Search within this section
Select a section below and enter your search term, or to search all click Business combinations and noncontrolling interests, global edition
Favorited Content
10.1 Pushdown accounting
Publication date: 01 Oct 2023
us Business combinations guide
Business combinations are recorded using the acquisition method. The acquirer recognizes the assets acquired and liabilities assumed at fair value with limited exceptions. 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. Pushdown accounting is optional under ASC 805-50-25-4.
Pushdown accounting typically results in higher net assets for the acquired company on the acquisition date because the assets and liabilities are “stepped-up” to fair value and goodwill is recognized. This in turn usually results in lower net income in periods subsequent to the acquisition due to higher amortization, higher depreciation, and potential impairment charges. Refer to Figure BCG 10-1 for an illustration of the impact of pushdown accounting on an acquired company’s financial statements.
Figure BCG 10-1
Typical impact of pushdown accounting on an acquired company’s financial statements
Typical impact of pushdown accounting on an acquired company’s financial statements
Assets
|
 |
Impact of goodwill and “step up” in value of PP&E, intangibles, and inventory
|
Revenue
|
NEUTRAL
|
Prior to adoption of ASU 2021-08, future revenues could decrease if the fair value of acquired deferred revenue is less than book value
|
Liabilities
|
NEUTRAL
|
Liabilities could increase if contingencies are recorded at fair value
|
Expenses
|
|
Impact of increased amortization and depreciation expense
|
Equity
|
|
Reflects value paid by buyer, typically exceeds book value
|
Net income
|
 |
Impact of increased expenses
|
Operating cash flows
|
NEUTRAL
|
Impact of pushdown is typically noncash
|
EBITDA
|
NEUTRAL
|
EBITDA could decrease if “step up” of inventory results in increased cost of goods sold
|
Presentation and disclosure guidance related to pushdown accounting is included in FSP 17.6.
10.1.1 Scope (pushdown accounting)
A company that is a business has the option to apply pushdown accounting when it is acquired by another party (a change-in-control event). A nonprofit activity or business also has the option to apply pushdown accounting when a not-for-profit acquirer obtains control of the nonprofit activity or business and initially recognizes their assets and liabilities in the acquirer's financial statements. In accordance with ASC 805-50-15-10, the election is available to the acquired company, as well as to any direct or indirect subsidiaries of the acquired company. The acquired company or, as noted in ASC 805-50-25-8, any of its subsidiaries can each make its own election independently for its separate financial statements.
Even when a subsidiary does not elect to apply pushdown accounting in its separate financial statements, its net assets may be subject to “push down” of the parent’s historical cost if those assets are subsequently transferred to another subsidiary under the parent’s control (i.e., in a common control transaction). See BCG 7 for further information.
In accordance with ASC 805-50-15-11, the pushdown accounting guidance does not apply to transactions listed in ASC 805-10-15-4 (e.g., asset acquisitions). See BCG 1.1.2 for additional information.
10.1.2 First step: identify the acquirer (pushdown accounting)
As described in ASC 805-50-25-4. the pushdown election is optional for an acquired company’s separate financial statements. However, the acquirer’s consolidated financial statements must apply acquisition accounting. Accordingly, the first step is to identify the acquirer in any change-in-control event. The acquirer is the entity or individual that obtains control of the acquiree, which may occur in a variety of ways, as described in BCG 10.1.4. The guidance on consolidations in ASC 810 and business combinations in ASC 805 should be followed to identify the acquirer. The acquirer is not always clearly evident in a business combination; for example, the legal acquirer may not be the same as the accounting acquirer (e.g., in a reverse acquisition). However, if the acquiree is a variable interest entity, the primary beneficiary of the acquiree is always the acquirer. In accordance with ASC 805-50-25-5, when it is not clear which entity is the acquirer in a business combination, the factors in ASC 805-10-55-11 through ASC 805-10-55-15 should be considered.
The guidance in the General Subsections of Subtopic 810-10 on consolidation, related to determining the existence of a controlling financial interest shall be used to identify the acquirer. If a business combination has occurred but applying that guidance does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs 805-10-55-11 through 55-15 shall be considered in identifying the acquirer. However, if the acquiree is a variable interest entity (VIE), the primary beneficiary of the acquiree always is the acquirer. The determination of which party, if any, is the primary beneficiary of a VIE shall be made in accordance with the guidance in the Variable Interest Entities Subsections of Subtopic 810-10, not by applying the guidance in the General Subsections of that Subtopic relating to a controlling financial interest or the guidance in paragraphs 805-10-55-11 through 55-15.
The determination of the accounting acquirer also may not be clearly evident when a new entity (NewCo) is created to effect a transaction. The determination of whether a NewCo is the accounting acquirer is judgmental and requires an understanding of the substance and legal form of the transaction. If the NewCo is the acquirer, acquisition accounting (rather than pushdown accounting) would need to be applied in the NewCo’s financial statements; it would not be optional.
Refer to BCG 2.3 for further guidance on identifying the accounting acquirer, and BCG 2.3.1 for guidance on when a NewCo is created to facilitate the business combination.
Example BCG 10-1 provides an example of the first step in evaluating a change-in-control event to identify the acquirer and the related pushdown accounting considerations by the acquiree.
EXAMPLE BCG 10-1
Identifying the accounting acquirer and pushdown accounting considerations by the acquiree
Identifying the accounting acquirer and pushdown accounting considerations by the acquiree
Parent Company acquires 100% of Target Company from Seller. In order to effect the transaction, a substantive entity (NewCo) that performs significant precombination activities is formed by Parent Company, which is used to acquire all of the shares of Target Company. Target Company will continue as a wholly-owned subsidiary of NewCo, and NewCo will be a reporting entity.
What are the accounting considerations for NewCo and Target Company?
Analysis
NewCo is the accounting acquirer and would be required to apply acquisition accounting for the acquisition of Target Company. The pushdown accounting election would only be available to Target Company and its subsidiaries (in their separate financial statements).
10.1.3 Considerations when making the pushdown election
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 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 at the acquired company level 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 even when its acquirer is applying acquisition accounting. 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 (that is, when there is no tax “step-up”).
The acquiree may also consider the impact on accounting policies when determining whether or not to apply pushdown accounting. If the acquiree elects to apply pushdown accounting, the acquirer’s basis is used in the acquiree’s separate financial statements. That basis is determined based on the existing accounting policies of the acquirer on the acquisition date. See BCG 2.12 for additional information on conforming the acquiree’s accounting policies to those of the acquirer. Alternatively, if the acquiree does not elect to apply pushdown accounting in its separate financial statements, the acquiree would not be able to change its accounting policies without demonstrating the preferability requirements in ASC 250.
10.1.4 Change-in-control events (pushdown accounting)
For purposes of pushdown accounting, a change-in-control event is one in which an acquirer obtains control of a company. An acquirer might obtain control of a company in a variety of ways, as described in ASC 805-50-25-4, 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. 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. Refer to BCG 1.1.1 for additional guidance on determining whether an acquirer has obtained control.
A transaction that results in a party losing control without any other party obtaining control is not a change-in-control event; therefore, it is not eligible for pushdown accounting. There may also be instances when there is a change-in-control event, but acquisition 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, an acquired company could still elect to apply pushdown accounting as if the acquirer had applied acquisition accounting under ASC 805.
10.1.5 When to make the pushdown accounting election
As described in ASC 805-50-25-6, the decision to apply pushdown accounting is 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 for entities that do not file with the SEC) to make the election.
Pushdown accounting is applied as of the acquisition date. In accordance with ASC 805-50-25-9, once applied, pushdown accounting is irrevocable. However, as contemplated in ASC 805-50-25-7, if an entity has not applied pushdown accounting, it may elect to do so in a subsequent period as a change in accounting principle in accordance with ASC 250, provided that the change is preferable, and retrospectively adjust its reporting basis as of the date of the change-in-control event.
In such case, the entity is required to use the parent’s acquisition accounting as of the most recent change-in-control event. A roll-forward of that accounting (e.g., depreciation and amortization of stepped-up values, and potential impairments) would also be required. Sometimes, the parent may not have applied acquisition 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 (see BCG 10.1.6). 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.
The pushdown accounting election 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.
The option to apply pushdown accounting may be elected each time there is a change-in-control event in which an acquirer obtains control of the acquiree. An acquiree shall make an election to apply pushdown accounting before the financial statements are issued (for a Securities and Exchange Commission (SEC) filer and a conduit bond obligor for conduit debt securities that are traded in a public market) or the financial statements are available to be issued (for all other entities) for the reporting period in which the change-in-control event occurred. If the acquiree elects the option to apply pushdown accounting, it must apply the accounting as of the acquisition date.
If the acquiree does not elect to apply pushdown accounting upon a change-in-control event, it can elect to apply pushdown accounting to its most recent change-in-control event in a subsequent reporting period as a change in accounting principle in accordance with Topic 250 on accounting changes and error corrections. Pushdown accounting shall be applied as of the acquisition date of the change-in-control event.
The decision to apply pushdown accounting to a specific change-in-control event if elected by an acquiree is irrevocable.
10.1.6 Applying pushdown accounting
When pushdown accounting is elected, an acquired company should record the new basis of accounting established by the acquirer for the individual assets and liabilities of the acquired company. An acquiree that elects pushdown accounting must apply it in its entirety; applying the election to a subset of assets and/or liabilities is not permitted.
Excerpt from ASC 805-50-30-10
If an acquiree elects the option in this Subtopic to apply pushdown accounting, the acquiree shall reflect in its separate financial statements the new basis of accounting established by the acquirer for the individual assets and liabilities of the acquiree by applying the guidance in other Subtopics of Topic 805.
In accordance with ASC 805-50-30-11, goodwill should be calculated and recognized by the acquired company consistent with the acquisition accounting applied by the acquirer. Bargain purchase gains, however, should not be recognized in the income statement of the acquired company applying pushdown accounting. Instead, they should be recognized in additional paid-in capital within equity.
An acquiree shall recognize goodwill that arises because of the application of pushdown accounting in its separate financial statements. However, bargain purchase gains recognized by the acquirer, if any, shall not be recognized in the acquiree’s income statement. The acquiree shall recognize the bargain purchase gains recognized by the acquirer as an adjustment to additional paid-in capital (or net assets of a not-for-profit acquiree).
The amount of goodwill recognized by the acquiree in its separate financial statements may differ from the amount of goodwill assigned by the acquirer to the specific reporting unit(s) that include the acquiree in the acquirer’s consolidated financial statements, as the acquirer may assign some of the goodwill that arose from the acquisition to other reporting units. See Example BCG 10-2 for an illustration. Further, a goodwill impairment charge recorded in the standalone financial statements of a subsidiary may not necessarily result in an impairment in the parent’s consolidated financial statements (and vice versa), because each entity would use its own reporting unit structure. However, a goodwill impairment charge at the subsidiary may represent a triggering event for potential impairment of the parent company’s goodwill. Refer to BCG 9.9.4.3 and BCG 9.9.4.4 for discussion on the subsequent accounting for goodwill in both the parent’s consolidated financial statements and the standalone financial statements of the subsidiary when a subsidiary recognizes a goodwill impairment.
Example BCG 10-2 provides an illustration of how goodwill recognized by the acquired company when pushdown accounting is elected could differ from the amount of goodwill allocated by the acquirer to the reporting unit that includes the acquired company.
EXAMPLE BCG 10-2
Goodwill recognized by the acquired company – pushdown elected
Goodwill recognized by the acquired company – pushdown elected
Parent acquires Target Company and records $100 of goodwill. Parent expects an existing reporting unit to benefit from the synergies of the acquisition and assigns $20 of goodwill to that reporting unit. Parent assigns all of Target Company’s identifiable assets acquired and liabilities assumed and remaining goodwill of $80 to a new reporting unit. Parent prepares separate, stand-alone financial statements for Target Company subsequent to its acquisition.
Assuming pushdown accounting is elected, how much goodwill should be reflected in the post-acquisition separate financial statements of Target Company?
Analysis
The separate financial statements of Target Company should reflect goodwill of $100. This is equal to the total amount of goodwill recognized by Parent for Target Company on the date of acquisition.
In accordance with ASC 805-50-30-12, acquisition-related debt should be recognized by the acquired company only if it represents an obligation of the acquired company. As such, contingent consideration or financing obtained in connection with the acquisition would generally not be recognized in the acquired company’s separate financial statements unless the acquired company is the legal obligor.
An acquiree should recognize an acquisition-related liability incurred by the acquirer only if the acquiree is required to recognize a liability in accordance with other applicable GAAP. For example, a determination should be made as to whether any joint and several obligations that exist among multiple subsidiaries and/or the parent fall within the scope of ASC 405-40, Obligations Resulting from Joint and Several Liability Arrangements. Under this guidance, such obligations should be measured as the sum of (a) the amount the reporting entity agreed with its co-obligors to pay and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The corresponding entries (e.g., cash, an expense, a receivable, equity) will depend on the specific facts and circumstances of the transaction.
In accordance with ASC 805-50-35-2, an acquiree that elects pushdown accounting should follow the subsequent measurement guidance in other subtopics of ASC 805 and other applicable GAAP to subsequently measure and account for its assets, liabilities, and equity instruments.
Transaction costs should generally be recognized as an expense by the acquirer, and not pushed down to the acquired company as they are typically not for the benefit of the acquired company. Refer to BCG 2.7.1 for further discussion on acquisition-related costs in a business combination, including information on accounting for certain acquisition-related costs "on the line" (BCG 2.7.1.5).
10.1.7 Expenses incurred on behalf of subsidiary
A parent company may incur certain expenses (including employee compensation) on behalf of its subsidiary. In these cases, SEC Staff Accounting Bulletin Topic 1.B.1, Costs Reflected in Historical Financial Statements, and SEC Staff Accounting Bulletin Topic 5.T, Accounting for Expenses or Liabilities Paid by Principal Stockholder, indicate that the income statement of a company should reflect all of its costs of doing business. Pushdown accounting under ASC 805-50 does not change this or other similar guidance in US GAAP (e.g., accounting for share-based payments under ASC 718), and, therefore, expenses incurred by a parent entity on behalf of its subsidiaries should be carefully evaluated even if a subsidiary does not elect pushdown accounting.
10.1.8 Foreign currency translation (pushdown accounting)
Acquisition accounting adjustments (i.e., step up) related to the acquisition of a foreign entity should be considered in the translation process by the parent entity in its consolidated financial statements as if those adjustments were pushed down to the foreign entity. In essence, pushdown accounting is effectively applied in the parent’s consolidated financial statements for purposes of translating a foreign entity regardless of the foreign entity’s basis of accounting in its separate financial statements. See BCG 9.4.5 for further guidance on this topic.
10.1.9 Tax bases (pushdown accounting)
If an acquired company does not elect to apply pushdown accounting, but the transaction is accounted for as a purchase of assets for tax purposes, there would be a change in the tax bases of the assets and liabilities of the acquired company without a corresponding change in the acquired company’s book basis. In this situation, deferred taxes would be recognized in the acquired company’s financial statements for the book-to-tax basis differences that result from the transaction. The initial deferred tax balances resulting from the transaction would be recorded in equity. See TX 14.6 for further guidance.
10.1.10 Measurement period adjustments
In accordance with ASC 805-10-25-13 through ASC 805-10-25-19 (described in BCG 2.9), an acquirer in a business combination should report provisional amounts when measurements are incomplete as of the end of the reporting period in which the business combination occurred. Changes arising during the measurement period, as defined in ASC 805-10-25-14, due to new information about facts and circumstances that existed at the acquisition date should be recorded by adjusting the amounts recognized at the acquisition date in the reporting period in which the adjustment amount is determined. Any cumulative income statement impacts, such as depreciation or amortization, should be recognized in current-period earnings. We believe the same measurement period accounting and disclosure requirements of the acquirer would apply to an acquiree that has elected pushdown accounting.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
