finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

, 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 Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares. ...

expected when a bond is bought at a discount to its

par value In finance and accounting, par value means stated value or face value of a financial instrument. Expressions derived from this term include at par (at the par value), over par (over par value) and under par (under par value). Bonds A bond selli ...

,Accretion definition on the financial dictionary
/ref> given that, it is expected to mature at par. Accretion can be thought of as the antonym of amortization: Accreting swap vs

Amortising swap An Amortising swap Frank J. Fabozzi, 2018''The Handbook of Financial Instruments'' Wiley is usually an interest rate swap in which the notional principal for the interest payments declines (i.e. is paid down) during the life of the swap, perha ...

. In a

corporate finance Corporate finance is an area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and analy ...

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. Similarly, re

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...

, accretion is referred to as the increase in a company's

earnings per share Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company during a defined accounting period, period of time, often a year. It is a key measure of corporate profitability, focusing on the inte ...

on a

pro forma The term ''pro forma'' (Latin for "as a matter of form" or "for the sake of form") is most often used to describe a practice or document that is provided as a courtesy or satisfies minimum requirements, conforms to a norm or doctrine and tend ...

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 decrease following the transaction. See: Accretion/dilution analysis, Diluted EPS, Dilutive security; Swap ratio. In

accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

, an accretion expense is created when updating the

present value In economics and finance, present value (PV), also known as present discounted value (PDV), is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money ha ...

(PV) of an instrument. (For example, if the present value of a liability was originally recognized at $650, which has a future value (FV) of $1000, then every year one 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%, the accretion expense in year 1 would be $65 and the PV of the liability at the end of year 1 would be $715.) Since the statement dates will not necessarily coincide with the anniversary dates of these commitments, the expense is prorated.

References

Bonds (finance) Bond valuation Corporate finance Embedded options Mergers and acquisitions Swaps (finance) {{investment-stub