Appendix A — Pushdown Accounting
Appendix A — Pushdown Accounting
A.1 Overview of Pushdown Accounting
When an entity obtains control of a business, a new basis of accounting is
established in the acquirer’s financial statements for the assets acquired and
liabilities assumed. ASC 805-10, ASC 805-20, and ASC 805-30 provide guidance on
accounting for an acquisition of a business in the acquirer’s consolidated financial
statements. Sometimes the acquiree will prepare separate financial statements after
its acquisition. An acquiree in a business combination has the option of whether to
use the parent’s basis of accounting or the acquiree’s historical carrying amounts
for the assets acquired and liabilities assumed in the acquiree’s separate financial
statements. Use of the acquirer’s basis of accounting in the preparation of an
acquiree’s separate financial statements is called “pushdown accounting.”
Under previous guidance, entities applied the pushdown accounting guidance in SAB Topic 5.J, EITF Topic D-97, and comments made by the SEC observer at EITF meetings. In addition, certain accounting practices developed on the basis of SEC staff speeches; the AICPA’s October 30, 1979, issues paper on pushdown accounting; and the FASB’s December 18, 1991, discussion memorandum on this topic. However, such guidance was complicated and incomplete, only applied to SEC registrants, and was based on bright lines that provided opportunities for structuring and misapplication. To address those concerns, the FASB issued ASU 2014-17, which gave an acquiree the option to apply pushdown accounting in its separate financial statements when it has undergone a change in control.
ASU 2014-17 became effective on November 18, 2014, its date of issuance. The guidance in ASU 2014-17 was codified in the ”Pushdown Accounting” subsections of ASC 805-50. An acquiree may elect to apply that guidance to (1) any future transaction or event in which an acquirer obtains control of the acquiree or (2) a past transaction or event in which an acquirer obtains control of the acquiree “when the financial statements of the reporting period that contains the acquisition date have not been issued” (conduit bond obligors or SEC filers) or have not been made available to be issued (all other entities). If the financial statements for the period that includes the most recent event in which an acquirer obtained control of the acquiree already have been issued or made available to be issued, the entity may still apply pushdown accounting; however, in such cases, the event must be accounted for as a change in accounting principle.
In response to the issuance of ASU 2014-17, the SEC staff issued SAB 115 to rescind the guidance in SAB Topic 5.J, and the FASB issued ASU 2015-08 to rescind the remaining guidance on pushdown accounting and collaborative groups in ASC 805-50-S99. As a result, all authoritative guidance related to the application of pushdown accounting is now in the “Pushdown Accounting” subsections of ASC 805-50.
A.2 Scope
ASC 805-50
05-9 The guidance in the Pushdown Accounting Subsections addresses whether and at what threshold an
acquiree that is a business or nonprofit activity can apply pushdown accounting in its separate financial
statements.
15-10 The guidance in the Pushdown Accounting Subsections applies to the separate financial statements of an acquiree and its subsidiaries.
15-11
The guidance in the Pushdown Accounting Subsections does not
apply to transactions in paragraph 805-10-15-4.
ASC 805-10
15-4
The guidance in the Business Combinations Topic does not
apply to any of the following:
- The formation of a joint venture
- The acquisition of an asset or a group of assets that does not constitute a business or a nonprofit activity
- A combination between entities, businesses, or nonprofit activities under common control (see paragraph 805-50-15-6 for examples)
- An acquisition by a not-for-profit entity for which the acquisition date is before December 15, 2009 or a merger of not-for-profit entities (NFPs)
- A transaction or other event in which an NFP obtains control of a not-for-profit entity but does not consolidate that entity, as described in paragraph 958-810-25-4. The Business Combinations Topic also does not apply if an NFP that obtained control in a transaction or other event in which consolidation was permitted but not required decides in a subsequent annual reporting period to begin consolidating a controlled entity that it initially chose not to consolidate.
- Financial assets and financial liabilities of a consolidated variable interest entity that is a collateralized financing entity within the scope of the guidance on collateralized financing entities in Subtopic 810-10.
The pushdown accounting subsections in ASC 805-50 address when an acquiree may elect to apply
pushdown accounting. ASC 805-50-15-10 indicates that the scope of pushdown accounting includes “the
separate financial statements of an acquiree and its subsidiaries” that meet the definition of a business
in ASC 805-10, as indicated in ASU 2014-17, or a nonprofit activity “upon the occurrence of an event in which an acquirer (an individual
or an entity) obtains control of the [acquiree].” The scope includes both public and nonpublic entities.
The EITF considered whether the scope of the pushdown accounting subsections in ASC 805-50 should
be limited to transactions in which an entity becomes substantially wholly owned rather than applying
to all transactions or events in which an acquirer obtains control of a business or nonprofit activity.
The Task Force ultimately decided that the scope of the guidance should be broader and should be
consistent with the scope of ASC 805-10, ASC 805-20, and ASC 805-30, which apply to all transactions
or events in which an acquirer obtains control of a business or nonprofit activity. As indicated in the
Background Information and Basis for Conclusions of ASU 2014-17, the Task Force reasoned that
the FASB had already decided in ASC 805-10, ASC 805-20, and ASC 805-30 that obtaining control of
a business is a significant event for which a new basis of accounting is required “for the net assets
acquired and, in the absence of another distinct threshold that is conceptually grounded in GAAP,
change-in-control events also could serve as the basis for establishing a new basis in an [acquiree’s]
separate financial statements.” The Task Force also decided that a change-in-control threshold for
pushdown accounting could reduce the complexity of the pushdown accounting guidance by eliminating
the need to reconsider or develop collaborative group guidance, under which a group of investors may
be regarded as a single investor in some circumstances.
An acquiree may only elect pushdown accounting if another entity or individual (i.e., an acquirer) has
obtained control of the acquiree. Certain transactions are not within the scope of the pushdown
accounting subsections of ASC 805-50 because they are not transactions in which an acquirer obtains
control of a business or nonprofit activity (i.e., they are not within the scope of ASC 805-10, ASC 805-20,
and ASC 805-30). Such transactions include the formation of a joint venture; combinations between entities, businesses, or
nonprofit activities under common control; and mergers of not-for-profit entities. For example, the
pushdown accounting election does not apply to the formation of a joint venture because, while an
entity loses control of a subsidiary in such a transaction, no other individual or entity obtains control
of it.
A.2.1 Pushdown Accounting for an Asset Acquisition
Since the introduction of the revised definition of a business
and the screen test in ASU
2017-01, certain transactions that formerly would have
constituted business combinations may now be accounted for as asset acquisitions
even though in substance, they are similar in nature. While the scope of the
guidance in ASC 805-10 and ASC 805-50 does not explicitly extend the option to
apply pushdown accounting to asset acquisitions, we do not believe that the
intent of ASU 2014-17 was to preclude it. In addition, we note that if pushdown
accounting was viewed to be prohibited in an asset acquisition, the acquirer
could structure and execute a transaction immediately after the acquisition in
which the acquired assets are transferred to another entity under common control
and such a transfer would require the application of pushdown accounting in
accordance with ASC 805-50-30-5 (see Section A.4). Accordingly, we believe that
it would be acceptable to elect pushdown accounting in the separate financial
statements of an acquired entity that does not meet the definition of a
business. Given that diversity in practice may exist, discussion with accounting
advisers is encouraged.
A.3 Option to Apply Pushdown Accounting Upon a Change in Control
ASC 805-50
25-4 An acquiree shall have the option to apply pushdown accounting in its separate financial statements when
an acquirer — an entity or individual — obtains control of the acquiree. An acquirer might obtain control of an
acquiree in a variety of ways, including any of the following:
- By transferring cash or other assets
- By incurring liabilities
- By issuing equity interests
- By providing more than one type of consideration
- Without transferring consideration, including by contract alone as discussed in paragraph 805-10-25-11.
25-5 The guidance in the General Subsections of Subtopic 810-10 on consolidation, related to determining the
existence of a controlling financial interest shall be used to identify the acquirer. If a business combination has
occurred but applying that guidance does not clearly indicate which of the combining entities is the acquirer,
the factors in paragraphs 805-10-55-11 through 55-15 shall be considered in identifying the acquirer. However,
if the acquiree is a variable interest entity (VIE), the primary beneficiary of the acquiree always is the acquirer.
The determination of which party, if any, is the primary beneficiary of a VIE shall be made in accordance with
the guidance in the Variable Interest Entities Subsections of Subtopic 810-10, not by applying the guidance
in the General Subsections of that Subtopic relating to a controlling financial interest or the guidance in
paragraphs 805-10-55-11 through 55-15.
25-6 The option to apply pushdown accounting may be elected each time there is a change-in-control event
in which an acquirer obtains control of the acquiree. An acquiree shall make an election to apply pushdown
accounting before the financial statements are issued (for a Securities and Exchange Commission (SEC) filer
and a conduit bond obligor for conduit debt securities that are traded in a public market) or the financial
statements are available to be issued (for all other entities) for the reporting period in which the change-in-control
event occurred. If the acquiree elects the option to apply pushdown accounting, it must apply the
accounting as of the acquisition date.
An acquiree can elect to apply pushdown accounting in its separate financial statements each time
another entity or individual obtains control of it. The decision of whether to apply pushdown accounting
upon a change in control is not an accounting policy election. For example, an acquiree may elect to
apply pushdown accounting upon its acquisition in one year and, if it is acquired again in a subsequent
year, may elect not to apply pushdown accounting at that time. An acquiree that elects to apply
pushdown accounting must do so in its separate financial statements as of the date on which the
acquirer obtains control of the acquiree (i.e., the acquisition date). ASC 805-10-25-6 and 25-7 provide
guidance on identifying the acquisition date.
The term “control” is used in both the business combinations guidance and the
pushdown accounting guidance and has the same meaning as the term
“controlling financial interest” in ASC 810-10. ASC 810-10 indicates
that a controlling financial interest generally results when one
entity obtains, either directly or indirectly, more than 50 percent
of the outstanding shares of another entity. However, control can
also be obtained in other ways, such as through a contractual
arrangement or when an entity becomes the primary beneficiary of a
VIE. See Deloitte’s Roadmap Consolidation — Identifying a
Controlling Financial Interest for
more information about determining whether an acquiree has undergone
a change in control.
As noted in the Background Information and Basis for Conclusions of ASU 2014-17, the Task Force
considered whether pushdown accounting should be required or optional. The Task Force ultimately
decided that requiring pushdown accounting may not be beneficial for some users and could be costly
for preparers, since such a requirement would cause many more entities to apply pushdown accounting
and may result in more frequent application of pushdown accounting by the same entity. The Task Force
also noted that users’ views on the benefits and relevance of pushdown accounting differed, with some
indicating that they “prefer not to distort historical trends by establishing a new basis of accounting for
each change-in-control event” and others stressing that they “would prefer a new basis and consider
an [acquiree’s] financial information in the context of its parent.” The Task Force acknowledged that
giving entities an option reduces comparability in this area but decided that “allowing entities to apply
judgment on the basis of their unique set of facts and circumstances” was more important than
achieving such comparability. Before deciding whether to elect pushdown accounting, entities should
consider the information needs and preferences of their financial statement users. When pushdown
accounting is not elected, no adjustment is made to the acquiree’s financial records in connection with
the acquisition. Therefore, in such cases, the acquiree will need to maintain accounting records that are
separate from those of the parent to track items such as depreciation and amortization and will need
to perform separate impairment analyses. It will be more difficult to maintain two sets of accounting records if multiple entities are acquired at different times. However, entities may prefer to carry over the acquiree’s historical basis for financial reporting purposes if carryover basis is being used for tax reporting purposes (i.e., when there is no tax “step-up”). Thus, entities should consider the burden of record keeping and their particular facts and circumstances when deciding whether to apply pushdown accounting.
Example A-1
Loss of Control of a Subsidiary
Company A has a wholly owned subsidiary, X. Company A sells 80 percent of its shares in X to the public in an
initial public offering. The public shareholders are widely dispersed, and no individual shareholder acquires
more than 3 percent of X’s shares. Company A concludes that it no longer controls X.
Company A loses control of X upon the sale of X’s shares to the public. Because no entity or individual obtains
control of X, a new basis of accounting cannot be established in X’s separate financial statements.
If a new legal entity is established to effect an acquisition, one must determine whether that newly
formed entity (commonly called a “newco”) should be identified as the acquirer or whether it should be
disregarded for accounting purposes. If the newco is identified as the acquirer, acquisition accounting,
rather than pushdown accounting, would be applied to establish a new basis of accounting for the
acquiree’s assets and liabilities in the newco’s financial statements. See Section 3.1.5 for further
discussion.
A.4 Common-Control Transactions May Trigger Pushdown Accounting
In a common-control transaction, the receiving entity recognizes the transferred
assets and liabilities at their carrying amounts
on the date of transfer. However, sometimes the
carrying amounts of the assets and liabilities
transferred in the parent’s consolidated financial
statements differ from those in the transferring
entity’s separate financial statements (e.g., if
the transferring entity had not applied pushdown
accounting). ASC 805-50-30-5 states that, in such
cases, the receiving entity’s financial statements
must “reflect the transferred assets and
liabilities at the historical cost of the parent
of the entities under common control.” We believe
that the historical cost of the parent refers to
the historical cost of the ultimate parent or
controlling shareholder. While ASU 2014-17 made it
optional to apply pushdown accounting in an
acquiree’s separate financial statements, it did
not amend the guidance in ASC 805-50-30-5.
A.5 Subsequent Election to Apply Pushdown Accounting
ASC 805-50
25-7 If the acquiree does not elect to apply pushdown accounting upon a change-in-control event, it can elect
to apply pushdown accounting to its most recent change-in-control event in a subsequent reporting period as
a change in accounting principle in accordance with Topic 250 on accounting changes and error corrections.
Pushdown accounting shall be applied as of the acquisition date of the change-in-control event.
An acquiree that does not elect to apply pushdown accounting before the financial statements are
issued (SEC filer) or are available to be issued (other entities) may subsequently elect to apply pushdown
accounting to its most recent change-in-control event in a later reporting period. However, such a later
election is a change in accounting principle and the acquiree would be required to apply the guidance on a change in accounting principle in ASC 250 in such circumstances, including all relevant disclosure
requirements. We believe that an election to apply pushdown accounting would generally be preferable.
ASC 250-10-45-5 requires that an entity “report a change in accounting principle through retrospective
application . . . to all prior periods,” unless doing so would be impracticable. We would expect entities
that elect pushdown accounting on a later date to apply it retroactively to the acquisition date since the
parent generally would be expected to have maintained the records for all prior periods.
An SEC registrant that elects a voluntary change in accounting principle must file a preferability letter
with the SEC (i.e., a letter from the entity’s independent accountant indicating why the new accounting
principle is preferable). Such a letter must be included in the registrant’s first filing under the Securities
Exchange Act of 1934 (i.e., Form 10-Q or Form 10-K) after the date of the accounting change.
A.6 Election to Apply Pushdown Accounting Is Irrevocable
ASC 805-50
25-9 The decision to apply pushdown accounting to a specific change-in-control event if elected by an acquiree is irrevocable.
While an entity can elect to apply pushdown accounting in a subsequent reporting period, it cannot
reverse the application of pushdown accounting in financial statements that have been issued (SEC
filer) or are available to be issued (other entities). In addition, if an acquiree elects to apply pushdown
accounting and that acquiree is subsequently acquired by another entity, the historical cost basis of the
acquiree is based on the “pushed down” amounts. The new acquirer cannot revert to the acquiree’s
historical cost basis that existed before the election to apply pushdown accounting.
According to the Background Information and Basis for Conclusions of ASU 2014-17, the Task Force
decided that an entity should be allowed to apply pushdown accounting on a later date if, for example,
the investor mix changes significantly and “pushdown accounting would be more relevant to the current
investors.” Nonetheless, the Task Force decided that entities should be prohibited from subsequently
reversing the application of pushdown accounting. Because an acquirer applies acquisition accounting
to establish a new basis of accounting in its consolidated financial statements and subsequently
accounts for the related assets and liabilities under GAAP, the acquiree would generally have the
information to apply pushdown accounting on a later date. However, once a new basis is established
in the acquiree’s separate financial statements, the historical cost basis for the acquiree’s assets and
liabilities would often not be available.
A.7 Subsidiary’s Election to Apply Pushdown Accounting
ASC 805-50
25-8 Any subsidiary of an acquiree also is eligible to make an election to apply pushdown accounting to its separate financial statements in accordance with the guidance in paragraphs 805-50-25-4 through 25-7 irrespective of whether the acquiree elects to apply pushdown accounting.
A subsidiary of an acquiree is not constrained by the acquiree’s or a higher-level subsidiary’s decision of
whether to apply pushdown accounting upon a change-in-control event. If multiple entities are acquired
in a business combination, the acquiree and any of its subsidiaries independently have the option to
apply pushdown accounting in their separate financial statements.
The Background Information and Basis for Conclusions of ASU 2014-17 points out that the Task Force
“considered, but ultimately rejected, a view in which an [acquiree] must elect to apply pushdown
accounting in order for its subsidiaries to be able to elect the option to apply pushdown accounting”
because “subsidiaries should reflect their parent’s basis.” The Task Force rejected that view on the
basis that “each entity has different users and their perspectives may be different from one another.”
Therefore, each entity within the group of acquired entities “should be allowed to separately evaluate
whether pushdown accounting applies to their separate financial statements.”
Example A-2
Subsidiary’s Elections to Apply Pushdown Accounting
Company A obtains control of Company B in a transaction accounted for as a business combination, and B
becomes a subsidiary of A. Company B has two wholly owned subsidiaries, Subsidiary X and Subsidiary Y,
each of which has two subsidiaries. Subsidiary X and Subsidiary Y2 each issue separate financial statements,
and each may independently elect to apply pushdown accounting irrespective of whether B, Y, or any other
acquired entity elects to do so. In addition, X’s or Y2’s ability to elect pushdown accounting does not depend on
whether B issues separate financial statements.
A.8 Specific Initial Recognition and Measurement Guidance in an Acquiree’s Separate Financial Statements
ASC 805-50
30-10 If an acquiree elects the option in this Subtopic to apply pushdown accounting, the acquiree shall
reflect in its separate financial statements the new basis of accounting established by the acquirer for the
individual assets and liabilities of the acquiree by applying the guidance in other Subtopics of Topic 805. If the
acquirer did not establish a new basis of accounting for the individual assets and liabilities of the acquiree
because it was not required to apply Topic 805 (for example, if the acquirer was an individual or an investment
company — see Topic 946 on investment companies), the acquiree shall reflect in its separate financial
statements the new basis of accounting that would have been established by the acquirer had the acquirer
applied the guidance in other Subtopics of Topic 805.
If an acquiree elects to apply pushdown accounting, the carrying amounts of its assets and liabilities
in its separate financial statements are adjusted to reflect the amounts recognized in the acquirer’s
consolidated financial statements as of the date on which control was obtained. As discussed in the
paragraphs below, ASC 805-50 contains guidance on the initial recognition and measurement of certain
assets, liabilities, and gains in an acquiree’s separate financial statements. For assets, liabilities, gains,
and losses not specifically addressed in ASC 805-50, we believe that an acquiree should apply the
recognition and measurement guidance in ASC 805-20 and ASC 805-30 that the acquirer applies.
An acquiree that elects pushdown accounting must apply it in its entirety; the
acquiree cannot pick or choose which assets or liabilities to recognize in its
separate financial statements. However, assets or liabilities that are the legal
right or obligation of the parent or acquirer, rather than the acquiree, should not
be pushed down unless they must be recognized in the acquiree’s financial statements
in accordance with other GAAP (see Section A.11). In addition, expenses are not part of the acquirer’s
basis in the assets acquired and liabilities assumed. Expenses incurred by the
acquirer should not be pushed down to the acquiree’s separate financial statements
unless the acquirer incurred such expenses on behalf of, or for the benefit of, the
acquiree (see Section
A.12).
An acquirer sometimes is not required to apply ASC 805-10, ASC 805-20, and ASC 805-30 to the
acquiree’s assets acquired or liabilities assumed (e.g., the acquirer is an individual or an investment
company). In such cases, the acquiree may nonetheless elect to apply pushdown accounting by
recognizing in its separate financial statements the basis the acquirer would have recognized had it
applied ASC 805-10, ASC 805-20, and ASC 805-30.
A.8.1 Measurement Period
ASC 805-10-25-15 states:
The measurement
period is the period after the acquisition date
during which the acquirer may adjust the
provisional amounts recognized for a business
combination. The measurement period provides the
acquirer with a reasonable time to obtain the
information necessary to identify and measure any
of the following as of the acquisition date in
accordance with the requirements of this Topic:
- The identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree (see Subtopic 805-20)
- The consideration transferred for the acquiree (or the other amount used in measuring goodwill in accordance with paragraphs 805-30-30-1 through 30-3)
- In a business combination achieved in stages, the equity interest in the acquiree previously held by the acquirer (see paragraph 805-30-30-1(a)(3))
- The resulting goodwill recognized in accordance with paragraph 805-30-30-1 or the gain on a bargain purchase recognized in accordance with paragraph 805-30-25-2.
We believe that if the
acquiree is acquired in a business combination and elects to apply pushdown accounting,
the acquirer’s measurement period also applies to the acquiree’s separate financial
statements. That is, any adjustments made by the acquirer to the provisional amounts
recognized in the business combination would also be reflected in the acquiree’s separate
financial statements. We believe that the acquiree’s separate financial statements should
also include any relevant disclosures if the initial accounting for the business
combination is incomplete.
See Section 6.1 for more information about the measurement
period and Section 7.11 for
discussion of the disclosure requirements when the initial accounting for the business
combination is incomplete.
A.9 Subsequent Measurement Guidance
ASC 805-50
35-2 An acquiree shall follow the subsequent measurement guidance in other Subtopics of Topic 805 and
other applicable Topics to subsequently measure and account for its assets, liabilities, and equity instruments,
as applicable.
ASC 805-50 contains no specific subsequent-measurement guidance related to an acquiree’s separate
financial statements. An acquiree that elects pushdown accounting should apply the subsequent-measurement
guidance in ASC 805-20 and ASC 805-30 and other applicable GAAP to subsequently
measure and account for its assets, liabilities, and equity instruments.
A.10 Goodwill and Bargain Purchase Gains
ASC 805-50
30-11 An acquiree shall recognize goodwill that arises because of the application of pushdown accounting in
its separate financial statements. However, bargain purchase gains recognized by the acquirer, if any, shall
not be recognized in the acquiree’s income statement. The acquiree shall recognize the bargain purchase
gains recognized by the acquirer as an adjustment to additional paid-in capital (or net assets of a not-for-profit
acquiree).
An acquiree that applies pushdown accounting must recognize the goodwill related
to the acquisition in its separate financial
statements. Certain items, such as liabilities that
are not the legal obligation of the acquiree or
bargain purchase gains, are not pushed down to the
acquiree. Because these items are not pushed down to
the acquiree’s financial statements on the
acquisition date, there will be an adjustment to the
acquiree’s APIC rather than to goodwill. However, a
bargain purchase gain recognized by the acquirer is
not recognized in the acquiree’s separate income
statement even if the acquiree elects to apply
pushdown accounting. An acquiree that elects to
apply pushdown accounting recognizes a bargain
purchase gain as an adjustment to APIC (or net
assets of a not-for-profit acquiree) in its separate
financial statements.
ASC 350-20 requires that an acquirer assign all goodwill acquired in a business combination on the
acquisition date to the acquirer’s reporting units “that are expected to benefit from the synergies of the
combination.” Such an allocation could result in a difference between the amount of goodwill recognized
in the acquiree’s separate financial statements and the amount of goodwill assigned to the acquiree
in the parent’s consolidated financial statements if some of the goodwill is assigned to one or more
reporting units that do not include the assets or liabilities of the acquiree.
A.11 Acquisition-Related Liabilities
ASC 805-50
30-12 An acquiree shall recognize in its separate financial statements any acquisition-related liability incurred by the acquirer only if the liability represents an obligation of the acquiree in accordance with other applicable Topics.
ASC 805-50 provides guidance on applying pushdown accounting to acquisition-related liabilities
that the acquirer (or acquiree) incurs at the time of the acquisition (e.g., acquisition-related debt or
contingent consideration). Such liabilities differ from liabilities assumed, which were liabilities of the
acquiree before the acquisition that the acquirer assumes as part of the acquisition.
The Background Information and Basis for Conclusions of ASU 2014-17 notes that
the Task Force concluded that an acquiree should “recognize a liability incurred by
the acquirer only if that obligation is the [acquiree’s] liability” (i.e., the
liability is the acquiree’s legal obligation even if the acquirer incurred the
liability on behalf of the acquiree). The Background Information and Basis for
Conclusions also cites the guidance in ASC 405-40, which applies to obligations
related to joint-and-several liability arrangements for which the total amount under
the arrangement is fixed as of the reporting date. ASC 405-40-30-1 requires entities
to recognize and measure liabilities resulting from joint-and-several liability
arrangements as the sum of the following:
-
The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors.
-
Any additional amount the reporting entity expects to pay on behalf of its co-obligors. If some amount within a range of the additional amount the reporting entity expects to pay is a better estimate than any other amount within the range, that amount shall be the additional amount included in the measurement of the obligation. If no amount within the range is a better estimate than any other amount, then the minimum amount in the range shall be the additional amount included in the measurement of the obligation.
A.11.1 Acquisition-Related Debt
Acquisition-related liabilities include debt incurred at the time of the acquisition. Under ASC 805-50-30-12, an acquiree must recognize any acquisition-related debt in its separate financial statements only
if it is required to do so under other GAAP. Thus, acquisition-related debt should be recognized in the
acquiree’s separate financial statements only if (1) the debt is the legal obligation of the acquiree or
(2) the acquirer and acquiree are joint and severally liable and the criteria in ASC 405-40 are met. We
believe that if the acquiree recognizes the acquisition-related debt in its separate financial statements, it
should also recognize the related interest expense and debt issue costs.
An acquiree may be required to recognize acquisition-related debt and liabilities in its separate financial
statements as a result of other GAAP even if it does not elect to apply pushdown accounting.
For example, if the acquirer incurs debt to finance the acquisition but the acquiree is named as the legal
obligor, that debt would need to be recognized in the acquiree’s separate financial statements even if
the acquiree does not apply pushdown accounting. This could lead to the acquiree’s presentation of
negative equity in its financial statements if pushdown accounting is not elected.
Before being rescinded by SAB 115, SAB Topic 5.J expressed the SEC staff’s views on the pushdown of
acquisition-related debt to the acquiree’s separate financial statements. SAB Topic 5.J stated that the
parent’s acquisition-related debt, related interest expense, and allocable debt issue costs should be
included in a subsidiary’s financial statements in any of the following circumstances:
- The subsidiary was to assume the parent’s debt “either presently or in a planned transaction in the future.”
- The proceeds of a debt or equity offering of the subsidiary were to be “used to retire all or a part of [the parent’s] debt.”
- The subsidiary guaranteed or pledged “its assets as collateral for [the parent’s] debt.”
Because an acquiree’s assets are often pledged as collateral against an acquirer’s debt, we believe
that the rescission of SAB Topic 5.J will result in fewer instances in which acquisition-related debt is
recognized in the acquiree’s separate financial statements.
A.11.2 Contingent Consideration
ASC 805-10-20 defines contingent consideration as follows:
Usually an obligation of the acquirer to transfer additional assets or equity interests to the former owners of
an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions
are met. However, contingent consideration also may give the acquirer the right to the return of previously
transferred consideration if specified conditions are met.
ASC 805-30-25-5 requires that an acquirer recognize any contingent consideration at fair value on the
acquisition date “as part of the consideration transferred in exchange for the acquiree.”
ASC 805-50 does not specify whether contingent consideration should be pushed down to the
acquiree’s separate financial statements. We believe that the general principles for acquisition-related
liabilities incurred by the acquirer apply and that contingent consideration should be recognized in the
acquiree’s separate financial statements only if it is the acquiree’s legal obligation to pay (or legal right to
receive) the contingent consideration. If contingent consideration is not pushed down to the acquiree’s
separate financial statements, the acquiree would not recognize any changes in the fair value of the
contingent consideration in its separate statement of operations.
A.12 Acquisition-Related Costs
ASC 805-10-25-23 states:
Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.
We believe that the acquirer’s direct expenses for acquisition-related costs should not be recognized
in the acquiree’s separate financial statements unless the acquirer incurred such costs on behalf of,
or for the benefit of, the acquiree. SAB Topic 1.B states that “[i]n general, the staff believes that the
historical income statements of a registrant should reflect all of its costs of doing business. Therefore,
in specific situations, the staff has required the subsidiary to revise its financial statements to include
certain expenses incurred by the parent on its behalf.” Similarly, SAB Topic 5.T discusses the concept
of reflecting costs incurred by a shareholder on behalf of a company in the company’s financial
statements. SAB Topic 5.T states that a transaction in which “a principal stockholder pays an expense for the company, unless the stockholder’s action is caused by a relationship or obligation completely
unrelated to his position as a stockholder or such action clearly does not benefit the company,” should
be reflected as an expense in the company’s financial statements, with a corresponding credit to APIC.
While the guidance in SAB Topic 1.B and SAB Topic 5.T applies to public companies, we believe that
private companies should also apply this guidance when evaluating the recognition of acquisition-related
costs.
An acquiree will most likely incur acquisition-related costs associated with the business combination, such as legal fees or sell-side due diligence costs. The acquiree should recognize those costs in its separate financial statements in the periods in which the services are received. An acquirer may sometimes pay the liabilities of the acquiree on, or in close proximity to, the acquisition date. In such cases, it is necessary to determine whether the cash distributed should be reported as consideration transferred to effect the acquisition or as cash paid to settle a liability assumed in the acquisition. (See Section 4.12.1 for more information about making this determination.) If it is determined to be a liability assumed, and if the acquiree is the legal obligor for those costs, the liability should be recognized in the acquiree’s separate postacquisition financial statements regardless of whether it elects pushdown accounting.
A.13 Income Taxes
Although the application of pushdown accounting is optional under ASC 805-50, ASC 740-10-30-5
states that deferred taxes must be “determined separately for each tax-paying component . . . in each
tax jurisdiction.” Therefore, to properly determine the temporary differences and to apply ASC 740
accurately, an entity must push down, to each tax-paying component, the amounts assigned to the
individual assets and liabilities for financial reporting purposes. That is, because the cash inflows from
assets acquired or cash outflows from liabilities assumed will be reflected on the tax return of the
respective tax-paying component, the acquirer has a taxable or deductible temporary difference related
to the entire amount recorded under the acquisition method (compared with its tax basis), regardless of
whether such acquisition-method adjustments are actually pushed down and reflected in the acquiree’s
separate financial statements.
An entity can either record the amounts in its subsidiary’s books (i.e., actual pushdown accounting) or
maintain the records necessary to adjust the consolidated amounts to what they would have been had
the amounts been recorded on the subsidiary’s books (i.e., notional pushdown accounting). In many
instances, the latter method can make record keeping more complex.
Further, the entire amount recorded under the acquisition method for a particular asset or liability must
be converted to the currency in which the tax-paying component files its tax return (the “tax currency”)
to properly determine the temporary difference associated with the particular asset or liability and the
corresponding deferred tax asset or deferred tax liability (i.e., deferred taxes are calculated in the tax
currency and then translated or remeasured in accordance with ASC 830).
See Deloitte’s Roadmap Income Taxes for more information.
A.14 Foreign Currency Translation
ASC 830-30-45-11 states that “[a]fter a business combination, the amount assigned at the acquisition
date to the assets acquired and the liabilities assumed (including goodwill or the gain recognized for
a bargain purchase in accordance with Subtopic 805-30) shall be translated in conformity with the
requirements of this Subtopic [ASC 830-30].” This requirement applies regardless of whether the entity elects to apply
pushdown accounting.
See Deloitte’s Roadmap Foreign Currency Matters for more information.
A.15 Disclosures
ASC 805-50
50-5 If an acquiree elects the option to apply pushdown accounting in its separate financial statements, it shall disclose information in the period in which the pushdown accounting was applied (or in the current reporting period if the acquiree recognizes adjustments that relate to pushdown accounting) that enables users of financial statements to evaluate the effect of pushdown accounting. To meet this disclosure objective, the acquiree shall consider the disclosure requirements in other Subtopics of Topic 805.
50-6 Information to evaluate the effect of pushdown accounting may include the following:
- The name and a description of the acquirer and a description of how the acquirer obtained control of the acquiree.
- The acquisition date.
- The acquisition-date fair value of the total consideration transferred by the acquirer.
- The amounts recognized by the acquiree as of the acquisition date for each major class of assets and liabilities as a result of applying pushdown accounting. If the initial accounting for pushdown accounting is incomplete for any amounts recognized by the acquiree, the reasons why the initial accounting is incomplete.
- A qualitative description of the factors that make up the goodwill recognized, such as expected synergies from combining operations of the acquiree and the acquirer, or intangible assets that do not qualify for separate recognition, or other factors. In a bargain purchase (see paragraphs 805-30-25-2 through 25-4), the amount of the bargain purchase recognized in additional paid-in capital (or net assets of a not-for-profit acquiree) and a description of the reasons why the transaction resulted in a gain.
- Information to evaluate the financial effects of adjustments recognized in the current reporting period that relate to pushdown accounting that occurred in the current or previous reporting periods (including those adjustments made as a result of the initial accounting for pushdown accounting being incomplete [see paragraphs 805-10-25-13 through 25-14]).
The information in this paragraph is not an exhaustive list of disclosure requirements. The acquiree shall disclose whatever additional information is necessary to meet the disclosure objective set out in paragraph 805-50-50-5.
The disclosures that an entity applying pushdown accounting is required to provide under ASC 805-50
are generally based on the disclosures that an acquirer is required to provide for a business
combination under ASC 805-10, ASC 805-20, and ASC 805-30. However, the ASC 805-50 requirements
exclude certain disclosures that would only be relevant to users of the acquirer’s consolidated financial
statements. For example, an acquiree is not required to disclose items such as the percentage of voting
equity interests acquired by the acquirer, any transactions the acquirer recognized separately from the
acquisition, and supplemental pro forma information. In subsequent reporting periods, the acquiree
would need to provide any required disclosures for items such as goodwill and intangible assets.
There are no disclosure requirements for an acquiree that does not elect to apply pushdown
accounting. Therefore, an acquiree would not be required to disclose that it was acquired or that it
elected not to apply pushdown accounting.
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.
A.17 Identifying When a Newly Formed Entity to Effect an Acquisition Is the Acquirer
While ASU 2014-17 simplified the application of pushdown accounting, it did not
resolve certain long-standing practice issues related to whether a newly formed
entity (commonly called a “newco”) should be identified as the acquirer in a
business combination. Entities will often establish a newco to effect the
acquisition of a business. If the newco is identified as the acquirer and is the
reporting entity, it would apply acquisition accounting, rather than pushdown
accounting. Therefore, recognizing a new basis for the assets acquired and
liabilities assumed in the newco’s financial statements would not be optional.
ASC 805-10-55-15 provides limited guidance on whether a newco should be identified as the accounting
acquirer and states:
A new entity formed to effect a business combination is not necessarily the acquirer. If a new entity is formed
to issue equity interests to effect a business combination, one of the combining entities that existed before the
business combination shall be identified as the acquirer by applying the guidance in paragraphs 805-10-55-10
through 55-14. In contrast, a new entity that transfers cash or other assets or incurs liabilities as consideration
may be the acquirer.
Entities must use judgment in determining whether a newco should be identified as the acquirer. See
Section 3.1.5 for more information about identifying a newco as the acquirer in a business combination.
A.17.1 Newco and Acquisition-Related Costs
If the newco is identified as the acquirer, the buyer’s acquisition-related
costs should generally be reflected in the newco’s
financial statements in accordance with SAB Topic
1.B and SAB Topic 5.T. If the newco’s parent
incurred costs on the newco’s behalf, such costs
should generally be recognized as an expense in
the newco’s financial statements, with a
corresponding credit to APIC. See Section A.12 for more
information.
A.18 Recapitalization Transactions
A recapitalization is a type of reorganization designed to change an entity’s capital structure (i.e., mix
of debt and equity). Usually, these transactions involve new debt financing, issuing new shares, or
repurchasing outstanding shares. These transactions sometimes result in a change in control of the
entity undergoing the recapitalization and may or may not result in a new basis of accounting at the
entity level.
Example A-3
Recapitalization Transaction Without a Change in Control
Entities A, B, C, D, and E each own 20 percent of Company X’s issued and outstanding shares. None of the
entities has control of X. Company X buys back all of E’s shares, and the ownership of A, B, C, and D increases to
25 percent each. However, no entity obtains control of X. The transaction is a recapitalization transaction for X,
but there is no change in control over X.
Example A-4
Recapitalization Transaction With a Change in Control
Entities A, B, and C own all of Company X’s issued and outstanding shares. Entity A owns 45 percent, B owns
40 percent, and C owns 15 percent. None of the entities has control of X. Company X buys back all of C’s
shares. Entity A’s ownership increases to 53 percent. In the absence of evidence that A does not control X, a
business combination has occurred between A and X. Company X elects not to apply pushdown accounting.
The transaction is a recapitalization transaction for X and, since X elects not to apply pushdown accounting, the
basis of X’s assets or liabilities does not change when A obtains control of X.
A.18.1 Transaction Costs in a Recapitalization
Entities may incur costs related to structuring a recapitalization. An entity undergoing a recapitalization
should account for its costs on the basis of the nature of those costs. For example, costs related to
issuing debt are capitalized as debt issuance costs and amortized over the life of the debt by using
the effective interest method, costs related to issuing equity and raising capital are recognized as a
reduction to the total amount of equity raised, and costs related to advisory or legal services should be
expensed as incurred.
If the costs are billed to the entity as a single amount, we believe that the entity should apply the
guidance in paragraph 6 of SAB Topic 2.A, which states, in part:
When an investment banker provides services in connection with a business combination or asset acquisition
and also provides underwriting services associated with the issuance of debt or equity securities, the total
fees incurred by an entity should be allocated between the services received on a relative fair value basis. The
objective of the allocation is to ascribe the total fees incurred to the actual services provided by the investment
banker.
We believe that the amounts allocated to debt issuance costs should result in an effective interest rate
on the debt that is consistent with an effective market interest rate and that the amounts allocated to
equity issuance costs should be consistent with fees an underwriter would charge.
Further, we believe that if the fees are incurred by a new investor, those costs should not be recognized
in the financial statements of the entity undergoing the recapitalization unless they were incurred by the
investor on the entity’s behalf. We believe that entities should consider the guidance in SAB Topic 1.B
and SAB Topic 5.T in determining whether such costs were incurred on behalf of, and for the benefit of,
the entity. See Section A.12 for more information.