Basis of preparation

Carve out financial information is harder to trust than a clean company's for one reason: the entity whose accounts you are reading has never existed. The statements are constructed rather than extracted, and the construction involves choices.

Under IFRS there is no standard governing combined or carve out financial statements the way IFRS 10 governs consolidation. The reporting accountant therefore sets out a basis of preparation describing which legal entities and activities were included, how central costs were allocated, and what was assumed about financing and tax. Read that document before the numbers, because it is where the judgements live.

Four things deserve specific interrogation. The allocation basis, since revenue, headcount and floor area give different answers and none of them is right. Intercompany trading, because transfer prices between the division and the rest of the group were set for tax or administrative convenience rather than by a market, so margin can move once they become arm's length. Financing and tax, because a division with no balance sheet of its own has no observed interest charge and no observed tax charge, so both are modelled. And what actually transfers, since contracts, licences, permits and key people sit in legal entities that may not be the ones being sold.

An audit opinion on carve out accounts is an opinion on the stated basis of preparation. That is not the same thing as an audited history of the business you are buying, which is why buyers run heavier diligence, lenders underwrite a lower EBITDA, and European auctions of divisions almost always come with vendor due diligence covering exactly these points.