US GAAP had limited guidance on when the cost of acquiring an entity, or new accounting basis (pushdown accounting), would be required to be reflected in the acquired entity’s separate financial statements. While public companies had specific guidance to follow, private companies had little guidance to follow and therefore mix practice developed.
On September 18, 2014, the FASB’s Emerging Issues Task Force (EITF) reached a final consensus that when an acquirer obtains control of an entity, the reporting entity would have an accounting policy election to apply pushdown accounting in its standalone financial statements. This would also apply if an entity becomes primary beneficiary of a variable interest entity. Additionally, a subsidiary of the acquired entity may elect to apply pushdown accounting even if its immediate or upstream parent does not elect to do so.
Changes for SEC Registrants
While the SEC must complete its evaluation of the new pushdown guidance, the SEC observer indicated current plans were to rescind current guidance. This could have a significant impact to SEC registrants who are currently required to apply pushdown accounting if substantial control is obtained (>95%).
Transition Options and Effective Date
An entity may elect to apply pushdown accounting in the period in which a change in control occurs up and until financial statements are issued (or available to be issued for private companies). An entity may also retrospectively apply pushdown accounting to the most recent change in control transaction if it had not elected to do so initially. However, this is a “one-way” retrospective option.
To illustrate, if an entity acquired a business in 2016 and in that period of the change in control elected to not apply pushdown accounting, it could in the future retroactively apply pushdown accounting. An entity, however, could not retroactively decide in the future to unwind pushdown accounting if that election was previously made. Additionally, if the business was acquired several times prior to 2016, an entity could only retrospectively apply pushdown accounting to the most recent acquisition (i.e., pushdown of the current acquirer’s basis and not that of a previous owner).
The final consensus would be applied prospectively to all pushdown accounting elections made following issuance of the final standard.
A Big Deal
While this would appear to be a fairly narrow issue, recision of the SEC requirements for pushdown accounting could be a significant development. Take for example an acquired business of a significantly larger public company. The acquired business flourishes and is planned to be sold to another public company or will undertake an IPO. Under current SEC rules, pushdown accounting in the acquired business’s separate financial statements may be required. However, with this new standard, the entity will now have the option to not apply pushdown accounting. This means that separate financial statements may reflect carryover/historical cost basis, and for example, may not reflect intangible assets which were created by the entity but are carried in the acquirer’s financial statements.
Considerations for Pushdown
With this consensus the EITF has enabled preparers to determine the needs of its users when making the pushdown accounting election. While it makes sense to consider the current needs of the financial statement users, it is also appropriate to consider the future when considering pushdown accounting. We would encourage companies to consider some of the benefits of applying pushdown accounting in weighing cost/benefits of the election. Having new basis reflected at the subsidiary level may assist in income tax reporting, segment reporting, impairment testing, and ultimately may be more reflective of the true value of the business.