Push-Down Accounting

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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. 

Push down accounting has 2 different advantages to it. One is that the financial statements and the financial situation of the acquiring company will be reported similar for both consolidated and its own separate entity statements. The second advantage is that through push down accounting the consultation process will be made simpler for the parent company. Since carrying and the acquisition fair values will be similar to each other, there is probably no use of consolidated adjustments in this case. The parent company pushed sown the expenses to the books of the acquiring company. Through push down accounting the subsidiary can report a profit, but also contribute to any losses to the consolidated results of the parent company. 

Example of Push Down Accounting

Push down accounting would be such as this one. Let's say firm A buys out firm B, in the process borrowing to make an acquisition. Firm A is more in book value than the firm because of the following:

- $1000 in plant, equipment, machinery and intangibles

- $500 of goodwill

Dr PP&E $1,000 
Dr Goodwill $ 500 
Cr Debt $1,500

Instead of recording these profits through fair market value increments, company A records it to the books of the Company B. This makes no difference in the financial statements in the books of the company. It is just an entry in the books of the B. The above entry points to the subsidiary, that is the company B, but was legally and originally made by the parent company, that is company A. Push down accounting is required by U.S. GAAP.

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