Deferred cash consideration and contingent cash consideration

Eemma11y ago

Dear Sir, Can you please explain how to distinguish the two? I find it hard to determine when the question does not tell me explicitly. For example, in Air (Kaplan Final assessment 2009), I have assumed contingent consideration as the question said, '... payment of cash at $1 per share purchased, payable in three years from the date of acquisition. The terms of the agreement were such that this cash would only be paid if Blade makes profits of $3 million during that payment period. The directors are not confident that the profit will be made during that time'. The answer gave a deferred cash consideration without explanation. Thank you sir.

MikeLittleTutor11y ago#1

Both expressions relate to money payable in the future. Deferred consideration is an ACTUAL obligation that exists today but that will only be settled at some date in the future. In an F7 exam, it's not normally more than 2 years into the future before settlement date Contingent consideration is a POSSIBLE obligation that MAY become payable at some date in the future. However, for the purposes of IFRS 3 Business Combinations, we account for these POSSIBLE obligations as though they were ACTUAL and bring them into the goodwill calculation at their present value. Is that enough?

Eemma11y ago#2

Thank you for your prompt reply. Can I safely assume that, if such scenario appear on tomorrow's paper, I can just treat it as a deferred tax?

MikeLittleTutor11y ago#3

Deferred tax? Or do you mean deferred consideration? Taking a guess, I imagine that the acquisition (if there is one!) will be a share for share exchange including also an element of deferred consideration - either by way of late payment or by way of contingent payment Yes, if it appears in tomorrow's exam, treat it as deferred payment (not deferred tax!)

Eemma11y ago#4

I meant deferred consideration and not tax. Wonky after having sleepless nights... Many thanks, Sir.

MikeLittleTutor11y ago#5

You're welcome - and get to bed early this evening - plenty of bed rest so you're ready for F7 tomorrow, bright eyed and bushy tailed! Do not be tempted to struggle long into the night with last minute revision - it's guaranteed that that would be majorly counter-productive

Eemma11y ago#6

Yes sir!

MikeLittleTutor11y ago#7

:-)

RRa6y ago#8

Hello Sir, Can you please explain rationale and benefits to shareholders of including deferred cash consideration as part of the purchase consideration? Thanks..

P2-D2Tutor6y ago#9

Hi, The shareholders will want to know the true purchase price of the acquisition, just because something is paid in the future doesn't mean to say that it isn't part of the purchase price. By including it at present value we are giving them both more relevant and reliable information. Thanks

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