Accretion

What is accretion?

Accretion is the gradual increase in the value of an asset, a security, or a company’s earnings. In finance it commonly describes:

• The accumulation of income when a bond is bought at a discount and held to maturity.
• The growth in a company’s assets or earnings resulting from organic growth, a transaction, or an acquisition.

Accretion in fixed-income (bond) investing

When a bond is purchased below face (par) value, the difference between purchase price and face value represents accretion to be recognized over the bond’s remaining life. This process adjusts the investor’s cost basis upward until the bond’s redemption at maturity.

Key points:
– Accretion amount = face value − purchase price.
– Accretion rate (simple) = discount ÷ years to maturity.
– For zero-coupon bonds, interest is not paid periodically; the bond is issued at a deep discount and accretes to face value by maturity.

Example:
– Buy a $1,000 bond for $860 with 10 years to maturity. Accretion = $140. Over the 10 years, $14 per year (on a simple basis) is reclassified from the discount account into interest income so that $140 is recognized by maturity.

Accounting note:
– Rising market interest rates reduce the market price of existing bonds, but the accreted value (the contractual payoff at maturity) remains unchanged. Recognized accretion is an accounting recognition of that built-in gain.

Earnings accretion (M&A and EPS)

In corporate finance, accretion often refers to an increase in earnings per share (EPS) after an acquisition.

How it works:
– EPS = earnings available to common shareholders ÷ weighted average common shares outstanding.
– An acquisition is “accretive” if combined EPS after the deal is higher than the acquirer’s standalone EPS; it is “dilutive” if EPS falls.

Example:
– Company A: $2,000,000 earnings; 1,000,000 shares → EPS = $2.00.
– Company A issues 200,000 shares to buy Company B, which contributes $600,000 of earnings.
– Combined earnings = $2,600,000; combined shares = 1,200,000 → EPS = $2.17.
– The transaction is accretive because EPS increased from $2.00 to $2.17.

Practical considerations

• The accreted (contractual) value of a security may differ from its current market value; accretion reflects contractual or accounting recognition, not necessarily realizable market price.
• Accretion calculations can be done on simple or effective-interest bases depending on accounting rules and instrument type.

Key takeaways

• Accretion denotes gradual value growth—either of securities bought at a discount or of company earnings after growth or acquisition.
• For bonds, accretion represents the recognition of the discount as income over the bond’s remaining term.
• For companies, accretion often refers to an increase in EPS following an acquisition; transactions are evaluated as accretive or dilutive.
• Accreted value is an accounting/contractual concept and may not match current market value.