Classifying contingent consideration

Learning objectives

• Determine whether an obligation to pay contingent consideration is a liability or an equity instrument under IAS 32.L2, L3
• Record the contingent consideration according to its classification at the acquisition date.L2, L3

Normative references

• IFRS 3 §40The acquirer classifies an obligation to pay contingent consideration that meets the definition of a financial instrument as a financial liability or as equity on the basis of the definitions in para. 11 of IAS 32; it classifies as an asset a right to the return of previously transferred consideration if specified conditions are met. Wording from the Annual Improvements 2010-2012 Cycle (para. 64I); the current text refers only to IAS 32.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

5 questions

• In the acquisition of Aubépine SA, the acquirer undertakes to pay {payment} in {years} if a sales target is met; the obligation is classified as a liability. Case convention: its fair value is estimated by discounting that payment, assumed certain, at the rate of {discount_rate} (case data), and the entry is made at business combination level, against goodwill. Record the entry recognising the contingent consideration.L3
• In a business combination, the acquirer undertakes to pay additional consideration if the acquiree meets an activity target. How does it classify this obligation to pay contingent consideration?L2
• The analyst at Ormeau SA classified the contingent consideration of a business combination as equity, on the ground that settlement is to be in the acquirer's shares, without further analysis. What is the error?L2
• Teck SA acquires Nova SA. The agreement provides for additional consideration: if Nova's revenue exceeds a target, Teck will deliver to the former owners a number of shares set to reach a value determined at the time of settlement. Write a short note concluding on the classification of this obligation and on its subsequent measurement, distinguishing facts of the case, rule and professional judgement.L3
• On acquiring Opale-Net SA, the obligation to pay additional consideration, classified as a liability under IAS 32, was measured at {opening_fair_value} at the acquisition date. At the reporting date, its fair value is {closing_fair_value}, after a favourable development of the business since the combination. Case convention: subsequent measurement is at fair value and not at amortised cost. Record the remeasurement entry at the reporting date.L3