Definition
Push Down Accounting is an accounting method often used in corporate buyouts where the financials of the acquired company are restated to reflect the purchase costs of the acquiring company. This includes any new assets and liabilities incurred due to the acquisition, typically noted at fair market value. This method shows the impact of the acquisition on the financial statements of the acquired company.
Key Takeaways
- Push Down Accounting is an accounting method in which the financial statements of a subsidiary are adjusted to reflect the parent company’s cost basis rather than the subsidiary’s historical cost. In simpler terms, it “pushes down” the parent company’s values onto the financial statements of its acquired entity.
- This method is mostly employed during mergers and acquisitions. It results in the newly acquired company’s books showing new asset values and liabilities. The new values would mirror the acquisition costs rather than the historical costs, representing a fair current market value which can impact the profit or loss on the sale of assets and tax implications.
- While Push Down Accounting can offer more accurate financial insights following a merger or acquisition, it can also create some complexities. The resultant inflated assets and debts may make the subsidiary appear more leveraged than it really is, thereby impacting banking relationships or breaching debt covenants. Therefore, the financial implications of this accounting method should be thoroughly examined before making any strategic decisions.
Importance
Push Down Accounting is an important finance term because it has a significant impact on the financial statements of a company.
It occurs when the costs of an acquisition are pushed down to the books of a target company, which includes the newly-adjusted asset and liability values and any goodwill or other intangible assets resulting from the transaction.
This method provides a more accurate reflection of the acquisition cost and the entity’s economic value post-acquisition.
Additionally, it facilitates better comparison between periods post-acquisition because the results of operations include the costs incurred to acquire the assets.
Hence, it plays a crucial role in financial reporting and analysis post business combination.
Explanation
Push Down Accounting is used primarily to reflect the costs and financial implications of business acquisitions. Its purpose is to translate the acquired company’s assets and liabilities at the fair market value, often incorporating the premium that the acquiring company paid above the market value.
Essentially, it ‘pushes down’ the new basis of accounting onto the books of the acquired company. This method provides a clear image of the business value after the acquisition, which can aid the acquiring company in revealing the economic reality of the transaction and making informed decisions regarding future business and asset management.
The application of push down accounting can influence the future earnings of the acquired company, as post-acquisition, the company may potentially incur higher depreciation and amortization charges associated with the fair value adjustments. This can also affect the company’s financial ratios and result in a higher liability in the form of goodwill.
Hence, push down accounting serves as a valuable tool for stakeholders, including investors and lenders, as it provides a clearer picture of the acquisition costs and their impact on the acquiree’s financial position and profitability.
Examples of Push Down Accounting
Acquisition of NBC by Comcast: In 2009, Comcast Corporation acquired a major stake in NBC Universal, previously owned by General Electric. In the acquisition, Comcast used push down accounting to record the purchase. The assets and liabilities of NBC Universal were written up to fair value, and the difference between the fair value and the book value was recorded as goodwill. The existing debt was replaced with the new debt taken on by Comcast to finance the purchase.
Google’s acquisition of Motorola Mobility: In 2011, Google acquired Motorola Mobility for $
5 billion. Google used push down accounting to record the transaction, marking up the assets and liabilities of Motorola Mobility to their fair market value, which resulted in a significant amount of goodwill and intangible assets. This was preferred as it simplified the financial reporting process for Google, as the value of Motorola Mobility’s assets and liabilities on their balance sheet accurately represented their economic value at the time of the acquisition.
Berkshire Hathaway’s acquisition of Burlington Northern Santa Fe: In 2010, Berkshire Hathaway completed the acquisition of Burlington Northern Santa Fe (BNSF) railroad for a total value of around $44 billion. Berkshire Hathaway used push down accounting to depict the new financial structure of BNSF, where a significant amount of acquisition-related debt was recorded on BNSF’s balance sheet. This provided a more accurate reflection of BNSF’s financial position post-acquisition.
FAQs on Push Down Accounting
What is Push Down Accounting?
Push Down Accounting is a method of accounting in which the financial statements of a subsidiary are presented to reflect the costs incurred by the parent company in buying the subsidiary, instead of the subsidiary’s historical costs.
When is Push Down Accounting used?
Push Down Accounting is often used when a parent company makes a significant acquisition of another company. It provides a more accurate picture of the cost of the acquisition for the parent company.
What are the benefits of Push Down Accounting?
The major benefit of this method is the accurate presentation of the subsidiary’s financial position post-acquisition. It enables both entities to reflect the true economic reality of the acquisition transaction in their financial statements, rather than merely presenting a historical cost basis.
Are there any drawbacks to Push Down Accounting?
While Push Down Accounting provides clear benefits, it can also distort the financial image of the subsidiary by inflating its asset and liability figures. It may also lead to mismatched balances in intercompany transactions if not managed properly.
Is Push Down Accounting permissible under International Financial Reporting Standards (IFRS)?
Unlike the Generally Accepted Accounting Principles (GAAP), the IFRS does not explicitly allow nor disallow push down accounting. Instead, it relies on general principles of fair presentation and whether the application of the method would provide reliable and relevant information.
Related Entrepreneurship Terms
- Acquisition accounting: The method of accounting used by a purchasing company when it buys out another company. The cost of acquisition might include the price paid for tangible and intangible assets, and for assumed liabilities.
- Goodwill: A type of intangible asset that is made up of a business’s reputation, customer relationships, and other factors that provide value beyond its physical assets
- Asset valuation: The method of assessing the worth of a company’s assets, as required under acquisition accounting standards.
- Fair Value: The estimated market value of a property, an asset, or a company.
- US GAAP (Generally Accepted Accounting Principles): The standard framework of guidelines for financial accounting used in any given jurisdiction, in this case, the United States. Push Down Accounting is allowed under US GAAP.
Sources for More Information
- Investopedia: An excellent resource for financial and accounting terminology. Their comprehensive financial dictionary contains a detailed article on Push Down Accounting.
- Accounting Tools: Provides a large library of accounting courses, articles, and other resources. Their content on Push Down Accounting is very informative.
- Financial Accounting Standards Board: The board responsible for setting accounting standards in the U.S. They have authoritative articles and updates about Push Down Accounting and other related accounting topics.
- The CPA Journal: A professional journal for certified public accountants (CPAs). Their knowledgeable articles on Push Down Accounting offer a professional perspective on the subject.
