By Norbert F. Dietrich, CPA
Have you ever heard of the term pushdown accounting and wondered what it means or how it applies? Well, pushdown accounting is one method of recording a business combination. There is no requirement to adopt, and very little guidance within, U.S. generally accepted accounting principles (U.S.GAAP) for pushdown accounting for nonpublic entities. Due to the lack of guidance for nonpublic entities, diversity in practice exists. In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-17 to provide the much needed guidance.
Under U.S.GAAP, when an acquirer purchases another entity, the cost or amount paid to purchase the entity is recorded as an investment on the acquirer’s books and records. In consolidation, this investment is eliminated and the assets and liabilities of the acquiree are then reflected in the consolidated financial statements at their new cost basis. It should be noted that the assets and liabilities on the books and records of the separate acquiree are not changed and continue to be accounted for at historical costs in the separate standalone financial statements of the acquiree. An acquiree can elect to use pushdown accounting in its separate financial statements upon the occurrence of an event in which the acquirer obtains control of the acquired entity. Under pushdown accounting, the acquirer’s basis in the assets and liabilities at the time of the change in control are pushed down to the acquiree and become the acquiree’s new cost basis used in the preparation of the acquiree’s separate stand-alone financial statements. Any goodwill that arises as a result of the acquisition shall be reflected in the separate financial statements of the acquiree. Any bargain purchase gains recognized by the acquirer shall not be recognized in the acquiree’s income statement, but rather, the acquiree shall recognize such gain as an adjustment to additional paid-in capital.
The option to apply pushdown accounting should be researched extensively with all facts and circumstances taken into consideration, including any potential tax effects. The acquiree shall make the election to apply pushdown accounting before the financial statements are available to be issued (nonpublic entities) for the reporting period in which the change of control event occurred. If elected, pushdown accounting must be applied as of the acquisition date. The decision to apply pushdown accounting to a specific change in control event is irrevocable.
Volume 2, Issue 3
Summer 2015