Amounts included in equity for the carve-out financial statements are driven by the structure of the carve-out business. Often, the traditional captions in equity (e.g., common stock, additional paid-in capital, retained earnings) are not relevant. This is because, in many cases, the carve-out business represents only a portion of a legal entity (e.g., the carve-out of a product line), or a combination of legal entities or portions thereof. Therefore, it is common for components of equity other than accumulated other comprehensive income (loss) to be comprised of a single line item, often called “net parent investment” or “divisional equity.” Alternatively, in instances when the carve-out business is a separate legal entity, and financial statements of the legal entity are prepared, the full historical equity structure of the legal entity will be presented in the carve-out financial statements.
The statement of changes in net parent investment or divisional equity will be limited to changes in the parent’s net investment, accumulated other comprehensive income, and noncontrolling interests (if applicable).
In preparing the carve-out financial statements, the activity within the net parent investment account in the statement of changes in equity should be reconcilable to the other financial statements (e.g., income statement, statement of cash flows).

4.4.1 Net parent investment

The net parent investment consists of: (1) financing the carve-out business received from the parent entity to fund its operations through contributions to the carve-out business that did not require repayments, (2) cash dividends to the parent, (3) the net effect of cost allocations from transactions with the parent entity, from the carve out entity to its parent, and (4) the carve-out business’ accumulated earnings. Some transactions can be specifically identified as divisional equity. For example, cash contributions from the parent or cash dividends to the parent. Other activity that is reflected represents the net settlement of intercompany transactions with the parent often related to working capital items.
The carve-out income statement reflects allocations of costs for items such as officer’s salaries and rent expense, which may not have historically been charged to the carve-out entity. In order to record the cost allocation, a corresponding entry is made to the net parent investment account, to the extent such amounts are expected to be settled through an equity contribution rather than cash paid by the carve-out entity to the parent.
SAB Topic 1.B.1 Question 4 (codified in ASC 220-10-S99-3), indicates that for each period for which an income statement is presented, a reporting entity should include an analysis of the intercompany accounts and the average balance of the due to/due from parent. In practice, this analysis may take the form of listing the major components of the net parent investment (e.g., allocation of corporate costs, cash pooling or central cash management arrangements, financing activities).

4.4.2 Accumulated other comprehensive income (AOCI)

Carve-out financial statements should include the caption AOCI separate from divisional equity or net parent investment. Cumulative translation adjustments

If the carve-out business consolidates a foreign entity, the carve-out business applies the guidance in ASC 830, Foreign Currency Matters, to determine the appropriate cumulative translation adjustments (CTA). Pension plan gain or losses

If the multiemployer method is used to account for pensions, the plan assets and plan obligations are not recorded in the carve-out financial statements. Therefore, AOCI related to the pension plan(s) should not be recorded in the carve-out financial statements. However, if the carve-out entity has its own pension plan, applicable amounts should be reflected in AOCI. Unrealized gains and losses from hedging and AFS debt securities

If a derivative instrument was recorded in the carve-out financial statements, then the changes in the fair value of the derivative instrument previously recognized in the parent entity’s AOCI would be included in the carve-out financial statements. This also applies to AFS debt securities that have been attributed to the carve-out business.
Example CO 4-7 illustrates the recording of the various components of AOCI in carve-out financial statements.
Recording AOCI components in carve-out financial statements
Parent Entity plans to spin-off Subsidiary A. Prior to the spin, the consolidated financial statements of Parent Entity contain AOCI balances related to both Parent Entity and Subsidiary A’s assets and liabilities. Specifically, the consolidated AOCI balance includes unrealized gains and losses on available-for-sale debt securities, unamortized gain/loss or prior service cost on subsidiary-specific pension plans, and cumulative translation adjustments.
How would AOCI attributable to assets and liabilities of Subsidiary A be presented in post-spin financial statements of Subsidiary A?
AOCI related to Subsidiary A’s assets and liabilities existing at the date of the spin should be maintained in the opening equity accounts of the post-spin entity. That is, AOCI should not be collapsed into APIC. See Example CO 6-1.
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