Push Down Accounting

Push down accounting is a convention of accounting for the purchase of a subsidiary at the purchase cost rather than its historical cost. This method of accounting is required under U.S. Generally Accepted Accounting Principles (GAAP), but is not accepted under the International Financial Reporting Standards (IFRS) accounting standards. Since the acquired company is consolidated into the parent company for financial reporting purposes, push down accounting appears the same on a firm's external financial reporting.

Push down accounting is the method of accounting for mergers and acquisitions. Using this accounting method, the target company’s financial statement is adjusted to reflect the acquirer’s accounting basis rather than the target’s historical costs. In effect, the target company’s assets and liabilities are written up (or down) to reflect the purchase price and, to the extent the purchase price exceeds fair value, recognize the excess as goodwill. According to the U.S. Financial Accounting Standards Board (FASB), the total amount that is paid to purchase the target becomes the target’s new book value on its financial statements. Any gains and losses associated with the new book value are “pushed down” from the acquirer’s to the acquired company’s income statement and balance sheet. If the acquiring company pays an amount in excess of fair value, the target carries the excess on its books as goodwill, which is classified as an intangible asset.

For example, Company ABC decides to purchase Company XYZ, which is valued at $9 million. ABC is purchasing the company for $12 million, which translates to a premium. To finance its acquisition ABC gives XYZ’s shareholders $8 million worth of ABC shares and $4 million cash payment, which it raises through a debt offering. Even though it is ABC that borrows the money, the debt is recognized on XYZ’s balance sheet under the liabilities account. In addition, the interest paid on the debt is recorded as an expense to the acquired company. In this case, XYZ’s net assets, that is, assets minus liabilities, must equal $12 million, and goodwill will be recognized as $12 million - $9 million = $3 million.

In push down accounting, the costs incurred to acquire a company appear on the separate financial statements of the target, rather than the acquirer. It is sometimes helpful to think of push down accounting as a new company that is created using borrowed funds. Both the debt, as well as the assets acquired, are recorded as part of the new subsidiary.

From a managerial perspective, keeping the debt on the subsidiary's books helps in judging the profitability of the acquisition. From a tax and reporting perspective, the advantages or disadvantages of push down accounting will depend on the details of the acquisition, as well as the jurisdictions involved.

The Securities and Exchange Commission (SEC) sets the rules for when companies should use push down accounting. These rules apply only to public companies that have securities registered with the SEC. Private companies are not required to practice push down accounting but may choose to do so if it would help in evaluating the performance of an acquired company.