[Dan]

I have a question on push-down accounting that I was hoping someone can help clarify. I work for a company that is a subsidiary of another one. I’ve been tasked with reconciling the deferred cost account. There was a push-down entry that credited a large chunk of the deferred invoices and moved them to intangibles. That part confused me. My understanding of push-down is that you assess the balance sheet to fair value for the subsidiary. This part of moving the deferred cost to intangibles is a bit odd to me. Those costs are third party installation services that our company outsources. We recognize those costs as we recognize revenue.

 

thanks !

AUD - 83
BEC - 91
FAR - 85
REG - 79

.

[KenLee]

Based on my understanding, it is possible to treat deferred costs are directly associated with an intangible asset that was identified and valued as part of the acquisition process, they might be reclassified.

For example, if the installation services are part of a software implementation and the software is considered an intangible asset, then the costs of those services could possibly be included in the intangible asset's value.

I ask ChatGPT to give a simple example based on the scenario and I think that is a pretty decent examples.

Imagine a large company, “BigTech Parent Co.,” acquires a smaller tech company, “Innovative Subsidiary LLC.” Innovative Subsidiary LLC has been paying for third-party services to set up a complex software system that it sells to customers. These setup costs are initially deferred because they are recognized over the period the software is used by the customer, matching the revenue recognition.

Before the Acquisition:

Innovative Subsidiary LLC signs a contract for $100,000 with a third party to install the software.

Instead of expensing the $100,000 immediately, Innovative Subsidiary LLC defers the cost, recognizing it as an asset on the balance sheet.

As Innovative Subsidiary LLC earns revenue from the software (say over 5 years), it will recognize a portion of the $100,000 as an expense, matching the revenue recognized.

After the Acquisition:

BigTech Parent Co. acquires Innovative Subsidiary LLC and applies push-down accounting.

They evaluate all the assets and liabilities of Innovative Subsidiary LLC and adjust them to their fair market values on the acquisition date.

BigTech Parent Co. determines that the software setup, which includes the installation service, has created a valuable customer relationship—an intangible asset.

They decide that the $100,000 deferred cost is actually part of the value of this new intangible asset.

Accounting Treatment:

The $100,000 is moved from being a deferred cost on the balance sheet of Innovative Subsidiary LLC to being part of the intangible assets.

Now, instead of expensing the cost as it matches revenue, the $100,000 will be amortized over the useful life of the intangible asset.

Obviously it might not be the same situations that you are dealing with but it at least give you some ideas that how to make adjustments.

 

[Author]

Replies