What Is Pushdown Accounting?

Pushdown accounting is a bookkeeping method used by companies to record the purchase of another company. The acquirer’s accounting basis is used to prepare the financial statements of the purchased entity. In the process, the assets and 澳洲幸运5官方开奖结果体彩网:liabilities of the target company are u🍸pdated to reflect the purchase cost rather than the historical cost.

This method of accounting is an option under U.S. 澳洲幸运5官方开奖结果体彩网:Generally Accepted A🥃💯ccounting Principles (GAAP) but is not accepted under the 澳洲幸运5官方开奖结果体彩网:In🧸ternation꧒al Financial Reporting Standards (IFRS) accounting standards.

How Pushdown Accounting Works

When a company buys another company, accountants must record the transaction in detail, 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 澳洲幸运5官方开奖结果体彩网:written up (or down) to reflect the purchase price.

According to the U.S. 澳洲幸运5官方开奖结果体彩网:Fi💞nancial 👍Accounting Standards Board (FASB), the total amount that is paid to purchase the target becomes the target’s new 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:income statement and 澳洲幸运5官方开奖结果体彩网:balance sheet. If the purchase price exceeds 澳洲幸运5官方开奖结果体彩网:fair value, the excess is recognized as goodwill, which is an 澳洲幸运5官方开奖结果体彩网:intangible asset.

In pushdown accounting, the costs incurred 🌞to acquire a company appear on the separate financial s💎tatements of the target, rather than the acquirer.

It can be helpful to think of pushdown accounting as a new company that is created using borrowed money. Both the debt and the assets acquired are recorded as part of the new 澳洲幸运5官方开奖结果体彩网:subsidiary.

Example of Pushdown Accounting

Say Company ABC decides to purchase its rival, Company XYZ, which is valued a🍌t $9 million.

ABC is purchasing the company for $12 million, which translates to a premium. To finance its 澳洲幸运5官方开奖结果体彩网:acquisition, ABC gives XYZ’s shareholders $8 million worth of ABC shares and a $4 million cash payment, which it raises through a 澳洲幸运5官方开奖结果体彩网:debt offering.

Even though it is ABC that borrows the money, the debt is recognized on XYZ’s balance sheet under the liabilities account. In addition, 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 equal $12 million, and goodwill will be recognized as $12 million - $9 million = $3 million.

Pushdown Accounting Requirements

Pushdown accounting was formerly mandatory when the parent acquired at ꩵleast 95% ownership of another company. If the stake ranged between 80% to 95%, pushdown accounting was an option. If the stake was smaller, it was not permitted.

This has changed. Under new guidance in effect since late 2014, FASB has eliminated the percentage ownership rule. This means companies have the option to use pushdown accounting regardless of the size of their ownership stake.

The 澳洲幸运5官方开奖结果体彩网: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, but not the requirement, to use pushdown accounting regardless of the ownership stake of the company purchased.

Advantages and Disadvantages of Pushdow♋n Accounting

From a managerial perspective, keeping the debt on the subsidiary's books helps in judging the profitability of the acquisition.

From a tax and reporting perspective, the advantages or disadvantages of ꩵpushdown accounting will depend on the deta💧ils of the acquisition as well as the jurisdictions involved.