If the carve-out financial statements reflect the parent’s basis, the financial statements would usually include the historical goodwill amount. That is, acquisition-specific goodwill recognized by the parent that directly relates to the carve-out business would be presented in the carve-out financial statements.
Conceptually, goodwill should be attributed to the carve-out entity based on the amount that would have been recognized when it was acquired, as discussed in ASC 350-20-35-42
. That means that management would need to consider the fair value of the carve-out business and its assets and liabilities at the date of original acquisition. The amount of the goodwill recognized in the carve-out financial statements may not be the same as the amount of goodwill assigned by the parent to the divested business. See BCG 9.10.5
for more information on accounting by the parent entity.
When it is impracticable to determine what the fair value of the carve-out business and its assets and liabilities were at the date of original acquisition, management should develop a reasonable and supportable methodology for determining the goodwill attributable to the carve-out business and apply the methodology consistently for all periods presented. For example, an approach may include attribution based on the proportionate fair value of the acquired business included in the carve-out business relative to the fair value of the acquired business as a whole on the date of acquisition.
Attribution of goodwill may be complex when the carve-out business was acquired as part of a larger acquisition, and may be even more so if the carve-out includes components of multiple acquisitions. For example, if the carve-out business represents one out of three businesses acquired in a single transaction, and the entire transaction was assigned to a single reporting unit at the parent level, management would need to determine what portion of the goodwill resulting from the acquisition should be attributed to the carve-out business.
In some cases, goodwill may have lost its identity subsequent to acquisition due to reorganizations of the business (including changes in segments or reporting units), or the valuation performed at the time of the original acquisition may not have included information at a level of detail sufficient to determine the relative fair values as of that date. In such cases, another reasonable methodology may be utilized to determine the amount of goodwill to attribute to the carve-out business.
Example CO 4-3 provides an example of initial recognition of goodwill in carve-out financial statements, and Example CO 4-4 provides an example of the allocation of goodwill to reporting units in carve-out financial statements.
EXAMPLE CO 4-3
Historical goodwill presentation
On March 1, 20X3, Company A acquired Business B for $500 million. The fair value of the identifiable net assets acquired was $360 million and goodwill was $140 million. Business B is included in Company A’s reporting unit RU2. RU2 also includes the net assets ($200 million) and goodwill ($30 million) of Business C, which was acquired by Company A on March 1, 20X1.
On March 1, 20X6, Company A decides to spin off Business B and will retain the remaining assets in RU2 attributable to Business C. What is the amount of goodwill that should be included in the carve-out financial statements?
Acquisition-specific goodwill related to Company A’s acquisition of Business B of $140 million would be included in the carve-out financial statements. This is because that historical goodwill is identifiable and relates specifically to the carve-out business.
EXAMPLE CO 4-4
Allocation of goodwill to reporting units
On March 1, 20X1, Company A acquires Entity C, which is comprised of two businesses, for $300 million and records $140 million of goodwill. On the acquisition date, one of the businesses (Business B) had a fair value of $150 million with identifiable net tangible and intangible assets comprising $60 million of that amount.
On March 1, 20X4, Company A decides to spin off Business B and prepares carve-out financial statements. What is the amount of goodwill that should be included in the carve-out financial statements?
In order to determine the amount of goodwill to attribute to the carve-out financial statements, management would first consider the fair value of the business being sold on the date it was acquired. This value would be the basis for deriving the carve-out goodwill following the guidance in ASC 350-20-35-42
. As a result, the acquisition-specific goodwill attributed to the carve-out business is $90 million, or the difference between Business B’s $150 million fair value and $60 million net assets based on the information that was available on the acquisition date.
If this method is impracticable because Company A did not perform a separate analysis of identifiable net assets of the two business on the acquisition date, Company A may consider an approach that compares the fair value as of the acquisition date (i.e., March 1, 20X1) of the business to be sold ($150) to Entity C ($300). Given the carve-out business represented 50% of the acquisition date fair value, $70 million of acquisition-specific goodwill (50% of the $140 million goodwill balance) would be attributed to the carve-out business.
In instances when the attribution of goodwill to the carve-out business represents only a portion of a parent entity’s reporting unit and an impairment charge was recorded prior to the opening balance sheet date presented in the carve-out financial statements, management should consider what portion, if any, to attribute to the carve-out business. ASC 350-20-40
, which provides guidance on accounting for the disposal of all or a portion of a reporting unit, may be helpful to consider in these situations.