IFRS 3 para 52 (b), B55(a), contingent payments treated as remuneration, reconciliation of outstanding balances

RPC Group Plc – Annual report – 31 March 2018

Industry: manufacturing

Key Estimates and Judgements (extract)


Acquisition accounting – contingent consideration

Contingent consideration, including post-acquisition remuneration, as a result of significant acquisitions in previous years continues to be a significant estimate for the Group. Contingent consideration is revalued each reporting period according to the latest forecasts of the acquired business based on the terms of the earn-out arrangement. Where payment is dependent on the recipient remaining in employment, the payment will be accounted for as post-acquisition remuneration as required under IFRS 3 and movements in this balance will be classified as an adjusting item.

Contingent consideration relating to the Ace acquisition is still a significant liability on the balance sheet, as is the combined post-acquisition remuneration for the Ace, Letica, Strata Products, Innocan, Amber and Synergy transactions. The level of contingent consideration and post-acquisition remuneration payable is dependent on acquired businesses meeting EBITDA growth targets over the earn-out period. The earn-out agreements for each of these acquired businesses allow for a maximum earn-out of 100% and a minimum earn-out of 0%, depending on the actual EBITDA growth against the earn-out benchmarks. Due to the quantum of potential liabilities and the range of possible outcomes, there is a significant risk that differences in actual performance of acquired businesses could necessitate a material change in the values provided for as contingent consideration or post-acquisition remuneration in the financial statements.

Management estimate the range of contingent consideration and post-acquisition remuneration to be between £11.9m and £53.0m, which represents 6% to 27% of the maximum earn-out. The earn-out assessment is cumulative over a number of periods and therefore there exists a risk that acquired businesses could have exceptionally strong or weak performance in the next 12 months that could push them toward the maximum or minimum earn-out percentage. Additionally, at the end of the earn-out agreement management of RPC Group permit the acquired businesses to propose adjustments which have impacted reported results in the assessment of the final earn-out amount, which again could increase the amounts owed.

  1. ADJUSTING ITEMS (extracts)


Acquisition costs include transactional expenses relating to the acquisition of Astrapak, which completed in June 2017, and Nordfolien, which completed after the year end.

The major integration programme of integrating the Promens, GCS and BPI businesses into the RPC organisation is now complete, with the £23.8m incurred in the year being the final costs.

Other restructuring costs include expenses related to the integration of other acquisitions including ESE World and Plastiape, costs in respect of the restructure of the Belgian footprint following the fire at Eke, Belgium and fees related to aborted acquisitions.

The Group continues to accrue post-acquisition remuneration due to former shareholders of Ace, Letica, Innocan, Synergy, Amber and Strata Products who must remain as employees of the Group for the duration of the earn-out period to qualify for payment. This year a further write back to contingent amounts of £20.7m has been made to reflect the current view of the final payment that will be made in respect of the Ace and Letica acquisitions.

Insurance proceeds have been recognised and received for the Eke fire.

Adjusting finance costs are described in note 6. Adjusting taxation includes the impact of the US Tax Reforms of L12.9m and the tax effect of other adjusting items.



Unwind of discount and foreign exchange movement on contingent consideration relates to the Ace acquisition.



Contingent consideration relates to the acquisition of Ace. Post-acquisition remuneration is for vendors of Ace, Letica, Strata Products, Innocan, Amber and Synergy who remain in employment.

Amounts are initially measured at fair value which is typically at the maximum earn-out value under the share purchase agreement, supported by business model cash flows, with the contingent element discounted at the incremental cost of borrowing. These amount are subsequently revalued at each period end based on observable changes in facts and circumstances.

The valuation technique employed and inputs used to derive fair value involve:

  • Assessment of the earn-out criteria, typically EBITDA, operating profit or similar, either over or by a defined period;
  • Consideration of latest forecasts for the defined measure over the earn-out period, including an assessment of any estimates or judgements that are inherent;
  • Specific assessment of wider issues such as history (to the extent known) of forecasting accuracy, macroeconomic factors or other changes in the business; and
  • Comparison of the earn-out criteria to expectations of delivery.

Whilst these primary inputs represent the start point for all contingent consideration and post-acquisition remuneration valuations, they need to be considered alongside any potential for negotiation. Judgement is used in determining the potential for any specific and incremental expenses being added back which may improve business performance against earn-out metrics.

Once the expected performance and potential for negotiation has been compared to the threshold(s) contained in the share purchase agreement, the expected cash outflow is discounted to present value using an incremental borrowing rate where the effects of time value of money is material.

During the year a write back of £20.7m has been made, primarily in relation to the Ace acquisition, to reflect the current view of the final payment that is due to be made in 2018.

Contingent consideration and post-acquisition remuneration liabilities relating to the Ace acquisition are denominated in US dollars but held in a UK sterling functional currency company. Accordingly the foreign exchange revaluation of £2.9m, along with the unwind of discount of £(0.8)m, is recorded in the Group income statement in the line item ‘Adjusting financing costs’.

Post-acquisition remuneration liabilities relating to other acquisitions (Letica, Strata Products, Innocan, Amber and Synergy) are held in companies whose functional currency is consistent with the denomination of the obligation.

The Company has no contingent consideration at either year end.