Which Statement Is True with Respect to Push-Down Accounting

According to the U.S. Financial Accounting Standards Board (FASB), the total amount paid for the purchase of the target company becomes the new book value of the target company in its financial statements. All gains and losses associated with the new carrying amount are „pushed down“ from the acquirer`s income statement and balance sheet to the acquired entity`s profit and loss account and balance sheet. If the purchase price exceeds fair value, the excess is recognised as goodwill, which is an intangible asset. Companies have the option of whether or not to choose pushdown accounting at the beginning of the period in which the change of control event occurs (ASC 805-50-25-6); However, this decision is irrevocable (ASC 805-50-25-9). If an entity decides to change its choice at a later date, it will be considered a change in accounting policy under Theme 250 on Accounting Changes and Error Corrections and may require a retroactive adjustment of the financial statements (ASC 805-50-25-7). ASU 2014-17 leads the application of pushdown accounting. Under U.S. GAAP, when a purchaser acquires another company, the costs paid for the acquisition of the company or the amount paid for the acquisition of the company are recorded as an investment in the books and records of the acquirer. Upon consolidation, this investment is eliminated and the assets and liabilities of the acquired company are then included in the consolidated financial statements on their new cost basis. It should be noted that the assets and liabilities in the books and records of the acquired individual corporation are not altered and continue to be recognized at historical cost in the separate financial statements of the acquired corporation. An acquired entity may choose to use push-down accounting in its separate financial statements if an event occurs in which the acquirer takes control of the acquired entity. Under push-down accounting, the acquirer`s base of assets and liabilities at the time of the change of control is transferred to the acquired entity and becomes the new cost base of the acquired entity used in the preparation of the individual financial statements of the acquired entity.

Any goodwill resulting from the acquisition is presented in the separate financial statements of the acquired company. Purchase capital gains recognised by the purchaser are not recognised in the profit and loss account of the company being acquired, but in the result acquired as an adjustment for the additional paid-up capital. The Securities and Exchange Commission (SEC) has changed its own rules to comply with FASB guidelines, meaning that publicly traded companies and private companies have the ability, but not the requirement, to use pushdown accounting, regardless of the acquired company`s stake. ABC buys the company for $12 million, which is a bonus. To finance its acquisition, ABC is giving XYZ shareholders $8 million worth of ABC shares and a $4 million cash payment, which it raises through a debt offering. Have you ever heard of the term pushdown accounting and wondered what it means or how it applies? Well, pushdown accounting is a method of registering a business combination. There is no requirement and very little guidance in U.S. generally accepted accounting principles (GAAP) for downward recognition for unpublic companies. Due to the lack of guidance for non-public bodies, there is diversity in practice. In 2014, the Financial Accounting Standards Board (FASB) published the 2014-17 Accounting Standards (ASU) Update to provide much-needed guidance. The appendix shows the impact of pushdown accounting on the financial statements of an acquired company. Certain transactions, such as the creation of a joint venture and the acquisition of assets or a group of assets that do not constitute a company or business combination, are excluded from the application of push-down accounting.

This accounting method is an option under U.S. law. Generally accepted accounting principles (GAAP) are not accepted under international financial reporting standards (IFRS) accounting standards. The acquired entity should also provide the basis for the application of pushdown accounting and other relevant information to enable users of the financial statements to assess the impact of the application of pushdown accounting on the acquirer`s separate financial statements. Some of the relevant information that must be disclosed is: From a tax and reporting perspective, the pros or cons of pushdown accounting depend on the details of the acquisition as well as the jurisdictions involved. Other provisions of the new pushdown accounting guidelines are: B. Dry accounting does not allow the use of push-down accounting. Previously, pushdown accounting was mandatory if the parent company acquired at least 95% of the shares of another company. If the proportion was between 80% and 95%, pushdown accounting was an option. If the mission was smaller, it was not allowed.

The decision to apply push-down accounting to a business combination transaction is the choice of an accounting method. The use of acceptable alternative accounting methods for the creation of a subsidiary involves important discretionary decisions. Therefore, accountants and auditors should familiarize themselves with the new guidelines in order to provide sound advice. If an entity decides to change its choice at a later date, this will be considered a change in accounting policy and may require a retroactive adjustment to the financial statements. Since the FVCT is larger than the FVAR minus FVLA, this transaction results in goodwill in EA`s books that can be moved to ES`s books if it opts for pushdown accounting. The possibility of applying pushdown accounting should be thoroughly investigated, taking into account all facts and circumstances, including potential tax implications. The acquired entity chooses to apply push-down accounting before the financial statements for the reporting period in which the change of control event occurred are available (non-public entities). If this option is selected, pushdown accounting must be applied from the date of purchase. The decision to apply pushdown accounting to a particular change of control event is irrevocable.

ES has assets with a book value of $120 million and liabilities with a book value of $20 million. The fair value of the assets at the time of acquisition is estimated at $120 million and the fair value of the liabilities is estimated at $20. Company A will pay $100 million in cash in exchange for the acquisition of ES. Since push-down accounting leads to a new accounting basis, the acquired company is required to present the financial results and financial statements of the previous acquisition period and the post-acquisition period separated by a vertical black line. Since the transferred FVCT is identical to the FVAR minus FVLA, EA does not need to create a new base, and ES must do pushdown accounting. .

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