Share issue by acquirer

Hello Mike,

Could you please correct me on the following treatments surrounding contingent consideration for equity instruments?

Example: An acquirer promised to issue 5 million of $1 shares in two years time if the subsidiary’s profits hit $xx. It is felt that there is a 30% chance of the profit target being met. The share price at acquisition date was $3.

So for now:
1. We will recognise $4.5m (5m x $3 x 30%) as the fair value of contingent consideration in the determination of goodwill.

2. We will credit $1.5m in Share Capital and $3m in Share Premium, debit $4.5m in Investment In Subsidiary

Two years later….

The profit target has been achieved and the shares were issued at the listed price of $5 per share.

1. Goodwill is not readjusted

2. We will credit $3.5m ($5m – 1.5m previously recognised) in Share Capital

+

Credit $17m ($25m- 5m – $3m previously recognised) in Share Premium

+

Debit Retained Earnings $20.5m?

I am not quite sure about this last step. An article on ACCA web stated that “its subsequent settlement shall be accounted for within equity (eg Cr share capital/share premium Dr retained earnings).” But I have surely missed something out, haven’t I?