The concept of a controlling financial interest would be when a shareholder or group of
shareholders are in control of and hold most of the company’s stock, hence the term “controlling
interest”.
When there is a change in control of a company and pushdown accounting is not elected at the
time of that change, “the acquire can elect it in the next reporting period as a change in accounting
principle as outlined in FASB ASC 250”.
The most important consideration to decide on before making the election would be to remember
that the “decision is irrevocable. If an entity decides to change its election later, it will be
considered a change in accounting principle in accordance with Topic 250 on accounting changes
and error corrections and may require retrospective restatement of financial statements”.
https://www.cpajournal.com/2018/03/28/implications-pushdown-accounting/
The concept of a controlling financial interest in a business combination is closely related to whom
gets to control the business combination after the date of combination. According to the textbook,
U.S. GAAP allowing two methods to determine if a company has a controlling financial interest in
another company. First, is the voting interest model, where to exert control one company would
need to own or control at least 50.1% of the voting stock of another company. The second, the
variable interest entity (VIE) method in which a company has a controlling financial interest if it has
both the power to direct the company’s business activities the most significantly affect the
company's economic performance and has an obligation to absorb the company’s losses or the
rights to receive the benefits of the company’s economic performance (Christensen et al., 2019,
p.118).
Push-down accounting is the restatement of a newly acquired subsidiary’s assets and liabilities at
the fair-value directly on the subsidiary’s books. This is an optional practice that a subsidiary can
follow if they prepare and file financial statements that are separate from their new parent
company with the Securities and Exchange Commission (SEC). For the Subsidiary to exercise this
option it must decide to do so during the year of acquisition from the date of acquisition onward. If
a subsidiary later decides that it would like to use push-down accounting then it may, but it would
need to do so as a change in accounting principle, which would require that the subsidiary show
that the change is preferable, and that the subsidiary retrospectively adjust its assets and liabilities
as of the date of acquisition. When a subsidiary chooses to use push-down accounting that choice is
irrevocable and must be used for all future financial statements (PWC, 2021, p. 10.1.5).
There are multiple considerations to consider when trying to decide on using the push-down
accounting election. The different users of financial statements would have different views on how
they would want the subsidiary to record the assets and liabilities. One set of users would want the
values restated, while another set would not want the values restated because the restatement
would distort income statement trends since the restatement would increase expenses, specifically
depreciation and amortization expenses (PWC, 2021, p. 10.1.3). a separate set of financial
statement users would be indifferent to push-down accounting as they concentrate on cash flows
and earnings before interest, taxes, depreciation, and amortization (EBITDA) since these items will
be insignificantly affected by using push-down accounting. Also, there may be tax considerations
involved to electing to use push-down accounting as recognizing the fair values on the books could
cause an increase or decrease in the amount of income taxes that the subsidiary would need to pay
(PWC, 2021, p. 10.1.3). My preference would be to use push-down accounting, when possible, as to
avoid needing to keep track of the separate assets and liabilities at two different values, the
historical value of the subsidiary and the fair value that the parent bought the assets and liabilities
for when they acquired the company.
References
Christensen, T., Cottrell, D., & Budd, C. (2019). Advanced Financial Accounting (12th ed.). Mc-Graw
Hill Education.
PWC. (2021, December 31). 10.1 Pushdown Accounting. Retrieved on July 5, 2022, from
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/business_com
bination__28_US/chapter_10_other_bus/101_chapter_overview_US.html#pwc-
topic.dita_1827173301143245-tOp-S
