Intercorporate Investments - Contingent Consideration (pg 146)

What does this mean:

Both IFRS and GAAP do not remeasure equity classified contingent consideration; instead settlement is accounted for within equity.

u really study deep yes

I had the same questions on the entire contigent consideration section. My thoughts were the liability base created for the contigent liability could not be reassessed and thus go directly to OCI. Pure speculation on my part b/c i decided to discount that paragraph completely.

can anyone help with this?

Contingent consideration (CC) can be categorized as liability, equity, or asset (GAAP-only). When you initially book the value, it goes on the B/S at fair value.

Later on, if there is a change to the fair value of the CC, and the CC was booked as either a liability or an asset, the changes flow through the I/S. However, if the CC was initially booked as an equity item, the change in FV is a direct adjustment to equity through OCI (bypassing the I/S).

Hope this helps.

Aether, a note to your explanation: If you book CC to equity, it does not get remeasured, i.e. there are no subsequent changes in FV.

IFRS also permiits categorisation of CC as an asset. This happens when the purchase agreement provides for the possibility of return of amounts previously paid by the acquirer (if specified conditions for the repayment are met).

all the best!

Thank you both for the explanations. One question though: “Wojtek said there are no subsequent changes in FV” but there is a settlement in equity for changes in the contingent considerations.

Wojtek, not sure if you’re using the old material? Here’s the blurb, verbatim, from the CFAI text:

“Under both IFRS and U.S. GAAP, contingent consideration is initially measured at fair value. IFRS and U.S. GAAP classify contingent consideration as either a financial liability or equity. In addition, U.S. GAAP allows contingent consideration to also be classified as an asset. In subsequent periods, changes in the fair value of liabilities (and assets, in the case of U.S. GAAP) are recognized in the consolidated income statement. Both IFRS and U.S. GAAP do not re-measure equity classified contingent consideration; instead, settlement is accounted for within equity.”

Based on that last statement, it is implied that remeasurement is not allowed, but there could still be a change in the CV of the equity CC. In that case, the change would be recorded directly to equity via OCI.

You agree?

Hi Aether, I actually use the IFRS standards but have access to the current CFA book online.

Of course I agree with you! :slight_smile:

What happens is that the equity classified CC (i.e. CC in the form of a promise to issue shares if some condition is met in the future) does not change its carrying amount unitl the settlement date.

At the settlement date, if additional shares are indeed issued, the amount initially recognised gets transferred within to issued share capital. If there is no payment (because the condition which would trigger the payment was not met), then most companies would simply transfer that amount to retained earnings.

In both cases, you have a transfer of the original amount (never remeasured) to from one line in equity to a different line within equity (“settlement is accounted for within equity”), bypassing the income statement of course.

all the best!

^ Thanks for confirming, you sexy beast!