4 Methods of purchase consideration
As per section 14 it is the price paid by Transferee Company to the transferor company for the purchase of its business.
Methods of purchase consideration:
There are different methods of purchase consideration depending upon the terms and conditions settled between the transferor company.
1) Net asset method: under this method the net asset value is calculated by deducting all the liabilities taken over by the transferee company from the entire asset taken by the transferee company. The value of the assets and liabilities is not that appear in the balance sheet but it is that which is decided between the two companies.
2) Net payment method: in this case purchase consideration is calculated by adding all the payments made by the transferee company to the shareholders of the transferor company. Payment can be in the form of cash, shares or debentures.
3) Lump sum method: this is the case when Transferee Company agrees to pay Transferor Company a fixed sum of money. Like xyz limited agrees to pay abc ltd 25 lakh. This is lump sum method.
4) Intrinsic value or share exchange method: in this method to calculate purchase consideration following method is used:
Net asset available to the equity shareholders/ number of equity shares.
The above is the meaning of purchase consideration and 4 methods of purchase consideration.