Push-down accounting is a method of accounting required for ‘substantially wholly-owned subsidiaries’ and encouraged in other cases in preparation of their individual financial statements. It requires the subsidiaries to adopt the fair values of the subsidiary’s net identifiable assets as recognized by the acquirer as the new carrying value of its assets and liabilities.
In a business combination, the acquirer purchases majority holding in another company, the acquiree, which becomes its subsidiary. This gives the acquirer control over the business and financing decisions of the subsidiary; hence accounting standards require the acquirer (parent) to consolidate the financial performance and financial position of the subsidiary with its own. The consolidation process involves a comparison between the consideration the parent pays with the fair value of net identifiable assets of the subsidiary. The parent ignores the historical cost basis of the subsidiary’s net identifiable assets and works only with the acquisition date fair value, recognizing the difference between the fair value of net identifiable assets and the purchase consideration as a goodwill. Some standard setters believe that the subsidiary must also adjust its own books to reflect the new value assigned to its net identifiable assets. This approach is called push down accounting because the fair value adjustments are pushed down to the subsidiary’s books and hence no adjustment is needed in the parent’s book with respect to fair value adjustment and associated amortization.
FASB, the US accounting standard setting body, requires push-down accounting for subsidiaries which are substantially wholly-owned. In other cases, it gives the parent and subsidiary an irrevocable option to opt for push down accounting at the acquisition date. Previously, the guidance was issued by the SEC which required pushed down accounting for ‘substantially wholly-owned subsidiaries’ i.e. 95% or more holding.
Example and Journal Entries
Peaky Blinders, Inc. (PB) acquired 80% stake in Billy Kimber, Inc. (BK) for $80 million. The following table shows the book value and fair values of BK at acquisition date:
|Net identifiable assets of BK at acquisition date||Book Value||Fair Value|
|Non-current assets||$40 million||$60 million|
|Current assets||$15 million||$14 million|
|Liabilities||$20 million||$21 million|
|Net identifiable assets||$35 million||$53 million|
The accounting for PB (the parent) is pretty straight forward, it recognizes the fair value of net identifiable assets of the subsidiary through the consolidation process while also recognizing the associated additional amortization.
BK has two options with respect to preparation of its individual financial statements: (a) continue with its historical book value or (b) adjust its book value to reflect the new fair values.
The second option above is called push down accounting. BK must recognize the fair value changes in its own books at acquisition date and charge depreciation and amortization based on the new carrying value.
Advantages and Disadvantages
The main advantage of the push-down accounting is that no adjustments need to be made with respect to fair value changes and associated amortization during the consolidation process. The changes are made once at the acquisition date. Further, subsidiary financial statements prepared using push-down method are more meaningful because they provide information about the most relevant and recent assets and liability values.
The push-down accounting is not very appropriate when there is a significant non-controlling interest or debt. Adopting the push-down accounting in such an situation changes the basis of the financial statements which mightn’t be very relevant to the debt-holders or minority interest-holders.