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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
Deferred 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.Please 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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