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As neither US GAAP nor the SEC provide comprehensive guidance on preparing carve-out financial statements, disclosures are important to enable users to understand how the carve-out financial statements have been prepared. The nature and content of the disclosures describing the carve-out business may vary. However, given the nature of carve-out financial statements, disclosures typically include a description of the business, basis of presentation, and related party disclosures.

6.2.1 Description of the business

A description of the business often provides insights into the nature and scope of the carve-out business. It will typically include a description of the entities, businesses, or divisions included in the carve-out financial statements as well as whether the financial statements were prepared on a combined or consolidated basis. See CO 3.1 for further information regarding combined financial statements vs. consolidated financial statements.

6.2.2 Basis of presentation

The basis of presentation disclosure typically consists of the following elements:
  • The financial reporting framework under which the financial statements have been prepared
  • A statement that the carve-out business is part of a larger reporting entity and the nature of the relationship between the carve-out business and the parent entity
  • A statement that the carve-out financial statements may not be indicative of what the carve-out business would have been as a stand-alone entity.
  • The approach and methodology of significant allocations used in preparation of the carve-out financial statements, including management’s assertion that the allocation method used is reasonable.
  • Accounting policy disclosures. These are typically included for items such as cash and cash equivalents, pension accounting, and net parent investment, among others, to give financial statement users insight into items for which the basis of presentation may be specific to a carve-out.

6.2.3 Related party disclosures

Many transactions that were historically eliminated in consolidation by the parent entity are now recorded in the carve-out financial statements as transactions with affiliated entities. These transactions should be disclosed in accordance with ASC 850, Related Party Disclosures. Carve-out financial statements filed with the SEC will need to comply with the presentation requirements in Regulation S-X Rule 4-08(k).
An estimate, when practicable, of what the expenses from related party agreements (other than income taxes and interest) would have been on a standalone basis should be disclosed as required by Question 2 of SAB Topic 1.B, Allocation Of Expenses And Related Disclosure In Financial Statements Of Subsidiaries, Divisions Or Lesser Business Components Of Another Entity (codified in ASC 220-10-S99-3). This disclosure is required for each year for which an income statement is presented when such basis would have produced materially different results.
Financing arrangements with the parent should be disclosed, as required by Question 4 of SAB Topic 1.B.

6.2.4 Subsequent events

Events that occur after the most recent balance sheet date must be analyzed under ASC 855, Subsequent Events, to determine whether such events require recognition in the financial statements or disclosure.
It is generally acceptable for a reporting entity that is a subsidiary of another entity to only consider for recognition subsequent events that occur through the date the parent entity’s consolidated financial statements are issued (if the parent is a public entity) or available to be issued (if the parent is a non-public entity). Disclosure of nonrecognized subsequent events may still be required. See FSP 28.7 for more information.

6.2.5 Income taxes

When a reporting entity is a member of a group that files a consolidated tax return, it must make certain income tax disclosures. See FSP 16.8.3 for additional information.
As noted in Question 3 of SAB Topic 1.B.1, if the income statement does not reflect the tax provision on the separate return basis, a pro forma income statement for the most recent year and interim period reflecting a tax provision calculated on the separate return basis is required. See TX 14 for further discussion of the separate return method.

6.2.6 Segments

Public entities, as defined by ASC 280-10-15-2 through ASC 280-10-15-3, are required to include disclosures about their segments. As a result of the specific definition in ASC 280, Segment Reporting, reporting entities that are registering securities with the SEC (e.g., an initial public offering or spin-off) are required to include a segment footnote. However, financial statements prepared to comply with Regulation S-X Rule 3-05 or Regulation S-X Rule 8-04 do not need to include a segment footnote. If a segment footnote is required, management will need to determine segments from the perspective of the chief operating decision maker of the carve-out entity. See FSP 25 for more on segments.
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