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Push-down accounting" comes into play when one company purchases another. This technique involves putting the purchase costs on the books of the company being acquired, rather than the company doing the acquiring. Private companies aren't required to practice push-down accounting, but you may find it a useful way to evaluate performance.
Acquisitions and Statements
When a company has a controlling interest in one or more other firms, the parent company generally must prepare consolidated financial statements -- statements that treat both the parent and all the subsidiaries as a single, fully integrated company. For example, all the assets of all the companies appear on a single consolidated balance sheet, and all revenue appears on a single consolidated income statement. This is the case even if subsidiaries continue to operate as if they were independent. However, parent companies and subsidiaries also commonly maintain separate financial statements, so that managers can assess the performance of the companies independent of their links to each other. Push-down accounting relates to these separate statements.
Pushing Costs Down
In push-down accounting, the costs incurred to acquire a subsidiary company appear on the separate financial statements of the subsidiary rather than the parent. Say your company buys out another business for $200,000, and you finance part of the acquisition with a $100,000 loan. Under the push-down method, the liability for that debt will appear on the balance sheet of the subsidiary, not the parent, even though it was the parent that borrowed the money. Interest paid on the debt is an expense for the subsidiary, not the parent. These costs are "pushed down" from the parent to the subsidiary. Further, because you paid $200,000 for the subsidiary, then the subsidiary's net assets -- its assets minus liabilities -- must equal $200,000 after the sale. The purchase price, too, is being pushed down. This may require creating an intangible goodwill asset on the subsidiary's balance sheet to make everything come out even.
Why You'd Do It
Push-down accounting is about allocating costs between a parent company and its subsidiaries. Nothing changes in the parent's consolidated statements, since those statements make no distinction between parent and subsidiary. The prime advantage of push-down accounting is that it allows you, and any outsiders who may be interested, to look at the separate statements and evaluate the performance of a subsidiary in the context of what it cost to acquire that subsidiary. For example, you can judge the company's return on assets based on what you paid for those assets, or you can examine whether it's producing sufficient revenue to cover the costs of repaying the debt.
When to Use It
The Securities and Exchange Commission sets the rules for when companies should use push-down accounting. These rules apply only to public companies whose securities are registered with the SEC. Privately held companies are not required to use push-down accounting in any circumstances, although they certainly may do so if it helps them evaluate the performance of an acquired business. Public companies must use the push-down method for subsidiaries in which they have at least 95 percent ownership. If ownership is 80 percent or greater, push-down is optional. When the ownership stake is less than 80 percent, push-down is prohibited. If your company ever becomes an SEC-registered public firm, you may be required to revise previous statements to show push-down accounting.
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