25 September 2014
Arrears of preference dividend paid in cash by the transferee company at the time of amalgamation to preference shares are included or not while computing purchase consideration ?
14 July 2024
In the context of amalgamations or mergers, the treatment of arrears of preference dividend can vary based on the specifics of the transaction and the accounting treatment chosen by the companies involved. Here’s a detailed explanation:
### Amalgamation and Treatment of Arrears of Preference Dividend
1. **Purchase Consideration Calculation**: - The purchase consideration in an amalgamation typically includes the value of assets transferred, liabilities assumed, and any consideration paid or shares issued by the transferee company to the shareholders of the transferor company. - Arrears of preference dividend represent unpaid dividends on preference shares that have accrued but not yet been paid.
2. **Cash Payment of Arrears**: - If the transferee company (the company acquiring another company in an amalgamation) decides to pay the arrears of preference dividend in cash to the preference shareholders of the transferor company as part of the amalgamation process, this amount is considered an outflow of cash and forms part of the consideration paid.
3. **Inclusion in Purchase Consideration**: - Generally, when calculating the purchase consideration paid by the transferee company, any cash payments made to settle arrears of preference dividend are included. This is because these payments represent a cost incurred by the transferee company to acquire the assets and liabilities of the transferor company.
4. **Accounting Treatment**: - The transferee company will record the payment of arrears of preference dividend as part of the total consideration paid for the amalgamation. - It will be reflected in the financial statements of the transferee company as a reduction in cash and an increase in the liabilities or equity related to the preference shares.
5. **Impact on Purchase Price Allocation**: - When allocating the purchase price to identifiable assets and liabilities acquired in the amalgamation, the total cash payment made, including for arrears of preference dividend, will influence how the purchase price is apportioned. - This allocation is crucial for determining the values assigned to different classes of assets and liabilities for accounting and reporting purposes.
### Conclusion
In summary, arrears of preference dividend paid in cash by the transferee company as part of an amalgamation are indeed included in the calculation of the purchase consideration. This payment represents a cash outflow by the transferee company and affects the overall consideration paid for acquiring the assets and liabilities of the transferor company. Therefore, when assessing the total cost of the amalgamation and allocating the purchase price, these payments are considered integral to the transaction and are reflected accordingly in the financial statements of the transferee company.
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