Push Down Accounting

Push-down accounting is the method by which the acquirer's accounting basis about the assets and liabilities taken over is pushed down to the acquiree’s books. The acquiree’s books are also adjusted to reflect the value of its assets and liabilities considered in the acquirer’s consolidated financial statements, i.e., the book value of assets and liabilities of the acquiree would be adjusted to their fair values as considered by the acquirer.

• Pushdown accounting is a technique that involves adjusting the financial statements of a subsidiary to reflect the assets, liabilities, revenues, and expenses of the parent company as if they had always been part of the subsidiary's operation.
• Goodwill, gain on bargain purchases, transaction costs, acquisition liabilities, and disclosures are the items that are considered under pushdown accounting. Therefore, this method eliminates the mismatch in the carrying values.
• ASU 2014-17 provides an acquiree to utilize pushdown accounting in separate financial statements for every change-in-control occurrence.

ASU 2014-17 guides the application of pushdown accounting.

The acquiree can choose to apply to push down accounting whenever an entity obtains control of it. As per guidance in ASC 810 Consolidation, an entity is said to have obtained control when it

• directly or indirectly acquires more than 50% of the voting rights (voting interest model)
• becomes the primary beneficiary of a variable interest entity (variable interest model), or
• another control is transferred through a contractual arrangement, etc.

Such events where another entity obtains control of the acquiree are referred to as ‘change-in-control events’ in ASU 2014-17.

• The option to apply to push down accounting does not apply to situations where the acquirer does not obtain ‘control’ of the acquiree within the control parameters defined in ASC 810. The transaction would be outside of the scope of ASC 805 as well.
• For instance, acquisition accounting and consequently push down accounting would not apply in case of acquisition of assets or group of assets not constituting a business, in case of formation of joint ventures, etc.
• However, for an acquiree to apply to push down accounting, it is not a prerequisite that the acquirer should apply acquisition accounting. For example, if an investment company acquires control of the acquiree, the investment company may not be required to apply acquisition accounting as per ASC 805. Yet, the acquiree may choose to apply to push down accounting so long as a change-in-control event exists.
• Any subsidiary of the acquiree (i.e., step-down subsidiary), which the acquirer consolidates in its consolidated financial statements, may choose to apply to push down accounting in its separate financial statements regardless of whether the acquiree opts to apply the same.

Option to Apply Push Down Accounting

An entity has the choice to apply to push down accounting each time a change-in-control event occurs. For example, Entity A was acquired by Entity B in January 20×7. Entity A is further acquired by Entity C in January 20×8. The following options are available to Entity A.

• Therefore, each change-in-control event presents a new opportunity for the acquiree to apply or not apply to push down accounting. However, once an entity opts to push down accounting to a specific change-in-control event, it cannot revoke the decision.
• An acquiree that does not apply pushdown accounting before the financial statements are issued or available to be issued can apply the same in a subsequent period by treating it as a change in accounting principle. It means that the acquiree would be required to apply pushdown accounting retrospectively from the date of acquisition if it feels that pushdown accounting would be a more appropriate method of accounting.
• All the disclosures required to be made in the event of a change in accounting principle should also be made.

• If an entity chooses to apply pushdown accounting, the separate financial statements of the acquiree are to be adjusted to reflect the new basis of accounting adopted by the acquirer to measure the identifiable assets acquired and liabilities assumed.
• Suppose the acquirer is not required to follow acquisition accounting. In that case, the acquiree should adjust its books to reflect the amounts the acquirer would have recognized the assets acquired and liabilities assumed had it applied acquisition accounting.
• Since in pushdown accounting, the acquiree is considered a new reporting entity for accounting purposes, retained earnings are eliminated. The amount of adjustment to bring the book value of the acquiree to the fair value is recognized in the additional paid-in capital of the acquiree.

#1 - Goodwill

• Goodwill arising on the application of ASC 805 in the consolidated financial statements of the acquirer will be recognized in the separate financial statements of the acquiree under pushdown accounting.
• The acquirer is required to assign the goodwill; it recognizes different reporting units that benefit from the synergies of the acquisition.
• As a result, the goodwill assigned to the acquiree in the acquirer’s consolidated financial statements might not correspond to the amount of goodwill that is pushed down to the acquirer’s standalone financial statements.
• Once elected for a change-in-control event, Pushdown accounting has to be applied to all the items of assets and liabilities recognized by the acquirer as part of the transaction. Partial application of pushdown accounting is not allowed.

#2 - Example

Entity B acquires Entity A in a transaction that results in the goodwill of $100 million as per ASC 805. Entity B estimates the relative benefit of its different reporting units from the synergies of the acquisition and allocates the goodwill as follows:

1. Reporting Unit #1 – $25 million
2. Reporting Unit #2 - $10 million
3. Reporting Unit #3 - $65 (pertains to Entity A)

Hence, Entity B was assigned goodwill of $65 to Entity A in its consolidated financial statements. However, Entity A must recognize the entire amount of goodwill of $100 million in its separate financial statements while applying pushdown accounting.

#3 - Gain on Bargain Purchase

If the application of ASC 805 results in gain on bargain purchase being recognized in the acquirer’s books, the acquiree should not record the same in its separate financial statements.  Instead, the amount of bargain purchase gain is adjusted against the additional paid-in capital of the acquiree.

#4 - Transaction Costs

Transaction costs incurred by the acquirer to effect the acquisition are not pushed down to the acquiree.

#5 - Acquisition-Related Liabilities

Any liability incurred and recognized by the acquirer in the process of effecting the acquisition is to be recognized by the acquiree only if the acquiree must settle the liability or is jointly and severally obligated to settle the liability along with the acquirer.

#6 - Disclosures

Since pushdown accounting results in adopting a new accounting basis, the acquiree must present separately the financial results and statements about the pre-acquisition period and the post-acquisition period, separated by a vertical black line.

The acquiree should also disclose the basis for applying pushdown accounting and other relevant information to enable the users of the financial statements to evaluate the effect of applying pushdown accounting on the separate financial statements of the acquirer. Some of the relevant information to be disclosed include:

• Name and description of the acquirer,
• Description of how the acquirer obtained control of the acquiree
• Acquisition date
• The acquisition-date fair value of the consideration transferred by the acquirer
• Amounts recognized by the acquiree for each major class of assets and liabilities due to applying pushdown accounting as of the acquisition date.
• Qualitative description of the factors contributing to the goodwill, including expected synergies, intangible assets that do not qualify for recognition, and other factors. In case of a bargain purchase gain, the acquiree should disclose why the transaction resulted again and the amount of gain recognized in the acquiree’s additional paid-in capital.
• Information that is relevant for the users of financial statements to evaluate the economic effects of the adjustments made as part of pushdown accounting.

Entity B acquired a 100% stake in Entity A for $800 million. Entity A chooses to apply pushdown accounting in its separate financial statements. The fair value of Entity A’s identifiable assets acquired was to the tune of $800 mn and the fair value of liabilities assumed was $150 mn on the date of acquisition. The book value of the identifiable assets of Entity A as of the date of acquisition is $700, and that of liabilities assumed is $100 million. The common stock on the date of acquisition was $100 million, additional paid-in capital was $200 million, and retained earnings were $300 million.

Solution:

Goodwill on the transaction = Consideration paid (-) Fair value of identifiable net assets taken over

• = $800 mn - $650
• = $150 mn

The extent of adjustment to be made is calculated as follows:

Entity A would record the following entry as part of push down accounting adjustments:

Entity A’s financial statements would appear as follows:

• Push-down accounting eliminates the mismatch in the carrying values of the acquiree’s book value of assets and liabilities, and the acquirer’s records are maintained for consolidation. It thus eliminates adjustment entries to that extent at the time of preparation of consolidated financial statements.
• Maintaining different values and the basis of accounting in the acquiree and acquirer’s books increases when there are multiple change-in-control events with multiple acquirers obtaining control at various intervals.

In the case of an acquiree with a significant non-controlling interest, the relevance of the financial statements prepared based on pushdown accounting to the users of the financial statements is affected.

• ASU 2014-17 gives an acquiree the flexibility to apply to push down accounting in its separate financial statements for each change-in-control event.
• The option available to the consolidated subsidiaries of the acquiree to opt for a pushdown accounting provides for the adoption of a more relevant basis of accounting.
• Push-down accounting allows for a more consistent basis of accounting between the acquirer’s and acquiree’s books, easing the consolidation process to that extent.

This article has been a guide to What is Push Down Accounting & its Definition. Here we discuss when to apply pushdown accounting, examples, and measurement along with advantages and disadvantages. You can learn more about from the following articles –

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• Related Party Transactions Definition