There is no legal or accounting definition for carve-out financial statements. Rather, carve-out financial statements reflect the separate financial results and financial position of a portion of a larger entity, which can take the form of a subsidiary, an operating unit, a product line, or a brand. The financial statements presented may or may not be of a legal entity, which can lead to complexities in the basis of presentation of carve-out financial statements.
When determining whether carve-out financial statements are needed, the reporting entity should consider the nature of the planned divestiture, including any contractual or SEC reporting requirements. Often, the completion of a transaction or the related deal financing can be contingent on providing carve-out financial statements.
When the carve-out financial statements are to be included in an SEC filing, applicable SEC rules will determine the form of the filing, the annual and interim financial statements required, the age of the financial statements, and whether the financial statements need to be audited.
Figure CO 1-1 provides an overview of different types of SEC forms and when they may be required.
Figure CO 1-1
Typical SEC forms used in certain divestiture transactions
- Registration statement used by first-time Securities Act registrants for purposes of an initial public offering of a carve-out entity.
- Used to register securities issued by the acquirer in exchange for securities of the acquiree in the acquisition.
- Detailed financial information about the target is often required, including but not limited to interim and annual financial statements and MD&A.
- Used to inform shareholders about various material corporate events, including significant acquisitions or dispositions of businesses.
- If an acquisition has occurred, and it meets certain significance thresholds defined by the SEC, the acquirer may be required to include the carve-out financial statements of the acquired entity pursuant to Regulation S-X Rule 3-05 or Regulation S-X Rule 8-04.
- Often used to register shares of a subsidiary (may be newly created) that are subsequently distributed to the parent company’s shareholders (i.e., a spinoff transaction).
- Used to register securities issued by real estate investment trusts or other issuers whose business is primarily that of acquiring and holding for investment real estate.
When financial statements are prepared to satisfy SEC requirements, the number of periods required will be dictated by the applicable SEC regulations, including Regulation S-X Rule 3-05
or Regulation S-X Rule 8-04
. In certain cases, the determination of how many periods to present is based on significance thresholds. These thresholds are based on specific quantitative metrics that determine the level of significance of the acquired entity in comparison to the acquirer.
When the financial statements are not required to be filed with the SEC, the number of periods presented and form of carve-out financial statements varies based on the needs and specifications of the parties to the transaction.