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Beyond the numbers: Overcoming challenges in preparing carve-out financial statements

20 February, 2018

Michael Niland
US Divestitures Services Leader, PwC US
Kate Dahlberg
US Deals Director

In order to spin-off or sell a piece of your business, you may need to prepare financial statements for the operations you’re divesting of in order to comply with regulatory requirements, for the buyer to secure financing, or to allow interested parties to appropriately evaluate the deal. This information can be difficult to obtain and delineate from the greater organization. You’ll need to consider what level of detail your buyer needs and then use your judgment to best determine the historical results and operational costs of the operations to be carved-out.

This is not an easy process. To help you gain a deeper understanding of one of the most challenging aspect of a divestiture, our new PwC Deals paper titled Carve-out financial statements: Navigating the challenges of preparing carve-out financials, will serve as a resource to identify and explain many of the complexities of the process.

Fitting the pieces together to identify the challenges

There is limited guidance on preparing financial statements for carve-out entities and a significant level of judgment must be applied, coupled with appropriate disclosure, to ensure the financial statements are complete and accurate. Based on our years of advising many companies, both big and small and across industries, through the process, these pieces add up to the key elements that should go into completing the carve-out financial statements:

While this may seem pretty straightforward on the surface, you’ll likely encounter many complex challenges along the way, so you should seek good advice from a trusted advisor throughout the process.

Technology tools ease the process

By leveraging technology and automation, you can gain faster and better access to the carve-out data. A centralized data platform is a place to store, organize and analyze detailed financial and operational information throughout the deal continuum. From there, data analytics play a critical role in addressing key deal considerations by presenting objective and relevant fact sets.

We recommend that you design a flexible process with the ability to refresh data in a consistent way across the required time periods as well as maintain optionality to adjust quickly for various deal scenarios. This will allow you to adapt more nimbly to changing deal requirements.

Considerations for assets, liabilities, and expenses

Determining which asset, liability, or expense items should be included in the carve-out financial statements can be challenging. Often, the items are interconnected and dependent on other line items and it can be tricky to delineate what applies specifically to the carve-out versus the consolidated company. For example, the amount of goodwill and level at which goodwill is tested by the carve-out entity may differ from that of the Parent. The carve-out entity will need to determine its reporting units to test goodwill included in the carve-out financial statements. The carve-out entity’s determination of its reporting units may be different than that of the Parent.

To gain a deeper understanding of each line item and how to report the assets, liabilities and expenses of the carve-out entity, be sure to read our complete paper: Carve-out financial statements: Navigating the challenges of preparing carve-out financials.

We’re here to help

As you can see, there is a great deal of complexity involved in creating separate financial statements for a piece of your business to be divested, whether by spin-off or sale. Exercising the appropriate level of technical judgment and ensuring there is a framework of automation and organization surrounding the carve-out are critical success factors. So is seeking the right advice where you need it most.

We can help you assess the financial reporting and accounting implications related to the carve-out and supplement your existing finance, accounting and external audit resources with PwC Deals team members who deliver independent carve-out advice on M&A and capital markets transactions.