When a reporting entity completes a spin-off transaction, a question arises whether it is appropriate for the parent company to view the spin-off of the subsidiary as a change in the reporting entity, or present the spun-off entity in discontinued operations if it meets the discontinued operations criteria. If presented as a change in reporting entity, the parent's historical financial statements would be retrospectively adjusted as if the reporting entity never had an investment in the subsidiary. See FSP 30.6
for further discussion of presenting a change in reporting entity.
The SEC generally will not allow a parent reporting entity to retrospectively adjust its financial statements to reflect a spin-off as a change in the reporting entity (i.e., sometimes referred to as a “de-pooling”). If the parent reporting entity was required to file periodic reports under the 1933 Exchange Act within one year prior to the spin-off, the SEC staff believes the reporting entity should reflect the disposition as held for sale in conformity with ASC 360
as this presentation most fairly and completely depicts for investors the effects of the previous and current organization of the reporting entity. However, in limited circumstances involving the initial registration of a reporting entity under the Exchange Act or Securities Act, the SEC staff has not objected to financial statements that retrospectively reflect the reorganization of the business as a change in the reporting entity if the spin-off transaction occurs prior to effectiveness of the registration statement. The criteria the SEC staff considers when determining whether a "de-pooling" is acceptable in an initial registration as found in SAB Topic 5.Z, Accounting and Disclosure Regarding Discontinued Operations,
are that the reporting entity and subsidiary:
- Are in dissimilar businesses
- Have been managed and financed historically as if they were autonomous
- Have no more than incidental common facilities and costs
- Will be operated and financed autonomously after the spin-off
- Will not have material financial commitments, guarantees, or contingent liabilities to each other after the spin-off
All of the criteria listed above should be met to “de-pool” a transferred business retroactively from its historical financial reporting periods. This guidance is specific to SEC registrants involved in a spin-off transaction. Based on limited authoritative guidance, we believe private companies should consider applying these underlying concepts as well.
See PPE 6.4.2
for further details on the disposal of long-lived assets by spinoff.
Example FSP 27-5 illustrates the presentation in the income statement of a spin-off transaction.
EXAMPLE FSP 27-5
FSP Corp is comprised of two-wholly owned operating subsidiaries, Subsidiary X and Subsidiary Y. In July 20X1, Subsidiary Y spins off one of its legal entities, Entity Z, to parent FSP Corp by distributing the stock of Entity Z to its sole shareholder, FSP Corp. Entity Z is a component under ASC 360-10-20
, as its operations and cash flows can be clearly distinguished from Subsidiary Y, both operationally and for financial reporting purposes. Both Subsidiary Y and Entity Z have similar businesses. Entity Z meets the criteria for discontinued operations presentation. The following is a diagram of the organizational structure of FSP Corp before and after the spin-off.
How should Subsidiary Y present the spin-off of Entity Z in its standalone financial statements?
Subsidiary Y should account for the spin-off by presenting the operations of Entity Z as discontinued operations upon successful completion of the spin-off. Retrospectively adjusting Subsidiary Y's financial statements to reflect the spin-off of Entity Z as a change in reporting entity (i.e., de-pooling) would not be appropriate since they operate in similar businesses.
Generally, costs that are incurred to accomplish a spin-off should be classified as part of discontinued operations once the spin-off is completed. Such costs are similar to transaction costs incurred in connection with a sale, which are classified as discontinued operations. However, bonuses paid by the reporting entity to the reporting entity's employees (not employees of the spun-off entity) for the successful completion of the spin-off transaction should be reflected in continuing operations. Such payments are not considered "costs to sell" under ASC 360-10-35-38
and, therefore, would not be reported in discontinued operations.