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Push Down Accounting Definition
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.
A Little More on What is Push Down Accounting
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.
Let’s 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.
References for Push Down Accounting
Academic Research on Push Down Accounting
• Consolidation theories and push–down accounting: achieving global convergence, Baluch, C., Burgess, D., Cohen, R., Kushi, E., Tucker, P. J., & Volkan, A. (2010). Journal of Finance and Accountancy, 3, 1. There have been many theories presented on the consolidation of companies until today. Out of them, Push Down Accounting is the best convention. The authors analyse it whether it can carry off the consolidation process complexity. Lastly, the authors examine the International Financial Reporting Standards (IFRS) of FAS 141R and FAS 160 for the business entities going to merge. They suggest revisions to obtain worldwide convergence in this domain.
• Push Down Accounting: A Descriptive Assessment, Thomas, P. B., & Hagler, J. L. (1988). Accounting Horizons, 2(3), 26. This research is based on Push-Down Accounting standards. The authors make a descriptive assessment of this convention.
• Business combinations: Goodwill and push–down accounting, Colley, J. R., & Volcan, A. G. (1988). The CPA Journal, 58(8), 74. In this paper, the authors explain about business combinations. When two companies merge and form one large company, which accounting rules will have to be followed and what is about the goodwill of the company in this case? So, the authors state the important points of Push Down Accounting.
• The Push–Down Accounting Controversy , Holley, C. L., Spede, E. C., & Chester Jr, M. C. (1987). Strategic Finance, 68(7), 39. Just like any other convention, Push Down Accounting has also some controversies. The study highlights these arguments in detail.
• Push–Down Accounting: FAS 200?, Moore, J. (1988). M. Strategic Finance, 70(5), 53. This research is all about FAS 200 section of Push Down Accounting and its implications for the acquired as well as the acquiring company.
• Push–down accounting and alternatives: Risks and opportunities in corporate consolidations, Rosen, A. R., & Grossman, A. (1998). Tax Executive, 50, 369. This article examines the Push-Down Accounting and its alternatives in case of an acquisition. The authors describe the opportunities availed by the corporate in its consolidation and risks faced by it thereby.
• Push–down Accounting: A Comprehensive Case Study, Harris, P. (2015). Journal of Business Case Studies (Online), 11(1), 23. Push Down Accounting has become very popular over the last ten years. The SEC (Securities & Exchange Commission) of the United States recommends following the Push-Down Accounting. It is an effective and easy financial reporting method as compared to the complicated framework of inter-company merging entries. The end result is the same whether the companies use it or not. The author investigates its criterion, details and balance sheet preparation on the acquisition date.
• Push down accounting, Puglisi, J. A. (1984). The CPA Journal (pre-1986), 54(000002), 61. In this paper, the author throws light on the importance and benefits of Push Down Accounting and how to implement it in the consolidation scenarios.
• On Push–down Accounting, QIU, M. M., & LI, J. C. (2005). Journal of Anhui University of Technology (Sociel Sciences), 6, 022. This article provides detailed information on the Push-Down Accounting convention and focuses on its role in the modern accounting standards.
• An empirical study of corporate management support for push down accounting., Chester, M. C. J. (1992). This research is basically a statistical analysis of a joint company’s management support for the PDA (Push Down Accounting).