This free, guided checker walks your finance team through the key decision points for IFRS 3 Contingent Consideration in Business Combinations. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS 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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Earn-outs, milestone payments, and revenue or EBITDA targets payable to sellers are contingent consideration when part of the exchange for obtaining control under IFRS 3. Screen side letters and employment agreements as well: payments forfeited if a selling shareholder ceases employment are post-combination remuneration, not consideration (IFRS 3.52(b); IFRS 3.B55(a)). Contingent rights to recover consideration from sellers are indemnification or clawback assets, analyzed separately.
The contingent consideration workflow does not apply; complete the remaining acquisition-date measurements of consideration transferred and goodwill (IFRS 3.32; IFRS 3.37).
Official guidance: IFRS issued standards
IFRS 3.39 requires acquisition-date fair value inclusion in goodwill calculation regardless of probability of payment; use option-pricing or scenario-weighted models as appropriate. Fair value reflects market participant assumptions under IFRS 13, so a low-probability earn-out still carries a measurable value rather than zero. Retain the valuation model, scenario weights, and discount rate support as acquisition-date evidence.
Measure the contingent consideration at acquisition-date fair value and include it in consideration transferred before finalizing goodwill (IFRS 3.39; IFRS 3.32).
Official guidance: IFRS issued standards
IFRS 3.40 classifies the obligation using the definitions of a financial liability and an equity instrument in IAS 32.11. An earn-out settled in a variable number of shares is a financial liability even though it is share-settled; only a fixed-for-fixed settlement qualifies as equity. Test the earn-out clause against the fixed-number condition before concluding, and remember classification is set at the acquisition date.
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Official guidance: IFRS issued standards
After the measurement period, changes in fair value of liability-classified contingent consideration are profit or loss; measurement-period adjustments adjust goodwill retrospectively. The dividing line is the cause of the change: new information about facts that existed at the acquisition date adjusts goodwill within the one-year window (IFRS 3.45), while post-acquisition performance, forecast revisions, and discount-rate movements are always profit or loss (IFRS 3.58(b)).
Reclassify remeasurement to profit or loss, or to goodwill only where it is a measurement-period adjustment arising from facts existing at the acquisition date (IFRS 3.58; IFRS 3.45).
Official guidance: IFRS issued standards
Equity-classified contingent consideration is not remeasured at fair value after acquisition date; settlement is an equity transaction when shares are issued to sellers. Any difference between the acquisition-date amount and the value of shares at settlement stays within equity - no gain or loss is recognized. If the contract is later amended to allow cash or variable-share settlement, reassess the arrangement rather than continuing equity treatment.
Reassess classification under IFRS 3.40 and IAS 32.11; equity-classified amounts are not remeasured and settle within equity (IFRS 3.58(a)).
Official guidance: IFRS issued standards
IFRS 3.45-50 adjustments during the twelve-month measurement period relate to facts about acquisition-date conditions and adjust goodwill; later changes for liability-classified items go to profit or loss. Document the factual trigger of each change - achieving a post-acquisition revenue target is never an acquisition-date fact, whereas discovering pre-acquisition sales data that existed at closing can be (IFRS 3.46-47).
Separate measurement-period adjustments (goodwill, IFRS 3.45) from post-period remeasurement (profit or loss, IFRS 3.58(b)) in the acquisition tracker.
Official guidance: IFRS issued standards
Liability remeasurement requires current fair value using updated forecasts, discount rates, and settlement probability as facts evolve after acquisition date. Reconcile scenario forecasts to board-approved budgets and reflect non-performance risk in the liability's fair value (IFRS 13.42-44). Back-testing prior scenario weights against actual milestone outcomes is persuasive evidence that the model is maintained, not mechanical.
Update the contingent consideration valuation model with current milestones, probabilities, and discount rates before period-end remeasurement (IFRS 3.58(b); IFRS 13.61-62).
Official guidance: IFRS issued standards
Contractual caps, tiered earn-outs, and set-off against indemnification claims affect measurement and settlement accounting and must be reflected in the model. Caps and floors truncate the payout distribution and often make option-pricing techniques more faithful than simple expected values. Where earn-out formula language is ambiguous, obtain legal confirmation of the mechanics before finalizing the valuation.
Reconcile the earn-out model to the SPA's caps, tiers, and set-off provisions before remeasurement (IFRS 3.39).
Official guidance: IFRS issued standards
Temporary differences may arise on remeasured liabilities depending on local tax treatment of earn-outs; coordinate IFRS 3 remeasurement with IAS 12 deferred tax. Deferred tax recognized as part of the initial acquisition accounting affected goodwill, while tax effects of post-combination remeasurement generally follow the underlying item into profit or loss (IAS 12.66-68). Recognize deferred tax assets only to the extent recoverable (IAS 12.27-31).
Complete the IAS 12 deferred tax analysis on the contingent consideration remeasurement before finalizing the profit-or-loss impact (IAS 12.15; IAS 12.24).
Official guidance: IFRS issued standards
Classification is fixed at the acquisition date under IFRS 3.40 using the IAS 32.11 definitions of a financial liability and an equity instrument, applied alongside the IFRS 9 financial-instrument framework. An earn-out settled in a variable number of shares is a financial liability despite being share-settled. Document why the arrangement is liability or equity, and reassess only if the contract itself is modified - not for changes in expected outcomes.
Document the liability-versus-equity classification memo under IFRS 3.40 and IAS 32.11 before audit committee review.
Official guidance: IFRS issued standards
Disclose amount recognized, range of outcomes, key assumptions, and fair value hierarchy for remeasured liability-classified contingent consideration. IFRS 3.B64(g) requires the arrangement description and the basis for determining the payment amount in the year of acquisition, and IFRS 3.B67(b) carries the change and settlement disclosures forward each period until resolution. Earn-out liabilities are typically Level 3, triggering the IFRS 13.93(e) reconciliation and 93(h) sensitivity narrative.
Complete the contingent consideration disclosure draft covering IFRS 3.B64(g), IFRS 3.B67(b), and IFRS 13.93.
Official guidance: IFRS issued standards
Select the outcome that matches the classification and timing analysis: post-measurement-period fair value changes on liability-classified amounts go to profit or loss (IFRS 3.58(b)); equity-classified amounts are never remeasured and settle within equity (IFRS 3.58(a)); and only new information about acquisition-date facts identified within the one-year window adjusts goodwill (IFRS 3.45). Mixing these three treatments is the most common review finding on earn-outs.
Recognize the fair value change in profit or loss and update the liability carrying amount (IFRS 3.58(b)). Record the settlement within equity with no remeasurement through profit or loss (IFRS 3.58(a)). Adjust goodwill retrospectively for the measurement-period contingent consideration change, revising comparatives (IFRS 3.45; IFRS 3.49).
Official guidance: IFRS issued standards
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