Saturday, September 1, 2012

US GAAP Requirement for Push Down Accounting

Had a recent comment that push down accounting wasn not mandatory under USGAAP, rather is was simply permitted in certain circumstances. In response to that previous comment, the FASB requirement for push down accounting is 805-50-S99-1. Readers of this part of the Codification will need to pay careful attention to the answer in question1, and not jump to conclusions that push down accounting is allowed (see question 2).

Following is the text of SAB Topic 5.J, New Basis of Accounting Required in Certain Circumstances.
Facts: Company A (or Company A and related persons) acquired substantially all of the common stock of Company B in one or a series of purchase transactions.

Question 1: Must Company B's financial statements presented in either its own or Company A's subsequent filings with the Commission reflect the new basis of accounting arising from Company A's acquisition of Company B when Company B's separate corporate entity is retained?

Interpretive Response: Yes. The staff believes that purchase transactions that result in an entity becoming substantially wholly owned (as defined in Rule 1-02(aa) of Regulation S-X) establish a new basis of accounting for the purchased assets and liabilities.

When the form of ownership is within the control of the parent the basis of accounting for purchased assets and liabilities should be the same regardless of whether the entity continues to exist or is merged into the parent's operations. Therefore, Company B's separate financial statements should reflect the new basis of accounting recorded by Company A upon acquisition (i.e., "pushed down" basis).