Other Accounting Issues in Business Combinations

Contingent consideration

Many business acquisitions include contingent consideration features, which require, if specified conditions are later met, that additions to the purchase price be paid either in cash, or in shares of the acquiring entity. The presence of contingent consideration provisions in an acquisition arrangement must be addressed, both at the time of the acquisition and later, if and when contingent consideration is earned and paid.

Under current GAAP (FAS 141), contingent consideration is not deemed part of the cost of the acquisition until the contingency (e.g., future earnings) is resolved. (But see exception in following paragraph.) However, FASB is considering revisions to business combinations accounting in its forthcoming Business Combinations standard that may provide that the estimated fair value of such contingent payments be incorporated into the purchase price determination. Readers should be alert to further developments, which are expected by mid‐2007.

At the date of the acquisition, however, contingent consideration is important to the extent that it precludes immediate recognition of an extraordinary gain arising from the excess of “negative goodwill” over the amounts allocable to reduce the carrying values of various assets (all assets other than cash, receivables, inventory, financial instruments carried on the balance sheet at fair value, assets to be disposed of by sale, and deferred income tax ...

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