What is 'Accretion'

Accretion is asset and earnings growth due to business expansion, a company's internal growth, or mergers and acquisitions. In finance, accretion is also the accumulation of capital gains an investor expects to receive after purchasing a bond at a discount and holding until maturity.

BREAKING DOWN 'Accretion'

Purchasing bonds below their face or par value is considered buying at a discount, whereas purchasing above the face value is known as buying at a premium. In finance, accretion adjusts the cost basis from the purchase amount (discount) to the anticipated redemption amount at maturity.  For example, if a bond is purchased for an amount totaling 80% of the face amount, the accretion is 20%. 

Factoring in Bond Accounting

As interest rates increase, the value of existing bonds declines in value, which means that bonds trading in the market decline in price to reflect the interest rate increase. Since all bonds mature at the face amount, the investor recognizes a gain on a bond purchased at a discount, and that gain is recognized using accretion.

Bond Accretion (Finance)

Assume that an investor purchased a $1,000 bond for $860 and the bond matures in 10 years. Between the bond's purchase and maturity dates, the investor needs to recognize a capital gain of $140. When the bond is purchased, the $140 is posted to a discount on the bond account. Over the next 10 years, a portion of the $140 is reclassified into the bond income account each year, and the entire $140 is posted to income by the maturity date.

Earnings Accretion (Accounting)

The earnings-per-share (EPS) ratio is defined as earnings available to common shareholders divided by average common shares outstanding, and accretion refers to an increase in a firm’s EPS due to an acquisition.

Assume, for example, that a firm generates $2,000,000 in available earnings for common shareholders and that 1,000,000 shares are outstanding; the EPS ratio is $2. The company issues 200,000 shares to purchase a company that generates $600,000 in earnings for common shareholders. The new EPS for the combined companies is computed by dividing its $2,600,000 earnings by 1,200,000 outstanding shares, or $2.17. Investment professionals refer to the additional earnings as accretion due to the purchase.

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