Reference no: EM133291492

Cranfield is a public limited company that operates a national chain of supermarkets selling groceries and other household goods. It prepares its financial statements in accordance with International Financial Reporting Standards.

To diversify their business, Cranfield acquired all the shares of a small family-run but well-known bakery, on 1 July 2020. The family management were retained, and the purchase contract included a clause whereby the purchase consideration would be increased proportionately if certain pre-agreed targets were met within 12 months after the acquisition date.

Goodwill of $10 million was recognised on the initial acquisition. This included contingent consideration with a fair value of $1.4 million based on expectations at the time of the acquisition about the likelihood and amount of the future payment. The same estimate was maintained at the 30 September 2020 year end as expectations had not changed. By 30 June 2021 a lower target was met, and the amount paid on 30 June 2021 was $0.4 million.

Discuss how this arrangement should be accounted for in Cranfield's financial statements for the year ended 30 September 2021, with calculations.