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?