Among many considerations associated with a merger or acquisition, one that requires special attention is the accounting method to be used in valuing the assets and liabilities of the acquired business on the financial statements of the acquired company post- transaction. Pushdown accounting is a method that should be considered.
Historically, non-public companies have had relatively limited guidance for from Generally Acceptable Accounting Principles (GAAP) in determining whether, and at what threshold, pushdown accounting should be utilized in an acquired entity’s separate financial statement. However, the Financial Accounting Standards Board (FASB) recently issued accounting standard update ASU 2014-17 entitled Pushdown Accounting – A Consensus of the FASB Emerging Issues Task Force, that makes pushdown accounting an option for all entities upon a change-in-control. This update provides specific guidance on Pushdown accounting and aligns with the guidance provided for change-in-control in a business combination or consolidation, reducing complexity.
What is Pushdown Accounting?
Pushdown accounting refers to the establishment of a new basis for the assets and liabilities of an acquired company based on a “push down” of the acquirer’s purchase price accounting. The net assets are typically reported at higher amounts than their historical book values. Goodwill resulting from the transaction would be reported on the books of the acquired company as it is on the books of the acquirer. The increase in assets resulting from the pushdown accounting method would result in higher depreciation and amortization expense in subsequent periods.
There are a number of important nuances to consider with the push down accounting method. Bargain purchase gains reported by the acquirer are not recognized in the acquired company’s income statement. Instead, these gains are recognized only in the acquired company’s balance sheet as additional paid in capital. Also, any acquisition related liability incurred by the acquirer is recognized by the acquired company, but only if it is an obligation of the acquired company.
A company going through the merger or acquisition process may choose to use pushdown accounting in the period in which the change-of-control event occurs. However, this decision can also be made in a later reporting period as a change in accounting principle. The acquired company would retrospectively adjust its reporting basis as of the date of the most recent change-in-control event. Note that this option can be costly and difficult. Once a decision has been made, it cannot be revoked and it can be made on a case-by-case basis.
Some Considerations Before Making the Election
The most important and deciding factor is based on the needs of the end users of the financial statements of the acquired company. Some users prefer historical bases. This keeps the statements on the same reporting as in the prior years, avoiding future fluctuations in income that could arise due to the change in control. Others believe that reporting assets and liabilities at the acquired company amounts simplifies consolidation and reflects the concept of the acquired company as a new business. Some users focus on cash flows as a measure of performance and may be indifferent to the change. Finally, some companies may prefer historical costs for financial reporting purposes when the carry-over basis is used for tax reporting purposes. You will want to coordinate this election with those responsible for coordinating the filing of the acquirer’s consolidated financial statements and tax returns.
What Does CohnReznick Think?
CohnReznick can help clients evaluate the suitability of pushdown accounting in support of their merger and acquisition activities. Toward that end, we have several resources you should look into:
- CohnReznick Insights (cohnreznick.com/insights): Provides CohnReznick’s latest insights on business trends, regulatory developments, and economic issues. You can subscribe to receive Insights e-newsletters by email.
- CohnReznick Website (cohnreznick.com): In addition to Insights, our website provides extensive information about all aspects of Accounting and Assurance, Tax, and Advisory services.
- CohnReznick GovCon360 (govcon360.com): Keeps you up-to-date on the ever-changing regulatory environment that is government contracting. From reference materials to educational presentations and thought leadership pieces on industry matters, GovCon360 is a valuable resource for the Government contracting professional.