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CONSOLIDATION: DIFFERENCE BETWEEN DEFERRED CONSIDERATION & CONTINGENT CONSIDERAT

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 7 years ago by ammar5295.
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    Posts
  • November 18, 2015 at 4:35 am #283436
    marigold
    Member
    • Topics: 2
    • Replies: 5
    • ☆

    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 #285308
    ammar5295
    Member
    • Topics: 2
    • Replies: 12
    • ☆

    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 and

    Case 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% = $45455

    Case 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 #285313
    ammar5295
    Member
    • Topics: 2
    • Replies: 12
    • ☆

    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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