Definition
Push Down Accounting is an accounting method used in the United States whereby the fair value adjustments and goodwill recorded by an acquiring company as part of a business combination are pushed down to the financial statements of the acquired subsidiary. This method provides a clearer picture of the subsidiary’s fair value post-acquisition.
Examples
Company A acquires Company B: When Company A acquires Company B, it records the fair value of Company B’s assets and liabilities. Under push down accounting, these adjustments are also recorded in Company B’s individual financial statements, reflecting the new fair value of its assets and liabilities.
Goodwill Allocation: Suppose Company A pays $500 million to acquire Company B, whose net assets (at fair value) total $400 million. The $100 million difference is recognized as goodwill, which is then incorporated into Company B’s financial statements.
Frequently Asked Questions (FAQs)
What is the primary benefit of Push Down Accounting?
It allows for a more transparent and accurate representation of the subsidiary’s financial position and performance post-acquisition. This method reflects the fair value adjustments directly in the subsidiary’s accounts.
When is Push Down Accounting used?
Push Down Accounting is usually applied during Mergers and Acquisitions (M&A) when an acquiring company takes control of a subsidiary. Generally, it is used when the acquired subsidiary is wholly-owned.
Is Push Down Accounting mandatory?
No, Push Down Accounting is optional under U.S. GAAP. It is up to the acquirer’s discretion, often based on whether it provides a clearer financial picture and is beneficial for reporting purposes.
How are fair value adjustments recorded?
Fair value adjustments are recorded by revaluing the assets and liabilities of the acquired subsidiary at their current market values and incorporating this on the subsidiary’s balance sheet.
What happens to goodwill under Push Down Accounting?
Goodwill recognized by the acquiring company is also pushed down to the financial statements of the subsidiary, reflecting the excess purchase price over the fair value of net identifiable assets.
Related Terms
Fair Value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Goodwill
An intangible asset arising when a buyer acquires an existing business, representing the future economic benefits arising from other assets acquired that are not individually identified and separately recognized.
Financial Statements
Formal records of the financial activities and position of a business, person, or other entity. They typically include the balance sheet, income statement, and cash flow statement.
Online References
- Push Down Accounting – FASB
- Investopedia - Push Down Accounting
- CPA Journal Article on Push Down Accounting
Suggested Books for Further Studies
- “Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil, Katherine Schipper, and Jennifer Francis
- “Advanced Accounting” by Debra C. Jeter and Paul K. Chaney
- “Wiley GAAP 2022: Interpretation and Application of Generally Accepted Accounting Principles” by Joanne M. Flood