Acquisition of Companies

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Introduction

Company acquisition stands as a pivotal topic in corporate accounting, directly impacting how resources, liabilities, and interests are transferred and reported. For UGC NET aspirants, mastering this area isn't just about theory—it's about understanding real-world financial transformation and developing an ability to analyze and record complex transactions with precision.

Conceptual Framework

a. Acquisition vs Amalgamation vs Merger

• Acquisition involves one company purchasing another, with the acquired company's assets and liabilities taken over. The acquirer retains its identity, while the acquired company may cease to exist.
• Amalgamation is the blending of two or more companies into a new entity, with all combining companies losing their separate existence. Assets, liabilities, and shareholders are pooled into the new company.
• Merger refers to the integration of two companies, usually by absorption, where one survives and the other is absorbed into it. The surviving company continues, holding all assets and liabilities of the absorbed entity.

Purchase Consideration: Meaning

Purchase consideration represents the total amount paid by the purchasing company to the shareholders of the vendor company for acquiring its assets and liabilities. This sum can be in the form of cash, shares, debentures, or a mix of these. Calculating purchase consideration accurately is essential for correct accounting treatment and fair representation in financial statements.

Purchase Consideration Methods

a. Net Assets Method

The Net Assets Method calculates purchase consideration based on the fair value of assets acquired minus the liabilities assumed. Only assets and liabilities actually taken over are considered. If any asset or liability is left out of the agreement, it's excluded from the calculation.

Formula:

Purchase Consideration = Agreed Value of Assets Taken Over – Agreed Value of Liabilities Assumed

b. Payment Method

The Payment Method focuses on what is actually paid to the shareholders of the vendor company. This includes cash, equity shares, preference shares, debentures, or any other form of settlement. The total of these payments constitutes the purchase consideration.

Formula:

Purchase Consideration = Total of all payments (cash, shares, debentures, etc.) made to the shareholders of the vendor company

Journal Entries

a. In the Books of Purchasing Company

• For recording assets and liabilities taken over:

Assets Account   Dr.
  To Liabilities Account
  To Vendor Company Account (Purchase Consideration)

• For payment of purchase consideration:

Vendor Company Account  Dr.
  To Cash/Bank/Share Capital/Debenture Account

b. In the Books of Vendor Company

• For transferring assets and liabilities:

Realisation Account   Dr.
  To Assets Account
Liabilities Account   Dr.
  To Realisation Account

• For receiving purchase consideration:

Purchasing Company Account   Dr.
  To Realisation Account

• For distribution to shareholders:

Shareholders Account   Dr.
  To Purchasing Company Account
  To Cash/Bank

Example

Calculation of Purchase Consideration and Journal Entries

Suppose Alpha Ltd. acquires Beta Ltd. The agreement specifies:

• Assets taken over: Machinery ₹2,00,000; Stock ₹1,00,000; Debtors ₹50,000
• Liabilities to be assumed: Creditors ₹80,000
• Purchase consideration to be paid as: ₹1,50,000 in cash and 5,000 shares of ₹10 each issued at par

Purchase Consideration = (Machinery + Stock + Debtors) – Creditors
= (₹2,00,000 + ₹1,00,000 + ₹50,000) – ₹80,000
= ₹3,50,000 – ₹80,000 = ₹2,70,000

Purchase Consideration = Cash Paid + Shares Issued
= ₹1,50,000 + (5,000 x ₹10)
= ₹1,50,000 + ₹50,000 = ₹2,00,000

Notice the difference in purchase consideration between net assets and payment methods. Why does this happen? Payment method reflects only what is given to shareholders, while net assets method records the actual assets and liabilities taken over. For exam preparation, always read the question carefully—does it ask for the net assets transferred or for payment to shareholders?

Conclusion

Acquisition accounting is more than calculation—it's about understanding the flow of value, rights, and obligations. Focus on clarity in definitions, precision in calculations, and accuracy in journal entries. If you grasp these fundamentals, you'll find yourself not just answering questions, but thinking like a true commerce professional.