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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.

17.6.1 Change-in-control events (pushdown accounting)

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.

17.6.2 Making the election to apply pushdown accounting

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.

17.6.3 Pushdown accounting presentation considerations

The application of pushdown accounting represents the termination of the old accounting entity and the creation of a new one. That is, the assets and liabilities of the acquiree are recognized based on the parent’s new basis with an offset to additional paid-in capital. In addition, when pushdown accounting is applied, retained earnings and accumulated other comprehensive income of the predecessor company are not carried forward because a new basis of accounting has been established.
Accordingly, it would not be appropriate for financial statements for a given period to combine pre- and post-pushdown periods. For example, it would be inappropriate for a reporting entity with a December 31, 20X2 year-end, for which pushdown was applied as of July 1, 20X2, to present a combined income statement for the pre- and post-acquisition periods in the 12 months ended December 31, 20X2. This would also apply to the statements of cash flows, changes in stockholders’ equity, and comprehensive income. Footnote disclosures related to pre- and post-pushdown periods should likewise not be combined.
For the financial statements and footnote disclosure presented in a tabular format, reporting entities would generally include a vertical black line between the predecessor and successor columns to highlight for the reader the change in basis between the pre- and post-pushdown periods. For example, the balance sheet as of December 31, 20X2 would reflect the post-pushdown period, while the comparative prior year balance sheet would reflect the pre-pushdown period as of December 31, 20X1, separated by a vertical black line. The columns related to the pre-pushdown period columns are generally labelled "Predecessor Company," while the post-pushdown period columns are generally labelled "Successor Company." Other, similar designations can also be used.
A discussion of the basis of presentation should be included in the footnotes to the financial statements. This discussion should notify the reader that the reporting entity's results of operations and cash flows after the transaction are not comparable with those prior to the acquisition as a result of pushdown accounting, and therefore have been segregated in the respective financial statements.
Refer to BCG 10 for additional considerations related to the presentation of pushdown accounting.

17.6.3.1 Contingent acquisition-related costs “on the line”

In situations when predecessor and successor financial statements are presented with a “blackline” resulting from the effects of pushdown accounting, a question often arises as to which period acquiree expenses should be recorded in if the amounts are contingent on the closing of a business combination (e.g., acquiree’s investment banker “success” fees, acquiree’s share-based awards with performance conditions vesting upon a change in control). See BCG 2.7.1.5 for considerations on the presentation of acquiree acquisition-related expenses that are contingent on the closing of a business combination, including related disclosure considerations.
An acquirer’s costs that are contingent upon the closing of a business combination should be recognized in the acquirer’s financial statements in the period that includes the acquisition.

17.6.3.2 Impact of successor accounting changes on predecessor

The application of pushdown accounting represents the termination of the old accounting entity and the creation of a new one. As the “predecessor company” and “successor company” are separate reporting entities (and as such are not comparable), any changes in accounting policies or principles, including the adoption of new accounting standards, elected by the successor should not be “pushed back” to the predecessor. Instead, any differences in accounting policies or principles should be disclosed between the predecessor and successor companies within the footnotes to the financial statements.
The only exception to this rule exists in Section 13210.2 of the SEC’s Financial Reporting Manual, which requires that the predecessor financial statements be retrospectively reclassified to reflect the impact of a successor’s discontinued operations. However, the guidance should generally not be applied by analogy to other accounting policies or principles of the successor.

17.6.4 Pushdown accounting disclosure considerations

If a reporting entity elects pushdown accounting in its separate financial statements, ASC 805-50 requires that disclosures are provided that enable users to evaluate the effect of pushdown accounting.

ASC 805-50-50-6

Information to evaluate the effect of pushdown accounting may include the following:
  1. The name and a description of the acquirer and a description of how the acquirer obtained control of the acquiree.
  2. The acquisition date.
  3. The acquisition-date fair value of the total consideration transferred by the acquirer.
  4. The amounts recognized by the acquiree as of the acquisition date for each major class of assets and liabilities as a result of applying pushdown accounting. If the initial accounting for pushdown accounting is incomplete for any amounts recognized by the acquiree, the reasons why the initial accounting is incomplete.
  5. A qualitative description of the factors that make up the goodwill recognized, such as expected synergies from combining operations of the acquiree and the acquirer, or intangible assets that do not qualify for separate recognition, or other factors. In a bargain purchase (see paragraphs 805-30-25-2 through 25-4), the amount of the bargain purchase recognized in additional paid-in capital (or net assets of a not-for-profit acquiree) and a description of the reasons why the transaction resulted in a gain.
  6. Information to evaluate the financial effects of adjustments recognized in the current reporting period that relate to pushdown accounting that occurred in the current or previous reporting periods (including those adjustments made as a result of the initial accounting for pushdown accounting being incomplete [see paragraphs 805-10-25-13 through 25-14]).
The information in this paragraph is not an exhaustive list of disclosure requirements. The acquiree shall disclose whatever additional information is necessary to meet the disclosure objective set out in paragraph 805-50-50-5.

When an acquired company elects pushdown accounting, it should provide the same disclosures that would be provided by the acquirer pursuant to ASC 805, as applicable. It should also provide all relevant disclosures required by US GAAP in periods subsequent to the business combination, including but not limited to those relating to goodwill, intangible assets, and fair value measurements.
When pushdown accounting is applied, the reporting entity should consider disclosing pro forma information similar to that relating to business combinations described in ASC 805 in order to demonstrate the effects of the acquisition and related pushdown accounting on the acquired entity. If that pro forma information is presented, it should be presented for the entire fiscal period (i.e., reflecting the impact of the business combination and related pushdown accounting for the entire fiscal period). The pro forma information should not be presented separately for the successor and predecessor periods. Pro forma information for the prior year comparative periods should also be included.
Question FSP 17-2 addresses the disclosure requirements when there is a change-in-control event and the reporting entity does not elect pushdown accounting.
Question FSP 17-2
Is a reporting entity that does not elect pushdown accounting required to disclose that there was a change-in-control event or that it elected not to apply pushdown accounting?
PwC response
No. A reporting entity that does not elect pushdown accounting upon a change-in-control event is not required to disclose that there was a change-in-control event or that it decided not to elect pushdown accounting.

17.6.5 Example of “blackline” financial statements

Example FSP 17-3 illustrates the presentation of “blackline” financial statements when a change-in-control event has occurred and pushdown accounting is elected in the standalone financial statements of the acquiree.
EXAMPLE FSP 17-3
Presentation of “blackline” financial statements
Parent Corp is a non-public company that reports under US GAAP and has a calendar year-end. Parent Corp acquires 100% of the outstanding equity interests in Sub Corp, also a non-public company, on August 15, 20X2. Due to Sub Corp’s debt agreement with a lender, there is an ongoing reporting requirement for standalone financial statements of the Sub Corp reporting entity. Sub Corp has elected to apply pushdown accounting in its standalone financial statements as of the change-in-control date. Accordingly, Sub Corp will present “blackline” financial statements reflecting the change-in-control transaction.
How should Sub Corp reflect pushdown accounting in its standalone financial statements?
Analysis
Sub Corp should consider the following in its standalone financial statements:
  • The application of pushdown accounting represents the termination of the “old” (i.e., predecessor) reporting entity and the creation of a “new” (i.e., successor) reporting entity as of close-of-business on August 15, 20X2 when the change-in-control transaction was consummated. As such, the successor reporting entity’s assets and liabilities will be recognized based on Parent Corp’s new basis, with an offset to additional paid-in capital. In addition, retained earnings and accumulated other comprehensive income of the predecessor should not be carried forward, as a new basis of accounting has been established.
  • For the financial statements and footnote disclosures presented in a tabular format, Sub Corp should include a vertical black line between the predecessor and successor columns to highlight for the reader the change in basis between the pre- and post- change-in-control periods. The columns related to the pre-change-in-control period columns should be labelled “Predecessor Company,” while the post-change-in-control period columns should be labelled “Successor Company” (these or similar naming conventions may be used).
  • Disclosure of the basis of presentation should be included in the footnotes to the financial statements. This disclosure should notify the reader that the predecessor and successor results of operations and cash flows are not comparable as a result of the application of pushdown accounting.
  • Sub Corp should disclose information to evaluate the effect of pushdown accounting, including but not limited to those disclosures discussed in FSP 17.6.4. Additionally, Sub Corp should consider including other disclosures as required by ASC 805 to enable a user of the financial statements to evaluate the effects of pushdown accounting.

The following is an illustration of Sub Corp’s consolidated statement of operations:
Sub Corp
Statements of Operations
Periods from August 16, 20X2 through December 31, 20X2 (Successor),
January 1, 20X2 through August 15, 20X2 (Predecessor), and Year ended
December 31, 20X1 (Predecessor)
Successor
Predecessor
(in millions)
Period from August 16, 20X2 through December 31, 20X2
Period from January 1, 20X2 through August 15, 20X2
Year ended December 31, 20X1
Net revenue
$                      XX
$                      XX
$                      XX
Cost of goods sold
XX
XX
XX
Selling, general and administrative
XX
XX
XX
Depreciation and amortization
XX
XX
XX
Income from operations
XX
XX
XX
Interest expense, net
XX
XX
XX
Income before income taxes
XX
XX
XX
Income tax expense
XX
XX
XX
Net income
$                      XX
$                      XX
$                      XX
“Blackline” presentation would also be applied to Sub Corp’s consolidated balance sheet, statement of cash flows, statement of stockholders’ equity, and statement of comprehensive income (not illustrated here).
Additionally, in the basis of presentation footnote disclosure within Sub Corp’s financial statements, an excerpt of language to describe the basis of presentation may include the following:
Predecessor
The year ended December 31, 20X1 and the period from January 1, 20X2 through August 15, 20X2 reflect the historical cost basis of accounting of Sub Corp that existed prior to the Acquisition (see Note X). These periods are referred to as “Year ended December 31, 20X1 (Predecessor)” and “Period from January 1, 20X2 through August 15, 20X2 (Predecessor).”
Successor
The period from August 16, 20X2 through December 31, 20X2 is referred to as the “Successor period” and “Period from August 16, 20X2 through December 31, 20X2 (Successor).” The Successor period reflects the costs and activities as well as the recognition of assets and liabilities of Sub Corp at their fair values pursuant to the election of pushdown accounting as of the consummation of the Acquisition (see Note X).
Due to the application of acquisition accounting by our Parent, the election of pushdown accounting, and the conforming of significant accounting policies, the results of operations, cash flows, and other financial information for the Successor period are not comparable to the Predecessor periods.
An illustrative example of Sub Corp’s footnote disclosure for property, plant, and equipment is presented below:
Property, plant, and equipment, net of accumulated depreciation is as follows:
(in millions)
Successor 20X2
Predecessor 20X1
Machinery and equipment
$                          XX
$                          XX
Land and buildings
XX
XX
Furniture and fixtures
XX
XX
XX
XX
Less:  Accumulated depreciation
XX
XX
XX
XX
Construction in progress
XX
XX
Total property, plant and equipment, net
$ XX
$ XX
Depreciation expense related to property, plant, and equipment was $X million, $X million, and $X million for the year ended December 31, 20X1 (Predecessor), the period from January 1, 20X2 through August 15, 20X2 (Predecessor), and the period from August 16, 20X2 through December 31, 20X2 (Successor), respectively.
“Blackline” presentation would also be applied to all other Sub Corp footnote disclosures presented in tabular form (not illustrated here).
Note that these examples are select financial statement disclosures to emphasize certain aspects of ASC 805-50-50-6. Sub Corp should also disclose other information to describe the effects of pushdown accounting, including, but not limited to, those disclosures discussed in ASC 805-50-50-6 and other disclosures as required by ASC 805 to enable a user of the financial statements to evaluate the effects of pushdown accounting. Additionally, all other required GAAP disclosures would be included in Sub Corp’s financial statements.
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