Pushdown Accounting Explained: Definition, Mechanism, and Practical Example

Understanding Pushdown Accounting

Pushdown accounting is a specialized accounting technique employed when one company acquires another. This method involves adopting the acquirer's accounting basis to prepare the financial statements of the acquired entity. Consequently, the acquired company's assets and liabilities are adjusted to reflect the acquisition cost rather than their historical book values.

While pushdown accounting is permitted under U.S. Generally Accepted Accounting Principles (GAAP), it is not recognized within the International Financial Reporting Standards (IFRS).

Key Highlights

• Pushdown accounting records the purchase of a subsidiary at the acquisition price, not at historical cost.
• The acquired company's assets and liabilities are revalued to match the purchase price.
• Any resulting gains or losses from this revaluation are transferred ('pushed down') from the parent company to the acquired company's financial statements.

How Pushdown Accounting Operates

When a business acquires another, accountants must accurately document the transaction, including the valuation of the acquired company's assets and liabilities. Under pushdown accounting, these balances are adjusted upward or downward to align with the purchase price.

According to the U.S. Financial Accounting Standards Board (FASB), the total acquisition cost becomes the new book value on the acquired company's financial records.

Any gains or losses arising from this adjustment are reflected in the acquired company's income statement and balance sheet, effectively 'pushed down' from the acquirer. If the acquisition price exceeds the fair value of net assets, the excess is recorded as goodwill, an intangible asset.

Importantly, acquisition-related costs are reported on the acquired company's financial statements rather than those of the acquirer.

Think of pushdown accounting as establishing a new entity financed by borrowed funds, where both the liabilities and assets are recorded on the subsidiary’s books.

Illustrative Example of Pushdown Accounting

Imagine Company ABC acquires its competitor, Company XYZ, which has a valuation of $9 million.

ABC pays a premium, acquiring XYZ for $12 million. To finance this, ABC issues $8 million in shares to XYZ’s shareholders and raises $4 million in cash through debt.

Although ABC incurs the debt, the liability is recorded on XYZ’s balance sheet. Additionally, interest expenses related to the debt are charged to XYZ’s financials.

As a result, XYZ’s net assets are adjusted to $12 million, and goodwill of $3 million ($12 million minus $9 million) is recognized.

Important Update

Since late 2014, FASB has removed the ownership percentage requirement, allowing companies to elect pushdown accounting regardless of their ownership level.

Criteria for Applying Pushdown Accounting

Previously, pushdown accounting was mandatory if the parent company owned at least 95% of the subsidiary, optional between 80% and 95%, and disallowed below 80% ownership.

However, updated guidelines from late 2014 have eliminated these thresholds. Now, companies can choose to apply pushdown accounting irrespective of ownership stake.

The Securities and Exchange Commission (SEC) has aligned its regulations with FASB, granting both public and private companies the option—but not the obligation—to implement pushdown accounting regardless of ownership percentage.

Pros and Cons of Pushdown Accounting

From a management standpoint, recording the acquisition debt on the subsidiary's books provides clearer insight into the profitability of the acquisition.

Tax and reporting implications vary depending on the specifics of the acquisition and the regulatory environment, influencing whether pushdown accounting offers advantages or disadvantages.

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