Question

FASB has not taken a position on the use of push-down accounting. Take a position on whether push-down accounting provides the most relevant information for both internal and external financial statement users. Provide support for your rationale.

Answer 1

Push Down Accounting :-

Push down accounting is the method of accounting for mergers and acquisitions. Using this accounting method, the target company’s financial statement is adjusted to reflect the acquirer’s accounting basis rather than the target’s historical costs. In effect, the target company’s assets and liabilities are written up (or down) to reflect the purchase price and, to the extent the purchase price exceeds fair value, recognize the excess as goodwill. According to the U.S. Financial Accounting Standards Board (FASB), the total amount that is paid to purchase the target becomes the target’s new book value on its financial statements. Any gains and losses associated with the new book value are “pushed down” from the acquirer’s to the acquired company’s income statement and balance sheet. If the acquiring company pays an amount in excess of fair value, the target carries the excess on its books as goodwill, which is classified as an intangible asset.

Example :-

For example, Company ABC decides to purchase Company XYZ, which is valued at $9 million. ABC is purchasing the company for $12 million, which translates to a premium. To finance its acquisition ABC gives XYZ’s shareholders $8 million worth of ABC shares and $4 million cash payment, which it raises through a debt offering. Even though it is ABC that borrows the money, the debt is recognized on XYZ’s balance sheet under the liabilities account. In addition, the interest paid on the debt is recorded as an expense to the acquired company. In this case, XYZ’s net assets, that is, assets minus liabilities, must equal $12 million, and goodwill will be recognized as $12 million - $9 million = $3 million.

In push down accounting, the costs incurred to acquire a company appear on the separate financial statements of the target, rather than the acquirer. It is sometimes helpful to think of push down accounting as a new company that is created using borrowed funds. Both the debt, as well as the assets acquired, are recorded as part of the new subsidiary.

Internal users and External users of Financial Statement :-

Examples of internal users are owners, managers, and employees. External users are people outside the business entity (organization) who use accounting information. Examples of external users are suppliers, banks, customers, investors, potential investors, and tax authorities.

Push down accounting provides the most relevant information for both internal and external financial statement users :-

1.With the help of push down accounting, it is impossible for the subsidiary to alter its accounts and report losses to the parent company.

2.The other advantage of the push down accounting is that it simplifies the process of consolidation for the parent company.

From the above conclusion we can say that push down accounting provide most relevant information for both internal and external financial statement user.