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:
|Investment in Subsidiary Stock||XXX|
(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:
|Investment in Special Foods||370,000|
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:
|Buildings and Equipment 60,000||60,000|
|(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.
|Building & Equipment||300,000|
Peerless records its income and dividends from Special Foods on its parent-company books:
|Investment in Special Foods ||44,000|
|Income from Special Foods||44,000|
|(Record Peerless’ 100% share of Special Foods’ 20X1 income.)|
|Investment in Special Foods||30,000|
|(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:
|Beginning book value||370,000||200,000||100,000||70,000|
|+ Net Income||44,000||44,000|
|Ending book value||384,000||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:
|Income from Special Foods||44,000|
|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.
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
|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 Products||Special Foods||Elimination Entries||Consolidated|
|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|
|Statement of Retained Earnings|
|Less: Dividends Declared||(60,000)||(30,000)||30,000||(60,000)|
|Investment in Special Foods||384,000||384,000||0|
|Buildings & Equipment||800,000||360,000||1,160,000|
|Less: Accumulated Depreciation||(450,000)||(26,000)||(476,000)|
|Total Liabilities & Equity||1,224,000||584,000||414,000||30,000||1,424,000|