Accounting and Financial
Reporting Process for
Business Carve Outs
Colleen Cunningham, CPA
Vice President and Controller
Zoetis, Inc
1
Agenda
• Development of Carve Out Financial Statements
• Financial Reporting Implications
• Issues/Lessons learned
2
Development of Carve-Out Financial
Statements
• Pfizer Strategic Review
• Finance Team Structure
• 3rd Party Partnerships
• S-1 Financial Statement Data Requirements
• Carve-Out Methodology
• Data Collection Approach
• Audit Scope
• Financial Statement Transition
3
Pfizer Strategic Review
• Pfizer announces strategic alternative review of Animal Health business in July 2011
• First draft of S-1 filed in August 2012
• Initial IPO effective in February 2013
• Full Separation occurs in June 2013
4
Finance Team Structure
• Finance Advisory Committee
– Pfizer Controller
– Pfizer Treasurer
– Pfizer head of Shared services and Tax
– Pfizer business development
• Full time representatives from Pfizer Controllers, Shared Services, Internal Audit, Animal
Health Finance, Tax
• Additional technical guidance provided by Pfizer Controllers
• Supported by external advisors
– Capital markets and Accounting Advisory services of Big 4
– Valuation services of Big 4
– Tax services of Big 4
– Audit
– Legal advisory
– Investment banking advisory
• Additional coordination across Pfizer with various stakeholders
– Shared services
– Market leaders
– Information Technology
– Manufacturing
5
Workstreams
• Information Technology
• Enabling functions
• Procurement
• Shared Services
• Finance
• Tax
• Treasury
• Consolidation
• Technical Accounting
• Manufacturing
• Business development
6
Carve-Out Methodology
• Markets reported Animal Health assets, liabilities and operations as either specific or
shared
• Allocations performed centrally using consistent and reasonable allocation drivers (e.g.,
revenue, headcount, plant absorption, opex, etc.)
• Key accounting activities managed centrally
– Enabling functions, Corp overhead, Manufacturing, Restructuring, Share based
compensation, Purchase price allocation, Intercompany, Tax, Divestitures,
Pension/benefits, Debt, Transaction costs, Asset retirement obligations,
Environmental, Legal, CTA, Capitalized interest, Impairments, etc
• Extensive effort required to obtain data due to integration of the business (business
generally not in dedicated legal entities)
• Taxes calculated on a “standalone” basis
7
Basis of Presentation
• Historical view of the business
• Combination of dedicated and shared entities
• Combination of specifically identified items and allocation using reasonable drivers
• Allocation of costs – enabling functions, shared costs, corporate overhead
• Debt and capital presentation (SAB Topic 5-J/1-B)
• Segment reporting for new entity
• Pro-forma financial statements
• Income taxes (SAB Topic 1-B)
• Pensions and share-based compensation
• Related Party transactions
• Purchase accounting
• Restructuring
8
Income Statement
• Results of operations specifically identified to Zoetis
• Results of acquisitions subsequent to acquisition dates
• Allocations:
– Pension costs and share-based compensation
– Pfizer interest and transaction costs and related debt issuance costs to finance
acquisitions
– Restructuring costs
– Enabling functions and corporate overhead costs deemed directly attributable and
indirectly attributable
– Costs at shared manufacturing facilities
– Other central support for the Zoetis business
9
Balance Sheet
• All assets and liabilities of Pfizer subs that are primarily Zoetis-dedicated
• Assets and liabilities attributable to Zoetis business that reside in other subs
• Pension assets/liabilities of plans primarily dedicated to Zoetis
• Allocation of Pfizer debt and derivatives related to acquisitions
• Business unit equity
• No allocations of:
– Cash in mixed legal entities
– Pension assets/liabilities of mixed legal entities
– Property, plant and equipment
10
Pro Forma Financial Statements
• Started with historical Carve-Out financial statements
• Adjustments give effect to:
– Issuance of debt/related interest expense
– Transfer of Animal Health assets and liabilities
– Certain transactions associated with agreements with Pfizer
– Elimination/addition of assets/liabilities allocated in the Carve-Outs that were retained
by Pfizer/Zoetis (e.g., shared sites)
– Benefit plans
– Taxes
11
Data Collection Approach
• Designed to ensure integrity and completeness
• Initially obtained from HFM Consolidation system
• Lower materiality level than overall Pfizer
• Central Sharepoint repository for carve-out templates of mixed legal entities
• All submissions certified
• Detailed analytical reviews/follow up performed
• 3rd party support in many markets
• Detailed journal entry log to record allocations, etc.
• Separate HFM Consolidation instance created for Zoetis
12
Other Issues
• Materiality associated with existing Pfizer policies/reconciliation procedures
• Numerous judgments/little external guidance
• Develop new SOPs
• Transition services agreements
• Reconciliation from what Pfizer reported as the “Animal Health unit” externally to our
standalone financial statements
• Allocations
• Audit of all annual periods required, reviews of numerous interim periods
• Transition to a standalone company
• Monthly reporting
• Hiring all corporate functions during this period (weekly staffing updates)
• Legal entity stand ups
• Capitalization
• “Separation adjustments” required post-IPO as a result of not everything being legally
transferred by IPO date
• Move from “Carve Out” to “Standalone in 1Q13
• Standalone – but still a majority owned sub of Pfizer until full separation
• Development of new reporting package
• SOX
• Disclosure committee
• Set up of new Board
13