What adjustment occurs to the liability of contingent consideration post-acquisition?

The correct answer pertains to the treatment of contingent consideration in a business combination. After an acquisition, any contingent consideration—payments that are contingent on future events—needs to be recognized at its fair value at the acquisition date. However, it is important to note that this liability does not remain static.

As time progresses, the fair value of contingent consideration may change based on new information or developments related to the conditions attached to the payments. Therefore, the accounting standards dictate that this liability must be remeasured at the end of each reporting period. If the fair value of the contingent consideration increases or decreases, that change must be accurately reflected in the financial statements. This results in adjustments to the liability to ensure that it accurately represents its current fair value.

Through this ongoing remeasurement process, the financial statements can provide a true and fair view of the company's obligations related to the contingent consideration over time, highlighting the dynamic nature of these liabilities in the context of business combinations.