From the early stages of spin planning, the CFO and finance team must be engaged in five core financial reporting areas to enable long-term spin-off success:
- Preparation of carve-out financials: These documents will form the “F-pages” within the Form-10 registration statement. Annual periods will be subject to audit procedures.
- Carve-out audit considerations: There are important distinctions from the parent audit that must be strategically addressed in relation to a spin.
- Assembling the Form-10: Subject to SEC review, compilation of the Form 10 involves close stakeholder coordination to appropriately present the SpinCo to investors.
- Investor roadshow process: The investor roadshow process will include financial information, which often differs in certain areas from what was presented in SEC filings, and a linkage between the financial information is critical to manage.
- Post-spin reporting matters: Plan for the post-spin SEC reporting requirements of both the SpinCo and RemainCo.
Preparing for a spin-off? Each of these critical finance activities is discussed in detail below:
1. Preparation of Carve-Out Financials
- Deal perimeter alignment: Close collaboration with management, corporate development teams, and strategic advisors helps inform how historical financial information will be compiled in a manner consistent with the deal perimeter of SpinCo.
- Carve-out methodology: Consider the level of complexity in compiling the carve-out financial information and determine the methodology for compiling the financial information of the SpinCo by evaluating the following:
- Approach for specific identification of assets, liabilities, revenues, and expenses related to the carve-out entity within the company’s ERP system.
- Identification of commingled accounts and application of appropriate allocation methodologies to each account, which is consistent with guidance from Big Four accounting firms (e.g., headcount, revenue).
- Carefully consider historical audit differences, which may be material to the carve-out financial statements.
- Reconciling bridges: Ensure carve-out results bridge to historical financial information. Expect to explain, reconcile, and bridge various pieces of carve-out information.
2. Carve-Out Audit Considerations
- Auditor liaison: Involve auditors early in the process to establish alignment on the basis of presentation, carve-out approach, and cadence of touchpoints to proactively address audit issues.
- Technical documentation: Support the basis of presentation with appropriate technical documentation and audit-ready bridge files for the carve-out to facilitate an efficient audit. Separate analysis related to impairment, segments, intercompany, stock compensation, and other areas specific to the carve-out financials will likely be required for the audit file.
- Additional resources: Evaluate the need for dedicated audit assistance to ensure the carve-out audit is completed in accordance with the deal timeline. Subsidiaries may require additional support when subject to different audit requirements and materiality for a carve-out audit, further requiring hands-on expertise.
3. Assembling the Form 10
- Ownership: The Form-10, similar to other registration statements, requires input from a range of stakeholders and external parties. Assigning ownership of each section (and in some cases subsections) can help ensure a complete document is prepared efficiently and by the most appropriate stakeholder(s).
- MD&A: Preparation of a Management, Discussion & Analysis (MD&A) section will be required for inclusion in the Form-10. While the Parent’s MD&A may be an appropriate starting point, the specific dynamics of the SpinCo’s business must be reflected to present and discuss period-over-period variances accurately. Additionally, it’s common for SpinCo MD&As to include more granular information on variances compared to a Parent’s MD&A given the document is subject to SEC review.
- Pro forma statements: Compile adjustments to present pro forma income statements and balance sheets under Regulation S-X, Article 11. Preparers must be aware of the different classifications of potential pro-forma adjustments (e.g., autonomous entity adjustments), so SpinCo pro-formas are consistent with SEC guidelines, including disclosures around standalone and one-time costs.
- Peer benchmarking: Review and understand recently prepared Form-10s to gain an understanding of the structure of the document and the standard disclosures contained within. Performing this review before preparing the SpinCo’s Form-10 can ensure broad awareness among stakeholders of the information required.
- SEC comments: Maintain vigilance for potential areas of SEC comment within the Form-10 to facilitate a more efficient comment letter response process. Reviewing published SEC comment letter trends and comment letters issued to peer companies can provide valuable insights. Proper planning will contemplate the anticipated SEC review process and timing, and the periods required for amendments.
By preparing accurate and comprehensive financials, supported by a seamless audit process, you can enhance the attractiveness of the Spin-Off and ensure a smooth transaction process.
Featured Insight
4. Investor Roadshow Process
- Roadshow process: The investor roadshow process is an opportunity for the management team to communicate the value of the SpinCo to potential investors. The materials will include financial information, including historical and projected.
- Linkage to SEC filings: The financial information included in the roadshow materials will often have certain differences compared to what’s presented in SEC filings, including Non-GAAP presentations of historical information and projections. It’s critical to have a linkage to what’s reported in SEC filings and the projections based on historical information.
- Communication: The team involved in preparing the roadshow materials will include various stakeholders across the company and its external advisors. Communication and project management are crucial for consistent messaging and managing the required inputs and outputs.
5. Post-Spin Reporting Matters
- RemainCo: RemainCo will have reporting requirements as a result of the spin-off, including discontinued operations and Form 8-K reporting after the spin-off.
- SpinCo: SpinCo must maintain quarterly SEC filings as an independent public company after the effective date of the spin-off (Form 10-Q and Form 10-K).
Taking the Next Step
CrossCountry Consulting provides a suite of accounting, risk, compliance, systems, and deal expertise that empowers RemainCos and SpinCos to confidently and profitably navigate a spin-off. To establish and execute a divestiture roadmap at your organization, contact CrossCountry Consulting.
This information is for general knowledge and informational purposes only and does not constitute legal or professional advice. A comprehensive spin-off strategy requires careful planning and consideration of various factors, which is why consulting with legal, financial, tax, and other relevant experts is crucial.