Step I- Equity Share capital + Preference share capital issued+ any other additional consideration in form of cash and other assets by the Transferee Company. Step II- Existing Equity share capital + Existing Preference share capital in the books of Transferor Company. Step III- Step I- Step II= amount to be adjusted from the reserves of Transferee company.
Difference between the Purchase Consideration and Net Assets transfe rred: Any excess of the amount of purchase consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognized as goodwill in the financial statement of the transferee company. Any short fall should be shown as capital reserve. Goodwill should be amortized over period of five years unless a somewhat longer period can be justified. In simple terms, where in case of purchase method- the amount to be transferred to capital reserve or to be recorded as Goodwill- can be computed in the following 3 steps- Step I- Find out the Net assets amount using the following formula- Total assets- Outside liabilities (Non-current liabilities + Current Liabilities) Step II- Compute the purchase consideration using any of the methods as given under Purchase consideration computation. Step III- (a) If Step I- Step II= Positive amount- then it is capital reserve- since the assets received more than the amount paid as purchase consideration to acquire them.
(b) If Step I- Step II= Negative amount- then it is to be recorded as Goodwill (intangible asset) - since the amount paid for acquiring business is more than the Net assets, which is technically due to its goodwill.