A.16 Financial Statement Presentation
The application of pushdown accounting and the presentation of a new basis of accounting in a
subsidiary’s separate financial statements are akin to the termination of an old reporting entity and
the creation of a new reporting entity. Therefore, it is not appropriate to combine preacquisition and
postacquisition periods in a single set of financial statements. In both the financial statements and any
footnote disclosures presented in tabular format, the preacquisition and postacquisition periods are
separated by a vertical “black line.” The periods before the acquisition are labeled as the “predecessor”
periods and the periods after the acquisition and the application of pushdown accounting are labeled
as the “successor” periods. Since the application of pushdown accounting is akin to the creation of
a new reporting entity, the predecessor entity’s equity structure is not carried forward and the new
equity structure is presented in the successor period. The footnotes to the financial statements should
include separate footnote disclosures for the preacquisition and postacquisition periods. In addition,
the footnote disclosures should include a description of the acquisition to alert users that pushdown
accounting was applied and that, accordingly, the acquiree’s results of operations and cash flows in the
predecessor and successor periods are not comparable.
A.16.1 Recognizing Expenses on the “Black Line”
In a speech at the 2014 AICPA Conference on Current SEC and PCAOB Developments, an SEC staff
member (Carlton Tartar) discussed whether it is appropriate for an entity that is applying pushdown
accounting to exclude, from both the predecessor and successor income statement periods, certain
expenses triggered by the consummation of a business combination that were incurred by the acquiree.
Examples of such expenses include investment banking fees paid by the acquiree that are contingent
on the closing of the acquisition and share-based compensation awards with a preexisting provision
that accelerated their vesting upon a change in control. While the staff acknowledged that a registrant
needs to consider its specific facts and circumstances, it observed that registrants sometimes exclude
expenses that are contingent on a change-in-control event from the predecessor and successor periods
and record those expenses on the “black line” separating the two periods (i.e., neither the predecessor’s
nor the successor’s financial statements would report the contingent payments as expenses). The staff
encouraged “registrants to evaluate whether it is appropriate to record expenses that are related to
the business combination in either the predecessor or successor periods as appropriate, based on
the specific facts and circumstances underlying each individual transaction.” However, the staff also
noted that it would not object to black line presentation “provided that transparent and disaggregated
disclosure of the nature and amount of such expenses was made.”
This view is supported by analogy to the guidance in ASC 805-20-55-51, which prohibits entities from
recognizing a liability for contractual termination benefits and curtailment losses under employee
benefit plans that will be triggered by a business combination until the business combination is
consummated. Similarly, the argument in support of recognizing expenses on the black line is that
any expenses that do not become payable until the change in control should not be recognized until
consummation occurs and should not be recognized in the period before the business combination
(i.e., the predecessor period).
Another acceptable view is that all of the acquiree’s acquisition expenses, even those that are contingent
on a change in control, should be recognized in the period in which they were incurred. Because the
financial statements present the acquiree’s results of operations for the period up to the acquisition
date, there is no longer a risk that the business combination will not occur. Thus, recognition of the
expenses in the predecessor period is appropriate.
We believe that either alternative is acceptable provided that an acquiree recognizes all expenses
triggered by a change in control consistently, either in the predecessor period or on the black line.
A.16.2 Reflecting Changes by the Successor in the Predecessor Period
Because the application of pushdown accounting is akin to the termination of an
old reporting entity and the creation of a new reporting entity, the successor’s
changes in accounting principle, adoption of new accounting standards that
require retrospective application, reorganizations, or changes in segment
reporting are not “pushed back” into the predecessor period. However,
Section
13210.2 of the FRM does require that the predecessor
financial statements be retrospectively recast to reflect the successor’s
discontinued operations. It states:
Predecessor financial
statements are required to be retrospectively reclassified to reflect the
impact of a successor’s discontinued operations. Registrants should contact
the staff if unusual facts and circumstances may prohibit the company’s
ability to reclassify predecessor fiscal periods.