Amalgamation (part-2)

 Q2. What is purchase consideration according to Accounting Standard 14? How is it calculated?

Meaning of Purchase Consideration 

According to Accounting Standard 14, purchase consideration refers to the sum of shares issued and cash paid by the Transferee Company to the shareholders of the Transferor Company. 

In simple words, the amount paid by the Transferee Company to acquire the business of the Transferor Company is called Purchase Consideration. 

Transferor Company refers to a company that is amalgamated. 

Transferee Company refers to a company in which amalgamation takes place. 

Methods of Determining Purchase Consideration 

The main methods for determining purchase consideration are as follows: 

1. Total Payment method/Lump Sum Payment Method 

2. Net Assets method 

3.Net Payment Method 

1. Total Payment method/ lump sum payment method :- if the purchase consideration is determined based on this method, then in this case, the purchase consideration is calculated by adding up the various payments made by the transferee company to the transferor company.

2. Net Assets Method:- If the purchase consideration is determined based on this method, then in that case, we will use the following formula to determine the purchase consideration: 

Purchase Consideration = Assets - Outside Liabilities 

Note: In the absence of clear information, we will assume that the assets and liabilities of the transferor company have been taken over by the transferee company at book value. 

3. Net Payment Method:- If the purchase consideration is determined based on this method, then in that case, the sum of the payments made to equity shareholders and preference shareholders is called the purchase consideration, whether that payment was made in cash, shares, or debentures.