Under US GAAP, an acquirer of a business initially recognizes most of the acquired assets and liabilities at fair value. If the acquired business prepares separate financial statements, a question arises as to whether the historical basis of the acquired company or the “stepped-up basis” of the acquirer should be reflected in those separate financial statements. Pushdown accounting refers to the latter, which means establishing a new basis for the assets and liabilities of the acquired company based on a “push down” of the acquirer’s stepped-up basis.
As discussed in ASC 805-50-25-4, reporting entities have the option to apply pushdown accounting when they are acquired by another party (i.e., upon a change-in-control event).
For purposes of pushdown accounting, as discussed in ASC 805-50-25-6, a change-in-control event is one in which an acquirer obtains control of a company. As discussed in ASC 805-50-25-4, an acquirer might obtain control of a company in a variety of ways, including by transferring cash or other assets, by incurring liabilities, by issuing equity interests, or a combination thereof. In some cases, an acquirer might obtain control of a company without transferring consideration, such as when certain rights in a contract lapse. As discussed in ASC 805-50-25-5, the guidance on consolidations in ASC 810 and business combinations in ASC 805 should be used to determine whether an acquirer has obtained control of a company.
There may also be instances when there is a change-in-control event, but business combination accounting under ASC 805 is not applied by the acquirer. This may be the case, for example, if the acquirer is an individual that does not prepare financial statements, or an investment company that accounts for its investments at fair value (e.g., a private equity company). In these situations, as discussed in ASC 805-50-30-10, an acquired company could still elect to apply pushdown accounting as if the acquirer had applied business combination accounting under ASC 805.
The election is available to the acquired company, as well as to any direct or indirect subsidiaries of the acquired company. As discussed in ASC 805-50-25-8, each acquired company or any of its subsidiaries can make its own election independently.
Before making an election, it is important to consider the needs of the users of an acquired company’s financial statements. Some users may prefer the “stepped-up basis” that results from pushdown accounting. Other users may prefer the historical basis to avoid distorting income statement trends as a result of increased amortization and depreciation expense. Users that are focused on cash flow and EBITDA measures may be indifferent as these measures are often not significantly affected by pushdown accounting. Assessing user needs may be more challenging when there are multiple users of the financial statements with different needs (e.g., creditors versus equity investors).
Some acquirers may prefer to apply pushdown accounting to avoid separate tracking of assets, such as goodwill and fixed assets, at two different values (historical and “stepped-up basis”). Conversely, an acquired company may prefer to carry over its historical basis. Companies may also want to consider tax reporting implications and may prefer to carry over their historical basis for financial reporting purposes when carry over basis is being used for tax reporting purposes (i.e., when there is no tax “step-up”).
The decision to apply pushdown accounting is usually made in the reporting period in which the change-in-control event occurs. This means that a company would have until its financial statements are issued (or are available to be issued) to make the election.
The decision to apply pushdown accounting is irrevocable. However, if a reporting entity has not applied pushdown accounting for a change-in-control event, it may elect to do so in a subsequent period as a change in accounting principle, if preferable (see FSP 30.4). The reporting entity would retrospectively adjust its reporting basis as of the date of the most recent change-in-control event, even when that event preceded the issuance of the pushdown accounting guidance.
Retrospective application of pushdown accounting may be appropriate to align the reporting basis of a subsidiary with that of its parent. This would require the use of the parent’s business combination accounting as of the most recent change-in-control event. It would also require a roll-forward of that accounting (e.g., depreciation and amortization of stepped-up values, and potential impairments). Sometimes, the parent may not have applied business combination accounting (e.g., a private equity parent) or may not have applied it at a precise enough level for the subsidiary’s separate financial statements. In those cases, the subsidiary would have to retrospectively determine the fair value of its assets and liabilities as of the most recent change-in-control event, which can be difficult and costly.
As discussed in ASC 805-50-25-6, the decision of whether to apply pushdown accounting upon a change-in-control event does not establish an accounting policy. That is, a company may elect to apply pushdown accounting for one change-in-control event and, independent from that election, decide not to apply pushdown accounting upon the next change-in-control event, or vice versa.