Consolidating journal entries
This is called “pushdown accounting.”This article addresses the implications of ASU 2014-17 and pushdown accounting in the formation of a subsidiary and provides an illustration to clarify the concepts presented.
Third, ASU 2014-17 no longer mandates that companies with percentage of ownership “greater then 95%” adopt pushdown accounting.Under this approach, the control premium remains only in the acquirer’s books and does not get pushed down to the acquiree’s books.Entity A (EA) acquires 100% interest in a start-up entity (ES) for cash.The fair value of assets at the time of acquisition is estimated to be $120 million, and the fair value of liabilities is estimated to be $20.Entity A pays $100 million in cash as consideration transferred for acquisition of ES.One such exception is for acquisition-related liabilities, which are recorded if and only if they are liabilities of that respected entities.
Furthermore, ASC 805 requires that the acquirer recognize all preacquisition contingencies at fair value.
The consolidation journal entries at the formation of ES are as follows: ES has assets with a book value of $120 million and liabilities with a book value of $20.
The fair value of assets at the time of acquisition is estimated to be $140 million, and the fair value of liabilities is estimated to be $20.
Three resulting scenarios can occur: fair value of consideration transferred (FVCT) equals (fair value of identifiable assets received [FVAR] less fair value of identifiable liabilities assumed [FVLA]); FVCT is greater than (FVAR less FVLA); or FVCT is less than (FVAR less FVLA).
ES has assets with a book value of $120 million and liabilities with a book value of $20.
ASC 805-50-30-11 requires that the acquiree recognize such negative goodwill that arises due to application of pushdown accounting in their balance sheets as part of APIC, whereas the acquirer must recognize any negative goodwill in their earnings.