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There are often several operating units or divisions within a consolidated group of reporting entities or an individual reporting entity. These units or divisions often are not themselves separate legal entities but individually or collectively could qualify as a "business" as defined by S-X 11-01(d).
Circumstances may arise that require separate financial statements for these businesses (sometimes referred to as "carve-out" financial statements), or may require financial statements for subsidiaries of the reporting entity. For further discussion of carve-out financial statements, see PwC’s Carve-out financial statements guide. See FSP 17.6 and BCG 10.1 for discussion of pushdown accounting.

3.9.1 Presentation considerations

ASC 220-10-S99-3 (SAB Topic 1.B, Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity) provides guidance to registrants regarding the allocation of costs incurred by a parent on behalf of a carve-out entity in the carve-out financial statements. However, the guidance is also useful for any separate financial statement reporting of businesses/subsidiaries, not just carve-out financial statements.
ASC 220-10-S99-3 emphasizes the importance of presenting operating results that reflect all of the “costs of doing business” despite the fact that some of the costs may not have been allocated historically to the carve-out entity. These expenses include, but are not necessarily limited to, the following:
  • Officer and employee salaries
  • Rent and/or depreciation
  • Advertising
  • Accounting and legal services
  • Other selling, general, and administrative expenses
  • Income taxes
  • Interest
Often, a reasonable method of allocating common expenses to the subsidiary (e.g., incremental or proportional cost allocation) must be chosen because specific identification of expenses is not practicable. In these situations, SEC FRM 7210 states that reporting entities should include an explanation in the footnotes of the allocation method used, together with management’s assertion that the method is reasonable. Disclosures should be made of what expenses would have been on a standalone basis, if materially different. Although ASC 220-10-S99-3 requires a reasonable estimate of expenses incurred on behalf of a subsidiary to be reflected in the financial statements, changes to actual amounts on the basis of expected future results is prohibited in the historical financial statements.
Example FSP 3-4 illustrates the allocation of costs and expenses to a subsidiary.

Allocation of costs and expenses to a subsidiary
FSP Corp manufactures a wide range of product lines. It acquires the rights to manufacture and sell a specific branded product, Product A, from Company Y. Company Y has previously sold and marketed Product A through its sales force and marketing department, which also sells other product brands not being acquired by FSP Corp. The acquisition includes manufacturing facilities and related employees, inventory, certain tangible assets, patents, manufacturing and marketing rights, customer relationships, supply agreements, trade names, and trademarks. FSP Corp does not acquire the sales force and marketing department. FSP Corp will manufacture Product A at the acquired manufacturing facilities and will market the product through its existing sales force.
FSP Corp is required to file with the SEC a full set of “carve-out” financial statements if the acquisition is determined to be “significant” under S-X 3-05. Should the carve-out financial statements reflect an allocation of Company Y’s costs and expenses (e.g., marketing expenses) to Product A’s business?
FSP Corp will need to obtain carve-out financial statements from Company Y for historical financial information. These financial statements need to include all of the appropriate revenues, expenses, assets, and liabilities related to the acquired business, even though Company Y may not have maintained separate accounting records for Product A. This would include an appropriate allocation of selling and marketing expenses (even though Company Y’s sales force and marketing department was not acquired by FSP Corp), together with other costs such as overhead expenses in accordance with ASC 220-10-S99-3 as this reflects all “the costs of doing business” associated with Product A.

3.9.2 Disclosure considerations

If a reporting entity’s financial statements include separate financial statements (e.g., of a subsidiary or investee), ASC 850-10-50-4 indicates that the reporting entity does not need to repeat disclosures in the separate financial statements. This is permissible only if the separate financial statements also are consolidated or combined in a complete set of financial statements and both sets of financial statements are presented in the same financial report.
If separate financial statements are prepared for subsidiaries or investees of a reporting entity, S-X 4-08(k)(2) requires those financial statements to indicate the amount of related party transactions that are and are not eliminated in the separate financial statements. In addition, it requires the financial statements to include disclosure of any intercompany profits or losses resulting from transactions with related parties that are not eliminated.
ASC 220-10-S99-3 also requires additional disclosures of expense allocations from parents to subsidiaries regarding income taxes as follows:

ASC 220-10-S99-3, Question 3

What are the staff’s views with respect to the accounting for and disclosure of the subsidiary’s income tax expense?
Interpretive Response: Recently, a number of parent companies have sold interests in subsidiaries, but have retained sufficient ownership interests to permit continued inclusion of the subsidiaries in their consolidated tax returns. The staff believes that it is material to investors to know what the effect on income would have been if the registrant had not been eligible to be included in a consolidated income tax return with its parent. Some of these subsidiaries have calculated their tax provision on the separate return basis, which the staff believes is the preferable method. Others, however, have used different allocation methods. When the historical income statements in the filing do not reflect the tax provision on the separate return basis, the staff has required a pro forma income statement for the most recent year and interim period reflecting a tax provision calculated on the separate return basis.

Virtually all standalone subsidiary income tax provisions are prepared on this basis, given the SEC staff’s strong preference for the separate return method to be utilized, as well as the need to prepare pro forma separate return basis information.
ASC 220-10-S99-3 also requires specific disclosure related to financing arrangements between a parent and a subsidiary.

ASC 220-10-S99-3, Question 4

Should the historical income statements reflect a charge for interest on intercompany debt if no such charge had been previously provided?
Interpretive Response: The staff generally believes that financial statements are more useful to investors if they reflect all costs of doing business, including interest costs. Because of the inherent difficulty in distinguishing the elements of a subsidiary’s capital structure, the staff has not insisted that the historical income statements include an interest charge on intercompany debt if such a charge was not provided in the past, except when debt specifically related to the operations of the subsidiary and previously carried on the parent’s books will henceforth be recorded in the subsidiary’s books. In any case, financing arrangements with the parent must be discussed in a note to the financial statements. In this connection, the staff has taken the position that, where an interest charge on intercompany debt has not been provided, appropriate disclosure would include an analysis of the intercompany accounts as well as the average balance due to or from related parties for each period for which an income statement is required. The analysis of the intercompany accounts has taken the form of a listing of transactions (e.g., the allocation of costs to the subsidiary, intercompany purchases, and cash transfers between entities) for each period for which an income statement was required, reconciled to the intercompany accounts reflected in the balance sheets.


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