INFORMATION TO USERS

The most advanced technology has been used to photo­

graph and reproduce this m anuscript from the microfilm
master. UMI films the original text directly from the copy
submitted. Thus, some dissertation copies are in typewriter
face, while others may be from a computer printer.

In the unlikely event th a t the author did not send UMI a

complete manuscript and there are missing pages, these will
be noted. Also, if unauthorized copyrighted material had to
be removed, a note will indicate the deletion.

Oversize m aterials (e.g., m aps, drawings, charts) are re­

produced by sectioning the original, beginning at the upper
left-hand comer and continuing from left to right in equal
sections with small overlaps. Each oversize page is available
as one exposure on a standard 35 mm slide or as a 17" x 23"
black and white photographic print for an additional charge.

Photographs included in the original manuscript have been

reproduced xerographically in this copy. 35 mm slides or
6" x 9" black and white photographic prints are available for
any photographs or illustrations appearing in this copy for
an additional charge. Contact UMI directly to order.

UMI
Accessing the W orld’s Information since 1938

300 North Zeeb Road, Ann Arbor, Mi 48106-1346 USA

 O rder N u m b e r 8728949

Push down accounting: A conceptual analysis of its theoretical

implications

Thomas, Paula Bevels, D.B.A.

Mississippi State University, 1987

C o p y rig h t © 1 9 8 7 b y T h om as, P a u la B evels. A ll rig h ts re se rve d .

UMI
300 N. Zeeb Rd.
Ann Arbor, MI 48106
 PUSH DOWN ACCOUNTIN G: A CONCEPTUAL A N A L Y S IS
OF IT S T H EO R ETICA L IM P L IC A T IO N S

BY
PAULA BEVELS THOMAS

A DISSERTATION
SUBMITTED TO THE FACULTY OF
M I S S I S S I P P I STATE UNIVERSITY
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF DOCTOR OF BUSINESS ADMINISTRATION
IN THE COLLEGE OF BUSINESS AND INDUSTRY

M I S S I S S I P P I STATE, M IS S I S S I P P I
AUGUST, 1987
 COPYRIGHT BY
PAULA BEVELS THOMAS
1987

I i
 PUSH DOWN A C C O U N TIN G : A CONCEPTUAL A N A L Y S IS
OF I T S T H E O R E T IC A L I M P L I C A T IO N S

BY

PAULA BEVELS THOMAS

APPROVED:

Schoo I D ire d to r, D ivisio n of

>fcountancy ( M a j o r P r o f e s s o r G r a d u a t e S t u d i e s In
and C h a ir m a n o f D i s s e r t a t i o n Bus I ness
Committee)

P r o f e ^ r o r , School ' o f Dean , C o l I e g 6 o f

A c c o u n t a n c y ( Me m be r, B u s i n e s s and I n d u s t r y
D i s s e r t a t i o n Committee)

a l a
P ro fe s s d j^ o f M arketing V I c:e
e Pre^Idfent fo r
(Member, D i s s e r t a t i o n G r a d u a t e S t u d i e s and
Comm I t t e e ) Re s e a r c h

Au gust 1987

I I I
 DEDICATION

To E a r l , who e n c o u r a g e d me bo t h t o b e g i n my d o c t o r a l

p r o g r a m and t o se e it through c o m p le tio n and t o K a t e ,

who h e l p e d me keep it a ll In p e r s p e c t i v e
 ACKNOWLEDGEMENTS

I am s i n c e r e l y grateful for the e f f o r t s and s u p p o r t

o f my c h a i r m a n , Dr. J. Larry H agler. H i s h e l p has been

I n v a l u a b l e t h r o u g h o u t e v e r y phase o f my d o c t o r a l prog ram ,

from p l a n n i n g t h e co u rs e w o rk t h r o u g h t h e f i n a l e d it s of

my d i s s e r t a t i o n . Dr. Tr o y E. Daniel and D r . Danny R.

A r n o l d w e r e e n c o u r a g i n g and s u p p o r t i v e t h r o u g h o u t th is

research. I also a p p re c ia te the Input from t h e o t h e r

c o m m i t t e e members, Dr. Kirk P. A rnett, Dr. R o b e r t L.

Frnka, and D r . L a r r y W. W h i t e .

The i n f o r m a t i o n p r o v i d e d by s t a f f members a t the

S e c u r i t i e s and Exchange Commission and t h e F i n a n c i a l

A c c o u n t i n g S t a n d a r d s Board has g i v e n me v a l u a b l e Insight

in to the "reaI-w o rId " ap p licatio n of push down

accounting. I am a I so most g r a t e f u l for the p r a c t ic a l

inform ation I received from CPAs in p u b l i c p r a c t i c e ,

p a rtic u la rly Terry A llis o n from E r n s t & Whinney.

Dr. W illiam J. G rasty, my d e p a r t m e n t c h a ir m a n a t

M i d d l e Tenne sse e S t a t e U n i v e r s i t y , has been most

s u p p o r t i v e t h r o u g h o u t my e n t i r e doctoral pr ogr am . I

a p p r e c i a t e h i s e n c ou r ag em en t, as w e l l as h i s fle x ib ility

In a l l o w i n g me t i m e t o c o m p l e t e t h i s research.

M ajor p r o j e c t s seldom r e s u l t from s o l i t a r y actions.

The h e l p and s u p p o r t o f my f a m i l y have been i n v a l u a b l e as

I have s t r i v e d to achieve t h i s goal. In a d d i t i o n to

b e i n g a good f r i e n d , my s i s t e r , Carol Womack, has a l w a y s

been t h e r e when I needed t h e o p i n i o n o f another

accountant. My m o t h e r , P a u lin e Bevels, has p r o v i d e d

en c our age m en t and a s y m p a t h e t i c e a r . I am I n d e b t e d t o

b o t h my m ot he r and my f a t h e r , the late Joe D. Bevels, who

In s tille d In me t h e d e s i r e t o do t h e v e r y b e s t t h a t I

c o u I d w I t h my I I f e .

It is d i f f i c u l t to ad e q u ately thank t h e one

In d iv id u al who has h e l p e d me In e v e r y way p o s s i b l e . My

husband, Earl Thomas, has p r o v i d e d enc our age me nt

throughout a l l phases o f my d o c t o r a l pr o g r am . He has

done e v e r y t h i n g from k e e p i n g t h e h o u se ho ld go i n g t o

e d i t i n g my d i s s e r t a t i o n . Most im p ortan tly, Earl has

provided t h e moral s u p p o r t t h a t can o n l y come from

someone who, in a d d i t i o n t o b e i n g my b e s t frien d , has

also fin is h e d a doctoral pr ogr am . I con sider the

com pletion of th is d is s e rta tio n t o be a m i l e s t o n e not

Jus t f o r me, but for bo t h o f us.

vl
 ABSTRACT

P a u l a B e v e l s Thomas, D o c t o r o f B u s in e s s A d m i n i s t r a t i o n , 1987

M ajor: B u s in e s s A d m i n i s t r a t i o n ( A c c o u n t i n g ) ,
C o l l e g e o f B u s i n e s s and I n d u s t r y

T itle of D issertation: Push Down A c c o u n t i n g : A Cd n c e p t u a l

A n alysis of I t s T h e o re tic a l
Imp I I c a t Ions

D irected by: Dr. J. L a r r y Hag I e r

Pages in D i s s e r t a t i o n : 192 Words in A b s t r a c t : 327

ABSTRACT

The p r i m a r y p u r p o s e o f th is s t u d y was t o in vestig ate

the th e o r e t ic a l v a lid ity of push down a c c o u n t i n g . The

S e c u ritie s and Exchange Commission r e q u i r e s th is accounting

technique for a ll reg istra n ts , but t h e a c c o u n t i n g p r o f e s s i o n

has is s u e d no a u t h o r i t a t i v e pronouncement on t h e s u b j e c t .

Push down a c c o u n t i n g requires that the p a r e n t's purchase

p r i c e as e s t a b l i s h e d by an a c q u i s i t i o n be r e c o r d e d on t h e

books o f the s u b s id ia ry , thereby e s ta b lis h in g a new b a s i s o f

accounting for the s u b s id ia r y . The p r e m i s e o f th is study

was t h a t before s p e c ific implementation g u i d e l in e s are

developed, the fu nd a m e n ta l th eo retic al v a lid ity of push down

a c c o u n t i n g s ho ul d be e v a l u a t e d .

Push down a c c o u n t i n g was a n a l y z e d in r e l a t i o n to

several key components o f c u r r e n t g e n e r a l l y accepted

accounting p r i n c i p le s : the h is t o r ic a l cost concept, the

ownership e q u ity t h e o r i e s , and an as se ssm en t o f how

vl I
fin a n c ia l s t a t e m e n t s p r e p a r e d u s i n g push down a c c o u n t i n g

meet t h e needs o f the users. Push down a c c o u n t i n g was shown

t o be d e f e n s i b l e under t h e h i s t o r i c a l c o s t c o n c e p t and t h e

pro p rietary th e o r y of owners' e q u ity . I t was c o n c lu d e d t h a t

push down a c c o u n t i n g enhances most o f the q u a l i t a t i v e

c h a ra c te ris tic s lis te d by t h e FASB in I t s Conceptual

Framework p r o j e c t . A l t h o u g h t h e e s t a b l i s h m e n t o f a new

b as is of accounting d e t r a c t s from c o n s i s t e n c y and

c o m p a ra b ility , ad d itio n al d i s c l o s u r e s c o u l d overcome t h i s

o b s ta c Ie .

F in an c ial d a t a b a s e s w e r e s e a r c h e d t o d e t e r m i n e how push

down a c c o u n t i n g Is b e i n g a p p l i e d In p r a c t i c e . Several

practical p r o b le m s t h a t a r is e w ith Implem entation o f push

down a c c o u n t i n g w e r e a d d r e s s e d In t h i s study.

Push down a c c o u n t i n g was found t o be c o n s i s t e n t w i t h

the e x i s t in g conceptual fra mework o f a c c o u n t i n g . I t was

therefore recommended t h a t t h e FASB t a k e a c t i o n soon t o

elim in a te the d iv e r s it y that c u rren tly exists between SEC

reg istra n ts and n o n r e g i s t r a n t s . G u i d e l i n e s s h o u l d a l s o be

Issued t o q u a n t i f y t h e p e r c e n t a g e change In o w n e r s h i p t h a t

trig g e rs push down a c c o u n t i n g . The recommended g u i d e l i n e in

th is study is a 97 p e r c e n t change In o w n e r s h i p , w ith

fle x ib ility to adjust th is benchmark as needed on a ca s e by

ca s e b a s i s .

vi i I
 TABLE OF CONTENTS

Chapter Page

I . SETTING THE S T A G E ....................................................................... 1

Purp ose o f t h e S t u d y ........................................................ 3

Background ................................................................................. 6
J u s t i f i c a t i o n ............................................................................ 10
L i t e r a t u r e Review .................................................................. 13
AI CPA Is s u e s P a p e r ........................................................ 14
FASB D i s c u s s i o n Memorandum ................................... 16
D is s e r ta tio n A bstracts .............................................. 18
Journal A r t i c l e s ............................................................. 19
Emerging Is s u e s Task F o r c e D e c i s i o n s . . . . 23
S u m m a r y ...................................................................................... 25
Re se ar ch M e t h o d o l o g y ........................................................ 25
Scope and L i m i t a t i o n s ........................................................ 27

II. IMPLEMENTATION OF PUSH DOWN ACCOUNTING . . . . 28

P r a c t i c a l I m p l i c a t i o n s o f Im p le m e n ti n g
Push Down A c c o u n t i n g ................................................... 29
F in a n c ia l Statements P r io r to A c q u is it io n . 30
B a l a n c e Sh e e t Enhancement ......................................... 30
F i n a n c i a l S t a t e m e n t s A f t e r I m p le m e n ti n g
Push Down A c c o u n t i n g .............................................. 31
R e d u c t i o n o f Net I n c o m e .............................................. 32
E f f e c t on R a t i o A n a l y s i s ........................................ 33
Income S t a t e m e n t I n c o n s i s t e n c y . . . . . . 37
C o n s i d e r a t i o n s f o r Management .............................. 40
S u m m a r y ...................................................................................... 42
R e s u lts o f Database Searches ................................... 43
Company C i t e d is a W h o l l y Owned S u b s i d i a r y
U s in g Push Down A c c o u n t i n g .............................. 44
Company C i t e d R e p o r t s T h a t I t s W ho lly -O wn e d
S u b s i d i a r i e s Use Push Down A c c o u n t i n g . . 47
Company C i t e d Uses Push Down A c c o u n t i n g
When I t is not Who I ly O w n e d .............................. 48
Company C i t e d Does Not Use Push Down
A c c o u n t i n g ....................................................................... 50
Push Down A c c o u n t i n g A p p l i e d As A R e s u l t o f
a Sp I I t o f f ....................................................................... 51
C o n c l u s i o n ............................................................................ 53

ix
III. THE APPLICATION OF HISTORICAL COST TO
PUSH DOWN A C C O U N T I N G ............................................................. 57

An O v e r v i e w o f H i s t o r i c a l C o s t ......................... 58
D e f e n s e o f H i s t o r i c a l C o s t .............................. 58
C r i t i c i s m s o f H i s t o r i c a l C o s t .......................... 62
O t h e r V a l u a t i o n Methods ............................................. 66
E x a m p l e s ................................................................................. 72
P a r e n t Company T h e o r y .............................................. 73
E n t i t y Th e or y .................................................................. 73
A p p l i c a t i o n o f H i s t o r i c a l C o st t o Push
Down A c c o u n t i n g ............................................................. 74
H i s t o r i c a l Cost S u p p o r t f o r Push Down
A c c o u n t i n g .................................................................. 75
H i s t o r i c a l Co st E v i d e n c e A g a i n s t Push
Down A c c o u n t i n g .......................................................... 80
E v a l u a t i o n o f t h e E v i d e n c e .............................. 84
S u m m a r y ................................................................................ 87

IV. AN APPLICATION OF OWNERSHIP EQUITY THEORIES . . 88

Residual E q u ity Theory ............................................. 89

Commander Th e or y ............................................................. 90
E n t e r p r i s e The or y ............................................................. 91
The P r o p r i e t a r y T h e o r y .............................. 92
E f f e c t on C u r r e n t P r a c t i c e .............................. 93
A p p lic a tio n to C o nsolidated Statements . 95
A p p l i c a t i o n t o Push Down A c c o u n t i n g . . . 97
D i f f i c u l t i e s w i t h I m p le m e n t i n g Push
Down A c c o u n t i n g ........................................................ 99
The E n t i t y T h e o r y ............................................................. 101
E f f e c t on P r a c t i c e ................................................... 102
A p p lic a t io n to C onsolidated Statements . 103
A p p l i c a t i o n t o Push Down A c c o u n t i n g . . . 106
D i f f i c u l t i e s w i t h I m p le m e n ti n g Push
Down A c c o u n t i n g ........................................................ 111
S y n o p s i s o f t h e T h e o r i e s ........................................ 113
S u m m a r y ..................................................................................... 115

V. ASSESSING THE NEEDS OF FINANCIAL

STATEMENT USERS ...................................................................... 117

I d e n t i f y i n g F i n a n c i a l S t a t e m e n t U s er s . . . 117
A s s e s s s l n g t h e U s e r s ' Needs ................................... 121
Q u a lita tiv e C h a ra c te ris tic s . . 123
B e n e f i t s Exceed C o s t s ............................................. 124
U n d e r s t a n d a b I I I t y ........................................................ 127
D e c i s i o n U s e f u l n e s s .................................................. 130
R e l e v a n c e ........................................ 132
Re I I ab I I I t y ...................................................................... 139
ComparabI I I t y / C o n s I s t e n c y ................................... 144
- M a t e r I a I I t y ...................................................................... 149
S u m m a r y ..................................................................................... 149

x
 V I . SUMMARY, CONCLUSIONS AND RECOMMENDATIONS . . . 151

S u m m a r y ..................................................................................... 152
C o n c l u s i o n s ........................................................................... 161
Recommendations ................................................................. 164
I m p l i c a t i o n s f o r F u r t h e r R e sea rc h ........................ 168

APPENDIX A: DETAILED EXPLANATION OF

DATABASE SEARCHES ..................................................................... 170

P r e l i m i n a r y D a t a b a s e S e a r c h e s .............................. 170
D i s s e r t a t i o n A b s t r a c t s O n l i n e ........................... 170
D i s c l o s u r e Management .................................... 171
I n v e s t e x t ........................................................................... 175
NAARS D a t a b a s e ................................................................. 176
Key Words "Push Down" .................................... 178
NAARS— Second Approach .................................... 185

B I B L I O G R A P H Y ............................................................................................... 187

XI
 CHAPTER 1

SETTING THE STAGE

During the past few y e a r s , It has become v i r t u a l l y

I m p o s s i b l e t o r e a d any b u s i n e s s p u b l i c a t i o n w i t h o u t

e n c o u n t e r i n g some r e f e r e n c e t o a m er ger or a c q u i s i t i o n .

At any g i v e n tim e, some f i r m is fa c e d w i t h a proposed

frie n d ly or h o s tile takeover, a leveraged buyout, o r some

o t h e r change in Its ownership. Despite the In n u m e r a b l e

p r o b le m s t h e s e s i t u a t i o n s ca u s e f o r company management,

t h e a c c o u n t i n g pr ob le m s b e g i n a f t e r the tra n s a c tio n Is

consummated.

When one f i r m a c q u i r e s a n o t h e r , b u t bo t h c o n t i n u e

o p e r a t i n g as s e p a r a t e e n t i t l e s , s e p a ra te accounting

records a re norm ally m aintained for each company. These

s e p a ra te accounting r e c o r d s a r e u s u a l l y combined and

reported as a s i n g l e s e t o f c o n s o l i d a t e d fin a n cial

statements to b e tte r serve the in te re sts of shareholders.

A u t h o r i t a t i v e accounting lite ra tu re contains

sp e c ific g u id elin es r e g a r d i n g v a l u a t i o n o f a s s e t s and

lia b ilitie s o f a c q u i r e d companies on c o n s o l i d a t e d

fin a n cial statem ents. However, no such c r i t e r i a exist

for t h e a c q u i r e d company if it continues Its e x i s t e n c e as

a separate e n t i t y and is s u e s s e p a r a t e fin a n cial

1
statem ents a f t e r its acq u is itio n . Consequently, a

p ractice known as "push-down a c c o u n t i n g " has e v o l v e d for

use und er c e r t a i n con d itio n s.

Push-down a c c o u n t i n g requires that the purchase

price p a i d by t h e p a r e n t be r e f l e c t e d In t h e v a l u a t i o n of

t h e a s s e t s and lia b ilitie s on t h e books o f the

sub sid iary. The p a r e n t ' s c o s t Is thus "pushed down" to

t h e books o f the s u b s id ia ry . The use o f push-down

accounting, how eve r, has no e f f e c t on t h e c o n s o l i d a t e d

s t a t e m e n t s because t h e s e s t a t e m e n t s a l r e a d y re fle c t the

p rice p a i d by t h e p a r e n t .

If the s u b s id ia ry Is sue s s e p a r a t e fin a n c ia l

statem ents, the d e c is io n of whether or not t o use push

down a c c o u n t i n g can have s i g n i f i c a n t ram ificatio n s for

d eterm in ing ne t income, for the c a l c u l a t io n of key

fin a n c ia l ra tio s , and In t h e c o m p a r a b i l i t y o f the

fin a n cial s t a t e m e n t s between y e a r s . Push down a c c o u n t i n g

u su ally results in a r e d u c t i o n o f net income, due In p a r t

t o h i g h e r d e p r e c i a t i o n c h a rg e s r e s u l t i n g from t h e

increased v a lu a t io n s o f the assets.

In t h e absence o f a u th o rita tiv e g u id elin es,

su b sid iaries i s s u i n g s e p a r a t e s t a t e m e n t s c o u ld o p t f o r or

ag ain st t h e use o f push down a c c o u n t i n g . However, the

S e c u ritie s and Exchange Commission (SEC) released S t a f f

Accounting B u l l e t i n (SAB) Number 54 in November o f 198 3.

This B u ll e t in requires t h e use o f push down a c c o u n t i n g

for Its r e g i s t r a n t s when s u b s t a n t i a l l y a ll o f t h e common

stock Is a c q u i r e d and t h e firm has no o u t s t a n d i n g p u b l i c

debt or preferred sto ck.1

Although th e F in a n c ia l A c c o u n t i n g S t a n d a r d s Board

(FASB) w i l l address the t o p i c as a component o f i t s major

p r o j e c t on c o n s o l i d a t i o n s , 2 no a c c o u n t i n g standard-

s e t t l i n g body has issued an a u t h o r i t a t i v e pronouncement on

push down a c c o u n t i n g . Push down a c c o u n t i n g has become an

accounting re a lity for a l l p u b licly h e l d companies

w ith o u t t h e due p r o c e s s n o r m a l l y follow ed by t h e

accounting p ro fe s s io n (p u b lic hearings, exposure d r a f t s ,

and comment p e r i o d s ) . A d ditional problems a r i s i n g w it h

practical Im plem entation, such as how t o h a n d l e

acqu I s 111 ons. o f less than I 00 p e r c e n t o f the stock,

re m ai n u n s o l v e d .

Purpose o f t h e St ud y

U n til t h e SEC began r e q u i r i n g t h e use o f push down

accounting In 198 3, companies had an o p t i o n o f u s i n g or

not u s i n g t h i s method o f rep o rtin g . In t h e ab se nc e o f

a u th o rita tiv e accounting standard s, g e n erally accepted

accounting p r i n c i p l e s (GAAP) a l l o w companies t o implement

o r no t implement push down a c c o u n t i n g . As a r e s u l t o f

t h e SEC pro no un cem en t, r e g i s t e r e d companies a r e r e q u i r e d

S e c u r i t i e s and Exchange Commission, S t a f f

A c c o u n t i n g B u l l e t i n Number 5 4 . " A p p l i c a t i o n o f 'Push
Down' B a s i s o f A c c o u n t i n g in F i n a n c i a l S t a t e m e n t s o f
S u b s i d i a r i e s A c q u i r e d by P u r c h a s e , " (CCH, I n c . : November,
1983).

2 Edward E. W i l c o x , "Management Vi ew s o f Pu rc ha se
A c c o u n t i n g , " Oh I o CPA J o u r n a I 43 (Summer, 1 9 8 4 ) : 159.
t o use push down a c c o u n t i n g ; yet g u id elin es for th is area

have s t i l l n o t been Issu ed by an a u t h o r i t a t i v e accounting

body. N e ith er the th e o r e tic a l ju s tific a tio n for

I m p le m e n ti n g push down a c c o u n t i n g nor t h e p r o b le m s

Inherent In e s t a b l i s h i n g a new b a s i s o f a c c o u n t i n g has

been f o r m a l l y a d d re s s e d by t h e a c c o u n t i n g p r o f e s s i o n .

The lack of a u t h o r i t a t i v e g u id elin es s h o u l d not be

Interpreted t o mean t h a t the accounting p ro fe s s io n has

i g n o r e d push down a c c o u n t i n g . The t o p i c has been

Included In t h e FASB' s o v e r a l l c o n so lid atio n p ro ject, but

as p a r t o f t h e second phase o f the p r o je c t . Several

y e a r s c o u l d c o n c e i v a b l y pass b e f o r e t h i s phase is

com pleted. The Expos ure D r a f t on t h e firs t phase was

only Is su ed In December, 1986 a f t e r b e i n g added t o t h e

FASB's agenda in 1982.3

The a bs en ce o f a u t h o r i t a t i v e g u id elin es from t h e

accounting p ro fe s s io n has caused d i v e r s e rep o rtin g

p ractices. Companies n o t required to re p o rt t o t h e SEC

r em ai n free t o choose w h e t h e r o r not t o employ push down

accounting, w h i l e SEC r e g i s t r a n t s are being required to

estab lish a new b a s i s o f a c c o u n t i n g upon a c q u i s i t i o n .

This s i t u a t i o n can o n l y r e s u l t In c o n f u s i o n for fin a n cial

s t a t e m e n t u s e r s because Id en tic al c irc u m stan ce s might

resu lt in d i f f e r e n t rep o rtin g practices for d iffe re n t

3 F I n a n c I a I A c c o u n t i n g S t a n d a r d s B o ar d , Proposed
Statem ent o f F in a n c ia l Accounting S ta n d a rd s .
" C o n s o lid a tio n of a l l M ajority-O w ned S u b s i d ia r i e s , "
( S t a m f o r d : FASB, December 16, 1 9 8 6 ) , p a r a g r a p h 22.
 5

firm s. Even when f i r m s must comply w i t h t h e SEC

pronouncement and Implement push down a c c o u n t i n g , no

g u id elin es e x is t to resolve p r a c tic a l problems, such as

t h e p e r c e n t a g e change In o w n e r s h i p t h a t s h o u ld "trig g er^

re v a lu a tio n of the assets.

The p r e m i s e o f th is study is t h a t the t h e o r e t ic a l

v a lid ity of push down a c c o u n t i n g must be a d d r e s s e d b e f o r e

an a t t e m p t Is made t o resolve p r a c tic a l problems.

A l t h o u g h t h e a u t h o r s o f an a r t i c l e In Management

Account Ing w e r e a d d r e s s i n g t h e T r u e b l o o d R e p o r t o v e r a

de c ad e ago, the point t h e y made a p p l i e s e q u a l l y w e l l to

push down a c c o u n t i n g :

A c c o u n t i n g h i s t o r y has been t y p i f i e d by
t h e need o f r u l e making b o d i e s t o f i g h t br us h
fire s . Because b i l l i o n s o f d o l l a r s In
I n v e s t m e n t s w e r e a t I s s u e , many o f t h e br us h
f i r e s have been e x t r e m e l y h o t and v e r y u r g e n t .
And, a l t h o u g h we do u n d e r s t a n d t h e i m p o r t a n c e
and u r g e n c y o f f i g h t i n g bru sh f i r e s , t h e
answers found must be c o n s i d e r e d t o be o n l y
t e n t a t i v e and s u b j e c t t o h e r o i c r e v i s i o n u n t i l
t h e y can be made p a r t s o f a c o n s i s t e n t ,
o v e r a l l , adequate accounting th e o ry . W hile the
brush f i r e s must be a t t e n d e d t o , t h e
f u n d a m e n t a l s , b e g i n n i n g w i t h t h e o b j e c t i v e s and
p r e m i s e s , must a l s o r e c e i v e p e r s i s t e n t and
strenuous a t t e n t i o n , leading u l t i m a t e l y to
r e v i s i o n and h a r m o n i z i n g o f t h e ' p r i n c i p l e s '
t e n t a t i v e l y l a i d down In t h e b r u s h - f I r e
approach. 4

The a c c o u n t i n g p r o f e s s i o n and t h e b u s i n e s s community

need t h e FASB t o take actio n to e lim in a te , or at least

m in im ize, d iv e rs ity in r e p o r t i n g practices. But instead

4 BI I Iy E . G o e t z and Jacob G. B i r n b e r g , "A Comment on

t h e T r u e b l o o d R e p o r t , " Management A c c o u n t i n g 57 ( A p r i l
1 9 7 6 ) : 18.
of opting for the b r u s h - f lr e ap pr oa ch d e s c r i b e d abo ve,

the u n d erlying th e o re tic a l p r e m i s e s o f push down

a c c o u n t i n g must f i r s t be a d d r e s s e d . Very little research

of e ith e r a practical or a t h e o r e t ic a l n a t u r e has been

done w h ic h wo uld a i d in t h e dev el o pm en t o f a u t h o r i t a t i v e

g u id elin es. The p r i m a r y emphasis in t h i s study Is on t h e

th eo re tic a l aspects of push down a c c o u n t i n g and its

r e la tio n s h ip w ith the o v e ra ll framework o f c u r r e n t GAAP.

The o b j e c t i v e s o f the study a re s ta te d as f o l l o w s :

Prim ary Purpose: to determ in e whether push down

a ccounting Is t h e o r e t i c a l l y acceptable w ith in the o v e ra ll

fra me wo rk o f c u r r e n t GAAP.

S e c o n d a ry P u r p o s e : t o a d d r e s s some o f t h e pr obl em s

encountered in a c t u a l i m p l e m e n t a t i o n o f push down

account I n g .

Background

Push down a c c o u n t i n g e s t a b l i s h e s a new b a s i s o f

a c c o u n t i n g and r e p o r t i n g for an a c q u i r e d e n t i t y when It

p ub lishes sep arate fin a n c ia l statem ents. The logic

b e h i n d push down a c c o u n t i n g is t h a t the purchase p r i c e

p a i d by t h e a c q u I r I n g e n tity re fle c ts a new " c o s t " that

a c c o r d i n g l y s h o u ld be r e c o r d e d on t h e books o f the

a c q u i r e d company.

The A c c o u n t i n g P r i n c i p l e s Board (APB) Issued APB

O p i n i o n No. 16, Business C o m b in a tio n s , in 1970.5 This

A c c o u n t i n g P r i n c i p l e s Bo ar d, Op I n I o n No. 1 6 .
" B u s in e s s C o m b i n a t i o n s " (New Yo rk : AI CPA, 1 9 7 0 ) .
pronouncement c o n t a i n s g u i d e l i n e s for bo t h the p o o ling of

i n t e r e s t s method and t h e p u r c h a s e method o f recording

business co m b in a tio n s . Any c o m b i n a t i o n s t h a t do no t meet

the s p e c if ie d c rite ria for pooling of I n t e r e s t s must be

accounted for by t h e p u r c h a s e method. In c o m b i n a t i o n s

accounted for by t h e p u r c h a s e method,® APB 16 r e q u i r e s

that t h e a s s e t s and lia b ilitie s of t h e a c q u i r e d company

must be Included In t h e p u r c h a s e r ' s c o n s o l i d a t e d

statements a t th e ir fa ir market v a lu e , as e v i d e n c e d by

the a c q u is itio n price. However, APB 16 p r o v i d e s no

guidance for how t h e s u b s i d i a r y s ho ul d r e p o r t t h e s e same

a s s e t s and lia b ilitie s If it I ss ue s s e p a r a t e s t a t e m e n t s .

P rio r to the i s s u a n c e o f APB 16, many c o m b i n a t i o n s

were accounted for as p a r t p u r c h a s e - p a r t p o o l i n g .

A l t h o u g h APB 16 r e s o l v e d t h e c o n t r o v e r s y e x i s t i n g at that

tim e re g a rd in g accounting for business co m b in atio n s, it

s u b t l y and p r o b a b l y u n i n t e n t i o n a l l y raised the question

of how t h e s u b s i d i a r y s h o u l d r e p o r t the a c q u is it io n .

U n fortunately, It d i d n o t p r o v i d e an answer to th is

question.

The SEC f i r s t a d d r e s s e d t h e push down issue In 197 2.

A d r a f t was p r e p a r e d w hi c h would have e s s e n t i a l l y

required establishing a new b a s i s o f a c c o u n t i n g for an

®The push down a c c o u n t i n g is su e is r e l e v a n t o n l y

w i t h b u s i n e s s c o m b i n a t i o n s ac c o u n t e d f o r by t h e pu r c h a s e
meth od. I f t h e c o m b i n a t i o n meets t h e c r i t e r i a f o r
p o o l i n g o f I n t e r e s t s , t h e a s s e t s and l i a b i l i t i e s a r e
c a r r i e d f o r w a r d a t t h e i r h i s t o r i c a l c o s t on bo th t h e
c o n s o l i d a t e d s t a t e m e n t s as w e l l as any s e p a r a t e l y Issued
statem ents.
e n tity 's a s s e t s and lia b ilitie s measured by t h e s a l e s

p r ic e adjusted to re fle c t the tra n s a c tio n as If a ll the

common s t o c k had been s o l d . The r e q u i r e m e n t wo uld

g e n erally have been e f f e c t i v e when a s a l e o f more th an

fifty percent of an e n t i t y ' s common s t o c k o c c u r r e d w i t h i n

a twelve-month p e r io d . Thus, If sixty percent of a

firm 's s t o c k was p u r c h a s e d , the p r i c e paid for that sixty

p e r c e n t would be used t o Impute a v a l u e t o be r e c o r d e d

f o r one hundred p e r c e n t o f the firm 's assets. T h i s SEC

d raft r e l e a s e was nev er Issued f o r comment.7

It appears t h a t the f i r s t a p p licatio n of push down

accounting occurred sometime between Is s u a n c e o f APB 16

in 1970 and p r e p a r a t i o n by t h e SEC o f Its 1972 d r a f t on

the su b ject. The AICPA Is s u e s Paper (discussed In t h e

follo w in g section) r e v i e w e d SEC f i l i n g s and annu al

reports to l o c a t e examples o f how companies a c c o u n t for

m a j o r changes o f o w n e r s h i p . A 1972 a c q u i s i t i o n by Hughes

Tool of t h e Summa C o r p o r a t i o n resulted In t h e a p p l i c a t i o n

of push down a c c o u n t i n g on t h e books o f the s u b s id ia ry .®

An In te re stin g exa mp le l o c a t e d by t h e AICPA was t h e one

hundred p e r c e n t a c q u is itio n o f Armour by Greyhound

Corporation. A l t h o u g h t h e c o m b i n a t i o n was c o m p l e t e d in

December o f 197 0, t h e a c q u i s i t i o n was not r e c o r d e d on

7 James W . C r a f t and K e v i n P. O ' T o o l e , "Push Down

A c c o u n t i n g — Has I t s Time Come?" C o rp o rate Accounting 2
(S p rin g 1984): 60.

®Ac co u nt ln g S t a n d a r d s E x e c u t i v e Co m m itt ee Is su es
Paper "Push Down" A c c o u n t i n g (New Yo rk : AICPA, O c t o b e r
3 0 , 1 9 7 9 ) , page 29 .
 9

A r m o u r ' s books u n t i l January, 197 9. Push down a c c o u n t i n g

was t h u s employed e i g h t y e a r s a f t e r the a c q u is itio n

occurred.

The AICPA Task F o r c e on C o n s o l i d a t i o n s p u b l i s h e d an

Is s u e s Paper e n t i t l e d "Push Down" A c c o u n t i n g in 19 7 9.

This Is s u e s Paper reviewed a p p li c a b l e accounting

lite ra tu re on push down a c c o u n t i n g and lis te d ar gu m en ts

for and a g a i n s t its im plem entation. By an e i g h t to fiv e

vote, t h e Task F o r c e members c o n c lu d e d t h a t th ere are

s i t u a t i o n s wher e push down a c c o u n t i n g s h o u ld be

employed.9 The recommendation t o use push down

accounting raised several co lla te ra l Issues, most o f

w hi c h re m ai n u n r e s o l v e d :

1. What p e r c e n t a g e change In o w n e r s h i p s h o u ld

be r e q u i r e d to J u s t i f y a new b a s i s o f

accounting? Must one hundred p e r c e n t o f

t h e s t o c k be a c q u i r e d , or is a s m a l l e r

percentage ap p ro p riate?

2. Sho uld s p l i t o f f s and s p i n o f f s give ris e to

a new b a s i s o f a c c o u n t i n g ?

3. How s h o u ld a new b a s i s o f a c c o u n t i n g be

established In a s e r i e s o f step

transactions (i.e ., acq u is itio n of stock

over a p e rio d of tim e)?

9 Ib Id ., pp. 25-26.
 10

4. Are t h e r e m arket transactions In an

e n tity 's stock t h a t could resu lt In an

a p p licatio n of push down a c c o u n t i n g ?

5. How s h o u ld retain ed e a r n i n g s be t r e a t e d if

push down a c c o u n t i n g is u s e d ? 1®

U n til the i s s u a n c e o f SEC S t a f f Accounting B u l l e t i n

54 In 19 8 3, companies c o u l d use t h e i r own d i s c r e t i o n as

to whether t o a d o p t push down a c c o u n t i n g . This ch o ice

cau sed a d i v e r s i t y to e x i s t In p r a c t i c e . At t h e p r e s e n t

tim e, com panies not required to report t o t h e SEC can

s t i I I choose w h e t h e r t h e y want t o fo llo w push down

g u id elin es. Nonetheless, SEC r e g i s t r a n t s are required to

use push down a c c o u n t i n g w i t h o u t an e x a m i n a t i o n by t h e

accounting p ro fe s s io n to determ ine Its conceptual

vaI I d I t y .

J u s t I f I c a t I on

The pr ob le m s e v o l v i n g from t h e q u e s t i o n o f w h e t h e r

and when t o ad o pt push down a c c o u n t i n g f a r outnumber any

so lu tio n s. If t h e a c c o u n t i n g p r o f e s s i o n en d o r s e s

adoption of push down a c c o u n t i n g , several s p e c ific

implem entation Is s u e s ( suc h as t h o s e lis te d above

a d d r e s s e d by t h e AICPA Task F o r c e ) must be s e t t l e d .

Howev er , o t h e r more fu nd am en tal is s u e s must be r e s o l v e d

b e fo re progressing to th a t point.

10A c c o u n t i n g S t a n d a r d s E x e c u t i v e Co m m itt ee Is s u e s
P a p e r , "Push Down A c c o u n t i n g ." pp. 2 6 - 2 7 .
 11

In an a r t i c l e emphasizing the importance o f the

balance sheet for fin a n cial statement users, Sprouse

notes t h a t the resources r e p o r t e d on c o r p o r a t e b a l a n c e

sheets a r e n e c e s s a r ily lim ite d to assets that have been

a c q u i r e d as a r e s u l t o f past transactions. He a l s o

states that " . . . t h e e s s en ce o f re p o rted assets is

th eir a b ility to provide f u t u r e economic b e n e f i t s . " 11

Although t h i s comment is c o n c e p t u a l l y q u i t e a p p e a l i n g ,

t h e a c c o u n t i n g p r o f e s s i o n must a d d r e s s w h e t h e r push down

accounting helps in a c h i e v i n g th is ideal.

The t h r u s t o f t h e push down q u e s t i o n Is w h e t h e r or

not t h e p u r c h a s e p r i c e p a i d by one e n t i t y s h o u ld be

re fle c te d on t h e s e p a r a t e l y Issued, unconsolidated

statem ents of the s u b s id ia ry . V irtu a lly no r e s e a r c h has

been c o n d u c t e d t o a l l o w th is question t o be add re ss ed

from e i t h e r a practical reportin g point of v i e w or a

conceptual view poin t. U n til the v i a b i l i t y o f push down

a c c o u n t i n g as a r e p o r t i n g method is e xa m in ed , t h r e e major

problems p e r s i s t :

1. The o n l y a u t h o r i t a t i v e requirem ent that exists

Is SEC S t a f f Accounting B u l l e t i n 54, w h ic h mandates

adoption of push down a c c o u n t i n g for a l l registered

c o m p a n ie s . No f or m a l pronouncement has been issued by

11R o b e r t T. S p r o u s e , " B al an c e S h e e t — Embodiment o f

t h e Most Fundamental E l e m e n t s o f A c c o u n t i n g T h e o r y , " In
F o u n d a t i o n s o f A c c o u n t i n g Th e or y ( G a i n e s v i l l e : U n i v e r s i t y
o f F l o r i d a P r e s s , 197 1) p. 101.
 12

t h e FASB o r any o f Its predecessor standards s e t t in g

bod I e s .

2. D e s p i t e t h e SEC S t a f f Accounting B u l l e t i n

req u irin g push down a c c o u n t i n g , t h e r e a r e no p r o c e d u r a l

gu id elin es d e ta ilin g how t o a c t u a l l y Implement It in

p ractIce.

3. For companies not required to rep o rt t o t h e SEC,

a d iv e rs ity in r e p o r t i n g practices w ill continue to e x is t

u n til g u id elin es are established that sp e cify if and when

push down a c c o u n t i n g s h o u ld be i m pl em en ted .

Such d i v e r s i t i e s In r e p o r t i n g p r a c t i c e s cannot

b en efit fin a n cial statement users. In 19 8 1, Canada

Cement pushed down t h e p u r c h a s e p r i c e o f its one hundred

percent a c q u is itio n o f General P o rtland. This p r a c tic e

increased t o t a l a s s e t s by t w e n t y - f o u r percent and reduced

net Income by f o r t y - o n e p e r c e n t o f net income r e p o r t e d

before a p p lic a tio n of push down a c c o u n t i n g . A one

hundred p e r c e n t a c q u i s i t i o n o f F irs t D a t a R e sou rc es In

1983 by TRS increased t o t a l a s s e t s by s e v e n t y - e i g h t

percent for that year w h ile reducing net income by e i g h t

p e r c e n t . 12

Both o f t h e s e f i r m s employed push down a c c o u n t i n g

before t h e SEC issued t h e SAB r e q u i r i n g them t o do so,

but o th e r firm s in t h e same s i t u a t i o n s pro b a b ly opted

a g a i n s t push down a c c o u n t i n g . W hile t h i s d iv e rs ity has

been e l i m i n a t e d f o r companies t h a t report t o t h e SEC, It

^2C r a f t and O ' T o o I e , p . 6 1 .

 13

s till exists for no n re g is tran ts. The a c c o u n t i n g

p r o f e s s i o n must a c t to e lim in a t e th is d iv e rs ity and

a c h i e v e more c o m p a r a b i l i t y in f i n a n c i a l rep o rtin g . As so

su c cin ctly stated by t h e FASB:

To t h e e x t e n t t h a t s i m i l a r i t i e s and d i f f e r e n c e s
stem from f i n a n c i a l r e p o r t i n g r a t h e r t h a n from
the e n t e r p r is e s themselves, f in a n c ia l r e p o r tin g
h i n d e r s r a t h e r th an h e l p s i n v e s t o r s and
c r e d i t o r s In making t h e i r d e c i s i o n s . 13

Theoretical Ju s tificatio n for push down a c c o u n t i n g

w ith in the e x is t in g frame work o f GAAP i s exa mined In t h i s

p ro ject. The a n a l y s e s In t h i s study p ro v id e insight for

the accounting profession i n t o t h e d e v e lo p m e n t o f

gu id elin es for th is topic.

L ite ra tu re Review

The a c c o u n t i n g lite ra tu re contains very little

research s p e c i f i c a l l y c o n c e r n i n g push down a c c o u n t i n g .

But, l i k e most i ssu es In a c c o u n t i n g , push down a c c o u n t i n g

cannot e f f e c t i v e l y be a n a l y z e d In Iso latio n .

A ccordingly, throughout t h i s study r e l a t e d lite ra tu re Is

Incorporated in t h e e v a l u a t i o n o f push down a c c o u n t i n g ' s

conceptual v a lid ity .

S i n c e t h e use o f push down a c c o u n t i n g a f f e c t s only

sep arately iss ued s t a t e m e n t s o f the s u b s id ia ry , the

con solidated s t a t e m e n t s a r e not a l t e r e d by its use .

Nonetheless, push down a c c o u n t i n g c a n n o t be vi ew ed

13 F I n a n c I a I A c c o u n t i n g S t a n d a r d s B o a r d , Proposed
Statem ent of F in a n c ia l Accounting S ta n d a rd s .
"C o n so lid a tio n of A ll M ajority-O w ned S u b s id ia r ie s ,"
paragraph 45.
 14
s ep arately from t h e c o n s o l i d a t i o n p r o c e s s because It

i n v o l v e s c o m p a r a b i l i t y between amounts r e p o r t e d in t h e

consolidated s t a t e m e n t s and amounts r e p o r t e d on t h e

s u b sid iary's statem ents. Thus, much lite ra tu re on

consolidated rep o rtin g Is r e l e v a n t to th is issue, even if

on I y In d Ire c tIy .

Other r e l e v a n t accounting lite ra tu re Is employed

throughout th is s t u d y when a p p l i c a b l e . For e x a m p l e , push

down a c c o u n t i n g Is analyzed In C h a p t e r 3 re la tiv e to

h is to ric a l cost, so h i s t o r i c a l cost lite ra tu re Is

reviewed a t that point. The a c c o u n t i n g lite ra tu re

relate d s p e c ific a lly t o push down a c c o u n t i n g is reviewed

in t h e r e m a i n d e r of th is section.

A I CPA Is s u e s P a p e r

The most c o m p r e h e n s i v e work on push down a c c o u n t i n g

p u b l i s h e d by a r e c o g n i z e d a c c o u n t i n g body was t h e I ssu es

Paper, "Push Down" Account I n g . - p r e p a r e d In 1979 by t h e

A l C P A ' s Task F o r c e on C o n s o l i d a t i o n Problem s.^4 As noted

e a rlie r, th is Ta s k Force examined s e v e r a l i ss ue s r e l a t e d

to the topic of push down a c c o u n t i n g and p r o v i d e d some

a d v iso ry con clu sion s. In e v a l u a t i n g the d e s i r a b i l i t y of

estab lish in g a new b a s i s o f a c c o u n t i n g , t h e Task F o r c e

lis ts t h e f o l l o w i n g arguments f a v o r i n g push down

account In g :

14A c c o u n t l n g S t an d ar d s E x e c u t i v e Committee Is s u e s
P a p e r , "Push Down" A c c o u n t i n g .
 15

1. The p r i c e p a i d by t h e new owners when t h e r e Is a

sub stantial change In o w n e r s h i p Is t h e most r e l e v a n t

b asis f o r measuring a s s e t s , lia b ilitie s , and r e s u l t s of

operations of the e n t i t y from t h e p e r s p e c t i v e o f the

owners. Accordingly, th is p r i c e s h o u l d be r e f l e c t e d in

the e n t i t y ' s fin a n c ia l statem ents.

2. Substance over form f a v o r s t h e use o f push down

accountin g. The s u b s t a n c e o f transactions resu ltin g in

sub stantial changes In o w n e r s h i p is t h e same as If the

new owners pu r c h a s e d t h e n e t a s s e t s o f an e x i s t i n g

b u s i n e s s and e s t a b l i s h e d a new e n t i t y to co n tin u e the

bus I n e s s .

3. S i n c e APB No. 16 r e q u i r e s the co n so lid ated

statem ents to re fle c t th e purchase p r i c e , sep arately

Iss ue d fin a n cial s t a t e m e n t s s h o u ld a l s o r e f l e c t t h e same

p u r c h a s e p r i c e and t h e r e f o r e be s y m m e t r i c a l w ith the

c o n so lid ated statem ents.

4. FASB S t a t e m e n t No. 14 r e q u i r e s t h a t separate

segment Inform ation re fle c t the p a r e n t's cost basis for

each seg me nt. A l t h o u g h no t e v e r y s u b s i d i a r y is a

segme nt, issuing sep a ra te fin a n cial s t a t e m e n t s on a b a s i s

other t h a n push down c o u l d resu lt in t h e d i s t r i b u t i o n of

some c o n f l i c t i n g fin a n cial inform ation for t h e same

segment o r s u b s i d i a r y . 1®

151bId., pp. 13-14.

 16

In e x a m i n i n g bo t h s i d e s o f the Issue, t h e Task F o r c e

notes the follow ing ar g u m en ts a g a i n s t u s i n g push down

accounting:

1. Transaction s of the e n t i t y ' s shareholders are

not tra n sac tio n s of the e n t i t y , and a c c o r d i n g l y should

no t re fle c t the e n t i t y ' s accounting.

2. A new b a s i s o f a c c o u n t i n g w ou ld im p a ir

c o m p a r a b i l i t y and a f f e c t the a b i l i t y of the e n t i t y to

comply w i t h d e b t c o v e n a n t s r e q u i r e d by o u t s t a n d i n g debt.

3. FASB S t a t e m e n t no. 14 d e a l s w i t h reportin g

segments o f a b u s i n e s s and th us Is not relevant t o push

down a c c o u n t i n g .

4. There is no lo g ical way t o d e t e r m i n e w hi c h

owner's tra n s a c tio n s should q u a l i f y for push down

a c c o u n t I n g . 16

FASB D i s c u s s i o n Memorandum

The f i r s t a tte n tio n directed t o w a r d push down

a c c o u n t i n g by t h e FASB was c o n t a i n e d In a 1976 D i s c u s s i o n

Memorandum, "Accounting f o r B u s in e s s C o m b i n a t i o n s and

Pu rc h as ed In ta n g ib le s ." In Im plem entation Is s u e

T h irteen , t h e Board examined ar g u m en ts for and a g a i n s t

estab lish in g a new b a s i s o f a c c o u n t i n g . 17 T h i s document

is n o t as c o m p r e h e n s i v e in Its review of push down

16 I b I d . , pp. 15-17.

17F l n a n c i a l A c c o u n t i n g S t a n d a r d s B o ar d , D I s c u s s I on
Memorandum. "An A n a l y s i s o f I s s u e s R e l a t e d t o A c c o u n t i n g
f o r B u s i n e s s C o m b i n a t i o n s and Pu rc ha se d I n t a n g i b l e s "
( S t a m f o r d : FASB, 1 9 7 6 ) , p a r a g r a p h s 3 9 9 - 4 0 5 .
 17

a c c o u n t i n g as t h e AICPA Is s u e s Paper w h ic h follow ed three

years la te r, but s e v e ra l of the Id ea s a r e s i m i l a r . The

p r i m a r y ar gu m en ts lis te d by t h e FASB In s u p p o r t o f push

down a c c o u n t i n g a r e as f o l l o w s :

1. F in an cial s t a t e m e n t s p r e p a r e d u s i n g push down

a c c o u n t i n g a r e more r e l e v a n t for fin a n c ia l statement

users in e n a b l i n g them t o e s t i m a t e f u t u r e cash f l o w s .

2. The exchange t r a n s a c t i o n effected by t h e

com bination e s ta b lis h e s a new c o s t b a s i s .

3. If t h e a c q u i r e d company uses push down

accounting, Its fin a n cial statem ents w i l l be c o n s i s t e n t

w ith t h e combined e n t e r p r i s e ' s fin a n c ia l s t a t e m e n t s . 18

Arguments lis te d by t h e FASB a g a i n s t the

e s t a b l i s h m e n t o f a new a c c o u n t i n g b a s i s a r e as f o l l o w s :

1. The a c q u i s i t i o n o f a company r e p r e s e n t s a change

in its o w n e r s h i p b u t does not e s t a b l i s h a new c o s t b a s i s

under the h is to r ic a l cost f ra me wo rk .

2. Pro bl em s may r e s u l t from a g r e e m e n t s w i t h

o utsiders th at existed b efo re the com bination. Terms o f

t h e s e a g r e e m e n t s w e r e based on e x i s t i n g fin a n cial

inform ation p rior to the a c q u is itio n . Restatement of

e x is tin g amounts t o r e f l e c t a new b a s i s o f a c c o u n t i n g

could resu lt In pr ob le m s In m a i n t a i n i n g o r d e t e r m i n i n g

compliance w ith re s tric tio n s in t h o s e a g r e e m e n t s .

18 I b I d . , p a r a g r a p h s 4 0 1 - 4 0 2 .
 18

3. Comparab i I i t y w i t h p r e v I o u s pe r Iods w i l l be

ImpaI r e d . 19

The FASB n o t e s r e l a t e d Is s u e s t h a t must be a d d re s s e d

If a new b a s i s o f a c c o u n t i n g Is d e t e r m i n e d t o be

J u s tifie d . Examples i n c l u d e when push down a c c o u n t i n g

s h o u l d be a p p l i e d , how t o d e t e r m i n e t h e amount t o a s s i g n

to s p e c ific a s s e t s and lia b ilitie s , how r e t a i n e d earnings

s h o u l d be r e p o r t e d , and w ha t d i s c l o s u r e s s h o u ld be

m a d e . 20 Further action by t h e FASB was d e f e r r e d u n til

more p r o g r e s s was made on t h e c o n c e p t u a l f r a m e w o r k . 21

D isse rtatio n Abstracts

A com puterized search o f D i s s e r t a t i o n Abstracts

O n lin e covering the period 1861 to February 1987 r e v e a l e d

no c i t a t i o n for push down a c c o u n t i n g . The s e a r c h was

c o n d u c t e d u s i n g t h e words "push down" (both hy p he na te d

and n o n h y p h e n a te d ) w i t h t h e word "accounting." No

c ita tio n was located using these phrases t o g e t h e r . One

c ita tio n was found when t h e p h r a s e "push down" a l o n e was

used, but a review of the a b s tra c t disclo sed that the

study concerned d i g i t a l comp uter d e s i g n . As o f February

1987, no d i s s e r t a t i o n s have been c o m p l e t e d on push down

account In g .

19 I b I d . , paragraphs 4 0 3 -4 0 5 .

2 0 lb id ., paragraph 406.

21C h a r l e s E. H o l l e y , Edward C. Spede, and M i c h a e l C.

C h e s t e r , J r . , "The Push-Down A c c o u n t i n g C o n t r o v e r s y , "
Management Account Ing 68 ( J a n u a r y 1 9 8 7 ) : 4 1 .
Journal A rtic le s

S i n c e push down a c c o u n t i n g became a p o t e n t i a l

concern w it h the issua nc e o f APB 16 in 197 0, very little

has been w r i t t e n In t h e p r o f e s s i o n a l and aca de m ic

lite ra tu re on t h e t o p i c . The s i g n i f i c a n t a rtic le s are

discussed below.

C u n n in g h am 's A n a l y s i s . Cunningham e xa m in es pr os and

cons o f a d o p t i n g push down a c c o u n t i n g and u r g e s t h e

FASB's a c t i o n to e lim in a te the c u rre n tly e x is tin g

d iv e rs ity In r e p o r t i n g p r a c t i c e s . 22 He n o t e s t h e

fo llo w in g points In f a v o r o f push down a c c o u n t i n g :

1. FASB S t a t e m e n t No. 14 r e q u i r e s that inform ation

on s e p a r a t e segments o f an e n t e r p r i s e must re fle c t the

p a r e n t 's cost basis for each s e g m e n t . 23 A p plying the

same lo g ic t o s u b s i d i a r i e s as t o segments w ou ld imply

estab lish in g a new c o s t b a s i s as a c c o m p li s h e d t h r o u g h

push down a c c o u n t i n g .

2. Users o f fin a n cial s t a t e m e n t s can make more

a c c u r a t e as s es sm en ts If t h e y base t h e i r c o n c l u s i o n s on

t h e economic Impact o f t h e new ow ne rs ' a c tiv itie s rather

t h a n t h e p r e v i o u s ow ner s' a c t i v i t i e s . 24

22M I c h a e I E . Cunningham, "Push Down A c c o u n t i n g : Pros

and C o n s , " J o u r n a l o f A c co un ta nc y 157 ( J u n e 1 9 8 4 ) : 7 2 - 7 7 .

23F i n a n c i a l Accounting Standards Board, Statem ent of

F i n a n c i a l A c c o u n t i n g S t a n d a r d s No. 1 4 . " F i n a n c i a l
R e p o r t i n g f o r Segments o f a B u s in e s s E n t e r p r i s e "
( S t a m f o r d : FASB, 1 9 7 6 ) .

24CunnIngham, pp. 72-73.

 20

In a n a l y z i n g t h e n e g a t i v e a s p e c t s o f push down

accounting, Cunningham lis ts the fo llo w in g Ideas:

1. A d o p t io n o f push down a c c o u n t i n g may v i o l a t e the

h is to ric a l cost concept, and m i g h t be e q u i v a l e n t to

adoption of c u r r e n t value accounting. Follow ing th is

id ea t h r o u g h t o a logical conclusion could Imply t h a t all

e n titie s s ho ul d p r e s e n t t h e i r fin a n cial s t a t e m e n t s on a

current value b as is.

2. A new b a s i s o f accounting w i l l i m p a ir

co m p a ra b ility of fin a n c ia l s t a t e m e n t s between p e r i o d s . 2 ®

C raft and O ' T o o l e ' s P ractical A n aly sis. C raft and

O ' T o o l e examine some o f the p r a c t ic a l is su es a r i s i n g in

i m p l e m e n t i n g push down a c c o u n t i n g . 2 ® These a u t h o r s

provide illu s tra tio n s of the impact o f push down

a c c o u n t i n g on f i n a n c i a l s t a t e m e n t s and s p e c i f i c a l l y

d i s c u s s how v a r i o u s ra tio s and m u l t i p l e s are a ffe c te d .

In te re s tin g ly , C raft and O ' T o o l e s t a t e that present

accounting lite ra tu re ap p e a r s no t t o s u p p o r t push down

a c c o u n t i n g because a s s e t s s ho ul d not be w r i t t e n up t o

v a l u e s above c o s t t o t h e e n t i t y . 27 But looking a t

v irtu a lly t h e same issues, Cunningham s t a t e s that,

"C learly, current lite ra tu re seems t o p o i n t to w a rd push

**-____
I b i d . , pp. 7 3 - 7 4 .

2 ®James W. C r a f t and Ke vi n P. O ' T o o l e , pp. 57-62.

27 I b i d . , p. 60.
 21

down a c c o u n t i n g for fa ir presentation in lim ited

s Itu a tIo n s . . . "2 ®

H o llv. Spede and C h e s t e r . H o ily, Spede and C h e s t e r

ex am in e push down a c c o u n t i n g and s e v e r a l of the

c o lla te ra l issues t h a t a r i s e w it h its im plem entation.

They r e v i e w c u r r e n t GAAP as a p p l i e d t o push down

a c c o u n t i n g and n o t e t h a t no s p e c i f U: g u i d a n c e e x i s t s for

the s e p a ra te ly Issued fin a n c ia l statem ents of the

s u b s i d i a r y . 29 They a l s o summarize t h e push down

a c c o u n t i n g d e b a t e as r e l e v a n c y v e r s u s h i s t o r i c a l c o s t . 30

W hile noting that it s h o u ld no t be d i r e c t l y

ap p licab le to fin a n c ia l re p o rtin g , the authors s ta te that

a 1982 change In t h e Intern al Revenue Code has added t o

push down a c c o u n t i n g ' s p r a c t i c a l acceptance. The Tax

E q u i t y and F i s c a l R e s p o n s i b i l i t y Act o f 1982 changed

S e c t i o n 334 o f t h e Code t h a t previously required

liq u id a tio n of the s u b s id ia r y b e fo re a stepped-up b a s is

c o u l d be e l e c t e d for the ass ets. S e c t i o n 338 now a l l o w s

a step-up In b a s i s for the assets of an a c q u i r e d company

w ithout liq u id a tin g t h e company. The Intern al Revenue

Code and t h e SEC a r e t h u s in ag re em en t by a l l o w i n g the

same b a s i s r e g a r d l e s s o f w h e t h e r o r not c o r p o r a tio n s a re

m e r g e d . 31

28CunnIngham, p. 73.

29H o l l e y , Spede, and C h e s t e r , p. 40.

30 I b I d . , p. 39

31 lb i d . , p. 41 .
 22

W1 I cox * s V I e w s . W i l c o x d i s c u s s e s push down

accounting from t h e p e r s p e c t i v e o f bo th t h e a c q u i r i n g

company and t h e a c q u i r e d company. He n o t e s t h a t any

pro nounc eme nts o f t h e FASB w i l l n ecessarily be c on ce rn ed

w ith the fin a n c ia l rep o rtin g a s p e c t s o f push down

accounting, not th e Im p licatio n s f o r management o f the

a c q u i r e d company. W ilcox f o c u s e s on t h e p r a c t i c a l

co n sid eratio n s for bo th s e t s o f management when push down

accounting is e m p l o y e d . 32

A Canadian P e r s p e c t i v e . S y lp h q u e s t i o n s w h e t h e r

Canada s h o u l d fo llo w the le a d e s t a b l i s h e d by t h e U n i t e d

States In u s i n g push down a c c o u n t i n g . L ik e th e United

S tates, Canada has no a u t h o r i t a t i v e pronoun cem en ts

d ire c tly addressing the Issue. The a u t h o r notes th a t

Canadian g u i d e l i n e s p ro h ib it w ritin g up a s s e t v a l u e s "in

o rd in a ry circum stances." S y lp h s u g g e s t s t h a t ,

u ltim a te ly , th e p u b lic accountant w i l l be r e s p o n s i b l e for

d e te rm in in g whether a s p e c i f i c p u r c h a s e o f one

corporation by a n o t h e r can be d e f i n e d as “o r d i n a r y

circum stances," thus a l lo w i n g the asset r e v a l u a t i o n s . 33

He c o n c l u d e s by recommending t h a t the Canadian standard

s e ttin g body (C IC A ) address th e t o p i c a t an e a r l y d a t e . 34

32WI I c o x , p p . 1 5 9 - 1 6 0 .

3 3 James M. S y l p h , “Push Down A c c o u n t i n g : Is t h e U . S .

Lead Wor th F o l l o w i n g ? " CA M a g a z i n e 118 ( O c t o b e r , 1 9 8 5 ) :
52-53.

34 I b i d . , p. 55.
 23

Em erging I ssu es
Task F o r c e D e c i s i o n s

P e a t M a r w ic k M i t c h e l l & Co. raised the question of

push down a c c o u n t i n g t o t h e FASB's Emerging Is s u e s Task

Force:

R e c e n t l y t h e r e has been an I n c r e a s i n g number o f

we I I - p u b I I c I zed I n s t a n c e s o f company o w n e r s h i p s
ch a n g i n g hands. T y p ic a lly , the tra n s a c tio n s
have i n v o l v e d e i t h e r an o u t s i d e p a r t y b u y in g
s h a r e s In t h e m a r k e t p l a c e from e x i s t i n g
s h a r e h o l d e r s o r a company i s s u i n g a d d i t i o n a l
shares to o th e r p a r t i e s . A l s o , t h e change in
o w n e r s h i p may be In t o t a l ( I . e . , a l l t h e
compa ny's s h a r e s change hands) o r o n l y
p a r t i a l . 35

The p r i m a r y a c c o u n t i n g Is s u e s w e r e summarized as f o l l o w s :

a. t h e t h r e s h o l d o w n e r s h i p change a t w hi c h a
new a c c o u n t i n g b a s i s s h o u ld o r may r e s u l t ,
and w h e t h e r I t m a t t e r s I f t h e change o c c u r s
w i t h i n or o u t s id e the e n t i t y ,

b. how t o compute t h e new a c c o u n t i n g b a s i s ,

c. t h e amount a t w hi c h m i n o r i t y interests are

r e p o rte d . 3®

The Task F o r c e d i s c u s s e d t h e s e i s s u e s and p o s s i b l e

ways t o r e s o l v e them, b u t no c o n c l u s i o n was r e a c h e d . The

d iv e rs itie s ex is tin g in p r a c t i c e w e r e no te d and Task

F o r c e members w e r e enc ou ra ge d t o p r o v i d e t h e FASB s t a f f

w ith exa m pl es o f new b a s i s a c c o u n t i n g . 37

3 ®Emerg i ng I s s u e s Task F o r c e , I s s u e Summary 8 5 - 2 1 .

"Changes o f O w ne rs hi p R e s u l t i n g In a New B a s i s o f
A c c o u n t i n g , " ( S t a m f o r d : n . p . , 1 9 8 5 ) , p. 1.

3S Ib id .

3 7 Emerging i s s u e s Task F o r c e , M i n u t e s o f June 2 7 .

1985 Emerging I s s u e s Task F o r c e M e e t i n g . D e c i s i o n 8 5 - 2 1
(Stam ford: n . p . , 1985).
 Another d e c is io n by t h e Emerging Is s u e s Task F o r c e

may have some I m p l i c a t i o n s for push down a c c o u n t i n g . An

Is s u e was r a i s e d by t h e SEC I n v o l v i n g th e accounting for

l e v e r a g e d buy out transactions In w hi c h a h o l d i n g company

w ith no s u b s t a n t i v e o p e r a t i o n s I s formed by

p r o m o t e r / s h a r e h o I d e r s o f an o p e r a t i n g company t o a c q u i r e

t h e o p e r a t i n g company. As is t h e q u e s t i o n w i t h push down

accounting, t h e Task F o r c e no t e d t h a t the prim ary

a ccounting Issue Is "w h e th e r the a c q u is itio n of shares of

Oldco ( t h e o p e r a t i n g company) e s t a b l i s h e s a new b a s i s o f

a cc o u n tin g or whether predecessor cost to the e x te n t of

the carryo ver in terest s h o u ld be u s e d . " 38

The In itia l d ecision of t h e Task F o r c e was t h a t the

d e t e r m i n a t i o n o f w h e t h e r a new c o s t b a s i s is e s t a b l i s h e d

h i n g e s on who has c o n t r o l l i n g In te re s t of the holding

company a f t e r the tra n s a c tio n . If new I n v e s t o r s have a

c o n tro llin g In te re st, the tra n s a c tio n Is deemed

e s s e n tia lly equ ivalen t t o an o u t r i g h t p u r c h a s e and ,

sub ject to c e rta in lim ita tio n s , s h o u ld be r e c o r d e d a t the

fa ir value of the t o ta l co n sid eratio n paid. But if the

p a rtie s w ith a c o n tro llin g In terest in t h e new company

had an o w n e r s h i p In te re st In t h e o p e r a t i n g company, the

transaction Is s i m i l a r to a step a c q u is it io n and t h e

predecessor cost of those p a r t i e s s h o u ld be c a r r i e d

3 8 E m e r g I n g I s s u e s Task F o r c e , M i n u t e s o f J u l y 2 4 .
1986 Emerging Is s u e s Task F o r c e M e e t i n g . D e c i s i o n 8 6 - 1 6 .
" C a r r y o v e r o f P r e d e c e s s o r C o st In L e v e r a g e d Buyout
T r a n s a c t i o n s , " ( S t a m f o r d : n . p . , 1 9 8 6 ) , p. 10.
 25

o v e r . 3® However, some s p e c i f i c Im plem entation Is s u e s

concerning c a rry o v e r of predecessor cost In leveraged

bu y ou t t r a n s a c t i o n s re m ai n u n r e s o l v e d . 40

Summary

P ertinent lite ra tu re that s p e c ific a lly discusses

push down a c c o u n t i n g has been r e v i e w e d In t h i s section.

Other relevant lite ra tu re Is examined and d i s c u s s e d

throughout th e remainder of the study. T h e re a r e no

au th o rita tiv e a c c o u n t i n g pronouncements d i r e c t l y re la tin g

t o push down a c c o u n t i n g , but o t h e r relevant prom ulgations

were noted. As e v i d e n c e d by t h e b r i e f n e s s o f th is

section, little research has been p u b l i s h e d In

professional Journals, and t h e s e lim ited effo rts In d icate

that there Is no consensus r e g a r d i n g the d e s i r a b i l i t y of

push down a c c o u n t i n g . Most o f th is a v a ila b le research

m erely raises the I s s u e s and n o t e s pr ob le m s e n c o u n t e r e d

w ith practical Implem entation.

R es ear ch M e th o d o l o g y

T h is study I n v o l v e s an a n a l y s i s o f the t h e o r e t ic a l

v a lid ity of push down a c c o u n t i n g . Although accounting

g u i d e l i n e s and r e s e a r c h on t h e t o p i c a r e lim ited ,

prono unc eme nts and lite ra tu re deemed t o be r e l e v a n t to '

the to p ic are reviewed.

39 Ib i d . , pp. ? 0 - 11.

4 0 Emer g i n g I s s u e s Task F o r c e , Is s u e Number 8 6 - 1 6 .

Su pp le m en t No. 5 . " C a r r y o v e r o f P r e d e c e s s o r Cost in
L e v e r a g e d Buyout T r a n s a c t i o n s , " ( S t a m f o r d : n . p . , 1 9 8 7 ) .
 26

The v a l i d i t y and a c c e p t a b i l i t y of push down

accounting w i t h i n t h e frame work o f c u r r e n t GAAP a r e

analyzed. Extensive lib ra ry r e s e a r c h and a n a l y s i s a r e

re fle c te d In t h e r e p o r t . The r e s e a r c h includes a review

of bo th a u t h o r i t a t i v e a c c o u n t i n g lite ra tu re and o p i n i o n s

of other w r it e r s . Issues r e l a t e d t o push down

accounting, such as h i s t o r i c a l c o s t and v a r i o u s o w n e r s h i p

eq u ity theories, are d e t a ile d . The inform ation gained

from t h e r e s e a r c h Is t h e n a p p l i e d t o push down a c c o u n t i n g

to eva lu a te if and how I t fits into the c u rre n t

accounting f ra m e w o r k .

A s e c o n d a r y emphasis o f th is study is t o examine

some o f t h e prob lem s e n c o u n t e r e d In a c t u a l implementation

of push down a c c o u n t i n g . This o b j e c t i v e is a c c o m p li s h e d

by a s e a r c h o f the fo llo w in g databases: National

Automated A c c o u n t i n g R e se ar ch System (NAARS),

D issertatio n Abstracts O n lin e, D i s c l o s u r e Management, and

Investext. A fter companies em p l o y i n g push down

acc o u n tin g were Id e n tifie d , th eir fin a n cial statem ents

w er e r e v i e w e d for d is c lo s u r e s of the e f f e c t s of th is

technIque.

The r e m a i n d e r o f the study is o r g a n i z e d so t h a t each

chapter a d d r e s s e s one o f th e major th e o re tic a l accounting

issues: h is to ric a l cost, eq u ity th e o rie s , and an

ass essment o f how t h e fin a n c ia l s t a t e m e n t s meet t h e

users' nee ds . The r e s u l t s o f p r a c t i c a l implementation

 27

yielded from t h e s e a r c h o f th e database comprise another

ch a p te r.

Scope and L i m i t a t i o n s

T h is study Is conceptual in n a t u r e and , accordin gly,

It does not involve q u a n t i t a t i v e a n a ly s is . The p r i m a r y

o b j e c t i v e was t o exa mine t h e t h e o r e t i c a l v a lid ity of push

down a c c o u n t i n g w i t h i n the framework o f c u r r e n t GAAP.

Various related t o p ic s were researched in de p th and t h e n

app lied t o push down a c c o u n t i n g t o e v a l u a t e its

conceptual v a lid ity . The t h e o r y o f push down a c c o u n t i n g

was exa mined In lig h t of as many t r a d i t i o n a l accounting

c o n c e p t s and p r i n c i p l e s as deemed n e c e s s a r y .

Since t h i s study Is c o n c e p t u a l in n a t u r e , a ll

procedural r a m i f i c a t i o n s o f a d o p t i n g push down a c c o u n t i n g

were not e x p lo r e d . I s s u e s deemed t o be most r e l e v a n t ,

such as t h e impact on n e t income and r a t i o a n a lys is, were

e x a m in e d . A v a r ie ty of hypothetical and a c t u a l

a p p lic a tio n s of the c o m p le x itie s of push down a c c o u n t i n g

are a ls o discussed.

In t h e n e x t c h a p t e r , the p r a c tic a l aspects of

i m p le m e n ti n g push down a c c o u n t i n g a r e a d d r e s s e d bo t h on a

gen eralized b a s i s and f o r companies t h a t have a c t u a l l y

employed t h i s technique. The f oc us o f subs equ en t

chapters is on t h e t h e o r e t i c a l v a lid ity of push down

account In g .
 CHAPTER 2

IMPLEMENTATION OF PUSH DOWN ACCOUNTING

i
The p r i m a r y o b j e c t i v e o f th is study is to d e te rm in e

w h e t h e r push down a c c o u n t i n g a d h e r e s t o t h e e x i s t i n g

conceptual accounting framework. Most o f the analysis

includes a re v ie w of s ig n ific a n t aspects of c u r r e n t

g e n e r a ll y accepted accounting p rin c ip le s (GAAP) to

th e o re tic a lly e v a l u a t e how and If push down a c c o u n t i n g

fits the e x is t in g conceptual f ra m e w o r k . S p ecific

components t h a t a re discussed In t h i s e v a l u a t i o n include

the h is to r ic a l cost p r in c ip le , th e v a rio u s ownership

eq u ity theories, and how t h e fin a n c ia l s t a t e m e n t s meet'

the users' nee ds .

B e f o r e e x a m i n i n g each o f these conceptual areas, the

p ractical Im p licatio n s of push down a c c o u n t i n g a r e

addressed. It is Important t o have a w o r k i n g knowledge

of the p r a c t i c a l i t i e s o f push down a c c o u n t i n g b e f o r e

eva lu a tin g Its th e o re tic a l Impact. S p e c ific a lly , push

down a c c o u n t i n g ' s e f f e c t on t h e Income s t a t e m e n t , the

balance sh e et, ra tio an a lys is, and Its impact on

management is d i s c u s s e d . In t h e firs t part of the

chapter these p r a c tic a l I m p l i c a t i o n s a r e exa min ed f o r a

hypothetical company on a g e n e r a l i z e d basis. To examine

28
 29

actual Im p licatio n s of push down a c c o u n t i n g , fin a n cial

databa ses were searched t o l o c a t e com panies t h a t have

u tiliz e d th is accounting technique. The r e s u l t s o f these

database searches a r e discussed in t h e second p a r t o f the

ch a p te r.

P ractical I m p l i c a t i o n s o f I m p le m e n ti n g
Push Down A c c o u n t i n g

When push down a c c o u n t i n g is employed in " no rm al "

circum stances, the r e s u lt is u s u a l l y an increase in t h e

value of the assets w ith a corresponding increase In

e q u ity. This I n c r e a s e o c c u r s because t h e p r i c e p a i d by

the parent u s u a l l y e x c e e d s t h e book v a l u e o f the

s u b sid iary's a s s e ts .1

The r e m a I n d e r o f th is s e c tio n discusses the

a p p lic a tio n of push down a c c o u n t i n g in normal

c i r c u m s t a n c e s wh er e t h e r e c o r d e d a s s e t v a l u e s a r e

Increased. The impact o f these increases in t h e r e c o r d e d

amount o f a s s e t s and e q u i t y for a hypothetical company is

ex a m in e d . The f o l l o w i n g set of fin a n c ia l s t a t e m e n t s and

assumptions a r e u t i l i z e d :

A s s u m p t I o n s : Company P a c q u i r e s 100 p e r c e n t o f
Company S f o r $20 mi I I Ion on 1 / 1 / 1 9 X 2 when
Company S ' s n e t book v a l u e is $12 m i l l i o n . The
m a r k e t p r i c e o f Company S s t o c k a t t h e t i m e o f
a c q u i s i t i o n Is $40 per s h a r e . The e x c es s o f
t h e p u r c h a s e p r i c e o v e r t h e book v a l u e o f t h e
a s s e t s a c q u i r e d i s a l l o c a t e d as f o l l o w s :

W h e d a t a b a s e s e a r c h d i s c u s s e d In t h e second p a r t o f
t h i s c h a p t e r l o c a t e d two companies f o r wh ic h push down
a c c o u n t i n g d e c r e a s e d t h e r e c o r d e d amounts o f t h e a s s e t s .
H ow ev er, such c a s e s a p p e a r t o be e x c e p t i o n s t o t h e
commonly h e l d Idea o f I m p le m e n ti n g push down a c c o u n t i n g .
 30

In v e n to r y (FIFO basis) $1,000,000

Property, p lant and e qu ip m en t 3,000,000
GoodwI I I 4.000.000

Total excess $8.000.000

F in a n c ia l Statements
P rio r to A c q u is itio n

Company S
B a l a n c e Sh ee t
December 3 1 , 19X1
( In $ 0 0 0 ' s )

ASSETS LIAB ILITIES

Cash $ 1,000 Ac cou nt s P a y a b l e $ 2,000
Inventory 3,000 Other c u r r e n t I I a b . 3.000
ReceIvabIes 2.500 Total c u r r e n t I lab. $ 5,000
C urrent assets $ 6,500 Long-term debt 13.000
Fixed assets 23.500 Total l i a b i l i t i e s $ 18,000

Total assets $30.000 CAP ITAL

Common s t o c k ( 5 0 0 , 0 0 0
s h a r e s o f $10 p a r ) $ 5 , 0 0 0
P a id -In c a p ita l 2,000
Retained earnings 5,000
Total e q u ity $ 12.000
T o t a I I i abI I 111es
and e q u i t y $3 0 .0 0 0

Company S
Income S t a t e m e n t
For t h e Ye a r Ended December 3 1 , 19X1
( In $ 0 0 0 ' s)

Net s a Ie s $60,000
C o st o f goods s o l d 40.000
Gro ss p r o f 11 $20,000
O p e r a t I n g exp enses 10.000
Income b e f o r e t a x $10,000
Income t a x (50%) 5.000
N e t Income $ 5.000

E arn ing s per share $10.00

B a l a n c e S h ee t Enhancement

The i mm ed iat e r e s u l t o f a p p l y i n g push down

accounting is its Impact on t h e b a l a n c e s h e e t . The a s s e t

valuations increase to re fle c t the p a r e n t's purchase

 31

p r i c e and t h e r e Is a c o r r e s p o n d i n g increase in e q u i t y . A

seemingly s tro n g e r balance sheet r e s u l t s , p rim a rily

because o f the Increase In c a p i t a l . A p p l i c a t i o n o f push

down a c c o u n t i n g to the fin a n cial statem ents Introduced

above w ou ld Increase t o ta l assets from $30 ml I l i o n t o $38

m illio n . At t h e same t i m e , ca p ita l would I n c r e a s e from

$12 mi I I Ion t o $20 mi I I i o n . It Is g e n e r a l ly a g r e e d t h a t

retain ed earnings from b e f o r e t h e a c q u i s i t i o n s h o u ld not

be c a r r i e d fo rw a rd ; ^ it is u s u a l l y i n c l u d e d as a

component o f to tal paid In c a p i t a l . The f i n a n c i a l

statem ents i m m e d i a t e l y upon a c q u i s i t i o n w ou ld ap p ea r as

fo I Iows:

F in a n c ia l Statements A f t e r
I m p le m e n ti n g Push Down A c c o u n t i n g

Company S
B a l a n c e She et
J a n u a r y 1, 19X2
( In $ 0 0 0 ' s )

ASSETS LIA B ILITIES

Cash $ 1,000 Accou nts P a y a b l e & 2,000
Inventory 4,000 Other c u r r e n t I I a b . 3 .000
ReceIvabIes 2.500 Total c u rre n t I I a b . $ 5,000
Current assets $ 7,500 Long-term debt 13.000
Fixed assets 26,500 Total l i a b i l i t i e s $ 18.000
GoodwlI I 4.000
Total assets $38.000 CAP ITAL
Common s t o c k ( 5 0 0 , 0 0 0
s h a r e s o f $10 p a r ) $ 5 , 0 0 0
P a id -in c a p ita l 15.000
Total e q u ity $ 20.000
T o t a I I I a b I I 11 i es
and e q u i t y $38.000

A c c o u n t i n g S t a n d a r d s E x e c u t i v e C o m m i t t e e , I ssu es
P a p e r . " 'P u s h Down' A c c o u n t i n g " (New Y o r k : AICPA, O c to b e r
30 , 1 9 7 9 ) , p. 2 7 .
 32

Assuming t h a t Company S e x p e r i e n c e s id en tical s a l e s and

o p e r a t i n g exp en se s as in t h e p r e v i o u s y e a r , the income

statement a t t h e end o f t h e y e a r o f a c q u i s i t i o n would be

as f o l l o w s :

Company S
Income S t a t e m e n t
For t h e Ye ar Ended December 3 1 , 19X2
( in $ 0 0 0 ' s )

Net s a le s $60,000
Co st o f goods s o l d ( $ 4 0 , 0 0 0 + $ 1 0 0 0 ) 41,000
Gross p r o f i t $19,000
O p e r a t i n g exp enses
Per p r e v i o u s y e a r $10,000
A d ditional d ep reciatio n 300
G oodwill a m o r t i z a t i o n 100 10.400
Income b e f o r e t a x $ 8,600
Income t a x (50% o f ( 8 6 0 0 + 1 0 0 ) ) 4.350
Net Income $ 4.250

Earnings per share $

Reduction o f Net Income

Other than Its Impact on t h e b a l a n c e s h e e t , probably

t h e most r e a d i l y apparent r a m i f i c a t i o n o f push down

accounting Is a r e d u c t i o n o f net Income. Higher

dep re cia tio n expe nse must be r e c o g n i z e d as t h e r e c o r d e d

amount o f a s s e t s Increases. If Company S e x p e r i e n c e s

id en tic al operating results and does not implement push

down a c c o u n t i n g , its sep arately prepared fin a n cial

statements a t t h e end o f the a c q u is it io n year w i l l be

id en tic al to those prepared b e fo r e the a c q u i s i t i o n

(adjusted for the y e a r's Income, dep re cia tio n , e tc .).

But if push down a c c o u n t i n g is employed when t h e

operating resu lts are id e n tic a l, net income f o r the year

of a c q u i s i t i o n would be reduc ed from $ 5 , 0 0 0 , 0 0 0 t o

 33

$ 4,250 ,0 00, w ith a corresponding d e c lin e in e a r n i n g s per

share from $ 1 0 . 0 0 t o $ 8 . 5 0 . The r e d u c t i o n in n e t income

Is a r e s u l t o f three factors: (1) increase in t h e amount

of FIFO In v e n to ry being r e c o g n i z e d as an e x p e n s e , (2)

a d d itio n a l d ep re cia tio n expe nse due t o t h e h i g h e r

recorded v a lu a tio n s for the assets, and ( 3 ) a m o rtizatio n

of th e goodw ill recognized in t h e a c q u i s i t i o n .

The change in d e p r e c i a t i o n expe nse lo g ic a lly follow s

from t h e Increased ass et v a l u a t i o n s . However, W iicox

makes an in te re stin g point regarding the a m o rtiz a tio n of

in ta n g ib le assets, s p e c ific a lly goodwill in t h i s c a s e .

I n t a n g i b l e a s s e t s t h a t w e r e no t r e c o r d e d on t h e books o f

the su b sid iary u n t il t h e a c q u i s i t i o n may have been t h e

r e s u lt of p rio r r e s e a r c h and de v e lo p m e n t a c t i v i t y . To

the e xten t that th is Is t r u e , t h e company w i l l be

r e c o g n i z i n g an exp ens e t w i c e for t h e same a c t i v i t y : the

r e s e a r c h and de v e lo p m e n t c o s t s w e r e expensed as Incurred,

and t h e In ta n g ib le asset created by t h e s e r e s e a r c h

endeavors Is a g a i n b e i n g expensed w i t h Its a m o rtiza tio n .3

E f f e c t on R a t i o A n a l y s i s

The mere c a l c u l a t i o n of various fin a n cial ra tio s

alone u s u a lly has no i n h e r e n t m e a ni ng . To be u s e f u l , the

r a t i o s must be compared t o some benchmark, usu ally the

co m pa ny' s p r i o r year fin a n cial statement ra tio s . But

implem entation o f push down a c c o u n t i n g im pairs the

3 Edward E. W i l c o x , "Management Vi ew s o f P u rc h as e
A c c o u n t i n g , " O h io CPA J o u rn a l 43 (Summer, 1 9 8 4 ) : 160.
 34

c o m p a ra b ility norm ally a ffo rd e d by r a t i o a n a lys is because

a ll of t h e components o f the r a t i o s are a lte re d . The

e ffe ct of push down a c c o u n t i n g on some key r a t i o s Is

discussed in t h e f o l l o w i n g paragraphs.

Earn ing s per s h a r e . W i t h no change In t h e number o f

shares o f o u ts ta n d in g stock, the d e c lin e in e a r n i n g s that

u s u a l l y accompanies I m p l e m e n t a t i o n o f push down

accounting w i l l be accompanied by a d e c l i n e in e a r n i n g s

per share (EPS). R e ferring to th e fin a n c ia l statements

Introduced e a r l i e r in t h i s section, u tiliz a tio n of push

down a c c o u n t i n g resu lts In a d e c l i n e in EPS from $ 1 0 . 0 0

to $ 8 .5 0 . T h is d e c l i n e occurs d e s p it e no changes In t h e

c o m pa ny 's a c t u a l operations.

PrIce-EarnIngs R a tio . A n o t h e r key f i n a n c i a l ra tio

that is a f f e c t e d by im p le m e n ti n g push down a c c o u n t i n g is

the p rIc e -e a rn In g s (P/E) ra tio . In t h e fin a n cial

statem ents f o r Company S above, t h e P /E r a t i o p rio r to

a c q u is itio n Is 4 ( $ 4 0 / $ 1 0 ) . Assuming no change In t h e

m arket p r i c e per share o f the stock a f t e r the

a c q u is itio n , wh ic h wo uld be a c o n t e n t i o n o f the e f f i c i e n t

market hypothesis, t h e P/E r a t i o increases to 4 .7

($ 4 0 /$8.50). I n c r e a s e s such as t h i s have caused some

authors t o co n te n d t h a t push down a c c o u n t i n g d e g r a d e s t h e

P /E ra tio .4 It Is a l s o p o s s i b l e t h a t the s t o c k 's market

p r i c e would dro p as a r e s u l t o f the dec lin e in e a r n i n g s .

4C h a r I e s E . Ho I I e y , Edward C. Spede, and M i c h a e l C.

C h e s t e r ., J r . , "The Push-Down A c c o u n t i n g C o n t r o v e r s y , "
Management A c c o u n t i n g 68 ( J a n u a r y 1 9 8 7 ) : 4 1 .
 35

If t h is occurs, t h e P /E r a t i o w i l l not I n c r e a s e as much,

o r pe r h a p s It w ill not Increase at a l l .

For t h e e x a m pl e used In t h i s s itu a tio n , Company S ' s

P /E r a t i o has no r e a l sig n ifican ce s i n c e one hundred

percent of Its stock Is owned by Company P; there is

acc o rd in g ly no m a r k e t in Company S ' s stock. However, In

s i t u a t i o n s w h e r e t h e a c q u i r i n g company does n o t own a l l

of the s u b s id ia r y 's stock, t r a d i n g can t a k e p l a c e between

the m in o r ity s h a r e h o l d e r s so t h a t t h e m a r k e t p r i c e per

share, and- t h u s t h e P/E r a t i o , may be more m e a n i n g f u l .

Even f o r com pa nie s t h a t are in itia lly w h o l l y owned, the

p a r e n t company may Issue a d d i t i o n a l stock to the pub lic

a fter push down a c c o u n t i n g has been em pl oye d. (Actual

ex amp les o f th is nature are c ite d In t h e second p a r t of

th is c h a p te r.) The Impact on t h e P/E r a t i o can be q u i t e

su b stantial for p u b l i c o f f e r i n g s made a f t e r the

establishm ent of a new b a s i s o f a c c o u n t i n g .

R e t u r n on F i x e d A s s e t s . The r e t u r n on f i x e d assets

Is c a l c u l a t e d by d i v i d i n g earnings before In te re st and

t a x by f i x e d assets. This ra tio usu ally d ec lin es after

ap p licatio n of push down a c c o u n t i n g for two r e a s o n s .

F irs t, t h e numerator o f the fra ctio n d e c r e a s e s bec aus e

push down a c c o u n t i n g w i l l lower e a r n i n g s . Second, the

d e n o m in a t o r I n c r e a s e s as t h e r e c o r d e d amount o f the

a s s e t s goes up. E ither of these factors a lo n e serves to

d e c r e a s e t h e r e t u r n on f i x e d assets; together th eir

effe ct Is compounded.
 36

In t h e sample f i n a n c i a l statem ents In t h i s section,

the In itia l r e t u r n on f i x e d assets is 42 . 5 % ($ 1 0 ,0 0 0 ,0 0 0 /

$23 ,50 0,000). A fter ap p licatio n of push down a c c o u n t i n g ,

t h e r e t u r n on f i x e d a s s e t s dr o p s t o 32. 5% ( $ 8 , 6 0 0 , 0 0 0 /

$26 ,500,000). Again, t h e change in t h i s ra tio has

occurred d e s p ite no change In t h e comp an y's o p e r a t i n g

re s u Its .

De bt t o E a u l t v R a t i o . L i k e t h e P /E r a t i o , the

re la tio n s h ip of debt to e q u it y w i l l ap p e a r improved a f t e r

ap p licatio n of th is accounting technique. Unless the

debt involves a l e v e r a g e d buy out o r t h e r e has been a

m ateria l change in t h e In terest rates, the s u b s id ia r y 's

d e b t b e f o r e and a f t e r the a c q u is it io n w i l l re m a i n

v irtu a lly unc hanged. The comp an y's e q u i t y w i l l Increase

as a r e s u l t o f t h e Increased v a lu e of the ass e ts , and the

debt to eq u ity ra tio w ill a c c o r d i n g l y a p p e a r t o be

improved.

In t h e exa m pl e u t i l i z e d throughout t h i s s e c tio n , the

debt to eq u ity ra tio p rior to a c q u is itio n o f Company S Is

1.5:1. A fter a p p licatio n o f push down a c c o u n t i n g , the

debt ra tio Is enhanced t o .9 :1 . Despite the improved

appearance of th is ra tio , t h i s change I s n o t accompanied

by any cash c a p i t a l Infu sion for the s u b s id ia ry . It

c o u l d a c c o r d i n g l y be c l a i m e d that push down a c c o u n t i n g

a rtific ia lly enh ances t h e d e b t t o e q u i t y ra tio .

Summary. O n l y a few key r a t i o s a r e exa mined in t h i s

section, but v i r t u a l l y all ra tio s are a lte re d by t h e

 37

a p p lic a tio n o f push down a c c o u n t i n g . A p p licatio n of push

down a c c o u n t i n g has a n e g a t i v e Impact on some r a t i o s and

a p o s itiv e impact on o t h e r s . A company w i t h id en tic al

operating results b e f o r e and a f t e r im plem entation of push

down a c c o u n t i n g w i l l show lower EPS and a reduc ed r e t u r n

on f i x e d assets. In c o n t r a s t , a p p l i c a t i o n o f push down

accounting w i l l enhance t h e P/E r a t i o and t h e d e b t to

eq u ity ra tio . In a l l cases, co m p a ra b ility between y e a r s

is Impeded because t h e u n d e r l y i n g components o f the ra tio

a n a lys is have been a l t e r e d .

Income S t a t e m e n t Inconsistency

T h e r e a p p e a r s t o be an I n c o n s i s t e n c y between t h e

m in o rity I n t e r e s t on t h e c o n s o l i d a t e d Income s t a t e m e n t

and t h e income s t a t e m e n t o f t h e s u b s i d i a r y u s i n g push

down a c c o u n t i n g when l e s s th an 100 p e r c e n t o f its stock

has been a c q u i r e d . The f o l l o w i n g exa m pl e h e l p s

illu s tra te t h is discrepancy.

Assume t h a t Company P a c q u i r e s 90 p e r c e n t o f Company

S. Company S r e p o r t s net income o f $30 ,000. Since

Company P ' s p u r c h a s e p r i c e f o r Company S was in e x c e s s o f

t h e book v a l u e , Company P w i l l be a m o r t i z i n g its 90

percent of the excess. For s i m p l i c i t y , assume t h a t the

e n tire excess Is due t o increased d e p r e c ia t i o n charges

t h a t must be r e c o g n i z e d because o f t h e e x c es s o f the fa ir

market value of the Id e n tifia b le t a n g i b l e assets over

th e ir book v a l u e . Company P ' s c u r r e n t year p o rtio n of

th is excess (under the p r o p r ie ta r y theory) is $ 6 , 0 0 0 .

 38

The c o n s o l i d a t e d fin a n cial s t a t e m e n t s p r e p a r e d by

Company P wl I I r e f l e c t the fo llo w in g :

T o t a l n e t income r e p o r t e d by Company S $30,000

P e r c e n t a g e owned by Company P x .90
Co. S income r e p o r t e d by Company P $27,000
Les s: excess d e p r e c ia t i o n charges 6,000
Net e a r n i n g s o f Co. S r e p o r t e d
by Co. P

The m i n o r i t y In te re st net Income r e p o r t e d on t h e

con so lid ated Income s t a t e m e n t w i l l be $3 00 0 ($30,000 x

10% ) .
The s i t u a t i o n changes somewhat If Company S

implements push down a c c o u n t i n g . As t h e new b a s i s o f

accounting Is imp lem en ted , Company S w i l l r e c o r d on Its

own books t h e $ 60 00 exc es s d e p r e c ia t i o n , thusreducing

net Income from t h e p r e v i o u s l y reported $30,000 to

$24,000. If th is revised net income is d i s t r i b u t e d

s tric tly according to the ownership pe rc e n ta g e s , the

amounts w i l l change as f o l l o w s :

P a r e n t Co. S h a r e : $ 2 4 , 0 0 0 x 90% «* $ 2 1 , 6 0 0
M i n o r i t y In t e r e s t Share: $ 2 4 , 0 0 0 x 10% = 2.400

Tota! $24.000

S t a t e m e n t s p r e p a r e d u s i n g push down a c c o u n t i n g

s h o u l d be c o m p a r a b le w i t h the con so lid ated statem ents.

However, th is illu s tra tio n shows t h e p o t e n t i a l

I n c o n s i s t e n c y when m i n o r i t y In te re st exists. In t h e

example a b o v e , m in o rity In te re st net income has been

r edu ce d from $ 3 0 0 0 on t h e c o n s o l i d a t e d s t a t e m e n t s to

$ 24 00 on t h e s e p a r a t e s t a t e m e n t s . This d i f f e r e n c e is

so lely a re s u lt of the m in o r it y interest shareholders

 39

being forced to absorb a p o r t i o n o f the Increased

d e p r e c ia tio n charges. The t h e o r e t i c a l Inconsistency is

that these s h a re h o ld e rs did not ta k e p a r t in t h e

transaction th a t created the excess d e p r e c ia t i o n charg es,

and t h u s s h o u ld no t s h a r e In t h e p u r c h a s e a c c o u n t i n g

adjustm ents. The m i n o r i t y In te re st s h o u ld be no

d i f f e r e n t whether or not push down a c c o u n t i n g i s use d.

To a v o i d t h e e f f e c t shown a b o v e , it appears t h a t the

s u b s i d i a r y w ou ld have t o r e t a i n I n f o r m a t i o n on a

supplemental basis to allo w the c a lc u la tio n of net income

sep arately for the m a jo rity and t h e m i n o r i t y

shareholders. O therw ise, inform ation showing t h a t the

s u b s i d i a r y wo uld have e a r n e d $ 3 0 , 0 0 0 in t h e ab se nc e o f

push down a c c o u n t i n g Is lost; the only a v a i l a b l e

Inform ation Is t h a t net income is $ 2 4 ,0 0 0 .

This i n c o n s i s t e n c y becomes l a r g e enough t o be of

c o n c e r n o n l y when t h e r e is a s i g n i f i c a n t m i n o r i t y

in te re st. Otherw ise, t h e amounts i n v o l v e d a r e not

m a te ria l. There Is no I n c o n s i s t e n c y a t a l l when t h e

su b sid iary Is w h o l l y owned, b ec au se a l l of the

s u b s i d i a r y ' s a s s e t s a r e r e v a l u e d as a r e s u l t o f the

purchase. But as t h e m i n o r i t y In te re st share of

o w n e r s h i p grow s, t h e d i f f e r e n c e becomes more pr on ou nce d.

Although th is is s u e a r i s e s w i t h Implementation o f push

down a c c o u n t i n g , it is r e a l l y more a q u e s t i o n o f m i n o r i t y

Interest valuation th an a push down a c c o u n t i n g c o n c e r n .

 40

Nonetheless, i t may u l t i m a t e l y Impact t h e d e s i r a b i l i t y of

push down a c c o u n t i n g .

Cons I d e r a t Ions f o r Management

The Im p lication s of push down a c c o u n t i n g for

external fin a n cial sta te m e n t users were reviewed in t h e

previous s e c tio n . The d i s c u s s i o n s p e c i f i c a l l y c o n c e r n e d

its effe ct on t h e b a l a n c e s h e e t , the income s t a t e m e n t ,

and r a t i o a n a lys is. But management can a l s o be a f f e c t e d

as t h e new b a s i s o f a c c o u n t i n g Is r e c o r d e d on t h e

s u b s id ia ry 's records.

E f f e c t on M o r a l e . W lIcox contends t h a t push down

accounting w i l l have a n e g a t i v e Impact on m o r a l e bec au se

of the reduction in e a r n i n g s . I f management o f the

su b sid iary r em ai ns v i r t u a l l y unchanged b e f o r e and a f t e r

the a c q u is itio n , t h e managers may f a l l t o u n d e r s t a n d how

th e purchase of th e ir company's s t o c k s h o u l d change t h e

u n d e rly in g value of the assets. Management may r e s e n t

a m o r t i z a t i o n charges for Id e n tifia b le In ta n g ib le assets

w h ic h w e r e t h e r e s u l t of p rior years' r e s e a r c h and

d e v e lo p m e n t a c t i v i t y and w e r e a c c o r d i n g l y expensed when

Incu rred . Management o f t h e s u b s i d i a r y may f u r t h e r

r e s e n t exp ens e r e c o g n i t i o n for the a m o rtiz a tio n of

goodw ill r e c o r d e d as a r e s u l t o f the a c q u is itio n ,

e s p e c ia lly If they feel that the s y n e r g is t i c v a l u e t o be

 41

derived from t h e a c q u i s i t i o n Is due t o t h e t e c h n o l o g y o f

t h e a c q u i r i n g c o m pa ny .5

Product L in e A n a ly s is . In a d d i t i o n to Its negative

Impact on m o r a l e , W i l c o x a l s o n o t e s t h a t management o f

t h e a c q u i r e d company w i l l p r o b a b l y be opposed t o

establishm ent of a new b a s i s o f a c c o u n t i n g beca use

h is to ric a l benchmarks r e g a r d i n g p r o d u c t lin e

p ro fita b ility and p r o d u c t p r i c i n g decisions w i l l be lost.

He c l a i m s t h a t c o n f u s i o n may r e s u l t in t h e s a l e s and

m arketing fu n c tio n s .6 It s h o u ld be p o s s i b l e t o overcome

these d i f f i c u l t i e s through th e p r e p a r a t i o n of p r o forma

inform ation. N evertheless, inform ation gathered for

product lin e an a lys is d ir e c t ly from a c c o u n t i n g records

e m p l o y i n g a new b a s i s o f a c c o u n t i n g w i l l n o t be

comparable w i t h Inform ation obtained from t h e p r e v i o u s

records.

Dividend P a y o u t. As push down a c c o u n t i n g c au se s n e t

Income and EPS t o d r o p , management w i l l probably feel

p r e s s u r e d t o pay o u t less in d i v i d e n d s . If t h e company

f o l l o w s a s t a b l e pa y o u t r a t e as a p e r c e n t a g e o f EPS,

a p p licatio n of push down a c c o u n t i n g w i l l ca u s e t h e

absolu te d o lla r amount t o d e c l i n e . In c o n t r a s t , If the

company pays o u t a c o n s t a n t d o l l a r amount in d i v i d e n d s ,

it will ap p e a r that the d iv id e n d payout rate has

Increased.

5W I I c o x , pp. 159-160.

6 Ib Id .
 42

R e g a r d l e s s o f mana ge me nt 's f e e l i n g s a b o u t t h e

pe rc e n ta g e or d o l l a r amount t h a t s h o u l d be p a i d o u t In

dividends, some f i r m s may be f o r c e d t o lim it th e ir

dividends a f t e r im p le m e n ti n g push down a c c o u n t i n g . C raft

and O ' T o o l e n o t e t h a t l o n g - t e r m d e b t c o v e n a n t s may f o r b i d

t h e company from p a y i n g d i v i d e n d s In e x c es s o f a

sp e cified percentage of net income or if EPS f a l l below a

p r e - d e t e r m Ined le v e l.7 It is t h e r e f o r e p o s s i b l e t h a t

management wo uld be p r e c l u d e d from p a y i n g d i v i d e n d s , or

at least lim ited In t h e amount t h a t c o u l d be p a i d , merely

as a r e s u l t o f app lying push down a c c o u n t i n g .

In a d d i t i o n to Its impact on the-^-common

shareholders' dividends, t h e amount o f d i v i d e n d s received

by h o l d e r s o f p a rtic ip a tin g preferred s t o c k can be

s ig n ific a n tly affected by t h e a p p l i c a t i o n of push down

accounting. As e a r n i n g s a r e reduced, t h e amount o f

earnings a v a ila b le In w hi c h t h e p r e f e r r e d shareholders

can p a r t i c i p a t e w i l l a I so be lowered. Thus, even w i t h o u t

an a c t i v e e f f o r t on t h e p a r t o f management, push down

accounting lo we rs t h e d i v i d e n d pa y o u t for p artic ip a tin g

preferred stockh old ers.

Summary

P ractical r a m i f i c a t i o n s on c o r p o r a t e fin a n cial

statements of i m p le m e n ti n g push down a c c o u n t i n g have been

7 James W'. C r a f t and K e v i n P. O ' T o o l e , "Push Down

A c c o u n t i n g — Has I t s Time Come?" C o r p o r a t e A c c o u n t i n g 2
(S p rin g 1984): 58.
 43

reviewed In t h i s section. Its effe ct for both o u ts id e

u s e r s and management has been examined on a g e n e r a l i z e d

basis for a hypothetical company. I t was assumed

throughout the discussion t h a t a s s e t s and e q u i t y w i l l

i n c r e a s e when push down a c c o u n t i n g is e m p lo ye d . Results

o f a p p l i c a t i o n s o f push down a c c o u n t i n g by a c t u a l

com panies a r e p r e s e n t e d In t h e n e x t p a r t o f th is chapter.

In some o f these cases, push down a c c o u n t i n g resulted in

Increased a s s e t v a lu e s , w h ile In o t h e r c a s e s a s s e t v a l u e s

decreased.

R e s u lts o f Database Searches

Several fin a n cial databases were searched to find

exa m ple s o f companies t h a t had u t i l i z e d push down

accounting. Most o f the v a lid Info rm ation obtained in

th is section resulted from a s e a r c h o f the National

Automated A c c o u n t i n g Re se ar ch System d a t a b a s e . However,

the r e s u lt s of other fin a n cial database searches a re als o

Included In t h e d i s c u s s i o n .

The d e t a i l s of the Inform ation obtained from each

search, as w e l l as t h e k e y - w o r d s used in each s e a r c h , are

shown in Ap pen di x A. S i n c e t h e pu rp o se o f th is section

is t o d e s c r i b e how com panies a r e I m p le m e n ti n g (or not

implem enting) push down a c c o u n t i n g In p r a c t i c e , the

d e ta ile d output from each s e a r c h is not relevant for the

main t e x t o f the p r o je c t. Accordingly, the re s u lts of

all t h e s e a r c h e s a r e combined and d i s c u s s e d a c c o r d i n g to

the fo llo w in g c la s s ific a tio n scheme:

 44

* Company c i t e d is a w h o l l y owned s u b s i d i a r y u s i n g

push down a c c o u n t i ng

* Company c i t e d reports that I t s w h o l l y owned

s u b sid iaries use push down a c c o u n t i n g

* Company c i t e d uses push down a c c o u n t i n g when it is

not who I Iy owned

* Company c i t e d does not use push down a c c o u n t i n g

* Other

Company C i t e d is a
W h o l l y Owned S u b s i d i a r y
U s in g Push Down A c c o u n t i n g

Of the s ix te e n usable c i t a t i o n s obtained from t h e

database searches, exa ctly on e -h a lf of t h e companies meet

the basic d e f i n i t i o n of push down a c c o u n t i n g : a w holly

owned s u b s i d i a r y that has e s t a b l i s h e d a new b a s i s o f

accounting for the i ss ua n ce o f s e p a r a t e fin a n c ia l

statem ents. Each o f the fo llo w in g e ig h t firm s

implemented push down a c c o u n t i n g as a r e s u l t o f a n o t h e r

company a c q u i r i n g one hundred p e r c e n t o f th e ir stock:

1. Muse A i r

2. Normandy Insurance

3. Van Dusen A i r

4. ChI Id W o r Id Inc.

5. Tri Am eri can C o r p o r a t i o n

6. H i gbee

7. NACRe

8. F irst Nationw ide F in a n c ia l Corporation

 45

Most o f t h e com panies lis te d sim ply e s ta b lis h e d a new

b a s i s o f a c c o u n t i n g upon a c q u i s i t i o n . Any " u n u s u a l "

a c tiv itie s a re described In t h e fo llow ing paragraphs.

Muse A i r did not a c t u a l l y Issue a s e p a r a t e s et of

fin a n c ia l statem ents, but supplementary Info rm ation In

Its p a r e n t co m pa ny' s c o n s o l i d a t e d fin a n cial statements

shows M u s e ' s p o r t i o n o f a s s e t s , liabilities, and n e t

Income on a push down b a s i s . ®

The a c q u i s i t i o n o f Normandy I n s u r a n c e by S u n s t a t e s

C orporation r e p r e s e n t s an e x c e p t i o n to the g e n e r a liz e d

discussion of push down a c c o u n t i n g . The f o o t n o t e

disclosures In d ic ate that the cost of the net assets

a c q u i r e d was l e s s t h a n t h e book v a l u e o f those a s s e ts .

A p p lic a tio n of push down a c c o u n t i n g for Normandy

I n s u r a n c e t h u s r edu ce d t h e r e c o r d e d v a l u e o f the assets.®

C h i l d W o r ld Inc. is included in t h e c a t e g o r y o f

wholly-owned s u b s i d i a r i e s u t i l i z i n g push down a c c o u n t i n g

as a r e s u l t o f its 1984 a c q u i s i t i o n . However, after the

establishm ent of th is new b a s i s o f a c c o u n t i n g , a p u b lic

o ffe rin g o f C h i l d W or ld s t o c k was made in A u g u s t , 1985.

Accordingly, the o r ig in a l o w n er's ownership percentage

has been r ed uc ed from 100 p e r c e n t t o 8 1 . 5 p e r c e n t . 1®

TrI-A m erican Corporation ap p lied push down

accounting In J u l y o f 1981 a f t e r becoming a w h o l l y - o w n e d

” 8S o ut h w es t A i r l i n e s , Annual Report 1985, pp. 32-33.

® S u n s t a t e s Annual Report. 198 5, pp. 60-61.

1® C h l l d W o r l d , Inc., Annual R e po r t 198 5, pp. 14-15.

 46

s u b s i d i a r y o f S c o t t i s h & York In tern atio n al Insurance,

Inc. In November o f 1982, M i d w e s t e r n F i d e l i t y

C o rp o ra tio n acquired a l l of T rI-A m e rI c a n ' s stock from

S c o tt is h & York. The f i n a n c i a l statem ents merely

In d ic ate th at t h e p u r c h a s e method o f a c c o u n t i n g was used

for the 1982 a c q u i s i t i o n , not t h a t push down a c c o u n t i n g

was a p p l i e d a g a i n . 11

Although t h e r e a r e several s u b s i d i a r y and r e l a t e d

party transactions, NACRe Is e s s e n t i a l l y an exa mp le o f

app lying push down a c c o u n t i n g re s u ltin g from a one

hundred p e r c e n t a c q u i s i t i o n o f N o r t h American Company f o r

P r o p e r t y and C a s u a l t y Insurance (NAC). Kramer C a p i t a l

Corporation (KCC), t h r o u g h Grey E a g l e (a c o rp o ra tio n 95

p e r c e n t owned by KCC), a c q u i r e d NAC in 198 4. As o f June

28, 19 8 5, Grey E a g l e t r a n s f e r r e d Its ownership o f NAC t o

NACRe In exchange f o r 1000 s h a r e s o f NACRe's common

stock. A stock s p l i t resulted In an increase in t h e

number o f o u t s t a n d i n g shares to 2 , 6 5 0 , 0 0 0 . The f o o t n o t e s

state that:

T h i s r e l a t e d p a r t y t r a n s a c t i o n has been
a c c o u n t e d f o r by pus hing down t o NAC's
f i n a n c i a l s t a t e m e n t s Grey E a g l e ' s p u r c h a s e c o s t
b a s i s f o r NAC e s t a b l i s h e d a t May 2 4 , 1984 and
c o m bi ni ng NAC's r e s u l t s o f o p e r a t i o n s w i t h
t h o s e o f t h e Company (NACRe) from such d a t e . 12

After NACRe was o r g a n i z e d in June, 1985 t o a c q u i r e a l l of

NAC's s t o c k , a p u b l i c o f f e r i n g was made o f NACRe's s t o c k .

11T r I - A m e r l e a n C o r p o r a t i o n , Annual Report. 1982,

NAARS S e a r c h .

1 2 NACRe C o r p . , Annual Report 1985, p. 20.

 47

At t h e end o f 198 5, NACRe was o n l y 50 .7 % owned by Its

o rig in a l o w ne r , G rey E a g l e E n t e r p r i s e s .

Company C i t e d R e p o r t s T h a t
I t s Wh ol lv- O wn ed S u b s i d i a r i e s
Use Push Down A c c o u n t i n g

Three o f th e c i t a t i o n s were fo r p a r e n t companies

that in d ic ate th a t th eir w h o l l y owned s u b s i d i a r i e s have

established a new b a s i s o f a c c o u n t i n g upon a c q u i s i t i o n .

F lo rid a N ational Bancs and U n i t e d V i r g i n i a Ba nks ha re s

d isclose that push down a c c o u n t i n g has been a p p l i e d to

the sep arate fin a n c ia l statem ents of t h e i r w h o l l y owned

su b sid iaries. U nited V i r g i n i a B a n ks h a r es has

re tro a c tiv e ly a p p l i e d push down a c c o u n t i n g to the

ap p lic a b le separate fin a n c ia l statem ents of its

s u b s i d i a r i e s . 1^ This re tro a c tiv e a p p licatio n of push

down a c c o u n t i n g was a r e s u l t o f t h e SE C's p o s i t i o n on

push down a c c o u n t i n g . However, no a c t i o n was t a k e n by

t h e SEC t o s p e c i f i c a l l y require th is firm to Implement

push down a c c o u n t i n g . 14

R o b e r t C. Brown & Co. acquired a l l of the stock of

M id d le A t l a n t i c General I n v e s t m e n t Company ( t h e MAGIC

Group). However, t h e r e s u l t s o f MAGIC'S o p e r a t i o n s w er e

not Included In Bro w n' s c o n s o l i d a t e d fin a n c ia l

13UnI t e d V i r g i n i a Bankshares, Annual Report. 1983,

p. 29 .

14Jlm B a r r , Telephone c o n v e r s a t io n , A pril 14, 198 7.

 48

statem ents; MAGIC'S r e s u l t s on a push-down b a s i s w e r e

r e p o r t e d as s u p p l e m e n t a r y I n f o r m a t i o n . 15

Company C i t e d Uses
Push Down Account Inq
When I t Is Not W h o l l y Owned

Two o f t h e c i t e d c o m p a n Ie s je m p Io y e d push down

a c c o u n t i n g when l e s s t h a n one hundred p e r c e n t o f th e ir

s t o c k was a c q u i r e d . P a c i f i c Un ion Bank and T r u s t a p p l i e d

push down a c c o u n t i n g upon t h e a c q u i s i t i o n of 98 p e r c e n t

of Its common s t o c k by F r a n k l i n R e sou rc es Inc. The

transaction Is d e s c r i b e d as f o l l o w s :

On December 11, 1985, t h e B a n k ' s bo ar d

f i n a l i z e d I t s approval o f the purchase of
2 3 , 4 0 0 and 2 6 , 0 0 0 , 0 0 0 s h a r e s , r e s p e c t i v e l y , o f
t h e B a n k ' s u n i s s u e d p r e f e r r e d and common s t o c k
by F r a n k l i n . The p u r c h a s e o f t h i s new ly Iss ued
s t o c k was c o m p l e t e d on December 19, 1985 and
r e s u l t e d In F r a n k l i n o w n e r s h i p o f 100% and 97%,
r e s p e c t i v e l y , of the Bank's o u ts ta n d in g
p r e f e r r e d and common s t o c k a t December 3 1 ,
198 5. The c o n v e r s i o n o f t h e p r e f e r r e d s t o c k
i n t o common s t o c k as d i s c u s s e d In N o t e 12, and
t h e p u r c h a s e o f 1 3 , 3 3 3 , 3 3 3 a d d i t i o n a l s h a r e s by
F r a n k l i n , r e s u l t e d In F r a n k l i n ' s o w n e r s h i p
p e r c e n t a g e i n c r e a s i n g t o 98% a t September 3 0 ,
1986.

The a c q u i s i t i o n o f t h e Bank by F r a n k l i n was

a c c o u n t e d f o r as a p u r c h a s e , and "push down
a c c o u n t i n g " was a p p l i e d . The e x c e s s o f
F r a n k l i n ' s t o t a l purchase p r i c e , In c lu d in g
r e l a t e d l e g a l and o t h e r c o s t s o f $ 1 7 5 , 0 0 0 o v e r
t h e book v a l u e o f t h e B a n k ' s n e t a s s e t s , w hi c h
approximated the f a i r v a lu e of those a s s e ts ,
was r e c o r d e d as g o o d w i l l . The r e s u l t i n g
g o o d w i l l o f $ 9 1 6 , 6 2 7 is b e i n g a m o r t i z e d ov e r

15R o b e r t C. Brown & C o . , Annual R eport. 1985, NAARS

Search.
 49

ten y e a rs . A m o r t i z a t i o n f o r t h e n i n e months
ended September 3 0 , 1986 t o t a l e d $ 6 8 , 7 4 7 . 16

The company does not p r e s e n t l y p u b l i s h separate fin a n cial

statem ents, except for r e g u la t o r y purposes, and push down

accounting Is no t employed f o r these sep a ra te

s t a t e m e n t s . 17 Fran k lin Resources, In c ., the paren t of

P a c ific Un ion Bank & T r u s t C o . , accounts for t h e company

as an u n c o n s o l i d a t e d s u b s i d i a r y . 1®

C om m un ica tio ns & C a b l e Inc. Is engaged In

re s id e n tia l real e s t a t e dev el o pm en t and t h e c o n s t r u c t i o n

and o p e r a t i o n o f resid en tial cab le t e l e v i s i o n sy s te m s .

It Is an 80 p e r c e n t owned s u b s i d i a r y o f C e n v l l l

De ve lo pm en t C o rp . In J a n u a r y o f 198 5, a wholly-owned

su b sid iary of F ir s t American Bank and T r u s t p ur ch as ed a l l

of the shares of C e n v lll Development. The a c q u i s i t i o n

was a c c o u n t e d for as a p u r c h a s e o f C e n v l l l De velopment

and its su b s id ia rie s , i n c l u d i n g Communications & C a b l e .

The n o t e s t o Co mmunications & C a b l e ' s c o n s o l i d a t e d

fin a n cial statem ents d is c lo s e th a t:

The accompanying c o n s o l i d a t e d b a l a n c e s h e e t
r e f l e c t s an a l l o c a t i o n o f t h e a p p r o x i m a t e l y
$ 3 ,5 0 0 ,0 0 0 excess of th e purchase p r i c e
a t t r i b u t a b l e t o t h e company ov e r t h e c a r r y i n g
amount o f n e t a s s e t s a c q u i r e d , based on
M a na ge m e nt 's e s t i m a t e s o f t h e f a i r m a r k e t
v a l u e s a t t h e d a t e o f a c q u i s i t i o n , on t h e same

1® F r a n k l l n R e s o u r c e s , In c., Annual R e p o r t . September

30, 1986, NAARS S e a r c h .

17P e t e r M i l l s , Telephone c o n v e r s a t io n , A pril 21,

1987.

1® F r a n k l i n Resources, Inc., Annual R eport. 1986, p.

20.
 50

b a s i s as r e f l e c t e d in t h e f i n a n c i a l s t a t e m e n t s
o f i t s p a r e n t ("p ush -d ow n" a c c o u n t i n g ) . 19

Thus, Commun ica tions & C a b l e has a p p l i e d push down

a c c o u n t i n g as a r e s u l t o f the a c q u is itio n of the stock of

Its 80 p e r c e n t own er. The f i n a n c i a l statem ents contain

no s p e c i f i c d i s c l o s u r e s regarding the procedural aspects

of a p p l y i n g push down a c c o u n t i n g .

Company C i t e d Does Not

Use Push Down A c c o u n t i n g

Two o f t h e companies c i t e d by t h e d a t a b a s e s e a r c h e s

referred t o push down a c c o u n t i n g in t h e i r annu al reports

by n o t i n g that they did not implement It. Follow ing is

an e x c e r p t from H a r r i s B a n k c o r p ' s annual report:

On September 4 , 198 4, H a r r i s Ba n k c o r p , I n c .
became a w h o l l y - o w n e d s u b s i d i a r y o f Bankmont
F i n a n c ia l C o r p ., a Delaware C o r p o r a tio n .
Bankmont F i n a n c i a l C o rp . Is a w h o l l y - o w n e d
s u b s i d i a r y o f Bank o f M o n t r e a l . The p u r c h a s e
accounting adjustm ents a s s o c ia te d w ith the
a c q u i s i t i o n a r e r e f l e c t e d on t h e a c c o u n t i n g
r e c o r d s o f Bankmont F i n a n c i a l C o rp . and have
n o t been "pushed down" t o H a r r i s B a nk co r p.
T r a n s a c t i o n s in t h e c a p i t a l a c c o u n t s o f H a r r i s
Bankcorp w hi c h w e r e r e l a t e d t o t h e a c q u i s i t i o n
d i d not have a m a t e r i a l impact on t o t a l
sto c k h o ld e r's e q u i t y . 2 ®

S tru th er O il & Gas C o rp . did not a p p l y push down

a c c o u n t i n g as a r e s u l t o f the a c q u is it io n of 82.2 percent

of i t s common s t o c k . The f o o t n o t e s t o t h e fin a n cial

statem ents d escribe the s i t u a t i o n as f o l l o w s :

^9CommunI c a t Ions & C a b l e In c., Annual Report 1985,

p . 44.

2® H arris Bankcorp, Annual R eport. 1985, p. 66.

 51

The Company’ s f i n a n c i a l s t a t e m e n t s do n o t
r e f l e c t S o u t h l a n d ' s c o s t o f t h e a c q u i s i t i o n in
a c c o r d a n c e w i t h t h e r e q u i r e m e n t s o f "push down
a c q u is it io n accounting". Such a c c o u n t i n g would
r e s u l t in t h e Company's r e c o g n i t i o n o f an
ex c es s o f p u r c h a s e p r i c e o v e r n e t a s s e t s
a c q u i r e d as a r e s u l t o f S o u t h l a n d ' s a c q u i s i t i o n
o f $ 6 , 0 0 0 , 0 0 0 o f In te rc o m p a n y d e b t . Management
does n o t b e l i e v e I t Is a p p r o p r i a t e t o r e c o g n i z e
t h i s e x c e s s In t h e Company's f i n a n c i a l
s t a t e m e n t s In l i g h t o f t h e s i g n i f i c a n t m i n o r i t y
I n t e r e s t and t h e f i n a n c i a l c o n d i t i o n o f t h e
Company. 21

The f o o t n o t e s d e s c r i b e S t r u t h e r O i l and Gas Co rp . as

a company in f i n a n c i a l d iffic u lty . Losses s i n c e

ac q u is itio n to ta led $5,945,903, there is a d e f a u l t on

bank Indebtedness t o t a l i n g $6,314 ,4 13, there is a

d eficien cy of $6,732,835 In w o r k i n g c a p i t a l , and t h e r e is

a deficie n cy in n e t a s s e t s o f $ 6 , 5 4 3 , 2 5 3 . Thus It

a p p e a r s t h a t management passed up an o p p o r t u n i t y t o make

the fin a n cial s t a t e m e n t s app ear stronger bec au se t h e y

fe lt that push down a c c o u n t i n g d i d not r e f l e c t economic

reaI I t y .

Push Down A c c o u n t i n g A p p l i e d
As a R e s u l t o f a S o l l t o f f

The o n l y company c i t e d t h a t a p p l i e d push down

a c c o u n t i n g as a r e s u l t o f a spI I t o f f was P r l n c e v i l l e

Dev elo pm ent C o r p o r a t i o n , a company engaged In t h e

de v e lo p m e n t and s a l e o f real estate in H a w a i i .

P rln c e v ille De velopment C o r p o r a t i o n is not a t y p i c a l

exa mp le o f push down a c c o u n t i n g for two r e a s o n s . F irs t,

21S t r u t h e r O il & Gas C o r p . , Annual R eport. 1983,

NAARS S e a r c h .
 52

It is no lo ng er a s u b s i d i a r y . P rln c e v ille Development

C o r p o r a t i o n was e s t a b l i s h e d as a s e p a r a t e p u b l i c company

via a spinoff from Its fo r m e r parent, and push down

a c c o u n t i n g was a p p l i e d a t that tim e.

A c lo s e r a n a ly s is of t h i s company p r o v i d e s a n o t h e r

exception to the g e n e ra lize d a p p lic a tio n o f push down

accountin g discussed e a r l i e r In t h i s c h a p t e r . Discussion

In t h e com pany's 10-K s e c t i o n o f its annual report states

that the h is to r ic a l cost basis of the s u b s id ia r y 's ne t

a s s e t s was $ 5 9 , 0 3 3 , 3 2 4 Imm ediately p r i o r to the s a le .

Ho wever, a p p licatio n o f push down a c c o u n t i n g for th is

company r e s u l t e d in a downward a d j u s t m e n t t o $ 3 3 , 6 5 9 , 4 0 8

to r e f l e c t t h e p u r c h a s e p r i c e . 22 Thus, a p p licatio n of

push down a c c o u n t i n g for P r l n c e v i l l e Deve lop me nt

Corporation has r e s u l t e d In a d e c r e a s e in t h e r e c o r d e d

amount o f the assets ra th e r than the g e n e r a ll y perceived

Increase. In c o n t r a s t to s u ffe rin g the d e c lin e in

e a r n i n g s u s u a l l y e x p e r i e n c e d by companies a p p l y i n g push

down a c c o u n t i n g , earnings for t h i s company w i l l ben efit

from Its a p p lic a tio n . The p r e s i d e n t ' s le tte r recognizes

th is p o in t w ith t h e f o I IowI ng comments:

I t would n o t be f a i r , however, t o I g n o r e t h e
f a c t t h a t t h e 1985 e a r n i n g s w er e a i d e d
imm easurably by t h e f a c t t h a t PVDC's c o s t o f
a s s e t s have been s u b s t a n t i a l l y re duced below
t h e c o s t s o f t h e p r e d e c e s s o r o w ne r . . . . PVDC
w i l l b e n e f i t by b e i n g a b l e t o r e p o r t p o s i t i v e

2 2 P r I n c e v I I I e Development C o r p o r a t i o n , Annual R e po r t
198 5, p. 14.
 53

e a r n i n g s from t h e s e low b a s i s a s s e t s f o r many

y e a r s i n t o t h e f u t u r e . 23

Cone I us I on

The d a t a b a s e s e a r c h e s p r o v i d e some u s e f u l Insight

Into p r a c tic a l a p p licatio n o f push down a c c o u n t i n g . It

Is d i f f i c u l t to g e n e ra liz e the fin d in g s , but It appears

that the m a jo r it y o f companies t h a t Implement push down

a c c o u n t i n g do so as t h e r e s u l t o f the a c q u is itio n of a ll

of th e ir common s t o c k . There were o n ly two e x c e p t i o n s

no t e d in t h e companies c i t e d . Co mm un ic a tio ns & C a b l e

ap p lied push down a c c o u n t i n g as t h e r e s u l t o f t h e one

hundred p e r c e n t a c q u i s i t i o n of its parent, w h ic h owned 80

p e r c e n t o f Comm un ica tio ns & C a b l e . Although It no lo ng er

pub lishes sep arate fin a n cial statem ents, P a c ific Union

Bank & T r u s t In itia lly applied push down a c c o u n t i n g

fo llo w in g a 98 p e r c e n t change In o w n e r s h i p .

An u n e x p e c t e d f i n d i n g was t h a t , for at least two

companies a p p l y i n g push down a c c o u n t i n g , the asset

v a l u a t i o n s were l o w e re d . V irtu a lly a ll of the research

on push down a c c o u n t i n g to date addresses its impact

assuming t h a t the asset v a lu a tio n s w i l l increase. As t h e

asset values Increase, net income w i l l be re du c ed as more

d ep re cia tio n exp ens e Is r e c o g n i z e d from t h e s e h i g h e r c o s t

assets. A r e v i e w o f companies wh ic h have implemented it

in p r a c t i c e d i s c l o s e s that push down a c c o u n t i n g can and

has r e s u l t e d In a d e c r e a s e d v a l u a t i o n o f the assets w ith

23 I b i d . , pT “
a corresponding increase in n e t income. This appears to

be a r e a l i s t i c p o s s ib ility f o r com panies in in d u strie s

that have e x p e r i e n c e d economic d i f f i c u l t i e s . For bo th

Normandy I n s u r a n c e Company and P r l n c e v i l l e De vel opm ent

C orporation, t h e pushed down amounts r e c o r d e d w er e less

t h a n t h e p r e v i o u s book v a l u e s .

Another In te re stin g fin d in g of the database research

is inform ation ab o u t t h e companies t h a t do n o t implement

push down a c c o u n t i n g . Even though H a r r i s Bankcorp became

a w h o l l y owned s u b s i d i a r y , push down a c c o u n t i n g was not

a p p lied . The f o o t n o t e s c o n t a i n no I n d i c a t i o n o f why push

down a c c o u n t i n g was not a p p l i e d . They s i m p l y s t a t e that,

"Transactions In t h e c a p i t a l a c c o u n t s o f H a r r i s Bankcorp

w h ic h w e r e r e l a t e d to the a c q u is it io n d id not have a

m ateria l Impact on s t o c k h o l d e r ' s e q u i t y . " 24 S tru th e r O il

a l s o cho se no t to implement push down a c c o u n t i n g a f t e r a

cha nge in 8 2 . 2 percent of I t s ownership. The f o o t n o t e s

appear to In d ic ate t h a t management f e l t that applying

push down a c c o u n t i n g would be m i s l e a d i n g g i v e n t h e

co m pa ny 's fin a n c ia l co n d itio n .

The r e s u l t s o f these database searches v e r i f y an

e a rlie r contention of th is study: d iv e rs ity exists in

the rep o rtin g p r a c t i c e s o f f i r m s wh ic h do o r c o u l d

I mplement push down a c c o u n t i n g , w hi c h is a p r a c t i c a l

a p p licatio n s problem. Although t h e p r i m a r y pu r p o se o f

th is study is t o d e t e r m i n e w h e t h e r push down a c c o u n t i n g

24H a r r is Ba n k c o r p , p. 66.
 55

is t h e o r e t i c a l l y J u s tified , a th e o re tic a l ana lys is alone

could I g n o r e what is a c t u a l l y o c c u r r i n g In p r a c t i c e and

t h e r e f o r e n o t p r o v e t o have any r e a l a p p lic a b ility .

The d i v e r s i t y no te d In t h i s section further supports

t h e need f o r a cohesive theory r e g a r d i n g push down

accounting. The " t e x t b o o k case " o f push down a c c o u n t i n g

( i n w h ic h 100 p e r c e n t o f a company's s t o c k Is a c q u ire d )

c o n s titu te s o n e -h a lf of th e usable c i t a t i o n s located

through the database searches. But t h e r e m a i n i n g

c ita tio n s d i s p l a y a ra ng e o f v a r i a t i o n . For e x a m p le ,

although S tru th e r O il did not Implement push down

accounting a f t e r a change In 8 2 . 2 p e r c e n t o f Its

ownership, Commun ica tions & C a b l e d i d a p p l y push down

a c c o u n t i n g when Its parent ( w h i c h owned 80 p e r c e n t o f the

stock) was a c q u i r e d . A d d itio n a lly , the d isclosures for

t h e com panies t h a t have implemented push down a c c o u n t i n g

frequently do not d i s c u s s t h e p r o c e d u r a l aspects of

establishing t h e new b a s i s o f a c c o u n t i n g . This d i v e r s i t y

shows t h e importance of e s t a b l i s h i n g a cutoff point for

t h e p e r c e n t a g e change In o w n e r s h i p t h a t s h o u ld t r i g g e r

Im plem entation of push down a c c o u n t i n g . It also

Illu s tra te s t h e need f o r establishing standards of

d isclosure. The q u e s t i o n Is n o t m e r e l y a c a d e m ic , because

the d i v e r s i t y does e x i s t in p r a c t i c e .

A fter th is d i s c u s s i o n on t h e p r a c t i c a l impact o f

establishing a new b a s i s o f a c c o u n t i n g , it is hoped t h a t

the ensuing t h e o r e t i c a l analyses w i l l be more mean I n g f u I .

 56

The f o c u s In t h e r e m a i n i n g c h a p t e r s Is on t h e p r i m a r y

o b je c tiv e of the study: to d eterm in e whether push down

accounting Is t h e o r e t i c a l l y acceptable w ith in the o v e ra ll

framework o f c u r r e n t GAAP. In teractio n of push down

accounting w ith the h is t o r ic a l cost concept Is ad d re s s e d

in C h a p t e r 3.
 CHAPTER 3

THE APPLICATION OF HISTORICAL COST

TO PUSH DOWN ACCOUNTING

In C h a p t e r 2 , the Impact o f push down a c c o u n t i n g was

d i s c u s s e d on a g e n e r a l i z e d b a s i s and as It affects the

fin a n cial s t a t e m e n t s o f companies t h a t have Implemented

It In p r a c t i c e . The r e m a i n i n g c h a p t e r s f oc us on t h e

prim ary o b j e c t i v e of th is research: a conceptual

a n a lys is of push down a c c o u n t i n g .

One o f the prim ary c o n tro v e rs ie s s u r r o u n d i n g push

down a c c o u n t i n g I s w h e t h e r or n o t w r i t i n g up t h e

s u b s i d i a r y ' s a s s e t s based on t h e p a r e n t ' s c o s t v i o l a t e s

the h is t o r ic a l cost p rin c ip le . A recent a r t i c l e in

Management A c c o u n t i n g c l a i m s t h a t , "The push-down

a c c o u n t i n g d e b a t e can be summed up as r e l e v a n c y v e r s u s

h is to ric a l c o s t."1 The q u e s t i o n a p p e a r s t o be not q u i t e

that sim ple; pe r h a p s push down a c c o u n t i n g is both

relevant and in c o m p l i a n c e w i t h h is to ric a l cost. The

relevancy of push down a c c o u n t i n g Is examined in C h a p t e r

5. To a d d r e s s t h e c o m p l i a n c e o f push down a c c o u n t i n g

w ith h is to ric a l cost, the topic of h is to r ic a l cost

1C h a r l e s E. H o l l e y , Edward C. Spede, and M i c h a e l C.

C h e s t e r , J r . , "The Push-Down A c c o u n t i n g C o n t r o v e r s y , "
Management Account Ing 68 ( J a n u a r y 1 9 8 7 ) : 39.

57
 58

accounting Is f i r s t exa mine d, and t h e n Its a p p lic a b ility

t o push down a c c o u n t i n g Is r e v i e w e d .

An O v e r v i e w o f H i s t o r i c a l Co st

H is to ric a l cost Is an Inherent part of the

tra d itio n a l accounting framework. The Id e a pe r m e a te s

v irtu a lly a ll e x istin g a u th o rita tiv e s t a n d a r d s as w e l l as

current practice. Hendrlksen d e s c r ib e s h i s t o r i c a l cost

as t h e b a s i s o f t h e exchange p r i c e s a t w h i c h t h e

a cq u is itio n transaction takes p la c e . H is to ric a l cost

therefore r e p r e s e n t s t h e economic s a c r i f i c e required to

obtain a s p e c ific asset or group o f ass ets.2

H is to ric a l c o s t has bo t h Its p r o p o n e n t s and Its

c ritic s . The f o l l o w i n g s e c t i o n s examine b o t h d e f e n s e s

and c r i t i c i s m s o f t h i s v a l u a t i o n method.

Defense o f H i s t o r i c a l C o st

Hendrlksen notes t h a t the prim ary advantage o f using

h is to ric a l cost is its v e r i f i a b i l i t y . 3 Discounted future

cas h r e c e i p t s , c u rre n t output p r ic e s , c u r r e n t cash

eq u iva len ts, liq u id a tio n values, current Input c o s ts , and

discounted fu tu re costs, have been proposed as

a l t e r n a t i v e v a l u a t i o n methods o v e r the y e a r s . 4 One o f

th e major r ea s on s t h a t these o th e r bases have not been

2 E l d e n S. Hendr i k s e n , A c c o u n t i n g T h e o r y . 4 t h e d .
(Homewood: R i c h a r d D. I r w i n , I n c . , 1982) p. 26 4 .

3 lbld.„,'

4 I b I d , pp. 258-266.
 59

ad o p te d Is t h a t none a r e as v e r i f i a b l e as h i s t o r i c a l

cost.

M au tz makes a s t r o n g c a s e f o r using h i s t o r i c a l cost

by p o i n t i n g o u t t h a t a c c o u n t i n g emerged and has c o n t i n u e d

to e x is t b ec au se it provides Inform ation t o t h o s e who

make management and investment d e c is i o n s . If th ese users

had not found h i s t o r i c a l based a c c o u n t i n g inform ation to

be u s e f u l , changes would have " . . . long s i n c e been

m ade."5

L ittle to n agrees w ith the relevance of h is to ric a l

cost for d e c is i o n making. S p e c ific a lly he s t a t e s that:

Co st t o management is an I n v e s t m e n t , a
c a l c u l a t e d r i s k ; management d a r e not l o s e s i g h t
o f t h a t I n v e s t m e n t as a r i s k - c o s t ; t o do so
w i l l d e p r i v e them o f t h e b a s i s f o r J u d g in g , In
r e t r o s p e c t , t h e wisdom o f h a v i n g e n t e r e d upon
that ris k.®

In t h e same v e i n , Kam p o i n t s o u t that the best

understood concept o f p ro fit Is t h e e x c es s o f s e llin g

p r i c e over h is to ric a l cost. He says t h a t th is notion of

p ro fit Is a c c e p t e d as a measure o f s u c c e s s f u l performance

and t h a t people understand t h i s basic notion of business

success. Kam q u e s t i o n s t h e u s e f u l n e s s o f rep o rtin g an

increase In t h e v a l u e o f an a s s e t that the firm has no

In te n tio n to s e ll and t h e c o r r e s p o n d i n g re p o rtin g of

these market f l u c t u a t i o n s as income. He a l s o n o t e s t h a t

5 R o b e r t K. M a u t z , "A Few Words f o r H i s t o r i c a l Cost,"

F i n a n c i a l E x e c u t i v e ( J a n u a r y 1 9 7 3 ) : 23'.

®A. C. L i t t l e t o n , " S i g n i f i c a n c e o f Invested C o st,"

A c c o u n t i n g Review ( A p r i l 1 9 5 2 ) : 168.
 60

h is to ric a l cost is less s u s c e p t ib le to m a n ip u la tio n than

other propo sed m et ho ds , such as c u r r e n t c o s t or s e l l i n g

p rIc e .7

IJ irl Is a n o t h e r staunch d efen d er o f h is to ric a l

cost. He p o i n t s o u t t h a t although h is to ric a l c o s t does

n o t hav e t h e answe rs f o r every accounting Issue t h a t

arises, p e r h a p s one c o u l d b e s t a p p r e c i a t e Its advantages

by Imagining a business w orld w it h o u t it. Ijirl

s p e c ific a lly commends h i s t o r i c a l cost accounting for the

follo w in g reasons:

1. the data are less d is p u t a b le than data

p r o v i d e d by o t h e r v a l u a t i o n m et ho ds ,

2. It does not r e c o g n i z e h o l d i n g g a i n s and

losses, which he p e r c e i v e s t o be e s s e n t i a l

for m a in ta in in g order and s t a b i l i t y in

s o c Ie ty ,

3. It p ro vid es d a ta useful fo r decision-m aking

by b o t h managers and Investors, and

4. it is t h e least c o s tly to s o c ie t y .8

^Vernon Kam, Account Inq T h e o r y (New Y o r k : John WI Iey

& Sons, 1 9 8 6 ) , pp. 1 1 1 - 1 1 2 .

8 Y u j i I j i r l , “A D e f e n s e f o r H i s t o r i c a l Cost
A c c o u n t i n g , " In As se t V a l u a t i o n and Income D e t e r m i n a t i o n ,
e d . R o b e r t H. S t e r l i n g ( L a w r e n c e , Kansas: S c h o l a r ' s Book
C o . , 197 1) pp. 1 - 1 4 .
 61

An e a r l i e r w ritin g by IJI r I a ls o p raises h is to ric a l cost

b ec au se It Is t h e o n l y v a l u a t i o n method t h a t Is u n i q u e

and c e r t a i n . 9

Kohler summarizes t h e s u p p o r t for h is to ric a l cost

t h a t was o r i g i n a l l y stated In a 1936 r e p o r t by t h e

e x e c u t iv e committee of t h e Am er ic an A c c o u n t i n g

A s so ciatio n :

Accounting is . . . not e s s e n t i a l l y a
process o f v a l u a t i o n , but the a l l o c a t i o n of
h i s t o r i c a l c o s t s and r e v e n u e s t o c u r r e n t and
succeeding f i s c a l p e rio d s . . . . I f values
o t h e r t h a n u n a m o r t l z e d c o s t s a r e t o be qu o te d
t h e y s h o u ld be e x p r e s s e d . . . o n l y as
c o l l a t e r a l n o t a t io n s f o r i n f o r m a t iv e purposes.
. . . T h e r e seems t o be no sound re as on f o r
repeated adjustm ents of asset values fo r the
o r d i n a r y changes In p r i c e l e v e l s commonly
e x p e r i e n c e d from one g e n e r a t i o n t o a n o t h e r . . .
A h i s t o r y o f c o s t and c o s t a m o r t i z a t i o n Is a
c o n s is te n t record of a c tu a l occurrences . . .
and c o n s t i t u t e s an e s s e n t i a l s t a r t i n g p o i n t in
fin a n cial in t e r p r e t a t io n .^

He q u i t e su c cin ctly states h i s own d e f e n s e o f h is to ric a l

c o s t as f o I I o w s :

A c q u is itio n cost . . . rep res ents a

n e u tr a l, o b je c t iv e e v a lu a tio n of the p a s t's
c o n t r i b u t i o n t o p r o s p e c t i v e economic b e n e f i t s .
S i n c e p e o p l e have a c t e d In t h e p a s t In
a n t i c i p a t i o n o f b e n e f i t s t o be e n j o y e d In t h e
fu tu re , the o r ig in a l cost of a f u t u r e s e rv ic e
is p r e f e r a b l e t o any c u r r e n t m a r k e t v a l u e o f
g r e a t e r amount, a l l o t h e r t h i n g s b e i n g e q u a l .
Pa st m a r k e t p r i c e ( a c q u i s i t i o n c o s t ) is a l s o
s u p e r i o r t o c u r r e n t m a r k e t p r i c e as a measure

9Y u J I I J I r l . The F o u n d a t i o n o f A c c o u n t i n g
Measurement (Englewood C l i f f s , N. J . : P r e n t I c e - H a I I ,
1 9 6 7 ) , p. 6 4 - 6 7 .

19E r i c L. K o h l e r , "Why Not R e t a i n H i s t o r i c a l Cost?"

The J o u r n a l o f Ac cou nt an c y 116 ( O c t o b e r 1 9 6 3 ) : 3 8 - 3 9 .
 62

o f t h e " f o r g o i n g " o r " s a c r i f i c e " I n v o l v e d In

t h e use o r o t h e r d i s p o s i t i o n o f t h e a s s e t . 11

C riticism s of H is to ric a l Co st

H is to ric a l cost Is n o t w i t h o u t Its c r itic s . As

early as t h e 180 0's , L. R. Dlcksee, an a u t h o r o f one o f

the f i r s t B ritish a u d itin g t e x t s and r e f e r e n c e books,

advocated g iv in g some a t t e n t i o n t o changes In t h e m a r k e t

prices of pe rm ane nt a s s e t s . He c l a i m s t h a t " . . . whe re

a ss ets were s t a t e d above or below t h e i r 'c e rta in ly known

v a l u e , ’ then 'a t least the bare f a c t s s h o u ld be m e n t io n e d

in t h e A u d i t o r ' s c e r t i f i c a t e . ' " 12

F. S. B r ay a d v o c a t e s t h e use o f c u r r e n t c o s t s In a

le c t u r e given In 194 9. A l t h o u g h he ack no w le d ge s t h e

d iffic u ltie s Inherent In Im p le m e n ti n g c u r r e n t c o s t

accounting, he s u g g e s t s t h a t t h e s e pr ob le m s c o u l d be

overcome w i t h s u ffic ie n t aca dem ic r e s e a r c h . He s t a t e s

that o rig in a l c o s t s s h o u ld be c o n v e r t e d into c u rre n t

costs ". . . In o r d e r that In our s t a t e m e n t s o f

measurement a l l sig n ifican t en trie s sh a ll r e s t on a

homogeneous b a s i s . " 13

11 I b i d . , p. 39.

12As qu o te d In R. G. W a l k e r , " As se t C l a s s i f i c a t i o n
and A s s e t V a l u a t i o n , " A c c o u n t i n g and B u s in e s s R es ear ch 4
(Autumn, 1 9 7 4 ) : 2 9 0 - 2 9 1 .

13F r a n k S e w e l l B r a y , "The P r i n c i p l e s o f A c c o u n t i n g
M e a s u r e m e n t , " in A c c o u n t i n g M i s s i o n , e d . R o b e r t H.
S t e r l i n g ( L a w r e n c e , Kansas: S c h o l a r ' s Book C o . , 1973) pp.
33-34.
 63

Decades late r, th e d is c lo s u r e s Dicksee env isio n e d

have not become an Integral part of the fin a n c ia l

statem ents, nor has aca dem ic r e s e a r c h surmounted a l l of

t h e measurement pr ob le m s a s s o c i a t e d w i t h Im p le m e n ti n g

c u r r e n t cost accounting. C r itic is m s of s t r i c t l y adhering

to a h is t o r ic a l c o s t system have a c c o r d i n g l y not c e a s e d .

The FASB e x p e r i m e n t e d w i t h d i s c l o s i n g the e f f e c t of

changing p r i c e s In s u p p l e m e n t a r y s c h e d u l e s , 14 but t h e s e

rep o rtin g r e q u i r e m e n t s have s i n c e been s u s p e n d e d . 15

H e n d r i k s e n n o t e s t h a t one o f the prim ary

disadvantages of h is to ric a l cost is t h a t the value of the

asset to the f i r m may change o v e r tim e. H is to ric a l cost

may t h e r e f o r e e v e n t u a l l y have no s i g n i f i c a n c e as a

me as ur e o f the q u a n tity of resources a v a i l a b l e to the

firm . W hile IJ Irl perceives nonrecognition of g a i n s and

lo s s e s u n t i l an exc hange has a c t u a l l y t a k e n p l a c e t o be

an a d v a n t a g e ( a s no t e d a b o v e ) , Hendriksen is c r i t i c a l of

t h e same c h a r a c t e r i s t i c by c l a i m i n g that It fa ils to

perm it reco g n itio n of g a i n s and losses in t h e p e r i o d in

w h ic h t h e y may a c t u a l l y occur. F in a lly , Hendriksen

questions the a d d i t i v i t y f o r b a l a n c e s h e e t pu rp o se s o f

14 F I n a n c I a I A c c o u n t i n g S t a n d a r d s B o a r d , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g S t a n d a r d s No. 3 3 . " F i n a n c i a l
R e p o r t i n g and Changing P r i c e s " ( S t a m f o r d : FASB, 1 9 7 9 ) .

15 F i n a n c i a l A c c o u n t i n g S t a n d a r d s B o ar d , S t a t e m e n t
o f F i n a n c i a l A c c o u n t i n g S t a n d a r d s No. 89 " F i n a n c i a l
R e p o r t i n g and Changing P r i c e s " ( S t a m f o r d : FASB, 1 9 8 6 ) .
 64

the costs of assets acquired during periods of t i m e when

the p r ic e l e v e l s w e r e d i f f e r e n t . 1®

Hendrlksen's c r i t i c i s m questioning the a d d i t i v i t y of

cos ts of assets acq uired d uring p e rio d s of d i f f e r i n g

p rice levels Is a f r e q u e n t l y - h e a r d c r i t i c i s m of

h is to ric a l cost accounting. Solomons t a k e s t h i s i dea one

step further by c l a i m i n g that even c o s t s o f a s s e t s

pu rch ase d d u r i n g t h e same t i m e p e r i o d may no t be

comparable. For ex a m p le , u n it costs a re frequently

affected by t h e volume p u r c h a s e d . The same a s s e t

pu r c h a s e d In two d I f f e r e n t - s I zed l o t s on t h e same d a t e

might t h e o r e t i c a l l y have t o be r e c o r d e d a t two d i f f e r e n t

c o s t s . 17

Ross a g r e e s t h a t a c c o u n t a n t s " . . . attach a g reatly

exaggerated s ig n ific a n c e to actual t r a n s a c t i o n s as a

basis for fin a n c ia l r e p o r t i n g . " 1® He co n te n d s t h a t the

b a l a n c e s h e e t s h o u ld be ". . . what It ap p e a r s t o be— a

statement of the value of the e n te r p r is e , calculated by

establishing th e c u r r e n t or fa ir v a l u e o f a s s e t s and

d e d u c t i n g d e b t s . " 19

^H en d riks en , p. 264.

17D a v ld Solomons, " A ss et V a l u a t i o n and Income

D e t e r m i n a t i o n : A p p r a i s i n g t h e A l t e r n a t i v e s , " In A s se t
V a l u a t i o n and Income D e t e r m i n a t i o n , e d . R o b e r t H.
S t e r l i n g ( L a w r e n c e , Kansas: S c h o l a r ' s Book C o . , 1971) p.
109.

1®Howard Ross, " I s I t B e t t e r t o be P r e c i s e l y Wrong

Than V a g u e l y R i g h t ? " F i n a n c i a l E x e c u t i v e 39 ( J u n e 1 9 7 1 ) :
9.

1 9 Ro s s , p. 10.
 65

Knortz Is a ls o c r i t i c a l of h is to ric a l c o s t on t h e

grounds t h a t It does no t re fle c t "value." He c o n t e n d s

that “. . . 'valu e' Is and a l w a y s has been t h e p r o p e r

basis fo r accounting rep o rts." Knortz further asserts

that b a s i n g a c c o u n t i n g on a c o n c e p t o f c o s t is e q u i v a l e n t

to e re c tin g ", . .a n unnecessary impediment t o a t r u e

understanding of economic t r u t h . " 20

In a s t u d y c o n d u c t e d f o r the F in a n c ia l Executives

In s titu te , B a ck er c o n t e n d s t h a t , "The f u n d a m e n ta l pu r p o se

of b a l a n c e s h e e t s and Income s t a t e m e n t s Is t o re fle c t

v a l u e and changes in v a l u e . " 21 G iv e n t h i s p r e m i s e as a

sta rtin g point, It Is n o t s u r p r i s i n g t h a t Ba ck er

advocates the adoption of c u r r e n t valu e rep o rtin g . He

claim s that current values are useful Inform ation for

d e c is i o n makers, and a c c o r d i n g l y s h o u ld be r e c o g n i z e d In

fin a n c ia l statem ents e ith e r through f or m a l I n c l u s i o n or

as s u p p l e m e n t a r y In fo rm atio n . Bac ker further co n te n d s

that the in te re s ts of shareholders are b e t t e r protected

in m e r g e r s , tender o f f e r s , and p u r c h a s e s and s a l e s o f

b u s i n e s s when f i n a n c i a l statements re fle c t the c u rre n t

v a l u e o f a s s e t s . 22

2 0 H e r b e r t C . K n o r t z , "Economic R e a l i s m as a
R e p o r t i n g E s s e n t i a l , " F i n a n c i a l E x e c u t i v e 37 (March
1969): 24.

21M o r to n B a c k e r , "A Model f o r C u r r e n t V a l u e

R e p o r t i n g , " CPA J o u r n a l 44 ( F e b r u a r y , 1 9 7 4 ) : 27 .

22 I b i d . , pp. 27-28.
 66

Ba ck er makes a t h o u g h t - p r o v o k i n g comment in h i s

review of t h e de v e lo p m e n t o f the h is t o r ic a l cost concept.

He s t a t e s th at, "The r e v a l u a t i o n s o f the 1 9 2 0 ' s and

1 9 3 0 ' s have le ft a lin g e rin g s k e p t i c i s m to w a r d v a l u e

r e p o r t i n g , " 23 a s k e p t i c i s m that he p e r c e i v e s t o be

unwarranted. Accounting standard s were v i r t u a l l y

nonexistent in t h i s c o u n t r y u n t i l th e m id dle 1 93 0's , and

then they were only in r u d i m e n t a r y form. During th is

tim e as s e t v a l u a t i o n s were g e n e r a l l y u n s c ie n tific .

Ba ck er c o n t e n d s t h a t if e n e r g i e s had been expended t ow ar d

correcting these d e f ic ie n c ie s i n s t e a d o f ab a n d o n in g v a l u e

rep o rtin g , the h is to ry of fin a n c ia l reportin g in t h e

U n i t e d S t a t e s m i g h t have t a k e n a d i f f e r e n t t u r n . 24

O t h e r V a l u a t i o n Methods

D e sp ite the disadvantages associated w ith t h e use o f

h is to ric a l cost, It is s t i l l the framework upon wh ic h

tra d itio n a l accounting s t r u c t u r e and c u r r e n t fin a n c ia l

rep o rtin g a r e bas ed. O t h e r v a l u a t i o n methods have been

prop osed and d i s c u s s e d by a c c o u n t i n g w r i t e r s o v e r the

years, but for various re a s o n s none have been

im p le m e n te d . O t h e r pr opo sed v a l u a t i o n methods and

d iffic u ltie s t h a t wo uld be e n c o u n t e r e d w i t h th e ir

p ractical im plem entation a re reviewed In t h i s section.

23 I b i d . , p. 29.

24 lb i d .
 67

The c o n c e p t o f h is to ric a l cost discussed In t h e

previous section has t r a d i t i o n a l l y been m o d i f i e d by t h e

lower o f c o s t or m a r k e t r u l e . This r u le I s commonly used

In t h e v a l u a t i o n of Inventory. It e s s e n tia lly requires

that a d ec lin e In t h e m a r k e t v a l u e o f an a s s e t s h o u ld be

re fle c te d by a r e d u c t i o n In r e c o r d e d c o s t . The r ed uc ed

m a r k e t v a l u e t h e r e f o r e becomes c o s t .

In a d d i t i o n to the t r a d i t i o n a l lower o f c o s t o r

m arket, B arrett has s u g ge st ed t h e f o l l o w i n g as p o s s i b l e

asset valu atio n bas es :

1. lower o f h is to ric a l c o s t or m a r k e t— a d ju s te d for

general p ric e -le v e l changes: T h i s method

a t t e m p t s t o add s t a b i l i t y to the t r a d it i o n a l

c o s t b a s i s by a d j u s t i n g It for the e f f e c t s of

In fI at Ion.

2. economic v a l u e : This Is t h e n e t p r e s e n t v a l u e

of a l l f u t u r e cash f l o w s a s s o c i a t e d w i t h an

asset.

3. market v a l u e : This is the f a i r market v a lu e of

an a s s e t a t any g i v e n tim e. It I s not Intended

t o be e q u i v a l e n t t o scrap v a lu e or liq u id a tio n

vaIue.

4. p rice-In d ex replacement c o s t : T h i s method

a p p r o x i m a t e s r e p l a c e m e n t c o s t by a p p l y i n g

s p e c ific p rice I n d i c e s . 25

25 m . Edgar B a r r e t t , "Proposed Bases f o r A ss et

V a l u a t i o n , " F i n a n c i a l E x e c u t i v e 41 ( J a n u a r y 1 9 7 3 ) : 12-13.
 68

An Am er ic an A c c o u n t i n g A s s o c i a t i o n c o m m i t t e e

explored a l t e r n a t i v e v a lu a t io n concepts in d e p t h in 1972.

T h i s c o m m i t t e e no te d t h a t the choice of a valuation base

depends upon a t least two m a j o r c r i t e r i a : r e l e v a n c e and

f e a s i b i l i t y . 2® They r e v i e w e d c o s t s t o s o c i e t y o f making

I n c o r r e c t d e c i s i o n s based on t h e s e v a l u a t i o n m e t h o d s . 27

For v a r i o u s reasons, none o f these other valuation

meth ods have g a i n e d a c c e p t a n c e . W h i l e t h e y may be more

c o n c e p tu a lly ap p ealin g , t h e o t h e r methods u s u a l l y share

one m a j o r o b s t a c l e t o t h e i r practical im plem entation —

m ea s ur em en t. For e x a m p le , St au b us n o t e s t h a t

". . . t h e p r o p e r t y o f an a s s e t that fin a n cial statement

u s e r s would most lik e t o know Is I t s cash flow

p o t e n t i a l . " 2® But Im plem entation of such a t e c h n i q u e

poses s i g n i f i c a n t practical d iffic u ltie s . Both t h e

estim ation of t h e amount o f f u t u r e cash f l o w s and t h e

choice of the in te re st rate used t o d i s c o u n t t h o s e f l o w s

i n v o l v e a g r e a t d ea l of s u b je c tiv ity . Several questions

wo uld have t o be a d d r e s s e d and answered b e f o r e t h i s

method c o u l d be a d o p t e d . S p e c ific a lly , how w ou ld cash

flow estim a te s be de v e lo p e d ? How would a u d i t o r s evaluate

2 ®Amer i can A c c o u n t i n g A s s o c i a t i o n C o m m i tt e e on
A c c o u n t i n g V a l u a t i o n Base s, " R e p o r t o f t h e C o m m itt ee on
Accounting V a lu a tio n Bases," Accounting Review,
s u p pl e m e nt t o v o l . 47 ( 1 9 7 2 ) : 53 5 .

27 Ib i d . , p. 56 7 .

2 ®George J. S t a u b u s , “The Measurement o f A s s e t s and

L i a b i l i t i e s , " A c c o u n t i n g and B u s in e s s R es ear ch 3 (Autumn
1973): 245.
 69

t h e s e e s t i m a t e s once t h e y w er e made? What p r o c e s s would

be used t o choose t h e d i s c o u n t rate? St aub us d e s c r i b e s

such p r o b l e m s as weaknesses In t h e r e I I a b I I I t v o f

discounting f u t u r e cash flow s; he c o n t e n d s t h a t the

I n f o r m a t i o n would be r e I e v a n t t o d e c i s i o n s if a re lia b le

measurement c o u l d be m a d e . 29

Even though he c r i t i c i z e s h is to ric a l cost for b ei ng

11 I ess Inform ative" t h a n o t h e r m et ho ds , It is interesting

to note t h a t St au b us a d d r e s s e s t h e Id ea o f f u t u r e cash

flows in lis tin g th e o re tic a l advantages of h is to ric a l

cost. He s t a t e s that ". . . o rig in a l money c o s t is

u s u a lly determ ined w it h re fe re n c e to the f u tu re to the

extent that the d e c is io n to purchase th e ass et is based

on some e x p e c t e d p a t t e r n o f fu tu re services from I t . " 30

Sta ub us Im plies t h a t h is to ric a l c o s t can be v i e w e d as a

proxy for discounted f u t u r e cash f l o w s , e s p e c ia lly at the

tim e of a c q u is itio n of an a s s e t and s h o r t l y th ereafte r.

Im plied In t h e above d i s c u s s i o n is t h e i d ea t h a t if

t h e measurement p r o b le m s c o u l d be s o l v e d , perhaps another

v a l u a t i o n method wo uld be p r e f e r a b l e t o h i s t o r i c a l cost.

But, th is premise Is n o t s u p p o r t e d In p r a c t i c e . Even

though o b j e c t i v e c u r r e n t v a l u e s e x i s t for m arketable

s e c u ritie s , t h e s e a s s e t s ca n n o t be r e p o r t e d a t th eir

current fa ir market v a lu e If the c u rre n t fa ir market

Ib Id ., p. 252.

30Geo r g e J. S t a u b u s , " A s s e t s and S p e c i f i c E q u i t i e s "

in A c c o u n t i n g t o I n v e s t o r s , e d . R o b e r t H. S t e r l i n g
( L a w r e n c e , Kansas: S c h o l a r ' s Book C o . , 1 9 7 1 ) , p. 39.
 7°

v a l u e e x c e e d s c o s t . 31 Under normal cIrcum stances,

p r a c t i c e does not s u p p o r t t h e use o f c u r r e n t c o s t s In

excess o f h is to ric a l c o s t s even when o b j e c t i v e e v i d e n c e

exists t o measure t h e s e c o s t s .

D e s p ite th e shortcomings of h is to ric a l cost

accounting, It Is s t I I I t h e o n l y v a l u a t i o n basis

reco g n izab le f o r p u r p o se s o f GAAP. Current p r a c tic e ,

h ow eve r, allo w s for some e x c e p t i o n s t o t h e h i s t o r i c a l

cost ru le . In i t s Conceptual Framework p r o j e c t , t h e FASB

notes t h a t , "Items c u r r e n t l y reported in f i n a n c i a l

s t a t e m e n t s a r e measured by d i f f e r e n t attrib u tes,

dep en di ng on t h e n a t u r e o f the I tern and t h e r e l e v a n c e and

re lia b ility of the a t t r I b u t e measured."32 | n a d d itio n to

h is to ric a l cost, t h e Board lis ts four other acceptable

valuation bases, w it h some examples o f th eir ap p lic a tio n :

1. cu rren t cost - Some I n v e n t o r i e s a r e

reported a t cu rren t (replacem ent) cost.

2. c u r r e n t market valu e - Some Investments in

m arketable s e c u r it ie s are reported at th eir

c u r r e n t market v a lu e .

3. net re a liz a b le value - Short-term

r e c e i v a b l e s and some I n v e n t o r i e s a r e

31 F i n a n c i a l A c c o u n t i n g S t a n d a r d s Boa rd , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g S t a n d a r d s No. 12 " A c c o u n t in g f o r
C e r t a i n M a r k e t a b l e S e c u r i t i e s " ( S t a m f o r d : FASB, 1 9 7 5 ) .

3 2 p i n a n c i a l A c c o u n t i n g S t a n d a r d s Boa rd , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g Co nce pt s No. 5 " R e c o g n i t i o n and
Measurement In F i n a n c i a l S t a t e m e n t o f B u si n es s
E n t e r p r i s e s " ( S t a m f o r d : FASB, 1 9 8 4 ) , p a r a g r a p h 6 6 .
 71

reported at net r e a liz a b le value.

4. present value of f u t u r e cash flows - Long­

term r e c e iv a b le s a r e re p o rte d at th eir

p r e s e n t v a l u e . 33

Even though t h e FASB a s s e r t s that a ll fiv e

measurement bases a r e a c c e p t a b l e , t h e y a r e not a c c e p t a b l e

as a l t e r n a t i v e s for the v a lu a tio n of any g i v e n b a l a n c e

sheet item. S p e c ific a lly , a m anufacturer of a i r

c o n d i t i o n e r s c a n n o t choose t h e v a l u a t i o n method deemed t o

be t h e most d e s i r a b l e ; h is to ric a l c o s t must be used

unless market v a lu e is lower. The o t h e r valuation

methods a r e g e n e r a l l y mere e x t e n s i o n s o f the h i s t o r i c a l

cost concept. Ex c e p t for s p e c ia lize d situ a tio n s , such as

a g ricu ltu ra l and m i n e r a l In ven to ries, they a re u t i l i z e d

o n l y when t h e amounts c a l c u l a t e d under t h o s e methods a r e

bel ow h i s t o r i c a l cost. H is to ric a l cost norm ally re m a i n s

the c e i l in g a t w hi c h t h e s e I terns can be r e p o r t e d .

Since c u r r e n t c o s t, c u r r e n t market v a lu e , and n e t

re a liza b le v a l u e a r e u s u a l l y a p p l i e d o n l y when t h e s e

amounts a r e less than h i s t o r i c a l cost, th e ir ap p licatio n

Is no t relevant t o an e x a m i n a t i o n o f push down

accounting. Although the p rese n t v a lu e of f u t u r e cash

f l o w s method Is c o n c e p t u a l l y a p p e a l i n g , Its practical

a p p licatio n has no t expanded f a r enough t o be employed in

push down a c c o u n t i n g . To re m ai n w i t h i n the c o n fin e s of

the c u r r e n t conceptual framework, push down a c c o u n t i n g

33 I b I d . , p a r a g r a p h 6 7 .
 72

must t h e r e f o r e c on fo r m t o t h e d i c t a t e s o f h is to ric a l cost

accounting. A fter Illu s tra tin g push down a c c o u n t i n g in

the follo w in g sections, the technique Is fu rth er explored

to determ ine whether It v io late s h is to ric a l cost.

ExamoIes

The f o l l o w i n g examples show t h e m ec h a n ic s o f push

down a c c o u n t i n g and how i t relates to the Idea of

h is to ric a l cost. The f i r s t Illu s tra tio n uses t h e

p ro p rietary ( p a r e n t company) approach. Under th is

method, the assets are revalued only to the e x te n t of the

percentage of stock t h e p a r e n t company p u r c h a s e d . If

n in e ty percent of the stock Is a c q u i r e d , only ninety

percent of the assets w i l l be r e v a l u e d . The second

illu s tra tio n uses t h e same Inform ation to record the

a c q u is itio n under the e n t i t y theory. According to the

e n tity meth od, the value e s ta b lis h e d by an a c q u i s i t i o n of

l e s s t h a n one hundred p e r c e n t o f a comp an y's s t o c k s ho ul d

be used t o impute a v a l u e for a ll of the a s s e ts . ( Th ese

t h e o r i e s a re discussed In more d e t a i l in C h a p t e r 4 . ) For

both Illu s tra tio n s , assume t h e fo llo w in g facts: P

C o rp o ratio n acquired a n in e ty percent in te re st in S

C o r p o r a t i o n on J a n u a r y 1, 1987 f o r $ 2 , 5 0 0 , 0 0 0 a t which

tim e S C o rp o ra tio n had c a p i t a l s t o c k o f $ 1 , 6 0 0 , 0 0 0 and

retain ed earnings of $600,000.

 73

P a r e n t Company Th e o r y

The e x c es s o f c o s t o v e r book v a l u e is c a l c u l a t e d and

a s s i g n e d as f o l l o w s :

C a p ita l stock $1,600,000

Retained earnings 600.000
Book v a l u e o f t o t a l n e t a s s e t s $2,200,000
O w n e rs h ip p e r c e n t a g e .90
Book v a l u e o f n e t a s s e t s a c q u i r e d $1,980,000
Cash p a i d 2.500.000
Excess o f c o s t o v e r book v a l u e

T h is excess is a s s i g n e d as f o l l o w s :

Inventory (FIFO b a s is ) $ 50,000

Machinery (10-year l if e ) 200,000
Land 150,000
GoodwI I I 120.000
Total $ 520.000

In a d d i t i o n t o t h e e n t r i e s made by P C o r p o r a t i o n to

account for th is a cq u is itio n by t h e p u r c h a s e m ethod, S

C o r p o r a t i o n wo uld make t h e f o l l o w i n g e n t r y on t h e d a t e o f

ac q u is itio n t o push down P C o r p o r a t i o n ' s purchase p r i c e :

Inventory 50,000
Machinery 200,000
Land 150,000
GoodwIII 120,000
R evaluation C apital 520,000

E n tity Theory

According t o th e e n t i t y theory, the p a re n t's

purchase p r i c e is used t o Impute a v a l u e for a lI of the

assets of the acquired firm . U s in g t h e same in fo rm atio n ,

c a lc u la tio n s under the e n t i t y t h e o r y ap p ro ac h wo uld be as

fo I Iows:
 74

Cash p a i d $2,500,000
O w ne rs hi p p e r c e n t a g e _________ . 90
Imputed v a l u e o f a c q u i r e d f i r m $2,777,778
Book v a l u e o f n e t a s s e t s
a c q u ire d (p erabove) 2.200.00 0
Excess o f I m p l i e d v a l u e o v e r
book v a l ue §===§ZZj:ZZ§!
This excess i s a s s i g n e d as f o l l o w s :

In v e n to ry (FIFO) b a s is $ 55,5^6
M achinery(1 0 -y e a r life ) 222,222
Land 166,667 .
GoodwI I I 133.333
Total $ 577.778

In a d d i t i o n t o t h e e n t r i e s made by P C o r p o r a t i o n to

account for th is acq u is itio n by t h e p u r c h a s e m et hod , S

C o r p o r a t i o n wo uld make t h e follo w in g e n t r y on t h e d a t e o f

ac q u is itio n t o push down P C o r p o r a t i o n ' s p u r c h a s e p r i c e :

Inventory 55,556
M achinery 222,222
Land 166,667
GoodwI I I 133,333
R evaluation C a p ita l 577,778

A co m p a ri so n and e v a l u a t i o n o f t h e p a r e n t company

th e o ry versus the e n t i t y t h e o r y ap pr oa ch is po s tpo ned

u n til Chapter 4. The c e n t r a l question a t th is point Is

whether t h e push-down Jo u rn al e n trie s r e q u i r e d under

eith er o r b o t h methods v i o l a t e s the h i s t o r ic a l cost

concept. This Issue is addressed in t h e follow ing

sect Ion .

A p p l i c a t i o n o f H i s t o r i c a l Cost
t o Push Down A c c o u n t i n g

D e f e n s e s and c r i t i c i s m s o f h is to ric a l c o s t w er e

discussed e a r l i e r in t h i s chapter, but i t was no te d t h a t

In t h e c o n t e x t o f push down a c c o u n t i n g it Is t h e o n l y
 75

v a l u a t i o n method a c c e p t a b l e f o r GAAP. G iv e n t h e p r e m i s e

t h a t a c c o u n t i n g and f i n a n c i a l r e p o r t i n g must work w i t h i n

the co n fin es o f h is to ric a l cost, the basic question

involves cost t o whom. Which c o s t Is most relevant:

c o s t t o t h e new owners or c o s t to the e n t i t y Its e lf?

The FASB s t a t e s in Its firs t Statement In t h e

Conceptual Framework p r o j e c t that the o b j e c t i v e of

fin a n cial rep o rtin g is t o 11. . . provide inform ation that

Is u s e f u l t o p r e s e n t and p o t e n t i a l I n v e s t o r s and

cred ito rs and o t h e r users in making r a t i o n a l Investment,

c re d it, and s i m i l a r d e c i s i o n s . " 34 If push down

acc o u n tin g accomplishes t h i s o b je c tiv e w ith o u t

com pr om is in g o t h e r existin g p rin c ip le s and g u i d e l i n e s ,

t h e r e s h o u l d be no o p p o s i t i o n to Its adoption. A fter the

a p p lic a b ility of h is to ric a l c o s t t o push down a c c o u n t i n g

Is a d d r e s s e d In t h e f o l l o w i n g section, the evidence Is

evaluated to determ ine whether t h e e s t a b l i s h m e n t o f a new

cost b asis for the s u b s id ia ry v i o l a t e s the concept of

h is to ric a l cost.

H i s t o r i c a l C o st Su pp or t
f o r Push Down Account Inq

Cunningham o f f e r s support for push down a c c o u n t i n g

w ith in the framework o f h is to ric a l cost. He c o n te n d s

t h a t APB O p i n i o n 16 I n s t i t u t e d the p r i n c i p le that a new

3 4 F I n a n c I a I A c c o u n t i n g S t a n d a r d s Bo ar d, S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g Co n ce p t s No. 1 " O b j e c t i v e s o f
F i n a n c i a l R e p o r t i n g by B u s in e s s E n t e r p r i s e s " ( S t a m f o r d :
FASB, 19 7 8) p a r a g r a p h 3 4 .
 76

cost basis Is e s t a b l i s h e d for an a c q u i r e d compa ny's

a s s e t s and lia b ilitie s when t h e y a r e r e p o r t e d In t h e

con so lid ated statem ents. He f u r t h e r asserts that the

bargained cos ts of t h e a s s e t s and lia b ilitie s s h o u l d be

recorded, not th e cost o f those I terns t o t h e p r e v i o u s

ow ne rs . C u nni ngh am 's s t a n c e is t h a t c o s t s h o u ld

represent cost t o t h e new o w n e r . 3 ®

Cunningham a l s o o b s e r v e s t h a t , "FASB Co nc ep ts

S t a t e m e n t No. 3 commonly uses t h e p h r a s e 'tra n s a c tio n s

and o t h e r e v e n t s and c i r c u m s t a n c e s a f f e c t i n g an e n t i t y '

t o d e s c r i b e t h e s o u r c e s o r c au se s o f the comprehensive

Income components and o t h e r changes in a s s e t s ,

lia b ilitie s and e q u i t y . "3® The Im p licatio n is t h a t the

e n tity Its e lf does not have t o be a p a r t y to the

acq u is itio n . The mere f a c t that the e n t i t y is a f f e c t e d

by t h e a c q u i s i t i o n Is s u f f i c i e n t for establishing a new

cost b as is.

W ilcox notes t h a t the acq uiring corpo ration w il l

p r o b a b l y be in f a v o r o f push down a c c o u n t i n g so t h a t the

p rice it had t o pay f o r t h e company w i l l be r e f l e c t e d on

t h e s u b s i d i a r y ' s books. The a c q u i r i n g company would

prefer that the cost of its Investment a c t u a l l y be

3oM l c h a e l E. Cunningham, "Push Down A c c o u n t i n g : Pros

and C o n s , " J o u r n a l o f Ac cou nt an c y 157 ( Jun e 1 9 8 4 ) : 73.

3 6 lb id .
 77

r e c o r d e d on t h e a c q u i r e d compa ny's books in o r d e r to

d e t e r m i n e t h e r e t u r n on its i n v e s t m e n t . 37

A l t h o u g h he d i d n o t refer t o push down a c c o u n t i n g ,

It appears t h a t the thoughts of t h e s e w r i t e r s wo uld be

s h a r e d by Ross. He s t a t e s that, "It i s h i g h t i m e we

re a lize d and a d m i t t e d that the p r ic e paid in a

transaction in w hi c h t h e o w n e r s h i p o f p r o p e r t y passes

from one pe rs o n t o a n o t h e r Ls a good In d ic atio n of the

value of the property . . . "38 Ross was qu o te d e a r l i e r

In t h i s chapter as s a y i n g t h a t accountants " . . . attach

a g reatly exaggerated significance to actual transactions

as a b a s i s for fin a n cial r e p o r t i n g . " 33 Follow ing th is

lo g ic a step further, It c o u l d be c l a i m e d t h a t an e n t i t y

no t a d h e r i n g t o push down a c c o u n t i n g is r e f u s i n g to

record a tra n s a c tio n that has a c t u a l l y occurred.

A p p licatio n of FASB 14 a l s o p r o v i d e s h i s t o r i c a l cost

support for push down a c c o u n t i n g . This statement

requires that i n f o r m a t i o n on s e p a r a t e segments o f an

e n t e r p r i s e must r e f l e c t the p a r e n t's cost basis for each

s e g m e n t . 43 The AICPA Task F o r c e on C o n s o l i d a t i o n s

Prob lem s n o t e s t h a t w h i l e e v e r y s u b s i d i a r y Is n o t a

3 7 Edward E. W i l c o x , "Management Vi ew s o f P u rc h as e
A c c o u n t i n g , " O h io CPA Jo u rn al 43 (Summer, 1 9 8 4 ) : 159.

3 8 Ro s s , p. 9.

33 Ib i d .

4 3 F I . n a n c l a l A c c o u n t i n g S t a n d a r d s B o ar d , S t a t e m e n t
N o . 1 4 . " F i n a n c i a l R e p o r t i n g f o r Segments o f a B u s in e s s
E n t e r p r i s e " ( S t a m f o r d : FASB, 1976) p a r a g r a p h 6 .
 78

seg me nt, the s ep arate fin a n cial statem ents of acquired

e n title s s h o u ld be p r e s e n t e d in a l i k e manner t o a c h i e v e

sym m et ry. Issuance of separate fin a n c ia l s t a t e m e n t s on

any b a s i s o t h e r t h a n push down a c c o u n t i n g c o u l d resu lt in

c o n flic tin g fin a n c ia l Inform ation for t h e same segment or

subs I d I a r y . 41

Montgomery's A u d it in g p r o v i d e s a s t r o n g ar gum en t for

push down a c c o u n t i n g w i t h i n the h is t o r ic a l cost co n tex t.

This p o s itio n Is summarized as f o l l o w s :

T r a d i t i o n a l l y a company was a c q u i r e d and

t h e r e a f t e r r e t a i n e d f o r e v e r , s o l d as a u n i t t o
a t h ir d p a rty , or liq u id a te d . G o o d w i l l was
assumed t o be an a s s e t s o l e l y o f t h e a c q u i r i n g
o r p a r e n t company. F in a n c ia l statem ents of the
a c q u i r e d company w ere on a s e p a r a t e company
b a s i s and r em ai ne d t h e same (on I t s books) as
before the a c q u is itio n . R evaluation of the
a s s e t s a c q u i r e d and d e t e r m i n a t i o n o f t h e
p a r e n t ' s p o r t i o n o f g o o d w i l l a r o s e o n l y In
c o n s o l i d a t i o n and g o o d w i l l was r e c o r d e d In a
c o n s o lid a tin g e n try r e f l e c t i n g th a t the
p a r e n t ' s i n v e s t m e n t In t h e a c q u i r e d company
exceeded t h e r e p o r t e d n e t book v a l u e o f t h e
company. When t h e s u b s i d i a r y was s o l d , t h e
g o o d w i l l d i s a p p e a r e d from t h e c o n s o l i d a t e d
balance sheet along w ith the net assets of the
s u b s i d i a r y , and g a i n or l o s s t h e r e o n was
computed and r e c o r d e d . The t h e o r e t i c a l
p r obl em s o f m i n o r i t y i n t e r e s t s in g o o d w i l l w e r e
Ignored.

Those pr ob le m s c a n n o t be I g n o r e d i f an
I n t e r e s t in a s u b s i d i a r y is s o l d in a p u b l i c
o f f e r i n g o r f o r any o t h e r r e a s o n t h e s u b s i d i a r y
is r e q u i r e d t o p r e s e n t s e p a r a t e f i n a n c i a l
statem ents. I t Is i m p o s s i b l e t o I g n o r e t h e
f a c t t h a t a t r a n s a c t i o n has t a k e n p l a c e ,
e s t a b l i s h i n g a new b a s i s o f a c c o u n t a b i l i t y ,
whenever a b u s i n e s s is s o l d o r a c q u i r e d In an
a r m ' s - l e n g t h t r a n s a c t i o n , even though n o t h i n g

41 A c c o u n t i n g S t a n d a r d s E x e c u t i v e C o m m i tt e e , Is s u e s
P a p e r . " 'P u s h Down' A c c o u n t i n g " (New Y o r k : AICPA, O c t o b e r
3 0 , 1 9 7 9 ) , page 14.
 79

has o c c u r r e d w i t h i n t h e e n t i t y I t s e l f t o
w a r r a n t a new b a s i s o f a c c o u n t a b i l i t y . The
o c c u r r e n c e o f a s a l e and p u r c h a s e , r a t h e r t h a n
I n t e r n a l changes or l a c k o f them, must be t h e
b a s i s f o r r e c o r d i n g changes In c o s t . The
abrupt r e v a lu a t io n of a s s e ts , of course,
a f f e c t s c o m p a r a b i l i t y o f t h e n e t Income s t r e a m
o f t h e a c q u i r e d e n t i t y , b u t I t Is p r e f e r a b l e t o
i g n o r i n g t h e a c c o u n t i n g r e s u l t o f changed
ownersh i p . 42

The e s s en ce o f these authors' ar g u m en ts is t h a t the

a c q u is itio n by t h e p a r e n t o f the s u b s id ia ry is s u f f i c i e n t

to Ju stify estab lish in g a new c o s t b a s i s . The f a c t that

nothing w i t h in the e n t it y Its e lf has changed is

con sidered t o be Irre le v a n t.

The " s u b s t a n c e o v e r form" d o c t r i n e c o u l d a l s o be

I nvoked t o s u p p o r t push down a c c o u n t i n g w i t h i n the

h is to ric a l cost con text. When a company p u r c h a s e s

another firm 's stock, it Is in s u b s t a n c e a c q u i r i n g that

firm 's net a s s e t s . If a new .company Is formed by

purchasing id e n tic a l assets elsew here, t h e new company

wo ul d r e c o r d the assets a t t h e new c o s t b a s i s e s t a b l i s h e d

by t h e p u r c h a s e p r i c e . If an e x i s t i n g company does not

estab lish a new c o s t b a s i s as t h e r e s u l t o f the

acq u is itio n of its stock, It c o u l d be c o n te n d e d t h a t the

form o f the tra n s a c tio n Is t a k i n g precedence over Its

substance.

4 z PhI I Ip L . D e f I I e s e , Ken net h P. Johnson, and

R o d e r i c k K. M a c l e o d , M o n t g o m e r y ' s A u d i t i n g . 9 t h e d . (New
Y o r k : The Ron ald P r e s s Company, 1 9 7 5 ) , p. 6 9 2 .
 80

H i s t o r i c a l C o st E v i d e n c e
A g a i n s t Push Down A c c o u n t i n g

A c h ief c ritic is m o f push down a c c o u n t i n g is t h a t it

v io late s the h i s t o r ic a l cost concept. Some c r i t i c s

contend t h a t push down a c c o u n t i n g Is e q u i v a l e n t to

c u rre n t v a lu e accounting. Furthermore, s i n c e t h e FASB

has r e c e n t l y rescinded Its cu rren t value rep o rtin g

requirem ents, it c o u l d be c l a i m e d t h a t the accounting

p r o f e s s i o n does n o t c o n s i d e r c u r r e n t value re p o rtin g to

p ro v id e m eaningful I n f o r m a t i o n . 43 The Intended lo g ic of

th is ap p ro ac h is t h a t if push down a c c o u n t i n g is

e s s e n tia lly current v a lu e accounting, and if current

v a lu e accounting Is no l o n g e r deemed d e s i r a b l e by t h e

FASB, t h e n push down a c c o u n t i n g s h o u l d a c c o r d i n g l y no t be

empIoyed.

The above arg ume nt Is f l a w e d bec aus e a m a j o r

d ifferen c e exists between push down a c c o u n t i n g and

c u rre n t value accounting. O n l y a t one p o i n t in t i m e do

the values e s ta b lis h e d by push down a c c o u n t i n g represent

current values — the date of a c q u is it io n .

T h e o retically, any a r m s - l e n g t h transaction, except

b a rg a in purchases, w ill have t h e same c u r r e n t v a l u e and

h is to ric a l c o s t on t h e d a t e o f a c q u i s i t i o n . Once t h e new

cost basis Is e s t a b l i s h e d by push down a c c o u n t i n g ,

fu rth er price flu c tu a tio n s are Ignored, whereas c u r r e n t

4 3 F I n a n c I a I A c c o u n t i n g S t a n d a r d s B o ar d , S t a t e m e n t
No. 8 9 . " F i n a n c i a l R e p o r t i n g and Ch anging P r i c e s "
( S t a m f o r d : FASB, 1 9 8 6 ) .
 81

v a lu e accounting c o n t i n u a l ly r e c o g n i z e s changes in m a r k e t

vaIues.

Cunningham p o i n t s o u t t h a t some a c c o u n t a n t s fear that

r e c o g n i z i n g a new a c c o u n t i n g b a s i s from a change in

ownership rather th an from a p u r c h a s e by t h e e n t i t y

Its e lf v io late s the t r a d i t i o n a l conceptual accounting

f r a m e w o r k . 44 In some c a s e s t h i s accusation I s eas y t o

refu te. If t h e a c q u i r i n g company pu r c h a s e s one hundred

percent of the s u b s id ia ry 's stock, th is is e f f e c t i v e l y

t h e same as p u r c h a s i n g a l l of t h e company's n e t a s s e t s .

A purchase o f t h e n e t a s s e t s wo uld be r e c o r d e d a t the

p ric e paid. The end r e s u l t Is t h e same as an a p p l i c a t i o n

of push down a c c o u n t i n g . Assuming no o u t s t a n d i n g d e b t or

preferred stock (and no m i n o r i t y shareholders since t h is

is a one hundred p e r c e n t a c q u i s i t i o n ) , the prim ary

fin a n c ia l s tatem en t users w i l l be t h e new o w n e r s . In

order to b e tte r evaluate t h e ir own Investm ent, t h e new

owners wo uld p r e f e r t o see t h e p r i c e t h e y p a i d a c t u a l l y

r e c o r d e d on t h e books o f the s u b s id ia ry . W i t h a one

hundred p e r c e n t change In o w n e r s h i p , It is d i f f i c u l t to

d iffe re n tia te the e n t i t y from t h e ow ners.

But t h i s s c e n a r i o can q u i t e become c o m p l i c a t e d .

What If th e purchase is f o r o n l y ninety percent of the

outstanding stock? The e f f e c t o f push down a c c o u n t i n g on

the m in o rity s h a r e h o l d e r s must be c o n s i d e r e d . What If

there Is p u b l i c l y h e l d o u t s t a n d i n g d e b t? The d e b t ratio s

44Cunn i ngham, p. 73 .
 82

and d e b t c o v e n a n t s , w h ic h a r e o f s ig n ific a n t In te re st for

the lenders, w ill be a f f e c t e d . In l e s s t h a n one hundred

percent a c q u is itio n s , the in te re s ts of the fin a n c ia l

s t a t e m e n t u s e r s a r e more d i v e r s e . The m i n o r i t y

shareholders w i l l have little In common w i t h t h e new

owners, and bo th w i l l have little In common w i t h the

deb tho lders. The d i f f e r e n c e s between t h e f i n a n c i a l

statem ent u s e r s and t h e e n t i t y Its e lf become more

pronounced. These id e a s a r e further explored in C h a p t e r

4.

W ilco x notes t h a t several factio n s w ith in the

a c q u i r e d company may be opposed t o e s t a b l i s h i n g a new

cost b asis prim a rily bec aus e t h e y may doubt t h a t a

purchase o f s t o c k changes t h e v a l u e o f t h e a s s e t s . 45

T h i s a g a i n depends on t h e s p e c i f i c s o f the p a r t ic u la r

case. If management o f the s u b s id ia ry continues

v irtu a lly unchanged a f t e r the a c q u is it io n , t h e y may f a l l

t o see how d e p a r t u r e from t h e p r e v i o u s c o s t is Ju stified .

If the a c q u is itio n Is f o r l e s s th an one hundred p e r c e n t

of the stock, m in o rity s h a r e h o l d e r s may f a l l t o see how

purchase o f the m a jo r it y of th eir firm 's s t o c k by

o u t s i d e r s changes t h e u n d e r l y i n g a s s e t v a l u a t i o n s . Both

management and m i n o r i t y shareholders w i l l most lik e ly be

faced w it h greater d e p r e c i a t i o n c h a r g e s on t h e Income

s t a t e m e n t due t o t h e Increased asset v a l u a t i o n s . In

con trast, if the a c q u is it io n is f o r a ll of the stock, and

45W I I cox , p"! i"54 .

 83

If there Is a new management team and no o u t s t a n d i n g

debt, the previous cost w i l l ho ld no s i g n i f i c a n c e for any

of these fin a n cial statem ent users. The larger

d e p r e c i a t i o n charges w i l l p r o b a b l y now be c o n s i d e r e d

normal bec au se t h e y r e f l e c t a llo c a tio n of th is group's

r e le v a n t cost.

A b en efit afforded by h i s t o r i c a l cost Is t h a t It

allo w s f o r c o m p a r i s o n s between y e a r s . This c o m p a ra b ility

is v i r t u a l l y d e s t r o y e d when a new b a s i s o f a c c o u n t i n g Is

established. S t o c k h o l d e r s and c r e d i t o r s w i l l find

c o m p a r i s o n s b e f o r e and a f t e r ap p licatio n o f push down

accounting t o be m e a n i n g l e s s . Furthermore, it is

d iffic u lt t o e v a l u a t e t h e suc cess o f t h e new management

v e r s u s t h e o l d management bec aus e push down a c c o u n t i n g

has a l t e r e d many o f the und erlyin g determ inants of ne t

income. Even f o r internal purposes, h is to ric a l

benchmarks r e g a r d i n g product lin e p r o f i t a b i l i t y and

product p r ic in g w i l l be lo st.

The q u e s t i o n o f whose c o s t is most r e l e v a n t is

Illu s tra te d by a comment made by C r a f t and O ' T o o l e . They

state that p resent accounting lite ra tu re a p p e a r s not t o

s u p p o r t push down a c c o u n t i n g because p r o p e r t y , p lan t, and

eq u ip m en t s h o u ld no t be w r i t t e n up t o re fle c t ap p ra is a l,

market, o r c u r r e n t v a l u e s t h a t a r e above c o s t to the

e n t I t v ^S ( em p h as is a d d e d ) . They su g g e s t that since the

4 6 James W. C r a f t and K e v in P. O ’ T o o l e , "Push-Down

A c c o u n t i n g — Has I t s Time Come?" C o r p o r a t e A c c o u n t i n g 2
( S p r i n g 1 9 8 4 ) : 60.
 84

e n tity its e lf has n o t made a p u r c h a s e , a p p licatio n of

push down a c c o u n t i n g Is in v i o l a t i o n of the h is t o r ic a l

cost concept. T h i s argument is a d d re s s e d In C h a p t e r 4.

E v alu atio n of t h e Evidence

A c a s e can be made bo th f o r and a g a i n s t push down

accounting w it h in the context of h is to ric a l cost. Both

sets of ar gu m en ts have t h e i r m e r i t . The impact o f push

down a c c o u n t i n g on s p e c i f i c c h a r a c t e r i s t i c s o f the

h is to ric a l cost concept is e v a l u a t e d in t h i s sectio n .

Ve r i f I a b I I I t v . A frequently noted defense of

h is to ric a l cost is its v e rifia b ility . When an exc hange

takes p lace, there Is o b j e c t i v e , v e rifia b le evidence w ith

w h ic h t o v a l u e t h e new ly a c q u i r e d a s s e t . Such e v i d e n c e

exists in t h e c a s e o f an a c q u i s i t i o n o f one company by

another. The p r i c e p a i d for the stock is r e c o r d e d as

c o s t by t h e a c q u i r i n g firm . Push down a c c o u n t i n g does

not require the d e te rm in a tio n of new amounts; it sim ply

resu lts in t h e r e c o r d i n g on t h e books o f the s u b s id ia ry

t h e amounts a l r e a d y shown In' t h e c o n s o l i d a t e d fin a n cial

statem ents. But is t h i s p r i c e p a i d by t h e new owners

relevant for the s e p a ra te ly issu ed s t a t e m e n t s o f the

sub sid iary? If v e rifia b ility Is t h e o n l y c o n c e r n , the

evidence s tro n g ly le a n s to wa rd t h e use o f push down

account i ng.

Relevance f o r Decision M aking. Both Ma ut z and

L ittle to n defend h i s t o r i c a l c o s t on t h e b a s i s o f Its

 85

relevance for dec I s I o n - m a k I n g . 47 They c l a i m that it Is

p a rtic u la rly relevant t o management bec aus e It represents

th e ir investment in t h e s p e c i f i c c o r p o r a t e a s s e t s . But

th is comment poses a n o t h e r question: Which management is

at issue? Is i t management o f t h e a c q u i r i n g company or

management o f the subsidiary? Management o f the

a c q u i r i n g company would no d o u bt lik e t o see t h e i r

purchase p r i c e r e c o r d e d as c o s t because t h e i r decision

making w i l l be based on t h i s cost. In c o n t r a s t , the

p r i c e p a i d by t h e p a r e n t is p r o b a b l y Irre le v a n t for

managers o f the s u b s id ia ry . They may be c o n t i n u i n g th e ir

operations v i r t u a l l y as t h e y w e r e b e f o r e the a c q u is itio n

and t h u s se e no need f o r changes in c o s t . An increase In

the asset v a lu a tio n s w i l l be accompanied by increases in

d ep re cia tio n ex p en se and a r e d u c t i o n In n e t Income.

Managerial d e c i s i o n s on such p o i n t s as p r o d u c t lin e

p ro fita b ility may be a f f e c t e d If push down a c c o u n t i n g is

Imp I e m e n t e d .

What a b o u t d e c i s i o n s made by t h o s e o t h e r than

managers? Which c o s t Is most relevant for them? From

the investors' p ersp ective t h is i s s u e has many

co m p lexities, such as w h e t h e r o r not there are m in o rity

shareholders and/or preferred shareholders. L ik e the

m an ag er s, shareholders of t h e p a r e n t o r g a n i z a t i o n would

probably lik e t o see t h e s u b s i d i a r y employ push down

a c c o u n t i n g and t h u s r e f l e c t on Its records the p ric e

. 47M a u t z , p"! 2 3 , and L i t t l e t o n , p. 168.

 86

th e ir company p a i d for the stock. They p r o b a b l y a r e not

as c o n c e r n e d as management b ec au se t h e y own s t o c k In t h e

p a r e n t company, and t h e p u r c h a s e p r i c e is r e f l e c t e d In

the p a r e n t's co n solidated statem ents. In c o n t r a s t , the

m in o rity In terest s h a r e h o l d e r s may be q u i t e c o n c e r n e d

w ith t h e v a l u e s used t o r e p o r t th eir firm 's assets,

lia b ilitie s , and e a r n i n g s . Very lik e ly they w i l l fa il to

u n d e r s t a n d why t h e p u r c h a s e o f some o f th eir firm 's stock

by o u t s i d e r s s h o u ld change t h e i r firm 's b a s is of

report Ing.

The c r e d i t o r s may o r may not d e s i r e push down

accounting. There is no doubt t h a t it d is to rts

com p a ra b ility between y e a r s , but I t m i g h t be more

d es irab le If the parent has g u a r a n t e e d some o f the

s u b s id ia ry 's debt. The p r a c t i c a l ra m ific a tio n s of

em p l o y i n g push down a c c o u n t i n g w e r e d i s c u s s e d in g r e a t e r

d etail In C h a p t e r 2 , and a f u r t h e r assessment o f how t h e

fin a n cial s t a t e m e n t s meet t h e needs o f the users is made

in C h a p t e r 5. Some o f the c o m p l e x i t ie s a r e mentioned

here to Illu s tra te how t h e h i s t o r i c a l cost concerns

d iffe r between t h e fin a n cial statem ent users.

Cos t t o S o c i e t y . IJ Irl claim s th a t h is to ric a l cost

as a v a l u a t i o n basis Is t h e least c o s tly to s o c ie ty .4®

This Is a complex I s s u e t o a d d r e s s because it is

d iffic u lt, if no t I m p o s s i b l e t o a s s es s a l l the costs

48 I J I r I , "A D e f e n s e f o r H is to ric a l Co st A c c o u n t i n g , "

p. 14.
 87

involved In u s i n g or fa llin g t o use push down a c c o u n t i n g .

An e x a m i n a t i o n o f r e l e v a n t c o s t s s h o u ld be accompanied by

a review of the b e n e f i t s . In o r d e r to determ ine

b e n efits, I t must firs t be a s c e r t a i n e d (1) who uses t h e

I n f o r m a t i o n and ( 2 ) f o r wh at pu rp o se it i s us ed . These

Is s u e s a r e a d d re ss ed In I

Chapter 5.

Summary

An e x a m i n a t i o n o f h is to ric a l c o s t and its

a p p lic a tio n t o push down a c c o u n t i n g does not p r o v i d e

s u ffic ie n t eviden ce to endorse or disavow the concept.

Too many q u e s t i o n s re m ai n unanswered; the primary

question I s whose c o s t s h o u ld r e c e i v e t h e most c o n c e r n .

The p r e v i o u s s e c t i o n a d d r e s s e d t h e Is s u e " c o s t t o whom?".

T h i s q u e s t i o n ca n n o t fu lly be r e s o l v e d w i t h o u t s e ttlin g a

more fu n d am en ta l is s u e — has an exc hange a c t u a l l y taken

place? if so, the h i s t o r i c a l c o s t c o n c e p t would d i c t a t e

that t h e newly e s t a b l i s h e d c o s t be r e c o r d e d , thus

advocating the concept o f push down a c c o u n t i n g . If an

ex ch an ge is no t deemed t o have t a k e n p l a c e , i t wo uld t h e n

appear that t h e p r i c e p a i d by t h e p u r c h a s e r is irreleva n t

t o t h e a c q u i r e d company and, consequently, push down

accounting Is inappropriate.

These Ide as a r e a d d r e s s e d further in t h e f o l l o w i n g

chapter. O wn ers hip t h e o r i e s a r e examined t o a s c e r t a i n

when and if it Is a p p r o p r i a t e t o c l a i m that an exchange

has t a k e n p l a c e .
 CHAPTER 4

AN A P P L I C A T I O N OF OWNERSHIP EQUITY T HEO RI ES

In c o n t r a s t t o a s s e t s and lia b ilitie s , eq u ity Is t h e

u n i q u e component o f t h e a c c o u n t i n g e q u a t i o n because it

cannot I n d e p e n d e n t l y be m ea s ur ed . A valuation for eq u ity

Is o b ta in e d o n ly a f t e r a v a l u e has been e s t a b l i s h e d for

a s s e t s and lia b ilitie s . In t h e t r a d i t i o n a l se n s e , eq u ity

is g e n e r a l l y p e r c e iv e d t o be t h e r e s i d u a l remaining a f t e r

deducting lia b ilitie s from a s s e t s . But what does t h i s

residual r e p r e s e n t and t o whom does It bel on g? Of what

s ig n ific a n c e are perceptions of e q u ity for push down

accounting? These q u e s t i o n s a r e a d d r e s s e d as t h e e n t i t y

t h e o r i e s a r e ex a m in ed .

In t h i s c h a p t e r , fiv e t h e o r i e s o f ownership e q u it y

a r e ex am ined : the p r o p r ie ta r y theory, the e n t i t y theory,

the residual eq u ity theory, t h e commander t h e o r y , and t h e

en terp rise theory. A ll of the th e o rie s are firs t

discussed. The two t h e o r i e s e n c o u n t e r e d most frequently

in p r a c t i c e and in academic w r i t i n g s are the p r o p r ie ta r y

t h e o r y and t h e e n t i t y theory. The p r o p r i e t a r y theory

contends t h a t t h e a s s e t s b e l o n g t o t h e owner and t h e

lia b ilitie s represent the owner's d eb t. In c o n t r a s t , the

e n tity theory perceives the f i r m as h a v i n g i t s own

88
 89

separate existence; everyone Is v ie w ed as b e i n g an

o u tsid er. Discussion of t h e s e two t h e o r i e s is expanded

to Include t h e i r re la tio n to con solidated fin a n cial

s t a t e m e n t s and t h e i r ap p licatio n t o push down a c c o u n t i n g .

Residual E q u i t y Th e o r y

The r e s i d u a l eq u ity t h e o r y can be c l a s s i f i e d

somewhere between t h e p r o p r i e t a r y t h e o r y and t h e e n t i t y

theory. An a d v o c a t e o f the residual eq u ity t h e o r y would

state t h e a c c o u n t i n g e q u a t i o n as f o l l o w s :

Assets - S p ecific E q u itie s - Residual E q u itie s

S p ecific eq u ity holders g e n e ra lly Include c r e d it o r s and

preferred stockh old ers. However, If l o s s e s have been

l a r g e or If the firm Is involved In b a n k r u p t c y

proceedings, the e q u ity of t h e common s t o c k h o l d e r s may

become n o n e x i s t e n t and t h e p r e f e r r e d shareholders, or

even t h e b o n d h o l d e r s , may become t h e r e s i d u a l eq u ity

holders. Under normal business c o n d i t i o n s , the o b je c t iv e

of the residual eq u ity theory is t o p r o v i d e b e t t e r

Inform ation t o common s t o c k h o l d e r s for pu rp o se s o f

dec I s I on m a k I n g . 1

This th eo ry, a l s o known as t h e Investor Theory,

reveals t h e dependency o f residual e q u i t y on t h e v a l u e s

of a s s e t s and s p e c i f i c eq u itie s . It em ph as ize s t h e needs

of external users, shareholders In p a r t i c u l a r , in

contrast to the p r o p r ie ta r y theory, w h ic h c a s t s c o r p o r a t e

1EI den S . H e n d r I k s e n , A c c o u n t i n g T h e o r y . 4 t h e d .
(Homewood: R i c h a r d D. I r w i n , I n c . , 198 2) pp. 4 5 7 - 4 5 8 .
 90

shareholders in t h e lig h t of h a v in g more power t h a n t h e y

g e n e r a l l y do. The r e s i d u a l e q u ity theory perceives

s h a r e h o l d e r s t o have little power t o d e t e r m i n e what is

actu ally goi ng on w i t h i n th eir company. This t h e o r y 's

f o c u s on t h e needs o f the Investors h ig h lig h ts t h e need

f o r cash flow Inform ation. E v id e n c e o f the a c c e p t a b ilit y

of th is t h e o r y can be seen In t h e firs t statement of the

FASB's C o n c e p t u a l Framework In wh ic h t h e need f o r

Inform ation to e v a lu a te f u t u r e cash f l o w s Is e x p l i c i t l y

s t a t e d .2

Commander The or y

In c o n t r a s t to the p ro p rie to rs h ip t h e o r y and t h e

e n tity theory in wh ic h t h e f ocu s is on o w n e r s h i p , the

commander t h e o r y f o c u s e s on economic c o n t r o l of the

resources. The " p e o p l e " aspect of accounting is

em ph a si z e d on t h e grou nd s t h a t p e o p l e must u n d e r t a k e

a c tiv itie s and make d e c i s i o n s . People w it h th is control

are the “commanders." Although the p r o p r i e t a r y theory

f o c u s e s on t h e p r o p r i e t o r as t h e ow ner , t h e commander

t h e o r y would co n te n d t h a t f oc us s h o u ld be on t h e

pro p rieto r because he Is a commander o f the business

resources. C o r p o r a t i o n s have s e v e r a l commanders:

(1) shareholders, who do no t a c t u a l l y control corporate

r e s o u r c e s but c o n t r o l t h e amount o f th eir own r e s o u r c e s

^Vernon Kam, A c c o u n t i n g Th e or y (New Y o r k : John W i l e y

& Sons, 1 9 8 6 ) , pp. 3 1 3 - 3 1 4 .
 91

Invested In t h e company, and (2) the h ie ra rc h y of

managers who a c t u a l l y d e p l o y c o r p o r a t e a s s e t s . 3

It c o u l d be s a i d that t h e FASB's e x p o s u r e d r a f t on

co n so lid atio n s somewhat fo llo w s t h e commander t h e o r y

bec au se t h e d e t e r m i n a t i o n o f w h e t h e r o r not to

c o n s o lid a t e appears to hinge l a r g e l y on t h e Issue of

co n tro l. The Ex po su re D r a f t would remove e x i s t i n g

exemptions f o r c o n s o l i d a t i o n s when com pa nie s have

nonhomogeneous o p e r a t i o n s , a large m in o rity In terest, or

a fo reig n lo c a tio n .4 Emphasis a p p e a r s t o be more on who

con trols the s u b s id ia ry .

E n t e r p r i s e Th e or y

Although It is s i m i l a r to the e n t i t y theory, the

en terp rise theory is a b r o a d e r , more s o c i a l l y oriented

concept. The e n t e r p r i s e t h e o r y h o l d s t h a t th e business

Is a s e p a r a t e In s titu tio n operated for the b e n e fit of

many g r o u p s , not just the e q u ity h o l d e r s as c l a i m e d by

the e n t i t y theory. Relevant groups un d er t h e e n t e r p r i s e

theory i n c l u d e n o t o n l y s h a r e h o l d e r s and c r e d i t o r s , bu t

also t h e employees, th e customers, th e government, and

the general p u b lic .5 The e n t e r p r i s e theory is

3 Ib Id ., pp. 312-313.

4 F I n a n e l a I A c c o u n t i n g S t a n d a r d s B o ar d , Proposed
Statem ent o f F in a n c ia l Accounting Standards
" C o n s o lid a tio n of a l l M ajority-O w ned S u b s id ia r ie s "
( S t a m f o r d : FASB, December 16, 1 9 8 6 ) , p a r a g r a p h 9.

s H e n d r I k s e n , pp. 468-459.
 92

e s s e n tia lly a value-added c o n c e p t.6 This th e o ry appears

most t h e o r e t i c a l l y ap p licab le to l a r g e c o r p o r a t i o n s who

must c o n s i d e r the Impact o f th e ir a c t i o n s on a larger

group o f p e o p l e t h a n m e r e l y t h e i r shareholders. The

e n terp rise theory has not d e v e l o p e d t o t h e e x t e n t that it

has much p r a c t i c a l a p p licatio n for the actual recording

of transactions. Nonetheless, many d i s c l o s u r e s that

com pa nie s make, such as employment p r a c t i c e s and

compliance w ith environm ental re g u la tio n s , are in

accordance w ith the e n te r p r is e th eo ry.

The P r o p r i e t a r y Th e or y

According to th e p r o p r i e t a r y theory, the a s s ets of

the firm a re con sidered t o be owned by t h e p r o p r i e t o r and

the lia b ilitie s are o b lig a tio n s of the p ro p rie to r. The

p ro p rieto r is t h u s t h e c e n t e r o f in te re st, as r e f l e c t e d

by t h e s t a t e m e n t o f t h e a c c o u n t i n g e q u a t i o n under th is

theory:

Assets - L ia b ilitie s = P rop rietorship

The p r o p r i e t o r s h i p Is deemed t o be t h e n e t w o r t h o f the

b u s i n e s s t o t h e ow ne rs . At t h e t i m e t h e b u s i n e s s is

fo r m e d, the p r o p r ie ta r y In te re st equals the i n v e s t m e n t by

t h e o w n er s. This in itia l amount is I n c r e a s e d by

ad d itio n a l I n v e s t m e n t s and n e t Income and d e c r e a s e d by

w i t h d r a w a l s and n e t l os se s t h r o u g h o u t t h e life of the

business. The p r o p r i e t a r y t h e o r y can be d e s c r i b e d as a

6 Kam, pp. 315-316.

 93

w ealth concept.^ Revenue Is c o n s i d e r e d t o be an Increase

in p r o p r i e t o r s h i p and expenses t o be a d e c r e a s e . Under

the w ealth concept, net income a c c r u e s d i r e c t l y to the

owners b ec au se It r e p r e s e n t s an increase In t h e w e a l t h o f

the p ro p rie to rs .®

E f f e c t on C u r r e n t P ractice

Adoption o f an e q u i t y theory is Important for

re a s o n s o t h e r t h a n academic d i s c u s s i o n beca use it has

ram ificatio n s for the recording of business e v e n ts . Many

current practices are a r e s u lt of a p p lic a tio n of the

p ro p rietary theory.

Both t h e s o l e p r o p r i e t o r s h i p and t h e p a r t n e r s h i p

forms o f business o r g a n iz a t i o n are adaptable to the

p ro p rietary t h e o r y because o f the g e n e ra lly personal

rela tio n s h ip between management and o w n e r s h i p o f the

business. Indeed, c u r r e n t accounting p r a c t i c e for these

two t y p e s o f business o r g a n iz a t i o n s g e n e r a lly adheres to

the p r o p r i e t a r y t h e o r y bec aus e t h e n e t income o r loss f o r

each p e r i o d I s added t o o r s u b t r a c t e d from t h e ow ne r s'

personal c a p ita l accounts.® In n e i t h e r o f these forms o f

org an izatio n Is t h e amount p a i d t o t h e owners as a s a l a r y

a l l o w a n c e d e d u c t e d as an e x p e n s e . S i n c e t h e owner and

7H e n d r I k s e n , pT 45 3 .

8 Ib id ., pp. 453-454.

9H e n d r I k s e n , p. 454.
the firm a r e deemed t o be t h e same e n t i t y , one c a n n o t pay

oneself and de d u c t that as an e x p e n s e . 1®

On t h e s u r f a c e , the p r o p r ie ta r y theory is n o t as

a p p licab le to the co rp o ra te form o f o r g a n i z a t i o n . But

when t o t a l cap ita l stock, ad d itio n al p a id -in c a p ita l, and

retain ed e a r n i n g s a r e combined and d e f i n e d as t h e n e t

w ealth of the shareholders, the p r o p r ie ta r y theory is

Im plied. Lorlg notes t h a t , in t h e e v e n t o f a c o r p o r a t e

liq u id a tio n , the shareholders r e c e i v e bo t h t h e i r in itia l

I n v e s t m e n t and t h e i r share o f a c c u m u la te d e a r n i n g s . This

can be c o n s i d e r e d an acknowledgement t h a t those earn in g s

b e l o n g e d t o them a l l along, wh ic h Is a c o n t e n t i o n o f the

p ro p rietary t h e o r y . 11 S t o c k d i v i d e n d s do no t r e p r e s e n t

Income t o t h e r e c i p i e n t s ; they are m erely t r a n s f e r s from

one form o f proprietorship to another. S im ila rly , cash

dividends represent w ithdraw als of c a p ita l rather than

exp enses o f the business. In c o n t r a s t , in te re st on de b t

r e p r e s e n t s an expense o f t h e owners and , accordin gly, It

is d e d u c t e d for the determ in atio n of net i n c o m e . 12

The e q u i t y method o f a c c o u n t i n g for nonconsolidated

Investm ents in s u b s i d i a r i e s a l s o Im plies the p r o p r ie t a r y

theory. The p r o p o r t i o n a t e s h a r e o f the investee's

e a r n i n g s each p e r i o d is added t o t h e Investment account

10Kam, p. 30 4 .

11 A r t h u r N. L o r i g , "Some B a s i c Co nc ep ts o f
A c c o u n t i n g and T h e i r I m p l i c a t i o n s , " The A c c o u n t i n g Review
39 ( J u l y 1 9 6 4 ) : 5 6 9 - 5 7 2 .

12 H e n d r i k s e n , pp. 454-455.
 95

on t h e logic th a t the s u b s id ia r y 's earnings accrue to the

stockh old ers, Including t h e p a r e n t company as t h e m a j o r

s t o c k h o I d e r . 13

The c h a r g e t h a t c o r p o r a t i o n s a r e s u b j e c t to "d o u b le

taxatio n " Is an o u t g r o w t h o f the p r o p r ie t a r y theory.

Corporate Income, which i s v ie w ed as b e l o n g i n g to the

ow n er s, Is s u b je c t to Income t a x when e a r n e d . When t h e

shareholders receive Income In t h e form o f d i v i d e n d s ,

t h e y must a g a i n pay t a x on t h e d i s t r i b u t i o n . 1^ This Is

an In te re stin g I n c o n s i s t e n c y on t h e p a r t o f th e United

S t a t e s gov ernment in a p p l y i n g the eq u ity theories. The

e n tity t h e o r y must be a d h e r e d t o In levying the corpo rate

income t a x , but In d e n y in g t h e c o r p o r a t i o n the rig h t to

d e d u c t d i v i d e n d s as an e x p e n s e , the p r o p r i e t a r y theory

must be e m p l o y e d . 1®

Add I I c a t I on t o
C o n so lid a te d Statements

When a p p l i e d to c o n so lid ated statem ents, the

p ro p rietary th e o r y holds t h a t the co n solidated fin a n c ia l

s t a t e m e n t s a r e an e x t e n s i o n o f p a r e n t company s t a t e m e n t s

and a c c o r d i n g l y s ho ul d be p r e p a r e d from t h e v i e w p o i n t o f

p a r e n t company s h a r e h o l d e r s . This v ie w p o in t, a l s o known

as p a r e n t company t h e o r y , contends t h a t the m in o rity

s h a r e h o l d e r s a r e not e x p e c t e d t o b e n e f i t from

1 3 | b |d .

14Kam, p. 30 4 .

15 L o r I g , p. 570.
 96

c o n s o lid a te d statem ents s in c e they a re prepared for the

b e n e fit of t h e p a r e n t company s h a r e h o l d e r . Net Income

under p a r e n t company t h e o r y thus r e p r e s e n t s Income t o

p a r e n t company s h a r e h o l d e r s . 1®

P a r e n t company t h e o r y does not s p e c i f i c a l l y address

the s ig n ific a n c e of the percentage of t h e company owned

by m a j o r i t y shareholders. However, there is a v e r y real

d ifferen c e between one p e r c e n t m i n o r i t y o w n e r s h i p and

fo rty -fiv e percent m i n o r i t y ownership. A p p lic a tio n of

the p r o p r ie ta r y theory to these s itu a tio n s is examined

later in t h i s c h a p t e r .

B e r n s t e i n and E n g l e r state that t h e p a r e n t company

a p p ro a c h t o c o n s o l i d a t e d fin a n cial statements Is 11. . .

th eo retle a Ily J u s t i f i e d when t h e payment f o r exc ess is

deemed t o be made f o r economies o f s c a le or other

advantages t h a t accrue to the b e n e f i t of the parent

company o n l y . " 17 They c i t e , f o r e x a m p le , an a c q u i r e d

su b sid iary th at has m a r k e t i n g c h a n n e l s needed by t h e

parent. The p a r e n t may re d u c e o v e r a l l c o s t s by u s i n g t h e

s u b s id ia r y 's m arketing channels. In such a s i t u a t i o n ,

the parent Is t h e m a j o r b e n e f i c i a r y o f the a c q u is itio n of

the m arketing channels, and t h e exc es s p a i d by t h e p a r e n t

for th is f e a t u r e does n o t n e c e s s a r i l y b e n e f i t the

16F l o y d A . B e a m s , Advanced A c c o u n t i n g . 3 r d e d .
(Englewood C l i f f s , N. J . : P r e n t I c e - H a I I , I n c . , 1 9 8 5 ) , p.
489.

17Le o p o ld A. B e r n s t e i n and C a l v i n E n g l e r , Advanced

Account Ing (Homewood, I l l i n o i s : R i c h a r d D. I r w i n , I n c . ,
1 9 8 2 ) , p. 38 6 .
 97

m in o rity s h a r e h o l d e r s . 18 T h i s t y p e o f d i s t i n c t i o n would

be d i f f i c u l t to Implement In p r a c t i c e , ho w ev e r, because

t h e p a r e n t must feel that It is t h e m a j o r b en eficiary In

any a c q u i s i t i o n ; o t h e r w i s e t h e c o m b i n a t i o n wo uld n o t have

been u n d e r t a k e n .

AppI I c a t I on t o
Push Down A c c o u n t i n g

A conclusion In t h e p r e v i o u s c h a p t e r is t h a t asset

v a l u a t i o n s must a d h e r e t o t h e h i s t o r i c a l cost concept to

be In c o n f o r m i t y w i t h GAAP. The i s s u e o f whose c o s t

1 y t
s h o u l d be r e c o r d e d was r a i s e d , but not s e t t l e d . Is it

cost t o t h e owners as i m p l i e d by t h e p r o p r i e t a r y theory,

or cost to the e n t i t y as would be Im plied In t h e e n t i t y

theory?

The p r o p r i e t a r y t h e o r y v i e w s t h e a s s e t s and

lia b ilitie s o f a f i r m as t h o s e o f t h e owners r a t h e r than

the firm its e lf. Thus it fo llo w s that t h e most r e l e v a n t

cost Is t h e c o s t t o t h e ow ne rs . When o w n e r s h i p o f the

firm changes, as Is t h e c a s e when t h e q u e s t i o n o f push

down a c c o u n t i n g a r i s e s , t h e c o s t t o t h e new owners

u su ally d iffe rs from t h e c o s t t o t h e p r e v i o u s ow ne rs .

A p p lic a tio n of the p ro p rIe to rs h Ip t h e o r y would seem t o be

c o n s i s t e n t w i t h push down a c c o u n t i n g ; a change In

ownership J u s tifies a new b a s i s o f accounting.

A p ro p rietary t h e o r y p r o p o n e n t wo uld a l s o s u p p o r t

adoption of push down a c c o u n t i n g on t h e grounds t h a t an

18 I b i d .
 98

exc hange has t a k e n p l a c e . An exchange has o c c u r r e d

between t h e o l d owners and t h e new owners and,

acc o rd in g ly , the cost t o t h e new owners s h o u l d be

recorded. C o st for t h e p r e v i o u s owners Is no lo n g er

relevan t. C a r r i e d one s t e p furth er, no t r e c o r d i n g the

cost of t h e a s s e t s t o t h e new owners I g n o r e s an exchange

that has o c c u r r e d .

As n o t e d e a r l i e r In t h i s chapter, there are

d iffe rin g v i e w s on t h e d e s i r a b i l i t y of h a v i n g more than

one t h e o r y o f o w n e r s h i p e q u i t y . Some w r i t e r s do not

p erceive it t o be a p r o b l e m , 12 b u t most w r i t e r s feel that

one o w n e r s h i p t h e o r y s h o u ld s u f f i c e . In a g r e e i n g w i t h

wh at he c a l l s the m a jo r it y , Lorlg says t h a t m u l t i p l e

theories create Inconsistency in a c c o u n t i n g t h o u g h t and

p r a c t i c e . 2® He c o m p i l e d a lis t of nineteen areas th a t he

c la s s ifie s as ". . . c o n flic ts in a c c o u n t i n g t h o u g h t and

action that have a r i s e n o u t o f t h e use o f t h e two ( e n t i t y

and p r o p r i e t a r y ) concepts." A fter e x a m i n i n g each o f

these c o n f l i c t s , L o rlg concludes t h a t in s i x t e e n of the

nineteen situ a tio n s , accountants adhere to the

p r o p r i e t a r y c o n c e p t . 21

L o rig 's an a lys is provides evidence of the p ra c tic a l

a p p lic a b ility of the p r o p r ie ta r y theory to c u rre n t

accounting p r a c t i c e . The d e t e r m i n a t i o n o f w h e t h e r o n l y

1® H e n d r I k s e n , p. 461.

20L o r lg , pp. 563-564.

21 I b i d . , pp. 569-572.
 99

one th e o r y o f ownership e q u i t y Is d e s i r a b l e , and if so,

whic h one Is b e s t , Is beyond t h e scope o f th is research

endeavor. It Is the In te n tio n of th is s t u d y t o exa mine

push down a c c o u n t i n g In lig h t of the e x is tin g accounting

framework. As a p a r t o f that o b je c tiv e , the e q u ity

t h e o r i e s must be a n a l y z e d t o d e t e r m i n e how w e l l they

co n fo rm t o r e a l i t y . The s u p p o r t found f o r the

pro p rietary theory In a c c o u n t i n g p r a c t i c e and t h e fact

that push down a c c o u n t i n g can be d e f e n d e d und er the

pro p rietary th e o ry p ro v id e a v i a b l e defense fo r Its

Imp I e m e n t a t I o n .

D i f f i c u l t i e s w i t h Im p le m e n ti n g
Push Down A c c o u n t i n g

The c o n c l u s i o n drawn from t h e p r e v i o u s s e c t i o n is

that push down a c c o u n t i n g I s b a s i c a l l y a p p l i c a b l e under

the p r o p r ie t a r y t h e o r y because t h e r e has been a p u r c h a s e

of t h e u n d e r l y i n g a s s e t s by a new s e t o f o w n er s, thereby

Ju s tify in g a new b a s i s o f accounting. But w ha t if there

has not been a one hundred p e r c e n t change in o w n e r s h i p ?

What if only n in e ty -fiv e percent of t h e s t o c k was

purchased, o r maybe even o n l y fifty -o n e percent? C arried

t o an e x t r e m e , why not r e v a l u e t h e a s s e t s e v e r y t i m e any

transactions In t h e compa ny's s t o c k oc c ur ? Obviously,

t h i s wo uld n o t be f e a s i b l e . But if re v a lu a tio n of assets

can be J u s t i f i e d when one hundred p e r c e n t o f th e stock

changes hands and not when o n l y one s h a r e chang es hands,

wh ere s h o u l d t h e l i n e be drawn?
 100

Assume t h a t an a c q u i s i t i o n Is c o m p l e t e d In w hi c h

n in e ty -fiv e percent of the stock of a company Is

purchased. Consolidated fin a n cial s t a t e m e n t s showing t h e

combined r e s u l t s of operations for bo t h t h e p a r e n t and

th e s u b s id ia r y a r e prepared for the stockh old ers of the

p a r e n t company. Separate statements are also Is sue d fjor

t h e newly a c q u i r e d s u b s i d i a r y . In t h i s s itu atio n there

a r e two s e t s o f owners o f the s u b s id ia ry : (1) parent

company s h a r e h o l d e r s t h r o u g h t h e p a r e n t comp an y's

In v e s t m e n t and (2) shareholders in t h e s u b s i d i a r y Its e lf,

who now a r e t h e m i n o r i t y shareholders.

Under t h e p r o p r i e t a r y theory, relevan t cost is cost

to th e owners. Recording c o s t t o t h e new o w n e r s , wh ic h

Is t h e same c o s t re fle c te d in t h e c o n s o l i d a t e d fin a n cial

statem ents, supports adoption of push down a c c o u n t i n g .

But t h e c o s t p a i d by t h e new owners may n o t be r e l e v a n t

for the o ld owners, who a r e now t h e m i n o r i t y

shareholders. From t h e i r p ersp ective, t h e r e may be no

J u s tific a tio n f o r push down a c c o u n t i n g beca use no

exc hange has t a k e n p l a c e .

The two s e t s o f "cost" c a n n o t be r e p o r t e d

s i m u l t a n e o u s l y by one s e t o f fin a n cial statem ents. G iv e n

t h a t one s e t o f fin a n cial statements w i l l be p r e p a r e d ,

the i n t e r e s t s o f one group must become s u b o r d i n a t e t o t h e

needs o f the o th e r. A p p l y i n g push down a c c o u n t i n g and

recording t h e new a s s e t v a l u e s w i l l undeniably d e p riv e

the m in o r ity shareholders of some d e s i r e d inform ation.

 101

On t h e o t h e r hand, not e m p l o y i n g push down a c c o u n t i n g

Ignores c o s t t o t h e new owners who a r e a l s o now t h e

m a jo rity stockh old ers. It could f u r t h e r m o r e be c o n te n de d

that t h e v a l u e s e s t a b l i s h e d by t h e a c q u i s i t i o n are

relevant even f o r the m in o r ity shareholders; th is idea is

explored fu rth er In t h e fo llo w in g chapter.

The E n t I t v Theory

The e n t i t y t h e o r y v i e w s a b u s in e s s as h a v i n g an

existence separate from t h a t o f t h e ow ne rs . In e s s e n c e ,

the e n t i t y t h e o r y p e r c e i v e s e v e r y o n e as o u t s i d e r s ,

Includin g the stockholders. A statement of the

a c c o u n t i n g e q u a t i o n under e n t i t y t h e o r y would be:

Assets = E q u It Ie s

E q u itie s In t h i s sense r e p r e s e n t t h e r i g h t s and c l a i m s o f

bo th t h e c r e d i t o r s and t h e s h a r e h o l d e r s . 22

Under the e n t i t y theory, business net income b e lo ng s

to the e n t i t y Its e lf. It is Income t o t h e s t o c k h o l d e r s

only to the e xten t that It caus es an Increase In t h e

value of the In v e s t m e n t o r t h a t a cash d i v i d e n d Is

declared. A s tric t In te r p r e t a t io n of the e n t i t y theory

would a l s o h o l d t h a t I n t e r e s t on de b t is not an ex p e n s e ,

but Instead represents a d is t r ib u t io n of Income t o

another c la s s of e q u ity holders. Since net income does

no t b e l o n g t o the s to c k h o ld e rs , rev e nu es and exp en se s a r e

no t p e r c e i v e d to I n c r e a s e and d e c r e a s e s h a r e h o l d e r

2 2 H e n d r I k s e n , p. 455.
 102
-f
w ealth. Revenue is t h e p r o d u c t o f the firm , exp en se s a r e

deductions from t h a t revenue, and n e t income r e p r e s e n t s

t h e amount a v a i l a b l e for d is t r ib u t io n to a I I of the

eq u ity h o ld e rs or t o be r e i n v e s t e d in t h e b u s i n e s s . 23

The e n t i t y theory perce ive s the firm t o be in

business for Its e lf; Its primary In te re st is I t s own

su rvival. An a c c o u n t i n g Is r e n d e r e d t o a l l eq u ity

h o l d e r s t o meet legal requirem ents, and t o m a i n t a i n good

relatio n s in c a s e more fun ds a r e needed from them In t h e

f u t u r e . 24

Effect on P r a c t i c e

The e n t i t y t h e o r y has been c r i t i c i z e d for no t

conforming to r e a l i t y . Lorlg notes t h a t , "The c o n c e p t o f

an Independent e n t i t y w i t h Its own m o t i v a t i o n s and

interests seems u n j u s t i f i e d . . ."25 | n a d d itio n to

questioning the r e a l i s t i c ra m ific a tio n s of the e n t ity

theory, the i n h e r e n t meaning o f a c o r p o r a t i o n owning Its

own r e t a i n e d earnings Is u n c l e a r . Lorlg sum marizes t h i s

a d v e r s a r y v i e w p o i n t by s t a t i n g that, " T h i s means t h a t the

retain ed e a r n i n g s b e lo ng t o t h e c o r p o r a t i o n Its e lf, as

m e a n i n g l e s s as t h a t c o n c e p t m i g h t b e . " 2 ®

23 I b i d , p. 456.

2 4 Kam, p. 306.

25L o rig , p. 56 8.

2 6 L o r I g , p. 56 7.
 103

The influence of the e n t i t y t h e o r y on c u r r e n t

p ractice Is n o t as p e r v a s i v e as t h e p r o p r I e t a r y th e o ry 's

In flu en c e. The e n t i t y theory Is more p l a u s i b l e when

viewed In t h e c o n t e x t o f the c o rp o ra te form o f

o rg an izatio n . P ractical im plem entation of the e n t i t y

theory I s e v i d e n c e d when s a l a r i e s o f c o r p o r a t e employees

who a r e s ' ~ o s h a r e h o l d e r s a r e t r e a t e d as an e x p e n s e . 27

A p p lic a tio n to C o nsolidated

F in a n c ia l Statements

The e n t i t y theory of c o n s o lid a tio n s Is an o u t g r o w t h

of the e n t i t y th e o ry of ownership e q u i t i e s . In c o n t r a s t

t o p a r e n t company t h e o r y , the e n t i t y th eo ry of

consolidated fin a n cial s t a t e m e n t s does no t h o l d t h a t

c o n s o lid a te d statem ents a re prepared for the express

b e n e fit of p a r e n t company s h a r e h o l d e r s . The e n t i t y

theory, d e v e l o p e d by M o o n l t z , contends t h a t c o n s o lid a t e d

s ta te m e n ts should r e f l e c t the r e s u lts of the t o ta l

b u s i n e s s e n t e r p r i s e und er wh ic h a l l resources c o n t r o l le d

by t h a t e n tity s h o u ld be v a l u e d c o n s i s t e n t l y . 28 Under

e n tity theory, Income o f a s u b s i d i a r y must be d e t e r m i n e d

for a ll s h a r e h o l d e r s and a l l o c a t e d between m a j o r i t y and

m in o rity shareholders.

Pe rha ps even more s i g n i f i c a n t than Its th e o re tic a l

perception of net Income, the e n t i t y th e o ry holds t h a t

a il of the net assets of the s u b s id ia ry , even t h e p o r t i o n

27 I b i d . , pp. 309-310.

2 8 Beams, pp. 490-491.

 10 4

no t pu rc h a s e d by t h e p a r e n t , s h o u ld be c o n s o l i d a t e d a t

th e ir fa ir market v a lu e s . There is no p r a c t i c a l

d iffe re n c e between c o n s o l i d a t e d fin a n cial statem ents

under t h e p a r e n t company t h e o r y and t h e e n t i t y theory

when t h e s u b s i d i a r y Is w h o l l y owned. But, when less than

one hundred p e r c e n t o f t h e s t o c k has been a c q u i r e d , the

two t h e o r i e s w i l l yield d iffe re n t resu lts. The p a r e n t

company t h e o r y r e v a l u e s s u b s id ia ry assets only to the

extent of net assets (In c lu d in g g oo dw ill) a c q u i r e d by t h e

parent. The m i n o r i t y In te re st is c o n s o l i d a t e d a t book

value. W h i l e t h i s method does a c c o m p l i s h s t r i c t

adherence to the h i s t o r i c a l cost concept, It also le ad s

to inconsistent t r e a t m e n t o f m a j o r i t y and m i n o r i t y

Interests in t h e c o n s o l i d a t e d fin a n cial statem ents. The

r e s u l t a n t balance sheet re fle c ts neither h is to ric a l cost

nor fa ir v a l u e . 29

In c o n t r a s t , the e n t i t y th e o ry contends t h a t fa ir

m a r k e t v a l u e s h o u ld be Imputed f o r one hundred p e r c e n t o f

the s u b s id ia r y 's a s s e t s based on t h e p a r e n t ' s purchase

p rice. This r e s u l t s in a c o n s i s t e n t v a l u a t i o n o f th e net

assets for bo th m a j o r i t y and m i n o r i t y in te re s ts ." (An

Illu s tra tio n showing t h e d i f f e r e n c e between t h e two

met hods was g i v e n In C h a p t e r 3 . ) B ern stein and E n g l e r

note t h a t the e n t i t y ap p ro ac h Is most t h e o r e t i c a l l y

2 9 Beams, pp. 491-492.

30 I b i d .
 105

J u s t i f i a b l e when t h e payment o f t h e e x c e s s by t h e p a r e n t

Is a t t r i b u t a b l e t o o v e r v a l u e d o r u n d e r v a l u e d a s s e t s . 21

The e n t i t y theory of c o n s o lid a tio n s Is c o n c e p tu a lly

q u ite ap p ealin g , e s p e c i a l l y when t h e p a r e n t a c q u i r e s

e s s e n tia lly a ll of the stock of the s u b s id ia ry . Its

appeal dim inishes, ho w ev e r, as t h e p e r c e n t a g e o f the

s u b s id ia ry 's stock a cq u ired d e c lin e s , e s p e c ia lly If only

a s lim m a jo r it y of the stock is a c q u i r e d for noncash

a s s e ts or t h r o u g h an exc han ge o f s h a r e s . Another s trik e

ag ain st the e n t i t y theory Is t h a t , after the parent is

able to exe rcis e control over the s u b s id ia r y , the shares

h e l d by m i n o r i t y s t o c k h o l d e r s do not r e p r e s e n t e q u i t y

ownership In t h e usual sense. For e x a m p le , the r ig h t to

vote In s t o c k h o l d e r ele c tio n s Is not n e a r l y as v a l u a b l e

when t h e outcome is p r e d e t e r m i n e d . 22

A committee of t h e Ameri can A c c o u n t i n g A s s o c i a t i o n

(AAA) noted t h a t :

The e n t i t y c o n c e p t assumes t h e p r ed o m in an ce o f
t h e economic a s p e c t s o f b u s i n e s s o r g a n i z a t i o n .
Thus I t may be p r e f e r a b l e t h a t one s e t o f
f i n a n c i a l r e p o r t s c o v e r t h e s t a t u s and
o p e r a t i n g r e s u l t s o f a number o f a f f i l i a t e d
c o m p a n I e s . 33

3 1 B e r n s t e ! n and E n g l e r , p. 38 6.

3 2 Beams, p. 392.

3 3 Amer lean A c c o u n t i n g A s s o c i a t i o n , C o m m itt ee on

Concep.ts and S t a n d a r d s f o r C o r p o r a t e F i n a n c i a l
S t a t e m e n t s , " A c c o u n t in g and R e p o r t i n g S t a n d a r d s f o r
C o r p o r a t e F i n a n c i a l S t a t e m e n t s — 1957 R e v i s i o n , " The
A c c o u n t i n g Review 32 ( O c t o b e r 1 9 5 7 ) : 53 7 .
 106

A few y e a r s la te r, a n o t h e r AAA c o m m i t t e e e x p r e s s e s t h i s

same I d ea by s u g g e s t i n g that the e n t i t y concept supports

substance over form. The c o m m i t t e e n o t e s t h a t , "The

essence o f the e n t i t y concept in a c c o u n t i n g Is t h e a r e a

o f economic in te re s t, no t legal or a d m i n i s t r a t i v e

f o r m . " 34

Add I I c a t I on t o
Push Down A c c o u n t i n g

Proponents of the e n t i t y theory perce ive the firm to

have an e x i s t e n c e t o t a l l y s e p a r a t e and a p a r t from t h a t o f

i t s owners. According to t h i s theory, t h e amounts shown

as a s s e t s on t h e b a l a n c e s h e e t s h o u ld r e p r e s e n t c o s t to

the e n t I t y .

I t wo uld a t firs t appear that the e n t i t y theory is

inconsistent w ith push down a c c o u n t i n g in t h e s t r i c t e s t

sense. If the e n t i t y its e lf Is deemed t o be t h e owner o f

the assets, then w i t h i n t h e fra mework o f h is to ric a l cost

accounting Its r e c o r d s s h o u ld r e f l e c t the cost of those

assets to the e n t i t y , not t h e owners o f the e n t i t y .

One v i e w o f the e n t i t y t h e o r y would h o l d t h a t since

both c r e d i t o r s and e q u i t y h o l d e r s a r e p e r c e i v e d as

o u ts id e rs w ith claim s against the e n t i t y , t h e mere change

In t h e c o m p o s i t i o n o f th is group o f o u t s i d e r s has no

s ig n ific a n c e for the e n t i t y its e lf. No exc hange has

t a k e n p l a c e because t h e e n t i t y c o n t r o l l e d t h e same a s s e t s

3 4 Amer l ean A c c o u n t i n g A s s o c i a t i o n , 1964 Co n ce p t s and

S t a n d a r d s R es ear ch Stu dy C o m m i tt e e , "The E n t i t y C o n c e p t , "
The A c c o u n t i n g Review 40 ( A p r i l 1 9 6 5 ) : 3 6 3 .
 1 07

bo t h b e f o r e and a f t e r t h e change in o w n e r s h i p o f its

stock. Co st t o t h e e n t I t v is no t a f f e c t e d by t h i s

transaction. T h is view is a p p a r e n t l y sh a re d by B e r n s t e i n

and E n g l e r , who s t a t e t h a t when u n c o n s o l i d a t e d fin a n c ia l

statements o f a sub sid iary are issued, "Under t h e e n t i t y

theory tihey w ou ld be based on t h e o r i g i n a l h is to ric a l

carryin g a m o u n t s . " 35

In t h e p r e c e d i n g d i s c u s s i o n , a re s tric tiv e

d e fin itio n is a p p l i e d to the concept of the e n t i t y . If

the e n t i t y is p e r c e i v e d to include o nly the s u b s id ia r y ,

t h e n push down a c c o u n t i n g may v i o l a t e the concept o f

h is to ric a l c o s t beca use no exchange has o c c u r r e d wh ic h

wo uld J u s t i f y a. new b a s i s o f a c c o u n t i n g . But, If the

concept o f the re le v a n t e n t i t y Is expanded t o Include the

con solidated e n t i t y , t h e n a new b a s i s o f a c c o u n t i n g m i g h t

be d e f e n s i b l e , a g a i n dep end in g on o n e ' s d e f i n i t i o n of the

e n tIty .

One p o i n t o f view is t h a t the previous e n t i t y (now

the su b sid iary) has been expanded t o include the

con solidated e n t i t y . There is a c o n t i n u i t y o f in te re s t.

T h i s b r o a d e r v i e w o f an e n t i t y seems c o n s i s t e n t w i t h

id ea s d e v e l o p e d by an American A c c o u n t i n g A s s o c i a t i o n

c o m m i t t e e on t h e B u s in e s s E n t i t y C o n c e p t . When a n a l y z i n g

the Idea o f the re le v a n t e n t i t y for purposes o f

con solidated fin a n cial statem ents, t h e c o m m i tt e e n o t e s

that the basic is s u e is t h e d e t e r m i n a t i o n o f when an

3 5 B e r n s t e i n and E n g l e r , p. 396.
 108

en tity exp ires. Such a d e t e r m i n a t i o n can be made by

a s c e r t a in in g whether there Is (1) a c o n tin u in g area of

economic In te re st, and ( 2 ) a continuing Interested

ind ivid u al or group. E lim in atio n of e ith e r of these

factors suggests t h a t the e n t i t y has c ea se d t o e x i s t .

The mere f a c t that the e n t ity does n o t e x i s t In its

previous form does n o t mean t h a t It has e x p i r e d . 35

The c o m m i t t e e r e p o r t c o n t a i n s an exa mp le t h a t

provides Insight Into t h e i r p o s itio n :

In t h e c a s e o f c o r p o r a t e l i q u i d a t i o n , where t h e
co rp o ra te assets are d i s t r i b u t e d to
s t o c k h o l d e r s and t h e s t o c k h o l d e r s c e a s e t o be
a f f i l i a t e d as a gr o u p , t h a t a r e a o f I n t e r e s t Is
elim in ated . Under t h e s e c i r c u m s t a n c e s , a
l i q u i d a t e d c o r p o r a t i o n c e a s e s t o r e p r e s e n t an
a r e a o f economic I n t e r e s t f o r an i d e n t i f i a b l e
group o f s t o c k h o l d e r s . B u t , as long as t h e
I n t e r e s t o f t h e s t o c k h o l d e r s — n o t as s p e c i f i c
I n d i v i d u a l s b u t as a gr o u p , p e r h a p s w i t h
c o n tin u o u s ly changing co m p o s itio n — co n tin u e s
w i t h o u t i n t e r r u p t i o n , t h e economic e n t i t y
s u r v i v e s . . . The emergence o f a s i n g l e
expanded e n t i t y from, a b u s i n e s s c o m b i n a t i o n
does not n e c e s s a r i l y mean t h a t one o f t h e
co m bi ni ng e n t i t i e s has e x p i r e d . 37

Using t h e AAA c o m m i t t e e ' s idea, a sub sid iary that

continues its separate operations a f t e r an a c q u i s i t i o n

has n o t e x p i r e d . There Is a c o n t i n u i t y o f In te re s t; a

group o f interested shareholders e x i s t s , even though t h e

com position of that group has cha ng ed . The mere

co n tin u atio n of the s u b s id ia ry 's separate operations

afte r acq u is itio n le nds c r e d i b i l i t y to th is view p o in t.

" A m e r i c a n A c c o u n t i n g A s s o c i a t i o n , 1964 Co n ce p t s and

S t a n d a r d s Rese arch St u d y Co m m i tt e e , p. 3 6 4 .

37 I b i d -
 109

Follo w ing th is p e r c e p tio n of ownership e q u i t y , it does

not appear that push down a c c o u n t i n g can be J u s t i f i e d .

If the d e f i n i t i o n of the re le v a n t e n tity Is expanded t o

include the con so lid ated e n t i t y , t h e r e has been no

transfer from one e n t i t y to another, and t h u s it c o u l d be

claim ed that no r a t i o n a l e exists for estab lish in g a new

b asis of accounting.

This lin e of r e a s o n i n g does n o t l ead t o a logical

con clu sion . It cannot be d e n i e d t h a t a transaction has

o c c u r r e d and t h a t a s p e c ific d o lla r p r i c e was e s t a b l i s h e d

for acq u irin g the s u b sid iary. R e g a r d l e s s o f w h e t h e r or

n o t push down a c c o u n t i n g Is Imp le m en te d , fin a n cial

statem ents of the co n solidated e n t i t y w i l l re fle c t the

purchase p r i c e . If the con so lid ated e n t i t y is c o n s i d e r e d

t o be o n l y one e n t i t y , then I t wo uld ap p e a r that

sep arately Is sue d s t a t e m e n t s for a p o rtio n of that e n tity

should re fle c t co n sis ten t asset v a lu a tio n s . T h is premise

s u p p o r t s push down a c c o u n t i n g . Follow ing a s i m il a r lin e

of thought, push down a c c o u n t i n g has been r e f e r r e d t o as

". . . analagous to t h e e n t i t y theory except th a t Instead

of re fle c tin g c o m p l e t e m a r k e t v a l u e s on t h e c o n s o l i d a t i o n

w orking papers, the in dividu al a s s e t s and lia b ilitie s

In c lu d in g goodwill are adjusted t o m a r k e t v a l u e s on t h e

books o f t h e s u b s i d i a r y . " 35 But If th e view is taken

that the co n solidated e n tity Is m e r e l y an e x t e n s i o n o f

33B e rn ste ln and E n g l e r , p. 396.

 110

the previous e n t i t y , then It seems t h a t no b a s i s for push

down a c c o u n t i n g e x i s t s .

Another v ie w p o in t t o be c o n s i d e r e d Is t h a t the

consolidated e n t i t y is not an expanded v e r s i o n o f the

previous e n t i t y , but rather a new e n t i t y in Its own

rig h t. C o ntrary to the c r i t e r i a established by t h e AAA

( a s no t e d a b o v e ) , it c o u l d be ar g u e d t h a t the s u b s id ia ry

as an e n t i t y has e x p i r e d . If the old e n t i t y has e x p i r e d ,

then t h e r e Is no c o n t i n u i t y o f I n t e r e s t and a b e t t e r cas e

I s made f o r the establishm ent of a new b a s i s o f

accounting. It can be c l a i m e d that an exc hange has t a k e n

p l a c e between t h e o l d e n t i t y as an independent firm and

t h e new c o n s o l i d a t e d e n t i t y , thus Ju stifyin g the

a p p lic a tio n of push down a c c o u n t i n g .

In d i s c u s s i n g the b a s ic premises of c o n s o l id a t i o n ,

Moonltz states th a t co n so lid atio n deals w ith ". . .a n

economic o r b u s i n e s s e n t i t y composed o f le g a lly separate

units sub ject t o a common c o n t r o l . . . " 39 It seems

s e lf-e v id e n t to s ta te that th is economic e n t i t y described

by M o o n l t z d i d not e x i s t b e f o r e th e purchase o f the

s u b s i d i a r y company by t h e p a r e n t . The c r e a t i o n o f a new

co n solidated e n t i t y can be seen as t h e b a s i s for a new

set of asset values, thus o f f e r i n g support for push down

a c c o u n t i n g under the e n t i t y concept.

39M a u r l c e M o o n l t z , The E n t i t y The or y o f C o n s o l i d a t e d

S t a t e m e n t s ( B r o o k l y n : The F o u n d a t i o n P r e s s , I n c . , 1 9 5 1 ) ,
p. 12.
 111

D i f f i c u l t i e s w i t h I m p le m e n ti n g
Push Down Acc oun t Inq

A p p l i c a t i o n o f push down a c c o u n t i n g under the e n t i t y

t h e o r y h i n g e s not upon t h e p e r c e n t a g e o f s t o c k ch a n g i n g

hands, b u t upon t h e d e f i n i t i o n o f an e n t i t y . If It Is

established t h a t an exc hange has t a k e n p l a c e between two

e n title s , t h e n push down a c c o u n t i n g is s a n c t i o n e d

regardless o f t h e p e r c e n t a g e change in s t o c k o w n e r s h i p .

The o n l y re le v a n t cost Is c o s t to the e n t i t y . The new

basis of accounting e s ta b lis h e d by t h e exc ha ng e would be

Jus t as r e l e v a n t for m in o rity s h a r e h o l d e r s as It is f o r

m a jo rity stockh old ers.

If the e n t i t y Is d e f i n e d as t h e c o n s o l i d a t e d e n t i t y ,

it can be m a i n t a i n e d that an a c q u i s i t i o n o f one f i r m by

a n o t h e r e s t a b l i s h e s a new e n t i t y , thereby J u s tify in g a

new c o s t b a s i s for v a lu a tio n of the a ss ets. In c o n t r a s t ,

If t h e n a r r o w v i e w o f an e n t i t y Is ad o p te d and t h e e n t i t y

Is d e f i n e d as t h e s u b s i d i a r y o f the co n s o lid a te d firm ,

there i s no b a s i s for u s i n g push down a c c o u n t i n g . The

cost to the relevant un it has not changed and t h e p r i c e

p a i d by t h e new owners is Irre le v a n t for the e n t i t y ' s

record-keepin g purposes.

Regardless o f the d e f i n i t i o n of the r e le v a n t en tity,

a discussion of a p p l i c a b i l i t y of the e n t i t y t h e o r y would

not be c o m p l e t e w i t h o u t looking a t the p r a c t ic a l aspects

of its adoption. J u s t who is t h i s entity? Regardless of

who is p e r c e i v e d t o be owning t h e a s s e t s , it appears

s e lf-e v id e n t to s t a t e 't h a t the fin a n cial s t a t e m e n t s must

 1 12

be p r e p a r e d for the re le v a n t users. P re s e n ta tio n of

separate fin a n c ia l statements Im plies that the

con so lid ated e n t i t y I is n o t r e l e v a n t for some group o f

users. For t h i s group, the re le v a n t e n t i t y I s t h e same

e n tity th a t existed before a c q u is itio n .

The f o c u s on f i n a n c i a l statem ent users is expressed

by t h e FASB in its firs t statement In t h e C o n c e p t u a l

Fram ew ork. In e n u m e r a t i n g t h e o b j e c t i v e s o f fin a n c ia l

re p o rtin g , t h e FASB s t a t e s that:

F i n a n c i a l r e p o r t i n g s h o u ld p r o v i d e I n f o r m a t i o n
t h a t i s u s e f u l t o p r e s e n t and p o t e n t i a l
i n v e s t o r s and c r e d i t o r s and o t h e r u s e r s making
r a t i o n a l I n v e s t m e n t , c r e d i t , and s i m i l a r
dec I s I o n s . 4 ®

A s im ila r view i s e x p r e s s e d by a AAA c o m m i t t e e

exp loring the e n t i t y concept. The c o m m i t t e e s t a t e s that:

A c c o u n t i n g f o r an e n t i t y , t h e r e f o r e , i n v o l v e s
th e accum ulation o f In fo rm a tio n about th e a re a
o f economic i n t e r e s t and co m m u n ic at io n o f t h a t
i n f o r m a t i o n t o t h e i n t e r e s t e d I n d i v i d u a l or
g r o u p . 41

It Is d i f f i c u l t to p e rc e iv e the e n t i t y its e lf as t h e us e r

of Its fin a n c ia l statem ents.

The c o m m i t t e e f u r t h e r notes t h a t not o n l y w i l l the

perception of the re le v a n t e n tity d iffe r between

In d iv id u a ls according to t h e i r sp e c ific In te re sts , bu t

the nature of the i n f o r m a t i o n d e s i r e d may a l s o d i f f e r .

40F i n a n c la l Accounting Standards Board, Statem ent of

F i n a n c i a l A c c o u n t i n g Co nc ep ts No. 1 " O b j e c t i v e s o f
F i n a n c i a l R e p o r t i n g by B u s in e s s E n t e r p r i s e s " ( S t a m f o r d :
FASB, 1 9 7 8 ) , p a r a g r a p h 3 4 .

41 Am er ic an A c c o u n t i n g A s s o c i a t i o n , 1964 C o nc ep ts and
S t a n d a r d s R e sea rch St u d y C o m m i tt e e , p. 3 6 0 .
 113

Since p reparers of the fin a n cial statem ents obviously

cannot c o n s u lt w it h a ll of the users to d eterm in e t h e i r

nee ds , a s s u m pt io ns must be m a d e . 42 The d i v e r s e Interests

of t h e s e groups must be s a t i s f i e d , w hi c h a g a i n raises

many o f t h e same q u e s t i o n s as not ed under the p r o p r ie ta r y

theory. Despite th e o r e tic a l d ifferen c es, It is d i f f i c u l t

to separate In r e a l i t y t h e d i f f e r e n c e s bet.veen t h e e n t i t y

and Its shareholders. Implem entation o f push down

accounting from t h e u s e r s ' persp ective Is d i s c u s s e d in

Chapter 5.

Synopsis of the Theories

C u r r e n t a c c o u n t i n g p r a c t i c e does n o t a d h e r e s o l e l y

t o any one o f t h e above e q u i t y theories. As noted

throughout the d iscussio n, examples can be found where

each o f t h e above t h e o r i e s Is in o p e r a t i o n fo r a given

accounting issue.

No a u t h o r i t a t i v e body has e v e r s a n c t i o n e d one t h e o r y

to the exclusion of a l l others. In f a c t , in s e p a r a t e

pr ono uncements issued t h e same y e a r , th e Accounting

P r i n c i p l e s Board s p e c i f i c a l l y a d o p ts t h e e n t i t y theory In

one (APB O p i n i o n Number 16, paragraph 2 9 ) , w h il e adhering

to the p r o p r ie t a r y theory In t h e o t h e r (APB S t a t e m e n t

Number 4 , p a r a g r a p h s 21 and 2 3 ) . 43

42 Ib i d . , p. 362.

4 3 Kenneth S. M o s t , A c c o u n t i n g Th e o r y (Columbus,
Ohio: G r i d , I n c . , 1 9 7 7 ) , p. 30 0.
 1 14

W h i l e t h e s i m u l t a n e o u s use o f several t h e o r i e s may

appear t o be inconsistent, Hendrlksen contends t h a t a ll

of the th e o rie s are re le v a n t under d i f f e r e n t

c i r c u m s t a n c e s and o b j e c t i v e s . He c a u t i o n s that

a c c o u n t a n t s must be c a r e f u l t o a p p l y t h e most logical

e q u ity theory for a given case, and t o use t h e same

eq u ity t h e o r y when t h e c i r c u m s t a n c e s a r e s i m i l a r . 44

Ro bb in s a p p e a r s t o s u p p o r t H e n d r l k s e n ' s p o s i t i o n by

sta tin g that:

The d e c i s i o n t o use p r e d e c e s s o r b a s i s v e r s u s
f a i r v a l u e o r exc han ge p r i c e in a g i v e n
t r a n s a c t i o n be'comes a Judgment o f w hi c h
f u n d am en ta l a c c o u n t i n g t h e o r y — p r o p r i e t a r y or
e n t i t y — Is more a p p r o p r i a t e In t h e
cIrcum stances. 4®

He goes on t o s t a t e what is e s s e n t i a l l y the conclusion of

t h is chapter. He sa y s t h a t p ro p rietary th e o ry proponents

favor push down a c c o u n t i n g because It re fle c ts the cost

t o t h e new p r o p r i e t a r y I n t e r e s t and a c c o r d i n g l y p r o v i d e s

more r e l e v a n t inform ation. Supporters of the e n t i t y

t h e o r y oppose push down a c c o u n t i n g on t h e grounds t h a t a

corporation is a s e p a r a t e legal and a c c o u n t i n g e n t i t y

from Its shareholders. A transaction between

shareholders, and t h u s o u t s i d e t h e r e p o r t i n g en tity,

d e s e r v e s no a c c o u n t i n g by t h e e n t i t y . 4 ® A l t h o u g h he was

re fe rrin g to general questions of b a s i s and not

4 4 H e n d r I k s e n , p. 461.

4 ® B a r r y P. R o b b in s , "A Q u e s t i o n o f B a s i s , " J o u rn aI
o f Ac co un ta nc y 163 (March 1 9 8 7 ) : 100.

46 I b i d .
 115

s p e c ific a lly push down a c c o u n t i n g , Robbins c o n c l u d e s by

s ta tin g that perhaps the a m b ig u ity in a p p l i c a t i o n of the

e q u ity theories w ill remain, because . . In t h i s area

good a c c o u n t i n g re lie s on good J u d g m e n t ." 47

T h is view I s n o t sh a re d by o t h e r w r i t e r s who co n te n d

that d iv e rs itie s In e q u i t y t h e o r i e s l ead t o u n d e s i r a b l e

d ifferen c es in a c c o u n t i n g t h o u g h t and p r a c t i c e . This

o p p o s in g v i e w Is summarized as f o l l o w s :

I f a c c o u n t a n t s c o u l d r e a c h u n a n i m i t y on
t h e v e r y fu n d am en ta l q u e s t i o n o f t h e n a t u r e o f
e x t e r n a l a c c o u n t i n g t r a n s f e r s , i t would le ad t o
acceptance of e I t h e r p r o p r i e t a r y or e n t i t y
t h e o r y as a m a j o r u n d e r l y i n g c o n c e p t . The
r e s u l t o f t h i s c h o i c e would be t h e d e v e lo p m e n t
o f a c c o u n t i n g t h o u g h t and p r a c t i c e w h ic h would
be i n t e r n a l l y c o n s i s t e n t . " 48

Summary

Push down a c c o u n t i n g has been r e v i e w e d in

re la tio n s h ip t o t h e two most p r o m i n e n t th e o rie s of

ownership e q u it y : the e n t i t y t h e o r y and t h e p r o p r i e t a r y

theory. The pu r p o se o f th is c h a p t e r was not to prove the

v a lid ity o f one o f t h e t h e o r i e s w h i l e showing t h e fa lla c y

of the o th e r. Rather, It f o cu se d on d e m o n s t r a t i n g that

bo t h t h e o r i e s have m e r i t and bo t h have influenced

accounting t h o u g h t and p r a c t i c e .

47 I b i d . , p. 101.

4 8 F r a n c i s A. B i r d , Le w is F. D a v i d s o n , and C h a r l e s H.
Sm ith, " P e rc e p tio n s of E x te rn a l Accounting T r a n s fe r s
Under E n t i t y and P r o p r i e t a r y T h e o r y , " The Account I no
Rev Iew 49 ( A p r i l 1 9 7 4 ) : 24 4 .
 1 16

It has been Illu s tra te d that push down a c c o u n t i n g

can be c o n c e p t u a l l y d e f e n d e d under the p r o p r i e t a r y

theory. De pen di ng on o n e ' s d e f i n i t i o n of the rele v a n t

e n tity , push down a c c o u n t i n g may a l s o be d e f e n d e d under

the e n t i t y theory, but th e case Is not as s t r o n g under

the e n t i t y t h e o r y as It I s un de r t h e p r o p r i e t a r y theory.

Nonetheless, practical d iffic u ltie s a ris e w ith

im plem entation, e s p e c i a l l y when a c q u l s i t i p n s o f l e s s th an

one hund re d p e r c e n t o c c u r . Wh et he r t h e e x i s t e n c e o f

these p r a c t i c a l d iffic u ltie s negates th e conceptual

v a lid ity of push down a c c o u n t i n g is a much more

s u b je c tiv e determ in ation. This i dea Is e x p l o r e d further

In t h e fo llo w in g chapter.
 CHAPTER 5

ASSESSING THE NEEDS OF FINANCIAL STATEMENT USERS

Emphasis In t h e p r e v i o u s c h a p t e r was on o w n e r s h i p o f

the r e le v a n t e n t i t y . The f o c u s s h i f t s In t h i s chapter to

the fin a n c ia l s t a t e m e n t u s e r s and t h e q u a l i t i e s that

accounting Inform ation s h o u ld possess t o meet t h e needs

of these users. The FASB has r e c o g n i z e d t h e im p o r ta n c e

of c o n s id e rin g t h e needs o f fin a n cial statem ent users in

the standard s e t t in g process.^ Does t h e e s t a b l i s h m e n t o f

a new b a s i s o f a c c o u n t i n g enhance o r d e t r a c t from

I n f o r m a t i o n conveyed t o t h e us e rs ? The pur po se o f th is

chapter I s t o e v a l u a t e push down a c c o u n t i n g from t h e

p ersp ective of the fin a n cial s t a t e m e n t u s e r and t o as s ess

how w e l l i t meets t h e u s e r ' s d e c i s i o n making needs.

Id en tifyin g Financial S t a t e m e n t U se rs

Before a v a lid a t t e m p t can be made t o a n a l y z e push

down a c c o u n t i n g from t h e f i n a n c i a l statem ent users'

persp ective , t h e u s e r s must be id e n tifie d . P o ten tial

users of fin a n cial statem ent accounting i n f o r m a t i o n can

be c l a s s i f i e d as e i t h e r d i r e c t or in d ire c t users. D irect

1F I n a n e la I A c c o u n t i n g S t a n d a r d s B o a r d , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g C o nc ep ts No. 1 . " O b j e c t i v e s o f
F i n a n c i a l R e p o r t i n g by B u s in e s s E n t e r p r i s e s " ( S t a m f o r d :
FASB, 1 9 7 8 ) .

1 17
users Include the frequently c ite d category of present

and p o t e n t i a l I n v e s t o r s and c r e d i t o r s , ma nag er s, taxing

au th o ritie s , em p lo y e e s , and c u s t o m e r s . Financial

ana lys ts and a d v i s e r s , stock exchanges, lawyers,

regulatory au th o rities, the f in a n c ia l press, trade

associations, and l a b o r u n i o n s c o m p r i s e t h e group o f

In d ire c t u se rs .2

F in ancial s t a t e m e n t u s e r s have been d e f i n e d

d iffe re n tly throughout the yea rs. The c u r r e n t concept

most f r e q u e n t l y used was d e v e l o p e d by t h e FASB In its

Conceptual Framework p r o j e c t . The Board s t a t e s that:

F i n a n c i a l r e p o r t i n g s h o u ld p r o v i d e I n f o r m a t i o n
t h a t I s u s e f u l t o p r e s e n t and p o t e n t i a l
I n v e s t o r s and c r e d i t o r s and o t h e r u s e r s In
making r a t i o n a l I n v e s t m e n t , c r e d i t , and s i m i l a r
dec I s I o n s . 3

P rio r to the form ation of t h e FASB, th e Trueblood

Co m m i tt e e was c h a r g e d w i t h studying the e s ta b lis h m e n t of

accounting p r i n c i p l e s . T h i s group d e f i n e s fin a n c ia l

s t a t e m e n t u s e r s more b r o a d l y . The c o m m i t t e e s t a t e s that

An o b j e c t i v e o f f i n a n c i a l s t a t e m e n t s is t o
s e r v e p r i m a r i l y t h o s e u s e r s who have l i m i t e d
a u t h o r i t y , a b i l i t y , or resou rc es to o b t a in
I n f o r m a t i o n and who r e l y on f i n a n c i a l
s t a t e m e n t s as t h e i r p r i n c i p a l s o u r c e o f
i n f o r m a t i o n ab o u t an e n t e r p r i s e ' s economic
act I v I t y . 4

2 Kenneth S. M o s t , Account Ing The or y (Columbus, Oh io

G rid, I n c . , 1 9 7 7 ) , p. 9 1 .

3 F I n a n e la I A c c o u n t i n g S t a n d a r d s B o ar d , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g Co nc ep ts No. 1 . p a r a g r a p h 34 .

4 H e c t o r R. A n to n , " O b j e c t i v e s o f F i n a n c i a l
A c c o u n t i n g : Review and A n a l y s i s , " Jo u rn al o f Ac cou nt anc y
141 ( J a n u a r y , 1 9 7 6 ) : 4 2 , 4 5 .
 1 19

I n p u t t o t h e T r u e b l o o d Co mmitte e by some o f t h e Big

Eight accounting firm s provides further evidence of the

d iv e rs ity In t h o u g h t c o n c e r n i n g t h e d e s i r e d o b j e c t i v e s

and t h e intended use rs . Statements of b asic o b je c tiv e s

by f o u r o f t h e Big E i g h t firm s at that t i m e a r e as

fo ilo w s :

A r t h u r Andersen & Co.-

The o v e r a l l p u r po se o f f i n a n c i a l s t a t e m e n t s i s ,
in our o p i n i o n , t o communicate i n f o r m a t i o n
c o n c e r n i n g t h e n a t u r e and v a l u e o f t h e economic
resources of a business e n t e r p r i s e , the
i n t e r e s t s o f c r e d i t o r s and t h e e q u i t y o f owners
in t h e economic r e s o u r c e s , and t h e changes In
t h e n a t u r e and v a l u e o f t h o s e r e s o u r c e s from
period to p e rio d .

Arthur Young & Company:

In our o p i n i o n , t h e o b j e c t i v e o f f i n a n c i a l
s t a t e m e n t s s h o u ld be s i m p l y t h i s : t o respond
t o t h e needs o f I n v e s t o r s ( I n c l u d i n g bo th
e q u i t y s e c u r i t y h o l d e r s and c r e d i t o r s , p r e s e n t
and p r o s p e c t i v e ) f o r f i n a n c i a l i n f o r m a t i o n upon
w h ic h t o base t h e i r in ve s t m e n t d e c i s i o n s .

Ernst & E r n s t :

We recommend t h a t t h e o b j e c t i v e s o f c o r p o r a t e
f i n a n c i a l s t a t e m e n t s be r e g a r d e d as t w o - f o l d :

1. To show t h e e f f e c t o f m anag ement's d e c i s i o n

on t h e company's a s s e t s , l i a b i l i t i e s , and
o w n e r s ' e q u i t y as a c c o m p li s h e d t h r o u g h
co m p l e t e d t r a n s a c t i o n s ( t h e s o - c a l l e d
ste w a rd s h ip concept o f f i n a n c i a l r e p o r t i n g . )

2. To d i s c l o s e , s u p p l e m e n t a r y t o t h e r e p o r t e d
e f f e c t s o f c o m p l e t e d t r a n s a c t i o n s , no n -
t r a n s a c t i o n i n f o r m a t i o n which i s i m p o r t a n t t o
t h e d e c i s i o n s o f i n v e s t o r s , c r e d i t o r s , and
o t h e r s who have a f i n a n c i a l I n t e r e s t in t h e
company, p r o v i d i n g t h a t such i n f o r m a t i o n can be
s u p p o r t e d by r e a s o n a b l y o b j e c t i v e e v i d e n c e .
 120

P r i c e W at er h o u se & C o . :

G e n e r a l p u r po se f i n a n c i a l s t a t e m e n t s a r e
d e s i g n e d t o r e p o r t t o I n v e s t o r s on t h e use o f
f un ds t h e y have I n v e s t e d In t h e i r e n t e r p r i s e in
such a way as t o f a c i l i t a t e t h e i r I n v e s t m e n t
d ecisions of the f u t u r e . 5

T h e r e a r e u n d e n i a b l y many p o t e n t i a l users of

accounting Inform ation, and some o f t h e s e u s e r s have

s p e cia lized needs.. In r e f e r e n c e t o APB S t a t e m e n t No. 4,

Most n o t e s t h a t It ". . . resolves t h is dilemma by

assuming t h a t 'a s i g n i f i c a n t number o f u s e r s need s i m i l a r

Info rm ation' w h ile at t h e same t i m e c o n f e s s i n g that 'a

v ita l task is t o d e t e r m i n e t h e s e common needs and t h e

Inform ation that Is r e l e v a n t to th e m .'" 6 The I dea o f

" sm o rgasbord" fin a n cial rep o rtin g has been s u g g e s t e d ,

w h i c h wo uld p r o v i d e for d iffe re n t amounts t o be s e t forth

for d iffe re n t pu rp os es and a l l o w th e user to s e l e c t the

amounts t h a t b e s t s u i t h i s nee ds. This concept of

fin a n cial reportin g Is In d i r e c t c o n t r a s t w i t h t h e FASB's

p o s i t i o n wh ic h m a i n t a i n s t h a t fin a n cial r e p o r t s s h o u ld be

g e n e r a l-p u r p o s e sources of fin a n c ia l in fo rm a tio n designed

t o s e r v e t h e common needs o f the u s e rs .7

Id e n tific a tio n of a ll po ten tial fin a n cial statement

u s e r s and an assessment o f th eir sp e cia lized needs Is

beyond t h e scope o f th is study. Accordingly, t h e FASB's

5 Jan R o b e r t W i l l i a m s , " D i f f e r i n g O p i n i o n s on
A c c o u n t i n g O b j e c t i v e s , " CPA J o u rn a l 43 (Aug us t 1 9 7 3 ) :
652.

6M o s t , p. 107.

7 IbId. , p. 91 .
view of fin a n cial s t a t e m e n t u s e r s w i I I be u t i I I ze d:

p r e s e n t and p o t e n t i a l i n v e s t o r s and c r e d i t o r s . A lt h o u g h

t h e needs o f the other groups r e p r e s e n t a v i a b l e co n c e r n

the primary focus is on t h e group s d e f i n e d by t h e FASB.

A s s e s s in g t h e U s e r s * Needs

Financial rep o rtin g has t r a d i t i o n a l l y been g e n e r a l

purpose r e p o r t i n g . Since the s p e c i f i c needs o f the

v a r i o u s gr oup s a r e p r e s e n t l y unknown, a d e te r m in a tio n of

whether or no t t h o s e needs a r e b e i n g met c a n n o t

re a lis tic a lly be made. A gen eralized set of needs is

considered t o be met t h r o u g h t h e p r e s e n t format of

fin a n cial statem ents. The FASB s t a t e s that:

F i n a n c i a l r e p o r t i n g s h o u ld p r o v i d e I n f o r m a t i o n
t o h e l p p r e s e n t and p o t e n t i a l I n v e s t o r s and
c r e d i t o r s and o t h e r u s e r s In a s s e s s i n g t h e
amounts, t i m i n g , and u n c e r t a i n t y o f p r o s p e c t i v e
cash r e c e i p t s from d i v i d e n d s o r i n t e r e s t and
t h e p r o c e e d s from t h e s a l e , r e d e m p t i o n , or
m a t u r i t y o f s e c u r i t i e s or lo a n s . 8

But a d e t e r m i n a t i o n o f the p a r t ic u la r Info rm ation that

accomplishes t h i s o b jective is a d i f f i c u l t task.

Much work has been done in t h e b e h a v i o r a l areas to

s t u d y and a n a l y z e t h e d e c i s i o n making p r o c e s s . Knowledg

of th e workings of th is process could b e t t e r d e fin e the

s p e c ific kinds of Inform ation u t i l i z e d . T h i s knowl edg e

should a l lo w improvements in t h e q u a n t i t y o r type of

I n f o r m a t i o n p r o v i d e d by t h e a c c o u n t i n g sy s te m . The

'’ F i n a n c i a l A c c o u n t i n g S t a n d a r d s Board, S tatem ent of

F i n a n c i a l A c c o u n t i n g C o n c e p t s No. 1 . paragraph 37.
 122

dec I s I o n - m a k I n g p r o c e s s would be enhanced as t h e needs o f

the fin a n cial statem ent users a re b e t t e r met.

Hendrlksen Indicates that since in d iv id u al

preferences are re fle c te d through th e market p r i c e of

s e c u ritie s , the present lack of knowledge r e g a r d i n g the

actual d e c i s i o n making p r o c e s s i s not a p r o b l e m . The

semi s t r o n g form o f the e f f i c i e n t market hypothesis

assumes t h a t a ll p u b lic ly a v a ila b le Inform ation Is

re fle c te d I m m e d i a t e l y and In an u n b ia s e d manner In

s e c u rity p rices. H e n d r l k s e n summarizes h i s p o s i t i o n as

follow s:

I t I s n o t n e c e s s a r y t h a t we know e i t h e r how
I n d i v i d u a l s make t h e i r I n v e s t m e n t d e c i s i o n s ,
nor how I n f o r m a t i o n is used In t h e d e c i s i o n
processes of in d iv id u a l In v e s to rs . In f a c t , we
c a n n o t know d i r e c t l y how d e c i s i o n s a r e made
be c a u s e i n d i v i d u a l s c a n n o t g e n e r a l l y d e s c r i b e
how t h e y go ab o ut mak ing d e c i s i o n s .
F u r t h e r m o r e , I t Is I m p o s s i b l e t o o b t a i n
g e n e r a l i z e d d e c i s i o n mod el s from i n d i v i d u a l
d e c i s i o n p r o c e s s e s bec aus e o f t h e p r o b l e m o f
agg regating s u b je c tiv e u t i l i t i e s . Each pe rs o n
may p l a c e a d i f f e r e n t w e i g h t on each p i e c e o f
i n f o r m a t i o n t a k e n i n t o c o n s i d e r a t i o n in t h e
d e c is io n process.®

Hendrlksen Is p r o b a b l y rig h t; it is d o u b tfu l that an

in d iv id u a l's d e c i s i o n making p r o c e s s can e v e r be modeled

c o m p l e t e l y and a c c u r a t e l y . Even If such c a p a b i l i t i e s

existed, it Is d i f f i c u l t to envision a re p o rtin g

mechanism t h a t c o u l d p r o v i d e fin a n cial s ta te m e n t users

w ith a l l the Inform ation t h e y need on an in d iv id u alized

b a s Is .

®Elden S . H e n d r l k s e n , A c c o u n t i n g T h e o r y . 4 t h e d .
(Homewood: R i c h a r d D. I r w i n , I n c . , 198 2) p. 102.
 123

W h e t h e r one b e l i e v e s t h a t an u n d e r s t a n d i n g o f the

In d iv id u al d e c i s i o n mak in g p r o c e s s Is Irreleva n t and/or

no t fu lly understood, an a n a l y s i s o f Ind ivid u al fin a n c ia l

statem ent user needs Is beyond t h e scope o f th is study.

The f o c u s i s on t h e g e n e r a l i z e d set of needs id e n tifie d

by t h e FASB — inform ation t o a l l o w an asse ssm en t o f

f u t u r e ca sh flow s. An e v a l u a t i o n o f how w e l l push down

a cc o u n tin g accomplishes t h i s o b jective for p r e s e n t and

potential I n v e s t o r s and c r e d i t o r s c o m p r i s e s t h e r e m a i n d e r

of th is chapter.

Q u a lita tiv e C h ara c te ris tic s

To a c c o m p l i s h t h e o b j e c t i v e o f providing Inform ation

to assess f u t u r e cash f l o w s , t h e FASB has Id e n tifie d

ce rta in q u a lita tiv e c h a ra c te ris tic s that fin a n c ia l

s t a t e m e n t s s h o ul d p o s s e s s . The Board n o t e s t h a t :

To m a x i m i z e t h e u s e f u l n e s s o f a c c o u n t i n g
In fo rm a tio n , s u b jec t to c o n s id e ra tio n s of the
c o s t o f p r o v i d i n g I t , e n t a i l s c h o i c e s between
a l t e r n a t i v e a c c o u n t i n g me thods. Those c h o i c e s
w i l l be made more w i s e l y I f t h e i n g r e d i e n t s
th a t c o n trib u te to 'usefulness' are b e tte r
u n d e r s t o o d . 18 . . . The b e t t e r c h o i c e is t h e
one t h a t , s u b j e c t t o c o n s i d e r a t i o n s o f c o s t ,
p r o d u c e s from among t h e a v a i l a b l e a l t e r n a t i v e s
i n f o r m a t i o n t h a t Is most u s e f u l f o r d e c i s i o n
m a k I n g . 11

These comments s e r v e as t h e b a s i c p r e m i s e f o r th is

chapter. If push down a c c o u n t i n g Is shown t o be In

1° F I n a n c I a I A c c o u n t i n g S t a n d a r d s B o a r d , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g C o n c e p t s No. 2 " Q u a l i t a t i v e
C h a ra c te r I s t I c s of Accounting In fo rm a tio n " (Stam ford:
FASB, 1 9 8 0 ) , p a r a g r a p h 8 .

11 I b I d . , p. Ix.
 1 24

c o m p l i a n c e w i t h GAAP ( a s e v a l u a t e d In o t h e r c h a p t e r s ) ,

and c a p a b l e o f enhancing d e c is io n making, then a stro n g

c a s e can be made f o r I t s u se . If it hinders d e c is io n ­

making, its a p p licatio n becomes much more q u e s t i o n a b l e .

This sec tio n p r e s e n t s an a n a l y s i s o f push down a c c o u n t i n g

in l i g h t o f each o f the q u a l i t a t i v e c h a ra c te ris tic s

lis te d by t h e FASB. These c h a r a c t e r i s t i c s are:

a. b e n e f i t s ex ce ed c o s t s ,

b. understandabI I I t y ,

c. dec isio n usefulness,

d. relevance,

f. p r e d ic t iv e value,

g. feedback v a lu e ,

h. t imeI I n e s s ,

e. re I IabI I I t y ,

J. v e rIfIa b I I It y ,

k. neutraI I t y ,

I. representational fa ith fu ln e s s ,

I. comparabI I I t y / c o n s I s t e n c y ,

m. m a t e r I a I I t y . 12

B e n efits Exceed C o s ts

The I d ea t h a t b e n e f i t s s h o u ld exceed c o s t s is a

we I I - a c c e p t e d a c c o u n t i n g g u i d e l i n e . The FASB d e s c r i b e s

the c o s t-b e n e fit r u l e as a p e r v a s i v e c o n s t r a i n t in t h e

h ie r a r c h y of accounting q u a l i t i e s . The Board n o t e s t h a t

12 I b i d . , page 15.
 125

"Unless the b e n e f i t s t o be d e r i v e d from a commodity or

s e r v i c e exceed t h e c o s t s a s s o c i a t e d w i t h It, It will not

be sou ght a f t e r . " 13 The FASB r e c o g n i z e s t h a t th e re are

d iffic u ltie s Inherent In a p p l y i n g the c o s t- b e n e fit ru le

to accounting Inform ation. F irs t, In dividu al users

d iffp r In t h e i r perceptions of re la tiv e value, w h ile the

Board i s f a c e d w i t h m e e t i n g t h e needs o f s o c i e t y as a

w hole. Second, th e market for fin a n cial Inform ation

d iffe rs from t h e m a r k e t f o r most o t h e r c o m m o d i t ie s in

that the b e n e fit s of the I n f o r m a t i o n c a n n o t a l w a y s be

confined to i n d i v i d u a l s who pay f o r I t . 14

Several t y p e s o f c o s t must be c o n s i d e r e d in t h e

o ve ra ll co s t-b e n e fit a n a lys is. In a d d i t i o n to the o u t -

o f-p o c k e t costs I n c u r r e d by t h e company in c o l l e c t i n g and

processing the Inform ation, c o s t s t o t h e u s e r must a l s o

be c o n s i d e r e d . The Board n o t e s t h a t :

The c o s t s t o t h e u s e rs o f I n f o r m a t i o n , o v e r and
above t h o s e c o s t s t h a t p r e p a r e r s pass on t o
them, a r e m a i n l y t h e c o s t s o f a n a l y s i s and
I n t e r p r e t a t i o n and may I n c l u d e c o s t s o f
r e j e c t i n g In fo rm a tio n t h a t Is redundant, fo r
t h e d i a g n o s i s o f redundancy Is no t w i t h o u t i t s
c o s t . 15

B e n e f it s of accounting Info rm ation are received by

several sectors. S o ciety b e n e fits from f i n a n c i a l

i n f o r m a t i o n as a r e s u l t o f the Increased e f f i c i e n c y of

fin a n cial resource a l l o c a t i o n . The e n t e r p r i s e Its e lf

15 I b I d . , paragraph 134.

14 I b I d . , paragraphs 133-134.

1 5 1b I d . , paragraph 137.
 126

ben efits from Intern al u tiliz a tio n of the Inform ation,

Improved acc es s t o c a p i t a l markets, and a f a v o r a b l e

Impact on Its p u b lic r e l a t i o n s . 18 The In d iv id u al

fin a n cial s t a t e m e n t us e r b e n e f i t s to the e x te n t that th is

Info rm ation aids in t h e e v a l u a t i o n o f f u t u r e cash f l o w s .

Push down a c c o u n t i n g s u c c e s s f u l l y pa sses t h e c o s t -

b en efit s c r u t i n y when o n l y o u t - o f - p o c k e t c o s t s a r e

con sidered. T h e r e s h o u ld be fe w, If any, ad d itio n al

costs th a t accompany implementation o f push down

a c c o u n t i n g beca use It does not r e q u i r e the c a lc u la tio n of

a new s e t o f numbers. The pushed down amounts t h a t would

be r e c o r d e d a r e a l r e a d y c a l c u l a t e d in t h e c o n s o l i d a t i o n

process.

Costs o th e r t h a n o u t - o f - p o c k e t c o s t s s h o u ld a l s o be

con sidered. Cunningham n o t e s t h a t c o s t s a l s o include the

psychological cost of adopting t h e ch a n g e. He summarizes

his perception of the c o s t-b e n e fIt trad e-o ff as f o l l o w s :

The change s h o u ld be made I f t h e new d i s c l o s u r e

enhances o v e r a l l r e p o r t i n g t o p r i m a r y u s e r s o f
f i n a n c i a l s t a t e m e n t s and I f t h e c o s t o f
ch a n g i n g is l e s s t h a n t h e e x p e c t e d b e n e f i t s . 17

Even though t h e r e may be no a d d i t i o n a l out-of-pocket

costs, psychological costs th a t resu lt from u t i l i z a t i o n

of push down a c c o u n t i n g , such as its Impact on

c o m p a ra b ility, a r e examined t h r o u g h o u t t h i s c h a p t e r .

P o ten tial ben efits, such as Increased re le v a n c e , will

16 I b I d . , paragraphs 136-138.

17M i c h a e l E. Cunningham, "Push Down A c c o u n t i n g : Pros

and C o n s , " J o u rn a l o f Accoun tan cy 157 ( Jun e 1 9 8 4 ) : 74 .
 127

a l s o be a d d r e s s e d as t h e c h a p t e r progresses. The f i n a l

d ecision regarding the d e s i r a b i l i t y of push down

a c c o u n t i n g s h o u ld be based on t h e assessment o f w h e t h e r

or not a l l ben efits exceed a l l costs.

UnderstandabI I I tv

The FASB c l a s s i f i e s understandabI I I t y as a u s e r -

s p e c ific q u a lity In its h ie r a r c h y of accounting

q u a litie s . The Board e l a b o r a t e d on t h e Id ea o f

understandabI I I t y in its firs t statement in t h e

Conceptual Framework:

. . . F i n a n c i a l I n f o r m a t i o n is a t o o l an d , l i k e
most t o o l s , c a n n o t be o f much d i r e c t h e l p t o
t h o s e who a r e u n a b l e o r u n w i l l i n g t o use i t or
who m is u s e I t . I t s use can be l e a r n e d ,
h ow ev e r, and f i n a n c i a l r e p o r t i n g s h o u ld p r o v i d e
I n f o r m a t i o n t h a t can be used by a l l —
n o n p r o f e s s i o n a l s as w e l l as p r o f e s s i o n a l s — who
a r e w i l l i n g t o l e a r n t o use i t p r o p e r l y .
E f f o r t s may be needed t o I n c r e a s e t h e
understandabI I I t y of f in a n c i a l In fo rm a tio n .
C o s t - b e n e f i t c o n s i d e r a t i o n s may I n d i c a t e t h a t
i n f o r m a t i o n u n d e r s t o o d o r used by o n l y a few
s h o u ld n o t be p r o v i d e d . Conversely, f in a n c i a l
r e p o r t i n g s h o u ld not e x c l u d e r e l e v a n t
i n f o r m a t i o n m e r e l y because I t Is d i f f i c u l t f o r
some t o u n d e r s t a n d o r because some I n v e s t o r s o r
c r e d i t o r s choose not t o use I t . 1®

In a d d i t i o n to co n sid ering the understandabI I I t y of the

Inform ation its e lf, t h e Board n o t e s In t h e second

statem ent of t h e Co n c e p t u a l Framework t h a t

u n d e r s t a n d a b I I I t y can be enhanced t h r o u g h r e q u i r i n g the

1® F I n a n c I a I A c c o u n t i n g S t a n d a r d s B o a r d , S t a t e m e n t of
F i n a n c i a l A c c o u n t i n g C o n c e p t s No. 1 . p a r a g r a p h 3 6 .
 128

d isclo su re of inform ation t h a t was n o t p r e v i o u s l y

a v a I I a b I e . 1®

The r e l a t i o n s h i p between u n d e r s t a n d a b I I I t y and push

down a c c o u n t i n g can be ap pro ach ed from s e v e r a l

p ersp ectives. One c o n s i d e r a t i o n Is w h e t h e r push down

accounting Its e lf Is u n d e rs ta n d a b le . T h i s q u e s t i o n must

be answered a f f i r m a t i v e l y . If fin a n cial statement users

can u n d e r s t a n d and a c c e p t t h e p r e m i s e t h a t the p a r e n t's

a c q u is itio n c o s t e s t a b l i s h e s a new b a s i s o f a c c o u n t i n g on

the co n solidated statem ents, the co n ten tion that th is

same a c q u i s i t i o n e s t a b l i s h e s a new c o s t b a s i s for the

s u b s i d i a r y s h o u l d be u n d e r s t a n d a b l e . There a re

u n q u e s t i o n a b l y numerous r a m i f i c a t i o n s o f Its practical

im plem entation t h a t might In itia lly impede

u n d e r s t a n d a b I I I t y , such as r e d u c t i o n s in n e t Income and

chan ges in r a t i o a n a lys is. However, these p o t e n t ia l

p r o b l e m a r e a s c o u l d p r o b a b l y be e x p l a i n e d to fin a n c ia l

u sers through a d d i t i o n a l disclosure.

A second c o n s i d e r a t i o n o f th e understandabI I I t y of

push down a c c o u n t i n g is w h e t h e r o r not I t makes t h e

fin a n cial s t a t e m e n t s t h e m s e l v e s more u n d e r s t a n d a b l e .

This is a more s u b j e c t i v e I s s u e t o a d d r e s s bec au se v a l i d

arg um en ts e x i s t on bo th s i d e s . Proponents of push down

a c c o u n t i n g w ou ld a r g u e t h a t Its use makes t h e fin a n c ia l

s t a t e m e n t s more u n d e r s t a n d a b l e b ec au se t h e y r e f l e c t the

^ F i n a n c i a l A c c o u n tin g S ta n d a rd s B o ard, S ta te m e n t of
Financial Accounting Concepts No. 2 . p a ra g ra p h 41.
 1 29

same d a t a r e p o r t e d In t h e c o n s o l i d a t e d statem ents. On

the other hand, c ritic s would c l a i m that

understandabI I I t y w i l l be i m p a i r e d when f i n a n c i a l

s t a t e m e n t s p r e p a r e d u s i n g push down a c c o u n t i n g a r e

compared t o t h e same compa ny's f i n a n c i a l statem ents

before a c q u is itio n . T h i s pr obl em c o u l d most lik e ly be

overcome w i t h adequate d is c lo s u r e .

The FASB's c o n s i d e r a t i o n o f the c h a r a c t e r is t ic of

understandabI I I t y does n o t f o c u s on d e g r e e s o f

understandabI I I t y . Rather, the B o a rd 's concern appears

t o be w h e t h e r o r not a g i v e n a c c o u n t i n g method o r

disclosure Is u n d e r s t a n d a b l e t o " br oa d c l a s s e s o f

d e c i s i o n m a k e r s . " 20 Even though s p e c i f i c aspects of the

l o g i c and pu r p o se o f push down a c c o u n t i n g may r em ai n

q u e s t i o n a b l e t o some i n d i v i d u a l s , th e general population

of fin a n cial s t a t e m e n t s u s e r s s h o u l d be a b l e to

u n d e r s t a n d t h e t e c h n i q u e as w e l l as t h e y u n d e r s t a n d

various other accounting requirem ents, for e x a m p le ,

pensions, leases, and d e f e r r e d taxes. This thought is

s u p p o r t e d by t h e B o a r d ' s summary s t a t e m e n t on

understandabI I I t y :

The Board e s t a b l i s h e s c o n c e p t s and s t a n d a r d s

f o r g e n e r a l pu rp o se e x t e r n a l f i n a n c i a l
r e p o r t i n g by c o n s i d e r i n g t h e needs o f broad
c l a s s e s o f d e c i s i o n makers and c a n n o t base i t s
d e c i s i o n s on t h e s p e c i f i c c i r c u m s t a n c e s o f
I n d i v i d u a l d e c i s i o n m a k e r s . 21

20|b |d .

21 I b i d .
 13 0

D e c is io n Usefulness

D e c is io n u s e fu ln e s s suggests t h a t b e f o r e companies

s h o u l d be r e q u i r e d to report s p e c ific in fo rm atio n , the

I n f o r m a t i o n s h o u l d be u s e f u l f o r d e c is i o n making. Like

understandabI I I t y , t h i s c h a r a c t e r i s t i c Is a u s e r - s p e c i f i c

q u a lity and w i l l a c c o r d i n g l y v a r y by in d iv id u al. The

B oard's prim ary In terest regarding th is c h a ra c te ris tic

c e n t e r s on t h e i r own s t a n d a r d s e t t i n g process: if

Inform ation is not u s e fu l for d e c is io n making, t h e Board

s h o u l d no t be r e q u i r i n g it. The B o a r d ' s c o n c e r n w i t h the

amount o f inform ation required Is e v id e n t In t h e

fo llo w in g statem ent:

. . . t h e B o a r d , wh ic h must t r y t o c a t e r t o
many d i f f e r e n t u s e r s w h i l e c o n s i d e r i n g t h e
bur de ns p l a c e d on t h o s e who have t o p r o v i d e
Inform ation, con stantly treads a fin e lin e
between r e q u i r i n g d i s c l o s u r e o f t o o much
I n f o r m a t i o n and r e q u i r i n g t o o l i t t l e . 22

Since it Is a u s e r - s p e c i f i c q u a lity , there are

d iffic u ltie s inherent in e x a m i n i n g t h e c h a r a c t e r i s t i c of

usefulness alone. Chambers n o t e s t h a t :

I t Is a l m o s t I m p o s s i b l e t o ima gin e how a

c o m p l e t e s t y l e o f a c c o u n t i n g may be t e s t e d f o r
usefulness. U s e r s a r e many and v a r i e d . Their
c i r c u m s t a n c e s , and t h e i r s p e c i f i c i n t e r e s t s in
t h e c o r p u s o f i n f o r m a t i o n In a g i v e n s e t o f
f in a n c ia l statem ents, are v a rie d . And i f t h e y
' f i n d u s e f u l' the info rm ation they are g iven,
I t may w e l I be because t h e r e is no o t h e r
i n f o r m a t i o n by w h ic h t h e y can Judge I t s
usefulness. These may be r e a s o n s why
a c c o u n t a n t s have not been e x p l i c i t ab o ut
u s e f u l n e s s ; why t h e word I t s e l f o r t h e idea
c r o p s up and v a n i s h e s i n t e r m i t t e n t l y In

2 2 lbid., paragraph 36.

 131

accounting e x p o s itio n s , l i k e L ew is C a r r o l l ' s

CheshI r e c a t . 22

Although d e c is io n usefulness I s d e s c r i b e d as a u s e r -

s p e c ific q u a l i t y , 24 It c o u l d be d e s c r i b e d as a t h r e s h o l d -

type q u a l i t y for recognition of other character I s t I c s .

If I n f o r m a t i o n un de r c o n s i d e r a t i o n does not pass t h e

usefulness t e s t , t h e n any r e m a i n i n g e v a l u a t i o n o f It is

p o in tles s. U s e f u l n e s s o f any g i v e n I n f o r m a t i o n must be

ap pro ac he d from Its Impact on br o ad c l a s s e s o f fin a n c ia l

s t a t e m e n t u s e r s bec aus e It Is d i f f i c u l t , if not

im possible, t o make g e n e r a l i z a t i o n s regarding usefulness

for in d iv id u al fin a n cial statement users. The Board

recognizes t h i s p o i n t as f o l l o w s :

In t h e l a s t a n a l y s i s , each d e c i s i o n maker
Judges w ha t a c c o u n t i n g I n f o r m a t i o n is u s e f u l ,
and t h a t Judgment is i n f l u e n c e d by f a c t o r s such
as t h e d e c i s i o n s t o be made, t h e methods o f
d e c i s i o n making t o be u se d , t h e I n f o r m a t i o n
a l r e a d y possessed or o b t a i n a b l e from o t h e r
s o u r c e s , and t h e d e c i s i o n m a k e r ' s c a p a c i t y
(a lo n e or w it h p r o fe s s io n a l h e lp ) to process
the In fo rm a tio n .2®

Since d e c is io n usefulness is a q u a li t y that relate s

to the fin a n c ia l statem ent user rather th an t h e

Inform ation Its e lf, t h e u s e f u l n e s s per se o f push down

a c c o u n t i n g c a n n o t be a s s e s s e d . Its im p o r ta n ce in t h e

2 ^ R . ~ C h a m b e r s , " U s e f u l n e s s — The V a n i s h i n g Pr e m is e
in A c c o u n t i n g S t a n d a r d S e t t i n g , " Abacus 15 (December
1 9 7 9 ) : 73 .

24F ln a n c l a l Accounting S tandards Board, S tatem ent of

F i n a n c i a l A c c o u n t i n g C o n c e p t s No. 2 . page 15.

25lbid., paragraph 36.

 132

d e c i s i o n making p r o c e s s Is a d d r e s s e d In t h e s e c t i o n s that

f o I I ow.

Re Ie v a n c e

R e l e v a n c e has been d e f i n e d by t h e FASB as one o f the

primary q u a l i t i e s t h a t makes a c c o u n t i n g Inform ation

useful for dec I s l o n - m a k I n g . 26 In Its Statem ent o f Basic

A c c o u n t i n g T h e o r y , t h e AAA d e s c r i b e s r e l e v a n c e as t h e

prim ary q u a l i t a t i v e ob jective of fin a n c ia l r e p o r t i n g . 27

Relevant i n f o r m a t i o n can be d e f i n e d as inform ation that

has t h e c a p a c i t y to "make a d i f f e r e n c e " in t h e d e c i s i o n ­

making p r o c e s s . 2 ®

The r e l e v a n c e q u e s t i o n I s t h e e s s en ce o f e v a l u a t i n g

the d e s i r a b i l i t y of push down a c c o u n t i n g . If push down

a c c o u n t i n g can be shown t o be b o t h c o n s i s t e n t w i t h GAAP

and more r e l e v a n t to fin a n cial statem ent users than

inform ation no t based on push down a c c o u n t i n g , a strong

case e x i s t s for its adoption. But if it fa ils the

relevance t e s t , even though i t may be In c o m p l i a n c e w i t h

GAAP, the case fo r advocating Its implem entation is

weakened c o n s i d e r a b l y .

L i k e most o f the other q u a lita tiv e c h a ra c te ris tic s ,

relevance w i l l v a r y bo th a c c o r d i n g to the catego ry of

fin a n c ia l s t a t e m e n t user and t h e individu al making t h e

26 I b I d . , page x .

27M o s t , p . 9 1 .

2 ® F l n a n c l a l A c c o u n t i n g S t a n d a r d s Bo ar d, S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g Co nce pt s No. 2 . p a r a g r a p h 4 7 .
 133

decision. Though It is beyond t h e scope o f th is project

to consider the individu al decision-m aking process, push

down a c c o u n t i n g Is e v a l u a t e d a c c o r d i n g to the g e n e ra lize d

needs o f the c a te g o rie s of fin a n cial sta te m e n ts users

Id e n tifie d by t h e FASB.

I n v e s t o r s — P a r e n t Co. S tockholders. Relevance fo r

t h e p a r e n t company s t o c k h o l d e r s can be a d d re s s e d from

several p ersp ectives. It is g e n e r a l l y co n te n d e d t h a t

p a r e n t company s t o c k h o l d e r s would be a d v o c a t e s o f push

down a c c o u n t i n g because t h e y would p r e f e r t o see t h e

p u r c h a s e p r i c e p a i d by t h e i r company r e c o r d e d on t h e

s u b s id ia ry 's books. But i t c o u l d a l s o be ar gu e d t h a t the

su b sid iary's fin a n c ia l s t a t e m e n t s a r e not relevant for

p a r e n t company s h a r e h o l d e r s ' d e c i s i o n making pr oc e ss

re g a rd le s s o f whether or not push down a c c o u n t i n g is

u tiliz e d . Proponents o f t h i s v i e w p o i n t would co n te n d

that p a r e n t company s t o c k h o l d e r s fin d con solidated

s t a t e m e n t s more r e l e v a n t f o r d e c is io n making. If th is

contention Is t r u e , then It s ho ul d make no d i f f e r e n c e to

them w h e t h e r or n o t push down a c c o u n t i n g Is em ployed.

But If t h e p a r e n t company s h a r e h o l d e r s want t o

evaluate th e ir comp an y's s e p a r a t e h o l d i n g s , t h e y must

look t o t h e s u b s i d i a r y ' s sep arately Is sue d s t a t e m e n t s .

On t h e p r e m i s e t h a t t h e p a r e n t company s h a r e h o l d e r s w i l l

use t h e s e p a r a t e l y Iss ued s t a t e m e n t s , w h ic h b a s i s o f

a c c o u n t i n g would be most r e l e v a n t for them? T h i s group

of fin a n cial s t a t e m e n t u s e r s would most lik e ly be push

 13 4

down a c c o u n t i n g a d v o c a t e s . Costs I n c u r r e d by t h e

p r e v i o u s owners a r e irre le v a n t in p a r e n t company

shareholders' d e c i s i o n making p r o c e s s . T h e i r company has

acq uired th is s u b s i d i a r y and, for the b e tte r or the

worse, the a c q u is itio n w i l l affect th e market v a lu e of

th e ir stock. A ccordingly, a n a l y s e s made by p a r e n t

company s h a r e h o l d e r s t o ass es s f u t u r e cash flows w i l l

most lik e ly f o c u s on t h e p r i c e t h e i r company has p a i d for

the stock. They w i l l be interested In c a l c u l a t i n g

v a r i o u s measures o f return according to costs e s ta b lis h e d

by t h e a c q u i s i t i o n .

In v e s to rs — M in o r ity Stockholders. It is g e n e r a l l y

contended t h a t m i n o r i t y s h a r e h o l d e r s wo uld oppose push

down a c c o u n t i n g . The argument can be made t h a t from

th e ir p ersp ective , an a c q u i s i t i o n of stock in t h e i r

company by o u t s i d e r s Is not r e l e v a n t for pu rp os es o f

th e ir d e c is io n making. Even If an a c q u i s i t i o n of stock

can J u s t i f y a new c o s t b a s i s , the m in o r ity stockholders

had no p a r t In t h e a c q u i s i t i o n . Accordingly, c ritic s of

push down a c c o u n t i n g would co n te n d t h a t no new c o s t b a s i s

s h o u ld be e s t a b l i s h e d for the m in o r it y shareholders.

But a c a s e c o u l d be made t h a t t h e p r i c e p a i d by t h e

new owners is r e l e v a n t for the m in o r it y shareholders. A

transaction has u n d e n i a b l y o c c u r r e d , and t o r e f u s e t o

recog nize t h is on t h e books o f t h e s u b s i d i a r y may be

d ep riving the m in o r ity shareholders of some r e l e v a n t

Inform ation. The a s s e t c o s t s e s t a b l i s h e d by t h e new

 1 35

owners In t h e a c q u i s i t i o n may be Ju s t as r e l e v a n t for the

m i n o r i t y owners who w e r e n o t d i r e c t l y a p a rt of the

exchange, beca use t h i s r e p r e s e n t s t h e p r i c e p a i d by o t h e r

shareholders for at least a m a jo r ity of th e ir firm .

The m i n o r i t y s h a r e h o l d e r s do have a d d i t i o n a l

concerns t h a t a r e p r o b a b l y no t s h a r e d by t h e p a r e n t

company ow ne rs . S p e c ific a lly , r e l e v a n c e may be Impaired

If co m p a ra b ility Is Impeded. Push down a c c o u n t i n g

undeniably w i l l d is ru p t c o m p a ra b ility beca use t h e a s s e t

v a l u a t i o n s and t h e r e s u l t a n t net Income c a l c u l a t i o n s w i l l

be a l t e r e d . For e x a m p le , ap p licatio n of push down

accounting w i l l u su ally resu lt in a r e d u c t i o n o f net

income. If the m in o rity shareholders attem pt t o compare

current y e a r e a r n i n g s computed u s i n g push down a c c o u n t i n g

w ith p rio r years' e a r n i n g s c a l c u l a t e d on t h e o l d c o s t

b as is, t h e company w i l l ap p ea r t o be less p r o f i t a b l e .

The c o m p a r a b i l i t y p r ob le m c o u l d p e r h a p s be r e s o l v e d

through a d d it io n a l disclosures.

CredI t o r s . The p r i m a r y c o n c e r n o f c r e d i t o r s s ho ul d

be t h e a b i l i t y of the debtor to generate s u f f i c i e n t cash

flow s to repay the debt Incurred. C o n tra d Ic to ry opinions

e x i s t con cerning whether or not c o n s o l i d a t e d fin a n c ia l

s t a t e m e n t s p r o v i d e t h e most u s e f u l means f o r

accom plishing t h i s o b jective. Walker notes t h a t :

Some w r i t e r s have a s s e r t e d t h a t c o n s o l i d a t e d
s t a t e m e n t s a r e o f l i t t l e use t o c r e d i t o r s o f
s u b s i d i a r i e s and t h a t t h e y s h o u l d Iqok t o t h e
f in a n c ia l statem ents of the in d iv id u a l
s u b sid iaries. O t h e r s have c l a i m e d t h a t
c o n s o l i d a t e d s t a t e m e n t s do Indeed g i v e a
 136

g e n e r a l I m p r e s s i o n o f w h e t h e r o r not r e l a t e d
companies wo uld be a b l e t o s a t i s f y t h e c l a i m s
o f c r e d i t o r s . 29

If con so lid ated fin a n cial statem ents provide

s u ffic ie n t inform ation for c re d ito rs , t h e n t h e push down

Issue Its e lf is n o t relevant for th is group o f users.

Ho wever, t h e p r e p o n d e r a n c e o f e v i d e n c e p r e s e n t e d by

Walker appears to support the c o n te n tio n that c re d ito rs

do need t h e s u b s i d i a r i e s ' separate fin a n c ia l statem ents.

A ccordingly, th e remainder of th is section Is developed

on t h e p r e m i s e t h a t separate fin a n c ia l statements are

relevant for c re d ito rs .

In e v a l u a t i n g relevance for c re d ito rs , two s e p a r a t e

catego ries s h o u l d be c o n s i d e r e d : (1) c r e d ito r s w ith

e x is tin g lo ans t o the su b s id ia ry a t the tim e of

a c q u is itio n , and (2) cred ito rs extending c r e d i t afte r the

acq u is itio n . Push down a c c o u n t i n g is d i s c u s s e d from t h e

persp ective of bo th gr o u p s .

A l e n d e r who has e x t e n d e d c r e d i t p rior to the

a cq u is itio n has done so by e v a l u a t i n g t h e compa ny's

fin a n cial p o s itio n at the tim e th e loan was made and

a s s e s s i n g t h e comp an y's f u t u r e d e b t - p a y i n g a b ility based

on t h a t fin a n cial po s itio n . A p p licatio n of push down

accounting w i l l u s u a l l y enhance p e r c e p t i o n s o f the

d e b to r's fin a n c ia l co n d itio n beca use a s s e t s and e q u i t y

g e n erally Increase. Thus de b t as a p e r c e n t a g e o f e i t h e r

2 9 R . G. W a l k e r , "An E v a l u a t i o n o f t h e I n f o r m a t i o n
Conveyed by C o n s o l i d a t e d S t a t e m e n t s , " Abacus 12 (December
1976): 7 9-80 .
 13 7

a s s e t s or e q u i t y w i l l decrease, and a r a t i o a n a ly s is of

t h e company w ou ld I n d i c a t e an Improved f i n a n c i a l

s itu a tio n . But, in r e a l i t y , t h e r e has been no change in

the s u b s id ia ry 's debt-paying a b i l i t y . The Increase in

a s s e t s and e q u i t y has not been accompanied by an Infusion

o f cash and , therefore, the a p p lic a t io n or non ap p lica tio n

of push down a c c o u n t i n g re a lly has no economic b e a r i n g on

the firm 's a b ility to repay d e b t. For c o m p a r a b i l i t y In

analyzing t h e comp an y's c o n t i n u i n g a b i l i t y to repay

outstanding debt, t h e s e c r e d i t o r s would most lik e ly

oppose push down a c c o u n t i n g u n l e s s a d d i t i o n a l disclosures

a re provided t o a l l o w c om pa ri so n s w i t h p r e v i o u s y e a r s .

P otential cred ito rs w ill not have t h e c o m p a r a b i l i t y

pr ob le m s e x p e r i e n c e d by d e b t h o l d e r s a t the tim e of

acq u is itio n . The In te re s ts of p o te n tia l c red ito rs ap p ea r

sim ila r to the In te re s ts of t h e p a r e n t company

shareholders. Both groups a r e Interested in an

ass essment o f f u t u r e cash f l o w s w i t h o u t the c o m p a ra b ility

pr o b le m s e x p e r i e n c e d by m i n o r i t y s h a r e h o l d e r s and

c r e d i t o r s w it h o u ts ta n d in g debt a t the tim e of

acq u is itio n . For p o t e n t i a l cred ito rs, push down

a c c o u n t i n g wo uld p r o b a b l y be more r e l e v a n t bec aus e it

re fle c ts the cost basis e s ta b lis h e d by a c q u i s i t i o n price

of t h e new o w n er s.

P r e d i c t i v e V a l u e and Feedback V a l u e . In d e v e l o p i n g

the h ie ra rc h y of q u a lita tiv e c h a ra c te ris tic s , t h e FASB

d e s c r i b e s p r e d i c t i v e v a l u e and fe e d b a c k v a l u e as
 13 8

components o f relevance. Inform ation w i l l be r e l e v a n t if

It Improves t h e d e c i s i o n m a k e r ' s c a p a c i t y to p r e d i c t or

If it con firm s or c o r r e c ts e a r l i e r e x p e c ta tio n s ." These

a ttrib u te s of the relevance of push down a c c o u n t i n g w er e

discussed in t h e p r e c e d i n g s e c t i o n s .

TImeI I n e s s . The Board d e s c r i b e s t i m e l i n e s s as t h e

th ird aspect of relevance. If inform ation i s not

a v a ila b le u n til long a f t e r an e v e n t has o c c u r r e d , it has

no v a l u e for d e c i s i o n making and w i l l therefore not be

relevan t. The FASB n o t e s t h a t , " T im e lin e s s a lo n e cannot

make inform ation relevan t, but a la ck o f t i m e l i n e s s can

rob Inform ation of relevance i t might o t h e r w is e have

h a d . 1,31

Tim eliness s h o u ld not be a f a c t o r in t h e e v a l u a t i o n

of push down a c c o u n t i n g . The d e c i s i o n o f w h e t h e r o r not

to e s ta b lis h a new b a s i s o f a c c o u n t i n g is a o n e - t i m e

d e c i s i o n made d u r i n g t h e y e a r o f a c q u i s i t i o n . If push

down a c c o u n t i n g I s not a d o p t e d , the accounting process of

the s u b s id ia ry w i l l not be a f f e c t e d by t h e a c q u i s i t i o n

and t i m e l i n e s s s h o u ld no t be Im paired. N either s ho ul d

tim elin ess be a f f e c t e d if push down a c c o u n t i n g is

employed beca use a f t e r In itia lly r e c o r d i n g t h e new ly

established v a l u e s as c o s t , t h e a c c o u n t i n g p r o c e s s s h o u ld

continue v i r t u a l l y as b e f o r e . T h e r e s h o u ld be no e f f e c t

3 0 F I n a n c I a I A c c o u n t i n g S t a n d a r d s Bo ar d, S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g Co nc ep ts No. 2 . p a r a g r a p h 5 1 .

31 I b i d . , p a r a g r a p h 56.
 1 39

on t i m e l i n e s s o f the p re p a ra tio n of the f in a n c i a l

statem ents.

Re I lab I I I t v

R e lia b ility Is d e f i n e d by t h e FASB as b e i n g one o f

the primary d e c is io n - s p e c if ic q u a litie s that accounting

info rm ation s h o u ld p os se ss . The Board n o t e s , "T h a t

info rm ation s h o u ld be r e l i a b l e as w e l l as r e l e v a n t Is a

notion that is c e n t r a l t o a c c o u n t i n g . " 32

On t h e s u r f a c e , push down a c c o u n t i n g a p p e a r s t o be

re lia b le bec au se its i m p l e m e n t a t i o n does n o t r e q u i r e the

c a lc u la tio n o f any new amounts. All of the a c q u is itio n

prices t o be r e c o r d e d on t h e s u b s i d i a r y ' s books have

a l r e a d y been c a l c u l a t e d for the consolidated fin a n cial

statem ents. The argument c o u l d be made t h a t If these

amounts a r e re lia b le for the con solidated statem ents,

t h e y must a l s o be r e l i a b l e for the s u b s id ia r y 's

sep arately Is su ed s t a t e m e n t s . Nonetheless, a th or o u g h

exam ination of the r e l i a b i l i t y of fin a n cial statement

inform ation p r e p a r e d a c c o r d i n g t o push down a c c o u n t i n g

requires further ana lys is. The FASB l i s t s three

attrib u te s that r e l i a b l e accounting Inform ation sh ou ld

p o s se ss : v e rifia b ility , n e u tra lity , and r e p r e s e n t a t i o n a l

f a i t h f u l n e s s . 33 The f o l l o w i n g p a r a g r a p h s ex am in e t h e s e

c h a ra c te ris tic s In more d e t a i l .

. 32 I b I d . , paragraph 58.

33 Ib i d . , page 15.
 140

V e rIf ta b !I(tv . The FASB d e s c r i b e s t h i s

c h a ra c te ris tic as f o l l o w s :

The q u a l i t y o f v e r i f i a b i l i t y c o n t r i b u t e s t o t h e
u s e f u l n e s s o f a c c o u n t i n g i n f o r m a t i o n beca use
t h e p u r p o s e o f v e r i f i c a t i o n is t o p r o v i d e a
s i g n i f i c a n t degree o f assurance t h a t a c c o u n tin g
m eas ur es r e p r e s e n t wh at t h e y p u r p o r t t o
r e p r e s e n t . 34

The B o a r d ' s fu rth er discussions of v e r i f i a b i l i t y describe

It as a method o f m i n i m i z i n g b o t h m ea s ur er b i a s and

measurement b i a s . V e rific a tio n Is co n c e r n e d w i t h the

accuracy of the data, not Its usefulness. The FASB n ot es

that, "V e rific a tio n con tributes little or n o th in g to wa rd

insuring t h a t measures used a r e relevant to the decisions

f o r w hi c h t h e Inform ation Is i n t e n d e d t o be u s e f u l . " 33

T h e r e s h o u l d be no q u e s t i o n c o n c e r n i n g t h e

v e rifia b ility o f push down a c c o u n t i n g . E stablishm ent of

a new b a s i s o f a c c o u n t i n g does n o t r e q u i r e the

c a lc u la tio n of new amounts t h a t would be s u b j e c t to

a d d itio n a l v e rific a tio n . The pushed down amounts

r e c o r d e d by a company can be e a s i l y v e rifie d by

co m p a ri so n t o t h e amounts r e p o r t e d in t h e c o n s o l i d a t e d

fin a n c ia l statem ents. It s h o u l d be p o i n t e d o u t that some

of t h e amounts on t h e c o n s o l i d a t e d fin a n c ia l statem ents

a r e based on e s t i m a t e s , but th e Issue here is

v e rifia b ility of t h e push-down v a l u e s . A ccordingly, the

v e rifia b ility of t h e amounts r e p o r t e d on t h e c o n s o l i d a t e d

34 I b I d . , p a r a g r a p h 81 .

35 I b I d .
 141

statements is a c o n s o l i d a t i o n s issue, not re a lly a push

down issue.

NeutraI I t v . The FASB d e s c r i b e s n e u tra lity as h a v in g

more t o do w i t h the standard s e t t in g process than w it h

a p p lic a tio n of those standards in t h e p r e p a r a t i o n o f

fin a n c ia l reports. The Board n o t e s t h a t :

N e u t r a l i t y means t h a t e i t h e r In f o r m u l a t i n g or
Implementing s ta n d a rd s , th e p rim a ry concern
s h o u l d be t h e r e l e v a n c e and r e l i a b i l i t y o f t h e
in fo rm a tio n t h a t r e s u l t s , not th e e f f e c t t h a t
t h e new r u l e may have on a p a r t i c u l a r
I n t e r e s t . 36

C o n sid eratio n of n e u tra lity has s i g n i f i c a n t

ra m ific a tio n s for the th e o r e tic a l exam ination of push

down a c c o u n t i n g . Push down a c c o u n t i n g has been

c ritic ize d bec au se o f Its p otential negative Impact on

net Income and its Impact on r a t i o ana lys is. But

according t o t h e FASB's s t a n c e on n e u t r a l i t y , the

resu ltan t effect of push down a c c o u n t i n g on t h e fin a n c ia l

s t a t e m e n t s s h o u l d not be a f a c t o r In e v a l u a t i n g its

a c c e p ta b ility . If r e l e v a n c e and r e l i a b i l i t y a r e enhanced

by u s i n g push down a c c o u n t i n g , t h e n any n e g a t i v e impacts

that I t may have on n e t income s h o u ld be Ignored.

From an o v e r a l l standard s e t t in g p ersp ective, the

Board n o t e s t h a t it is u n d e s i r a b l e for the stan d a rd -

s e ttin g p r o c e s s t o be p o l i t i c a l l y m o t i v a t e d , bec aus e

36 I b I d . , paragraph 98.
 142

". . . p o litic a lly m o t i v a t e d s t a n d a r d s would q u i c k l y lose

th e ir c re d ib ility . . . "37 This view p o in t Is w e ll

summarized by a s t a t e m e n t made by t h e c h a ir m a n o f t h e SEC

concerning o i l and gas a c c o u n t i n g :

I f I t becomes a c c e p t e d o r e x p e c t e d t h a t
a c c o u n t i n g p r i n c i p l e s a r e d e t e r m i n e d or
m o d i f i e d In o r d e r t o s e c u r e pu rp o se s o t h e r t h a n
economic mea su rem ent — even such v i r t u o u s
p u r p o s e s as e n e r g y p r o d u c t i o n — we assume a
g r a v e r i s k t h a t c o n f i d e n c e In t h e c r e d i b i l i t y
o f ou r f i n a n c i a l I n f o r m a t i o n system w i l l be
underm I n e d . 33

R epresentational fa ith fu ln e s s . The FASB d e f i n e s

representational fa ith fu ln ess as " . . . c o r r e s p o n d e n c e or

ag r ee m en t between a measure o r d e s c r i p t i o n and t h e

phenomena it purports to r e p r e s e n t . " 39 The Board f u r t h e r

discusses r e p r e s e n ta tio n a l fa ith fu ln e s s In te r m s o f the

degrees o f the c h a r a c t e r is t ic present, p recision, and

lack of bias.

Is push down a c c o u n t i n g r e p r e s e n t a t I o n a I Iy f a i t h f u l ?

T h e r e s h o u ld be no q u e s t i o n a b o u t its precision because

t h e pushed down amounts t o be r e c o r d e d have a l r e a d y been

calculated for the consolidated fin a n c ia l statem ents.

The amounts r e c o r d e d f o r cash and a c c o u n t s r e c e i v a b l e

w ill u n d e n i a b l y be more p r e c i s e t h a n t h e amounts r e c o r d e d

37 I b I d . , paragraph 104.

3 ® H ar ol d W i l l i a m s , C h a ir m a n , S e c u r i t i e s and Exchange
Commission, " A c c o u n t in g P r a c t i c e s f o r O i l and Gas
P r o d u c e r s , " ( W a s h i n g t o n , D . C . , 1 9 7 8 ) , p. 12, qu o te d in
F i n a n c i a l A c c o u n t i n g S t a n d a r d s B o ar d , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g Co nce pt s No. 2 . p a r a g r a p h 104.

39lbid., paragraph 63.

 14 3

for p l a n t and e q u i p m e n t , bu t t h i s Is p a r t o f the

estim ation Inherent In t h e a c c o u n t i n g p r o c e s s , not a

r e s u lt of push down a c c o u n t i n g . The p r e c i s i o n o f push

down a c c o u n t i n g its e lf sh ou ld not be a t is s u e because It

does n o t d i f f e r from t h e p r e c i s i o n o f the con solidated

fin a n c ia l statem ents. The a s s e r t i o n that fin a n cial

Info rm atio n s h o u ld n o t be b i a s e d Is q u i t e s i m i l a r to the

claim that it s h o u l d be n e u t r a l . T h i s c o n c e p t was

discussed In a p r e v i o u s s e c t i o n .

It appears t h a t the cen tral Issue in a s s e s s i n g

representational f a I t.hf u I ness Is how w e l l fin a n cial

s t a t e m e n t s p r e p a r e d u s i n g push down a c c o u n t i n g a g r e e w i t h

t h e phenomena t h a t they purport to represent. Upon c l o s e

scru tin y, th is question Is e s s e n t i a l l y one o f

m ea su rem ent . Although th e accounting p ro fe s s io n has

experim ented w ith o th e r bases o f rep o rtin g , most a s s e t s

are r e p o r t e d based on h i s t o r i c a l cost. Arguments f o r and

against h is to ric a l c o s t w ere no te d in C h a p t e r 3 . Some

g r oup s co n te n d t h a t h is to ric a l cost is t h e b e s t v a l u a t i o n

mea su re and op p o n en t s c l a i m t h a t o t h e r measures would be

su p erio r. Nonetheless, i t was c o n c l u d e d t h a t h is to ric a l

cost Is t h e o n l y v a l u a t i o n method a p p l i c a b l e t o push down

accounting t h a t e x is ts w ith in the c u rre n t framework o f

GAAP. The d e t e r m i n a t i o n o f w h e t h e r o r not h i s t o r i c a l

cost is t h e o p t i m a l valuation basis is beyond t h e scope

of th is study.
 14 4

ComparabI I I t v / C o n s I s t e n c v

The FASB d e s c r i b e s c o m p a r a b i l i t y , Including

con sis ten cy, as h a v in g an a f f e c t on b o t h r e l e v a n c e and

re lia b ility . The Board n o t e s t h a t :

I n f o r m a t i o n a b o u t an e n t e r p r i s e g a i n s g r e a t l y
In u s e f u l n e s s I f I t can be compared w i t h
s i m i l a r i n f o r m a t i o n ab o u t o t h e r e n t e r p r i s e s and
w i t h s i m i l a r I n f o r m a t i o n ab o ut t h e same
e n t e r p r i s e f o r some o t h e r p e r i o d o r some o t h e r
p o i n t In t i m e . 4 °

U n lik e the prim ary d e c is i o n - s p e c if i c q u a litie s of

r e l e v a n c e and r e l i a b i l i t y , a p a rtic u la r set of

i n f o r m a t i o n c a n n o t be s a i d t o be c o m p a r a b l e .

C o m p arability i s not a q u a l i t y o f Inform ation, but is

Instead a q u a l i t y of the r e la t io n s h ip between two o r more

sets of I n f o r m a t i o n . 41

The need f o r c o m p a r a b i l i t y and c o n s i s t e n c y Is

probably a g re a te r stum bling block to Im p le m e n ti n g push

down a c c o u n t i n g t h a n any o f the o th er q u a lita tiv e

c h a ra c te ris tic s . Other than its potential vio latio n of

h is to ric a l cost, t h e s t r o n g e s t argument a g a i n s t push down

a c c o u n t i n g may w e l l be Its negative impact on

c o m p a r a b i l i t y and c o n s i s t e n c y . By e m p l o y i n g push down

accounting, a company e s t a b l i s h e s a new b a s i s o f

accounting that w ill r e n d e r com pa ris on o f the c u rre n t

y e a r's fin a n c ia l statem ents w ith those in p r e v i o u s y e a r s

v irtu a lly m eaningless. Comparisons o f balance sheets

4 0 1bId., paragraph 111.

41lbld., paragraph 116.

 145

between y e a r s w i l l be I m p a ir e d because t h e a s s e t v a l u e s

w l I I n o r m a l l y be h i g h e r , and t h e r e w i l l be a

corresponding increase In t h e e q u i t y s e c t i o n . Increased

asset valu atio n s w il l resu lt In h i g h e r d e p r e c i a t i o n

charges, and p e r h a p s a m o r t i z a t i o n o f g o o dw ill, th us

causing a lower n e t income. Accordingly, th is w ill make

comparisons o f Income s t a t e m e n t s between y e a r s e x t r e m e l y

d iffic u lt, if not Im possible. H o lly , Spede, and C h e s t e r

note th a t It Is c o n c e i v a b l e t h a t some companies m i g h t be

In v l - o l a t l o n o f th eir d e b t agr ee m en ts a f t e r I m p le m en tin g

push down a c c o u n t i n g . 42

The argument c o u l d be advanced t h a t u tiliz in g push

down a c c o u n t i n g enhances c o m p a r a b i l i t y bec aus e It results

in f i n a n c i a l s t a t e m e n t s t h a t a r e p r e p a r e d on a b a s i s

comparable w it h th a t of the co n solidated statements.

Although t h i s Is t r u e , it Is a f a i r l y weak ar gu m en t.

P re s e n ta tio n of separate fin a n c ia l statements of a

su b sid iary a f t e r acq u is itio n Im plies t h a t inform ation is

needed t h a t ca n n o t be o b t a i n e d from t h e c o n s o l i d a t e d

statem ents. Accordingly, If the s u b s id ia r y 's separate

s t a t e m e n t s a r e needed f o r d e c i s i o n m a k i n g , and if

c o m p a ra b ility/co n sis ten cy is t h e o n l y issue in q u e s t i o n ,

u s e f u l n e s s would be enhanced by making t h e s e s t a t e m e n t s

c o m p a r a b le w i t h s t a t e m e n t s o f the s u b s id ia ry for previous

““^ C h a r l e s E. H o l l y , Edward C. Spede, and M i c h a e l C.

C h e s t e r , J r . , "The Push-Down A c c o u n t i n g C o n t r o v e r s y , "
Management A c c o u n t i n g 68 ( J a n u a r y 1 9 8 7 ) : 4 0 .
 146

years rather than f o c u s i n g on c o m p a r a b i l i t y w i t h the

con solidated statem ents.

Although i t was c o n c l u d e d in a p r e v i o u s s e c t i o n that

push down a c c o u n t i n g Is more r e l e v a n t for some groups o f

fin a n c ia l statement users, It appears f a i r l y clear that

It does Impair c o m p a r a b il i t y . Then, how s h o u ld

accounting standard s e t t e r s pr oce ed when a t e c h n i q u e

enh ances one d e s i r a b l e q u a l i t a t i v e a c c o u n t i n g

c h a ra c te ris tic at t h e e x p en se o f a n o t h e r d e s i r a b l e

character Is tIc ?

In te re s tin g ly , t h e Board a d d r e s s e s t h e i dea o f two

competing o b j e c t i v e s In t h e s e c t i o n o f t h e Conceptual

Framework on c o n s i s t e n c y . The B o a r d ' s p o s i t i o n is

summarized as f o l l o w s :

C o n s i s t e n t use o f a c c o u n t i n g p r i n c i p l e s from
one a c c o u n t i n g p e r i o d t o a n o t h e r , I f pushed t o o
f a r , can I n h i b i t a c c o u n t i n g p r o g r e s s . No
cha nge t o a p r e f e r r e d a c c o u n t i n g method can be
made w i t h o u t s a c r i f i c i n g c o n s i s t e n c y , y e t t h e r e
is no way t h a t a c c o u n t i n g can d e v e l o p w i t h o u t
c h a n g e . 43

T h e r e must o b v i o u s l y be a t r a d e - o f f between

a c h ie v in g optimal a c c o u n t i n g methods and m a i n t a i n i n g

co m p a ra b ility/co n sis ten cy. A c c o u n t i n g as an a r t is a

re la tiv e ly new d i s c i p l i n e . As r e s e a r c h p r o g r e s s e s so

th at better a c c o u n t i n g methods and a l t e r n a t i v e s are

dev eloped, changes must be made. These chang es w i l l

unavoidably Impact t h e fin a n c ia l statem ents, thus

4 3 F In a n c I a I A ccounting Standards Board, S tatem en t of

F i n a n c i a l A c c o u n t i n g C o n c e p t s No. 2 . p a r a g r a p h 1 2 2 .
 14 7

detractin g from c o m p a r a b i l i t y . But t h i s negative e f fe c t

on c o m p a r a b i l i t y s h o u ld no t be p e r c e i v e d t o be s t r o n g

enough t o n e g a t e a p o s i t i v e ch a n g e. If such a s i t u a t i o n

was a l l o w e d to e x is t , t h e r e wo uld be no f u r t h e r room f o r

progress.

S im ilar t h o u g h t s a r e e x p r e s s e d by H e n d r l k s e n . He

contends t h a t the consistency c o n s tr a in t is v a l i d only

when t h e r e i s a c h o i c e among two o r more equal ly r e I e v a n t

( e m p h a s i s added) and v a l i d procedures. Hendrlksen

p e rc e iv e s consistency in a somewhat d i f f e r e n t lig h t from

t h e FASB; he c o n s i d e r s It t o be a u s e r c o n s t r a i n t . U se rs

w ou ld fin d It d iffic u lt t o make p r e d i c t i o n s based on t i m e

series data th a t a r e not measured and c l a s s i f i e d In t h e

same way o v e r t i m e . 44

Fortunately, t h e pr ob le m s a r i s i n g from Im p le m e n ti n g

a more d e s i r a b l e a c c o u n t i n g method a t t h e exp en se o f

c o m p a r a b i l i t y can g e n e r a l l y be s o l v e d through a d d i t i o n a l

d isclosures. W i t h push down a c c o u n t i n g , In t h e y e a r that

t h e company e s t a b l i s h e s t h e new b a s i s o f accounting,

d i s c l o s u r e s c o u l d be p r o v i d e d t h a t wo uld show t h e e f f e c t

on t h e fin a n c ia l statem ents. Pro forma s t a t e m e n t s c o u l d

be p r e p a r e d t o show t h e r e s u l t s o f o p e r a t i o n s as if push

down a c c o u n t i n g had not been i m p le m en te d . R etroactive

r e s t a t e m e n t o f c u r r e n t y e a r e a r n i n g s and b a l a n c e s h e e t

I n f o r m a t i o n wo uld be more d i f f i c u l t , because it Is

u n lik e ly that evidence e x is t s upon w hi c h t o base a s s e t

44H e n d rIk s e n , p . 73.

 14 8

valuations for e a r l i e r periods. In itia l c o s t was

e s t a b l i s h e d when t h e s u b s i d i a r y a c q u i r e d the assets, and

a new c o s t Is e s t a b l i s h e d when t h e p a r e n t company

com pletes th e purchase t r a n s a c t i o n . In t h e Interim , no

o b j e c t i v e evidence e x i s t s to determ ine " r e t r o a c t i v e cost"

of the assets.

In i t s concluding remar ks on c o m p a r a b i l i t y , the

Board makes an In te re stin g comment:

G re a te r c o m p a r a b il i t y of accounting
I n f o r m a t i o n , w h ic h most p e o p l e a g r e e Is a
w o r t h w h i l e a i m , Is n o t t o be a t t a i n e d by making
u n l i k e t h i n g s look a l i k e any more t h a n by
making l i k e t h i n g s look d i f f e r e n t . The moral
Is t h a t In s e e k i n g c o m p a r a b i l i t y a c c o u n t a n t s
must not d i s g u i s e r e a l d i f f e r e n c e s nor c r e a t e
f a l s e d i f f e r e n c e s . 45

Does Im plem entation of push down a c c o u n t i n g c r e a t e a

"fa ls e d iffe re n c e ," o r does non imp I e m e n t a t I on d i s g u i s e a

"real d ifference"? This Is a d i f f i c u l t but v a l i d

question. It c a n n o t be answered s o l e l y by t h e

exam ination of d e s ir a b le q u a l i t a t i v e c h a r a c t e r i s t i c s

undertaken in t h i s c h a p t e r . If one a d o p t s t h e v i e w p o i n t

t h a t an a c q u i s i t i o n by t h e p a r e n t o f a s u b s i d i a r y is not

a transaction that s h o u ld be r e c o r d e d on t h e books o f the

su b sid iary, t h e n a p p l i c a t i o n o f push down a c c o u n t i n g can

be c r i t i c i z e d as c r e a t i n g a fa ls e d iffe re n c e . On t h e

other hand, proponents o f push down a c c o u n t i n g who

b elieve t h a t an exc hange has t a k e n p l a c e and s ho ul d t h u s

be r e c o r d e d would a r g u e t h a t non Imp I e m e n t a t I on o f push

45 F In a n c I a I A ccounting S tandards Board, S tatem en t of

F i n a n c i a l A c c o u n t i n g C o n c e p t s No. 2 . p a r a g r a p h 11 9 .
 149

down a c c o u n t i n g d i s g u i s e s a r e a l d ifferen c e. This is s u e

must be r e s o l v e d o u t s i d e a c o n s i d e r a t i o n o f d e s i r a b l e

q u a lita tiv e c h a ra c te ris tic s .

Mater I a I I tv

The Board d e s c r i b e s m a t e r i a l i t y Judgments as b e i n g

concerned w it h screens or thresholds. Mater I a I I t y has

many f a c e t s , but It Is e s s e n t i a l l y concerned w i t h both

the r e l a t i v e s ize of an item and t h e n a t u r e o f the Item

I t s e l f . 46 The FASB's p o s i t i o n on m a t e r i a l i t y Is

summarized as f o l l o w s :

The o m i s s i o n o r m i s s t a t e m e n t o f an I tern In a
f i n a n c i a l r e p o r t I s m a t e r i a l I f , In t h e l i g h t
o f surrounding c ircu m stan ce s, th e magnitude of
t h e Item Is such t h a t I t Is p r o b a b l e t h a t t h e
Judgment o f a r e a s o n a b l e pers on r e l y i n g upon
t h e r e p o r t would have been changed o r
I n f l u e n c e d by t h e I n c l u s i o n o r c o r r e c t i o n o f
t h e I t e m . 47

It goes w i t h o u t s a y i n g t h a t push down a c c o u n t i n g can

m a te ria lly affe ct the fin a n c ia l statem ents. Actual

ex a m p le s w e r e c i t e d In e a r l i e r chapters of its impact on

b o t h t h e b a l a n c e s h e e t and income s t a t e m e n t .

Summary

The e f f e c t o f push down a c c o u n t i n g on t h e

q u a lita tiv e c h a ra c te ris tic s that t h e FASB i d e n t i f i e d In

its Conceptual Framework p r o j e c t has been e v a l u a t e d in

th is chapter. The p r i m a r y d e c i s i o n - s p e c i f i c q u a litie s of

r e l e v a n c e and r e l i a b i l i t y w e r e e m p ha si z e d, but a l l of the

46 I h I d . , paragraphs 123-132.

47lbld., paragraph 132.

 150

c h a r a c t e r i s t i c s were c o n s id e r e d . The f o l l o w i n g points

have e v o l v e d from t h i s an a lys is:

1. A p p licatio n of push down a c c o u n t i n g a p p e a r s

c o n s i s t e n t w i t h most o f the q u a l i t a t i v e c h a r a c t e r is t ic s .

For the c h a ra c te r Is t ic s such as c o m p a r a b i l i t y that push

down a c c o u n t i n g a p p e a r s t o v i o l a t e , t h e pr o b le m can

g e n e r a l l y be r e s o l v e d t h r o u g h a d d i t i o n a l disclosure.

2. W he th er o r no t push down a c c o u n t i n g enhances a

p a rtic u la r c h a ra c te ris tic frequently h i n g e s upon who is

using th e fin a n c ia l statem ents. For e x a m p le , w h ile

fin a n c ia l s t a t e m e n t s p r e p a r e d u s i n g push down a c c o u n t i n g

may be more r e l e v a n t for p a r e n t company s t o c k h o l d e r s ,

t h e y may be less r e l e v a n t for c r e d ito r s w ith outstanding

debt a t the tim e of a c q u is it io n .

3. A p p lic a tio n of push down a c c o u n t i n g requires

tra d e-o ffs. R e l e v a n c e may be g a i n e d a t t h e exp en se o f

com p a ra b ility and c o n s i s t e n c y . The f i n a l assessment

s h o u ld be made based on a d e t e r m i n a t i o n o f w h e t h e r or not

a ll b en efits gained from e s t a b l i s h i n g a new b a s i s o f

a c c o u n t i n g exc eed t h e r e l a t e d c o s t s .

At t h i s point, relevant accounting lite ra tu re has

been r e v i e w e d and a p p l i e d t o push down a c c o u n t i n g . This

inform ation is e v a l u a t e d and summarized In t h e n e x t

ch ap ter.
 CHAPTER 6

SUMMARY, CONCL USI ONS, AND RECOMMENDATIONS

In t h e p r e v i o u s f iv e chapters, to p ic s of major

importance In t h e a r e a o f push down a c c o u n t i n g have been

e x a m in e d . The e f f e c t on t h e f i n a n c i a l statem ents of

Im p le m e n ti n g push down a c c o u n t i n g was examined In. C h a p t e r

2. Financial d a t a b a s e s w e r e s e a r c h e d t o d e t e r m i n e how

companies a r e a c t u a l l y I m p le m e n ti n g t h i s technique in

practice; the r e s u lts of these searches were a ls o

discussed In C h a p t e r 2. S i n c e push down a c c o u n t i n g Is

frequently c r it ic iz e d for vio latin g h is to ric a l cost, push

down a c c o u n t i n g was a n a l y z e d In C h a p t e r 3 In r e l a t i o n to

h is to ric a l c o s t to determ in e whether t h e two c o n c e p t s a r e

com patible. In C h a p t e r 4 , the establishm ent of a new

basis of a c c o u n t i n g was e v a l u a t e d under t h e two most

prominent t h e o r i e s of ownership e q u it y ; the p r o p r ie ta r y

t h e o r y and t h e e n t i t y theory. The p r e m i s e o f C h a p t e r 5

was t h a t even If push down a c c o u n t i n g does no t v i o l a t e

the t r a d i t i o n a l conceptual accounting framework, i t must

s till be u s e f u l from t h e fin a n c ia l statement users'

p ersp ective before It is w i d e l y Implemented.

151
 152

Summary

At t h e o n s e t o f the study, i t was f e l t that an

exam ination of a ll of the I s s u e s d e s c r i b e d w ou ld p r o v i d e

a cle a r-c u t, d e fin itiv e answer to the basic questions

surrounding th e v a l i d i t y of push down a c c o u n t i n g . To

some e x t e n t , th is has o c c u r r e d . U n fo rtu n ately, the

an a lys is I n c l u d e s a g r e a t d ea l of s u b je c tiv ity , and is

t h u s open t o d i f f e r i n g I n t e r p r e t a t i o n s and c o n c l u s i o n s .

One o f th e primary con clusions of the study is t h a t

push down a c c o u n t i n g is not an a u t o m a t i c v i o l a t i o n of

h is to ric a l cost. A lt h o u g h c o n t r a r y o p i n i o n s e x i s t , there

is s u f f i c i e n t evidence fo r push down a c c o u n t i n g w i t h i n

the c o n te x t o f h is to ric a l cost to support Its

im plem entation, at least In some s i t u a t i o n s . Evidence In

defense of t h i s c o n c l u s i o n can be summarized as f o l l o w s :

1. APB O p i n i o n 16 In s titu te d the p r i n c i p l e that a

new c o s t b a s i s is e s t a b l i s h e d f o r an a c q u i r e d com pany's

a s s e t s and lia b ilitie s when t h e y a r e included in t h e

co n solidated fin a n cial statem ents. To r e p o r t the

su b sid iary's a s s e t s and lia b ilitie s a t one amount on t h e

co n solidated s t a t e m e n t s and a t a d iffe re n t amount on t h e

s e p a r a t e s t a t e m e n t s would r e s u l t in t h e co n v e y a n c e o f

c o n flic tin g fin a n c ia l in fo rm atio n .

2. B efore the c o n te n tio n is made t h a t push down

accounting v i o l a t e s h is to ric a l cost, a d e te r m in a tio n of

whose c o s t Is t h e most r e l e v a n t must be made. The

pro p rietary t h e o r y o f owners e q u i t y would c o n t e n d t h a t

 153

c o s t s h o u l d r e p r e s e n t c o s t t o t h e new o w n er s, not the

p r e v i o u s o w n er s.

3. FASB 14 c o n c e r n i n g segment r e p o r t i n g requires

that I n f o r m a t i o n on s e p a r a t e segments o f an e n t e r p r i s e

must re fle c t the p a r e n t's cost basis for each segment.

A l t h o u g h each segment is n o t n e c e s s a r i l y a s u b sid iary,

the sep arate fin a n c ia l statem ents of acquired e n t i t i e s

s h o u l d be p r e s e n t e d In a l i k e manner t o a c h i e v e symmetry.

4. It Is Impossible to ignore the fact that a

transaction has t a k e n p l a c e . The consummation o f th is

transaction s h o u ld be s u f f i c i e n t to e s ta b lis h a new b a s i s

of acc o u n ta b ility .

Most p e o p l e who c r i t i c i z e push down a c c o u n t i n g on

t h e grounds t h a t it vio late s h is to ric a l cost contend t h a t

a mere cha nge in t h e o w n e r s h i p o f a co m pa ny' s s t o c k

should not a l t e r the u nd erlying v a lu a tio n o f the assets.

However, th is argument can e s s e n t i a l l y be re du c ed t o an

e va lu a tio n of the ownership e q u it y theories. I t was

noted In C h a p t e r 4 t h a t a l t h o u g h t h e p r o p r i e t a r y theory

and t h e e n t i t y t h e o r y can b o t h be found In p r a c t i c e , the

p ro p rietary theory Is much more p r e d o m i n a n t . The

contention t h a t c o s t s h o u ld represent cost to the firm Is

a claim of the e n t i t y theory. C ertain ly a v a lid ca s e

c o u l d be made f o r that a r g u m e n t. But t h e f a c t that the

p ro p rietary theory Is more f r e q u e n t l y found in p r a c t i c e

adds s u p p o r t t o t h e d e f e n s e o f push down a c c o u n t i n g under

that theory.
 154

The d e f e n s e o f push down a c c o u n t i n g w i t h i n the

context of h is to ric a l cost is s t r e n g t h e n e d when t h e

p ro p rietary theory of owner's e q u ity Is em p lo ye d . The

p ro p rietary th e o r y contends t h a t the f i r m 's a s s e t s and

lia b ilitie s b e l o n g t o t h e o w ne r . Cost o f the assets

s h o u l d r e p r e s e n t c o s t t o t h e o w n er s. Thus, If ownership

changes, t h e c o s t o f t h e a s s e t s t o t h e new owners s ho ul d

a c c o r d i n g l y be r e c o r d e d . The e s t a b l i s h m e n t o f a new c o s t

b asis is ju s tifie d under t h e h i s t o r i c a l c o s t concept

b ec au se an exc hange has t a k e n p l a c e between t h e o l d

ow n ers and t h e new ow ne rs .

T h is study contends t h a t push down a c c o u n t i n g does

not v i o l a t e the e x is tin g conceptual framework.

Nonetheless, a review o f the to p ic is n o t c o m p l e t e

w ithout e v a lu a tin g Its e f f e c t on t h e f i n a n c i a l statement

users. I t was e s t a b l i s h e d in C h a p t e r 5 that s in c e the

needs o f s p e c ific u s e r s a r e not known, fin a n c ia l

rep o rtin g has t r a d i t i o n a l l y been g e n e r a l purpose

rep o rtin g . Push down a c c o u n t i n g was t h u s e v a l u a t e d on a

g en eralized basis for th e users Id e n tifie d by t h e FASB:

p r e s e n t and p o t e n t i a l i n v e s t o r s and c r e d i t o r s . The

c h a p t e r co n te n d e d t h a t push down a c c o u n t i n g enhances most

of the q u a l i t a t i v e c h a r a c t e r is t ic s recognized by t h e FASB.

as d e s i r a b l e for fin a n cial s tatem en ts to possess.

S p e c ific a lly , fin a n c ia l statem ents prepared according to

push down a c c o u n t i n g a r e g e n e r a l l y deemed t o p r o v i d e t h e

most r e l e v a n t Inform ation for t h e owners.

 15 5

The p r i m a r y q u a l i t a t i v e c h a ra c te ris tic s vio late d by

push down a c c o u n t i n g a r e c o m p a r a b i l i t y and c o n s i s t e n c y .

C o m p arability of the s u b s id ia r y 's b a l a n c e s h e e t between

periods Is I m p a i r e d beca use t h e p a r e n t ' s purchase p r i c e

Is r e c o r d e d as t h e new b a s i s o f re p o rtin g . Net Income

c alcu lated b e f o r e and a f t e r Im plem entation of push down

accounting w i l l usu ally n o t be c o m p a r a b le f o r at least

one o f the fo llo w in g reasons: d ep re cia tio n expe nse w i l l

d iffe r as a r e s u l t o f a change in t h e v a l u e o f the

un d erlyin g assets, in te re st expense may be a f f e c t e d by

t h e change In Imputed in terest resu ltin g from r e v a l u a t i o n

of the lia b ilitie s , and any g o o d w i l l r e c o r d e d as a r e s u l t

of the a c q u is itio n w i l l be s y s t e m a t i c a l l y r e c o g n i z e d as

expense.

A c o n flic t exists to the extent that push down

a c c o u n t i n g enhances a l l of the c h a r a c t e r is t ic s except

c o m p a r a b i l i t y and c o n s i s t e n c y . The FASB a d d re s s e d its

p o s itio n on co m p e ti n g o b j e c t i v e s by s t a t i n g t h a t any

change t o a p r e f e r r e d a c c o u n t i n g method w i l l require a

s a c r i f i c e of con sisten cy, w h ile sim ultaneously

recog nizing t h a t changes a r e r e q u i r e d as an inherent part

of t h e de v e lo p m e n t o f th e accounting p r o c e s s .1 Although

t h e y s u p p o r t ' p u s h down a c c o u n t i n g , the authors of

Montgomery's A u d it in g a l s o concede t h a t , "The a b r u p t

" ' F i n a n c i a l A c c o u n t i n g S t a n d a r d s B o ar d , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g Co n ce p t s No. 2 "Qua I I t a t I v e
C h a r a c t e r i s t i c s of Accounting In fo rm atio n " (Stam ford:
FASB, 1 9 8 0 ) , p a r a g r a p h 122.
 1 56

reva lu atio n of assets, o f course, affects co m p a ra b ility

of the net Income s t r e a m o f the acquired e n t i t y , but it

is p r e f e r a b l e to Ignoring the accounting resu lt of

changed o w n e r s h i p . " 2

The im p ai r m en t o f c o m p a r a b i l i t y Is u n d en ia b ly a

problem, but the b e n e fit s t o be g a i n e d from r e c o g n i z i n g

t h e new b a s i s o f a c c o u n t i n g e s t a b l i s h e d by t h e

a c q u i s i t i o n outweigh its n eg ative aspects. Thus, If It

Is r e l e v a n t for the f in a n c ia l statem ents users, does not

vio la te the h is t o r ic a l cost concept, and can be de f e n d e d

und er t h e p r o p r i e t a r y theory of owner's e q u it y , a strong

case e x i s t s f o r c o n c e p t u a l l y d e f e n d i n g push down

account In g .

Push down a c c o u n t i n g has a l s o been c r i t i c i z e d on t h e

grou nd s t h a t It gen erally results in a r e d u c t i o n in n e t

income. This c r i t i c i s m can be r e f u t e d by r e f e r e n c e t o

th e concept of n e u tra lity , a c h a ra c te ris tic lis te d as

d e s i r a b l e by t h e FASB. The Board n o t e s t h a t in t h e

form u lation and implem entation of accounting standards,

t h e p r i m a r y c o n c e r n s h o u ld be t h e r e l e v a n c e and

re lia b ility of the Inform ation that resu lts. N e u tra lity

d ic ta te s that t h e c o n c e r n s ho ul d be on t h e s e

c h a ra c te ris tic s rather than th e e f f e c t of a p a r tic u la r

s t a n d a r d on a g i v e n s e c t o r o f fin a n cial statement users.

Thus, the fact that push down a c c o u n t i n g g e n e r a l l y lowers

2 PhI I Ip L . D e f l i e s e , Kenneth P. Johnson, and

R o d e r i c k K. M a c l e o d , M o n t g o m e r y ' s A u d i t i n g . 9 t h e d . (New
Y o r k : The Ronald P r e s s Company, 1975) p. 6 9 2 .
 157

net Income s h o u l d n o t be a f a c t o r In e v a l u a t i n g Its

d e s ira b ility . Furthermore, two companies w e r e located in

the database searches th a t experienced increased e a rn in g s

from im p le m e n ti n g push down a c c o u n t i n g . P ractice

illu s tra te s that push down a c c o u n t i n g can a l t e r net

income in e i t h e r d ire c tio n , perhaps p r o v id in g e v id en ce

that push down a c c o u n t i n g its e lf Is n e u t r a l .

The p r i m a r y pu r p o se o f th is pro ject is t o d e t e r m i n e

w h e t h e r push down a c c o u n t i n g Is t h e o r e t i c a l l y acceptable

w ith in the o v e ra ll framework o f c u r r e n t GAAP. R es ear ch

and a n a l y s i s performed In t h e p r e v i o u s c h a p t e r s and

summarized h e r e r e q u i r e t h a t t h e answer must be a

qua I I f I e d " y e s ."

A se c o n d a r y pur po se o f the study Is t o a d d r e s s some

of t h e pr obl em s e n c o u n t e r e d In a c t u a l Implem entation of

push down a c c o u n t i n g . Most o f the d i f f i c u l t i e s are

m a na g ea bl e when t h e s u b s i d i a r y is w h o l l y - o w n e d . Problems

w ith the v a lu a tio n of m in o rity in te re st, s p e c ific a lly the

d e te r m in a tio n of whether to r e v a lu e o n ly the perce nta ge

of t h e a s s e t s purc h as ed or t o impute a v a l u e f o r one

hundred p e r c e n t o f the assets, are elim in ated . The

reduction in n e t income t h a t norm ally results from

im p le m e n ti n g push down a c c o u n t i n g Is no t a s i g n i f i c a n t

pr o b le m f o r a new s h a r e h o l d e r group ( t h e p a r e n t compa ny) ,

b ec au se n e t income r e f l e c t s the cost of a c q u is it io n by

t h e new ow ner s. If co m p a ra b ility is a probl em f o r eith er

 158

t h e new owners o r any c r e d i t o r group, it can be r e s o l v e d

t h r o u g h t h e use o f p r o forma s t a t e m e n t s .

When a c q u i s i t i o n s Involve l e s s t h a n a one hundred

p e rc e n t purchase of the stock, these t h e o r e t ic a l

ar g u m en ts s u p p o r t i n g push down a c c o u n t i n g a r e somewhat

I
weakened by t h e d i f f i c u l t i e s a r is in g w ith its practical

Im plem entation. The weaknesses grow as t h e p e r c e n t a g e o f

the s u b s id ia ry 's stock acquired d e c lin e s . P a rtic u la rly

troublesome from a t h e o r e t i c a l p ersp ective is t h e

treatm ent of the m in o r ity in te re s t. Should a l l of the

a s s e t s be r e v a l u e d , o r o n l y t h e p e r c e n t a g e pu rc ha sed ?

Although both th e p r o p r i e t a r y t h e o r y and t h e e n t i t y

t h e o r y a r e d e f e n s i b l e under c u r r e n t GAAP, t h e SEC

c u r r e n t l y only accepts p r o p r ie t a r y theory from its

reg istran ts. T h i s e f f e c t i v e l y means t h a t t h e a s s e t s can

be r e v a l u e d o n l y t o t h e e x t e n t a c q u i r e d by t h e p a r e n t

company. On t h e c o n s o l i d a t e d statem ents, the

s u b sid iary's net assets are c o n s o lid a te d a t the p a re n t's

purchase p r i c e for the percentage o f the stock a c q u ire d ,

and t h e m i n o r i t y In te re st p ortio n of net assets Is

c o n s o l i d a t e d a t book v a l u e . This technique Is ju s tifie d

on t h e p r e m i s e t h a t c o n s o l i d a t e d fin a n cial statem ents are

prepared from t h e v i e w p o i n t o f p a r e n t company

shareholders, and a c c o r d i n g l y a r e n o t I n t e n d e d t o be

useful for the m in o rity shareholders.

Almost by d e f i n i t i o n , sep arate statements of the

s u b s i d i a r y s h o u l d be u s e f u l for some group o t h e r than the

 15 9

m ajo rity shareholders. I t wo uld seem t h a t t h e y s h o u ld be

useful for the m in o rity s h a r e h o l d e r s as w e l l as t h e

s u b s id ia ry 's c re d ito rs . But If push down a c c o u n t i n g Is

e m p lo ye d , a new c o s t b a s i s for a major p o rtio n of the

assets is e s t a b l i s h e d from a t r a n s a c t i o n In w h ic h t h e

m in o rity shareholders did not p a r t i c i p a t e . C om parability

becomes an issue. The group I n t e n d e d as a m a j o r group o f

users w i l l p r o b a b l y see n e t Income r edu ce d as t h e r e s u l t

of a transaction In w hi c h t h e y d i d not p a r t i c i p a t e .

C red ito rs w ill experience impaired c o m p a r a b i l i t y

regardless of the percentage of stock a c q u ire d .

As a p r a c t i c a l m atter, the c o m p a ra b ility pr obl em s

can be r e s o l v e d through th e p r e s e n ta tio n o f supplementary

p r o forma r e p o r t s . M in o rity s h a r e h o l d e r s and e x i s t i n g

c r e d i t o r s wo uld t h e n be g i v e n t h e o p p o r t u n i t y to evaluate

the f ir m 's o p e r a t i o n s under t h e "old r u l e s . " It Is

somewhat t h e o r e t i c a l l y d iffic u lt to defend r e v a lu a tio n of

the assets from a t r a n s a c t i o n In wh ic h t h e m i n o r i t y

shareholders did not p a r t i c i p a t e . However, th is

p o ten tial s t u m b l i n g b l o c k can be r e f u t e d by invoking the

p ro p rietary t h e o r y o f owners e q u i t y , w hi c h c o u l d be

Interp reted t o co n te n d t h a t c o s t s h o u ld rep res en t cost

for the m a jo rity of t h e ow ne rs . I t can a l s o be c l a i m e d

that the v a lu a tio n s established by t h e a c q u i s i t i o n

provide relevant I n f o r m a t i o n even f o r the m in o r ity

shareholders. R evaluation of the assets only to the

extent that t h e y w e r e p ur ch as ed does e s t a b l i s h cost to

 160

the m a jo rity of t h e owners w i t h i n t h e bounds o f bo th t h e

p ro p rietary t h e o r y and t h e h i s t o r i c a l cost concept. Co st

t o t h e new owners (the m a jo rity shareholders) w ill be

d iffe re n t t h a n c o s t t o t h e p r e v i o u s owners (th e m in o rity

sh a reholders), and t h e a c c o u n t i n g records w i l l re fle c t

th is d Ifferen c e.

In e v a l u a t i n g the a p p l i c a b i l i t y of push down

a c c o u n t i n g under t h e v a r i o u s o w n e r s h i p e q u i t y theories,

it was e s t a b l i s h e d that d e f e n s e o f push down a c c o u n t i n g

un d er the e n t it y t h e o r y depends upon o n e ’ s d e f i n i t i o n of

the re le v a n t en tity . The e n t i t y theory im plies th a t cost

should r e p r e s e n t c o s t to the e n t i t y . If the e n t i t y afte r

a c q u is itio n Is deemed t o be m e r e l y a c o n t i n u a t i o n o f the

previous e n t i t y , then t h e r e is no J u s t i f i c a t i o n for push

down a c c o u n t i n g bec au se c o s t to the e n t i t y has not

changed. In c o n t r a s t , if the e n t i t y afte r a c q u is itio n is

d e f i n e d as a new e n t i t y , then cost to the e n t i t y has

changed and push down a c c o u n t i n g is ju s tifie d . It

appears t h a t ar gum en ts for push down a c c o u n t i n g under t h e

e n tity theory are fa irly weak. When t h e s u b s i d i a r y is

con tinuing Its operations in t h e same manner as b e f o r e

a c q u is itio n , it is d i f f i c u l t to v is u a liz e t h a t a new

e n tity has emerged m e r e l y as t h e r e s u l t of a change in

ownership. Nonetheless, t h e weak s u p p o r t t h a t exists for

push down a c c o u n t i n g und er the e n t i t y theory is not

considered t o be a t h e o r e t i c a l w ea kn e ss . A lt h o u g h

evidence of bo th t h e p r o p r i e t a r y t h e o r y and t h e e n t i t y
 161

t h e o r y can be found In p r a c t i c e , the p ro p r ie ta r y theory

Is e n c o u n t e r e d more f r e q u e n t l y . The f a c t that push down

accounting Is d e f e n s i b l e under t h e p r o p r i e t a r y theory

s h o u l d p r o v i d e ample s u p p o r t for th is fa c e t of its

acceptance.

Cone I us Ions

The p r i m a r y c o n c l u s i o n reached in t h i s study is t h a t

push down a c c o u n t i n g i s d e f e n s i b l e when t h e a c q u i s i t i o n

Is f o r one hundred p e r c e n t o f a s u b s i d i a r y ' s stock.

W h i l e push down a c c o u n t i n g Is no t f e a s i b l e when an

e x t r e m e l y s m a ll percentage of t h e s t o c k changes

ownership, determ in ing the exact percentage t h a t s h o u ld

s e r v e as t h e "trig g er" for Ju stifyin g t h e use o f push

down a c c o u n t i n g Is a much more d i f f i c u l t assessment t o

make.

Any g u i d e l i n e s for establishing the "trig g er" w ill

of n e c e s s i t y be a r b i t r a r y . A c a s e c o u l d be made f o r

contending that the establishm ent of a new b a s i s o f

accounting is a c c e p t a b l e o n l y a t the fo llo w in g percentage

ch a ng es In o w n e r s h i p :

1. 100 p e r c e n t : A s t r o n g c a s e has been b u i l t for

the v a l i d i t y o f push down a c c o u n t i n g when a s u b s i d i a r y is

w h o l l y owned. P ractical Implem entation d i f f i c u l t i e s

q u i c k l y d e v e l o p when l e s s th an I00 p e rc e n t o f a

s u b s id ia ry 's stock Is a c q u ir e d . These d i f f i c u l t i e s could

t h u s be r e s o l v e d by r e f u s i n g to Implement push down

accounting for any o t h e r th an w h o l l y owned s u b s i d i a r i e s .

 2. 97 p e r c e n t / 9 5 p e r c e n t ; In d e t e r m i n i n g an

acceptable c u to ff point, m a t e r i a l i t y must be c o n s i d e r e d .

How much r e a l d ifferen c e exists between a c q u i s i t i o n s o f

97 p e r c e n t o r 95 p e r c e n t o f a company's s t o c k and a l l of

Its stock? A l t h o u g h no o f f i c i a l p o s itio n has been t a k e n

by t h e a c c o u n t i n g p r o f e s s i o n to q u a n tify m a t e r i a l i t y ,

t h r e e p e r c e n t seems t o have g a i n e d some p r a c t i c a l

acceptance. ( F o r e x a m p le , if fu lly d ilu te d e a r n i n g s per

s h a r e a r e no more t h a n t h r e e p e r c e n t less than prim ary

e a r n i n g s per share, the fu lly d ilu ted amounts do not have

t o be s e p a r a t e l y rep o rted .) Although its p o s itio n is

l ik e w is e not fo rm alized , t h e SEC seems t o be g e n e r a l l y

follo w in g t h e 97 p e r c e n t ru le. T h i s agency Is r e q u i r i n g

push down a c c o u n t i n g o n l y when " s u b s t a n t i a l l y a ll" of a

compa ny's s t o c k Is a c q u ir e d . At a m e e t i n g o f the

Emerging I s s u e s Task F o r c e , "The SEC o b s e r v e r stated that

new b a s i s a c c o u n t i n g Is b e i n g required ( w i t h one

exception ) only in t h o s e s i t u a t i o n s w he re t h e r e is

v irtu a lly a 100 p e r c e n t a c q u i s i t i o n (e .g ., 97 p e r c e n t )

and no o u t s t a n d i n g p u b l i c l y - h e l d d e b t or preferred

stock.

3. 90 p e r c e n t ; A 90 p e r c e n t c u t o f f c o u l d a l s o be

d e f e n d e d as r e p r e s e n t i n g t h e p u r c h a s e o f "su b s tan tially

a ll" of a firm 's stock. This Is t h e g u i d e l i n e t h e APB

employs in d e t e r m i n i n g the c r i t e r i a for purchase vs.

^ E m e r g i n g I s s u e s Task F o r c e , M i n u t e s o f June 27.

1985 Emerging I ss ue s Task F o r c e M e e t i n g . "Changes o f
O wn e rs hi p R e s u l t i n g In a New B a s i s o f A c c o u n t i n g "
(Stam ford: n . p . , 1985).
 163

pooling accounting. If 90 p e r c e n t o f the stock has

changed hand s, th is Is deemed t o be l a r g e enough t o

Ju stify a combining o f shareholder In terests, and thus

a llo w the pooling of I n t e r e s t s method.

4. 80 p e r c e n t : The AICPA Task F o r c e lis ts 80

p e r c e n t as a p o s s i b i l i t y In Its exam ination of push down

accounting. T h i s amount is less r e s t r i c t i v e t h a n t h e 90

percent c r i t e r i a established for poo ling, b u t more

re s tric tiv e than a sim ple m a j o r i t y .

5. 50+ p e r c e n t : A change In m a j o r i t y o w n e r s h i p o f

a company m i g h t be s u f f i c i e n t to e s ta b lis h a new b a s i s of

accounting. The is s u e o f c o n t r o l Is a f r e q u e n t l y

discussed topic In t h e r e c e n t a c c o u n t i n g lite ra tu re .

Control Is v i r t u a l l y a s s u r e d w i t h a change in t h e

m a j o r i t y o w n e r s h i p , o f a company, and it can be a s s e r t e d

that th is change In c o n t r o l is s u f f i c i e n t for

estab lish in g a new b a s i s o f a c c o u n t i n g . However, If only

a sim ple m a j o r i t y of the stock has changed hands,

pr ob le m s w i t h m i n o r i t y o w n e r s h i p can become f o r m i d a b l e .

(This I n c o n s i s t e n c y was d i s c u s s e d more f u l l y In C h a p t e r

2 .) M in o rity in te re st Is not v e r y s i g n i f i c a n t or

m ateria l if It c o n s titu te s only three percent of the

to tal s h a re h o ld er's in te re s t. But If it Is a l m o s t h a l f

of the t o ta l ownership, the r e a l i t i e s of the s it u a t i o n

are q u ite d if f e r e n t .

6. 20 p e r c e n t : This Is t h e benchmark e s t a b l i s h e d

fo r eva lu a tin g whether the e q u ity method of acco u n tin g

 164

for Investments In s u b s i d i a r i e s s h o u ld be em pl oye d.

Absent e v i d e n c e t o t h e c o n t r a r y , such as a m a j o r i t y

shareholder, sig n ifican t Influence is deemed t o be

established a t t h e 20 p e r c e n t level. Although th is point

has m e r i t for its Intended purpose, u tiliz a tio n of a 20

p e r c e n t benchmark f o r i m p le m e n ti n g push down a c c o u n t i n g

poses Innumerable problems. In t h i s situ atio n , the

sh a re h o ld ers not ta k in g part In t h e a c q u i s i t i o n

c o n stitu te the m a jo rity . They w i l l Iik e ly be q u i t e

opposed t o r e v a l u a t i o n o f the assets from a

t r a n s a c t i o n w h ic h a f f e c t e d o n l y a m i n o r i t y o f t h e ow ners.

I t w ou ld be more d i f f i c u l t to In vo ke t h e p r o p r i e t a r y

theory, b ec au se c o s t for the m a jo r ity of t h e owners has

not ch an ged .

RecommendatIons

One c o n c l u s i o n o f th is study is t h a t push down

accounting Is a c c e p ta b le w it h a one hundred p e r c e n t

a c q u is itio n , b u t not e v e r y t i m e t r a n s a c t i o n s In a

comp an y's s t o c k o c c u r . It has a l s o been n o t e d t h a t any

gu id elin es d e v e l o p e d between t h e s e two e x t r e m e s w i l l be

arb itra ry an d , therefore, sub ject to disagreement.

V irtu a lly by d e f i n i t i o n , con solidated fin a n cial

statem ents a re prepared from t h e p e r s p e c t i v e o f the

p a r e n t company s h a r e h o l d e r s . It lo g ic a lly follow s that

any s e p a r a t e s t a t e m e n t s o f t h e s u b s i d i a r y s h o u l d be

useful for the m in o rity shareholders. If s u b s ta n tia lly

a il of the s u b s id ia ry 's stock is a c q u i r e d , t h e amount and

 1 65

treatm ent of m in o rity in te re st Is not s ig n ific a n t. The

reduction In e a r n i n g s illu s tra te d In C h a p t e r 2 that Is

experienced s o l e l y by t h e m i n o r i t y shareholders w i l l not

be m a t e r I a I .

As t h e m i n o r i t y In terest s h a r e o f o w n e r s h i p becomes

larger, ho w ev e r, p r o b le m s and t h e o r e t i c a l Inconsistencies

Increase. The a s s e t v a l u a t i o n s t h a t wo uld r e s u l t fro m,

for example, a 60 p e r c e n t a c q u i s i t i o n o f a compa ny's

stock, represent t h e p r i c e p a i d by 60 p e r c e n t o f the

owners, and 40 p e r c e n t o f the p re v io u s ly e s ta b lis h e d cost

b as is. This is not a c o n c e p t u a l l y a p p e a l i n g , nor read ily

understandable, valuation scheme. The income s t a t e m e n t

Inconsistencies Illu s tra te d In C h a p t e r 2 become more

pro nounced as t h e m i n o r i t y in te re st increases. These

shareholders are forced t o ab s or b Increased charges

a g a i n s t e a r n i n g s bec aus e o f the adjustm ents resu ltin g

from t h e p u r c h a s e . If t h e amounts involved are m a t e r i a l ,

the th e o r e tic a l I n c o n s i s t e n c i e s become u n a c c e p t a b l e . The

r e s u l t wo uld be a hodge-podge o f a c c o u n t i n g that Is

d iffic u lt t o comprehend o r In te rp re t.

The recommendation o f th is study Is t h a t push down

a c c o u n t i n g s h o u ld o n l y be Implemented when a s u b s i d i a r y

issues s e p a r a t e fin a n c ia l s t a t e m e n t s as a r e s u l t o f the

cha nge In o w n e r s h i p o f e s s e n t i a l l y a l l of its stock. The

d e fin itio n of "es s e n tia lly all" Is d i f f i c u l t to q u a n tify

by e s t a b l i s h i n g a set of rules that w i l l always hold.

One o p t i o n Is t o leave it open f o r d e t e r m i n a t i o n on a

 1 66

c a s e by c a s e b a s i s by individual company management and

th e ir accountants. T h i s may be a v i a b l e o p t i o n .

Nonetheless, It is more d e s i r a b l e t o e s t a b l i s h a

q u a n t i f i a b l e ben chmark, and a l l o w that benchmark t o be

re fu ta b le If so d i c t a t e d by t h e f a c t s and c i r c u m s t a n c e s

of the p a r t ic u la r case.

The recommended benchmark Is 97 p e r c e n t . Few would

argue t h a t a 97 p e r c e n t a c q u i s i t i o n Is m a t e r i a l l y

d iffe re n t from a I00 perce n t a c q u i s i t i o n . It c o u l d be

contended t h a t 95 p e r c e n t o r 90 p e r c e n t also c o n s titu te

"e s s e n tia lly a ll," and pe rh a ps t h i s Is t r u e . However,

t h e rec omm endation Is t o ado pt a h i g h e r c u t o f f , w ith the

understanding that t h e number Is n o t e t c h e d in s t o n e .

Room s h o u ld be a l l o w e d for Judgment w i t h each In dividu al

case. For e x a m p le , If 94 p e r c e n t o f a s u b sid iary's stock

I s a c q u i r e d by a new p a r e n t , and t h e o t h e r 6 percent is

h e l d by an e x e c u t i v e o f f i c e r of the s u b s id ia ry , then a

s t r o n g c a s e s h o u ld be made f o r estab lish in g a new b a s i s

of accounting. The o f f i c e r ' s o w n e r s h i p p e r c e n t a g e does

not represent m in o rity In te re st In t h e usual sense.

It is f u r t h e r recommended t h a t t h e a s s e t s be

revalued only to the e x te n t of the stock purchased. This

is in c o m p l i a n c e w i t h the p r o p r ie ta r y t h e o r y and t h e

c u r r e n t SEC p o s i t i o n . Again, m a t e r i a l i t y must be

con sidered. When e s s e n t i a l l y a l l of th e stock is

acq uired , t h e r e s u l t wi I I not be m a t e r i a l ly d i f f e r e n t

from i m p u ti n g a v a l u e for a ll of t h e a s s e t s based on t h e

 1 67

purchase p r i c e . R e valu atio n of o nly the percentage of

t h e a s s e t s p ur ch as ed Is t h e o r e t i c a l l y con sisten t w ith

h is to ric a l cost; imputing a v a lu e Is n o t .

If com p a ra b ility I s a pro bl em f o r m i n o r i t y

sh a reholders or c r e d i t o r s , p r o forma Inform ation s h o u ld

be p r e p a r e d . Financial s t a t e m e n t s c o u l d be p r e s e n t e d on

a supplemental basis rep o rtin g the r e s u lts of operations

as If a new b a s i s o f accounting had n o t been e s t a b l i s h e d .

T h i s w ou ld p r o v i d e interested fin a n cial statem ent users

the o pp ortunity t o compare t h e co m pa ny' s o p e r a t i o n s on a

b a s i s w i t h w h ic h t h e y w e r e f a m i l i a r , as w e l I as e n a b l i n g

them t o see t h e e f f e c t of push down a c c o u n t i n g .

The s t a n c e ad o p te d by t h e SEC I s p a r t i a l l y s i m i l a r

to the rec omm endation made by t h i s study: push down

*
accounting s h o u ld be employed when s u b s t a n t i a l l y a ll of^a

firm 's stock Is a c q u ir e d . However, t h e SEC I s not

req u irin g push down a c c o u n t i n g when t h e r e is p u b l i c l y

held outstanding deb t. But even In t h e s e c a s e s , It is

recommended t h a t push down a c c o u n t i n g be employed w i t h

supplementary p r e s e n ta tio n of the f in a n c ia l s t a t e m e n t s on

the old basis o f accounting. Such s u p p l e m e n t a r y

d i s c l o s u r e wo uld overcome t h e c o m p a r a b i l i t y pr obl em s t h a t

e xist for these o u ts id e rs .

The o rig in a l premise of th is study is t h a t b e f o r e

t h e FASB I s s u e s needed g u i d e l i n e s regarding the

Im plem entation procedures for push down a c c o u n t i n g , Its

fundamental th e o re tic a l v a l i d i t y must firs t be

 1 68

asc erta in e d . The c o n c l u s i o n reached, recog nizing the

bounds d e s c r i b e d abo ve , Is t h a t push down a c c o u n t i n g does

no t v i o l a t e the e x is tin g conceptual accounting f ra m e w o r k .

A ccordingly, t h e FASB s h o u ld a d d r e s s push down a c c o u n t i n g

as soon as p o s s i b l e t h r o u g h Its normal due p r o c e s s and

Is s u e g u i d e l i n e s to the accounting p r o fe s s io n to

e lim in a te the c u rre n t d i v e r s i t y that exists in p r a c t i c e .

T h i s t o p i c s h o u ld be g i v e n p r i o r i t y by t h e FASB

b ec au se o f t h e g ro w in g number o f companies t h a t may be

affected. W i t h t h e c u r r e n t wave o f c o r p o r a t e

restru ctu rin g s, t h e need f o r o f f i c i a l g u i d a n c e on push

down a c c o u n t i n g w i l l almost c e r t a i n l y increase. The

g u i d e l i n e s developed in t h i s r e s e a r c h would work w e l l In

p ra ctice, b u t t h e FASB s h o u ld e nc ou r ag e p u b l i c hearings

and comment p e r i o d s as It n o r m a l l y does w i t h p ro je c ts of

t h is m agnItude.

Im p lication s for Further Rese ar ch

Push down a c c o u n t i n g Is a r e l a t i v e l y new c o n c e p t ,

and as such, o ffe rs a great number o f research

o p p o rtu n ities . Some p o s s i b i l i t i e s a r e as f o l l o w s :

1. I n v e s t i g a t e who is u s i n g t h e s u b s i d i a r y ' s

s ep arately Iss ued s t a t e m e n t s , and d e t e r m i n e what

a d d itio n al d i s c l o s u r e s would be o f in te re st to these

groups when push down a c c o u n t i n g is i m pl em en ted .

2. Id e n tify other situ atio n s f o r w hi c h t h e

e s t a b l i s h m e n t o f a new b a s i s o f a c c o u n t i n g m i g h t be

approprI a t e .
 3. As d i s c u s s e d In C h a p t e r 2 , procedural problems

exist If push down a c c o u n t i n g Is a p p l i e d when l e s s than

one hundred p e r c e n t o f a company's s t o c k Is a c q u i r e d .

The Inco n s isten c ies are Immaterial when s u b s t a n t i a l l y a ll

of the stock Is p u r c h a s e d , b u t t h e y become l a r g e r as t h e

percentage of stock a cq u ired d e c lin e s . If these

procedural pr obl em s c o u l d be overcome, fu rth er research

could f o c u s on t h e d e s i r a b i l i t y o f e m p l o y i n g push down

a c c o u n t i n g when less than s u b s t a n t i a l l y a ll of the stock

is a c q u i r e d .
 A P P E ND I X A

D E T A I L E D EXP L AN AT IO N OF DATABASE SEARCHES

Summarized f i n d i n g s o f several fin a n cial database

searches a re con tained In C h a p t e r 2 . The o u t p u t from a l l

s e a r c h e s was combined and d i s c u s s e d a c c o r d i n g to whether

the c it e d company had implemented push down a c c o u n t i n g ,

and t h e p e r c e n t a g e o f stock t h a t had been a c q u i r e d . For

r e a d e r s who a r e more Inte re ste d in t h e d e t a i l s o f each

search, th is App endix d i s c u s s e s t h e s p e c i f i c find ings

from each d a t a b a s e as we I I as t h e key words used t o

perform the search.

P r e l i m i n a r y D a t a b a s e Se a r c h e s

P r e l i m i n a r y database searches were conducted through

the M is s is s ip p i S t a t e U n i v e r s i t y Computer A s s i s t e d

Inform ation R etrieval Service (CAIRS) departm ent.

Although th e r e s u l t s of these searches alone d id not

provide s u f f i c i e n t inform ation for th is study, they

nonetheless y ie ld e d some v a l i d Inform ation. The

follow ing sections d e ta il the output from each s e a r c h .

D issertatio n Abstracts O nline

B efore beginning th is study, a s e a r c h was p e r f o r m e d

of D is s e rta tio n Abstracts O n lin e . This database c o n ta in s

170
 171

v irtu a lly e v e r y Am er ic an d i s s e r t a t i o n accepted a t an

accred ited In s titu tio n since 186 1. The s e a r c h was

performed using th e phrase "push down," bo t h w i t h and

w i t h o u t a hyphen. When t h e p h r a s e "push down" was

combined w i t h th e phrase "accounting," no c i t a t i o n s w ere

located. One c i t a t i o n was found u s i n g "push dcjwn" a l o n e ,

■i
b u t t h e d i s s e r t a t i o n d e a l t w i t h d i g i t a l comp uter d e s i g n .

Thus a t the tim e of th is search, no d i s s e r t a t i o n s had

been c o m p l e t e d on t h e t o p i c o f push down a c c o u n t i n g .

D i s c l o s u r e Management

The n e x t d a t a b a s e s e a r c h Involved a review of the

D i s c l o s u r e Management d a t a b a s e . This database provides

d e t a i l e d management I n f o r m a t i o n on o v e r 10,000 p u b lic

c o m p a n ie s . Data In t h i s system is g a t h e r e d from SEC

filin g s . The management inform ation includes the

p re s id e n t's le tte r, t h e management d i s c u s s i o n , and o t h e r

c o rp o ra te events. T h i s d a t a b a s e was s e a r c h e d bo t h u s i n g

th e phrase "push down" a l o n e and u s i n g it in c o n j u n c t i o n

w ith "accounting ." Both methods r e s u l t e d In f o u r

c ita tio n s (i.e ., a il cases of "push down" w e r e ca se s of

push down a c c o u n t i n g ) .

The f i r s t company c i t e d from t h i s search Is NACRe

C orporation, an I n s u r a n c e h o l d i n g company. Although

th ere are several s u b s i d i a r y and r e l a t e d party

tran sactio n s, e s s e n tia lly th is I s an ex am pl e o f

ap p lic a tio n of push down a c c o u n t i n g w i t h a one hundred

percent a c q u is itio n o f N o r t h Am erican Company f o r

 1 72

P r o p e r t y and C a s u a l t y Insurance (NAC). Kramer C a p i t a l

Corporation (KCC) t h r o u g h G re y E a g l e (a c o r p o ra tio n 95

p e r c e n t owned by KCC) a c q u i r e d NAC in 198 4. As o f June

28, 198 5, G re y E a g l e t r a n s f e r r e d its o w n e r s h i p o f NAC t o

NACRe In ex ch an ge f o r 1000 s h a r e s o f NACRe's common

stock. A stock s p lit resulted in an increase In t h e

number o f o u t s t a n d i n g shares to 2 ,6 5 0 ,0 0 0 . The f o o t n o t e s

state that:

T h i s r e l a t e d p a r t y t r a n s a c t i o n has been
a c c o u n t e d f o r by p u s h in g down t o NAC's
f i n a n c i a l s t a t e m e n t s G rey E a g l e ' s p u r c h a s e c o s t
b a s i s f o r NAC e s t a b l i s h e d a t May 2 4 , 1984 and
c o m b i n i n g NAC's r e s u l t s o f o p e r a t i o n s w i t h
t h o s e o f t h e Company (NACRe) from such d a t e . 1

A fter NACRe was o r g a n i z e d In June, 1985 t o a c q u i r e a l l of

NAC's s t o c k , a p u b lic o f fe r in g was made o f NACRe's s t o c k .

At t h e end o f 1985, NacRe was o n l y 50.7% owned by its

o rig in a l owner, Grey E a g l e E n t e r p r i s e s .

The second company lis te d from t h i s search is

P rln c e v ille De velopment C o r p o r a t i o n , a company engaged in

t h e d e v e lo p m e n t and s a l e o f real estate in H a w a i i .

P rln c e v ille Devel opm ent C o r p o r a t i o n I s not a t y p i c a l

exa mple o f push down a c c o u n t i n g for two r e a s o n s . F irs t,

it does n o t meet t h e p r e v i o u s l y e s t a b l i s h e d d e f i n i t i o n of

an e x i s t i n g sub sid iary that is s u e s a s e p a r a t e s e t o f

fin a n cial statem ents. P r l n c e v i l l e Dev elo pm ent

C orporation is no lo n g er a s u b s i d i a r y . I t was

established as a s e p a r a t e p u b l i c company v i a a spinoff

' NACRe C o r p . , Annual Report 1985, p. 20.

 173

from Its former p a r e n t , and push down a c c o u n t i n g was

ap p lied at that tim e.

A closer a n a lys is of t h i s company p r o v i d e s a n o t h e r

exception to the gen eralized a p p lic a tio n of push down

a ccounting discussed e a r l i e r In t h i s chapter. Discussion

in t h e comp an y's 10-K s e c t i o n o f Its annual report states

that the h is t o r ic a l cost basis of the s u b s id ia ry 's net

a s s e t s was $ 5 9 , 0 3 3 , 3 2 4 immediately p r i o r to the s a le .

Howe ve r, ap p licatio n of push down a c c o u n t i n g for th is

company r e s u l t e d in a downward a d j u s t m e n t to $33,659,408

to re fle c t th e purchase p r i c e . 2 Thus a p p l i c a t i o n of push

down a c c o u n t i n g for P r l n c e v i l l e De ve lo pm en t C o r p o r a t i o n

has r e s u l t e d In a d e c r e a s e In t h e r e c o r d e d amount o f the

assets rather than th e g e n e r a lly perceived Increase.

Rather than s u f f e r i n g the d ec lin e In e a r n i n g s u s u a l l y

e x p e r i e n c e d by com panies a p p l y i n g push down a c c o u n t i n g ,

earnings for th is company w i l l b en efit from its

a p p lic a tio n . The p r e s i d e n t ' s le tte r recognizes t h i s

p o in t w ith the f o l l o w i n g comments:

I t would n o t be f a i r , how eve r, t o i g n o r e t h e

f a c t t h a t t h e 1985 e a r n i n g s w e r e a i d e d
I mme asurably by t h e f a c t t h a t PVDC's c o s t o f
a s s e t s have been s u b s t a n t i a l l y r edu ce d below
t h e c o s t s o f t h e p r e d e c e s s o r o w n e r . . . . PVDC
w i l l b e n e f i t by b e i n g a b l e t o r e p o r t p o s i t i v e
e a r n i n g s from t h e s e low b a s i s a s s e t s f o r many
years Into the f u t u r e . 3

2P rin c e v llle Development Corporation, Annual Report

1985, p. 14.

3 Ib Id ., p. 1.
 174

The t h i r d company c i t e d in t h i s search is F i r s t

Nationw ide F in a n c ia l Corporation, a s a v i n g s and loan

h o l d i n g company. T h i s company became a w h o l l y - o w n e d

sub sid iary of For d M ot o r Company in 19 8 5. The footnotes

in d ic a te that t h e m er ger was a c c o u n t e d f o r as a p u r c h a s e ,

and push down a c c o u n t i n g was a p p l i e d . 4

The last company located in t h i s database search Is

C om m un ica tio ns & C a b l e Inc. T h i s company is engaged In

re s id e n tia l real e s t a t e d e v e lo pm en t and t h e c o n s t r u c t i o n

and o p e r a t i o n o f resid en tial cab le t e le v is io n sy st em s.

C om m un ica tio ns & C a b l e i s an 80 p e r c e n t owned s u b s i d i a r y

of C e n v ill De vel opm ent C o rp . In J a n u a r y o f 198 5, a

w h o l l y - o w n e d s u b s i d i a r y o f F i r s t A m er ic an Bank and T r u s t

purchased a I i of the shares of C e n v i l l Development. The

a c q u i s i t i o n was a c c o u n t e d f o r as a p u r c h a s e o f C e n v i l l

De ve lo pm en t and Its su b sid iaries, includin g

Co mmu ni ca tio ns & C a b l e . The n o t e s t o Commu nic atio ns &

C a b le 's co n solidated fin a n cial statem ents d is c lo s e th a t:

The accompanying c o n s o l i d a t e d b a l a n c e s h e e t
r e f l e c t s an a l l o c a t i o n o f t h e a p p r o x i m a t e l y
$ 3 , 5 0 0 , 0 0 0 exc es s o f t h e p u r c h a s e p r i c e
a t t r i b u t a b l e t o t h e company o v e r t h e c a r r y i n g
amount o f n e t a s s e t s a c q u i r e d , based on
M an ag e m e nt 's e s t i m a t e s o f t h e f a i r m a r k e t
v a l u e s a t t h e d a t e o f a c q u i s i t i o n , on t h e same
b a s i s as r e f l e c t e d In t h e f i n a n c i a l s t a t e m e n t s
o f i t s p a r e n t ( "p ush -d ow n" a c c o u n t i n g ) . 5

4 F i r s t Nationw ide F in a n c ia l Corporation, Annua I

R e p o r t . 1985, NAARS S e a r c h .

5 CommunI c a t I o n s & Cable Inc., Annual Report 1985, p.

44 .
 175

Thus Comm un ica tio ns & C a b l e has a p p l i e d push down

a c c o u n t i n g as a r e s u l t o f the a c q u is itio n of the stock of

Its 80 p e r c e n t owner.

Investext

The f i n a l database searched through th e M is s is s ip p i

S t a t e U n i v e r s i t y CAIRS d e p a r t m e n t was Investext. This

database p ro v id e s i n d u s t r y and company r e s e a r c h reports

g e n e r a t e d by f i n a n c i a l analysts of leading Investment

firm s in t h e U n i t e d S a t e s , Canada, Europe and Jap an.

D etailed data r e g a r d i n g s a l e s and e a r n i n g s forecasts,

market share p r o j e c t io n s , and r e s e a r c h and d e v e lo p m e n t

expenditures is Included for a p p r o x i m a t e l y 250 0 p u b l i c l y

t r a d e d c o m p a n ie s . When t h e p h r a s e "push down" was

combined w i t h "accounting" for pu rp o se s o f the search,

f o u r c i t a t i o n s w e r e found .

The r e s u l t s of th is search d id not p r o v e as u s e f u l

as t h e s e a r c h o f t h e D i s c l o s u r e Management d a t a b a s e . Two

of t h e f o u r c i t a t i o n s w er e company r e p o r t s f o r S o ut h w es t

Gas C o r p o r a t i o n and N o r f o l k S o u t h e r n C o r p o r a t i o n . A

th ird cita tio n was S o f t w a r e Companies Is su es & Answers,

an Industry report. The f i n a l c i t a t i o n was t h e 1984

e d itio n of S o u t h e a s t e r n Bank Research..

Upon o b t a i n i n g t h e annual reports for So u th w e s t Gas

and N o r f o l k Southern, no m e n t i o n o f push down a c c o u n t i n g

c o u l d be located. The c i t a t i o n s obtained from t h i s

search were e s s e n t i a l l y references to s p e c ific Investext

reports. S i n c e no r e f e r e n c e t o push down a c c o u n t i n g

 1 76

c o u l d be located in t h e annual reports c ite d , a follow -up

search o f th is d a t a b a s e was p e r f o r m e d t o o b t a i n one o f

these actual Investext reports to a s c e rta in the type of

inform ation It contained. An expanded s e a r c h o f the

N o r f o l k Southern c i t a t i o n s i m p l y showed t h e h y p o t h e t i c a l

co n trib u tio n of t h e compa ny's propo sed p u r c h a s e o f

C o n rall on Its earnings, i n c l u d i n g an a d j u s t m e n t for push

down a c c o u n t i n g . Accordingly, i t was c o n c lu d e d t h a t the

I n v e s t e x t database d id not c o n ta in the type of

Info rm ation needed f o r th is study. No f u r t h e r follow -up

of t h e r e m a i n i n g c i t a t i o n s was p e r f o r m e d .

NAARS D a ta b a s e

Although th e Inform ation obtained from t h e

p r e l im i n a r y database searches provided v a lu a b le In sig h t

into the Is s u e o f push dowri a c c o u n t i n g , i t was f e l t that

th is s t u d y r e q u i r e d more examples t o e v a l u a t e how

com panies a r e a c t u a l l y i m p le m e n ti n g push down a c c o u n t i n g

in p r a c t i c e . A ccordingly, the National Automated

A c c o u n t i n g Rese ar ch System (NAARS) d a t a b a s e o f the

A m er ic an In s t it u t e of C e r t if ie d P u b l i c A c c o u n t a n t s was

searched. The NAARS d a t a b a s e c o n t a i n s annu al reports,

Including footnote disclosures, f o r more t h a n 40 0 0

com panies each y e a r . Since it does not Include a l l

p u b lic ly t r a d e d co m pa ni e s, a search of t h e NAARS system

c a n n o t be c o n s i d e r e d t o be an e x h a u s t i v e lis tin g of a ll

cases o f a given te c h n iq u e , bu t it does p r o v i d e examples

from a l a r g e sample o f com pa nie s.

 177

The NAARS d a t a b a s e s e a r c h was c o n d u c t e d u s i n g two

approaches. The f i r s t appro ach was a s e a r c h for the

phrase "push down" in t h e compa ny's f o o t n o t e s . The

s e a r c h was c o n d u c t e d by looking f o r any form o f t h e word

"push" when t h e n e x t word is "down"; "pushdown" as one

word was a l s o included In t h e s e a r c h . A n o th e r s e a r c h was

performed looking for any form o f t h e word "result" to

appear w i t h i n t h r e e words o f "goodw ill" (or " ex ce ss"

w ith in t h r e e words o f "cost" w i t h i n t h r e e words o f

" a s s e t " — a n o t h e r p h r a s e used t o d e s c r i b e g o o d w i l l ) ; th is

a ll was t o ap p e a r w i t h i n t h r e e words o f "restate" or

"adjust" w ith in two words o f "purchase." In o r d e r to

ap p e a r as a c i t a t i o n on t h e NAARS p r i n t o u t , a ll of the

Inform ation in t h e second ap pr oa ch had t o ap p e a r w i t h i n

t e n words o f "subsidiary fin a n c ia l statem ents." The

second ap p ro ac h was an a t t e m p t t o l o c a t e examples o f push

down a c c o u n t i n g when t h e t e c h n i q u e was d e s c r i b e d In t h e

fin a n cial s t a t e m e n t s as a r e s t a t e m e n t o f the assets

rather t h a n b e i n g d e s c r i b e d as push down a c c o u n t i n g .

Output from t h e two app ro ac he s is d i s c u s s e d s e p a r a t e l y .

The o u t p u t from t h e NAARS s e a r c h Is a r e p o r t

containing t h e name o f t h e company c i t e d , and a p o r t i o n

of the footnote containing the phrase included In t h e

search. An a t t e m p t was made t o o b t a i n the complete set

of fin a n cial statem ents of t h e com panies c i t e d by

review ing t h e annual report m icro fiche c o lle c tio n of the

lib ra rie s a t M i d d l e Tennessee S t a t e U n i v e r s i t y and

 1 78

V an d erb ilt U n iv e rs ity . R e q u es t s w er e a l s o made d i r e c t l y

t o t h e com panies t h e m s e l v e s . Most o f the fin a n c ia l

s ta te m e n ts were o b ta in e d through t h i s process. However,

a few o f t h e companies w e r e no t Included In t h e

m ic ro fic h e se rv ic e , and a l s o d i d not re spond t o t h e

rjequest for th e ir fin a n c ia l statem ents. A second NAARS

s e a r c h was p e r f o r m e d s i m p l y t o p r i n t o u t th e complete

te x t of the footnote for t h e companies whose f i n a n c i a l

s t a t e m e n t s c o u l d n o t be o b t a i n e d o t h e r w i s e . The

r e m a i n i n g a n a l y s i s was p e r f o r m e d from t h e inform ation

obtained as d e s c r i b e d In t h i s paragraph.

Key Words "Push Down"

The r e s u l t s o f th is firs t search y i e l d e d twenty

reports. However, s i n c e each y e a r Is f i l e d sep arately in

th is database, t h e same company c o u l d be l i s t e d more th an

once if the designated phrase Is c o n t a i n e d in more th an

one y e a r ' s annual report. T h i s was t h e c a s e f o r four of

the twenty reports yielded from t h i s search. An

a d d itio n al two o f t h e r e p o r t s a r e not a p p l i c a b l e to th is

s t u d y b e c au se t h e y d i d not d ea l w i t h push down

accounting; one c o n t a i n e d a comment t h a t the U.S. d o lla r

pushed down f o r e i g n exc ha ng e r a t e s , and t h e o t h e r

referred to the p ric e of t h e company's p r o d u c t b e i n g

pushed down from increases in s u p p l y . In v a r y i n g

degrees, th e remaining fourteen rep o rts are useful for

th is study. The f o l l o w i n g c la s s ific a tio n categorizes the

twenty re p o rts obtained from t h i s search:

 Company C i t e d Is a W h o l l y Owned S u b s i d i a r y
U s in g Push Down A c c o u n t i n g

1. Muse A i r
2. F i r s t Nationw ide F in a n c ia l Corporation
3. Normandy I n s u r a n c e
4. Van Dusen A I r
5. ChI Id W or Id I n c .
6. T r I Ameri can C o r p o r a t i o n

Company C i t e d R e p o r t s T h a t I t s W h o l l y Owned
S u b s i d i a r i e s Use Push Down A c c o u n t i n g

1. F l o r i d a N a t i o n a l Bancs
2. U n i t e d V i r g i n i a B a nk sh ar es
3. R o b e r t C. Brown & Co.

Company C i t e d Uses Push Down A c c o u n t i n g When It

Is Not a W h o l l y Owned S u b s i d i a r y

1. P a c i f i c Union Bank & T r u s t ( 9 8 p e r c e n t )

2. Commu nica tions & C a b l e ( 8 0 p e r c e n t )

Push Down A c c o u n t i n g A p p l i e d as a R e s u l t o f a
Sol I t o f f

1. P r l n c e v i l l e De vel opm ent C o r p o r a t i o n

Push Down A c c o u n t i n g Not A p p l i e d

1. H a r r i s Bankcorp ( w h o l l y owned)
2. S t r u t h e r O i l and Gas ( 8 2 . 2 p e r c e n t )

Not A p p l i c a b l e — Same Company C i t e d f o r More

t h a n One Year

1. H a r r i s Bankcorp
2. P r i n c e v i l l e De vel opm ent Co rp .
3. U n i t e d V i r g i n i a Ba nks ha re s
4. Co mmunications & C a b l e

Not A p p l i c a b l e — C i t a t i o n not for Push Down

Account Ing

1. Borg Warner
2. Louisiana P a c if i c Corporation

W h o l l y Owned S u b s i d i a r i e s Using Push Down

Account I n g . Of t h e fourteen usable c i t a t i o n s from t h i s

search, six of t h e companies meet t h e b a s i c d e f i n i t i o n o

 180

push down a c c o u n t i n g : a w h o l l y owned s u b s i d i a r y that is

u tiliz in g push down a c c o u n t i n g when issuing sep arate

fin a n c ia l statem ents. Each o f these s ix firm s

Imp lemented push down a c c o u n t i n g as a r e s u l t o f the

a cq u is itio n o f one hundred p e r c e n t o f th eir stock.

Muse A i r did not a c t u a l l y issue a s e p a r a te s e t of

fin a n c ia l statem ents, but supplementary Inform ation in

its p a r e n t comp an y's c o n s o l i d a t e d fin a n cial statem ents

shows M u s e ' s p o r t i o n o f a s s e t s , lia b ilitie s , and n e t

income on a push down b a s i s . 6 The a c q u i s i t i o n o f

Normandy I n s u r a n c e by S u n s t a t e s C o r p o r a t i o n r e p r e s e n t s an

exception t o t h e g e n e r a l i z e d d i s c u s s i o n o f push down

accounting e a r l i e r in t h i s appendix. The f o o t n o t e

d isclosures In d ic ate th a t the cost of the net assets

acquired is l e s s t h a n t h e book v a l u e o f those a s s e ts .

A p p lic a tio n of push down a c c o u n t i n g f o r Normandy

I n s u r a n c e t h u s r ed uc es t h e r e c o r d e d v a l u e o f the a s s e t s . 7

C h i l d W o r ld Inc. Is Included In t h e c a t e g o r y o f

wholly-owned s u b s id ia r i e s u tiliz in g push down a c c o u n t i n g

as a r e s u l t o f Its 1984 a c q u i s i t i o n . However, afte r the

establishm ent of th is new b a s i s o f a c c o u n t i n g , a pub lic

o ffe rin g o f C h i l d W or ld s t o c k was made In August o f 1985.

A ccordingly, the o r ig in a l o w ner's ownership perce n ta g e

has been r edu ce d from 100 p e r c e n t t o 8 1 . 5 p e r c e n t . 6

6So ut h w es t A I r I I n e s , Annual Report 1985, pp. 32-33.

7 S u n s t a t e s Annual Report. 1985, pp. 60-61.

6C h l l d W o r l d , Inc., Annual Report 1985, pp. 14-15.

 181

Tri-A m erican C orporation ap p lied push down

accounting In J u l y o f 1981 a f t e r becoming a w h o l l y - o w n e d

s u b s i d i a r y o f S c o t t i s h & York Intern ational Insurance,

Inc. In November o f 198 2, M idwestern F i d e l i t y

C o rp o ra tio n acquired a l l of TrI-A m erI c a n ' s stock from

S c o t t i s h & York. The f i n a n c i a l statem ents merely

in d ic a te that t h e p u r c h a s e method o f a c c o u n t i n g was used

for the 1982 a c q u i s i t i o n , n o t t h a t push down a c c o u n t i n g

was a p p l i e d a g a in .9

W hol ly- Own ed S u b s i d i a r i e s o f C i t e d Companies Use

Push Down A c c o u n t i n g . Three of the fo u rte e n usable

c i t a t i o n s were f o r p a r e n t companies who In d ic ate that

t h e i r w h o l l y owned s u b s i d i a r i e s have e s t a b l i s h e d a new

b a s i s o f a c c o u n t i n g upon a c q u i s i t i o n . F lo r id a National

Bancs and U n i t e d V i r g i n i a Ba nks ha re s d i s c l o s e t h a t push

down a c c o u n t i n g has been a p p l i e d to the separate

fin a n cial statements of t h e w h o l l y owned s u b s i d i a r i e s .

The U n i t e d V i r g i n i a Bankshares fo o tn o te s d i s c l o s e that

push down a c c o u n t i n g has been r e t r o a c t i v e l y ap p lied to

the a p p lic a b le separate fin a n c ia l statements of the

s u b s i d i a r i e s . 10 Per d i s c u s s i o n w i t h bank o f f i c i a l s , th is

re tro a c tiv e a p p licatio n of push down a c c o u n t i n g was a

resu lt of t h e SEC's p o s i t i o n on push down a c c o u n t i n g .

9 T r I - A m e r I can C o r p o r a t i o n , Annual Report. 1982,

NAARS S e a r c h .

10U n l t e d V i r g i n i a Bankshares, Annual Report. 1983,

p. 29.
 182

However, no a c t i o n was t a k e n by t h e SEC t o s p e c i f i c a l l y

require th is firm to implement push down a c c o u n t i n g . 11

R o b e r t C. Brown & Co. acquired a l l of the stock of

M idd le A t l a n t ic General I n v e s t m e n t Company ( t h e MAGIC

Group). However, t h e r e s u l t s o f MAGIC'S o p e r a t i o n s w er e

not Included in B r o w n 's c o n s o l i d a t e d fin a n cial

statem ents; MAGIC'S r e s u l t s on a push-down b a s i s w er e

r e p o r t e d as s u p p l e m e n t a r y Info rm ation.

Push Down A c c o u n t i n g A p p l i e d When S u b s i d i a r y Is Not

Who I I v Owned. Two o f t h e companies c i t e d employed push

down a c c o u n t i n g when l e s s th an one hundred p e r c e n t o f

th e ir s t o c k was a c q u i r e d . One o f t h e comp an ie s,

Co mmu ni ca tio ns & C a b l e , was f i r s t c ite d In t h e D i s c l o s u r e

Management d a t a b a s e s e a r c h and was d i s c u s s e d In an

e a rlie r section of th is appendix.

P a c ific Union Bank and T r u s t a p p l i e d push down

a c c o u n t i n g upon t h e a c q u i s i t i o n of 98 p e r c e n t o f Its

common s t o c k by F r a n k l i n Re sources Inc. The f o o t n o t e s

d escribe the tra n s a c tio n as f o l l o w s :

On December 11, 1985, t h e B a n k ' s boa rd

f i n a l i z e d I t s approval of t h e purchase of
2 3 , 4 0 0 and 2 6 , 0 0 0 , 0 0 0 s h a r e s , r e s p e c t i v e l y , o f
t h e B a n k ' s u n i s s u e d p r e f e r r e d and common s t o c k
by F r a n k l i n . The pu r c h a s e o f t h i s newly issued
s t o c k was c o m p l e t e d on December 19, 1985 and
r e s u l t e d In F r a n k l i n o w n e r s h i p o f 100% and 97%,
r e s p e c t i v e l y , o f the Bank's o u ts ta n d in g
p r e f e r r e d and common s t o c k a t December 3 1 ,
198 5. The c o n v e r s i o n o f t h e p r e f e r r e d s t o c k
i n t o common s t o c k as d i s c u s s e d in N o te 12, and
t h e p u r c h a s e o f 1 3 , 3 3 3 , 3 3 3 a d d i t i o n a l s h a r e s by
F r a n k l i n , r e s u l t e d in F r a n k l i n ' s o w n e r s h i p

11 J Im B a r r , T e I e p h o n e c o n v e r s a t i o n , A p ril 14, 1987.

 1 83

percentage Increasing t o 98% a t September 3 0 ,

198 6.

The a c q u i s i t i o n o f t h e Bank by F r a n k l i n was

a c c o u n t e d f o r as a p u r c h a s e , and "push down
a c c o u n t i n g " was a p p l i e d . The e x c e s s o f
F r a n k l i n ' s t o t a l purchase p r i c e , In c lu d in g
r e l a t e d l e g a l and o t h e r c o s t s o f $ 1 7 5 , 0 0 0 o v e r
t h e book v a l u e o f t h e B a n k ' s n e t a s s e t s , w hi c h
approximated the f a i r v a lu e of those a s s e ts ,
was r e c o r d e d as g o o d w i l l . The r e s u l t i n g
g o o d w i l l o f $ 9 1 6 , 6 2 7 is b e i n g a m o r t i z e d o v e r
ten years. A m o r t i z a t i o n f o r t h e n i n e months
ended September 3 0 , 1986 t o t a l e d $ 6 8 , 7 4 7 . 12

P a c i f i c Union Bank & T r u s t does n o t p r e s e n t l y

pub lish separate fin a n c ia l statements except for

regulatory purposes. Push down a c c o u n t i n g i s not

employed f o r t h e s e s e p a r a t e s t a t e m e n t s . 13 F ran k lin

Resources, In c., the parent of P a c if ic Un ion Bank & T r u s t

C o ., accounts fo r t h e company as an u n c o n s o l i d a t e d

subs I d I a r y . 14

Push Down A c c o u n t i n g A p p l i e d As a R e s u l t o f a

Sp I I t o f f . The o n l y company c i t e d In t h e NAARS s e a r c h

that a p p l i e d push down a c c o u n t i n g as a r e s u l t o f a

spI I t o f f was P r l n c e v i l l e Development C o r p o r a t i o n . This

company is a l s o Included in t h e o u t p u t o f the Disclosure

Management d a t a b a s e s e a r c h , and was a c c o r d i n g l y d i s c u s s e d

in t h a t section of th is appendix.

12F r a n k l i n R e s o u r c e s , In c., Annual R e p o r t . September

30, 19 8 6, NAARS S e a r c h .

13P e t e r M i l l s , Telephone c o n v e r s a t io n , A pril 21,

1987.

14F r a n k l i n Resources, Inc., Annual Report. 1986, p.

20.
 18 4

Push Down A c c o u n t i n g Not A p p l i e d . Two o f the

companies c i t e d by t h e NAARS s e a r c h r e f e r r e d t o push down

accounting In t h e i r annual r e p o r t s by n o t i n g that they

did not implement it. Follow ing is an e x c e r p t from

H a r r i s B a n k c o r p ' s annu al report:

On September 4 , 19 8 4, H a r r i s B a n k c o r p , I n c . j
became a w h o l l y - o w n e d s u b s i d i a r y o f Bankmont
F i n a n c ia l C o r p ., a Delaware C o r p o r a t i o n .
Bankmont F i n a n c i a l C o r p . Is a w h o l l y - o w n e d
s u b s i d i a r y o f Bank o f M o n t r e a l . The p u r c h a s e
accounting adjustm ents a s s o c ia te d w it h the
a c q u i s i t i o n a r e r e f l e c t e d on t h e a c c o u n t i n g
r e c o r d s o f Bankmont F i n a n c i a l C o r p . and have
no t been "pushed down" t o H a r r i s B a n kc o r p .
T r a n s a c t i o n s In t h e c a p i t a l a c c o u n t s o f H a r r i s
Bankcorp w hi c h w e r e r e l a t e d t o t h e a c q u i s i t i o n
d i d not have a m a t e r i a l impact on t o t a l
s t o c k h o l d e r ' s e q u i t y . 1®

S tru th e r O il & Gas C o r p . did n o t a p p l y push down

a c c o u n t i n g as a r e s u l t of the a c q u is itio n of 82.2 percent

of i t s common s t o c k . The f o o t n o t e s to the fin a n cial

statem ents d es crib e the s i t u a t i o n as f o l l o w s :

The Company's f i n a n c i a l s t a t e m e n t s do not

r e f l e c t S o u t h l a n d ' s c o s t o f t h e a c q u i s i t i o n in
a c c o r d a n c e w i t h t h e r e q u i r e m e n t s o f "push down
a c q u is it io n accountin g". Such a c c o u n t i n g would
r e s u l t In t h e Company's r e c o g n i t i o n o f an
e x c es s o f p u r c h a s e p r i c e o v e r n e t a s s e t s
a c q u i r e d as a r e s u l t o f S o u t h l a n d ' s a c q u i s i t i o n
o f $ 6 , 0 0 0 , 0 0 0 o f in te rc o m p a n y d e b t . Management
does n o t b e l i e v e I t is a p p r o p r i a t e t o r e c o g n i z e
t h i s e x c e s s In t h e Company's f i n a n c i a l
s t a t e m e n t s In l i g h t o f t h e s i g n i f i c a n t m i n o r i t y
I n t e r e s t and t h e f i n a n c i a l c o n d i t i o n o f t h e
Company. 16

15H a r r l s Bankcorp, Annual R eport. 1985.

16S t r u t h e r O i l & Gas C o r p . , Annual Report. 1983,

NAARS S e a r c h .
 18 5

The f o o t n o t e s d e s c r i b e S t r u t h e r O i l and Gas C o r p . as

a company In f i n a n c i a l d iffic u lty . Losses s i n c e

a cq u is itio n total $5,945,903, there Is a d e f a u l t on bank

indebtedness t o t a l i n g $6,314 ,4 13, there Is a d e f i c i e n c y

of $6,732,835 In w o r k i n g c a p i t a l , and t h e r e is a

d eficien cy In n e t a s s e t s o f $ 6 ,543 ,2 53. Thus it seems

t h a t management passed up an o p p o r t u n i t y t o make t h e

fin a n cial s t a t e m e n t s ap p ea r s t r o n g e r bec aus e t h e y fe lt

th at push down a c c o u n t i n g d i d n o t con fo rm t o economic

reaI I t y .

NAARS— Second Approach

The second a s p e c t o f t h e NAARS d a t a b a s e s e a r c h was

an a t t e m p t to l o c a t e exa mp les o f push down a c c o u n t i n g

when t h e t r a n s a c t i o n was d e s c r i b e d as t h e e s t a b l i s h m e n t

of a new b a s i s o f a c c o u n t i n g . This search y i e l d e d

nineteen reports, o n l y one o f w hi c h was u s e f u l for th is

study.

The o n l y relevant c ita tio n In t h i s aspect of the

search for push down a c c o u n t i n g I s H i g b e e Company. The

e n tire eq u ity I n t e r e s t o f H i g b e e Company was a c q u i r e d in

1984 by IEPL H o l d i n g s , Inc. The f o o t n o t e s d i s c l o s e that

t h e a c q u i s i t i o n was r e c o r d e d under t h e p u r c h a s e method o f

accounting, and t h a t H i g b e e :

. . . has r e f l e c t e d such new b a s i s o f

a c c o u n t i n g in i t s c o n s o l i d a t e d f i n a n c i a l
s t a t e m e n t s as o f O c t o b e r 2 8 , 1984.
A c co rd in g ly, the c o n so lid ated f in a n c ia l
s t a t e m e n t s and r e l a t e d f o o t n o t e amounts f o r t h e
p e r i o d s u b se qu e nt t o t h e a c q u i s i t i o n a r e not
comparable to the c o n s o lid a t e d f i n a n c i a l
 1 86

s t a t e m e n t s and r e l a t e d f o o t n o t e amounts f o r
p e r i o d s p r i o r t o t h e a c q u i s i t i o n . 17

The r e m a i n i n g c i t a t i o n s a re not u s e fu l for various

reasons. Several of t h e companies c i t e d made f o o t n o t e

references t o t h e e s t a b l i s h m e n t o f a new b a s i s o f

accounting for th eir su b sid iaries, b u t t h e new b a s i s was

established for pu rp o se s o f the co n solidated fin a n c ia l

statem ents. These s i t u a t i o n s do n o t refer t o push down

accounting, bec au se t h e s u b s i d i a r i e s a r e not p r e p a r i n g

separate fin a n c ia l statem ents. This is sim ply

a p p licatio n of t h e pu r c h a s e method o f a c c o u n t i n g w h e r e

t h e p r i c e p a i d by t h e p a r e n t for the su b s id ia ry Is

re fle c te d In t h e c o n s o l i d a t e d fin a n cial statem ents. Two

of t h e com panies had made a r e f e r e n c e to the

establishm ent of a new b a s i s o f a c c o u n t i n g for the

Inventories of acquired s u b s id ia r i e s . O t h e r companies

c i t e d were not r e l e v a n t because t h e y w e r e s i m p l y a

c ita tio n In a d i f f e r e n t year f o r a company p r e v i o u s l y

cite d . S i n c e t h e NAARS d a t a b a s e c o n s i d e r s each y e a r to

be a s e p a r a t e report, companies w i l l be lis te d as many

t i m e s as r e f e r e n c e s e x i s t in t h e i r annu al report to the

topic in q u e s t i o n .

^H igbee Company, Form IO-K. 1985, NAARS S e a r c h

 SELECTED BIBLIOGRAPHY

Books and Pronouncements

A c c o u n t i n g P r i n c i p l e s B o a r d . O p i n i o n No. 1 6 . " Bu s in e ss
C o m b i n a t i o n s . " New Y o r k : AI CPA, 1970.

A c c o u n t i n g S t a n d a r d s E x e c u t i v e C o m m i tt e e . Is s u e s P a p e r .
" ' P u s h Down' A c c o u n t i n g . " New Y o r k : AI CPA, 1979.

Beams, F l o y d A. Advanced A c c o u n t i n g . 3 r d e d . Englewood

C l i f f s , N. J . : P r e n t I c e - H a I I , 198 5.

B e r n s t e i n , Le op old A . , and E n g l e r , C a l v i n . Advanced

Account I n q . Homewood, I l l i n o i s : R i c h a r d D. I r w i n ,
I n c . , 1982.

Bray, F r a n k S e w e l l . "The P r i n c i p l e s o f A c c o u n t i n g
Measurement" in A c c o u n t i n g M i s s i o n , e d . R o b e r t H.
S t e r l i n g . La w re nce , Kansas: S c h o l a r ' s Book
Company, 1973.

D e f l i e s e , P h i l i p L . ; Johnson, Kenneth P . ; and M a c l e o d ,

R o d e r i c k K. M o n t g o m e r y ' s A u d i t i n g . 9 t h e d . New
Y o r k : The Ronald P r e s s Company, 1975.

F i n a n c i a l A c c o u n t i n g S t a n d a r d s Boa rd . D I s c u s s I on
Memorandum. "An A n a l y s i s o f Is s u e s R e l a t e d t o
A c c o u n t i n g f o r B u s in e s s C o m b i n a t i o n s and Purchased
I n t a n g i b l e s . " S t a m f o r d : FASB, 197 6.

__________ . Proposed S t a t e m e n t o f F i n a n c i a l A c c o u n t i n g
S tan d ard s. "C o n so lid a tio n of a l l M ajority-O w ned
S u b s i d i a r i e s " . S t a m f o r d : FASB, 1986.

__________ . S t a t e m e n t o f F i n a n c i a l A c c o u n t i n g Co n ce p t s No.
J., " O b j e c t i v e s o f F i n a n c i a l R e p o r t i n g by B u si n es s
E n t e r p r i s e s " S t a m f o r d : FASB, 1978.

__________ . S t a t e m e n t o f F i n a n c i a l A c c o u n t i n g Co nc ep ts No.
2, " Q u a l i t a t i v e C h a r a c t e r i s t i c s of Accounting
I n f o r m a t i o n . " S t a m f o r d : FASB, 19 8 0 .

187
_________ . S t a t e m e n t o f F i n a n c i a l A c c o u n t i n g Co nce pt s
No. 5 . " R e c o g n i t i o n and Measurement In F i n a n c i a l
S t a t e m e n t o f B u s in e s s E n t e r p r i s e s . " S t a m f o r d :
FASB, 198 4.

_________ . S t a t e m e n t o f F i n a n c i a l A c c o u n t i n g S t a n d a r d s
N o . 1 2 . " A c c o u n t in g f o r C e r t a i n M a r k e t a b l e
S e c u r i t i e s . " S t a m f o r d : FASB, 1975.

_________ . S t a t e m e n t o f F i n a n c i a l A c c o u n t i n g S t a n d a r d s
N o . 1 4 . " F i n a n c i a l R e p o r t i n g f o r Segments o f a
Business E n t e r p r i s e . " S t a m f o r d : FASB, 1976.

__________. S t a t e m e n t o f F i n a n c i a l A c c o u n t i n g S t a n d a r d s
No. 3 3 . " F i n a n c i a l R e p o r t i n g and Ch anging P r i c e s .
S t a m f o r d : FASB, 1979.

_________ . S t a t e m e n t o f F i n a n c i a l A c c o u n t i n g S t a n d a r d s
No. 8 9 . " F i n a n c i a l R e p o r t i n g and Changing P r i c e s .
S t a m f o r d : FASB, 1986.

H e n d r l k s e n , , EI den S. A c c o u n t i n g T h e o r y . 4 t h e d .
Homewood: R i c h a r d D. I r w i n , I n c , 1982.

IJ iri, Yu J I . “A D e f e n s e f o r H i s t o r i c a l C o st A c c o u n t i n g ,
In A s s e t V a l u a t i o n and Income D e t e r m i n a t i o n , e d .
R o b e r t H. S t e r l i n g . La w re nc e , Kansas: S c h o l a r ' s
Book C o . , 197 1.

__________. The F o u n d a t i o n o f A c c o u n t i n g M e a s u r e m e n t .
Englewood C l i f f s , J. J . : P r e n t I c e - H a I I , 196 7.

Kam, V e r n o n . A c c o u n t i n g T h e o r y . New Yo rk : John W l l e y

& Sons, 1986.

M o o n i t z , M a u r i c e . The E n t i t y The or y o f C o n s o l i d a t e d
S t a t e m e n t s . B r o o k l y n : The F o u n d a t i o n P r e s s , I n c . ,
1951 .

Most, Ken net h S. A c c o u n t i n g T h e o r y . Columbus, Ohio:

G r i d , I n c . , 1977.

S e c u r i t i e s and Exchange Commission. S t a f f A c c o u n t i n g

BuI I e t I n g N o . 5 4 . " A p p l i c a t i o n o f 'Push Down' Bas
o f A c c o u n t i n g in F i n a n c i a l S t a t e m e n t s o f
S u b sid iaries A c q u i r e d by P u r c h a s e . " CCH,
November, 1983.

Solomons, D a v i d . " As se t V a l u a t i o n and Income

D e t e r m i n a t i o n : A p p r a i s i n g t h e A l t e r n a t i v e s " in
A s s e t V a l u a t i o n and Income D e t e r m i n a t i o n , e d .
R o b e r t H. S t e r l i n g . La w ren ce , Kansas: S c h o l a r ' s
Book Company, 1971.
 189

S p ro u s e , R o b e r t T. Foundations o f Accounting T h e o r y .
G a in e s v ille : U n i v e r s i t y o f F l o r i d a P r e s s , 197 1.

S t a u b u s , George J. " A ss et s and S p e c i f i c E q u i t i e s " In

A c c o u n t i n g t o I n v e s t o r s , e d . R o b e r t H. S t e r l i n g .
L aw r en ce , Kansas: S c h o l a r ' s Book Company, 197 1.

W i l l i a m s , H a r o l d . " A c c o u n t in g P r a c t i c e s f o r O i l and Gas

P r o d u c e r s . " W a s h i n g t o n , D . C . : 197 8, qu o te d In
F i n a n c i a l A c c o u n t i n g S t a n d a r d s B o ar d , S t a t e m e n t o f
F i n a n c i a l A c c o u n t i n g C o n c e p t s No. 2 .

Per I o d I c a I s

Am eri can A c c o u n t i n g A s s o c i a t i o n , C o m m itt ee on Co nc ep ts

and S t a n d a r d s f o r C o r p o r a t e F i n a n c i a l S t a t e m e n t s .
" A c c o u n t i n g and R e p o r t i n g S t a n d a r d s f o r C o r p o r a t e
F i n a n c i a l S t a t e m e n t s — 1957 R e v i s i o n . " The
A c c o u n t i n g Review 32 ( O c t o b e r 1 9 5 7 ) : 5 3 6 - 5 5 3 .

__________. 1964 Co nc ep ts and S t a n d a r d s R es ear ch St ud y

C o m m i t t e e . "The E n t i t y C o n c e p t . " The Account Ing
Rev Iew 40 ( A p r i l 1 9 6 5 ) : 3 5 8 - 3 6 7 .

_________ . Co m m itt ee on A c c o u n t i n g V a l u a t i o n Ba ses .

" R e p o r t o f t h e C o m m itt ee on A c c o u n t i n g V a l u a t i o n
B a s e s . " The A c c o u n t i n g R e v i e w , sup pl e me nt t o v o l .
47 ( 1 9 7 2 ) : 5 3 5 - 5 7 3 .

An to n , H e c t o r R. " O b j e c t i v e s o f F i n a n c i a l A c c o u n t i n g :
Review and A n a l y s i s . " J o u r n a l o f A c co un ta nc y 141
(January 1976): 4 0-51 .

B a c k e r , M o r t o n . "A Model f o r C u r r e n t V a l u e R e p o r t i n g . "

CPA J o u r n a l 44 ( F e b r u a r y 1 9 7 4 ) : 2 7 - 3 3 .

B a r r e t t , M. E d g a r . "Proposed Bases f o r As s e t V a l u a t i o n . "

F i n a n c i a l E x e c u t i v e 41 ( J a n u a r y 1 9 7 3 ) : 1 2 - 1 7 .

B ird, F r a n c i s A . ; D a v id s o n , Le w is F . ; and S m i t h , C h a r l e s
H. " P e r c e p t i o n s o f E x t e r n a l A c c o u n t i n g T r a n s f e r s
Under E n t i t y and P r o p r i e t a r y T h e o r y . " The
A c c o u n t i n g Review 49 ( A p r i l 1 9 7 4 ) : 2 3 3 - 2 4 4 .

Chambers, R. J. "Usef u I ne s s— The V a n i s h i n g P r e m i s e In

A c c o u n t i n g S t a n d a r d S e t t i n g . " Abacus 15 (December
1979): 7 1 -92 .

C raft, James W . , and O ' T o o l e , K e v i n P. "Push Down

A c c o u n t i n g — Has I t s Time Come?" C o r p o r a t e
Account Ing 2 ( S p r i n g 1 9 8 4 ) : 5 7 - 6 2 .
 190

Cunningham, M i c h a e l E. "Push Down A c c o u n t i n g : Pros and

Co n s . " J o u r n a l o f A c co un ta nc y 157 ( J u n e 1 9 8 4 ) : 7 2 -
77 .

Goetz, B i l l y E . , and B l r n b e r g , Jacob G. "A Comment on t h e

T r u e b l o o d R e p o r t . " Management Acc oun t Ing 57 ( A p r i l
1976): 18-20.

H o l l e y , C h a r l e s E . ; Spede, Edward C . ; and C h e s t e r ,

M i c h a e l C . , J r . "The Push-Down A c c o u n t i n g
C o n t r o v e r s y . " Management A c c o u n t i n g 68 ( J a n u a r y
1987): 3 9 -4 2 .

K n o r t z , H e r b e r t C. "Economic R e a l i s m as a R e p o r t i n g
E s s e n t i a l . " F i n a n c i a l E x e c u t i v e 37 (March 1 9 6 9 ) :
21-30.

K o h l e r , E r i c L. "Why Not R e t a i n H i s t o r i c a l Co s t? " The

J o u r n a l o f Ac co un ta nc y 116 ( O c t o b e r 1 9 6 3 ) : 3 5 - 4 1 .

L i t t l e t o n , A. C. " S i g n i f i c a n c e o f I n v e s t e d C o s t . "
A c c o u n t i n g Review (A p r il 1952): 167-173.

L orlg, A r t h u r N. "Some B a s i c C o n c e p t s o f A c c o u n t i n g and

T h e i r I m p l i c a t i o n s . " The A c c o u n t i n g Review 39
(J u ly 1964): 563-573.

Mautz, R o b e r t K. "A Few Words f o r H i s t o r i c a l C ost."

F i n a n c i a l E x e c u t i v e 41 ( J a n u a r y 1 9 7 3 ) : 23-27, 60.

R o b b i n s , B a r r y P. "A Q u e s t i o n o f B a s i s . " J o u r n a l of
Accountancy 163 (March 1 9 8 7 ) : 9 6 - 1 0 1 .

Ross, Howard. " I s I t B e t t e r t o be P r e c i s e l y Wrong Than

V a g u e l y R i g h t ? " F i n a n c i a l E x e c u t i v e 39 ( Jun e
1971): 8 -1 2 .

S t a u b u s , Ge or ge J. "The Measurement o f A s s e t s and

L I a b I I 1 1 1 e s . " A c c o u n t i n g and B u s i n e s s Re se ar ch 3
(Autumn 1 9 7 3 ) : 2 8 6 - 2 9 6 .

S ylph, James M. "Push Down A c c o u n t i n g : Is t h e U . S . Lead

Worth F o l l o w i n g ? " CA M a o a z I n e 118 ( O c t o b e r 1 9 8 5 ) :
52-55.

W a l k e r , R. G. "An E v a l u a t i o n o f t h e I n f o r m a t i o n Conveyed
by C o n s o l i d a t e d S t a t e m e n t s . " Abacus 12 (December
1976): 7 7-11 5.

__________. " A ss et CI ass I f I c a t I o n ^ a n d A s s e t V a l u a t i o n . "

A c c o u n t i n g and B u s in e s s R e se ar ch 4 (Autumn 1 9 7 4 ) :
286-296.
 191

W i l c o x , Edward E. "Management Vi ew s o f P u rc h as e
A c c o u n t i n g . " O hl o CPA J o u rn a l 43 (Summer 1 9 8 4 ) :
159-160.

W i l l i a m s , Jan R o b e r t . " D i f f e r i n g O p i n i o n s on A c c o u n t i n g
O b j e c t i v e s . " CPA J o u r n a l 43 (A ug u st 1 9 7 3 ) : 6 5 1 -
656.

j Annual R e p o r t s and O t h e r

B arr, Jim . Telephone c o n v e r s a tio n . A p ril 14, 198 7.

C h ild W orld, Inc. Annual R eport. 1985.

Co mm un ic a tio ns & C a b l e Inc. Annual Report. 198 5.

Emerging I s s u e s Task F o r c e . I s s u e Summary 8 5 - 2 1 ;

"Changes o f O wn er sh ip R e s u l t i n g in a New B a s i s o f
A c c o u n t i n g . " S t a m f o r d : n . p . , 1985.

__________. M i n u t e s o f June 2 7 . 1985 Emerging Is s u e s Task

Force M eetin g . Decision 8 5 - 2 1 . "Changes o f
O w n e rs h ip R e s u l t i n g In a New B a s i s o f
A c co u n tin g ." Stamford: n . p . , 1985.

__________. M i n u t e s o f J u l v 2 4 . 1986 Emerging I s s u e s Task

Force M e e tin g . D ecision 8 6 - 1 6 . "C arryover of
P r e d e c e s s o r Co st In L e v e r a g e d Buyout T r a n s a c t i o n s . "
S t a m f o r d : n . p . , 198 6.

__________. I s s u e Summary 8 6 - 1 6 . Supplement No. 5 .

" C a r r y o v e r o f P r e d e c e s s o r C o st in L e v e r a g e d Buyout
T r a n s a c t i o n s . " S t a m f o r d : n . p . , 1987.

F irst N ationw ide F in a n c ia l Corporation. Annual R eport.

NAARS S e a r c h : 1985.

F r a n k l i n Resources, Inc. Annual R e p o r t . NAARS S e a r c h :

198 6.

H arris Bankcorp. Annual R eport. 1985.

H l g b e e Company. Form 1 0 - K . NAARS S e a r c h : 198 5.

Mills, P eter. Telephone c o n v e r s a t io n . Apri l 21, 1987.

NACRe C o r p o r a t i o n . Annual Report. 198 5. ,

P r l n c e v l l l e Deve lop men t C o r p o r a t i o n . Annual R eport.

1985.

Robert C. Brown & Co. Annual Report. 1985.

S o u th w e s t A i r l i n e s . Annual Report. 198 5.

S truther ON & Gas C o rp . Annual R eport. 19 8 3.

Sunstates. Annual Report. 1985.

TrI-A m erican C o rp oration. Annual R eport. 1982.

U nited V i r g i n i a Bankshares. Annual R eport. 198 3.