So how do we account for deferred consideration? Well, there's two ways of measuring the deferred consideration on the balance sheet at the transaction date. If the future payment is in assets or for a fixed dollar amount in shares, then it must be treated as a liability. However, if the future payment is based on a fixed number of shares, it will be treated as equity. So the two methods of accounting for a liability or equity, in my experience, the most common one tends to be a liability. At the time of the acquisition, we must measure the deferred consideration at fair value, and the way to do that is to take the future cash flows that you expect, probability weight them, and then present value them back to today using a discount rate. So very, very similar to a discounted cash flow valuation. The situation gets a bit more complex if the contingent consideration relates to a partially owned subsidiary, in other words where you're creating a non-controlling interest. In that situation, the contingent consideration that's owned by the non-controlling interest won't be put in the NCI, will be separated and put into a liability. Now, if originally, you classified the deferred consideration as equity because the future amount was agreed as a number of shares, there's no fair value remeasurement. In other words, the fair value at the very beginning of the acquisition will be the constant fair value measure. You would never increase it or decrease it. But that's only if you agree a fixed number of shares to be transferred. However, if you agree a dollar amount in shares or cash, that means you must remeasure the liability at each balance sheet date. And if you expect the payment to be higher, then you're going to have to increase the liability and take a loss to the income statement, and vice versa. If the liability is lower, you'll take a gain to the income statement. Now, the rules between US GAAP and IFRS are very, very similar, so there's no big difference between them. Now, because you've got the liability on the balance sheet at fair value, and it's a present value, that means as time goes on, even if you don't adjust the fair value, the present value will eventually grow to the feature value. And the way the accounting deals with that is they effectively charge interest on the present value, and then they'll add that interest expense to the liability, which will grow it to the future value. But because they're increasing the liability, they also need to expense the interest on the income statement. Now, historically, deferred consideration was actually linked to goodwill. And if the deferred consideration went up, then goodwill would go up. There was no income statement impact. That is no longer the case. Goodwill is a separate calculation to deferred consideration, so your deferred consideration can go up or down, and it can be completely unrelated to goodwill. But obviously, if there's a permanent reduction in this subsidiary value, that will also impact goodwill.
