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HMRC internal manual

Business Income Manual

Business successions: accountancy treatment of consideration

Sale consideration can be in money or money’s worth. For example a trader agrees to take over a Wednesday market stall business for cash of £3,000. He takes over stock valued at £2,500, a van valued at £1,000 and the liability to pay trade creditors of £3,000. Here the total consideration is £6,000, (the cash of £3,000 and taking over a liability of £3,000). What he is getting is stock of £2,500, the van and the market stall pitch and goodwill worth £2,500.

The accountancy treatment is to say that consideration is the amount of cash paid and the fair value of any other consideration given by the acquirer (including an estimate of any contingent consideration expected to be payable in the future) together with the expenses of acquisition. In this example consideration would be simply the cash of £3,000. They then compare this figure with the net assets acquired to find the value of goodwill. Here the net assets are stock of £2,500 and the van, £1,000 less the trade liability of £3,000, giving a net asset figure of £500. As the consideration was £3,000 this leaves £2,500 for goodwill.