Contingent Consideration ? The New Valuation Challenge under IFRS 3 (rev. 2008)

With the issuance of IFRS 3 (rev. 2008) - Business Combinations, the accounting for mergers and acquisitions changed again. Although many of the old provisions have remained unchanged, the new standard provides for additional accounting and valuation challenges. In the author's opinion the most significant change from an accounting, valuation and financial impact perspective arises from contingent consideration, such as earn-out agreements concluded between the buyer and the seller of a business. The fair value of contingent consideration has a severe impact on the total consideration paid for a business, goodwill as well as current and future statements of financial position and comprehensive income of the acquiring entity. As a consequence it is of paramount importance to completely understand the complex accounting provisions and possible valuation approaches and methods. In particular, the valuation of contingent consideration has not been extensively covered by relevant appraisal literature and as a consequence this article intends to provide a marginal contribution to cover this gap. The paper analyzes in its first part the identification of contingent consideration and related accounting provisions. After defining the standard of value in the context of the recently published IFRS 13 ? Fair Value Measurement, the article discusses various applicable valuation methods followed by a numerical example based on the expected discounted cash flow method supported by sensitivity and simulation analyses. The article concludes with practical implications and recommendations for reporting entities, valuers and accountants.