Forums › ACCA Forums › ACCA FR Financial Reporting Forums › CONSOLIDATION: DIFFERENCE BETWEEN DEFERRED CONSIDERATION & CONTINGENT CONSIDERAT
- This topic has 2 replies, 2 voices, and was last updated 8 years ago by ammar5295.
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- November 18, 2015 at 4:35 am #283436
Good day, I’m a bit confused. Please what is the difference between a deferred consideration and a contingent consideration. I understand deferred consideration as a future payment that is being discounted to its present value now. But I’m a bit confused with contingent consideration
Also I don’t really getting the treatment of the unwinding of the discount in the consolidated fin. Statement.
Thank you
November 25, 2015 at 11:21 pm #285308Deferred Consideration is the payment that is to be paid by the buyer after a pre-defined time period.
Contingent Deferred Consideration is the payment that is to be paid by the buyer ONLY if some events, which are specified in the contract occur within a pre-defined time period.
For example,
Cost of capital = 10%
P buys S for $300,000 on 1-1-15 andCase 1:
Deferred payment of $500,000 on 31-12-15,
Then $500,000 will be converted into Present Value i.e
Present Value of deferred consideration $500,000 x 1.1^(-1) = $454545
The unwinding of discount will be 454545 x 10% = $45455Case 2:
Contingent Deferred payment of $500,000 on 31-12-15 ONLY if Profit < $1000000,
Then $500,000 will be converted into Present Value i.e
Present Value of deferred consideration $500,000 x 1.1^(-1) = $454545
The unwinding of discount will be 454545 x 10% = $45455 (same so far)
BUT if condition is not met, Gain will be recorded then
DEBIT Contingent Constructive Obligation 500,000
CREDIT Profit and Loss/Retained Earnings 500,000
No impact on goodwill if condition not met though.
I hope it helps.November 26, 2015 at 12:23 am #285313Please do confirm this with your teacher. I am student myself and shared my workings. I do not represent Opentuition and not a teacher so there is a chance I might be wrong. I am unsure if I was allowed to answer the queries. There is no edit or delete button so now I think I just have to stick with it. I am not sure exactly how it works. Anyways, best of luck for your exams.
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