CONTINGENT CONSIDERATION AND MEASUREMENT PERIOD

(Adapted)

On December 31, 2020, XANDER Corp enters into a business combination by acquiring the assets and
assumed the liabilities of FORD Corp in which FORD Corp will be dissolved. XANDER consideration transferred
consists of the following:

● 30,000 unissued shares of its P10 par common stock, with a market value of P25 per share
● P 180,000 in long term 8% notes payable and
● A contingent payment of P120,000 cash on January 1, 2023, if the average income of during the 2 year
period of 2021 – 2022 exceeds P 300,000 per year. XANDER estimates that there is a 30 percent
chance or probability that the P120,000 payment will be required.

In addition, XANDER pays the following at the time of the merger:

● Finder’s fee P120,00
● Accounting fees, P 24,000
● Legal fees to arrange the business combination P 42,000
● Cost of SEC registration for shares issued, including accounting and legal fees P 18,000
● Indirect costs of combining, including allocated overhead and executive salaries P 27,600

Balance sheet and fair value information for the two companies on December 31, 2020, immediately before the
merger, is as follows:

XANDER FORD
Account Titles Book value Fair value Book value Fair value
Cash 276,000.00 276,000.00 24,000.00 24,000.00
Receivables – net 96,000.00 96,000.00 48,000.00 48,000.00
Inventories 288,000.00 360,000.00 120,000.00 72,000.00
Land 108,000.00 240,000.00 72,000.00 240,000.00
Buildings – net (10 year life) 480,000.00 720,000.00 240,000.00 360,000.00
Equipment – net (15 year life) 432,000.00 588,000.00 216,000.00 300,000.00
In process research and devt - - - 60,000.00
Total Assets 1,680,000.00 2,280,000.00 720,000.00 1,104,000.00

Accounts payable 216,000.00 216,000.00 72,000.00 72,000.00

Other liabilities 240,000.00 216,000.00 144,000.00 168,000.00
Common stock, P10 par 720,000.00 240,000.00
Additional paid in capital 240,000.00 192,000.00
Retained earnings 264,000.00 72,000.00
Total liabilities and equity 1,680,000.00 720,000.00

REQUIREMENTS

I. CONTINGENT CONSIDERATION BASED ON FUTURE EARNINGS WITH MEASUREMENT PERIOD RULE

APPLICATION

A. Assume that on August 31, 2021 because of improved Information about facts and circumstances
that existed at the acquisition date, the contingent consideration was revised to an expected value of
P 60,000.

1. Determine the amount of goodwill that will be recorded on December 31, 2020.

2. Determine the amount of adjusted goodwill (if any) that will be recorded as adjustment on August 31,
2021.
 B. As continuation of letter A, assume that on November 1, 2021, the probability value of the contingent
consideration amounted to P48,000:

3. Determine the amount of adjusted goodwill (if any) and journalize the adjustment on November 1, 2021
if any.

C. As continuation of letter B, assume that on December 15, 2021, the expected value of the contingent
consideration amounted to P 78,000:

4. Prepare the required entry to reflect the adjustment, if any. Determine the amount of adjusted
goodwill (if any)

D. As continuation of letter C, assume that on January 1, 2023, FORD’s average income in 2021 is P 324,000
and 2022 IS P312,000, which means that the target has met:

5. Prepare the required entry to reflect the adjustment, if any. Determine the amount of adjusted
goodwill (if any)

II. CONTINGENT CONSIDERATION BASED ON PRESENT VALUE OF FUTURE PERFORMANCE – CASH

FLOWS WITH MEASUREMENT PERIOD RULE APPLICATION

A. Going back to the original problem above and assuming that if FORD Corporation will generate cash flows
from operations of P360,000 or more in 2021. FORD estimates that there is a 35% chance that the P 120,000
will be required. FORD Uses an interest rate of 4% to incorporate the time value of money.

1. Compute the amount of goodwill that will be recognized on December 31, 2020

B. Continuation of A. On December 31, 2021, FORD Corporation’s cash flow from operations amounted to
P336,000, which means that it did not exceed the cashflows from operations threshold of P360,000, therefore,
there is no cash payment to be made to FORD Corporation:

2. Determine the amount of adjustment to goodwill if any.

3. Prepare the required entry if any.

 Solution to XANDER & FORD Co

III. CONTINGENT CONSIDERATION BASED ON FUTURE EARNINGS WITH MEASUREMENT PERIOD RULE
APPLICATION

A.
# 1. Determine the amount of goodwill that will be recorded on December 31, 2020.

Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 30% probability 36,000
Total P 966,000
Less: Fair value of identifiable assets acquired and
liabilities assumed:
Cash P 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Accounts payable ( 72,000)
Other liabilities ( 168,000) 864,000
Positive Excess – Goodwill P 102,000

#2

Determine the amount of adjusted goodwill (if any) that will be recorded as adjustment on August 31, 2021.

The goodwill to be reported then on the acquisition should be P126,000 (P102,000 + P24,000).

The adjustment is still within the measurement period, the entry to adjust the liability would be:
Goodwill 24,000
Estimated liability for contingent consideration 24,000
Adjustment to goodwill due to measurement date.

In this case, the measurement period ends at the earlier of:

● one year from the acquisition date, or
● the date when the acquirer receives needed information about facts and
circumstances (or learns that the information is unobtainable) to consummate the
acquisition.
 #3

On November 1, 2021, the probability value of the contingent consideration amounted to P48,000, the
entry to adjust the liability would be: The goodwill to be reported then on the acquisition
should be P126,000

Estimated liability for contingent consideration 12,000

Gain on estimated contingent consideration 12,000
Adjustment after measurement date.

#4

The goodwill remains at P126,000, since the change of estimate should be done only once (last August
31, 2021).
On December 15, 2021, the entry would be:
Loss on estimated liability contingent 30,000
consideration
Estimated liability for contingent consideration 30,000
Adjustment after measurement date.

#5

On January 1, 2022, FORD’s average income in 2021 is P270,000 and 2022 is P260,000, which
means that the target is met, XANDER Corporation will make the following entry:
Estimated liability for contingent consideration 78,000
Loss on estimated contingent consideration 42,000
Cash 120,000
Settlement of contingent consideration.
The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 2021).

IV. CONTINGENT CONSIDERATION BASED ON PRESENT VALUE OF FUTURE PERFORMANCE – CASH

FLOWS WITH MEASUREMENT PERIOD RULE APPLICATION
A.
1. Compute the amount of goodwill that will be recognized on December 31, 2020

Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 35% probability x (1/[1 + .04]*) 40,385
Total P 970,385
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Goodwill P 106,385
B.
1. Determine the amount of adjustment to goodwill if any.
2. Prepare the required entry if any.

1. Goodwill remains at P106,385.

2. The entry for XANDER Corporation on December 31, 2021 to record such occurrence would be:
 Estimated liability for contingent consideration 40,385
Gain on estimated contingent consideration 40,385
Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is that the conditions
that prevent the target from being met occurred in a subsequent period and that XANDER had the
information to measure the liability at the acquisition date based on circumstances that existed at
that time. Thus the adjustment will flow through income statement in the subsequent period.