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HMRC internal manual

Business Income Manual

Business successions: introduction

The guidance in this chapter refers to section 19 of FRS102. Other accounting standards that deal with business combinations and goodwill are FRS7, FRS10, IFRS3 and IAS38. Except where specifically noted, the basic principles of these standards are not significantly different.

Section 19 of FRS102 applies when a business entity is purchased. A business entity is a collection of assets and liabilities, often with an ongoing trade. The business is bought as an overall deal. Sometimes, but not always, the sale agreement apportions the sale proceeds between different parts of the business being sold.

The purchaser then values all of the assets and liabilities and brings them into their accounts at their fair value. The difference between the net asset value and the consideration paid is goodwill. This can be either positive or negative.

The purchase is on capital account for accounting and most tax purposes. All adjustments are balance sheet adjustments for accountancy purposes. The tax treatment follows the accounting treatment for all assets and liabilities within the ‘trading regime’ except stock. For assets within the capital gains, capital allowances regimes or within the Corporation Tax loan relationship, derivative contracts or intangible assets regimes, other factors may need to be considered. For guidance on the Corporation Tax regimes, see the Corporate Finance and Corporate Intangibles Research and Development Manuals.