The Divestiture Method in Accounting

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Divestiture involves the selling off of a subsidiary business entity. Parent companies may choose to divest a subsidiary business to reduce debt exposure or to increase liquidity for other acquisitions. While the accounting procedures for investiture are relatively uncomplicated, similar procedures for recording divestiture transactions can be complex. Business accountants must take steps to see that the company follows proper protocols in recording the divestiture on the company's financial statements.

Divestiture of Businesses

  • The divestiture of one business from another, also known as disentanglement, is typically a more labor-intensive process than integrating an acquired company. While business integration can take as long as needed, disentanglement calls for strict time constraints. Divestitures involve extensive planning and speedy execution of the detachment of the business being divested from the seller before the transaction closes. The process also requires that the group in charge of the disentanglement must also handle the marketing and selling of the divested entity at the same time.

Operational Challenges

  • Accountants often act as significant contributors to the operational facets of divestiture proceedings. The primary function of these financial professionals lies in measuring the fiscal effect of divestiture decisions on the company's bottom line. They must also participate in the due diligence process, which allows the buyer to ensure that the seller receives the full story about the items for sale in the divestiture. Accountants must handle large quantities of financial data in this process, so accurate record-keeping and financial reporting are necessities to a successful divestiture.

Carve-Out Financial Statements

  • One of the tasks that accountants face in a divestiture is the generation of "carve-out" financial statements. These statements represent the financial status of the business to be divested. The U.S. Securities and Exchange Commission requires that these financial statements present the divested business as the divesting company had managed it. These statements must also show all the costs of conducting business, regardless of whether or not they had been separately allocated in past years.

Accounting Complexities

  • The divestiture of the business requires the completion of several complex accounting tasks before the sale can be completed. For instance, the accountants must determine which portions of the divested company's debt load are attributed to the parent company or to third parties. They must also determine the capital structure of the divested entity. If the divested company's financial statements are to undergo an independent audit, the parent company's accountants must work with the auditors to ensure that the auditor's conclusions line up with those of the company's management.

References

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