This free, guided checker walks your finance team through the key decision points for ASC 805-30 Contingent Consideration in a Business Combination. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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ASC 805-30 applies only when the transaction is a business combination. Run the definition-of-a-business analysis first, including the screen test in ASC 805-10-55-5A added by ASU 2017-01: if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar assets, the set is not a business. Asset acquisitions and common-control transactions follow ASC 805-50, where contingent payments are not remeasured through earnings under ASC 805-30-35-1.
Outside ASC 805-30 - contingent payments in an asset acquisition follow the cost accumulation model in ASC 805-50 and other applicable GAAP, not acquisition-date fair value with remeasurement through earnings.
Official guidance: FASB Accounting Standards Codification
ASC 805-10-55-24 requires the acquirer to determine whether contingent payments to employees or selling shareholders are contingent consideration in the exchange or a separate transaction for post-combination services. Automatic forfeiture on termination of employment is the one bright line in the guidance: those payments are compensation, whatever the purchase agreement calls them. Read every employment, consulting, and noncompete agreement executed alongside the deal before answering.
A contingent payment arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post-combination services, accounted for separately from the business combination (ASC 805-10-55-25(a)).
Official guidance: FASB Accounting Standards Codification
The eight indicators in ASC 805-10-55-25 are: the terms of continuing employment, the duration of required employment, the level of remuneration compared with other key employees, incremental payments to employee-sellers versus non-employee sellers, the number of shares owned by the selling shareholders, linkage of the payment formula to the valuation of the acquiree, how the formula compares with a profit-sharing arrangement, and other agreements and income tax treatment. No single indicator other than automatic forfeiture is determinative - weigh them collectively and document the judgement. If you selected mixed, continue the classification analysis for the consideration portion and expense the compensation portion.
The substance of the arrangement is remuneration for post-combination services; account for it separately from the business combination as compensation cost (ASC 805-10-55-25).
Official guidance: FASB Accounting Standards Codification
ASC 805-30-25-6 requires the acquirer to classify an obligation to pay contingent consideration as a liability or as equity by applying ASC 480-10, ASC 815-40, or other applicable GAAP; ASC 805-30-25-7 classifies a right to the return of previously transferred consideration as an asset. Read the settlement mechanics in the purchase agreement rather than relying on the label - an arrangement described as an equity earnout that can or must be net cash settled is analyzed as a potential liability.
Classify the right to the return of previously transferred consideration as an asset, measured at acquisition-date fair value and remeasured through earnings until resolution (ASC 805-30-25-7; ASC 805-30-35-1).
Official guidance: FASB Accounting Standards Codification
Work through the sequence in order: first test ASC 480-10, which requires liability classification for obligations to issue a variable number of shares whose monetary value is predominantly fixed or varies on something other than the fair value of the issuer's shares; then apply the two-part ASC 815-40 analysis - whether the instrument is indexed to the entity's own stock and whether the equity classification conditions are met. A common trap: a share-settled earnout that promises a fixed dollar value of shares (value known, share count variable) is a liability under ASC 480-10-25-14 even though only shares will ever be delivered.
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Official guidance: FASB Accounting Standards Codification
Distinguish two very different adjustments. New information about conditions that existed at the acquisition date, identified within the measurement period of up to one year (ASC 805-10-25-13 through 25-19), adjusts the provisional amount against goodwill. Changes driven by post-acquisition events - achieving milestones, updated forecasts, discount rate movements - are fair value remeasurements recognized in earnings under ASC 805-30-35-1. The common trap is routing an earnout true-up through goodwill because the deal is less than a year old; the one-year window does not convert performance-driven changes into measurement-period adjustments.
Recognize the liability at its acquisition-date fair value as part of consideration transferred (ASC 805-30-25-5; ASC 805-30-30-7). Adjust the provisional amount in the period the adjustment is determined, with the offset to goodwill and catch-up of any related income statement effects (ASC 805-10-25-13 through 25-19; ASU 2015-16). Remeasure the liability to fair value with the change recognized in earnings; this is not a measurement-period adjustment and does not touch goodwill (ASC 805-30-35-1).
Official guidance: FASB Accounting Standards Codification
Equity-classified contingent consideration is measured once, at acquisition-date fair value, and is not remeasured for subsequent changes in fair value; settlement is accounted for within equity with no gain or loss (ASC 805-30-35-1). The measurement period is the narrow exception: new information about acquisition-date facts obtained within one year adjusts the provisional amount against goodwill. Because there is no later remeasurement, the initial valuation and the ASC 815-40 classification analysis carry the full weight - both attract close audit attention.
Recognize the arrangement within equity at its acquisition-date fair value as part of consideration transferred (ASC 805-30-25-5). Adjust the provisional acquisition-date amount within the measurement period, with the offset to goodwill (ASC 805-10-25-13 through 25-19). Do not remeasure - equity-classified contingent consideration stays at acquisition-date fair value and settlement is accounted for within equity (ASC 805-30-35-1).
Official guidance: FASB Accounting Standards Codification
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