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Deferred Consideration - Hassan1975 - 01-31-2009 08:12 PM

Hello Friends,
I am a new member to this forum and I have a question if some body can help me that will be greatly appreciated
I am doing the ACCA subject F7-Financial Reporting. My question is
What is the meaning of "Deferred Consideration" in calculating the Goodwill and How is it calculated.

Thanks and regards.


- Muhammad Amir - 02-01-2009 05:01 PM

Deferred Consideration means any thing that has to be paid in future by parent/acquirer company to the original shareholders of subsidiary acquired. For example Company 'P' acquired Company 'S'. 'P' has decided to issue 2 of its shares in exchange of '1' share originally held by shareholders of 'S' in 'S'. 'P' has also announced that it will give $5 to each shareholder for every share originally held in 'S' after 2 years, assuming that issued Share Capital of S was 10m shares, this amount totals $50m(10m shares*$5 per share). So, this 50m is a deferred consideration that has to be paid by parent company in 2 years time. The accounting treatment for this transaction is that $50m will be discounted to reach present value by using company's cost of capital. This is also known as present value of future consideration. Let's assume that company's cost of Capital is 10%. Present Value of $50m would be, ($50m/1.1^2)=>$41.32m. Accounting entry for this transaction is.

=DRInvestment In Subsidiary============>XXXXX+$41.32m
=========CRShare Capital=============>XXXX
=========CRShare Premium============>XXXX
=========CRDeferred Consideration======>$41.32m

Now, the difference of $8.68m($50m-$41.32m) will be spread through 2 years by unwinding of discount.

<b>At the end of Year 1.
$41.32*10%=$4.132+$41.32=$45.452. Accouting entry would be.

DRParent's Reserves=====>$4.132m
===>CRDeferred Consideration===>$4.132m

<b>At the end of Year 2.</b>

$45.452*10%=$4.5452+$45.452=$50m. Accouting entry would be.

DRParent's Reserves=====>$4.5452m
===>CRDeferred Consideration===>$4.5452m

- kamranACA - 02-02-2009 06:16 PM

Keep it up Amir.

- awaisaftab - 02-13-2009 02:13 PM

well Done Amir

You explain a very difficult and long describing issue in a very precise and easy way.

Please tell me why Reserve account will be debited ? when Reserve accounts is debited it means it is decreasing. Please explain in way as explained you previou querry.


Awais Aftab

- Muhammad Amir - 02-14-2009 05:11 AM

Dear Mr. Aftab,

Although, I understood your scheme but let me explain you this concept.

When a Parent Entity defers some consideration for future payments, it eventually raises its liability as "Deferred Consideration" which should be discounted to reach its present value by using appropriate discount rate. When original amount is discounted in present terms, continuing the above example, future liability of $50m is discounted at $41.32m in present terms, it means that this $41.32m is taken as principle amount and it will yield interest of $8.68m in two years time. So, $41.32m will yield interest of $8.68. Now, if you get through your Inter Commerce or B.Com books you will see a double entry of interest payments but for your convenience I am giving it you here,

Dr Interest Expense===XXX
Cr Liability/CASH======XXX

Now, Debiting Interest Account means Debiting Profit & Loss, next entry would be.

Dr Profit & Loss A/C===XXX
Cr Interest Expense ========XXX

Now, Debiting Profit & Loss means Debiting Retained Earnings which means, as you said, decreasing reserves.

Hence, the entry

DR Reserves===========$8.68
CR Deferred Consideration====$8.68

I hope I have passed my test.


Muhammad Amir

- Abubakar - 02-16-2009 07:37 PM

Dear Brothers,
Revised IFRS 3 Stated that Fair Value Takes care of Probabilty and no need to take the Present value and to charge interest each year to P&L.

We just have to concentrate on Fair Value, if it increases it'll causes to increase the Deffered consideration payable, whereas in case of Decrease in fair value the Deffered Consideration payable will also decreases.

In the Year of Acquisition,

Dr- COI ( Cost of Investment )
Cr- DCP ( Deffered Consideration payable )

In subsequest years
If FV Increases,
Dr- Consolidated Reserve

If FV Decreases


- awaisaftab - 02-19-2009 08:54 PM

Dear Amir

I was not taking your test. you misinterpreted my query. I cannot think why my post was interpreted by you. Dear, if you extacts from any of my word that I am taking your test it is not right. We are professionals and come online on accountancy forum to learn and share our views.

- Muhammad Amir - 12-11-2009 07:17 AM

I have just passed through this post.

Dear Mr. Abubakar

You are mixing two concepts which are quite different inter-se. According to my understanding, all contingent considerations are deferred considerations but all deferred considerations are not contingent considerations.


===1] Deferred Consideration.
===2] Contingent Consideration.

Deferred Consideration is something that <b>you have to pay</b> to original share holders of the Subsidiary, irrespective of any future performance.


Contingent Consideration is something that <b>you might need to pay</b> to original share holders of the Subsidiary, conditional upon the future targets met by the subsidiary.

In case of Deferred Consideration, there is no question of whether this will be payable or not because you have to pay it. So, you have to record it as a liability in your books and if the period of settelement of liability is material then you should discount it by using approprate discount rate.

In case of Contingent Consideration, there is a question to ask whether this amount will be payable or not? According to previous version of IFRS-3, it should be recorded if it is probable that financial resources will be required to settle it in future and the cost can be measured reliably and so on. However, this practice has been abandoned by IFRS-3 Revised, which requires contingent consideration to be recorded at fair value. Moreover, IFRS-3 states that if there is an ammendmend in future regarding contingent consideration, it might be due to two reasons;

====1] Additional information obtained which pertains to pre-acquisition events and if it had been foreseen at that time, it will result in the changes made to the fair value of contingent consideration.

====2] The change is due to the events occured after acquisition which did not exist at acquisition date.

Changes in Fair value of contingent consideration resulted due to reason # 1 should be dealt as pre-acquisition event and the goodwill should be remeasured.

Changes in Fair value of contingent consideration resulted due to reason # 2 should be dealt as follows;

=====A] If the contingent liability is to be setelled in Equity then it should not be remeasured.

=====B] If the contingent liability is to be setelled by issuing debt instrument then it should be dealt under IAS-39.

I hope, seniors will correct me if I am wrong anywhere.

Best Regards,

Muhammad Amir