Valuing Contingent Consideration under SFAS 141R, Business Combinations: Issues and Implications for CFOs and the Transaction Team

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American Society of Appraisers Business Valuation Review™
Summer 2009 Volume 28, Issue 2 pp. 59-66
Lynne J. Weber, PhD
Rick G. Schwartz, PhD

Summary

Statement of Financial Accounting Standards No. 141, Business Combinations (revised 2007) (“SFAS 141R”) overhauls the financial reporting requirements for business combinations. The implications are broad and numerous. The transaction price, the amount of goodwill, the number of financial statement items recorded at fair value, and the time it takes for a transaction to become accretive all will be different under this new standard. A key change in SFAS 141R is the requirement to recognize contingent consideration at fair value on the acquisition date. Valuations of contingent consideration will need to be transparent and well-supported to withstand audit scrutiny. Furthermore, the potential earnings impact of subsequent re-measurement of certain contingent consideration assets and liabilities raises a number of important issues for transaction structuring and for the negotiation of transaction terms. This paper discusses how to value contingent consideration and the implications for the CFO, the financial reporting function and the transaction team of this important aspect of SFAS 141R.
Valuing Contingent Consideration under SFAS 141R, Business Combinations: Issues and Implications for CFOs and the Transaction Team
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