The Financial Accounting Standards Board recently released Update No. 2014-`17 for November 2014, known as Business Combinations Topic 805.
Effective Nov. 18, the update serves as an amendment to pushdown accounting rules, which typically apply whenever a company is acquired by another entity and the purchase price of the acquired group or organization is "pushed down" as a reflection of its net assets. This requires adjustments on the part of the acquiring entity to reconcile the paid price, and is applied under business combination rules outlined in the FASB's standards for codification.
According to the FASB, the update addresses previously limited guidance regarding pushdown accounting for non-public companies. Prior to the amendment's publication, non-public companies had to analogize rules from the Securities and Exchanges Commission when determining whether or not pushdown accounting standards needed to be applied. Now, companies have an option for applying pushdown accounting upon changes in control – defined as a purchase of greater than 50 percent of the targeted entity – and in response, the SEC has rescinded its own, no-longer-in-effect guidance terms.
"An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle in accordance with Topic 250," read a section of the update. "If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. If an acquired entity elects the option to apply pushdown accounting in its separate financial statements, it should disclose information in the current reporting period that enables users of financial statements to evaluate the effect of pushdown accounting."
Improving financial statements
The application of pushdown accounting usually results in the acquired entity's assets and liabilities being reflected at fair value, as established by the acquiring organization. In this sense, the amendment enhances transparency and consistency for all parties, while helping facilitate the analysis of the accounting tactics and their effectiveness in short order.
For the oil and gas industry, especially, this update should have positive ripple effects. Increased mergers-and-acquisitions activity should precipitate more positive accounting treatment, meaning the new standard will be a boon as it is applied to the oil and gas industry. Given that many acquirers prefer to have their subsidiaries' financial statements reflect the fair value that was paid, it's reasonable to expect more instances in which pushdown accounting is applied.
For more information regarding the update, businesses and individuals can consult a LaPorte energy industry group professional.