Subsequent measurement of contingent consideration

Learning objectives

• Calculate the change in fair value of contingent consideration classified as a liability and its effect on profit or loss.L2, L3
• Record the remeasurement or settlement of contingent consideration according to its classification.L2, L3

Normative references

• IFRS 3 §58Changes in the fair value of contingent consideration resulting from additional information about facts that existed at the acquisition date are measurement period adjustments (paras. 45 to 49); those resulting from events after the acquisition date (meeting an earnings target, reaching a specified share price, reaching a milestone on a project) are not. For the latter: contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity; any other contingent consideration is measured at fair value at each reporting date, with changes recognised in profit or loss (in accordance with IFRS 9 if within its scope). Wording from the Annual Improvements 2010-2012 Cycle (business combinations with an acquisition date on or after 1 July 2014, para. 64I).

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

9 questions

• 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
• At the acquisition date of Cormier SA, the contingent consideration classified as a liability has a fair value of {opening_fair_value}. At the reporting date, its fair value is {closing_fair_value}, the increase resulting from better earnings prospects that arose after the acquisition date. Case assumption: the change does not come from information about facts existing at the acquisition date. Calculate the change in fair value to be recognised in profit or loss.L2
• After the acquisition date, how does the acquirer treat contingent consideration? More than one answer is possible.L2
• The additional consideration owed by Lilas SA to the former owners of Mûre SA, indexed to future sales, is classified as a liability. Its fair value was {opening_fair_value} at the acquisition date; it is {closing_fair_value} at the reporting date, after better commercial performance by Mûre since the combination. Record the remeasurement entry at the reporting date.L3
• As a general rule, after the acquisition date, the acquirer measures and accounts for the assets acquired, the liabilities assumed and the equity instruments issued in accordance with the IFRSs applicable to those items.L2
• Which statements about the subsequent measurement of the items of a business combination are correct? More than one answer is possible.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