NAME : CHARME .M.

SAGAR
CLASS : SYBCOM DIV :D
ROLLNO :004
SUBJECT :FINANCIAL ACCOUNTING
TOPIC : PURCHASE CONSIDERATION.
 INTRODUCTION

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.
In case of amalgamation, purchase consideration is the agreed amount which transferee company
(Purchasing company) pays to the transferor company (Vendor company) in exchange of the
ownership of the transferor company. It may be in form of cash, shares or any other assets as
agreed between both the companies. For example, XYZ Ltd is purchasing the business of ABC
Ltd for an agreed amount of INR 5000K and 100K shares of INR 10 each. Here, purchase
consideration is INR 6000K (5000000 + 1000000).
Purchase of Business generally means buying of one business firm by another business firm. But
the term is used differently in different cases. ‘Purchase of Business’ basically refers to the
acquisition of a sole proprietorship firm or a partnership firm or a company by a limited company.

Acquisition of a limited company by another limited company is not called ‘Purchase of Business
’. It is called ‘‘Amalgamation’’ or “Merger”.

Therefore, the purchase or acquisition of the business by a limited company generally refers to the
purchase of a non-corporate form of a business organization like sole proprietorship or
partnership form of business by a company.
Purchase of business by a limited company may take any of the
following two forms:

1.An existing company may purchase an existing sole-proprietorship or

partnership business.

2.A new company may be formed to take over an existing business of a

sole proprietor or a partnership firm, i.e., the existing business unit may
be converted into a limited company.
Purchase consideration’ means the purchase price payable by the company for the business
acquired. Generally, an agreement is made between the company and the vendor (the firm which
is going to be sold out) which contains the terms and conditions of the acquisition of a business.
The basis for determining the purchase consideration, and the mode of payment of the purchase
consideration. Hence, at first, the purchase consideration is to be determined.
Consideration, i.e., the purchase price may be paid in cash, in shares & debentures of the
purchasing company or in both cash and shares & debentures.

The meaning of consideration is defined by the ICAI in Accounting Standard 14 in the following
way:
Consideration for the amalgamation means the aggregate of the shares and other securities issued
and the payment made in the form of cash or other assets by the transferee company to the
shareholders of the transferor company.
In case of amalgamation, purchase consideration is the agreed amount which transferee company
(Purchasing company) pays to the transferor company (Vendor company) in exchange of the
ownership of the transferor company. It may be in form of cash, shares or any other assets as
agreed between both the companies. For example, XYZ Ltd is purchasing the business of ABC
Ltd for an agreed amount of INR 5000K and 100K shares of INR 10 each. Here, purchase
consideration is INR 6000K (5000000 + 1000000).

DEFINITION OF PURCHASE CONSIDERATION

Basis for Calculation of Purchase Consideration

The purchase price payable is the money value of Consideration. Therefore when the
consideration is calculated there must be a certain basis. For this the following points are
considered:
1.The value of the tangible assets acquired by the company as per agreement.

2.The amount payable for goodwill.

3.The amount of liabilities of the vendor firm to be taken over by the purchasing company.
 There are different methods of purchase consideration depending upon the terms and conditions
settled between the transferor company.
  
 1.Lump sum method: This is the case when Transferee Company agrees to pay Transferor
Company a fixed sum of money. Like xyz limited agrees to pay abc ltd 25 lakh. This is lump sum
method.
2.    Net asset method : Under this method the net asset value is calculated by deducting all the
liabilities taken over by the transferee company from the entire asset taken by the transferee
company. The value of the assets and liabilities is not that appear in the balance sheet but it is that
which is decided between the two companies.
The net asset method for evaluating purchase consideration is pretty straightforward.

The buyer will take the seller’s total assets, excluding any fictitious assets, and deduct all
liabilities from the assets to come up with a value.

The formula looks like this:

•Seller’s total assets – Seller’s total liabilities = Seller’s net assets

•Seller’s net assets / Seller’s total outstanding shares = Seller’s net assets per share
The net result will reflect the purchasing consideration the buyer will be prepared to pay to
purchase the seller’s business.
3.    Net payment method: In this case purchase consideration is calculated by adding all the
payments made by the transferee company to the shareholders of the transferor company.
Payment can be in the form of cash, shares or debentures. The formula for the net payment
method is simple:

Total cash + value of shares + debentures + other assets = Total net payment
If a business is acquired using cash, securities, debentures and other assets, then the net
payment method will require that you add up the value of the cash, the value of the securities
and the other assets to come up with the total net payment.

4 . Intrinsic value or share exchange method: The intrinsic value method is the value of the
company’s stock. The intrinsic value can be calculated as follows:
Seller’s net asset value / Buyer’s price per share = Seller asset value per share
Seller asset value per share / Seller’s total outstanding shares = Intrinsic value ratio
This method uses the seller’s net assets value on a per-share basis to derive the intrinsic value.
Calculation of purchase consideration is one of the important task in the process of
amalgamation of companies. The purchase consideration is determined as per the agreement
between the companies.

While calculating the purchase consideration, the provision of AS-14 must be taken into
consideration. As per AS-14, Purchase consideration means, “the aggregate of the shares and
other securities issued and the payment made in the form of cash or other assets by the
transferee company to the shareholders of the transferor company”.
Important Points Regarding Purchase Consideration: 

1.Only payment to shareholders are to be taken into consideration.

2.Consideration for debenture holders will not be included in the purchase consideration.
3.Liquidation expenses or payment for cost of absorption are not included in the purchase
consideration.
 Conclusion

The consideration for the amalgamation may consist of securities, cash or other assets. In
determining the value of the consideration, an assessment is made of the fair value of its
elements. A variety of techniques is applied in arriving at fair value. For example, when the
consideration includes securities, the value fixed by the statutory authorities may be taken to be
the fair value. In case of other assets, the fair value may be determined by reference to the market
value of the assets given up. Where the market value of the assets given up cannot be reliably
assessed, such assets may be valued at their respective net book values. 15. Many amalgamations
recognise that adjustments may have to be made to the consideration in the light of one or more
future events. When the additional payment is probable and can reasonably be estimated at the
date of amalgamation, it is included in the calculation of the consideration. In all other cases, the
adjustment is recognised as soon as the amount is determinable [see Accounting Standard (AS) 4,
Contingencies and Events Occurring After the Balance Sheet Date].
Amalgamation is one of Mergers and Acquisitions’ tools that can assist businesses evading
competition and including to market products. It is for the mutual benefit of the acquirer and the
acquired company. This is an appropriate method of corporate restructuring to cause better change
and make the business environment competitive.

The accounting standard for amalgamation is interpreted as allowing an enterprise in a rare and
dissimilar accounting practice that goes over various times, even the relatively accepted
accounting, instead of legally achieving the goal of equalizing treatment in all scenarios of
amalgamation.
Furthermore, integration of AS and IFRS in India is practicable with the continuation updated on
the accounting standard alterations or modification for the users.
REFERENCES / BIBLIOGRAPHY

1.WWW. Investotornight.com

2. https/indiafreenotes.com

3.Incorporatedpurchase.com

4.Lawinsider

5.https/mu.ac
THANKYOU!