IFRS 3 - Contingent consideration (Earn-Out) - seller side accounting

[pratikvdoshi]

Dear All,

We have partially sold one of our group companies in 2023. The SPA has a clause for cash earn out (payable in next 4 years depending on the EBITDA of next 4 years).

Buyer has to include this in the purchase price at fair value and book financial liability for this in 2023.

I am not sure about seller side - do we book this as part of sale consideration and book the receivable as financial asset or since it is a contingent asset, we book income for this earn out in income statement every year for the next 4 years as it happens?

[JRSB]

FVTPL based on forecasts at the reporting date

[pratikvdoshi]

Thanks.

So, based on this I assume we need to include FV of the expected earn out, in sale consideration for 2023, from seller side accounting. Correct?

Should the fv of expected earn out, to be booked in 2023, be based on our best estimate where we will land in terms of receiving the earn out?

[JRSB]

Forecast the future cash receipts and discount based on expected timing. It's uncertain so best estimate revised at each reporting date.

[Marek Muc]

I agree with JRSB. The reference here is to IFRS 10.B98 which mandates recognising the consideration at fair value. Since you've mentioned only partially selling your interest (but assuming you've lost control), make sure to recognise any retained investment in the former subsidiary at its fair value.