Pushdown Accounting to Be Optional

• Published date: 01 March 2015
• Author: Paul Munter,Oscar J. Holzmann
• DOI: http://doi.org/10.1002/jcaf.22033
• Date: 01 March 2015

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© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22033

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Oscar J. Holzmann and Paul Munter

Pushdown Accounting to Be Optional

After more than two years

of deliberations, the Emerg-

ing Issues Task Force (EITF)

reached a consensus, and the

Financial Accounting Stan-

dards Board (FASB) endorsed

a standard that will permit enti-

ties to elect to either use or not

use pushdown accounting each

time there has been a change in

control over the entity. Push-

down accounting results in

applying the acquirer’s basis

in a newly acquired entity in

the financial statements of the

acquiree.

Prior to the new Account-

ing Standards Update (ASU),

there was limited guidance on

when pushdown accounting

should be applied other than

guidance by the Securities and

Exchange Commission (SEC)

that was applicable to SEC

registrants but not to privately

held entities resulting in diver-

sity in practice, particularly

among private entities. Of

course, because the new FASB

standard is elective, it will not

reduce the existing diversity in

practice among private entities

and would result in additional

diversity in practice among

SEC registrants.

PREVIOUS GUIDANCE ON

PUSHDOWN ACCOUNTING

In Staff Accounting Bulletin

(SAB) Topic 5.J, the SEC staff

expressed its view that push-

down accounting was required

to be applied by an SEC regis-

trant when the entity became

“substantially wholly owned.”

1

SAB Topic 5.J further explained

that in situations where the

acquiree was not substantially

wholly owned, “the staff recog-

nizes that the existence of out-

standing public debt, preferred

stock or a significant noncon-

trolling interest in a subsidiary

might impact the parent’s ability

to control the form of owner-

ship. Although encouraging its

use, the staff generally does not

insist on the application of push

down accounting in these

circumstances.”

The SEC staff later stated

that in applying the guidance

of SAB Topic 5.J, pushdown

accounting was required in cir-

cumstances where 95% or more

of the entity’s ownership interest

is acquired. If 80% to 95% of its

ownership interest was acquired,

then pushdown was permitted

but not required, and if less than

80% of its ownership interest

was acquired, then pushdown

accounting generally was pro-

hibited.

2 Additionally, the SEC

staff introduced the concept of

a collaborative group in evaluat-

ing what portion of an entity’s

ownership interest had been

acquired. A collaborative group

is defined as a group of investors

that “both ‘mutually promote’

the acquisition and ‘collaborate’

on the subsequent control of

the investee company.” The SEC

staff provided a list of indica-

tors that should be considered in

determining whether the rebut-

table presumption is overcome,

but the evaluation nevertheless

involved significant judgment in

many cases.

CONSEQUENCES OF SEC

GUIDANCE

Because the SEC guid-

ance was applicable only to

SEC registrants, application

of pushdown accounting was

mixed among private entities.

This created a problem when a

private company that had been

previously acquired wanted to

“go public.” When that private

company filed its registration