Contingent Consideration, more commonly referred to as earnouts, is usually an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of an exchange for control of the acquiree if specific future events occur or conditions are met. Earnouts are often times used to bridge pricing differences between a buyer and seller of a company when there are significant differences in expectations of future results. Other common reasons for earnouts include using as a different form of financing, additional incentives for management, and sharing future risk and reward.
The Practice Aid, which was developed by The American Institute of Certified Public Accountants (AICPA) Contingent Consideration Task Force, provides guidance for financial statement issuers, valuation specialists, auditors and other interested parties as to best practices relative to the valuation of contingent consideration for financial reporting purposes in connection with ASC 805, Business Combinations. It is a highly useful document with which any valuation specialist preparing fair value analyses must be familiar and firmly understand. Auditors and companies whose financial statements rely upon such analyses should be aware of its key implications.