US GAAP Guide to preparing carve-out financial statements

Companies often consider divestitures to raise capital or maximize shareholder value. A divestiture may take the form of a sale of all or a portion of a business, a spin-off of all or a portion of a business to existing shareholders, or an initial public offering. Regardless of the form of the transaction, entities may need financial statements reflecting the operations to be divested to comply with regulatory requirements, to enable the seller and the buyer to evaluate the potential transaction or to obtain financing.
The term “carve-out financial statements” is used in practice to describe the financial statements of a business, such as a division or components of a business (or groups of businesses), that are derived from the existing consolidated financial statements of a parent entity. The composition of the financial statements prepared for a carve-out reporting entity1 depends on the facts and circumstances of the transaction. For example, the carve-out entity may be a discrete business that represents a portion of a legal entity or a group of businesses held by multiple legal entities controlled by the same parent. In contrast, when the reporting entity is a legal entity, full financial statements of the legal entity would be prepared rather than carve-out financial statements.
The principal purpose of carve-out financial statements is to present the historical operations of the carve-out entity and reflect all of the costs of doing business. The carve-out entity financial statements should provide users with relevant information on how the carve-out entity operated under its parent in the periods presented.
This publication provides considerations for the preparation of carve-out financial statements that represent the historical periods prior to the divestiture transaction in accordance with US GAAP and relevant Securities and Exchange Commission (SEC) guidance. It is not meant to provide comprehensive guidance for the parent entity’s accounting and reporting of the divestiture, which would follow existing US GAAP and SEC guidance where applicable.

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