Pushdown accounting — the recording of a new basis in assets and liabilities in the stand-alone financial statements of a newly acquired subsidiary entity — has been addressed by the Securities and Exchange Commission (SEC), but the Financial Accounting Standards Board (FASB) has not previously provided guidance that would apply to all nonregistrants. Last week, that began to change as the FASB issued a Proposed Accounting Standards Update entitled Business Combinations (Topic 805): Pushdown Accounting.

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Pushdown accounting — the recording of a new
basis in assets and liabilities in the stand-alone
financial statements of a newly acquired subsidiary
entity — has been addressed by the Securities and
Exchange Commission (SEC), but the Financial
Accounting Standards Board (FASB) has not
previously provided guidance that would apply to all
nonregistrants.
Last week, that began to change as the FASB issued
a Proposed Accounting Standards Update entitled
Business Combinations (Topic 805): Pushdown
Accounting.
Existing Practice
SEC registrants currently apply the guidance provided
by the SEC staff, which requires an acquired company
to present its financial statements using the new
basis of accounting that arises from the acquisition
of substantially all of its common stock by another
company. The general requirement, as expressed by
the Staff, is that pushdown accounting must be used
when a noncontrolling interest of 5% or less exists
(95% or more of an entity is acquired). The staff
does not require or object to pushdown accounting
when there is a noncontrolling interest of greater than
5%, but not more than 20%. When a noncontrolling
interest exceeds 20%, the acquired entity is generally
May 2014
A Pushdown Accounting Proposal for All
no longer considered substantially wholly owned,
and the Staff generally objects to the application of
pushdown accounting.
For nonregistrants, U.S. Generally Accepted
Accounting Principles (GAAP) provides only limited
guidance on pushdown accounting. The result is
diversity in practice, with some entities electing not to
use pushdown accounting in any circumstance, and
others generally following the guidelines of the SEC
Staff.
Proposed GAAP
The proposal will permit an acquired entity (acquiree)
to pushdown a new basis of accounting to its financial
statements whenever an acquirer obtains control of
the acquiree. In contrast to the SEC Staffs guidance,
the proposed standard never requires the use of
pushdown accounting, and it permits the election of
push down accounting any time there is a change of
control, regardless of the percentage of noncontrolling
interest.
The election to apply pushdown accounting is done
each time there is a change in control, therefore an
acquiree may apply pushdown accounting at the
time it is acquired and not elect to apply pushdown
accounting on a subsequent change in control.
Change in control generally occurs when either a
majority of the voting interests of the acquiree are
obtained by an acquirer, or when the acquiree is a
variable interest entity and a new primary beneficiary

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
is identified.
The acquiree determines the new basis of accounting
by applying Topic 805 Business Combinations,
which requires the use of the acquisition method.
The acquisition method recognizes and measures
the identifiable assets acquired, liabilities assumed,
and any noncontrolling interest of the acquiree. If
the acquirer was not required to use the acquisition
method, for instance, the acquirer accounts for its
investment in the acquiree at fair value. The acquiree
may still elect to apply pushdown accounting and
record a new basis as if the acquisition method
applied.
For registrants, the proposal will not change the
requirements for pushdown accounting established
by the SEC Staff.
In addition to guidance on when pushdown accounting
may be elected, the FASB addressed three specific
accounting issues that have had a diversity of practice
when pushdown accounting is applied. The proposed
standard establishes:
• Goodwill that arises from the acquisition shall
be recorded in the acquiree’s separate financial
statements.
• Abargainpurchasegainarisingfromtheacquisition
shall not be recognized in the acquiree’s separate
financial statements.
• Acquisition-related debt incurred by the acquirer
shall not be recognized in the acquiree’s separate
financial statements, unless the acquiree is
required to recognize a liability for the debt under
other applicable GAAP.
If pushdown accounting is elected, the acquiree shall
make the disclosures required by Topic 805 Business
Combinations as applicable. If pushdown accounting
is not elected, the acquiree shall disclose that the
acquirer obtained control of the acquiree during the
reporting period and that the acquiree elected to
continue to use historical cost basis.
What Happens Next
The comment period on the proposed standard ends
on July 31, 2014. Those interested in commenting
may obtain a copy of the proposed standard and the
questions asked by the FASB at FASB.org.
After the comment period is completed, the Emerging
Issues Task Force (EITF) will study the comments
and consider any changes to the proposed standard.
The EITF will then vote to determine if they reach
consensus on a final standard. Any consensus is
submitted to the FASB for final approval.
For More Information
MHM’s Professional Standards Group will continue to
monitor progress on the issuance of a final Accounting
Standards Update.
If you have any specific questions, comments or
concerns, please share them with Ernie Baugh or
James Comito of MHM’s Professional Standards
Group or your MHM service professional. You can
reach Ernie at ebaugh@mhm-pc.com or 423.870.0511
and James at jcomito@cbiz.com or 858.795.2029.