Effective November 18, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force ("EITF")). As this new FASB guidance is applicable to both private and public entities, the Securities and Exchange Commission ("SEC") concurrently issued Staff Accounting Bulletin ("SAB") No. 115, which rescinds the SEC’s previous guidance related to pushdown accounting (SAB Topic 5.J).
This new ASU provides guidance on when an acquired entity and its subsidiaries can apply pushdown accounting.Pushdown accounting is used subsequent to a business combination to adjust the standalone financial statements of an acquired entity to reflect the costs borne by the acquirer to buy the entity (acquirer’s basis), rather than the acquired entity’s historical cost basis.The acquirer’s cost basis generally reflects the fair value of identifiable assets acquired and liabilities assumed and could also include debt incurred in purchasing the entity and/or goodwill as a result of the purchase price of the entity being in excess of the fair value of the net assets acquired.
Prior to ASU No. 2014-17, there was limited guidance available to private entities related to the use of pushdown accounting, and as such private entities generally followed the guidance in SAB Topic 5.J.The new guidance, which is applicable to both private and public entities that are a business or non-profit, provides entities with the option to elect pushdown accounting at the time of the business combination. In certain circumstances, as defined in the change in accounting principle guidance, pushdown accounting may be applied at a date subsequent to the date of the change in control.Once elected, the pushdown option is irrevocable.
Previous guidance under SAB Topic 5.J prohibited the use of pushdown accounting in situations where the acquired ownership percentage was less than 80% and required pushdown accounting in situations where the ownership exceeded 95%.Entities were given the option to apply pushdown accounting if the ownership was between 80% and 95%. Under the new guidance, an entity has the option to apply pushdown accounting in any situation where there is a change in control, as defined in existing consolidation guidance.Generally, this would assume a direct or indirect ownership interest of greater than 50%. However, consolidation guidance does provide for situations where control may be obtained with less than 50% ownership.
In situations where the acquirer’s purchase price exceeds the fair value of the net assets acquired and pushdown accounting has been elected, the acquired entity would recognize goodwill in its separate financial statements.If the business combination is a bargain purchase, where the purchase price is less than the fair value of the net assets acquired, the resulting bargain purchase gain would not be pushed down to the purchased entity’s separate financial statements. Instead, the acquired entity would recognize an adjustment to equity.
Debt incurred in purchasing the entity should only be recorded in the acquired entity’s separate financial statements if that entity is required to recognize the liability in accordance with other U.S. Generally Accepted Accounting Principles.
An acquired entity that elects pushdown accounting is required to disclose adequate information for the users to determine the effect of the pushdown accounting on the financial statements.
Kim Lamplough, Partner, Assurance Services contributed to this article.