Earnout in M&A operations in Brazil and their impact on Equity Valuation

Abstract

Purpose: to evaluate the recording of information related to M&A (Mergers and Acquisitions) transactions that include earnout as an element of contingent consideration in accordance with the accounting standard IFRS 3 - Business Combination and the key aspects of accounting information disclosure as per the IASB Conceptual Framework for Financial Reporting.

Methodology: We conducted exploratory, descriptive, and qualitative research that adopted a three-dimensional view to analyze the economic, legal, and accounting aspects of business combination transactions carried out with the use of Earnout. We considered all M&A operations conducted in Brazil between 2016 and 2020 by companies listed on the Brazilian Stock Exchange, which included earnout components.

Findings: Our findings indicate that acquiring companies comply with the regulatory requirements of IFRS 3. However, they do not consistently provide uniform, comprehensive, and transparent information regarding earnout transactions.

Practical implications: This study underscores the necessity to reconsider the disclosure criteria for earnout transactions. It emphasizes the importance of providing useful information to stakeholders through financial statements and accompanying explanatory notes, enabling interested parties to comprehend the financial structure of the transaction and its potential future impacts on financial statements.

Value: This research contributes to the capital market, regulators, and other interested parties by demonstrating the economic and legal characteristics vis-à-vis the accounting treatment attributed to earnout in M&A transactions. It addresses the gap in existing literature and highlights the need to revise the criteria for disclosure of useful information.