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Inter corporate Investments in marketable securities are categorized

as
1. Investments in financial assets (when the investing firm has no
significant control over the operations of the investee firm)
2. Investments in associates (when investing company has
significant influence over the operations of the investee firm, but
not control)
3. Business Combinations (when investing company has control over
the operations of the investee firm)

Ownership

Degree of
Influence

Accounting Treatment

Less than 20%


No significant
(investment in financial influence
Assets)

Held to maturity (Debt


Securities), Available for sale,
Held for trading or
designated at Fair Value
(through Profit and Loss
account)

20% - 50% (Investment Significant


in associates)
Influence

Equity Method

More than 50%


(Business
Combinations)

Control

Acquisition Method

50%/50%

Shared Control

IFRS : Proportionate
Consolidation preferred
US GAAP : Equity Method

Investment in Associates
Conditions for Significant influence
1.
2.
3.
4.
5.
6.

20% to 50% investment


Representation on the board of directors
Participation in the policy making process
Material transactions between investor and the investee
Interchange of managerial personnel; or
Technological dependency

Equity Method : Under Equity Method of accounting, the


investment is initially recognized at cost and is increased
(decreased) to recognize the investors share of the
investees profit (loss) and decreased by any distributions
(dividends) received from the investee after the acquisition
date.
As a result the change in investment account reflects the investors
proportionate share of change in the investees net assets. The
investor also reports its share of investees profit and loss
on its income statement.

Investment cost that


exceeds the Book Value
of the Investee

The cost (purchase price ) to acquire shares is greater than the book
value of those shares. IFRS allows an entity to measure its PPE using
historical cost or FV (less accumulated depreciation). US GAAP however
requires the use of historical cost to measure PPE (less accumulated
depreciation).
When cost of Investments > investors proportionate share of
investees net identifiable assets, the difference is first allocated
to specific assets. These differences are then amortized to investors
proportionate share of investees profit and loss account over the
economic life of assets, whose FV exceeds historical value. This
allocation is not a formally recorded: the first impact is the investment
account on the B/sheet of investor is the COST Over time, as the
differences are amortized, the balance in investment account will come
closer to representing the ownership % of the BV of net assets of
associate.
The difference between COA and investors share of FV of net identifiable
assets as Goodwill and is not amortised.( both US GAAP and IFRS)
Goodwill is reviewed for impairment on regular basis and written
down for any identified impairment. Goodwill is included in carrying

The excess purchase price allocated to assets and liabilities is accounted for in
the manner that is consistent with the accounting treatment for that asset
or liability to which it is assigned. Amounts allocate to assets and liabilities
that are expensed (inventory) or periodically depreciated or amortised (PPE
or intangible assets) must be treated in similar manner.

These allocated amounts are not reflected on the financial statements of the
investee and the investees income statement will not reflect the necessary
periodic adjustments. Therefore, the investor must directly record these
adjustment effects by reducing its share of investees profit recognized on
its income statement. Amounts allocated to assets or liabilities that are not
systematically amortized (e.g. land) will continue to be reported at their fair
value as of the date the investment instead of being separately recognized.
It is not amortized since it is considered to have an indefinite life.
If the investors share of the fair value of the associates net assets
(identifiable assets, liabilities and contingent liabilities) is greater
than the cost of the investment, the difference is excluded from the
carrying amount of the investment and instead included as income in the
determination of the investors share of the associates profit or loss in the
period in which the investment is required.

Fair Value Option


Both IFRS(39) and U.S. GAAP (SFAS 159) give the investor the option to
account for their equity method investment at fair value.
U.S. GAAP this option is available to all entities; however,
under IFRS , its use is restricted to venture capital organizations, mutual
friends and similar entities, including investment-linked insurance funds.

Both standards require that the election to use the fair value option occur
at the time of initial recognition and is irrevocable. Subsequent , to initial
recognition, the investment is reported at fair value with unrealized
gains and losses arising from changes in fair value as well as any
interest and dividends received included in the investors profit or
loss (income). Under the fair value method, the investment account on
the investors balance sheet does not reflect the investors proportionate
share of the investees profit or loss, dividends, or other distributions. In
addition, the excess of cost over the fair value of the investees
identifiable net assets is not amortized, nor is the goodwill created.

Alternative way of calculating year end investment :


% acquired X ( book value of net assets beginning of year +
Net Income Dividends + Unamortized excess purchase price
= 30% x (200,000 + 100,000 60,000) + (20,000 1,500) =
90,500

QUESTION
Assume A Co. acquires 30% of outstanding shares of B co. At the
acquisition date, book values and fair values of Bs recorded assets
and liabilities are as follows :
Book Value
Fair Value
Current Assets

$ 10,000

$ 10,000

Plant And
Equipment

190,000

220,000

Land

120,000

140,000

$320,000

$370,000

Liabilities

100,000

100,000

Net Assets

$220,000

$270,000

A co. believes the value of B co. is higher than the fair value of its
identifiable net assets. They offer $ 100,000 for a 30% interest in B
co. Part of the excess purchase price is attributable to the $ 50,000
difference between Book value and fair value of the identifiable
assets and so the remaining amount is attributable to goodwill.

Question
On 1st January P company acquired 20 % of R co. common shares for
the cash price of $ 500,000. It is determined that P co. has the ability
to exert significant influence on R cos financial and operating
decisions. The following information concerning R cos assets and
liabilities on 1 January 2009 is provided :
Book Value
Fair Value
Difference
Current Assets

100,000

100,000

1,900,000

2,200,000

300,000

2,000,000

2,300,000

300,000

Liabilities

800,000

800,000

Net Assets

1,200,000

1,500,000

300,000

Plant And
Equipment

The plant and equipment are depreciated on straight line basis and
have 10 years of remaining life. R co. reports net income of 2009 of $
100,000 and pays dividends of $ 50,000.
Calculate
a) Goodwill included in purchase price
b) Investment in associates at the end of 2009

Impaired
The impairment loss is recognized on the income statement and the
carrying amount of the investment on the balance sheet is either
reduced directly or through the use of an allowance
account. As per IFRS
U.S. GAAP takes a different approach. If the fair value of the
investment declines below its carrying value and the decline is
determined to be permanent, U.S. GAAP requires an impairment
loss to be recognized on the income statement and the carrying
value of the investment on the balance sheet is reduced to
its fair value.
Both IFRS and U.S. GAAP prohibit the reversal of impairment
losses even if the fair value later increases.

Impairment of Investments in Associates


Equity Method investments must be tested for impairment. If the fair
value of the investment falls below the carrying value (investment
account on the balance sheet) and decline is considered
permanent, the investment is written down to fair value and a loss

TRANSACTION WITH THE INVESTEE


The profit from these transactions must be deferred until the profit is
confirmed through use of sale to third party.
Transactions can be described as upstream (investee to
investor) or downstream (investor to investee).
In an upstream sale , the investee has recognized all of the profit in the
income statement. However, for the profit that is unconfirmed (goods
have not been used or sold by the investor); the investor must
eliminate its proportionate share of the profit from the equity income of
the investee.
In the downstream sale the investor has recognized all the profit in the
income statement, so the investor must eliminate the proportionate
share of unconfirmed profit.
US GAAP and IFRS both require the unearned profits to be eliminated to
the extent of investors interest in the associate.

Example : Investor owns 30% of investee. During the year,


investee sold goods to investor and recognized $ 15000 of profit
from the sale. At year end, half of the goods purchased from Investee
remained in Investors inventory.
All of the profit is included in Investees Net Income. Investor must
reduce its equity income $ 2,250 ($ 15000 X 50% X 30%).

Example Investor owns 30% of investee. During the year,


investor sold $40,000 of goods to investee for $ 50,000.
Investee sold 90% of goods by year end.
IN this case 10% of profit remains in investees Inventory. Investor must
reduce its equity income by proportionate share of unconfirmed profit
of $ 300 ($ 10000 X 10% X 30%). Once Investee sells the remaining
inventory, investor can recognize $ 300 of profit.

Issues for ANALYSTS


1. Analyst should question whether equity method is appropriate
2. One line consolidation in equity method does not reflect significant
assets and liabilities of investee in investors B/sheet. And income
for associate is included in investor net income but not specifically
included in sales. By ignoring Investees debt, leverage is lower
or debt equity ratio is lower. IN addition, margin ratios are
higher since the invetees revenues are ignored.
3. Quality of equity method earnings must be considered. Equity
method assumes % of each dollar earned by investee is earned by
investor even if cash is not recd. Analyst should consider potential
restrictions on dividend cash flows.

Business Combinations

Business Combinations
Merger : The distinctive feature of merger is that only one of the
entities remain in existence. The Net assets of company B are
transferred to company A. Company B ceases to exist.
Company A + Company B = Company A
Acquisition : Both companies continue to exist in a parentsubsidiary relationship. It may or may not acquire 100% share of the
target company. If it acquires less than 1005 share of target
company, Noncontrolling Interest or Minority Interest are reported on
the consolidated financial statements.
Company A + Company B = (Company A + Company B )
Consolidation : A new legal entity is formed and none of the
predecessor entities cease to exist.
Company A + Company B = Company C
Special Purpose entities : A special purpose or variable interest
entity is typically created for single purpose by sponsoring company.
The equity investor may lack control and when control effectively
remains with the sponsoring company

ACCOUNTING METHOD
1. Pooling of Interest Accounting Method : Under IFRS, pooling of
ineterest method, combines the ownership interest of two entities. The
assets and liabilities of two entities are simply combines. Key attributes
of pooling method includes the following :

The two firms are combined using historical book value. (Fair
Value plays no role in accounting for a business combination)

Operating results for prior periods are restated as though the


two firms were always combined.

Ownership interest continue, and former accounting bases are


maintained.
2. In purchase or acquisition method , the purchase is viewed as
purchase of net assets, and those of net assets recorded at fair
values. An increase in the value of depreciable assets resulted in
additional depreciation expense. As a result, for the same level of
revenue, the purchase method resulted in lower reported income then
pooling of interests method.
Fair value of net assets acquired at the acquisition date is the
appropriate measurement for acquisitions. The fair value is usually
equal to consideration given by the acquiring firm. Direct costs of the

The major issues that arise in business combination and


preparation on consolidated financial statements are :
1. Recognition and measurement of Identifiable assets and
Liabilities :IFRs and US GAAP require that the acquirer measure the
Identifiable assets and Liabilities at FAIR VALUE as on date of
acquisition. The acquirer must also recognize any assets and
liabilities that the acquiree has not previously recognized as assets
and liabilities.
2. Recognition and measurement of Contingent Liabilities : IFRS
include contingent liabilities if the Fair Value can be reliably
measured. US GAAP includes only those contingent liabilities that
are probable and can be reasonably estimated. Contingent Liabilities
is recognized if 1) it is a present obligation that arises from past
events 2) it can be measured reliably. Cost that the acquirer expects
(but is not obliged) to incur are not recognized as liabilities as of the
acquisition date. Instead these cost are recognized when incurred.

3. Recognition and measurement of Indemnification Assets


The seller in a business combination may contractually
indemnify the acquirer for the outcome of a contingency or
uncertainty related to all or part of a specific asset or
liability. For example, the seller may indemnify the
acquirer against losses above a certain amount on a
liability arising from a particular contingency, such as legal
action or income tax uncertainty. As a result, the acquirer
obtains an
indemnification asset. [IFRS 3:27]
IFRS 3 requires the acquirer to recognise an indemnification asset at
the same time that it recognises the indemnified item and that the
indemnification asset be measured on the same basis as the
indemnified item, assuming that there is no
uncertainty over the recovery of the indemnification asset. Therefore,
if the indemnification relates to an asset or liability that is
recognised at the acquisition date and that is measured at fair
value, the acquirer should recognise the indemnification asset at

4. Recognition
and measurement of Financial Assets and
Liabilities : Acquirer can reclassify the financial assets on the
basis of contractual terms , economic conditions, and the
acquirers operating or accounting policies and other pertinent
conditions that exist on acquisition date.
5. Recognition and measurement of Goodwill : Value that the
acquirer sees in the acquiree beyond the Fair value of acquirees
tangible and identifiable intangible assets. Under IFRS Goodwill is
recognized as the Fair Value of the acquisition less than the
acquirers share of the fair value of all identifiable
tangible and intangible assets, liabilities and contingent
liabilities acquired. This is referred as PARTIAL GOODWILL. US
GAAP considers the entity as whole. Goodwill is recognized as the
Fair Value of the acquisition less than the fair value of all
identifiable tangible and intangible assets, liabilities and
contingent liabilities acquired. This is referred as FULL GOODWILL.
IFRS also permits this 100 % goodwill under full goodwill option
on a transaction by transaction basis. Net income is not
effected by whichever method we use for Goodwill. The
impact on ratios would be different ROA and ROE in full

6. Minority Interest or Non Controlling Interest (NCI)


Classified (same as per US GAAP AND IFRS)on consolidated
Balance Sheet as a separate component of stockholders Equity.
For Valuation IFRS and US GAAP differ. IFRS the NCI is valued
either at FV method (full Goodwill) or NCI;s proportionate share of
acquirees identifiable net assets (partial Goodwill). Under US
GAAP, the parent must use full goodwill method and NCI value
NCI at Fair Value.
7. Recognition and measurement when Acquisition Price is less
than the Fair Value : In acquisition process if Purchase price is
less than the FV of targets net assets, the acquisition is
considered to be bargain acquisition. Negative Goodwill is
generated. Any contingent consideration must be measured and
recognized at FV at the time of business combination. Any
subsequent changes in the value of contingent considerations are
recognized in profit and loss account. As per both US GAAP and
IFRS any difference between FV of the net assets acquired and
purchase price is recognized immediately as gain in profit or loss.

Goodwill

Example
Missile has acquired a subsidiary on 1 January 2008. The fair value
of the net assets of the subsidiary acquired were $2,170m. Missile
acquired 70% of the shares of the subsidiary for $2,145m. The noncontrolling interest was fair valued at $683m.
Goodwill based on the partial and full goodwill methods under IFRS 3
(Revised) would be:
Full goodwill

Missile - partial goodwill


Identifiable net assets - fair value 2,170

Identifiable net assets - fair value 2,170

Non-controlling interest
(30% x 2,170)

(651)

Non-controlling interest

(683)

Net assets required

1,487

Net assets required

1,519

Purchase consideration

(2,145)

Purchase consideration

(2,145)

Goodwill

626

Goodwill

658

QUESTI
ON

Soluti
on

QUESTION

Franklin Book
Value

Jeffereson
Book Value

Jeffereson
Fair Value

Cash and
Receivable

10,000

300

300

Inventory

12,000

1,700

3,000

PP&E (Net)

27,000

2,500

4,500

49,000

4,500

7,800

Current Payables

8,000

600

600

Long term Debt

16,000

2,000

1,800

24,000

2,600

2,400

25,000

1,900

5,400

5,000

400

Net Assets
Shareholder Equity;
Capital stock (1
par)

Additional paid in
6,000
700
capital co acquired 100%of outstanding shares of Jefferson by issuing
Franklin
1,000,000
shares of 1$
(15 $ Market Value).
Retained Earnings
14,000
800Show the Balances in post
combination method Under Acquisition Method.

SOLUTION

Fair Value of stock issued

15,000,000

Book Value of Jeffersons Net


Assets

1,900,000

Excess Purchase Price

13,10,000

Fair Value of Stock Issued

15,000,000

Fair Value allocated to identifiable


assets

5,400,000

Goodwill

9,600,000

Franklin Consolidated Balance Sheet 000


Cash and Receivable

10,300

Inventory

15,000

PP&E (Net)

31,500

Goodwill
Total Assets
Current Payables

9,600
66,400
8,600

Long term Debt

17,800

Total Liabilities

26,400

Capital stock (1 par)

6,000

Additional Paid in capital

20,000

Retained Earnings

14,000

Total Stockholders Equity

40,000

Total Liabilities and Stockholders Equity

66,400

QUESTION

parent Book
Value

Subsidiary
Book Value

Subsidiar
y
Fair Value

Cash and
Receivable

40,000

15,000

15,000

Inventory

125,000

80,000

80,000

PP&E (Net)

235,000

95,000

155,000

400,000

190,000

2,50,000

Current Payables

55,000

20,000

20,000

Long term Debt

120,000

70,000

70,000

175,000

90,000

90,000

2,25,000

1,00,000

160,000

Net Assets
Shareholder Equity;

Capital stock (1
87,000
34,000
par)
Parent
co acquired 90%of outstanding shares of Subsidiary in exchange
Retained
138,000
66,000
for
sharesEarnings
of Parent Co.
no par common stock
with FV of 180,000 . The
FMV of subsidiary shares on the date of the exchange was 2,00,000.

Full Goodwill
Method
Cash and Receivable

Partial Goodwill
Method

55,000

55,000

Inventory

205,000

205,000

PP&E (Net)

390,000

390,000

40,000

36,000

690,000

686,000

75,000

75,000

Long term Debt

190,000

190,000

Total Liabilities

265,000

265,000

20,000

16,000

Capital stock

267,000

267,000

Retained Earnings

138,000

138,000

Total Equity

425,000

421,000

Total Liabilities and


Shareholders Equity

690,000

686,000

Goodwill
Total Assets
Current Payables

Shareholder Equity :
Non Controlling Interests

Joint Ventures are defined differently in US GAAP and IFRS. IFRS


identify the following common characteristics of Joint Venture (1)
contractual agreement exists between two or more venturers and
2) the contractual agreement established the joint control. The 3
types of JV identified under IFRS are
1. Jointly controlled operations : 2 or more ventures combined their
operations, resources expertise to manufacture, market and distribute
jointly a particular product. No separate entity is established. Each
venture recognises in F/Statements the assets that it controls, the
liabilities and expenses incurred and the share of revenue generated
by JV.
2. Jointly controlled assets : The venture jointly owns or jointly control the
assets. These assets are used to obtain the benefits for the venturers..
Each venturer recognises in its own accounting records and F/
statements its share of controlled assets and liabilities it has incurred
on behalf of those assets as well as its share of jointly incurred
liabilities, any profit earned from use of its share of jointly controlled
assets, together with its share of any expense incurred by JV. In
addition it recognises any expense it has incurred in respect of its
interest on JV.
3. Jointly controlled entities : Involves the establishment of separate
entity in which each venturer has an interest. The project or venture is

Under US GAAP the term joint venture refers only to jointly controlled
separate entity in which business activities are conducted . A corporate
JV is a corporation that is owned and operated by 2 or more venturers as
a separate and specific business for the mutual benefit of venturers. APB
requires use of EQUITY METHOD to account for JVs. Proportionate
consolidation s not generally permitted except for unincorporated
entities operating in certain industries.
Proportionate consolidation requires ventures share of assets and
liabilities, income and expenses of JV to combine line by line, in contrast
with equity method results in single line item (Equity income of JV) on
income statement and single line item (investment in JV) on the balance
sheet.
THE TOTAL INCOME RECOGNISED IS IDENTICAL UNDER TWO
METHODS. ALSO THE TOTAL NET ASSETS of the investor is
IDENTICAL UNDER BOTH METHODS. There can be significant
differences, however, in ratio analysis because of different effects on
values of Total assets, liabilities, sales, expenses.

EFFECT ON
RATIOS Proportionate
Equity Method

Acquisitio
Consolidation n Method
Method

Leverage

Lower (more
In - between
Favorable) Liabilities
are lower and equity
is the same

Higher

Net Profit Margin Higher Sales are


lower and Net Income
is the same

In - between

Lower

ROE

Higher Equity is
lower and Net Income
is the same

Same

Lower

ROA

Higher Net Income


is the same and
assets are lower

In - between

Lower

QUESTION
On 31st March 2002, Sun company was merged into Moon Company. As
per the condition , Moon Company issued 4,00,000 shares of its
common stock of Rs 10 each when its market value was Rs 18 per
share in exchange of ll outstanding shares of Sun Ltd. The stockholder
equity section in the balance sheet of these companies immediately
before the merger was as follows :
If the merger qualifies for treatment as a purchase than on 31st March
2002, what amount should be reported in consolidated balance sheet
as the value of additional paid in capital?
Moon

Sun

Common Stock

60,00,000

30,00,000

Additional Paid in capital

26,00,000

3,00,000

50,000,000

17,00,000

1,36,00,00
0

50,00,000

Retained Earnings

QUESTION
On 1st April , Big company acquired small company by issuing
2,00,000 shares of Rs 10 each in exchange of all outstanding shares
of small company. The business combination is accounted by
following as a pooling of interest. On the same day the fair value of
each common share of Big company was RS 19. Other information is
as follows :
Carrying Amount

Fair Value

Cash

4,80,000

4,80,000

Receivables

5,40,000

5,40,000

Inventory

8,70,000

8,10,000

26,10,000

28,80,000

Liabilities

(10,50,000)

(10,50,000)

Net Assets

34,50,000

36,60,000

PPE

Calculate the amount of Goodwill resulting from Business


combination?

QUESTION
Purchase accounting is the most appropriate method for accounting a
business combination. Which of the following should be deducted in
determining the combined corporations net income for the current
period?

Direct cost of acquisition

General
expenses related
to acquisition

Yes

No

Yes

Yes

No

Yes

No

No

QUESTION
On 1st April 2002Suraj and Shekhar companies furnished the
following balance sheet of their own :
Shekhar

Suraj

Current Assets

1,40,000

40,000

Non Current Assets

1,80,000

80,000

Total Assets

3,20,000

1,20,000

60,000

20,000

Long term Debt

1,00,000

Stockholders Equity

1,60,000

1,00,000

Current Liabilities

Total liability and Stock


3,20,000
3,20,000
holders equity
On 1st April Shekhar & co purchased 90% of the outstanding common
shares of Suman using a new loan of Rs 1,20,000 borrowed on same
date. The debt agreement specified that the loan is paid in 10 equal
installments starting from 30th March 2002. The company decides to
distribute cost f investment over companies book value of acquired net
assets should be allocated to 60% of inventory and 40% to Goodwill.
Calculate value of Current Assets, Non Current Assets, Current liabilities
and Long term debt to be shown in consolidated Balance Sheet.

QUESTION On 30th June 2000, Srinil Co issued 6,30,000 shares of Rs 5


par common stock, for which it received 1,80,000 shares (90%) of
Swapnil Corps RS 10 par common stock , in business combination
appropriately accounted for as a purchase method of interests. The
stockholders equities immediately
Srinilbefore
Inc the combination
Swapnil were.
Common Stock

65,00,000

20,00,000

Additional Paid in
capital

44,00,000

16,00,000

Retained Earnings

61,00,000

54,00,000

1,70,00,000
90,00,000
Both corporations continued to operate as separate businesses,
maintaining accounting records with years ending December 31. For
2000, Net Income and dividends paid from separate company operations
were Srinil Inc
Swapnil
Net Income
Six months ended June 30, 2000

10,00,000

3,00,000

Six months ended December 30,


2000

11,00,000

5,00,000

Dividends paid April 1, 2000

13,00,000

a) In June 30,2000 consolidated balance sheet, common stock should


be reported at what amount?
b) In June 30,2000 consolidated balance sheet, additional paid in
capital should be reported at what amount?
c) In June 30,2000 consolidated balance sheet, retained earnings
should be reported at what amount?
d) In 2000 consolidated Income Statement, Net Income should be
reported at what amount?
e) In 2000 consolidated balance sheet, Minority Interest should be
reported at what amount?

QUESTION
On 30th September Arun Company acquired Tarun
Company in exchange of its 3,00,000 shares of Rs 20 each. The fair
value of common stock issued is equal to the book value of Tarun
companys net assets. Both the companies continue to operate
separately and books of accounts are also kept separate. Following
information furnished by two companies
Arun
Tarun
Net Income
Six Months ended September 30, 2000 15,00,000

4,50,000

Six Months ended March 31, 2001

7,50,000

16,50,000

Dividends Paid
July 25, 2000

19,00,000

February 15, 2001


6,00,000
On 31st March 2001, some merchandize was valued at RS 3,00,000 with
mark up of 30% in the inventory of Tarun, acquired from Arun on 31st
March 2001..
a) If the business combination is accounted under purchase accounting
method then in the 2000-01 consolidated income statement, what is
the net income that should be reported?
b) If the business combination qualifies for treatment as a pooling of

PUSH-DOWN ACCOUNTING

SEC Requires Push-Down


SEC requires push-down accounting
for SEC filings when the subsidiary
Is substantially fully owned (97%), and
Has substantially no public debt or
preferred stock

Establishes a new basis for the


assets and liabilities
Based on acquisition price

Push down accounting is a method of


accounting in which the financial
statements of a subsidiary are presented
to reflect the costs incurred by the parent
company in buying the subsidiary instead
of thesubsidiary'shistorical costs. The
purchase costs of the parent company
are shown in thesubsidiary'sstatements.

Push-down accounting works like this:


Company A buys Company B and borrows to make the acquisition.

Company A pays more than Company Bs 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 As 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 Bs legal entity
books, instead of its own books.
The entry being made in Company Bs books makes no difference to
the consolidated financial statements.

Reasons for Push Down Accounting

When an acquisition is made, there is usually some sort of debt created by


the acquiring company. With push-down accounting, the debt is recorded
for the acquired company rather than the buying company. In terms of
consolidated financial statements in which both companies will be
compared jointly, it does not matter where the debt goes because it will
show up regardless of the accounting method. This does make a difference
when it comes time for taxes and makes it easier to find out if the
acquired company is turning a profit or losing money. Legally, the debt still
belongs to the first company, because that company owns both and it is
the company where the debt originated.
U.S. GAAP necessitate the use of push-down accounting under certain
parameters. If the acquired company is to assume the full debt of the
acquiring company, if the proceeds of debt or equity are used to retire the
acquiring companys debt, or if the acquired company uses its assets as
collateral for the acquirer company, then push-down accounting
must be used. Even though these parameters are set up for when pushdown accounting must be used, an acquiring company can still legally use
this accounting method if the parameters are not met.

Push-Down Procedure
Assets and liabilities are revalued
Goodwill, if any, is recorded
Retained earnings (prior to
acquisition) are eliminated
Push-down capital replaces retained
earnings
Includes old retained earnings
Any adjustments to assets and liabilities,
including goodwill

Push-Down Example
Paly buys 90% of Sim. Sim's book and fair
values are:

Cash

BV
5

FV
5

Liabilities

Inventory
Plant
assets

10
20
0

15
30
0

Capital stock
Retained earnings

BV FV
25 30
10
0

90
21

If
Sim
applies
push-down
accounting,
it
would
Goodwill
0 50 Total
5
revalue its21
inventories,
fixed assets, liabilities,
37
and record 5goodwill.
Total
0

Sim Uses Parent Company


Theory
Sim revalues assets and liabilities
only to the extent of Paly's
ownership. Only 90% of the
increases/decreases
are recorded.
Inventory
4.5
Plant assets
Goodwill
Retained earnings
Liabilities

90.0
45.0
90.0

4.5

Push-down
capital

225.0

Sim Uses Entity Theory


Sim fully revalues assets and
liabilities. 100% of the
increases/decreases
are recorded.
Inventory
5
Plant assets
Goodwill
Retained earnings
Liabilities

100
50
90

Push-down
capital

240

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