What is Push Down Accounting?
Push down accounting is the method by which the acquirer’s accounting basis with regard to 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.
ASU 2014-17 provides guidance on the application of pushdown accounting.
When to Apply 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 parameters of control as defined in ASC 810, as a result of which 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 be able to apply to push down accounting, it is not a prerequisite that the acquirer should apply acquisition accounting. For example, in case 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 is consolidated by the acquirer 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 choose to apply or not apply to push down accounting. However, once an entity opts to apply to push down accounting to a specific change-in-control event, the decision cannot be revoked.
- 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. This means that acquiree would be required to apply pushdown accounting retrospectively from the date of acquisition if it feels that pushdown accounting would be a more relevant method of accounting.
- All the disclosures that are required to be made in the event of a change in accounting principle should also be made.
Measurement of Items under Push Down Accounting
- 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.
- In case the acquirer is not required to follow acquisition accounting, the acquiree should adjust its books to reflect the amounts at which 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 of the acquiree 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.
- Pushdown accounting once elected for a change-in-control event 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:
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- Reporting Unit #1 – $25 million
- Reporting Unit #2 – $10 million
- 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 is required to recognize the entire amount of goodwill of $100 million in its separate financial statements while applying pushdown accounting.
#3 – Gain on Bargain Purchase
In case 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 has an obligation to settle the liability or is jointly and severally obligated to settle the liability along with the acquirer.
#6 – Disclosures
Since pushdown accounting results in the adoption of a new basis of accounting, the acquiree is required to present separately the financial results and statements pertaining to 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 so as 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 as a result of applying pushdown accounting, as of the acquisition date
- Qualitative description of the factors that contribute 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 the reason why the transaction resulted in 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 financial effects of the adjustments made as part of pushdown accounting.
Example of Push Down 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. Book value of the identifiable assets of Entity A as on the date of acquisition is $700 and that of liabilities assumed is $100 million. The common stock of Entity A 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:
Advantages of Push Down Accounting
- 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 maintained for consolidation. It thus eliminates adjustment entries to that extent at the time of preparation of consolidated financial statements.
- The difficulty is 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 acquirer’s obtaining control at the various intervals of time.
Disadvantages of Push Down Accounting
In the case of an acquiree with a significant non-controlling interest, the relevance of the financial statements prepared on the basis of pushdown accounting to the users of the financial statements is affected.
Conclusion
- ASU 2014-17 gives an acquiree the flexibility to choose 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 push-down 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 process of consolidation to that extent.
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