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INTRODUCTION

Vendor company:

Sells the business.(transferor)

Purchasing company:

Buys the business.(transferee)

Purchase consideration:

The purchase price payable by the purchase

company.

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PURCHASE CONSIDERATION

According to accounting standard 14- there are someimplications for the purchase consideration like:

a) It is restricted to the total amount payable to theshareholders of the seeking company alone.

b) It should not include the amount of liabilitiestaken over by the transferee company, which willbe paid by the company.

c) Any amount agreed to be paid to debenture

holders or creditors should not be included inpurchase consideration.

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Methods of calculation ofPurchase 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

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Lump sum method

When the purchasing company agrees to pay afixed amount to the vendor company, it is called

Lump sum payment of purchase consideration.

Ex: A Ltd. Purchased the business of B Ltd. And

agrees to pay Rs. 12,00,000 in cash and shares.

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Net payment method

Under this method all the payments made by thepurchasing 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 assetsand liabilities need not be taken into account.

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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 XXXX

Less: Agreed value of liabilities

taken over

XXXX

Purchase consideration XXXX

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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/totalno.of equity shares in the company

The intrinsic value determines the ratio of

exchange of share between purchasing andvendor companies.

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Important points for calculationof purchase consideration

Assets will always include cash in hand and cashat bank unless otherwise specified.

Liabilities means all liabilities to third parties.

Trade liabilities includes creditors and billspayable 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.

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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 purchasingcompany and subsequently discharged, then suchamount 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 companyshould be ignored.

If the liquidation expenses are of the vendor company

are to be born by the purchasing company should notbe added to purchase consideration.

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