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Amalgamation doubts

vikas gupta (c.a final....) (714 Points)

27 November 2010

1. Why are debentures not included in calculation of purchase consideration?
2. calculation of intrinsic value method is net assets method?
3. Why are liquidation expenses not deducted in calculation of intrinsic value,if bcoz of they are hypothetically estimated......so asset 's market value are also hypothetically estimated,so why these assets are added ?

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32 Replies

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 27 November 2010

Your doubts are concepts related. The answers are as follows:-

1-- As per AS-14 , Purchase Consideration(PC) denotes amount paid to equity shareholders. Moreover, amalgamation takes place at ownership level i.e. owners are involved or equity shareholders. So in such case we don't take any amount due towards outsiders( Creditors or any outside 3rd party like Liquidator).

PC is to be given to owner & not to outsiders. In simple language, will you pay amount due to purchase of building to its owner or to any other 3rd party??? Obviously, you will pay to its owners to acquire ownership & not to any outsiders.

2-- Intrinsic value of shares means the real worth of Company shares & not merely its face value. To determine intrinsic value, we take net assets method because the value of shares is reflected in the form of Assets/ Outside liabilities.

In other words, the effect of transactions from investment of equity shares in company gets its real time value from various Assets acquired/ disposed & liabilities paid / taken over. The value that appear in balance sheet is the face value of shares. So to know correct value as on date we take real time figures of Assets & Outsiders Liabilities.

I can give you an example from your life which is true to understand intrinsic value concept. See a person who writes B.com from some tom n d**k University by mere presentation and just beating around the bush to fill pages is like a share having only face value. Similarly a candidate evaluated on ICAI benchmark is the real value of that candidate or the value is intrinsic(real strength). This is just for explanation , I feel it is apt example. If anyone is offended, then No Sorry as its the harsh reality..

3---- The answer lies in 1st reply itself.

Hope you understood.

8 Like

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 27 November 2010

More explanation on 3rd question---

As said earlier that PC involves payment to owners , we don't take any outsiders liabilities .They(Liquidator) are taken care off separately before payment to equity shareholders.

Intrinsic value is calculated for Equity Shares & these expenses are not taken because they arise only at the time of amalgamation. Other liabilities or Assets are the result of over a period transactions before amalgamation. Now read 2nd point again.

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 27 November 2010

The comparison made between CA & B.com in 2nd point is my observation. I have no intention in offending anyone but that is the fact which many will say at least in their hearts if not on face. Its the sad face of our education system. Many unproductive youths are being produced in our Indian Universities. Exceptions ruled out.

Kindly don't post any comments in relation to it. I know some people will post. I will not comment on that part and waste time by arguing on such topic.

Discussions & comments in relation to the topic of this forum can be continued .

Thnx.

1 Like

Manikanta Raju CA,CWA,(CS) (Industry) (4482 Points)
Replied 27 November 2010

Good explanationsfaiz

1 Like

Rohit Singh (ca final) (126 Points)
Replied 28 November 2010

as far as liquidation expenses goes we dont consider them because the whole concept of finding pc is based on hypothetical liquidation ie we think in our mind that if now the business is closed what will be the value of each equity share of the company, and as all this is only hypothetical no need to include them.

although i do agree with faiz on most points but i would also like to add that net assets is not a very favoured method and should be applied only when cirumstances are such that pc cant be calculated by the payments method.

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 28 November 2010

@ Rohit,

You have talked about payment( PC). That can be done by Net assets method or Payment method.

To be more apt & clear. PC can be calculated on the following basis:-

(a) Payment Method--- When all modes of payments are given along with their individual amounts.

(b)Net Assets method-- In all other cases other than condition of point (a).

>>>>>>Intrinsic value is an extension of Net Assets method rather a more refined way of valuations.

Hope I am clear.

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 28 November 2010

@ Rohit,

Amalgamation includes Absorption ( Companies Act, 1956)

So I would say, your reason for not considering it in PC is not suitable. In absorption, one Company has to appoint Liquidator to carry out absorption

Note-- Absorption means where an existing Co. is liquidated & another existing Co. takes over its business. Liquidator is appointed to carry out the proceedings. Its not a one day job. May take months also.

Suresh Prasad (www.aubsp.com) (15630 Points)
Replied 28 November 2010

Originally posted by : Faiz Ahmed
	Your doubts are concepts related. The answers are as follows:- 1-- As per AS-14 , Purchase Consideration(PC) denotes amount paid to equity shareholders. Moreover, amalgamation takes place at ownership level i.e. owners are involved or equity shareholders. So in such case we don't take any amount due towards outsiders( Creditors or any outside 3rd party like Liquidator). PC is to be given to owner & not to outsiders. In simple language, will you pay amount due to purchase of building to its owner or to any other 3rd party??? Obviously, you will pay to its owners to acquire ownership & not to any outsiders. 2-- Intrinsic value of shares means the real worth of Company shares & not merely its face value. To determine intrinsic value, we take net assets method because the value of shares is reflected in the form of Assets/ Outside liabilities. In other words, the effect of transactions from investment of equity shares in company gets its real time value from various Assets acquired/ disposed & liabilities paid / taken over. The value that appear in balance sheet is the face value of shares. So to know correct value as on date we take real time figures of Assets & Outsiders Liabilities. I can give you an example from your life which is true to understand intrinsic value concept. See a person who writes B.com from some tom n d**k University by mere presentation and just beating around the bush to fill pages is like a share having only face value. Similarly a candidate evaluated on ICAI benchmark is the real value of that candidate or the value is intrinsic(real strength). This is just for explanation , I feel it is apt example. If anyone is offended, then No Sorry as its the harsh reality.. 3---- The answer lies in 1st reply itself. Hope you understood.

Nice sharing ....

1 Like

Manmohan ACA, CS (Chartered Accountant ) (14243 Points)
Replied 28 November 2010

I thought you are satisfied with my answers

2 Like

Arpit Bansal (article) (69 Points)
Replied 28 November 2010

Ans: 1. Purchase consideration is calculated for payment to the owners of the company and deb holders are not treated as owners,they are on the same footing as creditors and hence their value is reduced while calculating NAV or Intrinsic value of a share

2. Ya procedure to calculate NAV and intrinsic value is almost same.Intrinsic value is normally calculated for Equity shares.When u reduce the value of pref shares from NAV,u get Net assets available for eq shareholders and when u divide Net assets available for eq shareholders with no of eq shares u get Intrinsic value

both the methods are equally acceptable,if question is silent u can apply any method

3. P.C is calculated on the basis of market value of assets appearing in B/S.If new company bears those exp it will reduce its capital reserve or increase its goodwill

CA Ashok Prasad (Practitioner) (133 Points)
Replied 28 November 2010

I believe PC is for the shareholders rather than equity shareholders. Hope I'm right?

s (-) (216 Points)
Replied 28 November 2010

If you are calculating the PC using Intrinsic Value Method i.e. Net Assets Method,

In That case, we deduct the Book Value of Debentures:

TOTAL OF ASSETS: XXXXX

Less: OUTSIDE LIABILITIES: XXXX }---------------> THIS WILL INCLUDE THE VALUE OF DEBENTURES

------------------------------------------------

NET ASSETS : XXXXX

INTRINSIC VALUE PER SHARE = TOTAL NET ASSETS / No. of Shares

CA PuRvI M!$rA (-) (2260 Points)
Replied 28 November 2010

Shareholders ( pref and equity ) are the real owners of the company .Any loss /profit is being shared by them at last . Though preference shares have right over the equity in case of dividends as well as profits . But there are preference shares which get participating rights.
Apart from shareholders , all other liabilities are outside settlement like creditors, debentures. Sometime tranferor company has some statuory reserves . that reserves has to be taken by the transfree company as it is . That we do through amalgamation adjustment a/c.

Purchase consideration has to be only the amount that has to paid to shareholders.Debentures are outsider's Liabilities from view point of shareholders . and it the shareholders actually who have given thier consent been take over by the new company keeping compulsory amalgamation by central govt. and in case of take over by bidding method e.tc.. in exceptional cases.