Question

When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition?
a. The fair value of the contingent consideration is expensed immediately at acquisition date.
b. The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized.
c. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met.
d. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm.

Answer 1

Answer:

b. The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized.

Explanation:

Measuring the fair value of contingent consideration for financial reporting is a complex process – based on a number of variable inputs, unique risk profiles, and potentially complicated payoff structures.