If the bank accounts used by the carve-out business are not in the name of the carve-out business, or cash was swept into a parent account, cash may not be reflected on the balance sheet of the carve-out financial statements. Even so, ASC 230-10-15
would still apply and information regarding cash inflows and outflows would be required.
The statement of cash flows of a carve-out business is derived from its financial statements (i.e., balance sheet and income statement). Management should prepare the statement of cash flows for the carve-out business utilizing carve-out-specific information. The preparation of the statement of cash flows can be complex. Certain financial statement line items (e.g., fixed assets) may have a number of shared assets or commingled transactions that require close attention by management to determine the proper cash flow presentation. For example, management may need to develop a new process to identify fixed asset purchases unpaid as of the end of the reporting period that relate to the carve-out business.
While intercompany transactions are eliminated in the parent entity financial statements, the carve-out statement of cash flows will reflect these transactions. The nature of the related party transaction should be considered to determine the appropriate presentation in the statement of cash flows. For example, receivables and payables due to/from affiliated entities that relate to intercompany sales/purchases and that are intended to be repaid would be reflected as operating cash flows. Executed notes receivable/payable with affiliates would typically result in investing or financing activities, respectively.
Many entities use centralized treasury functions in which the parent reporting entity controls all cash transactions on behalf of its subsidiaries, and maintains all cash accounts. This kind of arrangement results in due to/from parent in the carve-out entity’s standalone financial statements since the parent makes all cash payments on behalf of the carve-out entity and sweeps all cash balances. In such circumstances, the intercompany net due to/from parent is, in substance, the carve-out entity’s cash account. As a result, changes in the due to/from parent account should be reflected as actual cash flows in the carve-out entity’s standalone statement of cash flows.
A parent and the carve-out entity could classify the cash flow activity associated with the due to/from parent account as financing activities based upon the consolidating statement of cash flows example included in ASC 830-230-55-2
Alternatively, the cash flow classification could be based on whether the balance is a net due to or a net due from parent. That is, if the balance sheet shows a net due from parent, the carve-out entity would classify the cash flows as investing, as this balance is akin to a loan, as contemplated by ASC 230-10-45-12a
and ASC 230-10-45-13a
. However, if a carve-out entity’s balance sheet reflects a net due to parent, the carve-out entity would classify the cash flows as financing, as this balance is similar to issuing debt.
Management should consider the effect of changes in the taxes payable balance on the statement of cash flows. Generally, income tax expense would result in an increase in income taxes payable, which is shown as a non-cash “add back” to the operating cash flows. Only actual cash paid for taxes by the carve-out business would be shown as an operating cash outflow. If the parent entity paid taxes on behalf of the carve-out business, these transactions and the taxes payable balance would be treated in a manner similar to other intercompany transactions.