and valuation allowance assessments, corporate overhead, deferred taxes, among other items, to reflect the objectives of the accounting literature and present financial statements of part of an entity.

The memo addresses some of the challenges facing companies when it comes to determining which asset, liability, & expense items should be included in the carve-out financial statements, and also touches on parent company reporting issues associated with a carve-out.

John Jenkins