The term “push-down accounting” refers to the practice of revaluing acquired subsidiary assets and liabilities (current liabilities and long-term liabilities) at their fair values directly in the books of this subsidiary at the time of acquisition. If this practice is followed, the revaluations will be made once the books of the subsidiary at the time of acquisition and are therefore not consolidated Worksheets every time consolidated financial statements are prepared.

Those who prefer push-down accounting, argue that the change of ownership of the subsidiary in an acquisition is ground for adopting a new basis for accounting for the subsidiary’s assets and liabilities, and this new accounting basis should relate directly to the books of the subsidiary. This argument is most convincing if the subsidiary is 100% acquired or has its separate financial statements included in the parent’s statements.

On the other hand, if a subsidiary has a significant minority stake or the subsidiary has held bonds or preferred stock from the public, push-down accounting may not be suitable. Its use in financial statements issued to non-controlling shareholders or even those who hold bonds or preference shares, even have a new accounting basis, however, from the perspective of these financial statement users, the entity has not changed. From their opinion, push-down accounting leads to a revaluation of assets and liabilities of a continuous business, a practice that is normally unacceptable.

ASC 805-50-S99-2 requires push-down accounting for every business combination, the acquired subsidiary is a 100% owned (but only if it creates separate statements). It encourages but does not require a push-down accounting in situations where the subsidiary is a less than 100% owned, where the subsidiary has held outstanding debts or preferred shares from the public.

The revaluation of assets and liabilities in the books of a subsidiary involves an entry for debit or credit of each revalued asset and liability account with settlement to a revaluation capital account. The revaluation capital account is part of the equity of the subsidiary. Once the revaluations are made in the books of the subsidiary, the new carrying amounts of the assets of the subsidiary, including goodwill, are equal to the acquisition costs of the subsidiary. Thus, no difference arises in the Consolidation process. The entry to eliminate investments in a consolidation worksheet created immediately after the acquisition of a subsidiary and the revaluation of its assets its books might look like this:

Account NameDebitCredit
Capital Stock—SubsidiaryXXX
Retained EarningsXXX
Revaluation CapitalXXX
Investment in Subsidiary StockXXX

(Eliminate investment balance.)

Note that the Revaluation Capital account, as part of the subsidiary’s stockholders’ equity, is eliminated in preparing consolidated statements.

Push Down Accounting: Wholly Owned Subsidiary Example

When a subsidiary is acquired through a business combination, its assets and liabilities must be revalued to their fair value at the time of the combination for consolidated financial statements reporting. When push-down accounting is applied, revaluations at the time of the merger are made directly on the books of the subsidiary, and the worksheets do not require elimination entries for the differential.

The following example illustrates the consolidation process, in which assets and liabilities are revalued directly in the subsidiary’s books instead of using consolidation entries for the revaluation. Assume that Peerless Products buys all of Special Foods’ common stock for $ 370,000 in cash on January 1, 20X1. The purchase price is $ 70,000 over the book value of Special Foods. Of the total difference of $ 70,000, $ 10,000 relates to properties held by Special Foods, and $ 60,000 relates to buildings and equipment with a 10-year residual life. Peerless accounts for its stake in the Special Food stock using the equity method.
Peerless records the acquisition of shares in its books with the following entry:

Account NameDebitCredit
Investment in Special Foods370,000
Cash370,000

In contrast to a worksheet revaluation, the use of push-down accounting involves the revaluation of the assets on the separate books of Special Foods and alleviates the need for revaluation entries in the consolidation worksheet each period. If push-down accounting is used to revalue Special Foods’ assets, the following entry is made directly on its books:

Account NameDebitCredit
Land10,000
Buildings and Equipment 60,00060,000
Revaluation Capital70,000
(Record the increase in fair value of land and buildings.)

This entry increases the amount at which the land and the buildings and equipment are shown in Special Foods’ separate financial statements and gives rise to a revaluation capital account that is shown in the stockholders’ equity section of Special Foods’ balance sheet. Special Foods records $6,000 additional depreciation on its books to reflect the amortization over 10 years of the $60,000 write-up of buildings and equipment. This additional depreciation decreases Special Foods’ reported net income for 20X1 from $50,000 to $44,000.

Following entry removes the accumulated depreciation on the acquisition date so that the buildings an equipment appears at their current fair value with zero accumulated depreciation.

Account NameDebitCredit
Accumulated Depreciation300,000
Building & Equipment300,000

Peerless records its income and dividends from Special Foods on its parent-company books:

Account NameDebitCredit
Investment in Special Foods
44,000
Income from Special Foods44,000
(Record Peerless’ 100% share of Special Foods’ 20X1 income.)
Account NameDebitCredit
Cash
30,000
Investment in Special Foods30,000
(Record Peerless’ 100% share of Special Foods’ 20X1 dividend.)

The equity-method income recorded by Peerless is less than had push-down accounting not been employed because Special Foods’ income is reduced by the additional depreciation on the write-up of the buildings and equipment recorded on Special Foods’ books. Because the revaluation is recorded on the subsidiary’s books, Special Foods’ book value is then equal to the fair value of the consideration given in the combination. Therefore, no differential exists, and Peerless need not record any amortization associated with the investment. The net amount of income from Special Foods recorded by Peerless is the same regardless of whether or not push-down accounting is employed. The book value portion of the investment account can be summarized as follows:

Book Value Calculations:

 Total
Investment =
Common
Stock +
Retained
Earnings +
Revaluation
Capital
Beginning book value370,000 200,000 100,000 70,000
+ Net Income44,00044,000
– Dividends(30,000)(30,000)
Ending book value384,000 200,000 114,000 70,000

The basic elimination entry is very similar to the original example presented previously except that it must also eliminate Special Foods’ revaluation capital account and the income from Special Foods is $6,000 lower due to the extra depreciation on the revalued building:

Basic Elimination Entry:

Account NameDebitCredit
Common stock 200,000
Retained earnings 100,000
Revaluation capital 70,000
Income from Special Foods 44,000
Dividends declared 30,000
Investment in Special Foods 384,000

Again, because there is no differential with push-down accounting, the basic elimination entry completely eliminates the balance in Peerless’ investment account on the balance sheet as well as the Income from Special Foods account on the income statement.

push down accounting example entry T account

Consolidation Worksheet

Below is the consolidation worksheet prepared at the end of 20X1 and includes the effects of revaluing Special Foods’ assets. Note that Special Foods’ Land and Buildings and Equipment have been increased by $10,000 and $60,000, respectively. Also, note the Revaluation Capital account in Special Foods’ stockholders’ equity. Because the revaluation was accomplished directly on the books of Special Foods, only the basic elimination entry is needed in the worksheet
illustrated below.

December 31, 20X1, Equity-Method Worksheet for Consolidated Financial Statements, Initial Year
of Ownership; 100 Percent Acquisition at More than Book Value; Push-Down Accounting
Peerless ProductsSpecial FoodsElimination EntriesConsolidated
DRCR
Income Statement
Sales 400,000 200,000 600,000
Less: COGS (170,000) (115,000)(285,000)
Less: Depreciation Expense (50,000) (26,000) (76,000)
Less: Other Expenses (40,000) (15,000) (55,000)
Income from Special Foods 44,000 44,000 0
__________________________________________________________________________________________
Net Income 184,000 44,000 44,000 0 184,000
Statement of Retained Earnings
Beginning Balance 300,000 100,000 100,000 300,000
Net Income 184,000 44,000 44,000 0 184,000
Less: Dividends Declared (60,000) (30,000) 30,000 (60,000)
______________________________________________________________________________________________________
Ending Balance 424,000 114,000 144,000 30,000 424,000
Balance Sheet
Cash 140,000 75,000 215,000
Accounts Receivable 75,000 50,000 125,000
Inventory 100,000 75,000 175,000
Investment in Special Foods 384,000 384,0000
Land 175,000 50,000 225,000
Buildings & Equipment 800,000 360,000 1,160,000
Less: Accumulated Depreciation (450,000) (26,000) (476,000)
__________________________________________________________________________________________
Total Assets 1,224,000 584,000 0 384,000 1,424,000
Accounts Payable 100,000 100,000 200,000
Bonds Payable 200,000 100,000 300,000
Common Stock 500,000 200,000 200,000 500,000
Retained Earnings 424,000 114,000 144,000 30,000 424,000
Revaluation Capital 70,000 70,000 0
__________________________________________________________________________________________
Total Liabilities & Equity 1,224,000 584,000 414,00030,000 1,424,000