Guidance Note on Combined and Carve-Out Financial Statements
Introduction
1. Generally, consolidated financial statements of an entity are required to be presented under
the relevant legal or regulatory requirements. In India, these requirements are met by
presenting consolidated financial statements prepared under the applicable Accounting
Standards.
2. There may be occasions such as take-overs of entities and/or divisions/segments/businesses,
demergers, spin-offs, initial public offerings, etc. where specific financial information is
required for part or parts of entities which may or may not be part of a group. Similarly,
group financials may be required for group loan arrangements. The term `group', in such
cases, for the purpose of this Guidance Note may include the entities and/or
divisions/segments/businesses which are being combined as per the terms of the loan
arrangement. In the absence of control, preparation of consolidated financial statements
would not be appropriate. In such cases, as well as to present relevant combined financial
information of part or parts of one or more entities, combined financial statements may be
prepared. In certain circumstances, carve-out financial statements provide additional
financial information for a part of an entity, such as, in case of demerger, spin-off, etc.
3. The combined/carve-out financial statements can include financial information pertaining to
different entities, divisions, branches and/or an aggregation of similar assets, associated
liabilities and operations in a specified geographic region or line of business pertaining to
different entities. These financial statements can be prepared by aggregating financial
statements of segments, separate entities or components of groups which may not necessarily
have separate management and accounting records.
4. Combining businesses for which combined financial statements are prepared are generally
under a common control of an entity, or a person; or the management; or they might be
undertaking some common business. However, combined financial statements for combining
businesses can be prepared in other situations apart from these circumstances also.
5. Preparing combined/carve-out financial statements involve areas of judgement, driven by the
purpose for which the statements are prepared.
Objective
6. This Guidance Note provides the meaning of combined/carve-out financial statements,
indicative situations in which these may be required to be prepared and procedure for
preparation of the same and required disclosures.
Scope
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7. This Guidance Note applies in the preparation and presentation of combined/carve-out
financial statements.
8. This Guidance Note should not be construed to be applicable to the general purpose
financial statements as the combined/carve-out financial statements are prepared for
specific purposes and, therefore, are `special purpose financial statements'.
Definitions
9. The following terms are used in this Guidance Note with the meanings specified:
Carve-out business: For the purpose of this Guidance Note and notwithstanding the
definition of `business' as contained in Ind AS 103, Business Combinations, the term `carve-
out business' refers to an identifiable set of assets and liabilities, pertaining to an economic
activity carved out of the aggregate activities of an entity. A division, segment, or business
activity of an entity may also signify a carve-out business.
Carve-out Financial Statements: Carve-out financial statements are the financial statements
pertaining to a carve-out business.
Combined Financial Statements: Combined financial statements are the financial statements
that present the combined historical financial information of combining businesses that do
not comprise a group for which the consolidated financial statements can be prepared.
Combining businesses: For the purpose of this Guidance Note and notwithstanding the
definition of `business' as contained in Ind AS 103, Business Combinations, the term
`combining businesses' refers to two or more entities and/or divisions/segments/businesses of
the same or different entities, historical financial informations in respect of which are being
aggregated for the purpose of preparation of combined financial statements.
Common Control: Combining businesses are said to be under common control when all the
combining entities are ultimately controlled by the same party or parties and that control is
not transitory.
Financial Statements: For the purpose of this Guidance Note, combined/carve-out financial
statements are the complete set of financial statements that are required to be prepared by the
applicable Accounting Standards.
Remaining Group: Entities or part of entities other than the carve-out business in respect of
which carve-out financial statements are prepared.
10. The terms used in this Guidance Note and not defined in this Guidance Note have the same
meaning as those defined in the relevant Accounting Standards, and, in absence thereof,
those defined in the Guidance Notes issued by the Institute of Chartered Accountants of
India, unless the context requires otherwise.
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Circumstances in which Combined/Carve-out Financial Statements may be prepared
11. Combined financial statements can be prepared in cases where:
a) two or more entities are combined in their entirety; or
b) two or more carve-out businesses of the same or different entities are combined; or
c) one or more entities are combined with one or more carve-out businesses.
12. Following are the examples where combined financial statements for combining
businesses may be required to be prepared:
a) transactions such as acquisition or disposition negotiations/agreement; for instance, a
group of entities which do not form a group from a legal point of view, but are the
subject matter of an acquisition or disposal;
b) filings in accordance with statutory or regulatory requirements, e.g., initial public
offerings by Real Estate Investment Trusts, Infrastructure Investment Trusts etc.;
c) circumstances in which combined financial statements of commonly controlled
entities are likely to be more meaningful than their separate financial statements. For
example, combined financial statements would be useful if one or more individuals
control several entities that are related/unrelated in their operations.
d) where two or more companies under the same group are required to prepare
combined financial statements, for the purpose of borrowings from banks or other
financial institutions, e.g., common loan arrangements.
13. Carve-out financial statements may be prepared for one or more divisions, segments,
businesses, etc. of the same entity. Examples where carve-out financial statements may
be required to be prepared are demerger, spin-off, hiving off or any other related
restructuring of a segment/divisions/business of the same entity or acquisition of a
segment/division/business of another entity.
Preparation of Combined Financial Statements
Procedure for preparation of combined financial statements for two or more entities
14. The guidance given in paragraphs 15 and 16 is applicable for preparation of combined
financial statements for combining businesses of two or more entities in their entirety.
15. The procedure for preparing combined financial statements of the combining entities is
the same as that for consolidated financial statements as per the applicable Accounting
Standards. Accordingly, when combined financial statements are prepared, intra-group
transactions and profits or losses should be eliminated, and non-controlling interests,
foreign operations, different financial reporting periods, accounting policies or income
taxes should be treated in the same manner as in consolidated financial statements
prepared under the applicable Accounting Standards.
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16. In case the combining entities or any one of the combining entities are under common
control, the carrying amounts pertaining to a subsidiary, as reflected in the consolidated
financial statements of the parent, should be used for the purpose of preparing combined
financial statements.
Example: A Ltd. has three subsidiaries viz. X Ltd, Y Ltd. and Z Ltd. X Ltd. has better
creditworthiness and approaches the bank for loan which will be used by both X Ltd. and
Y Ltd. Bank requires combined financial statements of X Ltd. and Y Ltd. to be prepared
for loan appraisal purposes. Combined financial statements of X Ltd. and Y Ltd. should
be prepared using the amounts contained in A Ltd.'s consolidated financial statements
pertaining to subsidiaries X Ltd. and Y Ltd.
Procedure for preparation of combined financial statements where at least one of the
combining businesses is a carve-out business
17. Combined financial statements can be prepared reflecting aggregate historical financial
information of two or more carve-out businesses of same or different entities; or one or
more entities with one or more carve-out businesses.
Examples:
A toll road project of company A Ltd. having various other projects is sought to be
combined with a toll road project of another Company B; each of the companies
has remaining projects which continue to operate independently.
A toll road project of company A Ltd. having various other projects is sought to be
combined with a wind-mill project of the same company; remaining projects
continue to operate independently.
X. Ltd. which is a subsidiary of A. Ltd. is sought to be combined with a toll road
project of A Ltd; remaining projects of A. Ltd continue to operate independently.
X. Ltd. which is a subsidiary of A. Ltd. is sought to be combined with toll road
projects of A Ltd. and B Ltd; remaining projects of A Ltd. and B. Ltd continue to
operate independently.
18. Financial statements prepared in such situations are combined financial statements
irrespective of the fact that they involve one or more carve-out businesses as the
combining businesses.
19. The procedure for preparing combined financial statements where at least one of the
combining businesses is a carve-out business is as contained, hereinafter, in this
Guidance Note. Thereafter, two or more combining businesses including carve-out
businesses for which carve-out financial statements have been prepared are combined
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using the procedures similar to those for preparing consolidated financial statements as
per the applicable Accounting Standards as explained in paragraphs 15 and 16 above.
Procedure for preparation of Carve-Out Financial Statements
20. Where the information with regard to carve-out business is required, carve-out financial
statements may have to be prepared. For preparing carve-out financial statements,
difficulties in allocation may arise, for example, payroll accounting where a group of
employees provides services for a particular carve-out business as well as for the
remaining group, e.g., centralised purchasing, marketing, rent, advertising, legal,
insurance, management expenses, etc.
Basis for allocating transaction amounts and balances
21. Where transactions or balances are not directly identifiable to the carve-out assets and
liabilities and income and expenses pertaining to the concerned projects (collectively
termed as `carve-out business'), it will be desirable to develop methods for allocating the
relevant amounts to the carve-out business with a view to providing the fairest
approximation to the amounts actually attributable to the carve-out business. An
appropriate method can be adopted and applied for allocation purposes along with a
disclosure of the basis adopted for allocation.
Example: Allocation of brand cost amongst various segments when only one segment is
being carved-out while other segments also use the brand. In such case, brand cost may
be allocated on an appropriate basis with disclosure of the basis adopted for allocation.
22. The appropriate basis for allocating common income and expenditure to a carve-out
business will vary according to the circumstances. For instance, centrally accounted-for
salaries and other related costs including retirement benefits may be allocated on the
basis of headcount; however, relative levels of staff turnover or other factors also need
consideration. Similarly, the costs of a head office accounts department may be allocated
based on the relevant sizes of the carve-out business and remaining group. However, if
other factors suggest that size is not a good basis, for example, a disproportionate number
of the accounting team is engaged in work for one part of the business and not the other,
any other basis might be considered appropriate for the purpose of allocation.
23. Assets may be allocated on the basis of control, usage, legal ownership or any other
appropriate basis.
24. The basis of allocation of a group third party debt assumed by the carve-out business may
be by reference to the terms of the separation agreement. In other cases, the debt may be
treated as part of the carve-out business where the debt can be related to that business.
25. Finance lease liabilities may be allocated in line with the allocation of the related assets.
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26. The allocation of the income and expenses generally move with the related assets and
liabilities.
Example: The allocation of interest income and expenses would follow the way in which
the related instruments have been apportioned.
27. The purpose of the allocation is to attribute an appropriate element to the carve-out
business and not to measure and recognise income and expenses or assets and liabilities
as if the carve-out business had always been a standalone entity. Thus, the resulting
financial position may not be that which might have existed if the carve-out business had
been a stand-alone business.
Relationship with the remaining group
28. In addition to transactions with `third parties', the results of the business may also include
transactions with the remaining group.
Example: Sales which were previously regarded as `intra-group' will need to be re-
examined to determine whether they relate to entities within the carve-out business or
outside it.
29. It is necessary to identify the extent of the relationships between the carve-out business
and the remaining group. Balances with the remaining group may comprise elements of
trading balances and short term or long term funding balances, which may or may not
have been interest bearing. Balances of a trading nature will normally be presented as an
element of debtors or creditors. Balances which are considered to be funding in nature
(having regard, inter alia, to the use of the funds, the period for which they remain
outstanding and the level of other funds) will normally be classified according to their
general nature. Where the balance is interest bearing and/or has other characteristics of
debt, it will be presented as debt financing. Where a balance does not have the
characteristics of debt, it will be classified as capital and presented as a part of equity,
aggregated with the owners'contribution (capital) and reserves of the carve-out business.
Example: Carve-out business was charged royalty on a periodic basis for the use of a
product pertaining to an entity. From the perspective of carve-out financial statements,
this fee stands payable to the owners since it is owed to the owners. It will be presented in
the manner of debt financing in the carve-out financial statements since royalty is
charged on a periodic basis and bears the characteristics of debt. However, in case no
royalty is charged for the use of the product, then it will be treated as owner's
contribution.
30. Balances with the remaining group may also contain elements of third party debtors or
creditors which have been accounted for on behalf of the carve-out business by the
remaining group.
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Examples: VAT, payroll taxes, certain customers or suppliers common to the carve-out
business and the remaining group, and external funding balances.
Such elements of the balances with the remaining group should be allocated
appropriately.
Exceptional items
31. Exceptional items should be allocated to the carve-out business and accounted for in
accordance with the applicable Accounting Standards.
Aspects common to Combined/Carve-out Financial Statements
Taxation
32. The determination of tax expenses in preparing carve-out/combined financial statements
depends on whether the combining/carve-out businesses have filed separate tax returns or
have their tax affairs dealt with as part of a larger tax entity. Generally, tax expenses
should be determined for a combining/carve-out business as if the combining/carve-out
business is a separate taxable entity.
33. The approach would involve the aggregation of the tax expenses actually incurred by the
combining businesses (reflecting the benefits, reliefs and charges), after considering the
tax effects of any adjustments. Where the information relating to the tax expenses
actually incurred is not available, the tax expenses should be recomputed on the basis of
the results of the combining business. Thus, if separate tax returns do not exist, a basis for
allocating overall tax expenses must be determined on appropriate basis.
Impairment
34. For each period covered by the combined/carve-out financial statements, an independent
assessment of the presence or absence of impairment indicators should be made based on
the position post combination. Other provisions relating to measurement, recognition and
disclosure of impairment should be governed by the applicable Accounting Standards.
Transaction costs
35. Transaction costs include finder's fees; advisory, legal, accounting, valuation and other
professional or consulting fees; general administrative costs, including the costs of
maintaining an internal acquisitions department; and costs of registering and issuing debt
and equity securities. Such costs should be recognised as expenses in the periods in
which the costs are incurred and the services are received.
36. The costs to issue debt or equity securities should be recognised in accordance with the
applicable Accounting Standards.
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Capital
37. Where there is a legal capital, the same should be considered in preparing combined/
carve-out financial statements. However, it may not be possible to arrive at the amount of
share capital pertaining to combining/carve-out businesses. In such cases, the difference
between the assets and liabilities of the combining/ carve-out businesses, being net asset
value, may be presented as capital. While doing so, to the extent balances (not having the
characteristics of debt) treated as part of equity (see paragraph 29) should be considered
as a component of the equity.
Cash flow statements
38. A cash flow statement is prepared in accordance with the applicable Accounting
Standards.
39. Direct or indirect method may be adopted for preparation of cash flow statement
depending upon the information available.
Disclosures
40. Disclosure is required in the notes to the combined/carve-out financial statements of the
fact that the information presented may not be representative of the position which may
prevail after the transaction. Similarly, the fact that resulting financial position may not
be that which might have existed if the carve-out business/combining businesses had
been a stand-alone business should also be disclosed.
41. Comparatives are not necessarily required to be given for the combined/carve-out
financial statements.
42. The following should also be disclosed in the combined/carve-out financial statements
apart from the disclosures specified in the other paragraphs:
a) the purpose of preparation of combined/carve-out financial statements;
b) a list of combining businesses together with brief description of activities;
c) statement of compliance with the applicable Accounting Standards;
d) the principal accounting policies followed in preparing the combined/carve-out
financial statements;
e) the basis for allocation, critical assumptions, judgments, and estimates involved in the
preparation of combined/ carve-out financial statements;
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f) other disclosures as per the requirements of applicable Accounting Standards to the
extent relevant;
g) where the accounting policies are not uniform in respect of the combining businesses,
disclosure of that fact along with the accounting framework followed;
h) extent of balances (not having the characteristics of debt) treated as part of equity
(refer paragraphs 29 & 37);
i) the basis of pricing inter-group transfers and any change therein.
The above disclosures are not exhaustive and specific disclosures that will assist users'
understanding of combined/carve-out financial statements should also be made.
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