Purchase consideration based on intrinsic value of shares

This is an extension of net assets method for calculating purchase consideration. Here the number of shares to be issued by the transferor company is ascertained on the basis of intrinsic value per share of two companies
Intrinsic value is the amount per share that Eq Shareholders are expected to receive.
Here mkt value or net realisable value is taken into consideration. If mkt value is not given, then book value is taken into consideration
Intrinsic value= Value of net assets available for equity shareholders divided by number of equity shares

= Net realisable value of assets minus payable value of liabilities minus payable to preference shareholders divided by number of equity shares

COMPREHENSIVE ILLUSTRATION

Balance Sheet
3L Eq shares of Rs 10 each fully paid up                                                                     30L
10000 12% Pref Shares of Rs 100 each fully paid  up                                                  10 L

General Reserve                                                                                                               5 L
Non current Liab:
12%Debentures                                                                                                              10 L
trade Payables                                                                                                                 12L
Other CL                                                                                                                           8L
                                                                                                                                       -------
                                                                                                                                          75L


Assets
Non CA                                                                                                                             50L
CA                                                                                                                                     25L
                                                                                                                                        ---------
                                                                                                                                          75L
Other Information
Y Ltd takes over X Ltd in April 2012
Debenture holders of X Ltd are discharged by Y Ltd at 10% premium by issuing 12% debentures of Y Ltd
12% preference shareholders of X Ltd are discharged at a premium of 20% by issuing necessary number of 12.5% pref shares of Y Ltd ( face value Rs 100 each)


Intrinsic value per share of X Ltd is Rs 2 and that of Y Ltd is Rs 30.
Y Ltd will issue eq shares to satisfy the eq shareholders of X Ltd on the basis of the intrinsic value of the two companies

Solution:
Calculation of Purchase Consideration

Payment TO:             |   Form of Payment                    |  Working                 |  Amount
Pref Shareholders     |  12.5% pref shares in Y Ltd       |  10000 X   120        |  12L
Equity Shareholders   |Equity Shares in Y Ltd             |   3L X (20/30) X10 |   20L
                                                                                                                           -------------
                                                                                                                            30L

Amount payable to debenture holders will not be included while calculating purchase  consideration as per AS14. Such debentures will be taken over by Y Ltd and then immediately discharged by it 

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