INTRODUCTION

Vendor

company: Sells the business.(transferor) Purchasing company: Buys the business.(transferee) Purchase consideration: The purchase price payable by the purchase company.

PURCHASE CONSIDERATION
According to accounting standard 14- there are some implications for the purchase consideration like: a) It is restricted to the total amount payable to the shareholders of the seeking company alone. b) It should not include the amount of liabilities taken over by the transferee company, which will be paid by the company. c) Any amount agreed to be paid to debenture holders or creditors should not be included in purchase consideration.

Methods of calculation of Purchase consideration

It can be calculated by using the following methods: 1. Lump sum method 2. Net payment method 3. Net assets method 4. Shares exchange method

Lump sum method

When

the purchasing company agrees to pay a fixed amount to the vendor company, it is called Lump sum payment of purchase consideration. A Ltd. Purchased the business of B Ltd. And agrees to pay Rs. 12,00,000 in cash and shares.

Ex:

Net payment method

Under

this method all the payments made by the purchasing company to the vendors company are to be added to arrive the purchase consideration. This payment is usually made partly by issuing shares and partly cash. In this only payments are to be added to arrive the purchase consideration, the value of assets and liabilities need not be taken into account.

Net assets method

Also

known as net worth method. In this purchase consideration is calculated by adding agreed value of assets taken over minus agreed value of liabilities taken over.
Agreed value of assets taken over Less: Agreed value of liabilities taken over Purchase consideration XXXX XXXX XXXX

Shares Exchange Method

Under

this method the purchase consideration is calculated on the basis of intrinsic value of shares. Intrinsic value of share= Net assets/total no.of equity shares in the company The intrinsic value determines the ratio of exchange of share between purchasing and vendor companies.

Important points for calculation of purchase consideration

Assets will always include cash in hand and cash at bank unless otherwise specified. Liabilities means all liabilities to third parties. Trade liabilities includes creditors and bills payable and exclude bank overdraft, outstanding expense etc,. Business means all liabilities and assets. If any liabilities of the vendor company are not taken by the purchase company, the same should not be included in purchase consideration.

Important points contd

If the purchasing company agreed to pay any goodwill, it should be added to the purchase considerations. If the creditors and debentures are taken by purchasing company and subsequently discharged, then such amount should not be added to the purchase consideration. Any payments made by the purchasing company to any third party on the behalf of the vendor company should be ignored. If the liquidation expenses are of the vendor company are to be born by the purchasing company should not be added to purchase consideration.