Change-in-control events — like M&A transactions — do not happen every day. If you are currently in the market to merge with or buy a business, you might not be aware of updated financial reporting guidance that took effect in November 2014. The changes provide greater flexibility to post-M&A accounting.
Pushdown accounting is optional
Accounting Standards Update No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the Financial Accounting Standards Board (FASB) Emerging Issues Task Force), made pushdown accounting optional when there is a change-in-control event. The update applies to all companies, both public and private.
Pushdown accounting refers to the practice of adjusting an acquired company’s standalone financial statements to reflect the acquirer’s accounting basis rather than the target’s historical costs. Typically, this means stepping up the target’s net assets to fair value and, to the extent the purchase price exceeds fair value, recognizing the excess as goodwill. Previously, U.S. Generally Accepted Accounting Principles (GAAP) provided little guidance on when pushdown accounting might be appropriate.
For public companies, Securities and Exchange Commission (SEC) guidance generally prohibited pushdown accounting unless the acquirer obtained at least an 80 percent interest in the target and required it when the acquirer’s interest reached 95 percent. The SEC has rescinded portions of its pushdown accounting guidance, bringing it in line with the FASB’s updated standard.
To push down or not?
Under the updated guidance, all acquired companies may decide if they should apply pushdown accounting. Whether it is appropriate depends on a company’s circumstances. For some companies, there may be advantages to reporting assets and liabilities at fair value and adopting consistent accounting policies for both parent and subsidiary. Other companies may prefer not to apply pushdown accounting to avoid the negative impact on earnings, often associated with a step-up to fair value.
After pushdown accounting is applied to a change-in-control event, the election is irrevocable. Acquired companies that apply pushdown accounting in their standalone financial statements should include disclosures in the current reporting period to help users evaluate its effects.
We can help
If you are contemplating an M&A deal, we can help you decide whether pushdown accounting is a smart choice for reporting your transaction. Whichever option you choose, our advisors also can help you comply with financial reporting requirements under GAAP.