Friday, August 4, 2023

Financial Insights - Combined and Carve-out Statements


In the realm of finance, accurate and informative financial statements are essential for businesses to convey their financial health and performance. While consolidated financial statements are commonly used to present the financial position of a group of companies, there are instances where combined and carve-out financial statements become invaluable. These specialized financial statements serve specific purposes and require a thorough understanding of their nuances to ensure accuracy and transparency. Let's delve into the intricacies of combined and carve-out financial statements to understand their significance and the circumstances in which they are prepared.

Understanding Combined and Carve-out Financial Statements

  1. Combined Financial Statements: A Comprehensive View Combined financial statements involve aggregating the historical financial information of multiple businesses that do not form a legal group. These statements prove useful in scenarios where entities collaborate for specific purposes but do not have control over each other. Common examples include joint ventures, takeovers, or strategic partnerships. By combining financial data, stakeholders gain a comprehensive view of the collective performance of the participating entities, which aids in making informed decisions and assessing the overall financial health of the collaboration.

  2. Carve-out Financial Statements: Isolating and Analyzing a Segment Carve-out financial statements focus on a specific part of an entity, such as a division, segment, or business activity, that is carved out from its overall operations. These statements become necessary during restructuring, spin-offs, demergers, or acquisitions when isolated financial presentation is required. Carve-out statements allow stakeholders to analyze the performance of the isolated segment separately, providing valuable insights into the financial standing and operational effectiveness of the particular division or business unit.

Circumstances Requiring Combined/Carve-out Financial Statements

Combined and carve-out financial statements are prepared in various critical scenarios:

  • Combined Financial Statements:

    • During acquisition or disposition negotiations, where entities are not legally grouped but financial data is essential for evaluation and decision-making.
    • For filing requirements of entities like Real Estate Investment Trusts, Infrastructure Investment Trusts, etc., where combined financials are necessary to comply with regulatory norms.
    • When combined financials offer a more meaningful representation of commonly controlled entities, such as when multiple entities are managed by one or more individuals, and their financial information must be presented together.
    • For common loan arrangements involving multiple companies within the same group, where the lender requires a comprehensive view of the combined entities' financial position.
  • Carve-out Financial Statements:

    • In cases of demergers, spin-offs, or corporate restructuring, where specific segments or divisions need individual financial presentation to facilitate the assessment of the viability and financial performance of the carve-out business.
    • For acquisitions, when potential acquirers require detailed financial information of a particular carve-out business to evaluate its worth and compatibility with their business objectives.

Preparation of Combined and Carve-out Financial Statements

  • Combined Financial Statements for Multiple Entities: When combining several entities entirely, the process resembles that of preparing consolidated financial statements. Intra-group transactions are eliminated, and other adjustments are made to present a unified view of the combined entities' financial position, operating performance, and cash flows.

  • Combined Financial Statements with Carve-out Businesses: Carve-out financial statements are prepared first for the relevant businesses. These statements are then combined with others using procedures similar to consolidated financial statements, ensuring seamless integration of financial data and maintaining consistency in accounting treatment.

  • Preparation of Carve-out Financial Statements: Creating carve-out financial statements requires meticulous allocation of transactions and balances to the specific carve-out business. Suitable methods are adopted to allocate shared expenses and income between the carve-out business and the remaining entity. Full disclosure is made to ensure transparency and to facilitate the understanding of the carve-out business's financial performance in isolation.

Important Aspects and Disclosures

  • Taxation: The determination of tax expenses depends on whether combining/carve-out businesses file separate tax returns or are part of a larger tax entity. Proper tax accounting ensures accurate financial reporting and compliance with tax regulations.

  • Impairment: Impairment indicators are assessed independently for each reporting period, considering the position post combination. Impairment tests are crucial in providing a true and fair view of the asset's recoverable value.

  • Transaction Costs: All costs related to transactions, such as advisory, legal, and accounting fees, are recognized as expenses in the periods incurred. Properly accounting for these costs ensures transparency and prevents misrepresentation of financial results.

  • Capital: When legal capital is not determinable, presenting net asset value as capital provides stakeholders with insights into the underlying value of the carve-out business.

  • Cash Flow Statements: Cash flow statements are prepared following applicable accounting standards using either direct or indirect methods. Clear and accurate cash flow reporting is essential for understanding an entity's ability to generate cash.

  • Disclosures: Specific disclosures are made, including the purpose of preparation, list of combining/carve-out businesses, accounting policies, basis for allocation, critical assumptions, judgments, and estimates. Adequate disclosures ensure transparency and enable stakeholders to comprehend the financial statements effectively.


Combined and carve-out financial statements are valuable tools in specific financial scenarios, offering unique insights into the financial performance of entities or their individual segments. By understanding these specialized financial statements and the circumstances in which they are prepared, businesses can meet specific reporting needs and provide stakeholders with a comprehensive and informative view of their financial operations. Proper preparation and disclosure of these statements enable better decision-making and enhance the stakeholders' confidence in the accuracy and integrity of the financial information provided.