P Company agrees to pay $20 million in cash to the former owners of S, Inc., for all of its assets and liabilities. These former owners of S developed and patented a technology for real-time monitoring of traffic patterns on the nations top 500 frequently congested highways. P Co. plans to combine the new technology with its existing global positioning system and projects a resulting substantial revenue increase.

As part of the acquisition contract, P Co. also agrees to pay additional amounts to the former owners upon achievement of certain financial goals. P Co. will pay $8 million to the former owners of S Inc. if revenues from the combined system exceeds $100 million over the next three years. P Co. estimates this contingent payment to have a probability adjusted present value of $4 million.

The former owners have also been offered employment contracts with P Co. to help with system integration and performance enhancement issues. The employment contracts are silent as to service periods, have nominal salaries similar to those of equivalent employees, and specify a profit sharing component over the next three years (if the employees remain with the company) that P Co. estimates to have a current fair value of $2 million. The former owners of S say they will stay on employees of P Co. for at least three years to help achieve the desired financial goals.

Instruction:

Do some analysis and research, in your opinion, should P Co. account for the contingent payments promised to the former owners of S as consideration transferred in the acquisition or as compensation expense to employees?