Push-down accounting Select one:
a. is the process of recording the effects of the purchase price assignment directly on the books of the subsidiary.
b. requires a subsidiary to use the same accounting principles as its parent company.
c. is required when the parent company uses the cost method to account for its investment in a subsidiary.
d. is required when the parent company uses the equity method to account for its investment in a subsidiary.
The correct answer and explanation is :
The correct answer is:
a. is the process of recording the effects of the purchase price assignment directly on the books of the subsidiary.
Explanation:
Push-down accounting is an accounting method that specifically deals with situations where one company (the parent) acquires another company (the subsidiary). Under push-down accounting, the subsidiary adjusts its own financial records to reflect the fair values assigned to its assets and liabilities at the acquisition date. In other words, the effects of the parent company’s purchase price allocation are “pushed down” and recorded directly in the subsidiary’s books.
This means that the subsidiary will not carry its assets and liabilities at their historical (old) costs anymore. Instead, it will use the new fair values established during the acquisition process. As a result, the financial statements of the subsidiary are aligned with the economic reality recognized by the parent company.
Why Option A is Correct:
- Option A accurately describes push-down accounting as recording the effects of the purchase price assignment directly on the subsidiary’s books.
- This method simplifies consolidated financial reporting because both the parent and subsidiary now recognize the assets and liabilities at the same updated values.
- The revaluations typically include goodwill if the purchase price exceeds the fair value of identifiable net assets.
Why the Other Options Are Incorrect:
- Option B: While consistency in accounting principles between parent and subsidiary is often recommended, that is not what defines push-down accounting.
- Option C: Push-down accounting is not triggered by the parent’s use of the cost method. The cost method is about how the parent reports its investment, not about revaluations on the subsidiary’s books.
- Option D: Similarly, the equity method relates to how the parent records investment income and changes in subsidiary equity. It doesn’t mandate push-down accounting.
Additional Notes:
- Push-down accounting is typically optional unless certain conditions are met, such as the subsidiary becoming wholly owned.
- In the United States, FASB ASC 805-50 provides guidance on push-down accounting.
- When push-down accounting is used, the subsidiary often also recognizes a revaluation adjustment in equity for the difference between the old book values and the new fair values.