Monthly Archives: October 2018

What is Contingent Consideration?

imageWhat is contingent consideration?

A contingent consideration agreement is a separate understanding between the entity’s acquiring party and the entity seller’s to pay an additional price based on the occurrence of a target performance based on well-defined event or events described and outlined in the acquisition agreement.

These payments are referred to as earn-outs, the objective being to facilitate a closer meeting of the minds between the buyer and seller valuations. Terms can range over single or multiple reporting periods and generally involve additional consideration based on achieving agreed upon metrics over those single or multiple reporting periods. Not all of the achievements are financial and can include non-financial objectives which facilitate value enhancement such as those related to R&D, new product development, customer retention, and employee turnover.

Valuation of a Contingent Consideration

The valuation of unpaid contingent consideration, based on cash payments, involves probability related risk and present value considerations. The contingent amounts are payable in the future if and when, as defined, the contingent metrics are met. Since the likelihood of a payout depends solely whether goals are achieved, it either happens or does not. There are several theories about valuation, some of which encompass option pricing models, but for small business entities fair value of the net assets determines the contingencies by affecting acquisition goodwill and correspondingly liabilities for the contingent amount (fair value balance sheet presentations). Another way to look at the value of the contingency is to determine how a financial institution would value the contingency if it were offered as collateral for a loan (fair market value presentations).

Dennis B . Kremer, CPA/ABV/CFF/CGMA, CVA, CFE

Contributions Received & Made
Changes for Non-Profits

imageIn June 2018 FASB issued Accounting Standards Update 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The new guidance applies to all entities that receive or make contributions, including business entities.

The new guidance clarifies the definition of an exchange transaction.  Non-Profits will need to determine whether a contribution should be recorded as a contribution or exchange transaction.

  • A contribution is an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.
  • An exchange transaction is a reciprocal transfer in which each party receives and sacrifices approximately equal value. In an exchange transaction, the potential public benefits are secondary to the potential proprietary benefits to the resource provider.
  • A contribution that results if an entity voluntarily transfers assets (or net assets) or performs services for another entity in exchange for either no assets or for assets of substantially lower value and unstated rights or privileges of a commensurate value are not involved is an inherent contribution.

Before determining if you have a contribution or an exchange transaction there are many indicators that need to be considered; recipient Non-Profit intent in soliciting the asset/services, resource provider’s expressed intent about the purpose of the asset/services to be provided by the Non-Profit, method of delivery, method of determining amount of payment, penalties assessed if the Non-Profit fails to make timely delivery of assets/services, delivery of the assets/services to be provided by the recipient Non-Profit.

Government grants to business entities have been scoped out. Procurement/vendor arrangements are not affected.  No new disclosures are required.  If you have any questions regarding the new changes we can help, Please give our office a call.

Paul Conniff, CPA, CGMA