Accretion

Accretion Definition


While accretion is used to refer to a number of processes within the financial world, the most common accretion definition is the straight-line accumulation of value over time in discount bonds to be redeemed at full maturity. A more general accretion definition is the value created by a specific transaction; this is usually too vague to be useful, however. The term accretion is also used to refer to the increase in earnings per share after a merger or acquisition has been completed.

Accretive Earnings


The term accretive earnings is generally applied to the change in value of a discount bond as it nears its maturity date. Essentially, because discount bonds are bought at a price below their stated face value and increase over time due to accrued interest until they reach face value at maturity, they become more valuable as time passes. The stated face value is referred to as par value; because discount bonds are sold on the open market throughout their existence, they are generally increasing in value until they reach par value. The amount of increase between purchase price and current value is referred to as the bond’s accretive earnings.

Accretion Expenses


Just as accretive earnings apply to increases in the value of securities, accretion expenses refer to the increase in financial obligations as an asset nears the date of its scheduled removal and retirement. As the time nears for the retirement of a corporate asset, the fair value of the liability for its removal and replacement becomes greater until the actual retirement, at which time the liability comes to maturity and is fully due by the company. Accretion expenses are generally offset against increases in the liability account, allowing the company to fully amortize the cost of the asset retirement in advance of the requirement for those funds. The same principle is applied to financial instruments conveying a future financial obligation. As the date of maturity nears, the accretion expense increases until it is eventually equal to the sum required less the amount initially received in return for that instrument.

Accretive Acquisitions and Mergers


An accretive acquisition or merger is one that is perceived by shareholders and financial experts as likely to add to the earnings per share of the acquiring company. During a bear market, this perception must often be reinforced by supporting evidence that the acquisition will add more in value to shares than its initial cost in order to attract shareholder support. As a rule, in order to qualify as an accretive acquisition or merger the earnings per share of the acquiring company must increase after the costs of acquisition or merge are figured into those earnings. If the earnings per share decline after the merger or acquisition, then the result is referred to as a dilutive acquisition or merger since it has diluted the potential for earnings on the part of the acquiring company’s shareholders.

 


Tim Ord
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