Pushdown Accounting Election Considerations
By Michael French, CPA, ABV, CFE, Managing Director
Pushdown accounting is an accounting convention used in some business combinations that allows the debt and cost of purchase to remain with the newly acquired subsidiary. It establishes a new basis for reporting assets and liabilities in the acquiree’s standalone financial statements based on the “pushdown” of the acquirer’s basis.
Pushdown accounting typically results in higher net assets for the acquired company as of the acquisition date because its assets and liabilities are stepped up to fair value and goodwill and possibly other intangibles are recognized. This can result in lower net income in subsequent periods due to higher amortization, higher depreciation and potential impairment charges on these acquired assets.
What Matters to Investors and Creditors?
The impact of pushdown accounting is most pronounced on investors and creditors and varies depending on their interests. For example, retaining historical basis can result in an acquired company reporting negative equity if the transaction involves taking on new debt to finance the purchase of treasury stock (a leveraged recapitalization). In other cases, financial statement users may prefer an acquired company to retain its historical basis to avoid distorting income statement trends as a result of increased amortization and depreciation expense. So, every transaction must be evaluated on its own merits in terms of the pushdown accounting election.
As a result, before making the decision to use pushdown accounting, acquirers should carefully consider the needs of investors and creditors because once the pushdown accounting election is made there’s no going back. The election is not reversible.
Acquirers also may want to consider any international implications of their transactions when deciding whether to elect pushdown accounting. While pushdown accounting is acceptable under U.S. GAAP, it is not recognized by International Financial Reporting Standards (IFRS).
At one time companies had very little discretion in making the pushdown accounting election. Rules under GAAP required entities to hold ownership of 80% or more in a subsidiary in order to elect pushdown accounting and required it for entities with 95% or more ownership interest in a subsidiary. However, these thresholds were eliminated by ASC 2014-17, implemented in 2014, broadening the discretion for many acquirers to decide whether to apply pushdown accounting.
Previous guidance also did not require pushdown accounting for non-public companies and did not address situations in which they would apply it. ASC 2014-17 leveled the playing field, making pushdown accounting available to both public and private companies and allowing all companies the discretion to elect it or not.
Additional Considerations in Electing Pushdown Accounting
Buyers who report consolidated results may elect pushdown accounting to avoid separately tracking assets, such as goodwill and fixed assets, at two different values – historical basis and stepped-up basis. Or the acquired company may prefer to carry over its historical basis to avoid the complexities of pushdown accounting. Companies also may decide to retain the historical basis when that is the basis used for tax reporting in transactions where there is no tax step-up.
As mentioned earlier, once the pushdown accounting election is made, it is irreversible. However, if the company does not make the election immediately after a change-in-control transaction, it can do so later as a change-in-accounting policy.
For more information about pushdown accounting and how to assess whether it would benefit your company after a transaction, contact your PKF Advisory team member or:
Michael French, CPA, ABV, CFE