What Is Push Down Accounting?

The practice in the USA of incorporating the fair value adjustments on acquisition, including goodwill made by the acquiring company into the financial statements of the acquired subsidiary.

Historical Context

Push Down Accounting is a financial reporting method introduced in the United States to ensure that the acquired subsidiary’s financial statements accurately reflect the acquisition’s fair value. Historically, before this practice, the acquisition’s impacts were reported only in the acquiring company’s consolidated financial statements. The Financial Accounting Standards Board (FASB) has set forth guidelines that provide clarity and uniformity to this practice.

Types/Categories

• Mandatory Push Down Accounting: When specific conditions are met, and fair value adjustments must be applied.
• Optional Push Down Accounting: When a company can choose whether to apply the adjustments.
• Not Applicable: Instances where Push Down Accounting is not relevant or permissible.

Key Events

• 1940s: Early usage began in cases of mergers and acquisitions.
• 1982: SEC adopted guidelines under Staff Accounting Bulletin (SAB) 54.
• 2014: FASB issued Accounting Standards Update (ASU) 2014-17, offering entities an option to apply push-down accounting.

Detailed Explanations

Push Down Accounting involves revaluating the assets and liabilities of the acquired subsidiary to their fair values at the acquisition date. This adjustment includes goodwill, which represents the excess of the purchase price over the fair value of identifiable net assets.

Mathematical Formulas/Models

Calculation of Goodwill:

$$ \text{Goodwill} = \text{Purchase Price} - (\text{Fair Value of Assets} - \text{Fair Value of Liabilities}) $$

Charts and Diagrams

    graph TD;
	    A[Acquisition by Parent Company] --> B[Acquired Subsidiary]
	    B --> C[Asset Valuation]
	    B --> D[Liability Valuation]
	    C --> E[Fair Value Adjustments]
	    D --> E
	    E --> F[Financial Statements]

Importance

Push Down Accounting is crucial for:

• Reflecting accurate financial health of the subsidiary.
• Enhancing transparency in financial reporting.
• Aligning the subsidiary’s financial statements with those of the parent company.

Applicability

This practice is particularly applicable in scenarios involving:

• Corporate takeovers and mergers.
• Subsidiaries with significant independent financial operations.
• Regulatory compliance and financial audits.

Examples

• Example 1: A large tech company acquiring a smaller software firm incorporates fair value adjustments into the subsidiary’s financial records.
• Example 2: A retail giant acquiring a chain of stores applies push-down accounting to revalue inventory and property assets.

Considerations

• Regulatory Compliance: Ensuring adherence to SEC and FASB guidelines.
• Materiality: Assessing the significance of fair value adjustments.
• Consistency: Applying uniform accounting policies across the parent and subsidiary.

Related Terms

• Goodwill: An intangible asset that arises during an acquisition when the purchase price exceeds the fair value of identifiable net assets.
• Fair Value: The price at which an asset could be bought or sold in a current transaction between willing parties.
• Acquisition Accounting: The method of accounting for a business combination by measuring assets acquired and liabilities assumed.

Comparisons

• Push Down vs. Non-Push Down Accounting: Push down incorporates fair value adjustments into the subsidiary’s statements, while non-push down maintains the original book values.

Interesting Facts

• Push Down Accounting originated from the need to standardize financial reporting in mergers and acquisitions.
• The SEC and FASB have continuously evolved the guidelines to keep up with changes in the business environment.

Inspirational Stories

In the merger of two major healthcare providers, the acquirer used Push Down Accounting, resulting in enhanced transparency and operational efficiency. This transparency led to an increased trust among investors and stakeholders, demonstrating the power of accurate financial reporting.

Famous Quotes

“Transparency, honesty, kindness, good stewardship, even humor, work in businesses at all times.” – John Gerzema

Proverbs and Clichés

• “Numbers don’t lie.”
• “Transparency builds trust.”

Expressions

• “The books were adjusted.”
• “Fair value revaluation.”

Jargon and Slang

• “Pushing down the numbers”: Refers to applying fair value adjustments.
• “The push-down approach”: Implementing Push Down Accounting.

FAQs

Q: What is Push Down Accounting? A: It is the practice of incorporating fair value adjustments made by the acquiring company into the financial statements of the acquired subsidiary.

Q: When is Push Down Accounting mandatory? A: It is mandatory under specific conditions such as regulatory requirements or significant impact on financial reporting.

Q: What are the benefits of Push Down Accounting? A: It enhances financial transparency, accuracy, and aligns the subsidiary’s financial reporting with that of the parent company.

References

• Financial Accounting Standards Board (FASB)
• SEC Staff Accounting Bulletin (SAB) 54
• Accounting Standards Update (ASU) 2014-17

Summary

Push Down Accounting is an essential practice in financial reporting, particularly during acquisitions. By incorporating fair value adjustments and goodwill into the financial statements of the acquired subsidiary, it ensures greater transparency and accuracy, aligning the financial health of the subsidiary with that of the parent company. Understanding and implementing Push Down Accounting correctly can lead to more informed decision-making and increased stakeholder confidence.