Link to IFRS 9: contingent consideration as a financial liability

Learning objectives

• Explain why contingent consideration classified as a liability is measured at fair value through profit or loss after the acquisition date.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.
• 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.

1 question

• 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