Public Company Developments: Pushdown Accounting and Extraordinary Items

Keeping up with changing accounting standards is critical to every public company’s well-being. That’s why you need to consider these two recent developments.

Pushdown accounting 

In Accounting Standards Update (ASU) No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force), the Financial Accounting Standards Board (FASB) made “pushdown accounting” optional for all companies, both public and private, when there’s a change-in-control event.

Pushdown accounting refers to the practice of adjusting an acquired company’s standalone financial statements to reflect the acquirer’s accounting basis rather than the target’s historical costs. Typically, this means stepping up the target’s net assets to fair value and, to the extent the purchase price exceeds fair value, recognizing the excess as goodwill.

Previously, Generally Accepted Accounting Principles (GAAP) provided little guidance on when pushdown accounting might be appropriate. For public companies, SEC guidance generally prohibited pushdown accounting unless the acquirer obtained at least an 80% interest in the target and required it when the acquirer’s interest reached 95%. The SEC has rescinded portions of its pushdown accounting guidance, bringing it in line with FASB’s new standard.

Under the new guidance, all acquired companies may decide if they should apply pushdown accounting. Whether it’s appropriate depends on a company’s particular circumstances. For some companies, there may be advantages to reporting assets and liabilities at fair value and adopting consistent accounting policies for both parent and subsidiary. Other companies may prefer not to apply pushdown accounting to avoid the negative impact on earnings, often associated with a step-up to fair value.

The ASU took effect Nov. 18, 2014. Companies may now apply the new guidance to future change-in-control events or their most recent change-in-control event. Bear in mind that, if a company applies the guidance to its most recent change-in-control event, and its financial statements for the relevant period have already been issued or made available to be issued, it must comply with GAAP requirements for a change in accounting principle.

After pushdown accounting is applied to a change-in-control event, the election is irrevocable. Acquired companies that apply pushdown accounting in their standalone financial statements should include disclosures in the current reporting period to help users evaluate its effects.

Extraordinary items

To reduce financial statement complexity, FASB has issued ASU No. 2015-01, Income Statement — Extraordinary and Unusual Items, to eliminate the concept of “extraordinary items” from GAAP. Under previous guidance, companies were required to evaluate whether events or transactions met the criteria for classification as extraordinary and, if so, present and disclose them separately — net of tax and after income from continuing operations — on their income statements.

Prior guidance had been criticized for creating uncertainty, given the difficulty of determining whether an item should be considered both “unusual” and “infrequent” in deciding whether an event was extraordinary. In addition, financial statement users have said that, while they find information about unusual and infrequent events and transactions to be useful, extraordinary item classification and presentation aren’t necessary to identify such events and transactions. Finally, as the term suggests, classification of an item as extraordinary is rare.

Although the ASU eliminates the concept of extraordinary items, it doesn’t change the fact that certain events or transactions are unusual in nature or infrequent in occurrence. Companies must still present these events or transactions separately in their income statements, either as a component of continuing operations or within the financial statement footnotes. 

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively and also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.

Speak to your advisor

To help you determine how these two ASUs affect your company, discuss them with your business advisor. He or she can help you comply with FASB’s requirements. 

© 2015