Question

In November 2014, the FASB issued ASU 2014-17, which became effective upon issuance. ASU 2014-17, which was codified into the pushdown accounting subsections of ASC 805-50, now provides both public and nonpublic entities with authoritative guidance on applying pushdown accounting.

pushdown accounting, address the following:

• Describe the concept of a “controlling financial interest.”
• How does the acquiree elect pushdown accounting?
• What do you feel is the most important consideration to decide on before making the election?

There is no further info. Please just answer based on what you know of the matter.

Answer 1

Controlling finanacial interest

THE MEANING OF CONTROL

The issue of when a subsidiary is sufficiently controlled by a parent to merit consolidated financial reporting goes back many years (see "A History of Consolidation Policy," below).

In the most recent step, FASB is trying to calm concerns by defining what constitutes control of an entity which, it says, will provide CPAs with better tools with which to analyze complex corporate structures. But is such a definition what critics really want? Some CPAs and other financial professionals believe existing standards are sufficient and adding more detail will only confuse financial report users.

That's not the opinion of FASB's Ronald Bossio, who is spearheading the drive for a new ED to define when entities should be included in consolidated financial statements. "We're trying to move away from the 'bright-line' mentality. It has been an arduous process, says Bossio, one he describes as "grinding." Jack Albert, associate to the SEC chief accountant, which has oversight responsibility for FASB, calls the push for a new ED "a work in progress," but adds, "it's safe to assume implementation guidance will be coming."

Under the rule CPAs currently follow, commonly called the bright-line rule, the condition for a controlling financial interest is ownership of a majority voting interest--unless control is temporary or does not rest with the owner of the majority voting interest. But the existing standard, FASB Statement no. 94, Consolidation of All Majority-Owned Subsidiaries , doesn't define control, temporary or otherwise. "The notion of control has always been in the literature, but it was never defined," says Larry Dodyk, a partner at PricewaterhouseCoopers.

The revised ED, Dodyk says, will give CPAs a better working definition of what constitutes control. "The new wording is certainly crisper than the original 1995 version, which almost suggested that the 50% threshold for control was moving lower; that was something some did not want to see happen," he says.

For several reasons, including the one Dodyk cites, the October 1995 ED failed to get FASB approval. But will the new ED get the required supermajority of five on the seven-member board? Patricia McConnell, a senior managing director at Bear, Stearns & Co., thinks so. "The new wording makes the exposure draft more operational, especially the wording on general partnerships," she says. "I would say there's a high probability this new wording will pass."

Push Down Accounting

Push down accounting is a convention of accounting for the purchase of a subsidiary at the purchase cost rather than its historical cost. This method of accounting is required under U.S. Generally Accepted Accounting Principles (GAAP), but is not accepted under the International Financial Reporting Standards (IFRS) accounting standards. Since the acquired company is consolidated into the parent company for financial reporting purposes, push down accounting appears the same on a firm's external financial reporting.

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.

consideration to decide on push down accounting

Both public and private companies can elect to use “pushdown” accounting when there’s a merger, acquisition or other change-in-control event. What does this mean — and when might this alternative reporting method be advantageous?

Understanding your options

Pushdown accounting refers to the practice of adjusting an acquired company’s standalone financial statements to reflect the acquirer’s accounting basis rather than the target’s historical costs. Typically, this means stepping up the target’s net assets to fair value and, to the extent the purchase price exceeds fair value, recognizing the excess as goodwill.

In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force). The updated guidance made pushdown accounting optional for all companies.

Reporting post-M&A performance

Whether pushdown accounting is appropriate depends on a company’s particular circumstances. For some companies, there may be advantages to reporting assets and liabilities at fair value and adopting consistent accounting policies for both the parent and subsidiary. Other companies may prefer not to apply pushdown accounting to avoid the negative impact on earnings, often associated with a step-up to fair value.

Previously, U.S. Generally Accepted Accounting Principles (GAAP) provided little guidance on when pushdown accounting might be appropriate. For public companies, SEC guidance generally prohibited pushdown accounting unless the acquirer obtained at least an 80% interest in the target, and it generally required pushdown accounting when the acquirer’s interest reached 95%. The SEC has rescinded portions of its pushdown accounting guidance, bringing it in line with the FASB’s new standard.

Weighing your options

For each individual change-in-control event, acquired companies must evaluate the option to apply pushdown accounting. And once pushdown accounting is applied, the election is irrevocable. Acquired companies that apply pushdown accounting in their standalone financial statements are required to include disclosures in the current reporting period to help users evaluate its effects. Contact our A&A specialists for help deciding whether to elect this reporting option.