Pushdown accounting

Definition

Pushdown accounting is a method used in financial reporting where the acquired company's assets and liabilities are revalued at fair value on the books of the acquired company upon acquisition. This practice allows the acquirer to reflect the fair value of the acquired assets and liabilities directly in the financial statements of the acquired entity, creating a clearer picture of its financial position post-acquisition.

5 Must Know Facts For Your Next Test

1. Pushdown accounting is typically used when a parent company acquires a subsidiary, allowing the subsidiary's financial statements to reflect the acquisition's impact.
2. The use of pushdown accounting simplifies reporting by ensuring that the acquired entity's financials are consistent with the consolidated financials of the parent company.
3. It is important for pushdown accounting to adhere to relevant accounting standards, which may vary by jurisdiction or specific circumstances surrounding the acquisition.
4. When pushdown accounting is applied, goodwill is calculated based on the difference between the purchase price and the fair value of net identifiable assets at the subsidiary level.
5. Pushdown accounting can affect financial ratios and metrics significantly, as it alters the reported asset values and could impact future earnings reports.

Review Questions

• How does pushdown accounting impact the financial statements of an acquired company?
  • Pushdown accounting impacts the financial statements of an acquired company by revaluing its assets and liabilities at fair value on its books. This change provides a clearer representation of its financial position post-acquisition, aligning its values with those reflected in the consolidated financial statements of the parent company. By adopting this method, stakeholders can better assess the performance and worth of the acquired company in light of the acquisition.
• What are some advantages and disadvantages of using pushdown accounting compared to traditional methods?
  • One advantage of pushdown accounting is that it simplifies financial reporting by aligning the subsidiary's books with the parent's consolidated financial statements. This approach can enhance transparency regarding asset valuations. However, a disadvantage is that it can result in significant fluctuations in reported earnings and equity due to the revaluation process, potentially obscuring true operational performance. Additionally, not all jurisdictions permit pushdown accounting, which may limit its applicability.
• Evaluate how pushdown accounting could influence investor decisions regarding a newly acquired subsidiary.
  • Pushdown accounting could greatly influence investor decisions by providing a more accurate view of a subsidiary's fair value immediately after acquisition. Investors might be drawn to entities that transparently reflect their actual asset worth through this method, as it aligns more closely with market realities. However, if investors perceive that pushdown accounting inflates reported values or introduces volatility into earnings reports, they may exercise caution. Understanding how pushdown accounting alters financial statements helps investors assess risks and opportunities associated with their investment choices.

Related terms

Acquisition method: A standard for accounting for business combinations that requires an acquirer to recognize and measure identifiable assets acquired and liabilities assumed at their fair values.

Fair value: The estimated price at which an asset would trade in a competitive auction setting, reflecting market conditions and information available at the time of measurement.

Goodwill: An intangible asset that arises when an acquirer purchases an entity for more than the fair value of its net identifiable assets, representing future economic benefits.