Accretion (finance)


Accretion (finance)

In finance, accretion is the change in the price of a bond bought at a discount to the par value of the bond [ [http://financial-dictionary.thefreedictionary.com/accretion Accretion definition on the financial dictionary] ] .

Accretion, in a corporate finance environment, is essentially the actual value created after a particular transaction. A deal will always be earnings accretive if the acquirer's price-to-earnings ratio is greater than the target's price-to-earnings ratio, including the acquisition premium.

In accounting, accretion expense is the expense created when updating the present value of an instrument. For example, if you originally recognize the present value of a liability at $650, which has a future value of $1000, every year you must increase the PV of the liability as it comes closer to its FV. If the above liability, for example an asset retirement obligation, had a discount rate of 10%, accretion expense in Yr.1 would be $65 and the PV of the liability at the end of Yr.1 would be $715.

In the context of mergers and acquisitions, accretion is referred to as the increase in a company's earnings per share on a pro forma basis following the transaction. For example, if Company A has $1.00 earnings per share and after acquiring Company B, the combined company's earnings per share is $1.25, then the acquisition would be referred to as 25% accretive. In contrast, a transaction is dilutive if the earnings per share decreases following the transaction.

References


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