Purchase Consideration: What AS 14 Actually Means By It

In one line

Purchase consideration is what the transferee gives to the shareholders of the transferor company, and nothing it gives to anyone else.

The definition

Paragraph 3(g): consideration for the amalgamation means the aggregate of the 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.

Read it in three parts.

The aggregate of the shares and other securities issued: equity shares, preference shares, debentures, anything issued.

And the payment made in the form of cash or other assets: cash, or an asset handed over.

By the transferee company to the shareholders of the transferor company: and this is the part that decides questions.

What is not consideration

This is where the marks are won and lost.

Payments to debenture-holders are not consideration. If the transferee agrees to pay off, or to take over, the transferor's debentures, that is a liability assumed, not a payment to shareholders. Debenture-holders are creditors.

Payments to creditors are not consideration. Same reason.

Liquidation expenses are not consideration, even when the transferee agrees to bear them, unless the scheme expressly makes them part of the price payable to the shareholders. They are an expense of winding up the transferor.

Assets taken over and liabilities assumed are not consideration. They are what is bought, not what is paid.

A question will list all of these in the same paragraph as the consideration, precisely to see whether the student separates them.

The commonest error, stated plainly

A student is told: Alpha Ltd. takes over Beta Ltd., agreeing to issue 50,000 equity shares of Rs 10 each to Beta's shareholders, to discharge Beta's 10 per cent debentures of Rs 1,00,000 by issuing its own debentures, and to pay the liquidation expenses of Rs 5,000.

The purchase consideration is Rs 5,00,000. Not Rs 6,00,000, and not Rs 6,05,000.

The debentures are a liability taken over and appear in the net assets computation on the liabilities side. The liquidation expenses are an expense. Neither is a payment to Beta's shareholders.

Paragraph 40: how a non-cash element is valued

Paragraph 40 is the Main Principle on this, and it answers "at what figure?"

The consideration should include any non-cash element at fair value. Then three rules in order:

• In the case of issue of securities, the value fixed by the statutory authorities may be taken to be the fair value.
• In the case of other assets, fair value may be determined by reference to the market value of the assets given up.
• Where the market value of the assets given up cannot be reliably assessed, such assets may be valued at their respective net book values.