ESOP Alert - February 2015

February 2015

Pushdown Accounting in ESOP Transactions

As more fully described in BDO’s Flash Report, the FASB recently issued a standard that permits, but does not require, an acquired entity to apply pushdown accounting in its separate financial statements when an acquirer obtains control of the acquired entity (the “acquiree”).

The new pushdown standard does not change the guidance in U.S. GAAP that determines when a change-in-control occurs. As such, an acquiree must first conclude whether the acquirer has in fact obtained a “controlling financial interest” under Topic 810.[1] For example, an operating company (“the Employer”) would have to evaluate whether an ESOP has obtained control of the Employer as a result of a leveraged ESOP transaction. The Employer would only have the option to apply pushdown accounting in situations in which an ESOP obtains control. The assessment of control is based on specific facts and circumstances, including whether the Employer is considered a variable interest entity (VIE) or voting interest entity (VOE) under Topic 810. Other relevant factors include how the Employer’s governing documents are designed (e.g., board composition) and the rights of its stakeholders (e.g., primary lenders).

As such, if a leveraged ESOP transaction did not result in a change of control prior to the new pushdown accounting standard, it would not represent a change of control afterward either.

However, if an Employer is permitted to apply pushdown accounting and does so, it must prepare its financial statements using the acquirer’s new basis of accounting under Topic 805.[2] Goodwill is recognized in pushdown accounting; however bargain purchase gains are not. Instead, a bargain purchase gain recognized by an acquirer would be recorded as an adjustment to additional paid-in-capital of the acquiree. Additionally, any acquisition-related liability incurred by the acquirer (e.g., debt incurred by the ESOP) would only be recognized if it represents an obligation of the acquiree.

The Employer is required to record acquisition-related debt under ASC 718-40 even if the debt is incurred by the ESOP because it is the ultimate source of the cash to repay the debt. Since the acquisition method generally reflects the net assets at fair value, the fair value of debt reported by the Employer may be substantially different than its carrying amount outside of pushdown accounting. For example, in the absence of pushdown accounting, a leveraged ESOP may result in a negative amount of equity (debit equity, credit debt). The fair value of the debt recorded under pushdown accounting may be significantly less.

As the new pushdown standard acknowledges, deciding whether to apply pushdown accounting requires judgment based on the specific circumstances.[3] Reporting entities should consider the needs of their financial statement users in making that decision. For questions or to discuss matters related to this article, please contact Kim Blaugher or Adam Brown.


[1] Consolidation
[2] Business Combinations. Using the acquirer’s new basis of accounting applies even if the acquirer was not required to apply Topic 805, for example if the acquirer reports all of its investments at fair value under U.S. GAAP.
[3] See BC16 in ASU No. 2014-17.