Though the NYSSCPA largely agrees with a proposal by the Financial Accounting Standards Board (FASB) to standardize how entities use “pushdown” accounting—a practice in which a subsidiary’s financial statements reflect the acquiring company’s basis of accounting—it said that clearer guidance was needed in situations involving temporary change of control.

The Society voiced its concerns in a comment letter composed by members of its Financial Accounting Standards Committee and published on July 31.

The letter was in response to the FASB’s Proposed Accounting Standards Update (ASU)—Business Combinations (Topic 805), Pushdown Accounting, a Consensus of the FASB Emerging Issues Task Force, which was issued in April.

According to Margaret A. Wood, an NYSSCPA past president and one of the comment letter’s authors, the proposed ASU has been long coming. The only current guidance about pushdown accounting comes from the Securities and Exchange Commission (SEC) staff accounting bulletins, which indicate that the method is to be used when a substantially wholly owned subsidiary issues separate financial statements.

The SEC calls for pushdown accounting when a parent company assumes 95 percent or more of an entity, and prohibits it when a parent company owns less than 80 percent. However, Wood noted that this guidance only applies to SEC registrants. “There was nothing in the literature for nonpublic companies, which has resulted in divergence in practice, where some nonpublic companies have followed SEC guidance, while others have not,” she said.

As it stands, the FASB proposal would give any entity—whether public, private or not-forprofit—the option to use pushdown accounting in the event that another company acquires 50 percent or more of it. If the acquired entity accepts this option, it would reflect in its separate financial statements the acquirer’s new basis of accounting for the individual assets and liabilities, in accordance with FASB Accounting Standards Codification (ASC) Topic 805, Business Combinations.

If an entity is acquired by a company that it is not required to apply ASC 805, the subsidiary would have to reflect the new basis of accounting that would have been used had 805 been implemented, though if this results in a bargain purchase gain, the acquired entity would not recognize that gain in its income statement. Further, any acquisition-related debt incurred by the acquiring company would be recognized in the acquired entity’s financial statements, if the acquired entity is required to recognize a liability for that debt in accordance with other U.S. GAAP (generally accepted accounting principles) standards.

The acquired entity would also need to disclose information in the current reporting period to enable financial statement readers to evaluate the effect of pushdown accounting on its financial statements, as required in Topic 805 as applicable. If the acquired entity does not elect to apply pushdown accounting, it would need to disclose in the current reporting period that the entity has undergone a change-in-control event; the election to continue using its historical basis that existed before the acquirer obtained control of the entity; the terms of the acquisition agreement, including purchase price, assets exchanged, earnouts, fair value of assets and liabilities acquired; and the fair value of the assets and liabilities acquired in the change of control, if available.

The Society agreed that pushdown accounting should be optional, as certain companies have loan covenants that would be difficult to renegotiate if they were forced to apply these rules. In addition, it commented that if a new basis of accounting has not been established, the entity should reflect the fair value of the acquired entity’s assets and liabilities in the notes.

However, the NYSSCPA felt that the FASB proposal did not sufficiently account for temporary change in control, where a company may momentarily obtain control of more than 50 percent of another entity because it is, for example, retiring one piece of stock before issuing the next. “If control is not maintained, we don’t think the option of adopting pushdown should be made available, especially if control will reverse shortly and ownership will go back to below 50 percent,” Wood said.

What’s more, she added, the Society had concerns about how the FASB defined the very concept of control itself. According to the proposal, she said, “noncontrolling rights may prevent an owner with more than 50 percent of voting shares [from having] controlling interest.” “In that case, we don’t think pushdown should be used either, since control doesn’t really exist,” she said. “We asked the FASB to clarify that.” If finalized, the amendments in the FASB proposal would apply prospectively to events in which an acquirer obtains control of an entity on or after the update’s effective date.