Contingent consideration

Contingent consideration
See also

Contingent consideration it is a payment with use of additional cash or additional shares which company pay or issue in the future. This situation is used when the company is the acquirer which merger another company. After that the acquirer promising to pay particular sum of money or issue shares from the equity capital[1]. Every amount of additional money or assets, which are the part of business acquisition are established (at acquisition date) to fair value[2]. The acquirer and the company which is merged, may negotiated the contingent consideration[3].

Change in fair value

Sometimes the value may changed because of additional informations. If the change in value appears over “measurement period” (which is necessary to established fair value) than this change is regarded as variation in “provisional amount” and settled by the correction of goodwill. But when the change in value appears after the measurement period, and it is an asset, then this change is reported in “earnings of the period”[4].

Classification of contingent consideration

Contingent consideration is classified as[5]:

  • Asset
  • Liability
  • Equity

Forms of non-cash consideration

Apart from standard classification, sometimes when transaction is non-cash, acquirer may use three types of “non-cash consideration"[6]:

Then the measurement is lean on acquirer cost and “the fair value of the assets acquired”[7].

Measurement of asset and liability

Contingent liability is measured “in the best valuation of the amount of the loss”, or in initially recognized amount of money, which is the higher. In opposite to contingent liability, a contingent asset is measured not in amount of loss but in “settlement amount”, which is also the best valuation. Apart from that contingent asset is lower than fair value (for the date of acquisition)[8].

Contingent consideration payments after the business acquisition

Contingent consideration depending on date of payment by the acquirer may be classified as[9]:

  • Cash outflows for financing activities and operating activities (if “payment is not made after the acquisition date”)
  • Financing activities (if “payment is at the acquisition date”)
  • Cash outflows for investing activities (if “payment is made after acquisition date”)


  1. Delaney P. R., Whittington O. R., Wiley, (2009), p. 544
  2. Delaney P. R., Whittington O. R., Wiley (2010) , p. 672
  3. Robinson T. R., Henry E., Pirie W. L., Broihahn M.A., Cope A. T., (2015), p. 788
  4. Delaney P. R., Whittington O. R., Wiley (2010) , p. 672
  5. CFA Institute, (2016), p. 6.7.2
  6. Flood J. M., (2014), p. 289
  7. Flood J. M., (2014), p. 289
  8. CFA Institute, (2016), p. 6.7.1
  9. Hahne R. L., Aliff G. E., (2018), Chapter 13


Author: Kinga Dudek