Accretion (finance)
Encyclopedia
In finance
, accretion is the change in the price of a bond
bought at a discount to the par value
of the bond. Accretion can be thought of as the antonym of amortization
.
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.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, accretion is the change in the price of a bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
bought at a discount to the par value
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
of the bond. Accretion can be thought of as the antonym of amortization
Amortization
Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...
.
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
Accretion expense
In accounting, accretion expense is the expense created when updating the present value of a balance sheet item.For example, if one originally recognizes the present value of a liability at $650, which has a future value of $1000, every year one must increase the PV of the liability as it comes...
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
Earnings per share
Earnings per share is the amount of earnings per each outstanding share of a company's stock.In the United States, the Financial Accounting Standards Board requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations,...
on a pro forma
Pro forma
The term pro forma is a term applied to practices or documents that are done as a pure formality, perfunctory, or seek to satisfy the minimum requirements or to conform to a convention or doctrine...
basis following the transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
. 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.