Capitalising earn-out payments?
We acquired a one-man business last year with an agreement to pay an extra amount based on a percentage of 'extra' profit in the two years following the acquisition. A payment was made in April 01 based on the results in the financial year to March. This amt was capitalised as an acquisition cost & is still on the balance sheet. Another payment may be due in about 10 months time depending on results this year.
What's the correct accounting treatment for this? Write off the b/s amount over the year or over a longer period (e.g. the total earn out period)? Or, as the payment related to result last year, should it have been written off then.
Also, presumably if it's OK to capitalise as an acqn cost, the second payment should also have been accounted for at the time of acquistion. As it wasn't, I assume I accrue for that over this financial year.
Suggestions / ideas / gifts of money all welcome.
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