The Appraisal Foundation (TAF) has issued a Valuation in Financial Reporting (VFR) advisory on valuing contingent consideration, also known as earnouts. Contingent consideration must be reported at fair value as part of the purchase price in an M&A transaction. The valuation advisory “is a step forward in enhancing the public’s trust in business valuation” by making the process more transparent and “demystifying the black box of contingent consideration,” says Alok Mahajan, one of the advisory’s lead authors and Working Group chair, in a statement. The TAF points out that this VFR represents one of the only financial reporting valuation practice aids focused on valuation of options/real options. Therefore, the applications of the concepts extend beyond just contingent consideration.
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