Purchase Consideration
Purchase Consideration can be defined as
“ The aggregate of shares and other securities issued and payment made in the
form of cash or other asset by the transferee company to the shareholders of
the transferor company.” Thus in general terms It refers to the amount paid for
acquisition of a company by the acquiring firm. Consideration is the agreed
value for the asset take over. The consideration depends on the negotiation
between transferee and transferor company. Consideration consist of cash,
shares, assets and other securities depending upon the fair value of it. Purchase Consideration can be evaluated in
following methods
§ Net Asset Method
Under this
method all the values of the assets are being sum up and then the liabilities
are being deducted from the assets. The value which is obtained after deducting
the liabilities from assets is called consideration. Here fictitious assets are
not taken into consideration.
§ Net Payment Method
Under this
method consideration is assessed by adding up the agreed cash, agreed value of
assets given along with the agreed value of o the securities to discharge the
purchase consideration.
§ Lump Sum Method
It is the
simple method. Under this method a lump sum amount is decided and is paid. No valuation
of assets and liabilities is done here.
§ Intrinsic Worth Method
Consideration is been evaluated on
the basis of agreed value of shares of the transferor company. If the
transferee company pays all the shares of the transferor company it is said to
be paid for the entire business of transferor company.
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