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This is a bit P2ish type of question but when auditing the deferred or/and contingent consideration, what discount rate should the management use to get the fair value? (WACC, Ke, Kd)
And suppose the acquirer will pay a deferred consideration in the form of shares, should they discount this at Ke only?
And what if the acquirer will pay a deferred consideration in the form of cash, then what discount rate should they use?
Extracts from the IASPLUS website on IFRS 2
I think this answers you!
“More measurement guidance.
IFRS 2 requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted.
In the absence of market prices, fair value is estimated using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm’s length transaction between knowledgeable, willing parties.
The standard does not specify which particular model should be used.
If fair value cannot be reliably measured.
IFRS 2 requires the share-based payment transaction to be measured at fair value for both listed and unlisted entities.
IFRS 2 permits the use of intrinsic value (that is, fair value of the shares less exercise price) in those “rare cases” in which the fair value of the equity instruments cannot be reliably measured.
However this is not simply measured at the date of grant.
An entity would have to remeasure intrinsic value at each reporting date until final settlement.”
So far as P2 / P7 is concerned, the examiner will direct you to a discount rate should the examiner wish you to discount any amount payable in the future
OK?
Oh, and the special valuation technique is usually the option pricing model right?
This intrinsic value to be remeasured every year will only be for cash settled deferred consideration?
Not for equity settled correct?“This intrinsic value to be remeasured every year will only be for cash settled deferred consideration?
Not for equity settled correct?”Not necessarily. It’s to be used when “the fair value of the equity instruments cannot be reliably measured.”
That could quite easily apply to the shares of entities that are not quoted on any recognised stock exchange
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