Contingent consideration at the acquisition date

Learning objectives

• Calculate the fair value of contingent consideration from scenarios and probabilities given in the case, then discounted at the rate given in the case.L2, L3
• Record the contingent consideration in the consideration transferred at its acquisition-date fair value.L2, L3

Normative references

• IFRS 3 §39Contingent consideration (price adjustment clauses that depend on future events) is part of the consideration transferred and is recognised at its acquisition-date fair value.

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

3 questions

• On acquiring Prairie SA, Source SA undertakes to pay additional consideration depending on the next year's profit: {amount_1} with a probability of {probability_1}, {amount_2} with a probability of {probability_2} and {amount_3} with a probability of {probability_3}. Case convention: scenarios and probabilities are case data; probability weighting is not the only method of estimating fair value, and the calculation requested is before discounting. Calculate the expected value of the contingent consideration.L2
• On acquiring Étang SA, Rivage SA pays {cash_paid} in cash and undertakes to pay {contingent_payment} in {years} if an activity target is met. Case convention: the fair value of this contingent consideration is estimated by discounting the payment, assumed certain in the case, at the rate of {discount_rate} (case data, with no probability weighting). Calculate the consideration transferred at the acquisition date.L3
• 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