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In accordance with ASC 805-20-25-1, the acquirer in a business combination recognizes the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as of the acquisition date. The acquirer often recognizes goodwill on the acquisition date (see BCG 2.6.1). Less frequently, an acquirer may recognize a bargain purchase gain on the acquisition date (see BCG 2.6.2). The amount of goodwill or a bargain purchase gain recognized by the acquirer is determined based on the consideration transferred (see BCG 2.6.3 through BCG 2.6.8).

2.6.1 Goodwill

Goodwill is an asset representing the acquired future economic benefits such as synergies that are not individually identified and separately recognized (i.e., it is measured as a residual). The amount of goodwill recognized is also impacted by measurement differences resulting from certain assets and liabilities not being recorded at fair value (e.g., income taxes, employee benefits).
ASC 805-30-30-1 provides guidance for measuring goodwill.

Excerpt from ASC 805-30-30-1

The acquirer shall recognize goodwill as of the acquisition date, measured as the excess of (a) over (b):
a. The aggregate of the following:
1. The consideration transferred measured in accordance with this Section, which generally requires acquisition-date fair value (805-30-30-7)
2. The fair value of any noncontrolling interest in the acquiree
3. In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
b. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Topic.

Goodwill acquired in a business combination is recognized as an asset and is not amortized (except for private companies or not-for-profit entities electing the goodwill alternative – see BCG 9.11). Instead, goodwill is subject to annual impairment tests, or more frequently if there is an indication of impairment, based on the guidance in ASC 350, Intangibles—Goodwill and Other. See BCG 9 for a discussion of goodwill impairment testing.
If the amount calculated under this approach is negative, a bargain purchase may have occurred.

2.6.2 Bargain purchase

Bargain purchases occur if the acquisition date amounts of the identifiable net assets acquired, excluding goodwill, exceed the sum of (1) the value of consideration transferred, (2) the value of any noncontrolling interest in the acquiree, and (3) the fair value of any previously held equity interest in the acquiree. ASC 805 requires the recognition of a gain for a bargain purchase. The FASB believes that a bargain purchase represents an economic gain, which should be immediately recognized by the acquirer in earnings. When a bargain purchase gain is recognized in a business combination, no goodwill is recognized.
Although a bargain purchase gain is not expected to be recognized frequently, examples in which a bargain purchase may occur include transactions without a competitive bidding process or when there is a forced or distressed sale. A gain from a bargain purchase may also occur if the acquirer and acquiree enter into an agreement prior to the closing date in which the purchase price is fixed and the fair value of the net identifiable assets increases during the period prior to the closing date.
If a bargain purchase is initially identified, the acquirer should reassess whether all of the assets acquired and liabilities assumed have been identified and recognized, including any additional assets and liabilities not previously identified or recognized in the acquisition accounting. Once completed, the acquirer should review the procedures used to measure the following items:
  • Identifiable assets acquired and liabilities assumed
  • Noncontrolling interest in the acquiree, if any
  • Acquirer’s previously held equity interest in the acquiree, if any
  • Consideration transferred
The objective of reviewing the above items is to ensure that the measurements used to determine a bargain purchase gain reflect all available information as of the acquisition date. The acquirer should also consider whether there are any preexisting relationships that were settled as part of the business combination. If after this review, a bargain purchase is still indicated, it should be recognized in earnings and attributed to the acquirer in accordance with ASC 805-30-25-2. ASC 805 requires disclosure of (1) the amount of the gain, (2) the line item where the gain is recognized, and (3) a description of the reasons why the transaction resulted in a bargain purchase gain.
Example BCG 2-19 illustrates a bargain purchase gain recorded in acquisition accounting.
EXAMPLE BCG 2-19
Bargain purchase gain
Company A acquires 100% of Company B for $150 million in cash. The preliminary fair value of the identifiable net assets acquired is $160 million. After assessing whether all the identifiable net assets have been identified and recognized and reviewing the measurement of (1) those identifiable net assets, and (2) the consideration transferred, Company A adjusted the value of the identifiable net assets acquired to $155 million.
How should Company A record the transaction in acquisition accounting?
Analysis
Company A, as part of the acquisition accounting, should recognize a $5 million bargain purchase gain ($155 million –$150 million), which is the amount that the acquisition date amounts of the identifiable net assets acquired exceeds the consideration transferred.

When a bargain purchase gain is recognized in a business combination in which the acquirer obtains less than a 100% controlling interest in the acquiree, we believe that no portion of the bargain purchase gain should be allocated to the noncontrolling interest. This is consistent with ASC 805-20-30-7, which requires the acquirer to measure a noncontrolling interest in the acquiree at its fair value on the acquisition date. See BCG 6 for further information on measurement of a noncontrolling interest.

2.6.3 Measuring and recognizing consideration transferred

Consideration transferred is generally measured at fair value. Consideration transferred is the sum of the acquisition-date fair values of the assets transferred, the liabilities incurred by the acquirer to the former owners of the acquiree, and the equity interests issued by the acquirer to the former owners of the acquiree (except for the measurement of share-based payment awards, see BCG 2.6.3.1). Examples of consideration transferred found in ASC 805-30-30-7 include cash, other assets, contingent consideration, a subsidiary or a business of the acquirer transferred to the seller, common or preferred equity instruments, options, warrants, and member interests of mutual entities.
There may be circumstances where the consideration exchanged in a business combination is only equity interests and the value of the acquiree’s equity interests are more reliably measurable than the value of the acquirer’s equity interest. This may occur when a private company acquires a public company with a quoted and reliable market price. If so, the acquirer should determine the amount of goodwill by using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the equity interests transferred.
In a business combination that does not involve the transfer of consideration, the fair value of the acquirer’s interest in the acquiree (determined by using valuation techniques) should be used in the measurement of goodwill. See FV 7.3 for a discussion of valuation techniques.
Additionally, the acquirer must determine whether any portion of the consideration transferred is not part of the acquisition accounting, but instead relates to a transaction separate from the business combination. If a transaction is entered into by the acquirer and is primarily for the benefit of the acquirer or the combined entity, the transaction should likely be recognized and accounted for separately from the business combination. See BCG 2.7 for additional information.

2.6.3.1 Share-based payment awards

An acquirer may exchange its share-based payment awards for awards held by grantees of the acquiree. All or a portion of the value of the share-based payment awards may be included in the measurement of consideration transferred, depending upon the various terms and provisions of the awards. Share-based payment awards are identified as a measurement exception because these awards are measured in accordance with ASC 718, Compensation—Stock Compensation. The recognition and measurement of share-based payments in a business combination are discussed further in BCG 3.

2.6.3.2 Consideration transferred includes other assets of the acquirer

Other assets (e.g., nonmonetary assets) and liabilities of the acquirer may be transferred as part of the purchase consideration in some business combinations. If other assets or liabilities of the acquirer are part of the consideration transferred, the difference between the fair value and the carrying value of these other assets or liabilities is typically recognized as a gain or loss in the financial statements of the acquirer at the date of acquisition. However, sometimes the transferred assets or liabilities remain within the combined entity after the business combination (e.g., because the assets or liabilities were transferred to the acquiree rather than to its former owners), and the acquirer, therefore, retains control of them. In that situation, the acquirer should measure those transferred assets and liabilities at their carrying amounts immediately before the acquisition date and should not recognize a gain or loss in earnings on assets or liabilities it controls before and after the business combination.

2.6.3.3 Consideration held in escrow

Acquisition agreements may require that a portion of the consideration transferred to the seller be held in escrow, often for the settlement of general representation and warranty provisions. These provisions typically lapse within a short period of time after the acquisition date. Absent evidence to the contrary, general representations and warranties are assumed to be valid as of the acquisition date and release of the escrowed funds is considered likely to occur. Therefore, amounts held in escrow for general representations and warranties should generally be included in acquisition accounting as part of the consideration transferred by the acquirer as of the acquisition date. For escrow arrangements relating to specific indemnifications or contingencies, see BCG 2.5.14.
An acquirer should carefully evaluate the legal terms of the business combination and the escrow arrangement to determine if it should present the amounts held in escrow as an asset on its balance sheet. For example, if cash held in the escrow account is legally owned by the acquirer, the acquirer should consider whether an escrow asset and corresponding liability to the seller should be recognized.
Contingent consideration is defined in ASC 805-10-20 as an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. Amounts held in escrow for general representations and warranties would generally not meet the definition of contingent consideration as these amounts relate to conditions existing as of the acquisition date and are not contingent upon the occurrence of a future event. However, if the release amounts held in escrow are dependent upon the occurrence of a future event (e.g., achieving post-acquisition earnings targets), the acquirer should consider whether such amounts represent contingent consideration. See BCG 2.6.4 for information on evaluating contingent consideration arrangements.

2.6.3.4 Working capital adjustments

A working capital adjustment is typically included in a purchase and sale agreement as a means of agreeing on the amount of working capital that existed, and was thus acquired, as of the acquisition date. Examples of working capital adjustments may include adjustments to allowances for returns and rebates and inventory valuation allowances. Similar to general representation and warranty provisions, the subsequent determination of working capital that existed as of the acquisition date does not relate to future events or conditions (i.e., events occurring or conditions being met after the acquisition date) and therefore does not give rise to contingent consideration. Accordingly, payments or receipts for changes in provisional amounts for working capital would be recognized as an adjustment of consideration transferred by the acquirer in its acquisition accounting if the changes occur during the measurement period. Payments or receipts for changes in provisional amounts for working capital that occur outside of the measurement period should be recognized in current period earnings.

2.6.3.5 Deferred consideration (business combinations)

In a business combination transaction, an acquirer may be required to transfer a specified amount of consideration to the seller after the acquisition date. If the amount of consideration is contractually specified in the purchase agreement and is not contingent on a future event or condition being met (i.e., the payment is based solely on the passage of time), the obligation is not accounted for as contingent consideration as discussed in BCG 2.6.4. Rather, the acquirer should measure the deferred payment obligation at fair value on the transaction date and include this amount as part of the consideration transferred. Subsequent accounting for the obligation should follow other applicable US GAAP (e.g., ASC 835, Interest).
Example BCG 2-20 illustrates the accounting for deferred consideration that is not contingent on a future event or condition being met.
EXAMPLE BCG 2-20
Deferred payment of consideration
Company A acquires 100% of Target B in a business combination. The acquisition agreement requires Company A to make a $100 million cash payment to the shareholders of Target B on the acquisition date and an additional $30 million cash payment two years after the acquisition date.
How should Company A account for the deferred payment of $30 million?
Analysis
As the $30 million cash consideration is not dependent upon the occurrence of a future event or condition, the deferred payment is considered seller financing, not contingent consideration. The deferred payment should be recognized at fair value on the acquisition date and included in the consideration transferred. Subsequent accounting for the deferred consideration should follow ASC 835, Interest, for the seller financing obligation.

2.6.4 Contingent consideration

Contingent consideration generally represents an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders if future events occur or conditions are met. Contingent consideration can also take the form of a right of the acquirer to the return of previously transferred assets or equity interests from the sellers of the acquired business. It is often used to enable the buyer and seller to agree on the terms of a business combination, even though the ultimate value of the business has not been determined. Any payments made or shares transferred to the sellers of the acquired business should be evaluated to determine whether they should be accounted for separately from the business combination. Contingent consideration that is paid to sellers that remain employed and linked to future services is generally considered compensation cost and recorded in the postcombination period. See BCG 2.6.5.1 and BCG 3 for further information on compensation arrangements.
Contingent consideration is recognized and measured at fair value as of the acquisition date in accordance with ASC 805-30-25-5. An acquirer’s contingent right to receive a return of some consideration paid (i.e., contingently returnable consideration) is recognized as an asset and measured at fair value in accordance with ASC 805-30-25-5 and ASC 805-30-25-7.
An acquirer’s obligation to pay contingent consideration should be classified as a liability or in shareholders’ equity in accordance with ASC 480, Distinguishing Liabilities from Equity, ASC 815, Derivatives and Hedging, or other applicable US GAAP. A contingent consideration arrangement may be a freestanding instrument or an embedded feature within another arrangement.
The accounting for contingent consideration in the postcombination period is impacted by its classification as an asset, liability, or equity, which is determined based on the nature of the instrument. Accounting for contingent consideration in the postcombination period is as follows:
  • Contingent consideration classified as an asset or liability: Contingent consideration classified as either an asset or liability is measured initially and subsequently at each reporting date at fair value. Generally, we would expect a reporting entity to record the entire change as a component of operating income until the contingent consideration arrangement is resolved.
  • Contingent consideration classified as equity: Equity-classified contingent consideration is measured initially at fair value on the acquisition date and is not remeasured subsequent to initial recognition. Settlement of the equity-classified contingent consideration is accounted for within equity. In other words, the initial value recognized for an equity-classified contingent consideration arrangement on the acquisition date is not adjusted, even if the fair value of the arrangement on the settlement date is different. There may be situations when contingent consideration is settled by issuing an entity’s own equity securities, but the arrangement is accounted for as a liability. See BCG 2.6.4.2 for further information regarding the classification of contingent consideration. See FV 7.3.3.5 for further information regarding the measurement of share-settled contingent consideration.

2.6.4.1 Contingent consideration related to a partially-owned subsidiary

A contingent consideration arrangement may be entered into as part of the acquisition of a partially-owned subsidiary. Similar to a contingent arrangement in the acquisition of a 100% interest, when acquiring less than 100%, the economics of the arrangement will determine whether the changes in the fair value of the arrangement represents an expense of the acquiree or acquirer. However, if acquiring less than 100%, the determination of which entity the expense belongs to will impact the amount allocated to the noncontrolling interest.
Example BCG 2-21 provides an example of contingent consideration related to a partially-owned subsidiary.
EXAMPLE BCG 2-21
Contingent consideration related to a partially-owned subsidiary
Target is owned 60% by Shareholder 1 and 40% by Shareholder 2. On January 1, Company A purchases the 60% interest in Target from Shareholder 1 for $200 plus contingent consideration. The contingent consideration arrangement specifies that Company A (not Target) will make future cash payments to Shareholder 1 based on Target achieving certain earnings levels in the two-year period following the acquisition. The acquisition-date fair value of the contingent consideration arrangement, which is classified as a liability in Company A’s balance sheet, is $50.
How should changes in the fair value of a contingent consideration liability be treated when the arrangement relates to a partially-owned subsidiary?
Analysis
The contingent consideration arrangement is between Company A and Shareholder 1 and does not impact the earnings of Target after the acquisition. In this case, none of the expense associated with the increase in the contingent consideration liability would be recognized by Target and therefore none would be attributed to the noncontrolling interest in Company A’s consolidated financial statements.

2.6.4.2 Determining classification of contingent consideration

A contingent consideration arrangement that is required to be settled in cash or other assets should be classified as a liability. A contingent consideration arrangement that is indexed to the entity’s own stock and required to be (or at the issuer’s option can be) settled in shares is classified as a liability or as equity. Determining the liability or equity classification of a contingent consideration arrangement that is indexed to and can be settled in an entity’s own shares can be complex and will require analysis of the facts and circumstances of each transaction. A company should determine the appropriate classification of a contingent consideration arrangement only after it has evaluated the criteria in ASC 480, ASC 815-40, and any other, appropriate authoritative guidance. FG 5 provides guidance on the application of the equity-linked instruments model, including the application of ASC 480 (FG 5.5) and ASC 815-40 after the adoption of ASU 2020-06 (FG 5.6) and prior to the adoption of ASU 2020-06 (FG 5.6A).
The guidance in ASC 480 applies to freestanding equity and equity-linked financial instruments and requires a reporting entity to classify certain financial instruments as liabilities. Financial instruments in the scope of ASC 480 are:
  • Mandatorily redeemable financial instruments
  • Obligations to repurchase the issuer’s equity shares by transferring assets
  • Obligations to issue a variable number of shares that meet certain criteria
Often, a contingent consideration arrangement includes an obligation to issue a variable number of shares if certain targets are met (e.g., revenues, EBITDA). ASC 480-10-25-14 provides additional guidance on financial instruments that an issuer must or may settle by issuing a variable number of shares.

ASC 480-10-25-14

A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following:
a. A fixed monetary amount known at inception (for example, a payable settleable with a variable number of the issuer’s equity shares)
b. Variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the Standard and Poor’s S&P 500 Index and settleable with a variable number of the issuer’s equity shares)
c. Variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put option that could be net share settled).
See paragraph 480-10-55-21 for related implementation guidance.

The determination of whether the monetary value of an obligation is based solely or predominantly on the factors in ASC 480-10-25-14 can be complex. See FG 5.5.1.1 for additional guidance on the meaning of “predominantly.”
If the contingent consideration arrangement is required to be classified as a liability under ASC 480, the arrangement will be initially measured at fair value in accordance with ASC 805-30-30-7 and subsequently measured at fair value with changes in fair value recorded in earnings pursuant to ASC 805-30-35-1(b). If a reporting entity has determined that the contingent consideration is not required to be reported as a liability under ASC 480, additional analysis under ASC 815 and ASC 815-40 is required to determine whether the instrument should be accounted for as an equity instrument or a liability. See DH 2.3 for additional information on the definition of a derivative under ASC 815.
ASC 815-40-15 provides guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. ASC 815-40-25 provides guidance for determining whether the instrument (or embedded feature), if indexed to an entity’s own stock, meets the requirements to be classified in shareholders’ equity. If a contingent consideration arrangement is (1) indexed to an entity’s own stock and (2) classified in shareholders’ equity, the arrangement would not be classified as a liability. It is important to note that the guidance in ASC 815-40 must be applied even if the instrument does not meet the definition of a derivative under ASC 815. See FG 5.6 (for companies that have adopted ASU 2020-06) or FG 5.6A (for companies that have not adopted ASU 2020-06) for additional information on this guidance.

2.6.4.3 Determining whether instrument is indexed to entity’s own stock

In determining whether the instrument (or embedded feature) is indexed to an entity’s own stock, ASC 815-40-15 requires an entity to apply a two-step approach – first evaluating an instrument’s contingent exercise provisions and then the instrument’s settlement provisions.
The first step relates to the evaluation of the arrangement’s contingent exercise provisions. An exercise contingency is a provision that entitles an entity (or counterparty) to exercise an equity-linked financial instrument (or embedded feature) based on changes in the underlying, including the occurrence (or nonoccurrence) of an event. Any contingent provision that affects the holder’s ability to exercise the instrument (or embedded component) must be evaluated. For example, holders may have a contingent exercise right or may have their right to exercise accelerated, extended, or eliminated upon satisfaction of a contingency.
Under the first step of ASC 815-40-15, if the exercise contingency is based on (a) an observable market, other than the market for the issuer’s own stock, or (b) an observable index, other than one measured solely by reference to the entity’s own operations (e.g., revenue, EBITDA), then the presence of the exercise contingency precludes an instrument (or embedded feature) from being considered indexed to an entity’s own stock. See FG 5.6.2.1 (for companies that have adopted ASU 2020-06) or FG 5.6.2.1A (for companies that have not adopted ASU 2020-06) for additional guidance on the evaluation of exercise contingencies, including an example when the exercise contingency is based on a change in the S&P 500 (which would not be considered indexed to the entity’s own stock).
The second step relates to the evaluation of the arrangement’s settlement provisions. Under the second step of ASC 815-40-15, if the settlement amount equals the difference between the fair value of a fixed number of the entity’s equity shares and a fixed monetary amount (or a fixed amount of a debt instrument issued by the entity), then the instrument (or embedded feature) would be considered indexed to an entity’s own stock. The settlement amount is not fixed if the terms of the instrument (or embedded feature) allow for any potential adjustments, regardless of the probability of the adjustment being made or whether the entity can control the adjustments. ASC 815-40-15-7E discusses an exception to the “fixed for fixed” rule. The exception allows the instrument (or embedded feature) to still be considered indexed to an entity’s own stock if the only variables that could affect the settlement amount are variables that are typically used to determine the fair value of a fixed-for-fixed forward or option on equity shares. See FG 5.6.2.2 (for companies that have adopted ASU 2020-06) or FG 5.6.2.2A (for companies that have not adopted ASU 2020-06) for additional guidance on the evaluation of settlement provisions.
In most contingent consideration arrangements, the exercise contingency and settlement provisions are likely based on the acquired entity’s postcombination performance and not that of the combined entity as a whole. US GAAP does not preclude an instrument from being indexed to the parent’s own stock if the instrument’s payoff is based, in whole or in part, on the stock of a consolidated subsidiary and that subsidiary is a substantive entity. Similarly, an index measured solely by reference to an entity’s own operations can be based on the operations of a consolidated subsidiary of the entity.
For contingent consideration arrangements in a business combination that include more than one performance target, it must be determined whether the unit of account is the overall contract or separate contracts for each performance target within that overall contract. For contingent consideration arrangements to be assessed as separate contracts, each performance target must be readily separable and independent of each other and relate to different risk exposures. The determination of whether the arrangement is separable is made without regard to how the applicable legal agreements document the arrangement (i.e., separate legal agreements entered into at the same time as the acquisition would not necessarily be accounted for as separate contracts). If separable, the contracts for each performance target may then individually result in the delivery of a fixed number of shares and as a result be classified as equity (if all other applicable criteria have been met). Otherwise, the arrangement must be viewed as one contract that results in the delivery of a variable number of shares because the number of shares that will be delivered depends upon which performance target is met. Unless the performance targets are inputs into the fair value of a fixed-for-fixed forward or an option on equity shares (which generally would not be the case), equity classification would be precluded.

2.6.4.4 Equity classification for instrument indexed to entity’s stock—after adoption of ASU 2020-06

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40). As part of this guidance, the FASB amended the derivative guidance for the “own stock” scope exception and certain aspects of the EPS guidance.
For public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, the guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The one-time determination of whether an entity is eligible to be a smaller reporting company is based on an entity’s most recent determination as of August 5, 2020, in accordance with SEC regulations. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB also specified that an entity must adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period, other than the first interim period of their fiscal year.
This section discusses the guidance in ASC 815-40-25 after the adoption of ASU 2020-06. BCG 2.6.4.4A discusses the guidance in ASC 815-40-25 prior to the adoption of ASU 2020-06.
ASC 815-40-25 provides guidance for determining whether an instrument (or embedded feature), if indexed to an entity’s own stock (and not within the scope of ASC 480), should be classified in shareholders’ equity.
All of the criteria that are relevant to the instrument must be met before the arrangement could meet the criteria to be classified in shareholders’ equity. See FG 5.6.3 (for companies that have adopted ASU 2020-06) for guidance on the evaluation of whether the instrument meets the equity classification requirements. A contingent consideration arrangement that meets the criteria in ASC 815-40-15 and ASC 815-40-25 would be classified as equity at the acquisition date (provided it is not in the scope of ASC 480 and the mezzanine equity guidance in ASC 480-10-S99 for companies subject to that guidance). In addition, the arrangement must be continually assessed to determine whether equity classification remains appropriate. If the arrangement no longer meets the criteria for equity classification, it would be reclassified to a liability at its then current fair value (see FG 5.6.3.1).
In practice, equity classification is sometimes precluded because an entity does not have a sufficient number of authorized and unissued shares available to settle its potentially dilutive instruments. In a situation in which the issuance of a contingent consideration arrangement in the current business combination results in an insufficient number of authorized shares to settle all of the potentially dilutive instruments, the contingent consideration arrangements and/or the other dilutive instruments will require liability classification, depending on the company’s policy for allocating authorized shares to the dilutive instruments. See FG 5.6.3.1 for additional information on sequencing of instruments.

2.6.4.4A Equity classification for instrument indexed to entity’s stock—before adoption of ASU 2020-06

This section discusses the guidance in ASC 815-40-25 prior to the adoption of ASU 2020-06. BCG 2.6.4.4 discusses the guidance in ASC 815-40-25 subsequent to the adoption of ASU 2020-06.
ASC 815-40-25 provides guidance for determining whether an instrument (or embedded feature), if indexed to an entity’s own stock (and not within the scope of ASC 480), should be classified in shareholders’ equity.
All of the criteria that are relevant to the instrument must be met before the arrangement could meet the criteria to be classified in shareholders’ equity. See FG 5.6.3A (for companies that have not adopted ASU 2020-06) for additional guidance on the evaluation of whether the instrument meets the equity classification requirements.
A contingent consideration arrangement that meets the criteria in ASC 815-40-15 and ASC 815-40-25 would be classified as equity at the acquisition date (provided it is not in the scope of ASC 480). In addition, the arrangement must be continually assessed to determine whether equity classification remains appropriate. If the arrangement no longer meets the criteria for equity classification, it would be reclassified to a liability at its then current fair value (see FG 5.6.3.1A).
In practice, equity classification is sometimes precluded because an entity does not have a sufficient number of authorized and unissued shares available to settle its potentially dilutive instruments. In a situation in which the issuance of a contingent consideration arrangement in the current business combination results in an insufficient number of authorized shares to settle all of the potentially dilutive instruments, the contingent consideration arrangements and/or the other dilutive instruments will require liability classification, depending on the company’s policy for allocating authorized shares to the dilutive instruments. See FG 5.6.3.1A for additional information on sequencing of instruments.

2.6.5 Classification of contingent consideration: examples

The examples consider various contingent consideration arrangements and provide analysis for determining the classification of contingent consideration arrangements as a liability or as equity. The examples assume Company A is a public company and would issue the same class of shares as its publicly traded shares if the contingent performance measures are achieved. The analyses below for nonpublic entities would generally be the same, except that most nonpublic companies would not have a means to net cash settle the arrangement outside the contract since their shares are not readily convertible to cash. However, our experience is that most contingent consideration arrangements involving nonpublic companies include net settlement provisions within the contract. Without net settlement, the arrangement would not be considered a derivative within the scope of ASC 815. If an arrangement was not considered a derivative due to physical settlement terms or for any other reason, it would still need to meet the conditions of ASC 815-40 to be classified as equity. If the contingent consideration is not classified in equity, it is required to be reported at fair value with changes in fair value reflected in earnings in accordance with ASC 805-30-35-1(b).
The examples provided in this section assume common shares are non-redeemable.
  • Example BCG 2-22 illustrates a contingent consideration arrangement when a fixed number of shares is issued based on an entity’s performance.
  • Example BCG 2-23 illustrates a contingent consideration arrangement when a variable number of shares is issued based on an entity’s performance and there is only one discrete performance period.
  • Example BCG 2-24 illustrates a contingent consideration arrangement that is linked to the acquisition-date fair value.
  • Example BCG 2-25 provides an example of a contingent consideration arrangement when a fixed number of shares is issued based on another entity’s operations.
  • Example BCG 2-26 illustrates a contingent consideration arrangement when a variable number of shares is issued based on an entity’s performance and there are multiple performance periods.
EXAMPLE BCG 2-22
Issuance of a fixed number of shares based on entity’s performance
Company A, a publicly traded company, acquires Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. Company A also agrees to issue 100,000 additional common shares to the former shareholders of Company B if Company B’s revenues (as a wholly owned subsidiary of Company A) exceed $200 million during the one-year period following the acquisition.
Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification. The company has concluded that there is one unit of account since there is only one performance target.
How should the issuance of a fixed number of shares based on entity’s performance be recognized?
Analysis
The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The contingent consideration arrangement is not within the scope of ASC 480. That is, at inception, the arrangement will not result in the issuance of a variable number of shares and the arrangement does not obligate Company A to transfer cash or other assets to settle the arrangement.
The contingent consideration arrangement meets the characteristics of a derivative because it (1) has one or more underlyings (Company B’s revenues and Company A’s share price) and notional amount (100,000 common shares), (2) has an initial investment that is “less by more than a nominal amount” than the initial net investment that would be required to acquire the asset, and (3) can be settled net by means outside the contract because the underlying shares are publicly traded with sufficient float so that the shares are readily convertible to cash.
In determining whether the derivative instrument is in the scope of ASC 815, the instrument must be evaluated to determine if it is subject to the exception in ASC 815-10-15-74(a) (i.e., the arrangement is indexed to an entity’s own stock and classified in shareholders’ equity). In determining whether the arrangement is considered indexed to Company A’s own shares, the first step is to determine whether there are exercise contingencies and, if so, if they are based on an observable market, other than the market for the issuer’s shares, or an observable index, other than an index calculated solely by reference to the issuer’s operations. The exercise contingency (i.e., meeting the revenue target) is based on an index calculated solely by reference to the “operations” of the issuer’s consolidated subsidiary, so step one of ASC 815-40-15 does not preclude the arrangement from being considered indexed to Company A’s own shares. In performing step two of ASC 815-40-15, it has been determined that the settlement of the arrangement is considered fixed-for-fixed, since the exercise price is fixed and the number of shares is fixed (i.e., the settlement amount equals the difference between the fair value of a fixed number of the entity’s equity shares and a fixed monetary amount).
Based on the analysis performed, the contingent consideration arrangement would be classified as equity if all of the other criteria in ASC 815-40 for equity classification have been satisfied and classification as mezzanine equity is not required under ASC 480-10-S99.
EXAMPLE BCG 2-23
Issuance of a variable number of shares based on entity’s performance: single performance period
Company A, a publicly traded company, purchases Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. Company A also agrees to issue 100,000 additional common shares to the former shareholders of Company B if Company B’s revenues (as a wholly owned subsidiary of Company A) equal or exceed $200 million during the one-year period following the acquisition. In addition, if Company’s B’s revenues exceed $200 million, Company A will issue an additional 1,000 shares for each $2 million increase in revenues in excess of $200 million, not to exceed 100,000 additional shares (i.e., 200,000 total shares for revenues of $400 million or more).
Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification.
How should the issuance of a variable number of shares based on entity’s performance be recognized?
Analysis
The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The contingent consideration arrangement must first be assessed to determine whether each of the performance targets represents a separate contract. Since the number of Company A shares that could be issued under the arrangement is variable and relates to the same risk exposure (i.e., the number of shares to be delivered will vary depending on which performance target is achieved in the one-year period following the acquisition), the contingent consideration arrangement would be considered one contractual arrangement. The arrangement may be within the scope of ASC 480 since it is an obligation to issue a variable number of shares and it varies based on something other than the fair value of the issuer’s equity shares (in this case, based on Company B’s revenues). A determination would need to be made as to whether the arrangement’s monetary value at inception is based solely or predominantly on Company B’s revenues (versus Company A’s share price), which, if so, would require liability classification. This determination would be based on facts and circumstances, but generally the more substantive (i.e., difficult to achieve) the revenue target the more likely the arrangement is based predominantly on the revenue target. If the arrangement is determined to be predominantly based on revenues, it would be considered a liability under ASC 480.
For the purpose of this example, assume that Company A determines the arrangement is not based solely or predominantly on Company B’s revenues. Although the contingent consideration arrangement is not required to be classified as a liability under ASC 480, liability classification would still be required because the arrangement would also not meet the second step of ASC 815-40-15 for equity classification. The settlement amount of the contingent consideration arrangement incorporates variables other than those used to determine the fair value of a fixed-for-fixed forward or option on equity shares (i.e., one of the key variables to determine fair value for this contingent consideration arrangement is Company B’s revenues). In other words, the amount of revenues not only determines whether the exercise contingency is achieved, but also adjusts the settlement amount after the exercise contingency is met. Therefore, the contingent consideration arrangement would not be considered indexed to Company A’s shares because the settlement provisions are affected by the amount of revenues which is not an input in valuing a fixed-for-fixed equity award. Therefore, the contingent consideration arrangement would be recorded as a liability at its fair value following the guidance in ASC 805-30-25-6. Further, changes in the liability will be recognized in Company A’s earnings until the arrangement is resolved in accordance with ASC 805-30-35-1(b).
EXAMPLE BCG 2-24
Contingent consideration arrangement linked to the acquisition-date fair value
Company A, a publicly traded company, acquires Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. At the acquisition date, Company A’s share price is $40 per share. Company A also provides Company B’s former shareholders contingent consideration whereby if the common shares of Company A are trading below $40 per share one year after the acquisition date, Company A will issue additional common shares to the former shareholders of Company B sufficient to make the current value of the acquisition date consideration equal to $40 million (i.e., the acquisition-date fair value of the consideration transferred). However, the number of shares that can be issued under the arrangement cannot exceed 2 million shares.
Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification.
How should the contingent consideration agreement linked to the acquisition-date fair value be recorded?
Analysis
The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The security price guarantee feature of the contingent consideration arrangement should be assessed to determine whether it is a freestanding feature or whether it is embedded within the shares issued in the business combination. In this instance, the guarantee is a freestanding financial instrument that was entered into in conjunction with the purchase agreement and is legally detachable and separately exercisable. The guarantee arrangement is within the scope of ASC 480 (ASC 480-10-25-14(c)) since, at inception, the guarantee arrangement creates an obligation that Company A would be required to settle with a variable number of Company A’s equity shares, the amount of which varies inversely to changes in the fair value of Company A’s equity shares. For example, if Company A’s share price decreases from $40 per share to $35 per share one year after the acquisition date, the amount of the obligation would be $5 million. Therefore, the freestanding guarantee would be recorded as a liability at its fair value following the guidance in ASC 805-30-25-6. Further, changes in the liability will be recognized in Company A’s earnings until the arrangement is resolved in accordance with ASC 805-30-35-1(b).
EXAMPLE BCG 2-25
Issuance of a fixed number of shares based on another entity’s operations
Company A, a publicly traded company, acquires Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. Company A also agrees to issue 100,000 additional common shares to the former shareholders of Company B if Company B’s operating revenues (as a wholly-owned subsidiary of Company A) exceed Company X’s (its largest third-party competitor) operating revenues by $1 million at the end of the one-year period following the acquisition.
Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification. Company A has concluded that there is one unit of account since there is only one performance target.
How should the issuance of a fixed number of shares based on another entity’s operations be recorded?
Analysis
The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The contingent consideration arrangement is not within the scope of ASC 480. That is, at inception the arrangement will not result in the issuance of a variable number of shares and the arrangement does not obligate the Company to transfer cash or other assets to settle the arrangement.
The contingent consideration arrangement meets the characteristics of a derivative because it (1) has one or more underlyings (Company B’s operating revenues, Company X’s operating revenues, and Company A’s share price) and notional amount (100,000 common shares), (2) has an initial investment that is “less by more than a nominal amount” than the initial net investment that would be required to acquire the asset, and (3) can be settled net by means outside the contract because the underlying shares are publicly traded with sufficient float so that the shares are readily convertible to cash.
In determining whether the derivative instrument is in the scope of ASC 815, the instrument must be evaluated to determine if it is subject to the exception in ASC 815-10-15-74(a) (i.e., the arrangement is indexed to an entity’s own stock and classified in shareholders’ equity). In making the determination of whether the arrangement is considered indexed to Company A’s own stock, the first step would be to determine whether there are exercise contingencies and, if so, if they are based on an observable market, other than the market for the issuer’s shares, or an observable index, other than an index calculated solely by reference to the issuer’s operations. The exercise contingency requires Company B’s operating revenues to exceed Company X’s (largest third-party competitor) operating revenues by $1 million at the end of the one-year period following the acquisition and, therefore, is based on an index that is not calculated solely by reference to the issuer’s operations (i.e., the index is a comparison to Company X’s revenues). This precludes the arrangement from being considered indexed to Company A’s own stock. Therefore, it is not necessary to perform the second step of ASC 815-40-15.
Since the arrangement is not considered indexed to Company A’s own stock under ASC 815-40-15, the arrangement is a liability and should be subsequently measured at fair value with changes in fair value recorded in earnings in accordance with ASC 805-30-35-1(b).
EXAMPLE BCG 2-26
Issuance of a variable number of shares based on entity’s performance: multiple performance periods
Company A, a publicly traded company, acquires Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. Company A also agrees to issue 100,000 common shares to the former shareholders of Company B if Company B’s revenues (as a wholly-owned subsidiary of Company A) equal or exceed $200 million during the one-year period following the acquisition. Furthermore, Company A agrees to issue an additional 50,000 common shares to the former shareholders of Company B if Company B’s revenues (as a wholly-owned subsidiary of Company A) equal or exceed $300 million during the second one-year period following the acquisition. The achievement of the earnouts are independent of each other (i.e., outcomes could be zero, 50,000, 100,000 or 150,000 additional shares issued).
Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification.
How should the issuance of a variable number of shares based on Company B's performance be recorded?
Analysis
The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The contingent consideration arrangement must first be assessed to determine whether each of the performance targets represents a separate contract. Since this is a contingent consideration arrangement subject to ASC 805, and the year one and year two outcomes are independent and do not relate to the same risk exposures (i.e., the number of shares to be delivered will vary depending on performance targets achieved in independent one-year periods following the acquisition), the arrangement would be treated as two separate contracts that would each result in the delivery of a fixed number of shares, and not as a single contract that would result in the delivery of a variable number of shares. As a result, the arrangement is not within the scope of ASC 480. That is, at inception, the separate arrangements will not result in the issuance of a variable number of shares and do not obligate Company A to transfer cash or other assets to settle the arrangement.
The contingent consideration arrangement meets the characteristics of a derivative because it (1) has one or more underlyings (Company B’s revenues and Company A’s share price) and a notional amount (common shares of Company A), (2) has an initial investment that is “less by more than a nominal amount” than the initial net investment that would be required to acquire the asset, and (3) can be settled net by means outside the contract because the underlying shares are publicly traded with sufficient float so that the shares are readily convertible to cash.
In determining whether the derivative instruments are in the scope of ASC 815, the instruments must be evaluated to determine if they are subject to the exception in ASC 815-10-15-74(a) (i.e., the arrangements are indexed to an entity’s own stock and classified in shareholders’ equity). In making the determination of whether the independent arrangements are considered indexed to Company A’s own stock, the first step would be to determine whether each separate, independent contract has an exercise contingency that is based on an observable market, other than the market for the issuer’s shares, or an observable index, other than an index calculated solely by reference to the issuer’s operations. The exercise contingency is not an observable market. The exercise contingency (i.e., meeting the revenue target) is based on an index calculated solely by reference to the “operations” of the issuer’s consolidated subsidiary, so step one of ASC 815-40-15 does not preclude the independent arrangements from being considered indexed to Company A’s own shares. In performing the second step of ASC 815-40-15, it has been determined that the settlements for each separate, independent contract would be considered fixed-for-fixed since the exercise price is fixed and the number of shares is fixed (i.e., the settlement amounts are equal to the price of a fixed number of equity shares). The arrangement is for the issuance of the common shares of Company A, which are classified as shareholders’ equity.
Based on the analysis performed, assuming the other requirements in ASC 815-40 are met and classification as mezzanine equity is not required under ASC 480-10-S99, each independent contract within the contingent consideration arrangement would be classified as equity.
For contingent consideration arrangements in a business combination, judgment is required to determine whether the unit of account should be the overall contract or separate contracts within the overall arrangement. For instance, an arrangement to issue 100,000 shares if revenues equal or exceed $200 million in the one-year period following the acquisition or 110,000 shares if revenues equal or exceed $220 million in the one-year and one-month period following the acquisition would likely be considered a single overall contract with multiple performance targets. That is, the performance targets for both the one-year and the one-year and one-month periods are largely dependent on achieving the revenue targets in the first year given the short duration of time (i.e., one month) that elapses between the end of the first period and the end of the second period. If the arrangement (or multiple performance targets) relates to the same risk exposure, the unit of account would be the overall contract rather than two separate, independent contracts.

2.6.5.1 Contingent consideration requiring continued employment

Certain contingent consideration arrangements may be tied to continued employment of the acquiree’s employees or the selling shareholders. These arrangements are recognized as compensation expense in the postcombination period. An acquirer should consider the specific facts and circumstances of contingent consideration arrangements with selling shareholders that have no requirement for continuing employment in determining whether the payments represent part of the purchase price or are separate transactions to be recognized as compensation expense in the postcombination period. See BCG 3 for additional discussion of compensation arrangements.
Example BCG 2-27 provides guidance on consideration of side arrangements in a business combination.
EXAMPLE BCG 2-27
Consideration of side arrangements in a business combination
Company B is made up of two business units, BU1 and BU2. The company is owned 5% by the former CEO and current board member, 1% by each of two management employees (together the “owner-employees”) and 93% by the majority owner.
Company B is selling BU1 to Company A in exchange for a $10 million upfront payment with additional consideration up to $4 million based on BU1 meeting certain EBITDA targets over a two-year period. The three owner employees will remain employed by BU1. Company A became aware of a side arrangement between Company B and the former CEO whereby the additional consideration would be paid to the former CEO and divided among the three owner employees at his discretion. Company A did not initiate and was not involved in the side arrangement.
Should the additional consideration be accounted for as contingent consideration or compensation?
Analysis
If the side arrangement did not exist, the additional consideration would likely be considered contingent consideration. However, in this example, there is a side arrangement, and as such it must be evaluated. The side arrangement results in the additional consideration being directed to the three owner employees, providing these individuals with contingent consideration that is not consistent with the majority shareholder on a per-share basis. As a result, this is an indicator that the arrangement is compensation and not contingent consideration.

Example BCG 2-27 illustrates the importance of understanding the terms of the business combination, including any side arrangements. Refer to BCG 3.3 for additional considerations when determining whether amounts represent consideration or compensation.

2.6.5.2 Contingent consideration of an acquiree

A preexisting contingent consideration arrangement of the acquiree assumed by the acquirer in a business combination should be initially recognized and measured at fair value in accordance with ASC 805-20-25-15A and ASC 805-20-30-9A. The fair value of a contingent consideration arrangement of an acquiree should be determinable because (1) the existing contingent consideration arrangement is inherently part of the economic consideration in the negotiations between the buyer and the seller and (2) most contingent consideration obligations are financial instruments for which fair value can be determined using current valuation techniques.
After initial recognition of the contingent consideration, it is subsequently accounted for and measured by the acquirer in accordance with ASC 805-30-35-1A. However, rather than being accounted for as part of the consideration transferred (as would be the case, for example, in a contingent consideration arrangement agreed upon between the acquirer and acquiree), diversity in practice exists as some believe the assumed contingent consideration should be treated as an assumed liability. A preexisting contingent consideration arrangement of the acquiree may be considered an assumed liability because it is payable to a third party rather than the seller in the business combination. See BCG 2.6.4 for further information on the accounting for contingent consideration in a business combination.

2.6.5.3 Effect of contingently issuable shares on earnings per share

When contingent consideration arrangements are in the form of common shares (or may be settled in common shares at the election of one or both parties), the shares are considered contingently issuable shares and may need to be included in the computation of basic and diluted earnings per share (EPS) of the combined entity. The EPS guidance for contingently issuable shares is included in ASC 260, Earnings per Share, paragraphs ASC 260-10-45-13 and ASC 260-10-45-48 through ASC 260-10-45-57. Refer to FSP 7.4.3.1 and FSP 7.5.3 for additional information related to basic EPS and diluted EPS, respectively.

2.6.5.4 Contingent consideration: seller accounting

Entities may sell a business in a transaction that includes a contingent consideration arrangement. The seller should determine whether the arrangement meets the definition of a derivative in accordance with ASC 815-10-15-83. See DH 2.3 for additional information on the definition of a derivative under ASC 815.
If the arrangement meets the definition of a derivative and does not qualify for a scope exception in ASC 815-10-15, it should be recorded at fair value on the acquisition date and subsequently adjusted to fair value each reporting period. In the Basis for Conclusions in FAS 141(R) the FASB acknowledged that most contingent consideration arrangements are financial instruments and that many meet the definition of a derivative. However, in practice, contingent consideration arrangements when the underlying is revenue, net income, cash flow from operations, or EBITDA qualify for the scope exception in ASC 815-10-15-59 (unless the income measure is due predominantly to the movement of the fair value of a portfolio of assets) and would therefore not be accounted for as derivatives.
If the arrangement meets the definition of a derivative but qualifies for a scope exception in ASC 815-10-15 or does not meet the definition of a derivative, the seller should make an accounting policy election to either record the contingent consideration portion of the arrangement at fair value at the transaction date or record the contingent consideration portion of the arrangement when the consideration is determined to be realizable. If the seller elects to record the contingent consideration portion of the arrangement at fair value at the transaction date, the seller must also make an election with respect to the subsequent accounting. The Emerging Issues Task Force discussed the accounting for contingent consideration by the seller in EITF Issue No. 09-4, Seller Accounting for Contingent Consideration (EITF 09-4), but did not reach a consensus. In the absence of definitive guidance issued by the FASB, we believe it is helpful to consider the alternatives evaluated during the EITF’s deliberations, which included allowing the seller to elect to subsequently account for the contingent consideration using the fair value option or  in accordance with ASC 450. Other approaches may be acceptable based on facts and circumstances.
Example BCG 2-28 provides an example of how to account for a contingent consideration arrangement from a seller's perspective.
EXAMPLE BCG 2-28
Contingent consideration: seller accounting
Company A sells its entire controlling stake in wholly-owned Subsidiary B. The proceeds of the sale include $150 million in cash paid up front plus contingent payments of 5% of revenue for the next 3 years. Net assets of Subsidiary B were $100 million. Company A has accounted for the contingent consideration arrangement based on the following information:
  • The contingent consideration arrangement does not meet the criteria to be accounted for as a derivative under ASC 815.
  • The seller can make an accounting policy election to either record the contingent consideration portion of the arrangement at fair value at the transaction date or when the consideration is determined to be realizable. In this example, Company A will account for the contingent consideration arrangement at fair value at the transaction date.
  • The fair value of the contingent consideration proceeds as of the disposal date is $10 million (assessed based on expected sales over the next 3 years of $70 million in year 1 with a 15% annual growth rate for years 2 and 3 and using a 10% discount rate that does not change over the period of the arrangement). See FV 7.3.3.5 for further detail on recognizing contingent consideration at fair value.
  • At the end of year one, while revenue was equal to the projections for the year, it was determined that the years two and three revenue growth rate would increase to 30%.
  • For illustrative purposes, tax effects have been excluded from the transaction.
How should Company A recognize the disposal transaction?
Analysis
The journal entry to record the sale of Subsidiary B at the disposal date is as follows (in millions):
Dr. Cash
$150
Dr. Contingent consideration—asset
$10
Cr. Net assets
$100
Cr. Gain on sale
$60
Company A would need to make an election for the subsequent accounting of the contingent consideration (e.g., fair value option or in accordance with ASC 450).
If Company A had elected to record the contingent consideration portion of the arrangement when the consideration is determined to be realizable, then Company A would not have recorded a contingent consideration asset at the transaction date, and any subsequent proceeds would not be recognized until the contingent consideration asset was realizable.

2.6.6 Noncontrolling interest (NCI)

NCI is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent. Said differently, it is the ownership interest in a consolidated subsidiary that is held by an owner other than the reporting entity (see ASC 810-10-20 and ASC 810-10-45-15).
Only interests classified as equity for financial reporting purposes may be characterized as an NCI. Interests that are equity in legal form, but for financial reporting purposes are classified as liabilities, would not constitute an NCI. BCG 6.2.1 provides guidance on determining whether interests held by third parties should be classified as equity.
An NCI is recognized and measured at fair value on the acquisition date (see ASC 805-20-30-1). Additional guidance on the initial measurement of an NCI can be found in BCG 6.3.1 and FV 7.3.5.
While interests in a subsidiary classified as a liability would not be characterized as NCI, they would still impact the amount of goodwill recognized, as explained in BCG 2.6.1.

2.6.7 Treatment of previously held equity interest in an acquiree

The acquirer may hold an equity interest in the acquiree prior to a business combination. In the Basis for Conclusions in FAS 141(R).B384, the FASB concluded that, on the acquisition date, the acquirer exchanges its status as an owner of an investment in the acquiree for a controlling financial interest of the acquiree and the right to direct and manage its assets and operations. The FASB believes this change in control of the previously held equity interest in the acquiree is an economic event that triggers the remeasurement of the investment to fair value.
On the acquisition date, the acquirer recognizes a gain or loss, if any, in earnings based on the remeasurement of any previously-held equity interest in the acquiree to fair value in accordance with ASC 805-10-25-10.
A remeasurement of a previously held equity interest is more likely to result in the recognition of gains, since companies are required to periodically evaluate their investments for impairment.
See BCG 5.3.2 for additional information on remeasurement of a previously-held equity interest in an acquiree.

2.6.8 Business combinations achieved without consideration transferred

Business combinations achieved without consideration transferred should also apply the acquisition method. Business combinations can occur without the transfer of consideration, as control may be obtained through means other than the purchase of equity interests or net assets. As discussed in BCG 1, business combinations that do not involve a transfer of consideration include a share repurchase by an investee, combinations by contract, and the lapse of minority veto rights.
In a business combination achieved by contract alone, the equity interests in the acquiree held by parties other than the acquirer are the noncontrolling interest in the acquirer’s financial statements. This could result in the noncontrolling interest being equal to 100% of the acquiree’s equity if the acquirer holds no equity interests in the acquiree after the business combination.
When a business combination is achieved without consideration transferred, the purchase price is based on the acquisition-date fair value of the business obtained. In such situations, a bargain purchase gain is expected to be infrequent. As described in BCG 2.6.2, the acquirer should reassess whether it has correctly identified all of the assets acquired and liabilities assumed before recognizing a gain on a bargain purchase in accordance with ASC 805-30-25-4.
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