ASU 2014-17: An Overview of Pushdown Accounting

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-17 to provide clear guidance on pushdown accounting. This update standardized the application for all U.S. companies, superseding fragmented Securities and Exchange Commission (SEC) guidance and creating a single framework under U.S. Generally Accepted Accounting Principles (GAAP). The standard formalizes pushdown accounting as an optional election for an acquired company, or “acquiree,” following a transaction that results in a change-of-control. It allows the acquiree to choose whether to reflect the new owner’s basis of accounting in its own separate financial statements.

The Core Concept of Pushdown Accounting

Pushdown accounting is a method an acquired company can use for its own standalone financial statements. It involves the acquiree “pushing down” the new basis of accounting established by the acquiring company onto its own books. This means the historical costs of the acquiree’s assets and liabilities are replaced with the fair values determined by the acquirer as part of the business combination. The acquiree’s balance sheet is effectively reset to align with the purchase price the acquirer paid.

This process creates consistency between the parent’s (acquirer) and subsidiary’s (acquiree) financial records. When an acquirer buys a target, it records the target’s assets and liabilities at fair market value on its consolidated statements. By electing pushdown accounting, the acquiree mirrors these adjustments on its individual statements. The rationale is that the acquisition provides a fresh valuation of the acquiree’s net assets that is more relevant to financial statement users, as it reflects the current economic realities of the company under new ownership.

Criteria for Electing Pushdown Accounting

The ability to elect pushdown accounting hinges on a change-in-control event, which occurs when an acquirer obtains a controlling financial interest in the acquiree. A controlling financial interest is established when the acquirer gains ownership of more than 50% of the voting shares, though control can exist with a smaller stake through other arrangements.

A key aspect of ASU 2014-17 is that it makes pushdown accounting an option, not a mandate. Before this standard, SEC guidance sometimes required it if ownership exceeded 95% and prohibited it below 80%. The current guidance removes these thresholds, giving all acquirees the choice as long as a change-in-control has occurred.

An acquiree can elect to apply pushdown accounting in the reporting period of the transaction or in a subsequent period, where it is accounted for as a change in accounting principle. Once made, the election is irrevocable for that transaction, but the option can be re-evaluated with each new change-in-control.

Application and Measurement Principles

When an acquiree elects pushdown accounting, it must recognize and measure its assets and liabilities at the fair values established by the acquirer on the acquisition date. These are the same values the acquirer uses to prepare its consolidated financial statements.

A significant consequence is the recognition of goodwill on the acquiree’s standalone financial statements. Goodwill represents the amount of the purchase price that exceeds the fair value of the identifiable net assets acquired. This goodwill, always on the acquirer’s consolidated balance sheet, is also recorded directly on the acquiree’s books.

The application also impacts the acquiree’s equity section. The acquiree’s existing retained earnings from its pre-acquisition operations are eliminated. The net effect of adjusting all assets and liabilities to fair value, along with the recognition of goodwill, is recorded in the additional paid-in capital account.

Furthermore, if the acquirer incurs debt to finance the acquisition, that debt may also be pushed down to the acquiree’s financial statements. This occurs if the debt is an obligation of the acquiree, for example, if the acquiree is the borrower or a guarantor.

Required Financial Statement Disclosures

When an acquiree elects to apply pushdown accounting, it must provide specific disclosures in the notes to its financial statements for the period in which the election is made. These disclosures are intended to give users clear information about the effects of the change in basis.

The primary requirement is a statement confirming that the entity has chosen to apply pushdown accounting. The disclosures must also include key details about the change-in-control event itself, such as the date it occurred and a description of the transaction.

To quantify the impact, the acquiree must disclose the recognized amounts of major classes of assets and liabilities as of the acquisition date. Information about the total consideration transferred by the acquirer must also be part of the disclosure.