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Question: AutoNav Company agrees to pay $20 million


AutoNav Company agrees to pay $20 million in cash to the four former owners of Easy-C, Inc., for all of its assets and liabilities. These four owners of Easy-C developed and patented a technology for real- time monitoring of traffic patterns on the nation’s top 200 frequently congested highways. AutoNav plans to combine the new technology with its existing global positioning systems and projects a result- ing substantial revenue increase.
As part of the acquisition contract, AutoNav also agrees to pay additional amounts to the former owners upon achievement of certain financial goals. AutoNav will pay $8 million to the four former owners of Easy-C if revenues from the combined system exceed $100 million over the next three years. AutoNav estimates this contingent payment to have a probability adjusted present value of $4 million.
The four former owners have also been offered employment contracts with AutoNav to help with system integration and performance enhancement issues. The employment contracts are silent as to service periods, have nominal salaries similar to those of equivalent employees, and specify a profit- sharing component over the next three years (if the employees remain with the company) that AutoNav estimates to have a current fair value of $2 million. The four former owners of Easy-C say they will stay on as employees of AutoNav for at least three years to help achieve the desired financial goals.
Should AutoNav account for the contingent payments promised to the former owners of Easy-C as consideration transferred in the acquisition or as compensation expense to employees?

2.99

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