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
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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.
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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.
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
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
Accounting Basics: “Push Down Accounting” Fundamentals Quiz
### What is Push Down Accounting primarily used for?
- [x] Reflecting the fair value adjustments in the financial statements of the acquired subsidiary.
- [ ] Adjusting the market capitalization of the acquiring company.
- [ ] Revaluing the existing assets of the parent company.
- [ ] None of the above.
> **Explanation:** Push Down Accounting is used to reflect the fair value adjustments on acquisition, including goodwill, in the financial statements of the acquired subsidiary.
### Is Push Down Accounting mandatory under U.S. GAAP?
- [ ] Yes, it is mandated for all acquisitions.
- [x] No, it is optional under U.S. GAAP.
- [ ] Only applicable to international acquisitions.
- [ ] None of the above.
> **Explanation:** Push Down Accounting is optional under U.S. GAAP and applied at the acquirer's discretion.
### Which asset is recognized in the subsidiary's financial statements under Push Down Accounting?
- [ ] Only tangible assets
- [ ] Historical cost of assets
- [x] Goodwill
- [ ] Only liabilities
> **Explanation:** Goodwill is recognized in the subsidiary's financial statements under Push Down Accounting, representing the excess of the purchase price over the fair value of the net identifiable assets.
### What does Push Down Accounting help ensure?
- [ ] The subsidiary's historical performance is highlighted.
- [x] Accurate representation of the subsidiary’s post-acquisition financial position.
- [ ] The acquiring company’s costs are minimized.
- [ ] None of the above.
> **Explanation:** Push Down Accounting helps ensure an accurate representation of the subsidiary's post-acquisition financial position by incorporating fair value adjustments.
### Which party benefits most from the transparency Push Down Accounting offers?
- [ ] Auditors
- [ ] Only the subsidiary's management
- [x] Both the parent company and investors
- [ ] Competitors
> **Explanation:** Push Down Accounting provides transparency that benefits both the parent company and investors by reflecting the true financial status of the subsidiary.
### What are fair value adjustments recorded as in the subsidiary's books?
- [ ] Market capitalization
- [ ] Depreciation expense
- [x] Revaluations of assets and liabilities
- [ ] Historical costs
> **Explanation:** Fair value adjustments in Push Down Accounting are recorded as revaluations of assets and liabilities in the subsidiary's financial statements.
### When is Push Down Accounting typically applied?
- [x] During Mergers and Acquisitions (M&A).
- [ ] At the end of each fiscal year.
- [ ] When a subsidiary declares bankruptcy.
- [ ] None of the above.
> **Explanation:** Push Down Accounting is typically applied during Mergers and Acquisitions (M&A) to reflect the fair value adjustments made by the acquiring company.
### What does goodwill represent in Push Down Accounting?
- [ ] Tangible benefits
- [ ] Historical costs of assets
- [x] Future economic benefits from unidentifiable assets
- [ ] Current liabilities
> **Explanation:** Goodwill represents future economic benefits arising from assets that are not individually identified and separately recognized.
### What is the key characteristic of assets and liabilities in Push Down Accounting?
- [ ] They are valued based on historical cost.
- [x] They are recorded at fair value.
- [ ] They do not change during acquisition.
- [ ] None of the above.
> **Explanation:** Under Push Down Accounting, assets and liabilities are recorded at their fair value in the subsidiary's financial statements.
### How does Push Down Accounting impact subsidiary’s financial transparency?
- [ ] It decreases transparency.
- [ ] It complicates financial statements.
- [x] It increases transparency by showing fair value adjustments.
- [ ] It has no impact on transparency.
> **Explanation:** Push Down Accounting increases financial transparency by incorporating fair value adjustments directly into the subsidiary's financial statements.
