What is Push Down Accounting?

Push Down Accounting (PDA) is an accounting convention often used when a parent company purchases a subsidiary. The subsidiary is purchased at a determined price instead of its historical cost. Further, the debt and cost of purchase remains on the subsidiary company's books, rather than the financial statements of the acquirer. This accounting method follows United States GAAP (Generally Accepted Auditing Standards). But under IFRS (International Financial Reporting Standards), it is not accepted. For the purpose of financial reporting, the acquired company is merged into the parent company. So, the Push-Down Accounting convention is the same on the external financial reporting of a company.

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How Does Push Down Accounting Work? 

Push Down Accounting (PDA) is an accounting method used for acquisitions and mergers. The target company (to be taken over) adjusts its financial statements to reflect the accounting basis of the acquirer instead of its own historical cost. Effectively, the target company writes up/down its liabilities and assets to reflect the buying price. If the buying price is more than the fair value, the excess is recognized as goodwill.As per FASB (Financial Accounting Standards Board) of the United States, the overall amount paid to buy the target company becomes its new book value on its financial statements. The acquirer company pushes down the profits and losses attached to the new book value from its balance sheet and income statement to that of the acquired company.If the acquiring company makes payment of the amount in fair value excess, the target company, on its record, carries the excess as goodwill. This is categorized as an intangible asset.Lets suppose, ABC company decides to buy XYZ company that has 9 million US dollars value. ABC is buying XYZ for 12 million US dollars that include a premium. ABC grants its shares worth 8 million US dollars to the shareholders of XYZ and cash payment of 4 million US dollars that it has raised by credit offering. This is to finance the acquisition by ABC. Though ABC is lending the money, the credit will be recognized on the balance sheet of XYZ under the head of liabilities. Moreover, the paid amount of interest on the loan will be counted as the acquired company's expense. Here, net assets of XYZ, i.e. assets - liabilities = 12 million USD. On the other hand, the record of goodwill will be made like 12 million USD - 9 million USD = 3 million USD. The cost of acquiring a company is recorded on the target company's financial statements separately instead of the acquirer company in Push Down Accounting. It can be taken as a new company established with the help of borrowed money. So, the credit and acquired assets will become a part of the new underlying company.From the management point of view, recording the credit on the books of the subsidiary is helpful in checking the acquisition profitability. As far as the reporting and taxation is concerned, the merits and demerits of Push Down Accounting depend on the acquisition details and the involved jurisdictions.So, when the Push-Down Accounting should be used by the companies? It is on the part of the SEC (Securities and Exchange Commission) to devise such rules. They only apply to the public firms which register securities with this commission. It is not necessary for the private companies to follow Push Down Accounting convention. However, it is up to them to opt it out, in case, it is helpful in the performance evaluation of the acquired company.