Contingent considerations can be an important tool in deal negotiations, providing buyers with downside protection while allowing sellers to participate in the future upside. In accounting for a business combination, however, buyers are required to estimate the fair value of these contingent considerations as part of the total purchase consideration. These valuations are challenging: 1) contingent considerations typically include complex payoff structures -- so estimating the cash flows is difficult; and 2) contingent considerations typically include non-linear risks -- so estimating the discount rate is difficult.

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