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What is contingent consideration in the context of consolidation?How should contingent compensation be treated during consolidation?
Assume that 5 years ago, Company A acquired a controlling interest in Company B. Company A recently borrowed $50,000 from Company B.
In consolidating the financial records of these two companies, how will this debt be handled?
Expert Answer
When at the time of acquisition of business, the parties are unable to arrive at a prchase consideration , they enter into an agreement whereby the acquirer agrees for payment of additional consideration, if specified future events occur or conditions are met.
Thus the payment is contingent upon the happening of a future event. This is known as “contingent consideration”
The contingent consideration has to be accounted by creating a liability, at fair value ,at the time of acquisition.
The amonut of $50,000 is to be removed from liabilities of company A and removed from assets of company B.
