dated working papers and are not recorded on the books of the subsidiary. If separate
financial statements are issued by the subsidiary, they report the subsidiary’s original
book values.
This practice is now being questioned in the United States, especially with reports
that have to be made to the Securities and Exchange Commission (SEC). Under Staff
Accounting Bulletin (SAB) No. 54, “Application of `Push Down’ Basis of Account-
ing in Financial Statements of Subsidiaries, Acquired by Purchase,” when a change
in ownership involving substantially all (generally at least 95%) of an acquired com-
pany’s stock occurs, it establishes a new basis of accountability for the acquired com-
pany, equal to the cost of the acquisition.
Under push-down accounting, the new owner’s cost of the acquired company is
“pushed down” to the acquired company by recording the fair value of the assets and
liabilities on the acquired company’s books. This procedure assures that the acquired
company’s separate financial statements report the same valuation reflected in the
consolidated financial statement. This procedure is criticized by some, however, be-
cause it permits an entity to revalue its assets and liabilities based on an ownership
change rather than on a purchase transaction made by the entity.
18.6 BUSINESS COMBINATIONS
(a) Overview. There are two methods of accounting for business combinations: (1)
the purchase method and (2) the pooling-of-interest method (international account-
ing standards use the term uniting of interest). Under the purchase method, an acqui-
sition of one entity by another is deemed to have occurred and, therefore, a new basis
of accounting is established for the assets and liabilities of the acquired entity. Under
the pooling-of-interest method, the combined companies are deemed to have fused
their interest and therefore the assets and liabilities are carried forward at their book
values. It is as if the combined companies have always been one.
In practice, only a small minority of companies worldwide uses the pooling-of-in-
terest method. In the United States, pooling is not permitted for business combina-
tions initiated after June 30, 2001, nor is it permitted in Australia, Brazil, or Japan.
Interestingly enough, it is required under certain circumstances in Canada, France,
Sweden, and the United Kingdom. In most countries there are specific conditions that
must be met before the pooling-of-interest method can be in accounting for a busi-
ness combination. In all countries that permit the pooling method, the pooling-of-in-
terest method and the purchase method are not alternative methods for reporting of a
specific business combination.
The treatment of goodwill arising in a purchase is different among the various
countries. In the United States, goodwill must be capitalized and written off only
when it has been determined to be impaired. In some other countries, goodwill is cap-
italized and then subsequently amortized. In others, goodwill is charged off immedi-
ately against earnings or equity.
(b) Purchase Accounting. The purchase method is used to account for a business
combination when there is an acquisition of one company by another.
From an accounting standpoint, the purchase creates a new accounting basis for
the assets and liabilities of the company being purchased. It is to be considered the
same as if the acquiring company had acquired each individual asset and assumed
each individual liability of the acquired company and their fair values. Thus, under
18 • 14 CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS COMBINATIONS