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The purpose of preparing carve-out financial statements is to present the historical financial position and results of operations for the carve-out business. Determining the assets, liabilities, revenues, and expenses reflected in the carve-out financial statements may require judgment and will be influenced by how the carve-out business is defined. See CO 4 for the factors to consider when attributing assets and liabilities. See CO 5 for the factors to consider when allocating expenses.

3.2.1 Assets and liabilities

Carve-out financial statements include assets and liabilities (or components of assets or liabilities) relating to the operations of the carve-out business. For example, a component of the parent entity’s accounts receivable may be generated through the revenue-generating activities of the carve-out business and so are directly attributable to the carve-out business. As such, these receivables would be included on the carve-out balance sheet. Additional factors that may be considered when determining which assets and liabilities to attribute to the carve-out business include whether or not the asset or liability will be transferred in the transaction and which entity holds the legal title (asset) or has the legal obligation (liability).
In some instances, assets or liabilities are shared by the carve-out business and an affiliate of the parent entity, or with the parent itself (such as a corporate office building). It is typically not appropriate to partially allocate assets or liabilities. A determination will need to be made with regard to full attribution or exclusion of such items from the carve-out financial statements. Even if a specific asset or liability is excluded from the balance sheet, the carve-out business recognizes an appropriate allocation of the associated income statement impact. For example, a corporate office building may not be attributed to the carve-out balance sheet, but the carve-out entity would be allocated a portion of the depreciation expense. See CO 5.4.2.

3.2.2 Revenues and expenses

Revenues of the carve-out business are often easily identifiable, even at a level below a reportable segment or business unit. As a result, revenues will often be one of the more straightforward line items to assign to a carve-out entity.
With respect to costs, the historical income statements should reflect all of its costs of doing business, including costs incurred on the carve-out entity’s behalf by its parent. One of the challenges when preparing carve-out financial statements is the allocation of indirect costs, such as corporate overhead. In SAB Topic 1.B.1, Costs reflected in historical financial statements, codified in ASC 220-10-S99-3, the SEC staff noted the expenses recorded in the historical carve-out financial statements should reflect a reasonable allocation of costs incurred by the parent entity on behalf of the carve-out business. See CO 5.2 for a discussion of this topic.

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