Carve-Out Financial Statements for Divestitures

Introduction

On October 30, 2025, Honeywell spun off its Advanced Materials business as Solstice Advanced Materials, a separately listed maker of refrigerants, semiconductor materials and protective fibers. Solstice's first annual report presents three years of results, but for almost all of that time it was not a company. Its figures were derived from Honeywell's accounting records: about $200 million a year of Honeywell's corporate costs was allocated to it in proportion to its share of Honeywell's revenue, its income taxes were calculated as if it had filed its own returns, and its cash was swept into Honeywell's accounts and returned when needed. In place of share capital and retained earnings, its equity section showed a single net investment by Honeywell.

These are carve-out financial statements: historical accounts for a business that operated inside a larger company, prepared as if it had stood on its own. They are the financial basis for spin-offs, initial public offerings of subsidiaries and sales of divisions, and the judgments behind them shape the numbers buyers and investors first see.

A spin-off of a business into a new public company requires a registration statement with audited financial statements, usually for three years, and those statements have to be carved out of the parent's records. An initial public offering of a subsidiary needs the same. In a sale, the buyer may need audited financial statements of the business it is acquiring if the deal is significant under the Securities and Exchange Commission (SEC) tests described in pro forma financial statements and Article 11, and even private buyers expect carve-out figures in the data room, often accompanied by a quality of earnings report.

Carve-out financial statements

Financial statements of a business, such as a division, product line or group of subsidiaries, that has operated as part of a larger entity, prepared from the parent's records as if the business had been a separate entity. They include the assets, liabilities, revenue and costs attributable to the business, with allocations for shared costs and a net parent investment in place of share capital and retained earnings.

Not every divested business needs full carve-out statements. Since 2021, Rule 3-05(e) of Regulation S-X has allowed abbreviated financial statements for an acquired business, such as a product line, whose assets and revenue are each 20% or less of the seller's, that was never a separate entity, subsidiary, operating segment or division, and for which the seller kept no separate accounts: a statement of assets acquired and liabilities assumed and a statement of revenues and expenses that may omit corporate overhead, interest on debt not assumed and income taxes. The notes must explain why those costs were left out and why the figures are therefore not indicative of the business going forward.

Carve-out statements start from a question that a separate company never has to answer: what belongs to the business? Assets and liabilities used only by the business, such as its plants, inventory, receivables and customer contracts, are included. Shared assets, such as a headquarters building, a common information technology (IT) platform or a pension plan covering employees across the group, need judgment about whether and how much to include, and the answer often depends on what the business will take with it when it separates.

Two approaches to the scope are common. A legal entity approach includes every subsidiary that has historically formed the business, even if some of its assets or operations will stay with the parent; those retained operations remain in the statements until they are transferred. A management approach includes only the assets, liabilities and operations that will make up the new company, in the form management expects to run it, which may look much like a segment in the parent's segment reporting. The first is typical of spin-offs and offerings built around legal entities, the second of transactions that transfer assets and operations rather than whole subsidiaries.

Allocating Shared Costs

SEC staff guidance in Staff Accounting Bulletin (SAB) Topic 1.B requires the historical income statements to reflect all of the costs of doing business, including those the parent incurred on the business's behalf, as Deloitte's roadmap on expenses clearly applicable to a carve-out explains. Costs that can be identified with the business are charged directly. Costs of shared functions, such as legal, finance, IT and human resources, are allocated using a reasonable method: revenue, headcount, assets or usage. Solstice's allocations were $201 million, $205 million and $192 million for 2023, 2024 and 2025, based on its share of Honeywell's revenue and recorded in selling, general and administrative expenses.

An allocation is not a standalone cost. A revenue-based share of a large group's corporate costs can be higher or lower than what the business will spend once independent, when it needs its own board, listing, treasury, audit and systems. The staff therefore asks companies, where practicable, to disclose management's estimate of standalone costs when they would differ materially from the allocations.

Taxes, Cash and Debt

Income taxes are generally calculated using the separate return method, as if the business had filed its own tax returns, which can create tax losses, credits and valuation allowances in the carve-out statements that never existed in the parent's. Because the parent actually paid the taxes, the carve-out liabilities are treated as settled through the net parent investment. Solstice reported current tax expense of $198 million for 2024 but income taxes paid of only $22 million, since Honeywell made most of the payments.

Cash is often managed centrally, so a carve-out business may show little cash of its own, with the parent sweeping its balances and funding its needs. Transfers between the two appear in the cash flow statement as financing flows to or from the parent. The parent's debt and interest are usually not allocated, unless the business is a borrower or guarantor or the debt will move with it. Solstice's financing cash flows show the pattern before and at its separation:

Net Parent Investment

The equity section of carve-out statements has no share capital or retained earnings. It shows a net parent investment: the parent's cumulative investment in the business, increased by the business's earnings and decreased by net transfers of cash to the parent. At separation, the balance is reclassified into share capital and additional paid-in capital. Solstice's net parent investment stood at $3.5 billion at the end of 2024; after the spin-off, its total equity was $1.4 billion, reduced mainly by the $1.5 billion dividend it paid Honeywell from $2.0 billion of new debt raised at separation, as its 2025 annual report shows.

The central task with carve-out financials is moving from allocated costs to standalone costs. Bankers advising on a spin-off or sale estimate the cost of the functions the business will need, compare it with the allocations, and adjust earnings before interest, taxes, depreciation and amortization (EBITDA) for the difference, often called dis-synergies. Transition services agreements, under which the parent continues to provide services for a period after separation, smooth the change but carry their own fees and end dates. One-time separation costs, such as new systems, rebranding and legal work, are excluded from the run-rate but are real uses of cash. Spin-off pro formas show these effects in two layers: required autonomous entity adjustments for agreements such as Solstice's transition services agreement for IT support, and optional management adjustments for dis-synergies, which Solstice's Form 10 put at $44 million of recurring and $46 million of one-time costs for 2024.

Two checks help test the figures. The carve-out results should reconcile broadly with the parent's segment disclosures for the same business, with differences explained by allocations, scope or intercompany sales. And sales to the parent's other businesses need attention: Solstice sold $125 million of products and services to Honeywell affiliates in 2024, revenue that continues after separation only on whatever terms the two companies agree.

Capital structure is set at separation, not inherited. Spin-offs are often designed so that the new company borrows and pays a cash distribution to its parent, as Solstice did, leaving it with leverage chosen for the transaction rather than built up over time. The parent, for its part, presents the business as a discontinued operation when the disposal is a strategic shift with a major effect on its results: once a spin-off is complete, or as soon as a business to be sold qualifies as held for sale. Its own history is restated as the carve-out's is created.

For buyers of a division, the quality of carve-out figures varies with how separately the business was run. A division with its own legal entities, ledgers and management accounts can produce reliable statements; one that shared plants, sales forces and systems with the rest of the group depends heavily on allocations. A quality of earnings review that tests the allocation methods, the completeness of costs and the standalone adjustments is the usual way to close that gap before a price is agreed.