What Is Pushdown Accounting and How Does It Work?

Pushdown accounting is an accounting treatment an acquired company, or subsidiary, can use after being purchased. It involves adjusting the subsidiary’s financial statements to reflect the values determined by the parent company during the acquisition, adopting the new owner’s purchase price as its new accounting basis. The core idea is that the acquisition creates a new basis of accountability for the subsidiary. By “pushing down” the acquirer’s basis to the subsidiary’s books, its financial statements present a picture that is consistent with the parent company’s consolidated financial statements.

Eligibility for Application

The ability to apply pushdown accounting hinges on a change-in-control event. This occurs when an acquirer obtains a controlling financial interest, typically by acquiring more than 50% of the voting shares. The guidance for this accounting treatment is found within U.S. Generally Accepted Accounting Principles (GAAP) under ASC Topic 805.

Applying pushdown accounting is an irrevocable election made by the acquired company. The decision to adopt the new basis or continue using historical costs must be made before the subsidiary issues its first financial statements after the acquisition.

If a company initially forgoes the election, it may adopt pushdown accounting in a later period. This subsequent election is treated as a change in accounting principle under ASC 250. The company must justify that the new method is preferable and apply it retrospectively to the date of the original acquisition.

The New Basis of Accounting

Upon electing pushdown accounting, the subsidiary’s assets and liabilities are adjusted from their historical carrying amounts to their fair values as of the acquisition date. This new basis is derived from the valuation work the acquirer performed to account for the business combination in its own consolidated financial statements.

A significant consequence of this process is the recognition of goodwill on the subsidiary’s standalone balance sheet. Goodwill represents the amount the acquirer paid that exceeds the fair value of the identifiable net assets acquired. For example, imagine Acquirer Corp. purchases Subsidiary Inc. for $10 million. At the time of the purchase, Subsidiary Inc.’s assets and liabilities have a historical book value of $6 million but are determined to have a fair value of $8 million.

In this scenario, Subsidiary Inc. would increase the value of its net assets by $2 million on its balance sheet. The remaining $2 million of the purchase price is recorded as goodwill, an intangible asset. This goodwill is then subject to annual impairment testing, just as it would be on the acquirer’s consolidated statements.

If the acquirer had paid less than the fair value of the net assets, the difference would be recognized as an adjustment to additional paid-in capital on the subsidiary’s books, not as a gain.

Required Financial Statement Disclosures

When an entity elects to apply pushdown accounting, it must provide specific disclosures in the notes to its financial statements to ensure transparency. The requirements, outlined in ASC 805, mandate that the company provide enough information for a user to evaluate the effect of the accounting change.

The disclosures must include a statement confirming the election. Details about the transaction are also required, such as the name of the acquirer, the date of the change-in-control event, and a description of how control was obtained. The company must also disclose the fair value of the total consideration transferred by the acquirer.

Furthermore, the notes must detail the amounts recognized for each major class of assets and liabilities as of the acquisition date. If goodwill was recognized, the company needs to provide a qualitative description of the factors that contribute to it. In the case of a bargain purchase, a description of why the transaction resulted in a gain for the acquirer must be included. These disclosures are only required in the period the election is made.