Push-down accounting works like this:
Company A pays more than Company B’s book value for the following:
$1,000 Property, plant and equipment and definite lived intangibles
$ 500 Goodwill
Instead of making the entry for the fair market value increments (i.e. excluding book value) to Company A’s books for the purchase, which (simplified) would be--
Dr PP&E $1,000
Dr Goodwill $ 500
Cr Debt $1,500
--Company A makes the above entry in Company B’s legal entity books, instead of its own books.
The entry being made in Company B’s books makes no difference to the consolidated financial statements.
The entry above is generally attributable to the subsidiary, Company B, but was originally, and still likely legally, the parent's entry. U.S. GAAP requires push down accounting.
The Securities and Exchange Commission (SEC) has issued a bulletin stating that debt should be pushed down if "(1) Company B is to assume the debt of Company A either presently or in a planned transaction in the future; (2) the proceeds of a debt or equity offering of Company B will be used to retire all or a part of Company A's debt; or (3) Company B guarantees or pledges its assets as collateral for Company A's debt." "Push Down" Basis of Accounting for Parent Company Debt Related to Subsidiary Acquisition, SEC Staff Accounting Bulletin No. 73 (Dec. 30, 1987).
In situations where a corporation has incurred debt in connection with its acquisition of stock of another corporation and these criteria are not met or where the SEC rules are not applicable to the transaction, push down of debt, while not required, is still an acceptable accounting method.
Some corporations have, as an accounting practice, simply placed Company A's interest expense on B’s books. This is generally not acceptable for tax purposes, although could be acceptable in some circumstances. The rules and related jurisprudence are complex.
One common reason for push down accounting is more for management accounting purposes, since Company B would take deductions from income for depreciation, amortization on the fair market value increments and for interest expense.
Push down accounting may not be acceptable under IFRS on transition. So if a company has pushed down fair market value increments into subsidiaries, because the IFRS 1 business combination exemption is available only for business combinations in which the reporting entity is the acquirer, if the reporting entity is itself a subsidiary and its balance sheet reflects the effects of push down accounting from prior acquisitions, those amounts may have to be reversed upon adoption of IFRS. However, a previous revaluation done for purposes of push down accounting can be used as deemed cost in the case of property, plant and equipment, investment property, and certain intangible assets.
More on this topic later.
