What it means
When a company is acquired, the buyer usually records the purchase at fair value in its group accounts. That means the acquired assets and liabilities are valued at what they are worth today, and any extra price paid is recorded as goodwill (the premium paid over the fair value of the identifiable net assets).
Without push down accounting, the acquired company's own books continue to show the old historical costs. With push down accounting, the subsidiary adopts the buyer's new basis in its own separate financial statements.
Its buildings, brands and customer contracts are revalued, goodwill appears on its balance sheet, and its equity is reset to match the price paid. The subsidiary's accounts then tell the same story as the group's.
Why would a company do this? Lenders, regulators and minority shareholders often rely on the subsidiary's stand-alone statements, and consistent numbers avoid confusion.
It can also simplify reporting, because the group does not need to keep two sets of values for the same business. The effect on profit is real.
Higher asset values mean higher depreciation and amortisation (the gradual write-off of asset costs) in the subsidiary's income statement, so its reported profit falls compared with before the deal. Managers who are measured on the subsidiary's profit should be told in advance so they are not caught out.
Whether push down accounting is required or optional depends on the accounting framework and on how much of the company the buyer acquired. Under US rules, it is generally allowed or encouraged when the buyer gains control, and the choice is an election rather than a requirement for many entities.
Other frameworks treat it differently, so the local rules need to be checked. A nuance is that push down accounting changes the subsidiary's separate accounts only.
The group's consolidated accounts look the same either way, because the buyer has already recorded the acquisition at fair value. The difference lies in how the individual company reports itself.
In practice
Real-world examples.
Example
A private equity fund buys a manufacturing company for $12,000,000 and the company has a bank loan that requires audited financial statements. The fund elects push down accounting so the company's own accounts show the revalued machinery and goodwill. The lender can then see a balance sheet that reflects the real purchase price.
Example
A listed software group acquires a smaller competitor and the competitor continues to file separate statements with a regulator. After push down accounting, its capitalised customer contracts are amortised in its own income statement. Its reported profit falls for the next few years, and the management team is told the change is accounting rather than operational.
Example
A bank acquires a regional lender and wants the lender's regulatory reports to match the purchase price. It pushes down the fair values of the loan book and deposits. The lender's equity now reflects the amount paid, which makes capital ratios easier to explain.
Formula
Calculation
Goodwill = purchase price - fair value of identifiable net assets
Step-up in net assets = fair value of identifiable net assets - book value of net assets before the deal
Suppose a buyer acquires 100% of a company for $12,000,000. The target's books show net assets of $6,000,000, but the fair value of its identifiable net assets is $9,000,000. Goodwill = 12,000,000 - 9,000,000 = $3,000,000. The step-up is 9,000,000 - 6,000,000 = $3,000,000, so with push down accounting the subsidiary's own balance sheet now shows identifiable net assets of $9,000,000 plus goodwill of $3,000,000, giving total equity of $12,000,000. Deferred tax effects are ignored here for simplicity.Case study
Seen in the real world.
Oakridge Logistics is an illustrative, fictional freight company bought by a larger transport group for $20,000,000. Its books showed net assets of $11,000,000, but a valuation put the fair value of its trucks, depots and customer contracts at $15,000,000. The remaining $5,000,000 of the price was goodwill.
The group chose push down accounting so that Oakridge's own statements, which were still shared with a banking partner, matched the group's view. The step-up of $4,000,000 in net assets increased annual depreciation and amortisation by about $800,000. Oakridge's reported profit dropped by that amount even though trucks still ran the same routes.
The illustrative lesson was one of communication. Oakridge's managers, whose bonuses were tied to profit, were told in advance that the lower figure came from the accounting reset, and their targets were adjusted so they were judged on cash performance instead.
Watch out
Common mistakes.
- Assuming push down accounting changes the group's consolidated results, when it only changes the subsidiary's own separate accounts.
- Forgetting that higher asset values lead to higher depreciation and amortisation, which lower the subsidiary's reported profit.
- Assuming push down accounting is always compulsory, when under many frameworks it is an election depending on ownership level and local rules.
Questions
People also ask.
What is the difference between push down accounting and purchase accounting?
Purchase accounting records the acquisition at fair value in the buyer's accounts, while push down accounting also records those values in the acquired company's own accounts.
Does push down accounting change cash?
No, it is an accounting presentation and does not affect cash, taxes paid or the real operating performance of the business.
Why do lenders care?
Lenders often rely on the subsidiary's separate accounts, so a balance sheet that reflects the actual purchase price gives them a more meaningful picture of its net worth.
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