Certain Unresolved Ambiguities in Pushdown Accounting

Hugo Nurnberg, PhD, CPA

Pushdown accounting is the process of using the fair value of the shares of a newly acquired company (acquiree) following a change in ownership to infer a new basis of accountability for the assets and liabilities in the acquiree's separate financial statements. (“Fair value of the shares of a newly acquired company” is used here instead of “price paid by an investor for the shares of a newly acquired company” to be consistent with the entity theory orientation of SFAS 141[R] and SFAS 160. See also Accounting Standards Codification [ASC] 805-20-30 and 810-10-30.) The investor may pay cash or issue debt and equity securities. The change in ownership typically involves substantially all of the acquiree's capital stock and may result from a single transaction or a series of related and anticipated transactions. (For example, pushdown accounting is required if an acquiree becomes substantially wholly owned by a group of investors who act together and are able to control the form of ownership of the investee. One could argue that investors investing at about the same time are part of a collaborative group. See EITF D-97, 2001, and ASC 805-50-S99-2.) The fair value of the acquiree's shares is used (i.e., pushed down) to adjust its total stockholders’ equity to fair value. That amount is allocated to the acquiree's identifiable assets and liabilities, with the residual recognized as goodwill. (The allocation is similar to the #x201C;purchase price allocation” used by the acquirer to report the acquisition.) Additional paid-in capital is credited for the adjustment of the acquiree's net assets, and retained earnings is reclassified as additional paid-in capital. The rationale for pushdown accounting is that a substantial change in ownership results in a new entity without an earnings history, hence without a retained earnings balance, and with a new basis of accountability for its assets and liabilities. Frequently, the investor is another company, which becomes the parent company while the acquiree becomes its subsidiary.