Pushdown accounting is a method of accounting in which the financial statements of a subsidiary are prepared on the basis of the parent company’s basis of accounting, not on the original cost basis of the subsidiary.
In other words, if a parent company acquires a subsidiary, and the cost of the acquisition is more than the fair value of the subsidiary’s net assets (leading to goodwill), under pushdown accounting, the subsidiary would show this goodwill on its own balance sheet, even though the transaction occurred at the parent level.
The parent company’s costs – such as the purchase price, professional fees, and the fair value adjustments to the identifiable assets and liabilities – are “pushed down” to the subsidiary level and become the new accounting basis for the subsidiary.
Pushdown accounting can make a subsidiary’s financial statements more informative by aligning them with the economic realities of the business after the acquisition. However, this approach can also create issues, for example, if the purchase price is significantly above the subsidiary’s net asset value, the depreciation and amortization charges on the subsidiary’s income statement may be higher under pushdown accounting.
The U.S. Generally Accepted Accounting Principles (GAAP) allows but does not require pushdown accounting. The use of pushdown accounting is more commonly required under International Financial Reporting Standards (IFRS). Always consult with a professional accountant or auditor to get the most current and accurate information.
Example of the Pushdown Accounting
Imagine Company A buys Company B for $1,000,000. However, the book value (or net asset value) of Company B is only $700,000. The difference of $300,000 is considered goodwill and is a result of Company A paying a premium over the book value to acquire Company B.
Without pushdown accounting, on Company B’s individual financial statements, its net assets would still be shown as $700,000, the original book value.
However, with pushdown accounting, Company B’s balance sheet would reflect the purchase price of $1,000,000 paid by Company A. This would be broken down into the net assets at fair value ($700,000) and goodwill ($300,000).
Thus, under pushdown accounting, Company B’s balance sheet in its standalone financial statements would now show net assets of $1,000,000 (instead of $700,000), with goodwill of $300,000 making up the difference.
Remember, the application of pushdown accounting has implications for the income statement as well. The increased value of assets may result in higher depreciation or amortization expense for Company B, which could reduce its net income in subsequent periods.
Also, remember that the decision to apply pushdown accounting should be made considering the specific rules and regulations, and therefore, consultation with a professional accountant is essential.