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Hello, everyone. I would like some clarification on whether contingent consideration in a business combination is carried at the present value of the consideration at the date of acquisition times the probability of the consideration being met or is carried at the present value ingnoring the probability. I saw this in Q1 of September 2018 and would like some clarification on it’s accounting treatment. Thank you.
Contingent consideration has to be measured at fair value.
If the contingent consideration will for example definitely be payable in three years then the value will be discounted to present value. But ensure that you explain in the exam that this is fair value.
Thank you, but I mean will the probability of it occurring be taken into consideration when calculating?
This is what informs my question:
‘Additionally, cash of $18 million was due to be paid on 1 January 20X9 if the net pro t after tax of Grape grew by 5% in each of the two years following acquisition. The present value of the total contingent consideration at 1 January 20X7 was $16 million. It was felt that there was a 25% chance of the profit target being met.’
Will this be recognized in the goodwill calculation as $16m or as $4m ($16m x 25%)?
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