Pushdown accounting is used in takeovers, where the cost of acquiring a company is marked on the books of the acquired company instead of the acquiring company. This method is legal under GAAP and can be beneficial for tax purposes and determining profitability, but can also result in losses during earnings reporting.
Pushdown accounting is a special type of accounting used exclusively in the takeover market when one company buys another. Normally, the money used to buy the second company would be marked on the books of the first company as a loss, but pushdown accounting means that the cost is marked on the books of the second company. This form of accounting is legal under Generally Accepted Accounting Principles (GAAP) and can be good or bad, depending on the terms of the acquisition.
When an acquisition is made, the acquiring company usually creates some form of debt. With pushdown accounting, the debt is recorded for the acquired company rather than the acquiring company. In terms of consolidated financial statements in which both companies will be compared together, it doesn’t matter where the debt goes, as it will show up regardless of the accounting method. This makes all the difference when it comes tax time and makes it easier to tell if the second company is making a profit or losing money. Legally, the debt still belongs to the first company, because that company owns both and is the company where the debt originated.
US GAAP requires the use of push-down accounting under certain parameters. If the second company assumes the entire debt of the first company, if the proceeds from the debt or equity are used to pay off the first company’s debt, or if the second company uses its assets as collateral for the first company, then press down Accounting should be used. Although these parameters are set for when pushdown accounting should be used, an acquiring company can legally use this accounting method if the parameters are not met.
When it is not required, there are two main reasons why this method of accounting would be used. One is because this accounting method will write off or reduce the debt when it is tax time. The second is because it will show whether the company can make more money than the first company spent to acquire it. If you can’t get out of debt, the first company will usually consider abandoning or selling it. Using pushdown accounting has one major drawback: Depending on how the second company was acquired and the jurisdictions involved in the company’s acquisition, it can cause the first company to lose more money during earnings reporting.
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