Push-down accounting is applied in business combinations. The accounts books of an acquirer reflect the changes in the books of the acquiree. The target entity reflects the new fair value figures in its financial statement because of the new business combination that emerged after the transaction.
Push-down accounting is regulated under the GAAP rules in the US. Initially, the ASU 2014-17 issued the guidelines for Push-down accounting practices. Let us see how to apply the push-down accounting and new regulatory changes regarding the business combinations.
What is Push-down Accounting?
The ASU 2014-17 topic 805 regarding business combinations tells us the concept of Push-down accounting:
When an acquirer obtains control of another business (acquiree), it should establish a new basis of accounting to reflect changes in its financial statements. The acquiree will then follow the newly established acquirer’s basis to form its own assets and liabilities in its stand-alone financial statement.
In simple terms, the newly established entity’s basis of accounting is “pushed down” to the acquiree’s financial statement. It happens because business combinations always follow the fair market values of assets and liabilities. And the target company would reflect many of its assets and liabilities at book values.
Key Requirements for Push-down Accounting
Initially, push-down accounting practice could be applied only if the acquirer obtained control with 95% ownership stakes. However, changes to rules have amended the ownership and some other reporting requirements.
- The ASC 810-10-15-8 defines a controlling interest when an acquirer obtains at least 50% of the acquiree’s stakes. The control can also be obtained with fewer percentage stakes through contract, lease, or other means.
- The ASU 2014-17 eliminates the need for a control of 95% or more for mandatory and 80% or more for an optional push-down accounting implementation.
- The ASU 2014-17 also makes push-down accounting available for non-SEC registrants. It means private, public, and not-for-profit organizations can choose to apply push-down accounting principles.
- Each event of a change in control presents an option to apply the push-down accounting principles. However, once chosen, the decision cannot be revoked unless a new control event takes place or the entity chooses to follow new accounting principles.
Measuring Financial Statement Elements under Push-down Accounting
If an entity opts to apply the push-down accounting principles, it must reflect the changes in the key elements of financial statements. The acquiree needs to follow the new accounting basis following the push-down accounting.
Goodwill
The ASC 805 states the fair market value of net assets over net liabilities as goodwill. The goodwill arising due to establishing a new entity will be reported on the acquiree’s financial statement.
The acquirer will assign the goodwill arising due to differences in the book values and fair values of assets and liabilities. In case of bargain price, the newly established entity’s financial statements would represent negative goodwill and be adjusted in additional paid-in capital line.
Debt
Under ASC 805-5-30-12, an acquiree must report the debt only if meets certain conditions under GAAP.
- If the debt is the legal obligation of the acquiree.
- The acquirer and the acquiree are jointly and severally liable for the debt after the transaction.
Liabilities
Under ASC 805, the acquiree will only report liabilities for the newly established accounting basis if it is liable for liabilities or is jointly and severally liable for such liabilities along with the acquirer.
Transaction Costs
All transaction costs related to the acquisition do not pass on. Hence, there is no push-down practice for transaction costs to the acquiree.
Disclosures
The acquiree must report important disclosures about practicing the push-down accounting principles. It should also disclose key information on pre-transaction and post-transaction changes in the elements of the financial statement.
Some key points to be included in disclosures can be:
- Name and details of the acquirer.
- Acquisition date and details of the change in control transaction.
- The fair value amounts for key elements of the financial statement on the acquisition date.
- Amounts realized by acquiree after adopting the push-down accounting principles.
- Any other relevant disclosures and valuable information for users of financial statements.
Example
Suppose a company ABC acquires another company XYZ with 100% stakes. The acquisition price is $ 1,000 million. XYZ’s assets and liabilities with fair market value were $ 800 m and $300 m respectively. The book values for XYZ’s assets and liabilities were $ 550 m and $200 m respectively.
XYZ’s:
Common stock = $ 100 m
Paid-in capital = $ 150 m
Retained earnings = $ 100 m
XYZ decides to apply the push-down accounting principles.
Goodwill = consideration paid – net assets (fair value)
Goodwill = $ 1,000 – $ 500 = $ 500 m.
Additional Paid-In capital = identifiable Assets + Goodwill + Retained Earnings – liabilities assumed
Add. Paid-In capital = 250 + 500 + 100 – 100 = 750
Elements of financial statement to be adjusted:
| Element | Book Value | Fair Value | Adjustment |
|---|---|---|---|
| Assets | 550 | 800 | 250 |
| Liabilities | 200 | 300 | 100 |
| Goodwill | 500 |
XYZ would report the financial statement as below:
| Element | Before Push-down | After Push-down |
|---|---|---|
| Assets | 550 | 800 |
| Goodwill | 0 | 500 |
| Total Assets | 550 | 1,300 |
| Liabilities | 200 | 300 |
| Common Stock | 100 | 100 |
| Paid-in capital | 150 | 900 |
| Retained Earnings | 100 | 0 |
| Total Liabilities | 550 | 1300 |
Final Thoughts
The ASU 2014-17 allows an acquiree to report financial statements on the push-down accounting principles. An entity can choose to apply the principles at will. The adoption bridges the gap between the reported figures of the acquirer and acquiree after the transaction. The approach provides more consistent reporting on the acquiree’s financial statement.
