With mergers and acquisitions on the rebound in 2014, the Financial Accounting Standards Board and the Securities and Exchange Commission have given companies some new options about how to reflect a change in control in financial statements.
FASB issued Accounting Standards Update No. 2014-07 to provide an option around the application of “pushdown accounting,” which occurs when an acquired business adopts the new parent company’s basis of accounting in preparing its financial statements. At the same time, staff at the Securities and Exchange Commission released new guidance in Staff Accounting Bulletin No. 115 to rescind portions of its interpretative guidance to make SEC guidance consistent with the new FASB pronouncement.
FASB’s new rule, recommended by its Emerging Issues Task Force, says an acquired entity can elect the pushdown option in the reporting period in which the change-in-control event occurs. FASB says it pursued the EITF recommendation because GAAP contains limited guidance on the subject. With SEC guidance applying only to public companies, practice varies among public, private, and not-for-profit organizations, FASB said.
According to the SEC, FASB’s new guidance affects the stand-alone financial statements of an acquired entity. It does not change, however, the requirement for the acquisitive parent company to apply business combination accounting and record its new basis in the new entity’s assets, liabilities, and non-controlling interests in the parent company’s consolidated financial statements. SEC’s historical guidance indicated the staff would expect to see pushdown accounting if a new parent acquires 95 percent of a target’s ownership, allowed when the ownership stake is 80 to 95 percent, and prohibited when the parent company acquires any less.
FASB acknowledges that providing companies with the option to apply or not apply pushdown accounting does not assure comparability, but instead enables companies to adopt the method they believe best fits their facts and circumstances. In an alert to clients, EY says the new standard generally lowers the threshold for applying pushdown accounting, which increases eligibility to apply it.
FASB’s new rule takes effect immediately, enabling companies to apply it on any future transaction or for any recent event that has not already been reflected in issued financial statements. If a company wants to apply pushdown accounting to an event for which financial statements have already been issued, that can be accomplished through a change in accounting principle.
Merger and acquisition activity globally jumped 73 percent in the first half of 2014 over the same period in 2013, the strongest first half percentage increase since 1998, according to Thomson Reuters. The value of M&A activity in the United States reached $1.8 trillion, $1.1 trillion of that in the second quarter.