Pushdown Accounting is an accounting method used to revalue the financial statements of a subsidiary, reflecting the purchase cost incurred by the acquiring firm rather than retaining the subsidiary’s historical cost. This accounting practice results in the subsidiary’s financial statements mirroring the amounts recognized by the acquiring entity.
Definition
Pushdown Accounting allows an acquired subsidiary’s assets and liabilities to be updated to their fair values at the acquisition date, effectively aligning its financial statements with the parent’s purchase price. This method is particularly useful in providing stakeholders a consistent view of the financial position and performance post-acquisition.
Implementation of Pushdown Accounting
Procedural Steps
- Fair Value Assessment: The first step involves identifying and determining the fair value of the subsidiary’s assets, liabilities, and any contingent considerations.
- Journal Entries: Create journal entries to record the fair value adjustments in the subsidiary’s books.
- Eliminations and Adjustments: Remove historical cost amounts and replace them with new valuation figures.
- Consolidation: Integrate the newly revalued financial statements of the subsidiary into the parent company’s consolidated financial reports.
Accounting Treatment
Pushdown Accounting requires adjusting both tangible and intangible assets to fair value, recognizing goodwill or a gain on bargain purchase, and possibly dealing with deferred tax implications arising from the adjustments.
Examples of Pushdown Accounting
Consider a parent company that acquires a subsidiary for $10 million. The subsidiary has net assets listed at a historical cost of $5 million. When implementing pushdown accounting:
- The subsidiary’s books will reflect the new asset value of $10 million.
- If $3 million is identified as goodwill, adjustments will show $8 million in tangible/intangible assets and $2 million in liabilities.
Practical Application
An example journal entry for revaluing assets:
Dr. Asset $5,000,000
Dr. Goodwill $3,000,000
Dr. Liabilities $2,000,000
Cr. Equity $10,000,000
This reflects the subsidiary’s adjusted financial position post-acquisition.
Key Considerations
Advantages
- Consistency: Provides a synchronized view of the subsidiary’s financial status with its new parent.
- Transparency: Enhances the clarity of financial information for stakeholders.
- Compliance: May meet specific regulatory requirements or accounting standards.
Challenges
- Complexity: Can involve complex valuations and significant adjustments.
- Tax Implications: Deferred taxes need careful handling.
- Documentation: Requires thorough documentation to support the valuation adjustments.
FAQs
Q1: Why is Pushdown Accounting used?
Q2: Is Pushdown Accounting mandatory?
Q3: How does Pushdown Accounting affect Goodwill?
Summary
Pushdown Accounting serves as a bridging mechanism ensuring that a subsidiary’s financial statements reflect the economic realities of its acquisition cost. This alignment provides clarity and consistency for financial reporting, aids in compliance with relevant standards, and enhances the transparency of financial information disclosed to stakeholders. While beneficial, it requires careful execution and thorough documentation to address potential complexities and tax implications.
By understanding the definition, implementation process, examples, and key considerations discussed, organizations can effectively integrate pushdown accounting practices to enhance their financial reporting post-acquisition.
