Earn-out clause in acquisition
Entity C acquired a business before its date of transition to IFRSs and agreed to make an initial payment to the seller together with further payments based on a multiple of future profits of the acquiree. The fair value of the earn-out, which is contingent on future profits, changes after the acquisition date but was never recognised under previous GAAP. Under Entity C”s previous GAAP any goodwill was written off against equity as incurred.
At its date of transition to IFRSs, Entity C will account for changes in the fair value of the earn-out since acquisition and recognise the effect in retained earnings. [IFRS 1 Appendix C4(i)(ii)].