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NaviNow will pay $8 million to the four former owners of TrafficEye if revenues from the combined system exceed $100 million over the next 3 years. NaviNow estimates this contingent payment to have a probability adjusted present value of $4million. According to down said formula (http://www.ey.com/Global/assets.nsf/United%20Accounting/ATG_FRD_BB1616/$file/ATG_FRD_BB1616.pdf) the $8million is consideration transferred in the acquisition.
B6.4.4.7 Factors involving a formula for determining contingent consideration
Excerpt from Accounting Standards Codification
Business Combinations — Overall
Implementation Guidance and Illustrations
805-10-55-25
g. Formula for determining consideration. The formula used to determine the contingent payment may be helpful in assessing the substance of the arrangement. For example, if a contingent payment is determined on the basis of a multiple of earnings that might suggest that the obligation is contingent consideration in the business combination and that the formula is intended to establish or verify the fair value of the acquiree. In contrast, a contingent payment that is a specified percentage of earnings might suggest that the obligation to employees is a profit-sharing arrangement to compensate employees for services rendered.
The four former owners have also been offered employment contracts with NaviNow to help with system integration and performance enhancement issues. The profit sharing component over the next 3 years that NaviNow estimates to have a current fair value of $2 million. NaviNow should account the profit sharing component as compensation expense to employees. Furthermore, the following rule suggests that the former owners would be able to participate in profit sharing component provided they remain with the company.
B6.4.4.1 Continuing employment
Excerpt from Accounting Standards Codification
Business Combinations — Overall
Implementation Guidance and Illustrations
805-10-55-25
If it is
B6.4.4.7 Factors involving a formula for determining contingent consideration
Excerpt from Accounting Standards Codification
Business Combinations — Overall
Implementation Guidance and Illustrations
805-10-55-25
g. Formula for determining consideration. The formula used to determine the contingent payment may be helpful in assessing the substance of the arrangement. For example, if a contingent payment is determined on the basis of a multiple of earnings that might suggest that the obligation is contingent consideration in the business combination and that the formula is intended to establish or verify the fair value of the acquiree. In contrast, a contingent payment that is a specified percentage of earnings might suggest that the obligation to employees is a profit-sharing arrangement to compensate employees for services rendered.
The four former owners have also been offered employment contracts with NaviNow to help with system integration and performance enhancement issues. The profit sharing component over the next 3 years that NaviNow estimates to have a current fair value of $2 million. NaviNow should account the profit sharing component as compensation expense to employees. Furthermore, the following rule suggests that the former owners would be able to participate in profit sharing component provided they remain with the company.
B6.4.4.1 Continuing employment
Excerpt from Accounting Standards Codification
Business Combinations — Overall
Implementation Guidance and Illustrations
805-10-55-25
If it is