S4 Spinoffs and split-offs

This chapter was last added September 2014. S4 S4.1 Overview of spinoffs and split-offs... 1 S4.2 Identifying the accounting spinnor and spinnee... 2 S4.3 Accounting for spinoffs... 4 S4.4 Change in reporting entity... 8 S4.5 Example of spinoff presentation and disclosure... 9 S4.6 Split-offs... 10 S4.7 SEC reporting considerations... 12 Portions of FASB publications reprinted with permission. Copyright Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116, U.S.A. Portions of AICPA Statements of Position, Technical Practice Aids, and other AICPA publications reprinted with permission. Copyright American Institute of Certified Public Accountants, 1211 Avenue of the Americas, New York, NY 10036-8775, USA. Copies of complete documents are available from the FASB and the AICPA. i

.1 Overview of spinoffs and split-offs A spinoff is defined in ASC 505-60 Equity - Spinoffs and Reverse Spinoffs as a transfer of assets that constitute a business by an entity (the spinnor) into a new legal spun-off entity (the spinnee). The transfer of assets is followed by a distribution of the shares of the spinnee to the spinnor s shareholders, without the surrender by the shareholders of any shares of the spinnor. The shareholders then hold shares in both entities and can buy and sell shares from either entity independently. Spinoffs may occur for a variety of reasons. For example, if an entity is looking to sell parts of its business but is not getting any acceptable offers, the entity may elect to spinoff that business. Because the shareholders can buy and sell the shares from either entity independently, this potentially makes investments in the entities more attractive and maximizes the value of each. Spinoffs also may be driven by tax reasons. For example, ASC 505-60-05-3 states that if the spinoff were a nontaxable reorganization, the distribution would result in no taxable gain being recognized by either the spinnor or its shareholders. If the shareholders then sell their interests in the spinnee, they avoid the double taxation that would have occurred if the entity sold its subsidiary directly and distributed the proceeds to its shareholders. Although the definition of a spinoff in ASC 505-60 refers to a new legal spun-off entity, we do not believe creating a newly formed legal entity is a prerequisite for recording a spinoff. That, is we believe the distribution of shares of an existing legal subsidiary that is a business would qualify as a spinoff. A split-off is a means of reorganizing an existing corporate structure in which a parent exchanges its shares in a subsidiary for parent shares held by its shareholders and therefore the parent loses control over the subsidiary. Split-offs often occur when the parent wants to draw a greater distinction between itself and the split-off business, or wants to reduce its own total shares outstanding. The accounting for spinoffs and splitoffs is similar. are examples of nonreciprocal transfers, which are defined more broadly in ASC 845 Nonmonetary Transactions as transfers of assets or services in one direction, either from an entity to its owners (whether or not in exchange for their ownership interests) or from the entity to another entity, or from owners or another entity to the entity. The following table summarizes the accounting for nonreciprocal transfers to owners, which depends on whether (1) the assets distributed meet the definition of a business under ASC 805 Business Combinations and (2) the transfer is pro rata. (Refer to our Financial Reporting Developments publication (FRD), Business combinations, for guidance on determining whether the assets distributed are a business). See Section S4.3.1 for guidance on determining whether a transaction is pro rata. Business Not a business Assets distributed Shares of a consolidated subsidiary Equity method investment Nonmonetary assets Shares of a consolidated subsidiary Equity method investment Nonmonetary assets Other monetary assets (e.g., loans, receivables) Pro rata Yes Spinoff Carrying amount (Refer to S4) Carrying amount (Refer to N1.8.1) No Spinoff Fair value (Refer to S4) Fair value (Refer to N1.8.1) Fair value if criteria met, otherwise carrying amount (Refer to S4.3) Fair value if criteria met, otherwise carrying amount (Refer to N1.8.1) Fair value (Refer to N1.8.2) Spinoff-leasebacks are accounted for under ASC 840-40 Leases, Sale-Leaseback Transactions. See Section 9.5.2 of our FRD, Lease accounting, for guidance. 1

S4.2 Identifying the accounting spinnor and spinnee The first step in accounting for a spinoff is to determine whether it is a traditional (or forward) spin, or a reverse spinoff. ASC 505-60-25-8 presumes the accounting for a spinoff follows its legal form. In other words, the legal spinnor is also the accounting spinnor. However, in certain circumstances, that presumption may be overcome and the most accurate depiction of the substance of the transaction would be to treat the legal spinnee as the accounting spinnor (which is referred to as a reverse spinoff). For example, as noted in ASC 505-60-25-5, sometimes the legal form of the spinoff is driven primarily by tax planning strategies, and therefore may not accurately depict the substance of the transaction. ASC 505-60 states that entities should evaluate the following indicators to determine whether the spinoff is a reverse spinoff (no one indicator is presumptive or determinative): The size of the legal spinnor and the legal spinnee - All other factors being equal, in a reverse spinoff, the accounting spinnor (legal spinnee) is larger than the accounting spinnee (legal spinnor), based on a comparison of the assets, revenues and earnings of the two entities. There are no bright lines to determine which entity is the larger of the two. The SEC staff has stated they would consider operating earnings and net income as well as both book value and fair value of total and net assets in making this determination. 1 The fair value of the legal spinnor and the legal spinnee - All other factors being equal, in a reverse spinoff, the fair value of the accounting spinnor (legal spinnee) is greater than that of the accounting spinnee (legal spinnor). Senior management - All other factors being equal, in a reverse spinoff, the accounting spinnor (legal spinnee) retains the senior management of the formerly combined entity. Senior management generally consists of the chair of the board, chief executive officer, chief operating officer, chief financial officer, and those divisional heads reporting directly to them, or the executive committee if one exists. Length of time to be held - All other factors being equal, in a reverse spinoff, the accounting spinnor (legal spinnee) is held for a longer period than the accounting spinnee (legal spinnor). A proposed or approved plan of sale for one of the separate entities concurrent with the spinoff may identify that entity as the accounting spinnee. The following examples from ASC 505-60-55 illustrate whether the spinoff should be accounted for as a forward spinoff (based on its legal form) or as a reverse spinoff. Illustration S4-1: Accounting for spinoff follows legal form Retail Company, a retail store chain, has a wholly owned restaurant subsidiary. The retail and restaurant operations are operated independently with a small executive management team overseeing both. Because the two have unrelated operations, the shareholders believe that the two operations should be separated by way of a spinoff. They believe that this will allow those separate entities to pursue opportunities in their respective industries and maximize their individual value. To accomplish the spinoff, Retail Company creates a new legal entity, Restaurant Company, into which the assets and operations of the restaurant subsidiary are transferred. The shares of Restaurant Company are then distributed to the shareholders of Retail Company on a pro rata basis. 1 Excerpts from Speeches by the Staff of the Office of the Chief Accountant through 6 December 2001 (Reverse spinoff accounting, Blackley, 2000) 2

The executive management team of Retail Company will be divided between the two entities. A comparison of the two entities is as follows: Analysis (in 000s) Assets Revenues Net income Fair value Retail $500 $410 $150 $675 Restaurant $100 $75 $21 $170 Based on an analysis of the indicators contained in paragraph 505-60-25-8, the spinoff should be accounted for in accordance with its legal form. That is, the transaction should not be accounted for as a reverse spinoff. Retail Company should be designated as the accounting spinnor based on the first two of the following indicators: Retail Company has substantially larger operations than Restaurant Company. The fair value of Retail Company is greater than Restaurant Company. The management team is allocated between the two operations. There are no planned or likely disposals of either Retail Company or Restaurant Company. The designation of Retail Company as the accounting spinnor will provide the most accurate depiction of the transaction to shareholders and other users of the financial statements because, in substance, Retail Company has spun off its Restaurant Company into a separate entity. Illustration S4-2: Reverse spinoff Retail Company, a retail store chain, has a wholly owned restaurant subsidiary. The retail and restaurant operations are operated independently, with a small executive management team overseeing both. While the restaurant subsidiary has grown rapidly, the retail operations have deteriorated steadily due to increased competition. The shareholders believe that the two operations should be separated by way of a spinoff. Management intends to dispose of the retail operations. In order to accomplish the spinoff, Retail Company creates a new legal entity, Restaurant Company, into which the assets and operations of the restaurant subsidiary are transferred. The shares of Restaurant Company are then distributed to the shareholders of Retail Company on a pro rata basis. The executive management team of the combined entity will be assigned primarily to Restaurant Company, as the intent is to dispose of Retail Company (now solely comprising the retail operations). A comparison of certain statistics of the two entities is as follows: (in 000s) Assets Revenues Net income Fair value Retail $300 $210 $35 $375 Restaurant $600 $450 $150 $700 3

Analysis Based on an analysis of the indicators contained in paragraph 505-60-25-8, the spinoff should be accounted for as a reverse spinoff. Restaurant Company, although the legal spinnee, should be designated as the accounting spinnor based on the following: Restaurant Company has substantially larger operations than Retail Company. The fair value of Restaurant Company is greater than that of Retail Company. The management team is primarily assigned to Restaurant Company. Management intends to dispose of Retail Company upon finalizing the spinoff. The designation of Restaurant Company as the accounting spinnor will provide the most accurate depiction of the transaction to shareholders and other users of the financial statements, as, in substance, Retail Company disposed of its retail operations and continued its restaurant operations. S4.3 Accounting for spinoffs Under ASC 845-10-30-10 Nonmonetary Transactions, Overall, Initial Measurement, Nonreciprocal Transfers with Owners and ASC 505-60, a pro-rata spinoff of a consolidated subsidiary or equity method investee that meets the definition of a business under ASC 805 is recognized at carrying amount (after impairment, if necessary) within equity no gain or loss is recognized. The equity method investee itself is evaluated to determine if it is a business, rather than the investment in the investee. ASC 505-60-25-2 states that regardless of whether the spun-off operations will be sold immediately after the spinoff, a spinoff should not be accounted for as a sale of the spinnee followed by a distribution of the proceeds. We believe a non pro-rata spinoff of a business should be measured at fair value. If the spinoff is measured at fair value (e.g., because it is not pro-rata), ASC 845-10-30-1 requires the spinnor to recognize a gain or loss for the difference between the fair value and book value of the spinnee. In addition, in a non pro-rata spinoff, it is important to understand the substance of the transaction to determine whether there are other elements of the transaction that require separate accounting. If the assets distributed (that is, the subsidiary or equity method investee) do not meet the definition of a business under ASC 805, the distribution by definition is not a spinoff. Rather these transactions are nonreciprocal transfer of nonmonetary assets with owners (i.e., dividends-in-kind), as shown in the chart in Section S4.1. We believe the transaction should be measured at fair value if the fair value of the nonmonetary assets held by the subsidiary or equity method investee transferred are (1) objectively measurable and (2) clearly realizable to the transferor in an outright sale at or near the time of the distribution. These criteria are discussed in Section N1.8.1 of the Accounting Manual. The following example, adapted from ASC 505-60-55-2, illustrates a spinoff. Illustration S4-3: Pro-rata spinoff Big Company owns and operates a mall and a retail store that occupies the anchor store position in that mall. The mall and the store are managed by two separate divisions. The shareholders of Big Company would like to split Big Company into two entities so that each can focus on its own operations. To achieve this, Big Company transfers the mall s assets and operations into a newly created subsidiary, Mall Company, and distributes the shares of Mall Company to its shareholders on a pro-rata basis in a spinoff. Mall Company meets the definition of a business under ASC 805. 4

Before Shareholder 2 After Shareholder 2 Shareholder 1 Shareholder 3 Shareholder 1 Shareholder 3 Big Company (Mall and Retail) Big Company (Retail) Mall Company (Mall) Analysis Because Big Company distributed the shares of Mall Company to its shareholders on a pro-rata basis and Mall Company meets the definition of a business, Big Company would account for the spinoff at carryover basis. However, if Big Company distributed the shares of Mall Company to certain shareholders on a non pro-rata basis, Big Company would account for the spinoff at fair value. S4.3.1 Determining whether a spinoff is pro-rata As discussed in Section S4.3, the accounting for a spinoff depends in part, on whether the transfer is prorata. A transaction is considered pro-rata if each owner receives an ownership interest in the spinnee in proportion to its existing ownership interest in the spinnor (even if the spinnor retains an ownership interest in the spinnee). Indicators that the transaction may not be pro-rata include the following: A shareholder has the option to elect whether to participate in the spinoff (for example, the shareholder may elect to or elect not to participate in the spinoff). In this circumstance, we believe that even if all of the shareholders elected to participate in the spinoff, the spinoff would not be considered pro-rata, because, at inception the spinnor could not be certain that all of the shareholders would participate in the spinoff. A shareholder could choose whether to receive shares in the spinnee, or to receive cash for an equivalent fair value. Some shareholders receive shares of the spinnee while other shareholders receive other nonmonetary assets (even if the fair value of the shares of the spinnee equals the fair value of the other assets). In some cases, a shareholder might receive cash instead of shares (e.g., in lieu of fractional shares or for legal or regulatory reasons). In other cases, a shareholder s economic or voting rights may have changed as a result of the spinoff. In such instances, judgment is required, based on the particular facts and circumstances to assess whether the spinoff is pro-rata. 5

S4.3.2 Retained equity interest in a spinoff In some situations, the spinnor may retain an equity interest in the spinnee after the spinoff (that is, the spinnor elects not to distribute all of the spinnee s shares to its shareholders). In such situations, the spinnor should evaluate whether it has retained a controlling financial interest over the spinnee (see our FRD, Consolidation and the variable interest model). If the spinnor determines that it has lost control of the spinnee, the spinnor would record its retained equity interest at an amount equal to the spinnor s share of the carrying amount of the spinnee s net assets. Thereafter, the spinnor would account for its retained equity interest under other applicable US GAAP (e.g., as an equity method or cost method investment). Section 1.2 of our FRD, Equity method investments, provides a framework to determine the appropriate accounting for a retained noncontrolling equity interest in a spinnee. If the spinnor retains control of the spinnee, the spinnor would account for the decrease in the ownership of the spinnee as an equity transaction. See Section 4 of our FRD, Consolidated and other financial statements, for guidance. Illustration S4-4: Pro-rata spinoff with a retained noncontrolling equity interest Assume the same facts as in Illustration S4-3, except that Big Company retains a 20% noncontrolling equity interest in Mall Company after the spinoff that it will account for as an equity method investment. That is, only 80% of Mall Company is distributed to Big Company s shareholders on a prorata basis (e.g., Shareholder 1 receives a 20% interest in Mall Company, which is 25% of 80%). Further, assume that the carrying amount of the net assets of Mall Company is $100 on the date of the spinoff. Before After Shareholder 2 Shareholder 2 Shareholder 1 Shareholder 3 Shareholder 1 Shareholder 3 Big Company (Mall and Retail) Big Company (Retail) Mall Company (Mall) Analysis Ownership of Big Company (unchanged) Ownership of Mall Company after spinoff Shareholder 1 25% Shareholder 1 20% Shareholder 2 35% Shareholder 2 28% Shareholder 3 40% Shareholder 3 32% Big Company 20% Total 100% Total 100% Big Company would record the following entry to account for the spinoff: Dr. Equity ($100 * 80%) 80 Dr. Equity method investment ($100 * 20%) 20 Cr. Net assets of Mall Company 100 6

S4.3.3 Evaluating impairment in a spinoff A spinoff is measured at its carrying amount, after impairment, if necessary. The business being spun-off would be tested for recoverability as held and used (the estimate of future cash flows would be based on the use of the business for its remaining useful life) assuming that the spinoff will not occur. However, an impairment loss would be recognized upon the spinoff if the carrying amount of the business exceeded its fair value. See Section 3.2 of our FRD, Impairment or disposal of long-lived assets, for guidance. See ASC 350-20 Intangibles Goodwill and Other, Goodwill and Section 3.15.3 of our FRD, Intangibles goodwill and other, for guidance on allocating goodwill between the spinnor and the spinnee. For financial assets included in the spinoff (e.g., investments in debt and equity securities, equity method investments) the spinnor should determine whether there is an indicator of an other-than-temporary impairment under the applicable US GAAP (e.g., ASC 320 Investments Debt and Equity Securities, ASC 323 Investments Equity Method and Joint Ventures). See Section 5 of our FRD, Certain investments in debt and equity securities and Section 5.8 of our FRD, Equity method investments, for guidance. The SEC staff has noted that some registrants have tried to avoid recognizing an impairment loss through the execution of a spinoff. The SEC staff has challenged the recorded value of the spun-off assets when the spinnee's trading market value, shortly after the spinoff, is significantly below its historical cost.2 S4.3.4 Other accounting considerations in a spinoff Other accounting considerations in a spinoff include: Share-based payment considerations Modifications to share-based payments in a spinoff are accounted for under ASC 718 Compensation Stock Compensation See Section 8.6.3.1 and Section 8.6.4 of our FRD, Share-based payment, for guidance Changes in the volatility of the spinnor s shares when measuring the fair value or calculated value of a share-based payment after a spinoff See Section 7.3.2.1.2 of our FRD, Share-based payment, for guidance Allocations of the pool of excess tax benefits related to share-based payments between the spinnor and spinnee See Section 21.4.3.1 of our FRD, Income taxes, for guidance Income tax considerations Indemnifications related to taxes in a spinoff - See Section 19.4.7.2 of our FRD, Income taxes, for guidance Tax effects of a spinoff, such as changes in the indefinite reinvestment assertion or changes in a valuation allowance - See Section 15.2.7 of our FRD, Income taxes, for guidance Uncertain tax positions taken because of a spinoff - See Section 19 of our FRD, Income taxes, for guidance Employee benefit considerations Transfers of a pension benefit obligation or plan assets, which is sometimes referred to as a plan split-up See ASC 715-30 Compensation Retirement Benefits, Defined Benefit Plans Pension and ASC 845-10-55 Nonmonetary Transactions, Overall, Implementation Guidance and Illustrations for guidance 2 Nineteenth Annual National Conference on Current SEC Developments 1992, SEC Staff Interpretations in Registrant Matters Involving Accounting and Auditing Issues ( Nonmonetary Transactions Involving Transfers to Promoters/Stockholders or Spinoffs ) 7

Changes in benefit plans (e.g., freezing benefits for employees of the spinnee), including changes in assumptions (e.g., amortization period) See ASC 715-30-35 for guidance Guarantees between the spinnor and spinnee (since the spinnor is no longer the parent of the spinnee, any such guarantee would no longer qualify for the scope exception in ASC 460 Guarantees 3 ) - See ASC 460-10 for guidance Changes in exposures to loss contingencies as a result of the spinnor and spinnee negotiating which entity will assume any obligations related to loss contingencies See ASC 450 Contingencies for guidance Treatment of the foreign currency translation adjustments (FCTA) accumulated in the financial statements When the spinnee is an investment in a foreign entity or is within a foreign entity (as defined by ASC 830 Foreign Currency Matters) special considerations apply when evaluating whether to remove the FTCA from the spinnor s accumulated other comprehensive income as part of the distribution of the net assets of the spinnee. A foreign entity may include a subsidiary, division, branch, joint venture that contains an equity method investment or equity method investment by itself. That is, a foreign entity as defined by ASC 830 may differ from a legal entity. See Section 1.2.2 of our FRD, Foreign currency matters, for the definition of a foreign entity under ASC 830, and Section 4.4.3.2.1 of that FRD for guidance on how to treat any cumulative translation adjustment in this scenario. Changes in the spinnor s reporting structure in connection with a spinoff - see Section 4.7 of our FRD, Segment reporting, for guidance on segment reporting after a change in an entity s reporting structure Discontinued operations - The spinnor presents the spinnee as a discontinued operation if the spinnee meets certain conditions. See our FRD, Discontinued operations, for guidance The spinnor may provide services to the spinnee, or maintain an ownership interest in the spinnee after the spinoff. If such transactions were related party transactions, they would be disclosed under ASC 850 Related Party Disclosures See Section R1.3 of the Accounting Manual for guidance S4.4 Change in reporting entity Generally, it would not be appropriate for a spinnor to characterize a spinoff as a change in reporting entity and revise its financial statements as if it never had an investment in the spinnee. However, in limited circumstances involving the initial registration of an entity under the Exchange Act or Securities Act, the SEC staff did not object to financial statements that retroactively reflect the reorganization of the business as a change in reporting entity if the spinoff occurs prior to effectiveness of the registration statement and certain conditions are met. Conditions listed by the SEC staff in ASC 505-60-S99-1 include that the spinnor and spinnee: Are in dissimilar businesses (the SEC staff believes there should be substantially greater differences in the nature of the businesses than those that would ordinarily distinguish reportable segments under ASC 280-10-50-10 Segment Reporting, Overall, Disclosure, Reportable Segments) Have been managed and financed historically as if they were autonomous Have no more than incidental common facilities and costs Will be operated and financed autonomously after the spinoff Will not have material financial commitments, guarantees or contingent liabilities to each other after the spinoff 3 Remarks before the 2007 AICPA National Conference on Current SEC and PCAOB Developments by Eric West, Associate Chief Accountant, Office of the Chief Accountant, U.S. Securities and Exchange Commission (10 December 2007, FIN 45 Guarantees ) 8

In addition, the SEC staff has stated it would allow this presentation only for entities that have not distributed widely financial statements that include the spun-off subsidiary. When such conditions are met, ASC 250 Accounting Changes and Error Corrections gives guidance on accounting for a change in a reporting entity. Because of the limited circumstances in which the SEC staff accepts the presentation of a spinoff as a change in the reporting entity, we encourage entities to discuss their facts with the SEC staff prior to filing financial statements on that basis. S4.5 Example of spinoff presentation and disclosure The following example illustrates a spinoff. Illustration S4-5: Presentation and disclosure for a spinoff ABC Corporation Consolidated Statement of Changes in Equity (in part) (In Thousands, Except Share Amounts) Additional Total Common Stock Paid-in Retained Stockholders' Shares Amount Capital Earnings Equity Balance at 31December 20X0 1,030 $ 1,970 $ 1,230 $ 1,980 $ 5,180 Spinoff of XYZ Subsidiary (950) $ (950) Net income 920 $ 920 Balance at 31December 20X1 1,030 $1,970 $1,230 $ 1,950 $ 5,150 See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Description of Spinoff On 30 October 20X1, ABC Corporation (the Company) completed a pro rata distribution of the common stock of the Company s subsidiary, XYZ Subsidiary ( XYZ ), to the Company s stockholders of record as of the close of business on 20 October 20X1 (the XYZ Spinoff ). Each of the Company s stockholders received one share of XYZ common stock for each share of the Company s common stock held as of the close of business on 20 October 20X1. The distribution was recorded at the carrying amount of XYZ s net assets of $950 thousand as of 30 October 20X1, as follows: (amounts in thousands) 30 October 20X1 Assets Cash and cash equivalents $ 600 Accounts receivable, net 990 Inventories 1,960 Other current assets 700 Total current assets 4,250 Property and equipment, net 2,280 Intangible assets, net 40 Goodwill 80 Total assets $ 6,650 Liabilities Accounts payable $ 500 Notes payable 2,900 Accrued liabilities 800 Total current liabilities 4,200 Long-term debt 1,500 Total liabilities $ 5,700 Net assets of XYZ $ 950 9

The Company received a ruling from the Internal Revenue Service ( IRS ) that for US Federal income taxes, the XYZ spinoff will qualify as tax-free for XYZ, the Company and the Company s stockholders. The Company entered a tax sharing agreement with XYZ that governs rights and obligations after the spinoff regarding income taxes and other taxes, including tax liabilities and benefits, attributes, returns, and contests. XYZ met the criteria to be a discontinued operation and accordingly, its assets, liabilities, results of operations and cash flows are classified as discontinued operations (see Note X). During the period from 30 October 20X1 to 31 December 20X1, the Company provided transition services to XYZ for $30 thousand. Such amounts are recorded as other income for the year ended 31 December 20X1. No amounts were due to the Company under the transition services agreement as of 31 December 20X1. S4.6 Split-offs In a split-off, a parent exchanges its shares in a subsidiary for parent shares held by its shareholders and therefore the parent loses control over the subsidiary. The following example illustrates a pro rata split-off: Illustration S4-6: Pro-rata split-off Assume that 100 shares of Big Company are outstanding of which Shareholder 1, Shareholder 2 and Shareholder 3 own 25 shares, 35 shares and 40 shares, respectively. Further, assume that 60 shares of Mall Company are outstanding of which Big Company owns 100% of the shares. Big Company decides to split-off Mall Company. Big Company decides to design the transaction to acquire treasury shares; that is, it decides that in consideration for distributing the shares of Mall Company to the shareholders of Big Company, the shareholders must return shares of Big Company. The transaction is designed so that each shareholder returns 1/5 th of its Big Company shares and receives a proportionate amount of Mall Company shares. Ownership of Big Company (before splitoff) Shares returned Ownership of Big Company (after splitoff) Shareholder 1 25 shares 25% 5 shares 20 shares 25% Shareholder 2 35 shares 35% 7 shares 28 shares 35% Shareholder 3 40 shares 40% 8 shares 32 shares 40% Total 100 shares 100% 20 shares 80 shares 100% 10

Ownership of Mall Company (before splitoff) Shares distributed Ownership of Mall Company (after splitoff) Shareholder 1 15 shares 15 shares 25% Shareholder 2 21 shares 21 shares 35% Shareholder 3 24 shares 24 shares 40% Big Company 60 shares 100% Total 100 shares 100% 60 shares 60 shares 100% Questions may arise in practice as to whether a split-off should be accounted for under ASC 845 or ASC 810 Consolidation. ASC 810-10-40-5 states that if a parent deconsolidates a subsidiary or derecognizes a group of assets through a nonreciprocal transfer to owners, such as a spinoff, the guidance in ASC 845-10 applies. Because a split-off is a nonreciprocal transfer to owners (similar to a spinoff), entities should apply the guidance in ASC 845 instead of ASC 810. We believe a pro-rata split-off of a consolidated subsidiary that meets the definition of a business under ASC 805 is recognized at carrying amount (after impairment, if necessary). ASC 845-10-30-12 states that a non-pro rata split-off of a segment of a business in a corporate plan of reorganization is accounted for at fair value. In addition, ASC 845-10-30-13 explains that split-offs of a targeted business, distributed on a pro-rata basis to the holders of the related targeted stock, are measured at historical cost. However, if the targeted stock was created in contemplation of the subsequent split-off, the two steps (creation of the targeted stock and the split-off) cannot be separated and are viewed as one transaction and accounted for at fair value. Target stock (sometimes referred to as lettered stock) is a class of a parent common stock created to provide a return to holders that is linked to the performance of a particular business unit (the targeted business unit). 4 Although the value of the target stock is significantly influenced by the performance of the underlying targeted business unit, the target stock is common stock of the parent and is not a direct ownership interest in the targeted business unit. The characteristics of target stock, such as dividend, voting, liquidation and redemption rights may differ by entity. Judgment should be applied when determining if target stock was created in contemplation of the split-off. If the split-off is measured at fair value (e.g., because it is not pro-rata), ASC 845-10-30-1 requires the parent to recognize a gain or loss for the difference between the fair value and book value of the subsidiary shares being exchanged in the transaction. To determine the fair value of the subsidiary shares, ASC 845-10-30-1 states the fair value of the consideration given (subsidiary shares) should be used unless the fair value of the asset received (parent shares) is more clearly evident. In a split-off transaction, the fair value of the parent shares would generally be more clearly evident than the fair value of the subsidiary shares when the parent shares are publicly traded and the subsidiary shares are privately held after the split-off. In other situations, such as when both the parent and subsidiary shares are publicly traded, the fair value of the subsidiary shares would generally be used given the guidance in ASC 845-10-30-1. However, in certain situations judgment may be needed to determine which fair value is more clearly evident, after considering the liquidity and volume in the market for the respective shares. Nonetheless, if the fair values of the consideration given and received significantly differ, we believe that may suggest there is another element to the transaction that requires separate accounting. No specific guidance in ASC 845 exists for split-offs of assets that do not meet the definition of a business. We believe the general principles for accounting for nonreciprocal transfers of nonmonetary assets apply (see Section N1.8.2 of the Accounting Manual for guidance). Therefore, such transactions would be accounted for at fair value if certain criteria are met. See Section S4.3.4 for other accounting considerations that also might be relevant in a split-off. 4 This definition comes from the discussion papers preceding the issuance of EITF 01-2, which was codified in ASC 845, 11

S4.7 SEC reporting considerations Pro forma financial information giving effect to a spinoff is sometimes required in SEC registration statements and proxy statements filed by the spinnor, as required by Article 11 (Article 8 for smaller reporting companies) of Regulation S-X. Pro forma information also may be required in the Form 8-K, which is required to be filed within four days of the closing of the spinoff. Pro forma information is not required in Form 10-K or in the annual shareholders report. When preparing the pro forma financial statements, spinnors should adjust for non-recurring items directly attributable to the spinoff. In addition, the pro forma financial statements should include adjustments for any agreements entered in connection with the spinoff (e.g., transition services arrangements). See Section 2.7 of the SEC Manual for guidance on preparing pro forma financial information, including when such information is required, and the number of years required. 12