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HMRC internal manual

Business Income Manual

Business successions: accounting: business combinations and goodwill

The objective of section 19 of FRS102 is to ensure that when a business entity is acquired all of the assets and liabilities that existed in the acquired entity at the date of acquisition are shown in the acquirer’s accounts at the fair value which reflects their condition at that date. Any difference between the net asset value and the consideration paid is either positive or negative goodwill.

Fair values at acquisition are not affected by provisions or accruals for future expenditure that are expected to be incurred as a result of the acquisition. For example if the acquirer intended to retrain some employees after the take-over it is not entitled to include a provision for retraining costs as part of the calculation.

The cost of acquisition of a business includes the cash, loan notes or shares paid and the value of the assumption of liabilities.

In certain specified circumstances businesses may use merger accounting when they acquire another business.