Meaning of purchase consideration, Methods of calculating Purchase consideration, Net Payment method, Net Asset method

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.

If one company purchases another business as a going concern (that is, the business will continue to operate for eternity), it can pay for it using one or more of the following methods:

• Cash: The entire amount is paid in cash. This is a rare scenario as the following two methods are more common.
• Shares: The limited liability company offers some of its shares to the owners of the business that is being purchased.
• Debentures: The limited liability company may offer some of its debentures to the owners of the business.

The following two things must be kept in mind when the price of the business is being determined:

• The assets bought are stated at different values in the books of the limited company and the books of the selling business. This is because they are revalued to reflect their current worth in the market. This value is known as the fair value of the assets.

The acquisition consideration is the sum paid by the limited company to acquire the firm. In many circumstances, the purchase amount does not match the net assets acquired, and the discrepancy must be documented in the books of account.

If the purchase price exceeds net assets, the difference is referred to as positive goodwill. However, if the acquisition price is less than the net assets, the difference is known as negative goodwill. The accounting approach for each of these categories of goodwill varies.

Accounting Standard-14 defines 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 buy consideration refers to the overall payment paid by the purchasing business to the shareholders of the vendor firm, it may be calculated in a variety of ways, as shown below:

Lump sum technique

Net Assets Method

Net Payment Method

The Lump amount Method involves paying the acquisition price in one lump amount based on the acquiring company’s assessment. For example, if A Ltd. acquires B Ltd.’s firm for Rs.15, 00,000, the purchase consideration is the amount of Rs.15, 00,000.

Net Asset Method:

(1) The value of goodwill will be determined.

(2) The company’s fixed assets, whether disclosed or concealed in the Balance Sheet, are valued at their realizable value.

(3) Floating assets should be taken at market value.

(4) Remember to eliminate fictional assets like preliminary expenses and accumulated losses.

(5) Consider provisions for depreciation and bad debts.

(6) Determine the company’s external obligations to outsiders, including contingent liabilities.

Under this procedure, P.C. will be calculated as follows:

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: