Pushdown Accounting

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 liabilities of the target company are updated to reflect the purchase cost rather than the historical cost.

This method of accounting is an option under U.S. Generally Accepted Accounting Principles (GAAP) but is not accepted under the International 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 written up (or down) to reflect the purchase price.

According to the U.S. Financial Accounting Standards Board (FASB), the total amount that is paid to purchase the target becomes 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. If the purchase price exceeds fair value, the excess is recognized as goodwill, which is an intangible asset.

In pushdown accounting, the costs incurred to acquire a company appear on the separate financial statements 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 subsidiary.

Example of Pushdown Accounting

Say Company ABC decides 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 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.

Under revised 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.

Pushdown Accounting Requirements

Pushdown accounting was formerly mandatory when the parent acquired at least 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 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 Pushdown 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 pushdown accounting will depend on the details of the acquisition as well as the jurisdictions involved.