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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
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10.1.1 Scope (pushdown accounting)

A company that is a business or a not-for-profit entity has the option to apply pushdown accounting when it is acquired by another party (a change-in-control event). 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 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.

10.1.2 First step: identify the acquirer (pushdown accounting)

The pushdown election is optional for an acquired company’s separate financial statements but not for an acquirer’s consolidated financial statements since the acquirer 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 in a business combination. The guidance on consolidations in ASC 810 and business combinations in ASC 805 should be followed to identify the acquirer. However, the acquirer is not always clearly evident; for example, the legal acquirer may not be the same as the accounting acquirer (e.g., in a reverse acquisition).
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 be applied in the NewCo’s financial statements. 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.
Identifying the accounting acquirer and pushdown accounting considerations by the acquiree
Parent Company acquires 100% of Target 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. Target 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?
NewCo is the accounting acquirer and would be required to apply acquisition accounting for the acquisition of Target. The pushdown accounting election would only be available to Target 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, 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 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

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. Once applied, pushdown accounting is irrevocable. However, if an entity has not applied pushdown accounting, it may elect to do so in a subsequent period as a change in accounting principle, if preferable, and retrospectively adjust its reporting basis as of the date of the change-in-control event.
A company might elect to apply pushdown accounting as a change in accounting principle to align the reporting basis of a subsidiary with that of its parent. This would require the use of the parent’s acquisition 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 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. 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.

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.
Goodwill should be calculated and recognized by the acquired company consistent with acquisition accounting. 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.
In accordance with ASC 805-50-30-12, acquisition-related debt should be recognized by the acquired company only if it represent 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.
In contrast to the pushdown of parent company debt, 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.
Transaction costs should generally be recognized as 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 Example BCG 10-2 for an illustration of goodwill recognized by the acquired company when pushdown accounting is elected.
Goodwill recognized by the acquired company – pushdown elected
Parent acquires Target 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 the 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 subsequent to its acquisition.
Assuming pushdown accounting is elected, how much goodwill should be reflected in the post-acquisition separate financial statements of Target?
The separate financial statements of Target should reflect goodwill of $100. This is equal to the goodwill recognized by Parent on the date of acquisition.

10.1.7 Expenses incurred on behalf of subsidiary (pushdown)

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.

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