What to consider for carve-out transactions has been saved
What to consider for carve-out transactions
On the Radar: Carve-out financial statements
Carve-out financial statements are required when larger parent entities wish to pursue a sale, spin-off, IPO, or SPAC transaction involving a portion of their business. This edition of On the Radar features key management considerations and common pitfalls associated with the preparation of carve-out financial statements, as there is no single set of comprehensive guidance on preparing such statements.
The need for carve-out statements is growing.
The volume of IPO and SPAC transactions has decreased since reaching record levels in 2020 and 2021; however, divestiture activity (for which carve-out financial statements are often required) remains strong. As noted in Deloitte’s Divestitures Quarterly Update — Q2 2023, the number of divestiture deals grew by 85% quarter on quarter, while overall merger and acquisition activity grew by only 11%. At the same time, private equity buyers’ interest in divestitures grew significantly, with private equity accounting for 29% of the buyers in the second quarter of 2023 compared with 2% in the first quarter.
Management often may need to use judgment and carefully plan ahead when preparing carve-out financial statements since such a process can be challenging. Considerations management should take into account when preparing carve-out financial statements include the following:
- Assembling the right team
- Determining the transaction’s structure and scope
- Materiality and evaluating misstatements
- Internal controls
- Supporting documentation
- Significant judgments and estimates
- Working with auditors