Pushdown Accounting

What Is Pushdown Accounting?

Pushdown accounting is a bookkeeping method utilized by companies to record the purchase of another company. The acquirer's accounting premise is utilized to prepare the financial statements of the purchased entity. Simultaneously, the assets and liabilities of the target company are refreshed to mirror the purchase cost as opposed to the historical cost.

This method of accounting is an option under U.S. Generally Accepted Accounting Principles (GAAP) yet isn't accepted under the International Financial Reporting Standards (IFRS) accounting standards.

How Pushdown Accounting Works

At the point when a company purchases another company, accountants must record the transaction exhaustively, including the value of the assets and liabilities of the company that have been purchased. In pushdown accounting, the target company's assets and liabilities are written up (or down) to mirror the purchase price.

As indicated by the U.S. Financial Accounting Standards Board (FASB), the total amount that is paid to purchase the target turns into the target's new book value on its financial statements.

Any gains and losses associated with the new book value are "pushed down" from the acquirer's to the acquired company's income statement and balance sheet. In the event that the purchase price surpasses fair value, the excess is recognized as goodwill, which is a intangible asset.

In pushdown accounting, the costs incurred to procure a company show up on the separate financial statements of the target, as opposed to the acquirer.

It very well may be useful to think of pushdown accounting as another company that is made utilizing borrowed money. Both the debt and the assets acquired are recorded as part of the new subsidiary.

Illustration of Pushdown Accounting

Say Company ABC chooses to purchase its rival, Company XYZ, which is valued at $9 million.

ABC is purchasing the company for $12 million, which translates to a premium. To finance its acquisition, ABC gives XYZ's shareholders $8 million worth of ABC shares and a $4 million cash payment, which it raises through a debt offering.

Even however ABC acquires the money, the debt is recognized on XYZ's balance sheet under the liabilities account. What's more, the interest paid on the debt is recorded as an expense to the acquired company's balance sheet.

In this case, XYZ's net assets, that is assets minus liabilities, must rise to $12 million, and goodwill will be recognized as $12 million - $9 million = $3 million.

Under updated guidance in effect since late 2014, FASB has wiped out the percentage ownership rule. This means companies have the option to utilize pushdown accounting no matter what the size of their ownership stake.

Pushdown Accounting Requirements

Pushdown accounting was formerly mandatory when the parent acquired somewhere around 95% ownership of another company. In the event that the stake ran between 80% to 95%, pushdown accounting was an option. On the off chance that the stake was more modest, it was not permitted.

This has changed. Under new guidance in effect since late 2014, FASB has dispensed with the percentage ownership rule. This means companies have the option to utilize pushdown accounting no matter what the size of their ownership stake.

The Securities and Exchange Commission (SEC) changed its own rules to match the FASB guidance, meaning public companies as well as private companies have the option, however not the requirement, to utilize pushdown accounting no matter what the ownership stake of the company purchased.

Benefits and Disadvantages of Pushdown Accounting

According to a managerial point of view, keeping the debt on the subsidiary's books helps in passing judgment on the profitability of the acquisition.

From a tax and reporting viewpoint, the benefits or detriments of pushdown accounting will rely upon the subtleties of the acquisition as well as the locales in question.

Features

• Any gains and losses associated with the new book value are "pushed down" from the acquirer's to the acquired company's income statement and balance sheet.
• The target company's assets and liabilities are written up (or down) to mirror the purchase price.
• Pushdown accounting is a method of accounting for the purchase of one more company at the purchase price as opposed to its historical cost.