In finance, the term accretion refers to a positive change in value following a transaction; it is applied in several contexts.
When trading in bonds, accretion is the capital gain expected when a bond is bought at a discount to its par value, given that it is expected to mature at par. Accretion can be thought of as the antonym of amortization: see Accreting swap vs Amortising swap.
In a corporate finance context, accretion is essentially the actual value created after a particular transaction. A deal is earnings accretive if the acquirer’s price-to-earnings ratio is greater than the target’s price-to-earnings ratio, including the acquisition premium. Similarity, re mergers and acquisitions, accretion is referred to as the increase in a company’s earnings per share on a pro forma basis following the transaction. (For example, if Company A has $1.00 earnings per share and after acquiring Company B, the combined company’s earnings per share is $1.25, then the acquisition would be referred to as 25% accretive.) By contrast, a transaction is dilutive where the earnings per share decreases following the transaction. See: Accretion/dilution analysis, Diluted EPS, Dilutive security; Swap ratio.
In accounting, an accretion expense is created when updating the present value of an instrument. (For example, if you originally recognize the present value of a liability at $650, which has a future value of $1000, every year you must increase the PV of the liability as it comes closer to its FV. If the above liability, for example an asset retirement obligation, had a discount rate of 10%, accretion expense in Yr.1 would be $65 and the PV of the liability at the end of Yr.1 would be $715.) Since the statement dates will not necessarily coincide with the anniversary dates of these commitments, the expense is prorated.
- ^Accretion definition on the financial dictionary
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.