Leveraged recaps involve deal structuring techniques, often used by financial buyers in LBOs, to avoid application of push down accounting to acquired companies

• Push down accounting is required if more than 94.9% of a target company's shares are acquired, per SEC SAB 54

• Leveraged recap techniques avoid application of SAB 54
  by maintaining independent holdings of
  at least 5.1% of the target's shares

• Independent holdings are often held by management

• The term push down alludes to how accounting entries at the level of the acquiring entity are "pushed down" onto,
  and thus recognized by, the target entity
  as a new basis of accounting
• If applicable, push down accounting requires a
  revaluation at fair market value of the target's assets, based on the buyer's purchase price

• Thus, requiring recognition of goodwill
  to the extent purchase price paid exceeds
  fair value of net assets acquired
• Can also result in higher book values for acquired assets, with higher periodic depreciation expense

Avoiding push down accounting can benefit LBO financial buyers because goodwill charges and depreciation expense, although non-cash expenses, lower GAAP net income, potentially decreasing market valuation of any subsequent IPO exit

• Less a concern now that FASB 142 has eliminated required periodic goodwill amortization

• Can still use recap techniques to avoid higher depreciation expense and potential goodwill impairment charges
• Note: SEC can take issue with claimed independent holdings that are really part of a collaborative group

SEC Staff Accounting Bulletin 54

• Text
• Push-down basis of accounting 1983

• Included in SAB 103 as Topic 5.J

• Requires push down accounting if more than 94.9% of a target company's shares are acquired

FASB  EITF Issue No. 88-16

• Text
• Addresses application of push down accounting to LBOs

EITF D-97 (April 2001 EITF meeting)

• Text
• SEC statements suggest closer scrutiny on whether claimed independent holdings are really part of a collaborative group

SEC Speech   2001

• Text
• Push down accounting where public debt is not significant

M&A Accounting