Question

what is purchase consideration and types

Answer 1

Purchase Consideration – Meaning & Methods

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).

Methods of Purchase Consideration:

There are four various methods which can be used in this calculation:

Net asset method –

Purchase consideration is equal to the total net asset of transferor company.

Total agreed amount of asset – Total agreed amount of liabilities

Net payment method –

Payment made to the shareholders of transferor company in form of cash, shares or debentures.

Lump sum method –

Fixed amount paid by the transferee company to the transferor company. This method does not require any calculation as the amount is decided by mutual consent of both the companies.

Intrinsic value/ Share exchange method –

Purchase consideration is calculated by dividing the net asset value of transferor company by price of one share of transferee company.

The result figure then divided by number of existing shares of transferor company to find out the ratio.