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Publication date: 30 Apr 2024
us Carve-out financial statements guide
Historical intercompany transactions of the carve-out business and parent company must be identified and evaluated for proper presentation within the carve-out financial statements. Examples of transactions and balances with affiliated entities may include the following:
- Sales between the carve-out business and affiliated entities. Historical transactions might not reflect arms-length terms because they were related party transactions. However, the transaction amounts should not be adjusted.
- Corporate overhead provided by the parent entity for the carve-out business (e.g., payroll processing services, supplies, equipment, services such as global research center, centralized purchasing, legal, and corporate internal audit services)
- Employee charges (e.g., a group of marketing employees from the parent entity was brought onto a specific project for the carve-out business)
Transactions that were historically eliminated in the consolidation of the parent entity’s financial statements, now represent transactions with related parties. These related party transactions require separate disclosure. See CO 6.2.3 for further discussion of related party disclosures.
In other cases, intercompany transactions not previously recorded between the carve-out business and parent company will need to be recognized in the carve-out financial statements.
Intercompany transactions and balances between subsidiaries within the carve-out business will continue to be eliminated in preparing the carve-out financial statements.
5.9.1 Interest expense on intercompany debt
Intercompany debt and the related interest expense are generally presented in the carve-out financial statements when supported by a written agreement that includes principal amounts, interest rate, maturity date, etc.
An interest charge may not have historically been recorded on intercompany debt due from the carve-out business to its parent or affiliate. In evaluating whether interest expense should be recorded when it was not provided in the past, the guidance in SAB Topic 1.B.1 Question 4 (codified in ASC 220-10-S99-3) should be considered.
Excerpt from 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.
Interest expense related to intercompany debt previously recorded in the carve-out financial statements remains in the carve-out financial statements.
5.9.2 Taxes on intercompany transactions
Intercompany transactions that were formerly eliminated in the parent entity consolidated financial statements generally would not be eliminated in the carve-out financial statements. Accordingly, the income tax accounting for those transactions would also change. Specifically, the guidance in ASC 740-10-25-3(e), which prescribes the accounting for the income tax effects of intercompany inventory transactions, would not apply to such transactions in the carve-out financial statements. It would also be necessary for management to assess whether the income tax accounting effects of certain intercompany transactions are required to be recorded in equity in accordance with ASC 740-20-45-11(c) or ASC 740-20-45-11(g). See TX 14.8 for additional information on intercompany considerations related to taxes in carve-out financial statements.
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