Disc 3401: Push Down Accounting And The Recording Of Both Ta

Disc 3401push Down Accounting And The Recording Of Both Tangible Asset

Disc 3401 Push-down Accounting and the Recording of Both Tangible Assets and Intangible Assets Imagine you are the chief financial officer (CFO) of a corporation with plans to complete the acquisition of a key subsidiary during the current year. Your chief executive officer (CEO) has requested a presentation to the Board of Directors describing the methods available to account for the acquisition internally and the best method for the company during the acquisition year . Please assess the value of each method identified in your presentation to the Board and support your recommendation with examples. Compare the key differences between the U.S. GAAP and IFRS positions on both intangible research and development costs and tangible depreciable assets.

Indicate the key benefits and drawbacks to financial statement users of each method (U.S. GAAP and IFRS). Next, determine the method that provides the most relevant information to financial statement users. Provide support for your rationale.

Paper For Above instruction

The acquisition of a subsidiary is a pivotal event that significantly influences a company’s financial standing and transparency. As the Chief Financial Officer (CFO), understanding and effectively communicating the various accounting methods available during an acquisition is essential. The primary methods available within the context of U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) include the purchase method (also known as the acquisition method) and, in certain circumstances, the push-down accounting. Each method's evaluation requires careful assessment of its impact on financial statements, particularly concerning tangible and intangible assets.

Methods of Accounting for Acquisition

The purchase method involves recognizing the acquired subsidiary at its fair value, with goodwill or a gain from a bargain purchase recorded accordingly. Under U.S. GAAP, this method has been the standard since the issuance of ASC 805, "Business Combinations" (FASB, 2017). IFRS 3, "Business Combinations," similarly mandates the use of the acquisition method, emphasizing fair value measurement and recognition of identifiable assets and liabilities.

Push-down accounting, alternatively, records the acquired subsidiary’s assets and liabilities at their fair value as of the acquisition date directly on its books. This approach essentially "pushes down" the parent company's basis to the subsidiary, allowing the subsidiary to maintain separate, updated book values that reflect the acquisition's fair value (Kieso, Weygandt, & Warfield, 2019). While not permitted by U.S. GAAP in most circumstances, IFRS allows push-down accounting if certain conditions are met, especially when the parent owns a controlling interest (FASB, 2017; IFRS Foundation, 2023).

Assessment of the Methods

The purchase method offers advantages such as consistent application and comparability with other entities employing similar standards. It is favored under U.S. GAAP because it aligns with the principles of recognizing fair value and liability assumptions. However, it may not provide an immediate reflection of the subsidiary's fair value on its own books, potentially limiting clarity.

Push-down accounting benefits include providing investors with a more transparent view of the subsidiary’s assets and liabilities at fair value, potentially simplifying consolidation processes. It offers real-time reflection of the acquisition’s impact on the subsidiary’s accounting records. Nonetheless, it has drawbacks, including limited adoption—primarily in IFRS-compliant jurisdictions—and possible complexities in maintaining separate records.

Comparison of U.S. GAAP and IFRS Positions

U.S. GAAP generally discourages the use of push-down accounting, emphasizing the purchase method for business combinations. The Financial Accounting Standards Board (FASB) prefers the acquisition method for consistency, comparability, and avoidance of disparate reporting (FASB, 2017). Conversely, IFRS is more permissive; IFRS 3 allows push-down accounting when the subsidiary is a 'business combination' at the subsidiary level, facilitating a more straightforward reflection of fair value (IFRS Foundation, 2023).

Regarding intangible research and development costs, U.S. GAAP mandates expensing research costs as incurred, recognizing no intangible asset until development costs meet specific criteria (FASB, 2014). IFRS permits capitalization of development costs once certain technical and economic feasibility criteria are satisfied, aligning with a more asset-based view (IASB, 2018).

For tangible depreciable assets, both standards concur on initial recognition at cost, with subsequent depreciation reflecting usage and obsolescence. Differences may arise in impairment testing and component depreciation policies, but these are generally minor compared to intangible asset recognition.

Benefits and Drawbacks of Each Method

The purchase method under U.S. GAAP provides consistent, comparable data suited for external reporting but may obscure the subsidiary’s original book value and ongoing performance. It ensures transparency regarding goodwill and net assets but limits immediate reflection of fair value adjustments (FASB, 2017).

Push-down accounting offers enhanced transparency at the subsidiary level, aligning with stakeholder interests by providing a clear view of the fair value of individual assets and liabilities. However, its limited acceptance outside IFRS jurisdictions, potential compliance complexities, and inconsistencies can hinder its widespread adoption.

Most Relevant Method for Financial Statement Users

Considering relevance and usability of financial information, push-down accounting presents advantages by offering a direct, up-to-date valuation of assets and liabilities at the subsidiary level, thereby providing clearer information for decision-making. It allows investors and stakeholders to comprehend the fair value of assets immediately post-acquisition, facilitating better assessment of the subsidiary’s performance (Kieso et al., 2019).

However, due to the broader acceptance, comparability, and standardized nature of the purchase method adopted under U.S. GAAP, it remains the most practical and reliable approach for external reporting. Nonetheless, in jurisdictions or contexts where IFRS is predominant, and where push-down accounting is permitted, adopting push-down accounting could enhance the relevance and clarity of financial information.

Conclusion

In the context of acquiring a subsidiary, the choice of accounting method influences the transparency, comparability, and relevance of financial statements. The purchase method under U.S. GAAP remains the standard, providing consistency and comparability necessary for external users. Yet, push-down accounting can offer more immediate and transparent asset valuation, especially under IFRS. For strategic internal analysis, adopting push-down accounting could be advantageous, but for external reporting, the purchase method maintains broader acceptance and comparability. Ultimately, selecting the most appropriate method depends on regulatory environment, stakeholder needs, and the company's strategic objectives.

References

FASB. (2014). Accounting Standards Update No. 2014-02, "Intangibles—Goodwill and Other—Testing Goodwill for Impairment." Financial Accounting Standards Board.

FASB. (2017). Accounting Standards Codification (ASC) 805, "Business Combinations." Financial Accounting Standards Board.

IFRS Foundation. (2023). IFRS 3, "Business Combinations." International Financial Reporting Standards.

IASB. (2018). IFRS Practice Statement on Development of Accounting Policies.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.