PURCHASE CONSIDERATION
Purchase Consideration refers to the payment made by the transferee company to the transferor company for the business taken over. It includes all types of payments made in the form of the shares, securities, bonds or cash etc.
ACCORDING TO ACCOUNTING STANDARD 14
“The aggregate of 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.”
The purchase consideration does not include payment to debenture holders or any other outside liabilities which are taken over and discharged by Transferee Company.
It depends upon the fair value of securities and assets. The fair value of securities is fixed by the authorities and the fair value of assets is considered on the basis of their book value and on market value, if provided.
METHODS OF CALCULATING PURCHASE CONSIDERATION
The various methods for calculating purchase considerations are:
LUMP-SUM PAYMENT METHOD
In case of this method, there is no calculation regarding the amount paid by the transferee company to the transferor company. The whole amount paid by the transferee company is considered as purchase consideration.
EXAMPLE: X Ltd. take over the business of the Y Ltd. and agreed to pay Rs. 45,00,000. The amount so agreed to pay is the purchase consideration.
NET PAYMENT METHOD OF PURCHASE CONSIDERATION
Accounting Standard 14 recognizes the Net payment method for the calculation of purchase considerations. This method is used when the payment of the purchase considerations is made in the form of the securities or cash. As per this method, the payments to the debenture holders are not included in the purchase considerations. It is assumed that the debentures alike liabilities are taken over and repaid by the transferee company.
EXAMPLE: X Ltd. agreed to take over the business of the Y Ltd. the liabilities of Y Ltd. includes Rs. 5,00,000 debentures. The Y Ltd. has capital divided into 2,000 shares of Rs. 10 each. X Ltd agreed to pay by issuing 1,000 shares of Rs. 15 each and the balance by cash. The purchase consideration will be calculated as follows:
Shares issued : 1,000*15= 15,000
Cash paid :5,000
Total :20,000
The purchase consideration does not include the amount to be paid to the debentureholders by the transferee company.
NET ASSETS OR NET WORTH METHOD
As per this method, the purchase consideration is calculated by finding out the difference between the assets and liabilities of the company. The sum of liabilities is deducted out of the sum of assets to find out the purchase consideration.
Under this method:
- All the assets agreed to be taken over by the transferee company includes the cash and bank balances.
- The assets like goodwill and prepaid expenses are also included in the assets to be taken over by the transferee company.
- The liabilities taken over by the transferee company includes all third party liabilities.
- The accumulated profits and reserves never form the part of the purchase consideration.
EXAMPLE: X Ltd. agrees to take over the Y Ltd. which has following assets and liabilities:
Fixed assets: 6,50,000; Current Assets: 1,40,000; Goodwill: 10,000; Debentures: 1,00,000; Current Liabilities: 1,00,000.
As per this method, the purchase considerations will be calculated as follows:
Fixed Assets :6,50,000
Current Assets :1,40,000
Goodwill :10,000
Less: Debentures :(1,00,000)
Less: Current Liabilities :(1,00,000)
Purchase Considerations :6,00,000
ON THE BASIS OF VALUE OF SHARES EXCHANGED
Under this method, purchase consideration is calculated on the basis of the value of shares of the two companies involved.
EXAMPLE: The Y Ltd. has Rs. 20,000 share capital. X Ltd. wants to take over the business of Y Ltd. by paying shares of Rs. 20 each. The purchase consideration will be calculated by calculating the number of shares to be issued.
20,000/20=1,000 shares.
ACCOUNTING TREATMENT OF PURCHASE CONSIDERATION
The accounting treatment is studied in two parts:
In books of Transferor (Vendor) Company
In books of Transferee (Purchasing) Company
IN THE BOOKS OF TRANSFEROR COMPANY
FOR TRANSFER OF ALL ASSETS
Realisation Account…………………………….Dr.
To Sundry Assets Account
FOR TRANSFER OF LIABILITES TAKEN OVER
Sundry Liabilities Account…………………Dr.
To Realisation Account
FOR PURCHASE CONSIDERATION DUE
Transferee Company…………………………….Dr.
To Realisation Account
FOR RECIEPT OF PURCHASE CONSIDERATION
Shares in the Transferee Company Account………………………….Dr.
Debentures in the Transferee Company Account………………….Dr.
Bank Account…………………………………………………………………………….Dr.
To Transferee Company
FOR SALE OF ASSETS NOT TAKEN OVER BY THE TRANSFEREE COMPANY
Bank Account………………………………………………………..Dr.
To Realisation Account
FOR PAYMENT OF LIABILITIES NOT TAKEN OVER BY THE TRANSFEREE COMPANY
Sundry Liabilities………………………………………………….Dr.
To Bank/ shares in transferee company
FOR MONEY DUE TO PREFERENCE SHAREHOLDERS
Preference Share Capital Account……………………….Dr.
To Preference Shareholders Account
FOR PAYMENT TO PREFERENCE SHAREHOLDERS’
Preference Shareholders Account………………………Dr.
To Bank/ Shares in the transferee company
FOR PROFIT ON REALISATION
Realisation Account………………………………………………Dr.
To Equity Shareholders Account
FOR LOSS ONREALISATION
Equity Shareholders Account…………………………………Dr.
To Realisation Account
FOR TRANSFER OF EQUITY SHARE CAPITAL, RESERVES, ETC.
Equity share capital Account………………………………….Dr.
General Reserve Account………………………………………..Dr.
Accumulated Profits Account………………………………….Dr.
To Equity Shareholders Account
FOR PAYMENT TO EQUITY SHAREHOLDERS
Equity Shareholders Account………………………………….Dr.
To Shares in Transferee Company
To Bank Account
IN THE BOOKS OF TRANSFEREE COMPANY
The transferee company records transactions by Pooling of Interests Method and Purchase Method.
AS PER POOLING OF INTERESTS METHOD
PURCHASE CONSIDERATION DUE
Business Purchase Account………………………………Dr.
To Liquidators of Transferor Company
ACQUISITION OF ASSETS AND LIABILITIES OF THE TRANSFEROR COMPANY
Sundry Assets Accounts……………………………………Dr.
To Sundry Liabilities Account
To Statement of Profit and Loss Account
To Reserve Accounts
To Reserves Accounts
To Business Purchase Account
PAYMENT OF PURCHASE
Liquidators of Transferor Company Account…………………………Dr.
To Share Capital Account
To Debentures Account
To Bank Account
LIQUIDATION EXPENSES OF TRANSFEROR COMPANY BORNE BY TRANSFEREE COMPANY
Statement of Profit and Loss/ Reserve Account…………………………….Dr.
To Bank Account
FORMATION EXPENSES OF THE TRANSFEREE COMPANY IF NEW COMPANY IS FORMED
Preliminary Expenses Account…………………………………………………………Dr.
To Bank Account
AS PER PURCHASE METHOD
FOR PURCHASE OF BUSINESS
Business Purchase Account………………………………Dr.
To Liquidators of Transferor company account
FOR ASSETS AND LIABILITIES TAKEN OVER
Asset Account……………………………………………..DR.
To Liabilities Account
To Business Purchase Account
FOR PAYMENT OF PURCHASE CONSIDERATION
Liquidators of transferor company Account………………………………………..Dr.
To Share Capital Account
To Securities Premium Account
To Debentures Account
To Bank Account
WHEN RESERVES ARE MAINTAINED
Amalgamation Adjustment Account………………………………..Dr.
To statutory reserves account
FOR LIQUIDATION EXPENSES
Goodwill/ Capital reserve Account……………………………………….Dr.
To Bank Account
FORMATION EXPENSES OF NEW COMPANY
Preliminary Expenses Account………………………………………Dr.
To Bank Account
PAYMENT OF LIABILITY OF TRANSFEROR COMPANY
Liability Account……………………………………………..Dr.
To share capital account
To debentures account
To bank account
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