(A) Basic Principles when a limited company takes over another business

(1) It can satisfies the purchase consideration by giving

• cash,
• shares or debentures
• assuming the trade liabilities
• any combination of cash, shares/debentures/assuming trade liabilities

(2)  the assets acquired are often different from the values shown in the vendor business’s book ( example : ten years ago, the vendor company bought a property for $100,000 and now the purchasing company have to buy it for $1 million)

(3)  total purchase consideration > net tangible assets of the vendor company where the excess is called goodwill and this goodwill account will appear in the purchasing company’s book

(4) total purchase consideration < net tangible assets is treated as a Capital Reserve

(B) The Purchaser (limited company) can buy:

• a sole proprietorship or

• a partnership or

• another limited company’s business

If you found this post useful, keep updated with future posts by subscribing to FMAccounting (for free) through RSS or email.

Related Entries

• IFRS 3: Accounting For Business Combination
• Corporate Re-structuring: Hiving-Down
• Accounting For The Purchase Of A SoleProprietor Business(Part1)
• Accounting For The Purchase Of A Partnership Business(Part2)
• Hire Purchase, Credit Sales And Rental Agreement