What happens to the fair value (FV) of deferred consideration over time?

When considering the fair value of deferred consideration over time, the correct understanding is that it typically increases due to the unwinding of the discount. Deferred consideration often pertains to amounts payable in the future as part of a business acquisition, and when recorded, it's recognized at its present value using an appropriate discount rate.

As time progresses and the settlement date approaches, the present value of that deferred consideration will change — specifically, it will increase towards its nominal value. This increase is attributed to unwinding the discount applied to the future cash flows. Essentially, as each reporting period elapses, the effect of discounting diminishes, reflecting a gradual adjustment to the fair value upwards. Hence, the fair value trajectory reflects the time value of money principle, as future payment obligations become less discounted and align closer to their full value as time progresses.

This process is integral to maintaining accurate financial reporting and helps ensure that stakeholders have a realistic view of future obligations and their financial implications.