Push-down accounting is a special type of accounting used exclusively in the acquisitions market when one company buys another. Normally, the money used to buy the second company would be marked in the first company’s books as a loss, but push-down accounting means the cost is instead marked in the second company’s books. This form of accounting is legal under Generally Accepted Accounting Principles (GAAP) and can be either good or bad, depending on the terms of the acquisition.
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 second 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 second company is to assume the full debt of the first company, if the proceeds of debt or equity are used to retire the first company’s debt, or if the second company uses its assets as collateral for the first company, then push-down accounting must be used. Even though these parameters are set up for when push-down accounting must be used, an acquiring company can still legally use this accounting method if the parameters are not met.
When not required, there are two main reasons why this accounting method would be used. One is because this accounting method will amortize, or reduce, the debt when it is tax time. Second is because it will show whether the company is able to make more money than what the first company spent acquiring it. If unable to rise above the debt, the first company will generally consider abandoning or selling the company. Using push-down accounting has one main disadvantage: Depending on how the second company was acquired and the jurisdictions involved in acquiring the company, it may make the first company lose more money during income reporting.
