Meaning:
Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.
Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below:
A. Lump sum method
B. Net Assets method
C. Net Payment Method
A. Lump sum Method:
Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies valuation. E.g., if it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration.
B. Net Assets Method:
Under this method P.C. shall be computed as follows:
Particulars | Rs. |
Agreed value of assets taken over Less: Agreed value of Liabilities taken over | XXX XXX |
Purchase Consideration | XXX |
Note:
1. The term “agreed value” means the amount at which the transferor company has agreed to sell and the transferee company has agreed to take over a particular assets or a liability Otherwise book value will be the agreed value.
2. Fictitious assets (i.e., preliminary expenses, underwriting commission, discount on issue of shares, discount on issue of debentures and debit balance in P & L A/c) are not taken over.
C. Net Payment Method:
Under this method P.C. should be calculated by aggregating total payments made by the purchasing company. E.g.: A Ltd. had taken over B Ltd. and for that it agreed to pay Rs.5, 00,000 in cash 4, 00,000 Equity Shares of Rs.10 each fully paid at an agreed value of Rs.15 per share then the P.C. will be ascertained as follows:
Particulars | Rs. |
Cash 4,00,000 E. Shares of Rs.10 each fully paid, at Rs.15 per share | 5,00,000 60,00,000 |
Purchase Consideration | 65,00,000 |