What is 'Push Down Accounting'

Push down accounting is a convention of accounting for the purchase of a subsidiary at the purchase cost rather than its 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. Since the acquired company is consolidated into the parent company for financial reporting purposes, push down accounting appears the same on a firm's external financial reporting.

BREAKING DOWN 'Push Down Accounting'

Push down accounting is the method of accounting for mergers and acquisitions. Using this accounting method, the target company’s financial statement is adjusted to reflect the acquirer’s accounting basis rather than the target’s historical costs. In effect, the target company’s assets and liabilities are written up (or down) to reflect the purchase price and, to the extent the purchase price exceeds fair value, recognize the excess as goodwill. 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 acquiring company pays an amount in excess of fair value, the target carries the excess on its books as goodwill, which is classified as an intangible asset.

For example, Company ABC decides to purchase Company 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 $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.

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.

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.

The Securities and Exchange Commission (SEC) sets the rules for when companies should use push down accounting. These rules apply only to public companies that have securities registered with the SEC. 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.

RELATED TERMS
  1. Acquisition Accounting

    Acquisition accounting is a set of formal guidelines on reporting ...
  2. Purchase Acquisition

    Purchase acquisition is used in mergers and acquisitions where ...
  3. Busted Takeover

    A highly leveraged corporate buyout that is contingent upon the ...
  4. Acquisition Premium

    An acquisition premium is the difference between the estimated ...
  5. Goodwill

    Goodwill is an intangible asset that arises as a result of the ...
  6. Acquisition Adjustment

    The difference between the price an acquiring company pays to ...
Related Articles
  1. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  2. Investing

    Goodwill vs Other Intangible Assets: What's the Difference?

    "Intangible" assets don't possess physical substance. Yet they are quanitfiable, and of great importance to any business.
  3. Investing

    What is a Share Premium Account?

    The share premium account is an equity account found on a company’s balance sheet.
  4. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  5. Investing

    The Ins and Outs of In-Process R&D Expenses

    Are these charge-offs fair accounting or earnings manipulation? Learn more here.
  6. Investing

    Can You Count on Goodwill?

    Carefully examine goodwill and its sources before considering the value of your investment.
  7. Investing

    How To Calculate Goodwill

    Goodwill is an intangible, but it is still possible to effectively calculate or estimate it for a company.
RELATED FAQS
  1. How is market to market accounting different than historical cost accounting?

    Learn about historical cost accounting and mark to market accounting, the difference between and the limitations of the two ... Read Answer >>
  2. What happens to the stock prices of two companies involved in an acquisition?

    When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. ... Read Answer >>
  3. How can a company buy back shares to fend off a hostile takeover?

    Learn about why a business might use a stock buyback to thwart a hostile takeover attempt by reducing its total assets and ... Read Answer >>
  4. What is cost accounting?

    Learn about the main benefits of cost accounting systems, how they are different from financial accounting and why they are ... Read Answer >>
  5. Is goodwill considered a form of capital asset?

    Learn more about capital assets of a business, and understand why goodwill is an intangible asset that is classified as a ... Read Answer >>
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center