What is Accretion?
Accretion refers to the gradual increase in the value or amount of an asset or liability over time, typically due to the passage of time or compounding interest. In finance, it often describes the growth of a bond’s value as it moves toward maturity or the accumulation of earnings or natural resources.
Definition
Accretion is the incremental growth in asset value, either through interest, reinvestment, or natural expansion. It applies to bonds, accounting adjustments, natural resources, and mergers.
Key Takeaways
- Represents value growth over time due to interest, yield, or amortization.
- Common in discount bonds, mergers, and resource economics.
- Accretion expense appears in accounting as part of asset retirement obligations.
- Reflects non-cash increases recognized over time.
- Can apply in both finance and natural sciences.
Understanding Accretion
In finance, accretion describes the process by which the discount on a bond (the difference between its purchase price and face value) gradually converts into income as the bond nears maturity.
In accounting, it reflects the time-based increase in liabilities or asset values, such as the unwinding of discounts on long-term obligations. In mergers, it can describe how an acquisition increases earnings per share (EPS).
Outside finance, accretion can refer to the gradual accumulation of materials, such as sediment buildup in geology or cosmic dust in astronomy — but in economics, it consistently implies growth over time.
Formula (If Applicable)
For bonds:
Accretion = (Face Value − Purchase Price) ÷ Years to Maturity
Example:
A zero-coupon bond bought for $900 with a $1,000 face value and 2-year maturity has an annual accretion of:
($1,000 − $900) ÷ 2 = $50 per year.
Real-World Example
An investor purchases a U.S. Treasury zero-coupon bond at a discount. Each year, the bond’s value accretes toward its face value until maturity. The accreted value is recognized as taxable income even though no cash interest is received.
In corporate finance, accretive acquisitions occur when an acquisition increases the acquirer’s earnings per share (EPS), improving shareholder value.
Importance in Business or Economics
Accretion matters for:
- Measuring bond yield and investment income.
- Managing long-term liabilities like decommissioning obligations.
- Evaluating merger impacts on EPS and shareholder value.
- Assessing growth projections in resource and energy sectors.
Economically, accretion reflects the principle of time-based value increase, key to capital formation and market valuation.
Types or Variations
- Bond Accretion: Discount amortization over time.
- Accretion Expense: Liability growth due to time passage.
- Accretive Acquisition: Deal increasing EPS or asset value.
- Natural Accretion: Gradual buildup of resources or materials.
Related Terms
- Amortization
- Discount Bond
- Accretive (Deal)
- Asset Retirement Obligation (ARO)
- Yield to Maturity (YTM)
Sources and Further Reading
- FASB – ASC 835: Interest and Imputation.
- IFRS – IAS 37: Provisions, Contingent Liabilities, and Assets.
- Investopedia – Accretion Definition.
- Corporate Finance Institute (CFI) – Accretion vs. Dilution Analysis.
Quick Reference
- Purpose: Track gradual value growth over time.
- Context: Bonds, accounting, mergers, or natural resource buildup.
- Effect: Increases value or income recognition.
- Common Use: Zero-coupon bonds and EPS analysis.
- Nature: Non-cash, time-driven increase.
Frequently Asked Questions (FAQs)
What is accretion in bonds?
It’s the gradual increase in a bond’s value as it approaches maturity.
Is accretion income taxable?
Yes, accretion on discount bonds is typically recognized as taxable interest income.
What is the difference between accretion and amortization?
Accretion adds value over time (discount), while amortization reduces value (premium or cost recovery).
What makes an acquisition accretive?
It increases the acquiring company’s earnings per share (EPS) after completion.
