The term "accretion" most often means one of two things in the finance and accounting worlds. It can mean the amount of money added to the liability balance of a bond (or some other liability sold or booked on a discount from its par value) at each reporting period, which is usually quarterly for a public company. Accretion can also refer to the amount of additional earnings that a company will have after it does an acquisition or a merger.
Accretion for a Bond or Other Liability
Determine the future value of the bond or liability at its maturity. For example, bonds with a face value of $10,000,000 that pay this amount at maturity have a future value of $10,000,000.
Determine the present value of the bonds or other liability at the time they are first booked to the company’s balance sheet. For example, if the $10,000,000 in bonds were sold for $8,000,000, there was a $2,000,000 discount and the present value is $8,000,000.
Determine how many periods will occur between the time of execution and the time of maturity. If the bond matures in five years and the company reports its financial information quarterly, there are 20 periods (five times four quarters) between execution and maturity.
Divide the discount of $2,000,000 by 20, which equals $100,000. Each period until maturity there will be accretion of $100,000, raising the $8,000,000 liability balance by $100,000 each period until maturity.
Accretion for an Acquisition
Determine the earnings per share (EPS) for a company that is buying another company. Divide the total net income for the company by the number of shares outstanding. For example, a company with $100,000,000 in net income and 500,000,000 shares outstanding has an EPS of $0.20.
Add the net income of the company being acquired to the buyer company's net income. Assuming the target company had net income of $50,000,000, the revised net income will be $100,000,000 + $50,000,000 = $150,000,000.
Add the number of shares that were issued to raise the cash to make the purchase to the number of shares outstanding. For example, if 100,000,000 new shares were issued or sold, the new balance is 100,000,000 + 500,000,000 = 600,000,000.
Divide the new net income by the new shares total: $150,000,000 / 600,000,000 = $0.25.
Because an EPS of $0.25 (from Step 4) is $0.05 higher than the original EPS of $0.20, the deal’s accretion is $0.05.
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