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When the carve-out business is a separate legal entity, the statement of changes in equity will reflect the historical equity structure of the legal entity. However, when the carve-out business is not a separate legal entity, the statement of changes in equity in carve-out financial statements may be limited to presenting changes in the parent’s net investment, accumulated other comprehensive income, and noncontrolling interests (if applicable).
Example CO 6-1 provides an equity presentation in a carve-out entity’s statement of stockholders’ equity.
EXAMPLE CO 6-1
Statement of stockholders’ equity in carve-out financial statements
Company X was spun out from its Parent Entity on October 31, 20X1. Net parent investment was $1,000 and accumulated other comprehensive loss was $(100) at December 31, 20X0.
During the period January 1, 20X1 to October 31, 20X1:
  • net income was $50,
  • intercompany activity with the Parent Entity was $(20), and
  • other comprehensive income was $10.
Common stock with a par value of $50 was issued on October 31, 20X1. Net income was $5 during the period of November 1, 20X1 to December 31, 20X1.
How should Company X present its statement of stockholders' equity for the year ended December 31, 20X1?
Analysis
The following reflects the Company X's statement of stockholders' equity. Note that "Net parent investment" is adjusted to $0 on the spin-off date to reflect the new equity structure.
For the year ended December 31, 20X1
Common stock
Additional paid-in capital
Net parent investment
Accumulated other comprehensive income/(loss)
Retained earnings
Total stockholders' equity
Balance at December 31, 20X0
$--
$--
$1,000
$(100)
$--
$900
Net income
--
--
50
--
--
50
Net decrease in net parent investment
--
--
(20)
--
--
(20)
Other comprehensive income
--
--
--
10
--
10
Consummation of separation transaction on October 31, 20X1
50
980
(1,030)
--
--
-
Net income
-
-
-
-
5
5
Balance at December 31, 20X1
$50
$980
$0
$(90)
$5
$945
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