Pushdown accounting is now optional for companies that have been acquired in a business combination. PwC’s Jonathan Franklin discusses what it means and what to consider when deciding whether or not to apply pushdown accounting.
Hi, I'm Jon Franklin, a Senior Manager in the National Office.
Today’s discussion is on pushdown accounting, and specifically what it means and what to consider when deciding whether or not to apply it.
Pushdown accounting is now optional for all companies that have been acquired in a business combination. This gives acquired companies a choice between carrying over their old accounting basis or refreshing their accounting basis based on the acquisition date fair values recognized by the acquirer. Let’s first explain what we mean by pushdown accounting.
In a business combination, the acquirer 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 business or the “stepped-up basis” of the acquirer should be reflected in those separate financial statements. Pushdown accounting refers to the latter.
You could think of this as an acquired company purchasing itself, stepping up the value of its own assets and recording the goodwill. Because the basis is stepped up, this usually results in higher depreciation and amortization expense, and a greater chance of impairment, which in turn generally leads to lower net income in post-acquisition periods.
So now that there is choice, companies will need to weigh various factors to decide whether to apply pushdown accounting, including both practical considerations and the needs of investors and creditors and their needs may vary.
Some investors may prefer the “stepped-up basis” that results from pushdown accounting, and the resulting higher equity balance. Others may prefer an acquired company retain its historical basis to avoid distorting income statement trends. Investors that focus on cash flow and EBITDA measures, on the other hand, may be indifferent to the impact of pushdown accounting as these measures are often not significantly affected.
From a practical standpoint, acquirers that report consolidated results may favor pushdown accounting at the subsidiary level to avoid separately tracking assets, such as goodwill and fixed assets, at two different values in two different ledgers. Conversely, the acquired company may prefer to carry over its historical basis due to complexities of applying pushdown accounting. Companies may also decide to retain the historical basis when that basis is used for tax reporting purposes.
So, when is a company eligible to apply pushdown accounting? Pushdown can be elected when there is a change in control event in which an acquirer obtains control of the reporting entity. Existence of control should be determined based on consolidation guidance in U.S. GAAP. Control can be obtained in a variety of ways, including transferring cash or other assets, incurring liabilities, issuing equity interests or even without transferring consideration.
The decision to apply pushdown accounting is made in the period in which the change in control event occurs. But companies may be able to change their minds later: If an acquired company does not elect to apply pushdown accounting upon a change in control event, it can do so retrospectively in a subsequent period as a change in accounting policy, if that change is preferable. However, once pushdown accounting is elected for a specific transaction, that election is irrevocable.
Each change in control event for a reporting entity presents a new opportunity to elect pushdown accounting. So it is not an accounting policy election that needs to be applied consistently between two separate change in control events.
One of the most important determinations before electing pushdown accounting is making sure that the reporting entity itself is not the accounting acquirer. So, why is that important? Because the accounting acquirer, by definition, cannot elect pushdown accounting. The acquirer is required to apply business combination accounting. This can be the case for example in reverse mergers when the accounting acquirer is the legal acquiree. Similarly, if a new company is created to effect an acquisition, the new company may need to be identified as the accounting acquirer. So reporting at the new company level would require the application of business combination accounting at that level, and therefore it is not a question of pushdown accounting.
Take for instance the following structure. Ultimate Parent X is a global company and purchases Target Company. To do so they set up HoldCo underneath the parent. The company assesses the accounting acquirer guidance and determines that HoldCo is the accounting acquirer. In this example, Target Company is the acquired company and is the only entity that can choose to apply pushdown accounting. HoldCo, being the accounting acquirer, would be required to apply business combination accounting for its purchase of Target Company.
In conclusion, a few takeaways regarding pushdown accounting:
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