A buyer includes deferred and contingent consideration in the cost of a share purchase at the acquisition date, discounted where the effect is material, and the unwinding of the discount is charged as a finance cost. Under FRS 102 an earn out is included only if it is probable and can be measured reliably, and later changes in the estimate adjust the cost and therefore goodwill. Under IFRS 3 it is recorded at fair value from day one and later changes usually go through profit or loss instead.

What is the difference between deferred and contingent consideration?

  • Deferred consideration is a fixed amount payable later, such as £500,000 payable two years after completion. The only uncertainty is timing.
  • Contingent consideration, usually called an earn out, depends on future events, typically the target’s profits over one to three years after the deal. FRS 102 paragraph 19.12 describes it as an adjustment to the cost of the combination contingent on future events.

This page deals with the buyer’s accounts. The seller’s capital gains position on the same payments is explained in earn outs and deferred consideration on business sales.

How is fixed deferred consideration measured?

Paragraph 19.11 measures the cost of a business combination as the fair value at the acquisition date of the assets given, liabilities incurred or assumed and equity issued, plus directly attributable costs. A liability to pay a fixed sum in two years is worth less than that sum today, so it is discounted. The ACCA technical factsheet on FRS 102 consolidations says deferred consideration should be discounted to present value where material, using the rate at which the acquirer could borrow on similar terms, such as the rate its bank would charge.

The discount then unwinds. Paragraph 19.13B requires the unwinding to be recognised as a finance cost in profit or loss in the period it arises. The factsheet’s example confirms there is no later adjustment to goodwill for the unwinding, even if interest rates change before payment.

When does FRS 102 include an earn out in the cost?

Paragraph 19.12 requires the estimated amount to be included in the cost at the acquisition date, reflecting the time value of money if material, if the adjustment is probable and can be measured reliably. The ACCA factsheet reads probable as more likely than not. That leaves two outcomes at completion:

  1. Probable and measurable: include the best estimate, discounted, in cost and recognise a liability.
  2. Not probable, or not measurable: include nothing. Paragraph 19.13 says that if it later becomes probable and measurable, the extra consideration is treated as an adjustment to the cost of the combination at that point.

What happens when the earn out estimate changes?

Under FRS 102, paragraph 19.13A says that if the expected events do not occur, or the estimate needs revising, the cost of the combination is adjusted. Because goodwill under paragraph 19.22 is the cost less the acquirer’s share of net identifiable assets, a change in cost changes goodwill. A higher earn out increases goodwill and the liability; a lower one reduces both. Amortisation from then on reflects the revised goodwill (see goodwill useful life and amortisation).

This is different from the 12 month window in paragraph 19.19 for provisional fair values of the target’s assets and liabilities. Paragraphs 19.13 and 19.13A, which deal with contingent consideration, contain no equivalent time limit.

Is the payment consideration or pay for staying on?

Many earn outs are paid to sellers who stay on as directors. Paragraph 19.11B, added by the FRC’s Periodic Review 2024 amendments, says payments that remunerate employees or former owners for future services are not part of the cost of the combination. Whether contingent payments to selling shareholders are consideration or remuneration depends on the substance: why the agreement includes them, who proposed them and when. The FRC’s basis for conclusions (paragraph B19.5) says this guidance was added to highlight the importance of the distinction.

IFRS 3 paragraph B55 gives more detailed indicators, and is useful under FRS 102 as well. The strongest is in B55(a): if the payments are automatically forfeited when employment ends, they are remuneration for post combination services. B55 also points to the length of required employment compared with the earn out period, and whether the seller’s other pay is at a reasonable level.

If the payment is remuneration, it is accounted for as a cost of employing the sellers, not as part of the purchase price, so it never reaches goodwill.

How does IFRS 3 treat the same arrangement?

  • Initial measurement. Paragraph 39 recognises contingent consideration at its acquisition date fair value as part of the consideration. There is no probability threshold; probability is reflected in the fair value.
  • Classification. Paragraph 40 classifies an obligation to pay contingent consideration that is a financial instrument as a financial liability or equity under IAS 32.
  • Later changes. Paragraph 58 says changes from events after the acquisition date, such as meeting an earnings target, are not measurement period adjustments. Equity classified consideration is not remeasured. Other contingent consideration is remeasured to fair value at each reporting date, with changes in profit or loss. Goodwill is not changed.
  • Measurement period. Changes that reflect better information about facts existing at the acquisition date are measurement period adjustments under paragraph 45, limited to one year.

The ACCA article on accounting for goodwill makes the same distinction for deferred cash: it is recognised at present value in goodwill and as a liability, and the unwinding is an interest expense that does not change goodwill. The practical effect is that an earn out which pays out more than expected reduces profit under IFRS but increases goodwill under FRS 102. See IFRS 3 business combinations.

What about the parent’s own balance sheet?

The same consideration usually sits in the parent’s separate accounts as part of the cost of its investment in the subsidiary, with a matching liability. The ACCA factsheet example records the discounted deferred consideration as a debit to fixed asset investment and a credit to a deferred consideration liability, then charges the unwinding as interest payable. Where the parent measures investments at cost less impairment under paragraph 9.26, changes in the earn out estimate change that cost. See investments in subsidiaries in the parent’s accounts.

What must be disclosed?

For each combination in the period, paragraph 19.25(d) requires the cost of the combination and its components, and paragraph 19.25(dA) requires, for contingent consideration, the amount recognised at the acquisition date, a description of the arrangement and the basis for the payment, and an undiscounted range of outcomes. If a range cannot be estimated, the buyer says so and why; if the maximum is unlimited, that must be disclosed.

How does it work in numbers?

Illustration only. Buyer acquires 100% of Target for £1,000,000 cash plus an earn out of £300,000 payable in two years if Target’s profit exceeds an agreed figure. Payment is not linked to the sellers’ employment. At completion the earn out is judged probable. Using a 6% borrowing rate, its present value is £267,000. Target’s net identifiable assets at fair value are £900,000.

Event FRS 102 IFRS 3
Goodwill at completion £367,000 (£1,267,000 less £900,000) £367,000 if fair value is also £267,000
Unwinding in year 1 Finance cost of about £16,000 Included in the fair value change through profit or loss
Year 2: target missed, nothing payable Liability released against cost; goodwill reduced Liability released through profit or loss; goodwill unchanged

The same commercial outcome reduces goodwill under FRS 102 but produces a gain under IFRS.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.