Describe the concept of a "controlling financial interest."
A "controlling financial interest" is typically considered to be at least 50% of the outstanding
shares of a company. In some cases, it is defined as the largest held group of voting shares
because not every share carries a vote in some shareholder meetings. Either way, to have the
controlling financial interest in a company tends to give that person (or group) the most sway
over what does happen in those shareholder meetings and subsequently what happens within
the company. It should be known that this does not grant any exclusive control that cannot be
taken away or redistributed as those who wish to have a little more sway or influence can try
be elected to a board or lobby publicly for the changes they would like to see, putting the
control more definitively into their hands (Smith et al., 2021).
How does the acquiree elect pushdown accounting?
If an acquiree obtained control of the entity they sought to acquire, they can elect the use of
pushdown accounting in their separate financial statements (Dietrich, 2016). This would
essentially push the acquired assets and liabilities to the acquirer and become part of their
financial statements that are separated from the acquirer’s financial statements. It is important
to consider all the nuances that may arise from this method and the tax implications as well to
bring those assets, liabilities and more over from the date of the acquisition.
What do you feel is the most important consideration to decide on before making the election?
I think that the most important consideration that needs attention before committing to
making the election is how the acquired views their financial statements and whether or not
they match the way you do. While it may not hinder some, it is important to understand that
the way they view their statements can greatly fluctuate the outcomes of income statements
depending on if they use a historical basis. However, if you as the acquirer are more focused
on cash flow and EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization), then you may find you are indifferent to the issues that may come with
pushdown accounting (Christensen et al., 2019).
The concept of a controlling financial interest refers directly to any situation in which a
shareholder owns most of a company's voting stock. This is typically 50% or more shares of a
company. However, a shareholder does not have to have the majority ownership of a
company to have a controlling interest so long as he or she owns a significant portion of
voting shares.
Pushdown accounting is a method of accounting that is used for an acquisition or a merger of
companies. This method makes the purchase of another company easier because it values the
other company at the purchase price rather than using the company's historical cost. That said,
an acquiree can elect to use pushdown accounting. An acquiree can elect to use pushdown
accounting in its separate financial statements when an event happens in which the acquirer
obtains control of the acquired entity. The acquiree can elect pushdown accounting simply by
holding an election to apply pushdown accounting before any financial statements are ready
to be issued for the reporting period.
While it is very important to understand all the implications of pushdown accounting, the
most important thing to consider before making the election is any kind of possible tax
effects. Negative tax effects need to be considered and need to be weighed to make sure the
accounting method is worth it. This is important because the decision to apply pushdown
accounting to a certain event is irreversible.
A controlling financial interest means that a company) or individual) holds most of the voting
stock of a company. d It does not necessarily mean that they own 50% or more of the company,
as not all stock carries voting rights. At times, shareholders with only 10% ownership can
have substantial pull within a company and can even push for a seat on the board. d If all other
ownership is in very small quantities, they could have some control. In general, though,
having a controlling interest means most of the voting stock. d
Push down accounting is the method of accounting where an acquisition is recorded at
purchase price on the books rather than its historical cost. The assets and liabilities are
adjusted up or down to equal the purchase price. The gains or losses from this method are
"pushed down" from the acquirer to the target company's income statement and balance sheet.
Basically, this puts the cost to acquire the business on the targets financials rather than
showing up on the parent company (Liberto, 2021). Many executives feel this is the way it
should be as an acquired company should carry (or cover) the cost of its acquisition.
Pushdown accounting can be elected at the time the acquisition takes place or in a subsequent
period but once it is chosen it is irrevocable. Prior to 2014 pushdown accounting was
mandatory for purchases of 95% or more of a company, and could be used for purchases of
80% to 94%. In 2014 the FASB changed the requirements and pushdown accounting is now
available to anyone that wants to use if no matter the percentage of the purchase. The SEC
has also adopted this guideline as well (Liberto, 2021).
I feel the most important consideration, when choosing push down accounting, is what the
users (shareholders) will find most helpful to them. d Will they prefer seeing historical costs so
the income statement trends will not be distorted or would they prefer to see the "stepped-up
basis". The historical basis may be kept if the tax reporting basis is on the historical costs. I
think it is an event specific decision as to what is best for both companies including the ease
of the accounting, the reporting to the shareholders, and a way to create the best
representation of the acquisition. d I had never heard of pushdown accounting prior, and I find
that it would be a smart choice in many cases. d I like the idea of the cost of the purchase being
supported by the acquired company. In essence why buy a company that cannot support the
cost of its purchase? Even if it will still be run as the company it was before it is under new
ownership so the financials should reflect the change in the values of the company created by
the purchase.
The concept of a "controlling financial interest" is when one entity or company holds majority
ownership in a subsidiary's common stock. This can also mean that the "controlling"
entity/company has the majority voting interest. Pushdown accounting is when a company
acquires another and chooses to revalue the subsidiary's assets and liabilities to their fair
value. The acquiring company must choose pushdown accounting at the time that they record
the acquisition in their books. I think the most important consideration for pushdown
accounting is how the acquiring company plans to use the acquired company's financial
statements. If the subsidiary's financial statements will remain separate and the acquiring
company does not intend to use those records to analyse trends, it may be a good election.
A controlling financial interest is defined as an investment of 50% or more of the voting
equity of another entity. According to ARB 51, a company that holds 50% or more of the
voting equity of an affiliate is viewed as the controlling parent company and should include
the affiliate in its consolidated financial statement (Jones 08/2018).
Pushdown accounting is a method of accounting for the purchase of another company at the
purchase price rather than its historical cost. The target company's assets and liabilities are
written up or down to reflect the purchase price. An acquiree can elect to use pushdown
accounting in its separate financial statements upon the occurrence of an event in which the
acquirer obtains control of the acquired entity (Dietrich 12/2016)
Before applying pushdown accounting having all the facts and circumstances into
consideration is a most, you should include all potential tax effects. The acquiree shall make
the election to apply pushdown accounting before the financial statements are available to be
issued (non-public entities) for the reporting period in which the change of control event
occurred. If elected, pushdown accounting must be applied as of the acquisition date. The
decision to apply pushdown accounting to a specific change in control event is irrevocable
(Dietrich 12/2016).
The concept of controlling financial interest is just as it sounds. The person or group of
individuals oversee making the financial decisions. You can have shareholders become the
majority share but not controlling the financial decisions. Many companies have a portion of
shares that are not sellable so that they maintain the majority shares in a company which
allows them to make all the financial decisions.
"An acquiree can elect to use pushdown accounting in its separate financial statements upon
the occurrence of an event in which the acquirer obtains control of the acquired entity. (R,
2020)" Thus circling back to the question above of controlling financial interest. Once that is
obtained, they can elect how financial reports will be done for the company.
Some of the most important decisions are the board of directors and if you are the sole
decision maker. If there are others that can overhead your decisions then it's not a true
controlling interest that you have. A board of directors are another thing you should consider
since they can implement decisions that can control how much you have to say in the
business.
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Norbert F. Dietrich & McClintock & Associates Dec,2016 PUSHDOWN ACCOUNTING
Pushdown Accounting - McClintock & Associates (mcclintockcpa.com)
Richard C. Jones, PhD, CPA August 2018, Common Control Entities and Consolidation of
Variable Interest Entities: CPAJournal.com
Common Control Entities and Consolidation of Variable Interest Entities - The CPA Journal
Liberto, D. (March 28, 2021). Investopedia: Pushdown Accounting.
https://www.investopedia.com/terms/p/push-down-accounting.asp
Smith, Tim. (December 5, 2021). Investopedia: Controlling Interest.
https://www.investopedia.com/terms/c/controllinginterest.asp
Christensen, T. E., Cottrell, D. M., & Budd, C. (2019). Advanced Financial Accounting (12th
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Dietrich, N. (2016, December 20). Pushdown Accounting - McClintock & Associates.
McClintock & Associates. https://www.mcclintockcpa.com/pushdown-
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Smith, T. (2007, January 11). What Is a Controlling Interest? Investopedia.
https://www.investopedia.com/terms/c/controllinginterest.asp
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(12th ed.). McGraw-Hill Education.
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Retrieved July 6, 2022, from https://www.mcclintockcpa.com/pushdown-accounting/
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