Deferred Consideration

[Muhammad Amir]

Deferred Consideration means any thing that has to be paid in future by parent/acquirer company to the original shareholders of subsidiary acquired. For example Company 'P' acquired Company 'S'. 'P' has decided to issue 2 of its shares in exchange of '1' share originally held by shareholders of 'S' in 'S'. 'P' has also announced that it will give $5 to each shareholder for every share originally held in 'S' after 2 years, assuming that issued Share Capital of S was 10m shares, this amount totals $50m(10m shares*$5 per share). So, this 50m is a deferred consideration that has to be paid by parent company in 2 years time. The accounting treatment for this transaction is that $50m will be discounted to reach present value by using company's cost of capital. This is also known as present value of future consideration. Let's assume that company's cost of Capital is 10%. Present Value of $50m would be, ($50m/1.1^2)=>$41.32m. Accounting entry for this transaction is.

=DRInvestment In Subsidiary============>XXXXX+$41.32m
=========CRShare Capital=============>XXXX
=========CRShare Premium============>XXXX
=========CRDeferred Consideration======>$41.32m


Now, the difference of $8.68m($50m-$41.32m) will be spread through 2 years by unwinding of discount.

<b>At the end of Year 1.
</b>
$41.32*10%=$4.132+$41.32=$45.452. Accouting entry would be.

DRParent's Reserves=====>$4.132m
===>CRDeferred Consideration===>$4.132m


<b>At the end of Year 2.</b>

$45.452*10%=$4.5452+$45.452=$50m. Accouting entry would be.

DRParent's Reserves=====>$4.5452m
===>CRDeferred Consideration===>$4.5452m