Key Takeaways
- Adjusts subsidiary books to acquirer's purchase price.
- Resets retained earnings; records goodwill if any.
- Optional, irrevocable method after change of control.
- Improves transparency by reflecting fair value basis.
What is Push Down Accounting?
Push down accounting is an optional method under GAAP where an acquired company's standalone financial statements are adjusted to reflect the acquirer's purchase price basis. This means the subsidiary's assets and liabilities are revalued to fair market value as if it were a new entity, aligning its records with the acquisition economics.
This approach is typically applied after a significant change in control, such as a merger or acquisition, to better represent the fair value of the acquired company on its own books.
Key Characteristics
Push down accounting has distinct features that differentiate it from traditional accounting methods:
- Fair value adjustment: Assets and liabilities are stepped up or down to reflect fair market value at acquisition, not historical cost.
- Goodwill recognition: Any excess purchase price over the net fair value of assets and liabilities is recorded as goodwill.
- Retained earnings reset: The subsidiary’s pre-acquisition retained earnings are eliminated and replaced with a new equity account similar to paid-in capital.
- Fresh start basis: Depreciation and amortization are recalculated based on stepped-up asset values, impacting future expenses.
- Optional and irrevocable: Once elected for a transaction, push down accounting cannot be reversed.
How It Works
After a change-in-control event, such as acquiring more than 50% ownership, the parent company "pushes down" its purchase price basis to the subsidiary’s books. This involves revaluing identifiable assets and liabilities to fair value and recognizing goodwill for any excess paid.
The subsidiary resets its retained earnings to zero and establishes a new capital account reflecting the total consideration from the acquirer. The process removes old accumulated depreciation and records new gross asset values, which are then depreciated going forward. This creates a clear, updated financial picture aligned with the acquisition economics rather than historical costs.
Examples and Use Cases
Push down accounting is commonly used in industries where acquisitions and control changes frequently occur, providing clearer financial transparency.
- Airlines: Companies like Delta and American Airlines often apply push down accounting after mergers to reflect the fair value of acquired assets and liabilities.
- Private equity-owned firms: These entities may elect push down accounting to simplify reporting and align subsidiary financials with parent company valuations.
- Growth companies: Firms featured in guides like best growth stocks may undergo acquisitions where push down accounting helps investors understand the real asset and goodwill values.
Important Considerations
When considering push down accounting, note that it applies only to the subsidiary’s standalone financial statements and not consolidated statements. This distinction is critical for accurate reporting and compliance.
Since push down accounting impacts retained earnings and asset valuations, it affects key financial metrics. Companies must disclose these effects clearly, which can influence investor perceptions and lending decisions. Consulting experts familiar with D&B data and accounting standards is advisable to ensure proper application and transparency.
Final Words
Pushdown accounting aligns the subsidiary’s financials with the acquirer’s purchase price, improving transparency and simplifying consolidation. Consider reviewing your acquisition agreements to determine if pushdown accounting could clarify your subsidiary’s post-acquisition reporting.
Frequently Asked Questions
Push down accounting is an optional U.S. GAAP method where an acquired company adjusts its standalone financial statements to reflect the acquirer's purchase price. This means revaluing assets and liabilities to fair value as if the subsidiary were a new entity.
Push down accounting is applied after a substantial change in control, such as a merger or acquisition where ownership changes by more than 50%. It aligns the subsidiary's books with the transaction economics rather than historical costs.
The process involves revaluing assets and liabilities to fair market value, recognizing goodwill for any excess purchase price, resetting pre-acquisition retained earnings to zero, and recording a new pushdown capital account reflecting the acquirer's consideration.
Push down accounting improves transparency by reflecting the true economic value from the acquirer's perspective, simplifies reporting by easing consolidation, and provides better information for investors and lenders about asset values and future cash flows.
No, push down accounting is elective and irrevocable once chosen for a transaction. It is available to both public and private companies under FASB ASU 2014-17.
Under push down accounting, the subsidiary's pre-acquisition retained earnings are eliminated and reset to zero. They are replaced by a pushdown capital account that reflects the total purchase consideration paid by the acquirer.
Yes, because assets are stepped up to fair value, future depreciation and amortization expenses are generally higher. This reflects the new gross asset values recorded after acquisition.
Companies must disclose the effects of push down accounting on their financial statements, including changes in basis, impacts on equity, income, and any significant adjustments made due to the change in control.
