Carve-out financial statements include the share-based payment expense related to awards held by employees who historically provided services to the carve-out business. If a share-based compensation plan is directly related to the carve-out business (e.g., the carve-out business is a separate legal entity or entities with its own share-based compensation plan), the share-based compensation expense is included in the carve-out financial statements. Otherwise, the cost is reflected in the carve-out income statement through an allocation from the parent entity. To the extent an allocation is required, the assumptions made to allocate share-based compensation are generally consistent with the assumptions and methodologies utilized for other cash-based compensation amounts.

For a carve-out of a separate legal entity with its own share-based compensation plan, ASC 718, Compensation–stock compensation, disclosures are included in the carve-out financial statements for the plan. When employees of the carve-out business participate in a parent’s share-based payment plan, the carve-out financial statements should include relevant disclosures required by ASC 718; however, these disclosures would likely be based on the parent’s consolidated disclosures modified to reflect the balances related to employees of the carve-out business. For employees who provide service indirectly to the carve-out business (e.g., parent entity executive employees), the allocation of share-based compensation expense may be included in the disclosure of allocations of shared corporate costs.

As noted in CO 4.3.5, if the carve-out entity participates in the parent’s pension plan then it can elect to apply the multiemployer approach or the multiple-employer approach. In practice, the multiemployer approach is more common than the multiple-employer approach. For the multiemployer approach, an expense should be recognized in the carve-out financial statements based on the required “contribution” to the plan for the period. Although the carve-out business may not have been historically required to make actual cash contributions, the amount recognized as expense represents an allocation of net periodic pension cost, which must include (at a minimum) service cost.

For the multiple-employer approach, an expense should be recognized in the carve-out financial statements in the period that it is incurred. ASC 715-30-35-70 indicates that multiple-employer plans should be considered single employer plans. As a result, if the carve-out entity elects multiple-employer plan accounting, it should include the service component costs in the same line items as other compensation costs. The other components (e.g., interest costs, actual return on plan assets, amortization of prior service cost, actuarial gains and losses) should be included outside of income from operations.