Authoritative status of push-down accounting

The SEC in the U.S.

a. Requires push-down accounting if a subsidiary is "substantially wholly-owned," i.e., parent's
ownership interest is at least 95%;
b. Encourages push-down accounting if a parent's ownership interest is 80% to less than 95%;
and
c. Prohibits push-down accounting if a parent's ownership interest is less than 80%.

However, if the subsidiary has outstanding public debt or preference shares, the U.S.
SEC encourages, but does not require, the use of push down accounting. (U.S. SEC Staff
Accounting Bulletin No. 54)
It should be noted though that the PFRSS do not address push-down accounting.
Neither does the Philippine SEC require the use of the push-down accounting. This section only
attempts to illustrate how push-down accounting works.

Arguments on the use push-down accounting

Proponents' view. Proponents of push-down accounting argue that a substantial change in
ownership creates a new basis of accounting for the subsidiary's assets and liabilities.
Since the subsidiary's financial statements are viewed as extension of the parent's
statements (parent company theory), the basis of accounting for the subsidiary's net identifiable
assets should parallel the parent's accounting basis for newly purchased assets and liabilities,
i.e., at fair values. Therefore, the acquisition date fair values of the subsidiary's net identifiable
assets should be "pushed-down" to the subsidiary's separate financial statements:

Oppositions' view
Those who oppose push-down accounting argue that a new basis of accounting should not
arise irrespective of the ownership change in a subsidiary.

Since the subsidiary's financial statements are viewed as a distinct part of a group (entity
theory), the subsidiary should still retain its previous accounting basis for its net identifiable
assets (e.g., amortized cost for receivables, lower of cost or NRV for inventories, cost model or
revaluation model for PPE, etc.) in its separate financial statements.
Moreover, many believe that since the subsidiary did not actually sell anything (i.e., the
parent purchases its controlling interest from the subsidiary's former owners and not from the
subsidiary itself), a new basis of accounting should not arise.
Thus, the acquisition-date fair value adjustments should be reflected only in the
consolidated financial statements but not in the subsidiary's separate financial statements in
order to give readers information on the effect of the business combination.
Illustration 1: Push-down accounting - Acquisition date On January 1, 20x1, ABC Co. acquired
80% interest in XYZ, Inc. by issuing 5,000 shares with fair value of P15 per share and par value
of P10 per share. The individual financial statements immediately before the acquisition are
shown below:

ABC Co. XYZ Inc.

Cash 40,000 17,000

Inventory 40,000 23,000

Equipment, net 180,000 40,000

Total Assets 260,000 80,000

Accountas Payable 50,000 6,000

Share Capital 120,000 50,000

Share premium 40,000 -

Retained earnings 50,000 24,000

Total liabilities and Equity 260,000 80,000

The carrying amounts of XYZ's net identifiable assets approximate their fair values except for
the following:

XYZ, Inc. Carrying amts. Fair Values Fair Values

adjustment (FVA)

Inventory 23,000 31,000 8,000

Equipment, net (4 yrs 40,000 48,000 8,000

remaining life)

Totals 63,000 79,000 16,000

NCI is measured at proportionate share.

Requirement:
Prepare the consolidated
statement of financial position using "push-down accounting."
Solutions:

ABC Co. records the acquisition in its separate books as follows:

Jan 01 Investment in subsidiary (5,000 x 15) 75,000

20x1 Share capital (5,000 x 10) 50,000
Share premium 25,000

XYZ also records the transaction in its separate books.

Goodwill is computed as follows:
Consideration transferred 75,000
NCI in the acquiree (190,000 see below x 20%) 18,000
Previously held equity interest in the acquire -
Total 93,000
Fair value of net assets acquired (P50K+ P24K + P16K FVA) 90,000
Goodwill 3,000

The entry in XYZ's separate books is as follows:

Jan. 01 Goodwill 3,000

20x1 Inventory 8,000
Equipment 8,000
Retained earnings 24,000
Push-down Capital (squeez) 43,000
to 'push-down' FVAs in XYZ's books

The entry above is not a CJE but rather a regular entry that is recorded in the separate books of
XYZ.

Under push-down accounting, the subsidiary is viewed as a new entity. Accordingly, the pre-
acquisition retained earnings are eliminated and the accounts are remeasured at acquisition.
date fair values. The resulting "push-down capital" is presented as an equity account in the
subsidiary's separate financial statements, but this will be eliminated in the consolidated
financial statements. The individual financial statements after recording the entries above are
shown below:

Before acquisition After acquisition ABC Co.

ABC Co. XYZ, Inc.. XYZ, Inc

cash 40,000 17,000 40,000 17,000

Inventory 40,000 23,000 40,000 31,000
Investment in Subsidiary 75,000
Equipment 180,000 40,000 180,000 48,000
 Goodwill 3,000

Total Asset 260,000 80,000 335,000 99,000

Accountas Payable 50, 000 60,000 50,000 6,000

Share capital 120,000 50,000 170,000 50,000
Share Premium 40,000 - 65,000
push-dow Capital 50,000 43,000
Retained Earnings 24,000 50,000

Total Liabilities and Equity 260,000 80,000 335,000 99,000

When push-down accounting is used, the subsidiary:

a. Records the goodwill arising from the business combination;
b. Records the acquisition-date fair value adjustments to its dentifiable assets and liabilities;
c. Eliminates the pre-acquisition retained earnings; and
d. The balancing figure after performing (a) to (c) is recorded in the "push-down capital"
account.

As mentioned earlier, push-down accounting simplifies the consolidation process because the
consolidation journals entries.
mainly involve only the elimination of the investment in subsidiary and effects of intercompany
transactions, if any. No depreciation of FVA is made because the subsidiary's net identifiable
assets are already restated to acquisition-date fair values.

The consolidation journal entry is as follows:

CJE #1: To eliminate the investment in subsidiary

Jan. 01 Share capital - XYZ, Inc. 50,000

20x1 Push-down capital 43,000
Investment in subsidiary 75,000
Non-controlling interest (see above) 18,000
Just like in normal consolidation procedures, the CJE above is also not recorded in the separate
books but rather used only for consolidation purposes.

The consolidated statement of financial position is shown below:

ASSETS
Cash (40,000+ 17,000)- see after acquisition balances 57,000
Inventory (40,000+ 31,000) 71,000
Investment in subsidiary (eliminated) - (CJE #1) -
Equiment 288,000
Goodwill 3,000
Total Assets 359,000
LIABILITIES AND EQUITY
Accounts payable 56,000
Share capital (ABC Co. only) 170,000
Share premium (ABC Co. only) 65,000
Push-down capital (eliminated) - (CJE #1) -
Retained earnings (ABC Co. only) 50,000
Equity attributable to owners of parent 285,000
Non-controlling interest - (CJE #1) 18,000
Total equity 303,000
TOTAL LIABILITIES AND EQUITY 359,000

Whether or not the push-down accounting is used, the consolidated accounts should result to
the same amounts.

Illustration 2: Push-down accounting - Subsequent date Use the same facts in "Illustration 1"
above:
No intercompany transactions occurred during 20x1. Goodwill is not impaired. The December
31, 20x1 individual financial statements show the following information:

Statements of financial position

As at December 31, 20x1
ASSETS ABC Co. XYZ Inc.
Cash 98,000 79,000
Inventory 105,000 15,000
Investment in subsidiary 75,000 -
Equipment, net 140,000 36,000
Goodwill 3,000
TOTAL ASSETS 418,000 133,000

LIABILITIES AND EQUITY

Accounts Payable 73,000 30,000
Share Capital 170,000 50,000
Share Premium 65,000 -
Push-down capital 43,000
Retained earnings 110,000 10,000
Total Equity 345,000 103,000
TOTAL LIABILITIES AND EQUITY 418,000 133,000
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co. XYZ Inc.
Revenue 300,000 120,000
Expenses (240,000) (110,000)
Profit for the year 60,000 10,000
The consolidation journal entries are as follows:
CJE #1: To eliminate the investment in subsidiary

Dec. 31 Share capital - XYZ, Inc. 50,000

20x1 Push-down capital 20x1 31. 43,000
Investment in subsidiary 75,000
Non-controlling interest (acquisition date) 18,000

CJE #2: To eliminate XYZ's post-combination change in net assets

Dec 31 Retained earnings - XYZ, Inc. 10,000

20x1 Retained earnings - ABC Co." 8,000
Non-controlling interest (post-acquisition) 2,000

ABC's share in the net change in XYZ's net assets (P10,000 x 80%).
NCI's share in the net change in XYZ's net assets (P10,000 x 20%).

The consolidated financial statements are shown below:

ASSETS
Cash (98,000+79,000) 177,000
Inventory (105,000 + 15,000) 120,000
Investment in subsidiary (CJE #1) -
Equipment, net (140,000+ 36,000) 176,000
Goodwill 3,000
TOTAL ASSETS 476,000

LIABILITIES AND EQUITY

Accounts Payable (73,000+30,000) 103,000
Share Capital (ABC Co. only) 170,000
Share Premium (ABC Co. only) 65,000
Push-down capital (eliminated) - (CJE #1) -
Retained earnings (ABC Co.'s 110,000+8,000 CJE #2) 118,000
Equity attributable to owners of parent 353,000
Non-controlling interest (18,000 +2,000) (CJE #1 and #2) 20,000
Total Equity 373,000
TOTAL LIABILITIES AND EQUITY 476,000
Revenue 420,000
Expenses (350,000)
Profit for the year 70,000
Profit attributable to owners of parent 160,000+ (10,000 x 80%)] 68,000
Profit attributable to NCI (10,000 x 20%) 2,000
Profit for theyear 7,000
Chapter 7: Summary
 ● The consolidation procedures for a complex group structure are similar to those of a
simple structure except for the computations of goodwill and NCI. These computations
are affected by the indirect holding adjustment.
● An indirect holding adjustment is made because the consideration transferred to the
"sub-subsidiary" is partly made by the parent and partly by the direct subsidiary. Only the
portion made by the parent enters into the computation of goodwill.

PROBLEMS:

PROBLEM 1: MULTIPLE CHOICE

1. On January 1, 1993, Owen Corp. acquired all of Sharp Corp.'s common stock for P1,200,000.
On that date, the fair values of Sharp's assets and liabilities equaled their carrying amounts of
P1,320,000 and P320,000, respectively. During 1993, Sharp paid cash dividends of P20,000.
Selected information from the separate balance sheets and income statements of Owen and
Sharp as of December 31, 1993, and for the year then ended follows:

Owen Sharp
Balance sheet accounts:
Investment in subsidiary (equity method) 1,300,000
Retained earnings 1,240,000 540,000
Total equity 2,620,000 100,000
Income statement accounts:
Operating income 420,000 200,000
Equity in earnings of Sharp 120,000
Net income 400,000 120,000

In Owen's December 31, 1993, consolidated balance sheet, what amount should be reported as
total retained earnings?

a. 1,240,000 c. 1,380,000
b. 1,360,000 (Adapted) d. 1,800,000

Use the following information for the next seven questions:

On January 1, 1991, Dallas, Inc. acquired 80% of Style, Inc.'s outstanding common stock. On
that date, the carrying amounts of Style's assets and liabilities approximated their fair values.
Non controlling interest was measured using the proportionate share method.

During 1991, Style paid P5,000 cash dividends to its stockholders.

Summarized balance sheet information for the two companies follows:

Dallas Style .
 12/31/1991 12/31/1991 1/1/1991

Investment in Style (equity method) 132,000

Other Assets 138,000 115,000 100,000
Totals 270,000 115,000 100,000

Common stock 50,000 20,000 20,000

Additional paid-in capital 80,250 44,000 44,000
Retained earnings 139,750 51,000 36,000
Total 270,000 115,000 100,000

2. What amount should Dallas report as earnings from subsidiary, in its 1991 income
statement?
a. 12,000 c. 16,000
b. 15,000 d. 20,000

3. How much is the acquisition cost of the investment on January 1, 1991?

a. 120,000 c. 150,000
b. 132,000 d. 160,000

4. How much is the goodwill on the business combination?

a. 20,000 c. 32,000
b. 22,000 d. 40,000

5. How much is the non-controlling interest in the net assets of Style on December 31, 1991?

a. 20,000 c. 26,000
b. 23,000 d. None of these

6. How much is the consolidated retained earnings on December 31, 1991?

a. 190,750 c. 51,000
b. 139,750 d. 36,000

7. How much is the total assets in the consolidated statement of financial position as of
December 31, 1991?
a. 293,000 b. 280,000
c. 270,000 d. 253,000
8. What amount of equity attributable to the owners of the parent should be reported in Dallas'
December 31, 1991, consolidated balance sheet?

a. 270,000 c. 293,000
b. 286,000 d. 385,000

PROBLEM 2: MULTIPLE CHOICE

1. Penn, Inc., a manufacturing company, owns 75% of the common stock of Sell, Inc., an
investment company. Sell owns 60% of the common stock of Vane, Inc., an insurance
company. In Penn's consolidated financial statements, should