Push-Down Accounting

Defining Push Down Accounting

In accounting, when entities are preparing accounts for acquisitions and mergers, the subsidiaries are usually purchased at their purchase cost rather than their historical cost. This technique of accounting is known as push down accounting. This method is a requirement under US GAAP (Generally Accepted Accounting Principles); however, it is not an acceptable method under the International Financial Reporting Standard (IFRS). On the entity’s financial statements, push down accounting appears the same since for the financial reporting purpose of the group structure, the subsidiary and parent company’s accounts are consolidated.

The subsidiary’s financial statement is presented to show the costs borne by the company to buy the subsidiary. The current expenses incurred on the subsidiary is taken into consideration, instead of the subsidiary’s historical costs. The subsidiary’s statement will be shown as expenses to the parent company. If a new company was started through the borrowing of funds, the addition of the debt plus the assets would be counted and added to the subsidiary’s part. Acquisition profits could be counted through the recording of debts on the books of the subsidiary. This helps in decision making through the managerial perspective.

Explanation of the push down accounting

Sometimes, for the sake of understanding the push down accounting, you can think of the new subsidiary being acquired from the borrowed funds. The debts and the assets of the new subsidiary will be recorded as a part of it in the accounting of the new subsidiary.

From management’s point of view, if the entity keeps the debt in the books of the subsidiary, it will be helpful in determining the profitability of the acquisition. However, the advantages and disadvantages of the push down accounting are not so easy to determine. To make a clear guess, the entity will have to depend on the acquisition details and the jurisdiction of the country where the subsidiary is registered.

Push down does not have any effect on the combined statement of monetary position of the company; rather, it only affects the separate accounts of the subsidiary and its own financial statements. If the parent company asks the subsidiary to revalue all of its assets to their fair value, then it is known as push down accounting since the parent company has ‘pushed down’ the fair value to the books of the subsidiary. This has the same effect as if the parent company has formed a new subsidiary by purchasing all of its possessions and liabilities.

Advantages of the push down accounting

Push down accounting has two advantages:

• With the help of push down accounting, it is impossible for the subsidiary to alter its accounts and report losses to the parent company.
• The other advantage of the push down accounting is that it simplifies the process of consolidation for the parent company.