02/25/2010 (Updated on October 1, 2015*)
This edition discusses the accounting for earnouts from a buyer’s perspective, and how the accounting guidance may impact the buyer’s acquisition accounting and introduce a level of volatility in the buyer’s earnings.
Often times when the buyer and seller cannot agree on the total purchase price in an acquisition, the two parties agree to an additional payment, or contingent consideration, based on the outcome of future events. These payments are commonly referred to as earnouts and are typically based on revenue or earnings targets that the acquired company must meet after the acquisition date. The accounting for these arrangements under the M&A Standards** represents a significant change from past practice.
This edition of Mergers & Acquisitions — A snapshot discusses the accounting for earnouts from a buyer’s perspective, and how the accounting guidance may impact the buyer’s acquisition accounting and introduce a level of volatility in the buyer’s earnings in post acquisition periods that results from the earnout arrangement.
* This snapshot, updated since its original issuance to reflect changes for, among other things, contacts and branding, contains guidance that remains relevant as of the publication date.
** Accounting Standards Codification 805 is the US standard on business combinations, Accounting Standards Codification 810 is the US standard on consolidation and noncontrolling interests (collectively the “M&A Standards”).