The carve-out entity should determine which assets and liabilities relate to the operations of the carve-out business by considering:

Sometimes attributing the asset or liability to the carve-out business is straightforward. For example, a factory owned by the carve-out business and used to manufacture its product is directly attributable to the carve-out business and would be reflected on its balance sheet. Other times, however, the assets or liabilities are shared by the carve-out business and the parent or an affiliate of the parent (such as a corporate office). It is generally not appropriate to allocate assets or liabilities on a pro-rata basis. Assets and liabilities are fully attributed or fully excluded from the carve-out balance sheet. Even if a specific asset or liability is excluded from the balance sheet, the carve-out business may need to recognize an appropriate allocation of the associated income statement impact.

In certain situations, an asset or liability may need to be separated into individual units of accounts so that the parts can be attributed to the parent and carve-out. For example, accounts receivable that were generated through sales made by the carve-out business are directly attributable to the carve-out business, but often are commingled with the parent entity’s accounts receivable and may need to be separated from the larger population of accounts receivable. The level of effort to evaluate and bifurcate commingled balances, especially on the balance sheet, can be challenging when preparing carve-out financial statements.