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Generally, the accounting policies of the carve-out business should reflect the historical accounting policies applied by the parent entity. However, preparation of carve-out financial statements can result in adoption of an accounting principle or a change in accounting principle due to (1) materiality differences between the parent entity and the carve-out business, (2) newly issued accounting standards, and (3) preferability. See CO 3.4.1 through CO 3.4.3 for a discussion of these three topics.
ASC 250-10-45-1 provides guidance on these topics.

ASC 250-10-45-1

A presumption exists that an accounting principle once adopted shall not be changed in accounting for events and transactions of a similar type. Consistent use of the same accounting principle from one accounting period to another enhances the utility of financial statements for users by facilitating analysis and understanding of comparative accounting data. Neither of the following is considered to be a change in accounting principle:

  1. Initial adoption of an accounting principle in recognition of events or transactions occurring for the first time or that previously were immaterial in their effect
  2. Adoption or modification of an accounting principle necessitated by transactions or events that are clearly different in substance from those previously occurring.

ASC 250-10-45-2

A reporting entity shall change an accounting principle only if either of the following apply:
  1. The change is required by a newly issued Codification update.
  2. The entity can justify the use of an allowable alternative accounting principle on the basis that it is preferable.

3.4.1 Materiality

Materiality for the carve-out business will frequently differ from that applied by the parent entity. As a result, management of the carve-out business may need to revisit accounting policies for items that were considered immaterial for purposes of the parent entity’s consolidated financial statements.
The initial adoption of an accounting principle in recognition of events or transactions occurring for the first time or that previously were deemed immaterial by the parent would not be considered changes in accounting principles.

3.4.2 New accounting standards

Many accounting standards have different adoption dates for public business entities and non-public business entities. To determine the applicable effective dates for the relevant accounting standards, management should consider the purpose of the financial statements (e.g., Regulation S-X Rule 3-05, Regulation S-X Rule 8-04, IPO), and to the extent applicable, the type of issuer the carve-out entity will be (e.g., smaller reporting company or emerging growth company).
Oftentimes the carve-out business adopts new accounting standards at the same time as the parent entity. However, there may be limited situations when the timing of adoption differs between the parent entity and the carve-out business. For example, if the parent entity is private but the carve-out financial statements will be used for an IPO, the carve-out may need to adopt standards in an earlier period. This can also depend on whether the carve-out entity meets the definition of an emerging growth company and the extended transition provisions are elected.
If the carve-out business is a private entity, it may elect the private company accounting alternatives.

3.4.3 Preferability

A carve-out business can adopt an accounting principle different from that used by its parent, provided that the change is preferable.
A change in accounting policy requires retrospective application. The reporting entity must disclose the nature of the change in accounting principle and explain why the newly adopted accounting principle is preferable.
Reporting entities sometimes sell or spin-off divisions or subsidiaries. A spin-off is a transaction in which a portion of a reporting entity (e.g., a division, a subsidiary) becomes a new, separate reporting entity and the shareholders of the original reporting entity receive a pro rata ownership in the spun-off reporting entity.
When a division or subsidiary is preparing its financial statements to facilitate a sale or spin-off, the division or subsidiary usually follows the accounting principles of its parent. When a division or subsidiary is spun-off, it can change to an accounting principle different from that used by its parent, provided that the change is preferable. Such a change in accounting principle should be applied retrospectively in the financial statements.
The spun-off reporting entity must disclose the nature of the change in accounting principle and explain why the newly-adopted accounting principle is preferable.
A spun-off reporting entity cannot, however, retrospectively reflect changes in estimates. Such changes should be reflected in the period in which they occur in both the consolidated (if applicable) and spun-off reporting entity’s financial statements.
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