Accounting for contingent consideration - Don't let earnouts lead to earnings surprises (M&A snapshot)

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M&A snapshot 02/25/2010 by Assurance services
Accounting for contingent consideration - Don't let earnouts lead to earnings surprises (M&A snapshot)

At a glance

In many M&A transactions, 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.

In many M&A transactions, 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 volume 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. We encourage you to share this document with clients and prospective clients, and engage them in discussions about how they may be impacted.