Accretion

What Is Accretion?

In finance, accretion is the gradual increase in the book value of an asset or liability over time. The term is most often used in two settings: the slow rise of a bond's carrying value toward its par value, and the effect an acquisition has on the buyer's earnings per share. In both cases, accretion describes value being added over time rather than lost.

Accretion of Bond Discounts

When an investor buys a bond for less than its face value, the difference is a discount. Each accounting period, a portion of that discount is recognized as income, which raises the bond's carrying value a little at a time until it equals par at maturity. This process is closely related to amortization. It is common with zero-coupon bonds, which pay no periodic interest and are typically bought at a discount. The tax treatment of these gains depends on the type of bond and the applicable rules, so investors usually review those details separately.

Accretion in Mergers and Acquisitions

In deal analysis, accretion describes whether a merger increases the acquiring company's per-share earnings. A deal is accretive if the combined company's pro forma earnings per share are higher than the buyer's standalone figure, and dilution occurs if they are lower. A simplified calculation looks like this:

Pro forma EPS = (Acquirer net income + Target net income) / (Acquirer shares + New shares issued)

Hypothetical example: An acquirer earns 100 million with 50 million shares, so its EPS is 2.00. It buys a target earning 30 million by issuing 10 million new shares. Pro forma EPS is 130 million divided by 60 million, or about 2.17, which is accretive. Full analyses also account for financing costs, expected synergies, and accounting adjustments from the purchase, any of which can change the result.

Why It Matters

Accretion helps investors understand how a bond's reported value changes over time and whether a deal is likely to add to shareholder earnings per share. Neither measure alone shows a company's full financial health or a transaction's total value, so accretion figures are usually read alongside financial statements and the assumptions behind them.