July 10, 2018
Divestitures: Carve-Out Tax Provisions in Financials
We’ve previously blogged about advice from PwC on preparing carve-out financial statements in connection with spin-offs or other divestitures. Now, they’re back with this memo offering more advice on a specific component of those financials – the tax provision. As with just about everything else involved with carve-out financials, the process of determining the tax provision is complicated. Here’s an excerpt discussing the SEC’s preferred approach:
ASC 740-10-30-27 requires that the current and deferred tax expense for a group that files a consolidated return be allocated among the group members when those members issue separate financial statements. While ASC 740 does not require the use of any particular allocation method, it does require the method to be systematic, rational, and consistent with the broad principles of ASC 740. It goes on to indicate that the separate return method meets those criteria. In addition, the SEC staff has stated that it believes the separate return method is the preferred method.
Under the separate return method, the carve-out entity calculates its tax provision as if it were filing its own separate tax return based on the pre-tax accounts included in the carve-out entity. This can result in perceived inconsistencies between the tax provision of the carve-out entity and the tax provision of the consolidated group. This is acceptable, as ASC 740 acknowledges that if the separate return method is used, the sum of the amounts allocated to individual members of the group may not equal the consolidated amount.
The memo notes that the separate return method isn’t mandatory, and that another method may be acceptable as long as it’s systematic, rational, and consistent with the broad principles of ASC 740. The memo goes on to review one of those alternatives – the separate company method as modified for benefit or loss – and discusses a number of additional issues that need to be addressed in determining the appropriate tax provision & financial statement disclosure.
– John Jenkins