Corporate Financial Reporting · Absorptions, Amalgamations, External Reconstruction

Purchase Consideration Methods: Calculation for CMA Final

Updated 11 October 2026 · Fact-checked

Purchase consideration is what the transferee company gives the transferor's shareholders for the business: shares, other securities and cash. You calculate it by the lump sum, net assets, net payment or intrinsic value method. Pick the method the question names, include only what goes to shareholders, and value shares at issue price.

Understand Purchase Consideration Methods

When one company takes over another in an absorption, amalgamation or external reconstruction, the buying company (transferee) pays the selling company's shareholders. That payment is the purchase consideration. It is paid in equity shares, preference shares, debentures, cash, or a mix.

The main point is who receives the payment. Purchase consideration goes to the shareholders of the transferor. Money the transferee pays directly to creditors or debenture holders is not part of it. It is a cost of taking over liabilities, not a payment for the shares.

The four methods are four ways to arrive at the same kind of figure. Lump sum: the scheme simply states a fixed amount. Net assets: you add the agreed values of the assets taken over and subtract the liabilities taken over. Net payment: you add up the shares, securities and cash promised to the shareholders. Intrinsic value: you work out the value per share of both companies and use the ratio to decide how many shares to issue.

Shares are counted at their issue price, not their face value. If the transferee issues ₹10 shares at ₹15, each share adds ₹15 to the consideration. Under Section 52(1) of the Companies Act, 2013, the premium of ₹5 goes to the securities premium account. The same issue shows ₹10 in share capital and ₹5 in securities premium.

The four methods are the working tools of this chapter. Under Ind AS 103, consideration transferred is measured at fair value, and combinations under common control follow the pooling approach. Read the question to see which treatment it asks for.

Key rules to remember

Lump sum method: Purchase consideration = amount fixed in the scheme; No calculation of assets is needed. Only split the amount into shares and cash as the question says.
Net assets method: PC = agreed value of assets taken over − liabilities taken over; Leave out assets not taken over and liabilities not taken over. Use agreed values, not book values, where given.
Net payment method: PC = shares (at issue price) + other securities + cash payable to shareholders of the transferor; Include only payments to shareholders. Exclude liabilities paid off by the transferee, and the transferor's own liquidation costs.
Shares issued under an exchange ratio: Shares to issue = shares held in transferor × (new shares ÷ old shares in the ratio); Example: ratio 4:5 means 4 new shares for every 5 old shares.
Intrinsic value per share: Value per share = net assets available to equity shareholders ÷ number of equity shares; Compute for both companies. Shares to issue = (transferor value per share ÷ transferee value per share) × transferor shares.
Value of shares issued: Shares issued × issue price = value in PC; share capital = shares × face value; securities premium = shares × premium; This split is needed for the journal entry.

How to solve Purchase Consideration Methods questions

This order works for any purchase consideration question, whatever the method.

1Read the method named in the question. If none is named, look for the clues: a fixed sum (lump sum), assets and liabilities taken over (net assets), or a list of shares and cash per share (net payment).
2List what is given to whom. Separate the equity shareholders, preference shareholders, and creditors or debenture holders.
3For net assets: take each asset at the agreed value and include only those taken over. Deduct only liabilities taken over. For net payment: calculate the shares, securities and cash for each class of shareholder.
4Convert shares to rupees at the issue price. Work out the number of shares from the exchange ratio, or from the consideration divided by issue price.
5Add the shares, securities and cash to get the total purchase consideration, and check it against the other method if both are possible.
6Split the result into share capital, securities premium and cash, because the journal entries need each separately.
7State the final answer clearly with a short working note for each component.

Quickest way: Shareholder-payout check

When to use it: Use this under time pressure when the question gives both the asset side and the share terms, or when you are unsure what to include.

Ask for every item: does this go to a shareholder of the transferor? If yes, include it in PC. If no, leave it out.
Write the rupee value of each class of shares as shares × issue price, in one line each.
Add the cash component last.
If a net assets figure is also given, check that it equals your net payment total. A mismatch usually means a missed asset or liability, or the wrong issue price.
Mark the PC in a box and carry it into the goodwill or capital reserve working.

Common mistakes in Purchase Consideration Methods

Valuing shares at face value instead of issue price.
Students see the ₹10 share and forget the premium.
Fix: Always multiply the number of shares by the issue price. Show share capital and securities premium separately only after finding the total.
Including liabilities that the transferee does not take over.
Students deduct every liability in the balance sheet in the net assets method.
Fix: Deduct only liabilities expressly taken over. A liability left with the transferor stays out.
Including payment to debenture holders or creditors in net payment.
Students treat all payments by the transferee as consideration.
Fix: Net payment includes only amounts payable to the transferor's shareholders. Payments to creditors and debenture holders are not part of PC.
Using book values when the question gives agreed values.
Students pick the balance sheet numbers because they are in front of them.
Fix: If the scheme states a revised value for an asset, use it. Use book values only when no other value is given.
Including assets not taken over, such as fictitious assets or specified bank balances.
Students add up the full asset side.
Fix: Read the scheme for exclusions. Fictitious assets such as preliminary expenses are normally not taken over unless stated.
Wrongly computing the number of shares from the exchange ratio.
Students mix up which side of the ratio is old and which is new.
Fix: Write the ratio as 'new shares for old shares' and multiply the transferor's shareholding by new ÷ old.

Worked examples

Example 1

Alpha Ltd absorbs Beta Ltd. Beta has 1,00,000 equity shares of ₹10 each and 20,000 10% preference shares of ₹10 each. Alpha agrees to give: for every 5 equity shares in Beta, 4 equity shares of ₹10 each in Alpha issued at ₹15 each, plus ₹2 cash per Beta equity share; and for the preference shares, 10% preference shares of Alpha of ₹10 each at par. Calculate the purchase consideration by the net payment method and show the split.

Show the solution

Equity shares to issue: 1,00,000 × 4 ÷ 5 = 80,000 shares.
Value at issue price: 80,000 × ₹15 = ₹12,00,000.
Cash to equity shareholders: 1,00,000 × ₹2 = ₹2,00,000.
Preference shareholders: 20,000 × ₹10 = ₹2,00,000 in preference shares at par.
Total PC = ₹12,00,000 + ₹2,00,000 + ₹2,00,000 = ₹16,00,000.
Split of equity shares: share capital 80,000 × ₹10 = ₹8,00,000; securities premium 80,000 × ₹5 = ₹4,00,000.

Answer: Purchase consideration = ₹16,00,000 (equity shares ₹12,00,000, cash ₹2,00,000, preference shares ₹2,00,000).

Example 2

Gamma Ltd takes over Delta Ltd. The agreed values of assets taken over are: land ₹12,00,000; plant ₹7,00,000; stock ₹4,00,000; debtors ₹2,80,000; cash ₹1,00,000. Gamma takes over 12% debentures of ₹5,00,000 and creditors of ₹2,50,000. A bank loan of ₹1,50,000 is not taken over. Gamma will pay 25% of the purchase consideration in cash and the balance in equity shares of ₹10 each issued at ₹12 each. Calculate the purchase consideration and number of shares to issue.

Show the solution

Assets taken over = 12,00,000 + 7,00,000 + 4,00,000 + 2,80,000 + 1,00,000 = ₹26,80,000.
Liabilities taken over = 5,00,000 + 2,50,000 = ₹7,50,000. The bank loan is excluded.
PC = 26,80,000 − 7,50,000 = ₹19,30,000.
Cash = 25% × 19,30,000 = ₹4,82,500.
Balance in shares = 19,30,000 − 4,82,500 = ₹14,47,500.
Number of shares = 14,47,500 ÷ 12 = 1,20,625 shares.
Share capital = 1,20,625 × ₹10 = ₹12,06,250; securities premium = 1,20,625 × ₹2 = ₹2,41,250.

Answer: Purchase consideration = ₹19,30,000, settled by cash ₹4,82,500 and 1,20,625 equity shares of ₹10 each issued at ₹12.

Exam tips

Read the scheme terms line by line and underline what is taken over and what is left behind. Marks are lost mainly on inclusion and exclusion.
Show a clear working note for the purchase consideration. Even if one figure is wrong, step marks protect you in the written answer.
In MCQs on a case scenario, check whether the question asks for total PC or only the share part. The options usually include the wrong total.
If the question gives both methods, compute both and compare. A match confirms your answer.
Always show the split between share capital and securities premium, as later journal entries and goodwill depend on it.

Practice questions from Absorptions, Amalgamations, External Reconstruction

Purchase Consideration Methods in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Purchase Consideration Methods: frequently asked questions

What is the difference between the net assets method and the net payment method?

The net assets method starts from the transferor's assets and liabilities taken over, at agreed values. The net payment method starts from what the shareholders actually receive. They can give the same total when the scheme is balanced, but the net payment method is the one that follows the true definition of consideration.

How do I use the intrinsic value method?

Find the intrinsic value per share of both companies by dividing net assets by number of shares. For example, if the transferee has net assets of ₹30,00,000 on 2,00,000 shares, its value per share is ₹15. If the transferor has ₹12,00,000 on 1,20,000 shares, its value per share is ₹10. Shares to issue = 1,20,000 × 10 ÷ 15 = 80,000, and the PC at ₹15 is ₹12,00,000.

Should liabilities paid by the transferee be included in purchase consideration?

No. Liabilities the transferee takes over or pays are not part of consideration to shareholders. In the net assets method they are deducted from assets. In the net payment method they are ignored.

Is shares at premium included at face value in purchase consideration?

No. Include shares at their issue price. The premium goes to the securities premium account as required by Section 52(1) of the Companies Act, 2013.