What is Push Down Accounting?
Push down accounting is a bookkeeping method used by companies when they buy out another firm. The acquirer’s accounting basis is used to prepare the financial statements of the purchased entity. In the process, the assets and liabilities of the target company are updated to reflect the purchase cost, rather than historical cost.
This method of accounting is required under U.S. Generally Accepted Accounting Principles (GAAP), but is not accepted under the International Financial Reporting Standards (IFRS) accounting standards.
- Push down accounting is a convention of accounting for the purchase of a subsidiary at the purchase cost, rather than its historical cost.
- The target company’s assets and liabilities are written up (or down) to reflect the purchase price.
- Any gains and losses associated with the new book value are “pushed down” from the acquirer’s to the acquired company’s income statement and balance sheet.
How Push Down Accounting Works
When a company buys another one, questions surface about how to value the assets and liabilities of the firm that has been taken over. In push down accounting, the target company’s assets and liabilities are written up (or down) to reflect the purchase price.
According to the U.S. Financial Accounting Standards Board (FASB), the total amount that is paid to purchase the target becomes the target’s new book value on its financial statements. Any gains and losses associated with the new book value are “pushed down” from the acquirer’s to the acquired company’s income statement and balance sheet. If the purchase price exceeds fair value, the excess is recognized as goodwill, an intangible asset.
In push down accounting, the costs incurred to acquire a company appear on the separate financial statements of the target, rather than the acquirer. It is sometimes helpful to think of push down accounting as a new company that is created using borrowed funds. Both the debt, as well as the assets acquired, are recorded as part of the new subsidiary.
Example of Push Down Accounting
ABC decides to purchase XYZ, which is valued at $9 million. ABC is purchasing the company for $12 million, which translates to a premium. To finance its acquisition, ABC gives XYZ’s shareholders $8 million worth of ABC shares and a $4 million cash payment, which it raises through a debt offering.
Even though it is ABC that borrows the money, the debt is recognized on XYZ’s balance sheet under the liabilities account. In addition, the interest paid on the debt is recorded as an expense to the acquired company. In this case, XYZ’s net assets, that is assets minus liabilities, must equal $12 million, and goodwill will be recognized as $12 million - $9 million = $3 million.
Push Down Accounting Requirements
The Securities and Exchange Commission (SEC) sets the rules for when public companies should use push down accounting. Push down accounting is generally mandatory when the parent acquires at least 95% ownership of the subsidiary. If the stake ranges between 80% to 95% push-down accounting can also be used. Anything less and it is not permitted.
Private companies are not required to practice push down accounting but may choose to do so if it would help in evaluating the performance of an acquired company.
Advantages and Disadvantages of Push Down Accounting
From a managerial perspective, keeping the debt on the subsidiary's books helps in judging the profitability of the acquisition. From a tax and reporting perspective, the advantages or disadvantages of push down accounting will depend on the details of the acquisition, as well as the jurisdictions involved.