What is Contingent consideration?
In short
Contingent consideration is an acquirer's obligation to transfer more consideration to the former owners if specified future events occur, such as an earnout based on future profits. It is recognized at fair value on the acquisition date as part of the consideration.
Key takeaways
- If classified as a liability, it is remeasured at fair value each period, with changes in earnings.
- If classified as equity, it isn't remeasured.
- Later changes don't adjust goodwill unless they are measurement-period adjustments.
Where it's tested
BAR: Business Combinations (Advanced) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Contingent consideration in a business combination is classified as a liability. After the measurement period, a change in its fair value that results from events after the acquisition date is: