If the carve-out business is not a legal entity, the financial statements likely reflect “parent’s net investment” in lieu of a more traditional equity structure, as discussed in CO 4.4.1. As such, earnings per share would not be presented. If the form of the transaction includes a registration statement, any financial statement presentation after the reorganization of the carve-out business into a legal entity will reflect EPS for all periods presented, as discussed below. In cases when the carve-out entity is the issuer of an IPO, pro forma EPS may be required. See FSP 7.7 for further consideration of pro forma information.

6.6.1 EPS for a newly-formed entity

When calculating basic EPS for a newly-formed entity, the denominator for the periods prior to formation is the number of shares at formation. When calculating diluted EPS, the dilutive effects of stock options granted by the carve-out business should be considered from the grant date. Options to purchase shares of the parent entity are not included in the carve-out entity’s diluted EPS. See FSP 7.6.4 for further guidance on computing EPS in an IPO or spin-off of a subsidiary.

6.6.2 EPS for an existing subsidiary

With respect to an existing subsidiary (i.e., an entity with a separate legal identity), the historical weighted average number of shares outstanding during each period is reflected in the denominator and EPS for all periods presented. Issuance of shares to new investors in connection with the IPO/spin-off is treated prospectively from the issuance date. If there is a stock split, the EPS should be restated for all periods presented. See FSP 7.6.4 for further guidance on computing EPS in an IPO or spin-off of a subsidiary.
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