When another company is bought by a company, its accountant needs to make a record of the transactions in detail, including those purchases that have been made by the values of the assets and liabilities of the company. In pushdown accounting, to reflect the price of purchase, the targeted assets and liabilities of the company are written up or down. In this blog, we’ll guide you to know everything about pushdown accounting to make a record of any purchase quickly and smoothly.
What Exactly Do You Mean by Pushdown Accounting?
Push-down accounting is one type of technique that is used by an acquirer to record a purchase of another entity. The acquiring entity’s basis of accounting is used by the accountant under this elective approach to prepare the acquired entity of the financial statements. As of the acquisition date, the assets and liabilities of the acquire are updated to their fair values, which was it’s means. The fair value is the recorded book value of each acquired asset and liability.
Follow Criteria and Guidelines of Pushdown Accounting
When the parent acquired the ownership of another company of at least 95%, at that time, the pushdown accounting was formally mandatory. The pushdown accounting becomes an option if the stake is set in the range between 80% to 95%. The stake was not permitted if it was smaller. These things have already changed under the new guidance of effect since late 2014; the percentage of ownership rule was eliminated by FASB. This means, regardless of the size of the ownership stake, the company has another option to use pushdown accounting.
The own rule of the Securities and Exchange Commission(SEC) has been changed to match the guidance of FASB. It means that there are no requirements in public companies as well as the private companies, but they have the option to use pushdown accounting instead of ownership stake.
Principles of Pushdown Accounting
Conceptual Understanding
At its core, by a parent company, pushdown accounting remeasures the subsidiary assets and liabilities at a fair value to reflect them upon acquisition. In the consolidated financial statements, it appears to ensure that both the parent and subsidiary accurately reflect the current value of the acquired entity in the financial statements. The pushdown accounting is typically employed by making changes in control. Through the acquisition of the subsidiary, this control can be achieved with a majority stake of over 50%. The revaluation of the subsidiary was necessitated by the net assets.
Determination of Fair Value
In pushdown accounting, the determination of fair value is one type of critical aspect. At the measurement date, in an orderly transaction, the price of the fair value is received to sell an asset between market participants or paid to transfer a liability according to the Financial Accounting Standards Board (FASB). Including, market approach, income approach, and cost approach, several valuation techniques are used to determine the fair value.
What are the Applications of Pushdown Accounting?
Initial Recognition
To recognize initially, the pushdown accounting is involved when a parent company acquires a subsidiary at their fair value to measure its assets of identifiable and liabilities. From the date forward of the acquisition, the subsidiary’s financial statements were impacted by the revaluation.
Recording Adjustments
To align the new fair values with the acquisition cost, the adjustments are recorded in the subsidiary’s books. There are some typical adjustments available, such as:
- In Asset Values, there is an Increase/Decrease adjustment available.
- Recognition of Goodwill
- Recognition of Intangibles
- Deferred Tax Adjustments
Reporting and Following Measurements
The subsequent accounting follows the standard procedures after initial recognition for revalued assets and liabilities. Depreciation, amortization, and impairment are some assets of the fair value which are based on their remeasured accounts.
Know the Benefits of Pushdown Accounting
Enhanced Transparency
Through aligning the subsidiary’s financial position, the pushdown accounting enhances financial transparency with the economic realities of the acquisition. This transparency provides a clear picture of the subsidiary’s fair value, which is beneficial for investors and stakeholders to understand the opinion of the parent company.
Uniformity in Financial Reporting
Between the parent and the subsidiary’s financial statements, consistency is maintained by adopting pushdown accounting. This consistency makes it easier to analyze and interpret the financial health for stakeholders also simplifies the consolidation process with the performance of the entire corporate group.
Improved Decision-Making
By management, investors, and lenders, the subsidiary’s fair value aids accurate representation by making better decisions. To evaluate the subsidiary’s performance and investing or lending decisions, it provides a reliable basis.
Pros and cons of Pushdown Accounting
| Pros | Cons |
| The exact reflection of the acquisition cost was provided by it. | During an increased goodwill pushdown accounting, it may affect the financial ratio. |
| The profitability of the acquisition can be judged by taking its help. | In implementation and reporting, there are complexities available. |
| Regardless of ownership stake size, there was flexibility in usage. |
Conclusion
In Conclusion, pushdown accounting plays an essential role in representing the economic realities of corporate acquisitions accurately. At acquisition by remeasuring the fair value of a subsidiary’s assets and liabilities to ensure transparency, consistency, and informed decision-making. If you have any queries about this topic, the pushdown accounting guide will help you out with its best accounting systems to reflect the true position of financial acquired entries.