Historical intercompany transactions and account balances of the carve-out business and parent must be identified and evaluated for proper presentation within the carve-out financial statements. Examples of intercompany transactions may include the following:
  • Centralized cash management functions
  • Intercompany amounts (including intercompany debt, payables, and receivables) as well as amounts previously recorded as “due to” or “due from” affiliates
  • Inventory purchased by the carve-out business from affiliated entities, or vice versa
  • Dividends between the carve-out business and parent
  • Leases with the parent or other subsidiaries

Transactions that were historically eliminated in the consolidation of the parent entity’s financial statements now represent transactions with related parties. These related party transactions require separate disclosure. See CO 6.2.3 for further discussion of related party disclosures.
In other cases, intercompany transactions not previously recorded between the carve-out business and parent company will need to be recognized in the carve-out financial statements.
Intercompany transactions and balances between entities within the carve-out business will continue to be eliminated in preparing the carve-out financial statements.

4.5.1 Centralized cash management functions

It is common for the carve-out business to participate in a centralized cash management arrangement. In these situations, on a periodic basis, excess cash balances or deposits are swept into a cash pool (i.e., sweep account) and mixed with cash from other affiliated entities. Generally, under these types of arrangements, the sweep accounts are legally held by the parent entity and are used to fund the cash requirements of the affiliated entities included within the arrangement. As the sweep accounts are legally held by the parent entity, it typically would not be appropriate to include the sweep account cash balances in the carve-out financial statements. Any balance not swept to the cash pool account would be included in the carve-out financial statements to the extent the balance remains in an account in the legal name of the carve-out business.
Deposits within centralized cash management arrangements represent amounts due from the parent entity to the carve-out business and are typically classified as such. It would not be appropriate to classify these as cash and cash equivalents, despite the fact they may be payable by the affiliated entity immediately or within three months of the balance sheet date.

4.5.2 Intercompany notes, debt, receivables, and payables

Intercompany notes and debt are generally presented as assets or liabilities (i.e., not collapsed into equity) when supported by a written agreement that includes principal amounts, interest rate, maturity date, etc.
When determining the classification of intercompany balances related to foreign entities, it may be helpful to understand prior assertions made by the parent entity. To account for the translation on intercompany loans, the parent would need to determine whether such loans were of a “long-term-investment nature” as described in ASC 830-20-35-3b. Foreign currency transaction gains and losses related to intercompany loans or advances that the parent asserts will not be settled in the foreseeable future are accounted for in the cumulative translation adjustments account upon consolidation (i.e., the gains and losses are not recorded in the income statement). See FX 7.5 for more on intercompany loans. This accounting is because an intercompany loan, while considered a long-term investment, is essentially a capital contribution. Any repayment of the loan would then essentially be a dividend.
The parent’s stated intentions used to determine the appropriate tax treatment may also be informative. For example, the parent may have asserted that an intercompany loan will be repaid for tax purposes. This assertion may inform the classification of the intercompany agreement in the carve-out financial statements.
When not supported by written agreements, intercompany receivables and payables are reflected in the carve-out financial statements depending on the manner in which they will be settled. Intercompany balances expected to be settled between the carve-out business and retained entities of the parent (typically in cash) are reflected as “due to” or “due from” the parent entity in the carve-out financial statements. Conversely, if the intercompany balance is expected to be forgiven, it is reflected as an equity transaction (i.e., as a contribution or distribution of capital), which is included within the net parent investment account. If there is uncertainty as to how the transaction is to be settled, it may be appropriate to consider the past practices of settling intercompany funding provided by the parent entity.
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