Pushdown accounting — the recording of a new basis in assets and liabilities in the stand-alone financial statements of a newly acquired subsidiary entity — has been addressed by the Securities and Exchange Commission (SEC), but the Financial Accounting Standards Board (FASB) has not previously provided guidance that would apply to all nonregistrants.
Recently, that began to change as the FASB issued a Proposed Accounting Standards Update entitled Business Combinations (Topic 805): Pushdown Accounting.
SEC registrants currently apply the guidance provided by the SEC staff, which requires an acquired company to present its financial statements using the new basis of accounting that arises from the acquisition of substantially all of its common stock by another company. The general requirement, as expressed by the Staff, is that pushdown accounting must be used when a noncontrolling interest of 5% or less exists (95% or more of an entity is acquired). The staff does not require or object to pushdown accounting when there is a noncontrolling interest of greater than 5%, but not more than 20%. When a noncontrolling interest exceeds 20%, the acquired entity is generally no longer considered substantially wholly owned, and the Staff generally objects to the application of pushdown accounting.
For nonregistrants, U.S. Generally Accepted Accounting Principles (GAAP) provides only limited guidance on pushdown accounting. The result is diversity in practice, with some entities electing not to use pushdown accounting in any circumstance, and others generally following the guidelines of the SEC Staff.
The proposal will permit an acquired entity (acquiree) to pushdown a new basis of accounting to its financial statements whenever an acquirer obtains control of the acquiree. In contrast to the SEC Staff’s guidance, the proposed standard never requires the use of pushdown accounting, and it permits the election of push down accounting any time there is a change of control, regardless of the percentage of noncontrolling interest.
The election to apply pushdown accounting is done each time there is a change in control, therefore an acquiree may apply pushdown accounting at the time it is acquired and not elect to apply pushdown accounting on a subsequent change in control. Change in control generally occurs when either a majority of the voting interests of the acquiree are obtained by an acquirer, or when the acquiree is a variable interest entity and a new primary beneficiary is identified.
The acquiree determines the new basis of accounting by applying Topic 805 Business Combinations, which requires the use of the acquisition method. The acquisition method recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest of the acquiree. If the acquirer was not required to use the acquisition method, for instance, the acquirer accounts for its investment in the acquiree at fair value. The acquiree may still elect to apply pushdown accounting and record a new basis as if the acquisition method applied.
For registrants, the proposal will not change the requirements for pushdown accounting established by the SEC Staff.
In addition to guidance on when pushdown accounting may be elected, the FASB addressed three specific accounting issues that have had a diversity of practice when pushdown accounting is applied. The proposed standard establishes:
- Goodwill that arises from the acquisition shall be recorded in the acquiree's separate financial statements.
- A bargain purchase gain arising from the acquisition shall not be recognized in the acquiree's separate financial statements.
- Acquisition-related debt incurred by the acquirer shall not be recognized in the acquiree's separate financial statements, unless the acquiree is required to recognize a liability for the debt under other applicable GAAP.
If pushdown accounting is elected, the acquiree shall make the disclosures required by Topic 805 Business Combinations as applicable. If pushdown accounting is not elected, the acquiree shall disclose that the acquirer obtained control of the acquiree during the reporting period and that the acquiree elected to continue to use historical cost basis.
What Happens Next
The comment period on the proposed standard ends on July 31, 2014. Those interested in commenting may obtain a copy of the proposed standard and the questions asked by the FASB at FASB.org.
After the comment period is completed, the Emerging Issues Task Force (EITF) will study the comments and consider any changes to the proposed standard. The EITF will then vote to determine if they reach consensus on a final standard. Any consensus is submitted to the FASB for final approval.
For More Information
We will continue to monitor progress on the issuance of a final Accounting Standards Update.
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