What is Pushdown Accounting?đ¤
Pushdown accounting is a specialized bookkeeping technique used by companies to record the purchase of another entity. This method uses the acquirer’s accounting basis to prepare the financial statements of the purchased entity, updating its assets and liabilities to reflect the actual purchase price. This approach replaces the historical cost with the current purchase cost.
Pushdown accounting is permissible under U.S. Generally Accepted Accounting Principles (GAAP) but isn’t accepted under International Financial Reporting Standards (IFRS).
Essential Takeaways đ
- Purchase Price Match: Pushdown accounting aligns the target company’s financials to mirror its acquisition cost.
- Asset and Liability Revaluation: The approach necessitates writing up or down assets and liabilities of the target company to reflect the acquired price.
- Transference of Gains and Losses: Gains and losses associated with the revalued book value are pushed down from the acquirer to the acquired company’s financial records.
The Intricacies of Pushdown Accounting đ§
When Company A purchases Company B, accountants need to meticulously record each transaction detail including the value of the target company’s assets and liabilities. In pushdown accounting, acquired assets and liabilities are adjusted to match the purchase price. This revaluation turns the amount paid to acquire Company B into its new book value in its financial statements.
Gains and losses derived from the new book value are transferred from Company A (the acquirer) to Company Bâs income statement and balance sheet. If the purchase price surpasses the fair value, this additional amount becomes recognized as goodwillâan intangible asset.
Clear Example of Pushdown Accounting đ
Imagine Company Alpha decides to purchase its rival, Company Beta, valued at $9 million for a price of $12 millionâa $3 million premium. Alpha finances this acquisition via issuing $8 million worth of its shares to Betaâs shareholders and a $4 million cash payment funded through a debt offering.
Interestingly, even though Alpha takes the loan, the debt appears on Betaâs balance sheet under liabilities. The interest on this debt also records as an expense on Betaâs financial documents.
Thus, Betaâs net assetsâassets less liabilitiesâmust equate to the $12 million purchase price, with $3 million marked as goodwill.
Dynamic Requirements in Pushdown Accountingđ
Previously, pushdown accounting was mandatory when a parent company acquired at least a 95% ownership stake in another company. It was optional for ownership between 80% and 95%, and unauthorized for smaller stakes. However, these regulations shifted in late 2014. Today, companies have the flexibility to apply pushdown accounting regardless of the ownership stake, abiding by new guidelines from both FASB and the Securities and Exchange Commission (SEC).
Weighing the Pros and Cons of Pushdown Accounting â
From a managerial standpoint, keeping debt within the subsidiary’s books allows for clearer assessment of the acquisitionâs profitability. However, the tax and reporting implications of pushdown accounting may vary based on acquisition specifics and jurisdictional regulations.
In summary, pushdown accounting serves as a useful tool to align the financial realities of acquisitions, poring updated insights primarily beneficial for managerial evaluations.
Related Terms: goodwill, purchase price allocation, financial revaluation.
References
- International Financial Reporting Standards. “Staff Paper: IASB Meeting, Business Combination Under Common Control”, Page 3 and 8.
- U.S. Securities and Exchange Commission. “SEC Staff Releases Accounting Bulletin to Update Guidance on Pushdown Accounting”.
- Financial Accounting Standards Board (FASB). “Financial Accounting Series: FASB Accounting Standards Update No. 2014-17 November 2014”, Page 7-8.
- FASB. “Accounting Standards Update”.
- Morgan Lewis. “Financial Reporting and the Law”.
