Complex Securities Valuation

Contingent Consideration (earnout) valuation under ASC 805

One of the most complex challenges of a business combination is determining and then accounting for the fair value of any contingent consideration (earnout valuation) associated with the transaction. Acquirers must measure fair value not only at the acquisition date, but again at each quarter so long as the contingent consideration exists as an asset or liability. As a result, whatever effect the target company’s performance has on earnings can be tempered by an opposite (but not necessarily equal) impact on earnings. Best-of-breed valuation techniques are needed to estimate the fair value of the earnout provision.

Services for Earnout Valuation

We work with you to do the following:

  • Identify the earnout that is part of a business combination or equity compensation
  • Identify the circumstances under which the transaction agreement requires consideration to be returned
  • Calculate the acquisition-date earnout valuation using best-of-breed modeling techniques
  • Assist in developing probabilities of attaining the earnout payoffs
  • Determine whether any earnout should be classified as equity, a liability (such as an earnout clause), or an asset
  • Remeasure assets and liabilities for each reporting date until the contingency is resolved
  • Model the effects on future earnings under a variety of scenarios
  • Present the valuation results and core valuation model underpinnings to your external auditor to assist them in performing their audit procedures

Gain greater visibility into the financial implications of earnouts while establishing a robust one-time or recurring valuation process.

A Crash Course on Earnouts

In any M&A situation, the acquiring company wants to avoid paying too much while the target company wants to avoid selling for too little. To bridge the valuation gap and get the deal done, many firms use a contingent consideration, or earnout.

Download this issue brief to learn more about earnouts – what they are, how they work, and the fair value measurement (valuation) implications that affect the upfront and ongoing accounting.

Josh Schaeffer, PhD · 1/29/2016

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