Last month, the PCPS Technical Issues Committee (TIC) of the American Institute of CPAs (AICPA) held a public liaison meeting with the Financial Accounting Standards Board (FASB) to discuss TIC’s August 4 comment letter on FASB’s proposed Accounting Standards Update (ASU), Business Combinations (Topic 805): Pushdown Accounting. TIC’s objective is to represent the views of local and regional firms on professional issues in keeping with the public interest. Its views on various proposals are shared with the FASB in an annual face-to-face meeting at the Board’s offices in Norwalk, Conn.
Today, no authoritative guidance on pushdown accounting exists for private entities, unlike SEC registrants, which are required to follow the guidelines in SEC Staff Accounting Bulletin (SAB) Topic No. 5.J, New Basis of Accounting Required in Certain Circumstances. With authoritative guidance lacking, preparers of private company financial statements often ask whether pushdown accounting is permitted. In the near future, the FASB will provide a definitive answer to this question.
The proposed ASU would provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon the occurrence of an event in which an acquirer obtains control of the acquired entity (a “change-in-control” event). The scope of the proposal would cover public and nonpublic acquired entities that are businesses or that conduct nonprofit activities. Since the recognition trigger is based on a change in control (that may or may not involve an exchange of consideration), the proposed ASU would apply to traditional acquisitions of voting control, transactions or events that involve the change of a primary beneficiary of a variable interest entity (VIE) or acquisition of another entity by contract alone. The proposal defines the acquirer as the entity or the individual that obtains control of the acquiree. Among other requirements, the proposal includes a new disclosure that would apply if an acquired entity does not elect pushdown accounting when a change-in-control event occurs.
In its comment letter, TIC was very supportive of the Board’s proposal to develop an authoritative standard that would provide consistent accounting guidance for pushdown accounting, which applies when an acquired entity (an acquiree) decides to use the acquirer’s basis of accounting in the preparation of the acquiree’s separate financial statements.
TIC Liaison Meeting with FASB
At the September 16 liaison meeting, TIC had an opportunity to provide additional insight to the Board on a number of issues, including the frequency of pushdown accounting among private companies. TIC members indicated that it occurs fairly frequently, especially when there’s a reporting requirement at the target level. TIC cited two specific examples that members encounter on a regular basis: (1) U.S. subsidiaries of foreign parent companies often need separate financial statements for distribution within the U.S.; and (2) private equity firms often request pushdown accounting at the investee level, since the firms know they will eventually sell the investee.
TIC also clarified for the Board that there is diversity in practice today as to the point at which pushdown is elected. Within TIC’s constituency, target companies tend to start applying pushdown accounting when at least a 40 - 60 percent change in control occurs. However, other private entities have turned to the SEC guidance and have adopted the “substantially wholly owned” threshold from the SAB.
In response to a question TIC raised during the liaison meeting, the Board clarified that the proposed ASU would not apply to situations where a VIE and its primary beneficiary are under common control. TIC discussion leader, Sean Lager, indicated that VIEs that are not under common control generally do not occur among private companies. However, to the extent they do occur, TIC suggested additional guidance would be helpful to clarify what would be pushed down from the primary beneficiary to the VIE and whether FASB Accounting Standards CodificationTM Topic 805 (Business Combinations) requirements would still apply.
The Board also asked for TIC’s views on the proposed disclosures that would be applicable to acquired entities that decide not to adopt pushdown accounting. TIC did not see a problem with the disclosures for acquired entities that have changes in voting control, but TIC indicated that the proposed disclosure requirements could prove troublesome for certain VIEs that have had changes in their primary beneficiaries. The disclosure in question would require the VIE to know whether or not a change-in-control event (i.e., a change in the primary beneficiary) had occurred during the reporting period and, if such an event had occurred, the VIE would have to decide whether to apply pushdown accounting in its separate financial statements. If the VIE decides not to apply pushdown accounting, it would have to disclose the change-in-control event and the intention to continue to present its financial statements on the historical cost basis.
TIC informed the Board that a VIE might not always become aware of a change in its primary beneficiary. This could occur, for example, if the primary beneficiary is an individual with no financial reporting requirements. The need to reassess control each reporting period would be challenging for such VIEs and would add complexity to the financial reporting process. TIC therefore requested that the Board modify the disclosure requirement to allow the VIE to state (when applicable) that it could not determine if a change‐in‐control event occurred.
On October 8, following TIC’s liaison meeting with the FASB, the Board voted to approve a final standard that will provide an acquired entity an option to elect to apply pushdown accounting when a change-in-control event has occurred. The final ASU is now in the drafting stage.