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Journal entry — EITF adds issue to its agenda to address pushdown accounting

Published on: May 22, 2012

On May 14, 2012, the EITF Agenda Committee added Issue 12-F1 to its agenda.

Currently, there is limited U.S. GAAP guidance on determining when an acquiring entity can establish a new accounting and reporting basis (pushdown) in the acquired entity's stand-alone financial statements. For SEC registrants, SAB Topic 5.J,2 EITF Topic D-97,3 and ASC 805-50-S99-1 through S99-44 contain pushdown accounting requirements. However, because only SEC registrants are required to apply this guidance, there is diversity in practice in how other nonpublic entities or non-SEC registrants apply pushdown accounting.

The current guidance for SEC registrants is fairly prescriptive and indicates that if a transaction results in an entity’s becoming substantially wholly owned, its stand-alone financial statements should be adjusted to reflect the basis of accounting of the acquiring entity. In addition, ASC 805-50-S99-2 states that pushdown accounting is “required if 95 percent or more of the company has been acquired (unless the company has outstanding public debt or preferred stock that may impact the acquirer’s ability to control the form of ownership of the company), permitted if 80 percent to 95 percent has been acquired, and prohibited if less than 80 percent of the company is acquired.” Moreover,
ASC 805-50-S99-2 states, in part, that “[t]he SEC Staff believes that push-down accounting would be required even though the subsidiary became wholly owned for only a short time.”

The EITF agenda report indicates that the issue the Task Force is trying to resolve is “[w]hether an acquired entity should establish a new accounting basis in its standalone financial statements due to a change in its ownership as a result of a purchase transaction accounted for as a business combination [footnote omitted] by the acquiring entity. If so, the level of change in ownership at which the new accounting basis should be required.”

Three alternative views on this issue were presented to the EITF Agenda Committee:

1.     “A new accounting basis should be established when an acquiring entity obtains substantially all [footnote omitted] of the controlling financial interests in an acquired entity” and therefore has “control over the form of the acquired entity” (commonly considered to be 90 percent or more).

2.     “A new accounting basis should be established when an acquiring entity obtains control [footnote omitted] and consolidates the acquired entity's financial statements” in accordance with ASC 810.

3.     “A new accounting basis should not be established in an acquired entity's standalone financial statements due to a change in its ownership as a result of a purchase transaction accounted for as a business combination by the acquiring entity.”

Editor’s Note: If this EITF Issue is finalized, it would apply to both public and nonpublic entities. This could potentially have a significant impact on entities that are not currently required to apply the SEC’s pushdown guidance (i.e., non-SEC registrants).

The EITF plans to discuss Issue 12-F at a future meeting.

 


[1] EITF Issue No. 12-F, “Recognition of New Accounting Basis (Pushdown) in Certain Circumstances.”

[2] SEC Staff Accounting Bulletin Topic 5.J, “New Basis of Accounting Required in Certain Circumstances.”

[3] EITF Topic No. D-97, “Push-Down Accounting.”

[4] For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

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