Accretion definition

What is Accretion?

Accretion is the ongoing increase in the earnings and assets of a business. This increase in value is due to many factors, including organic growth and the acquisition of other entities. This concept is commonly used in situations involving bonds, loans, or any financial instrument where value changes predictably as time passes.

Accretion in Accounting

Accretion is also an accounting term, referring to the gain generated by an investor after a bond has been purchased at a discount. By holding the bond until its maturity, the investor gradually earns a profit on the difference between the discounted purchase price and the face value of the bond. This process is most evident when an investor purchases a zero-coupon bond, usually at a steep discount.

Accretion in Mergers and Acquisitions

When an acquirer buys another business, the difference between the price paid and the fair value of the acquired assets and liabilities is recognized as goodwill. If the price paid is lower than the fair value of these assets and liabilities, the outcome is recognized as a bargain purchase gain. The acquirer uses accretion to recognize this gain over time, which increases the value of the acquired assets.