When an acquirer gains control of an entity by acquiring more than 50% of the equity interests in an entity, assets and liabilities of the continuing entity may be revalued with a new cost basis. In an arms-length transaction between unrelated parties, negotiated values ordinarily represent market values.
New basis accounting, referred to as push-down accounting, results in the same carrying amounts for assets and liabilities in an acquired entity's financial statements as are included in the consolidated financial statements of a parent company. Push-down accounting is applied using the same values as the acquisition method in business combinations, generally market values.
When assets and liabilities have undergone a comprehensive revaluation and the new bases used for the acquired entity, the portion of the retained earnings adjustment not included in consolidated retained earnings of the acquirer, or which is not related to non-controlling interests, should be reclassified as capital stock, additional paid-in capital or a separately named equity account in stockholders' equity.
When the deferred income taxes method is used, deferred tax assets are recognized when it is more likely than not they will be realized. Those not likely to be realized are excluded from the revaluation. Subsequent recognition of deferred tax benefits not included in the revaluation should ordinarily be recognized in net income.
The following disclosures are required for the first period in which push-down accounting is first applied:
- The date of application of push-down accounting and the dates of the purchase or other transaction that led to its application.
- A description of transaction or event leading to the application of push-down accounting.
- Changes in major accounts resulting from the application of push-down accounting.
- In the fiscal period following the period push-down accounting was first applied, the date of its application, the amount of the revaluation adjustment and the equity account affected and the amount of retained earnings reclassified to other equity accounts.
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