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HMRC internal manual

Corporate Intangibles Research and Development Manual

Intangible assets: notes on accounting practice: FRS7/IFRS3


The objective of FRS7 is to ensure that when one business entity is acquired byanother:

  • all the assets and liabilities that existed in the acquired entity at the date of acquisition are recorded at fair values, reflecting their condition at that date, and
  • that all changes to the acquired assets and liabilities, and the resulting gains and losses, that arise after control of the acquired entity has passed to the acquirer are reported as part of the post-acquisition financial performance of the acquiring group.


FRS7 applies to all financial statements that are intended to give a true and fair view of a reporting entity’s financial position and profit or loss (or income and expenditure) for a period. Although FRS7 is framed in terms of the acquisition of a subsidiary undertaking by a parent company that prepares consolidated financial statements, it also applies where an individual company or other reporting entity acquires a business other than a subsidiary undertaking.

Smaller Entities

Reporting entities applying the FRS for Smaller Entities currently applicable are exempt from the FRS unless preparing consolidated financial statements, in which case they should apply the FRS to such statements as required by the FRS for Smaller Entities, see CIRD30525.

Meaning of Fair Value

Where an intangible asset is recognised, its fair value should be based on its replacement cost, which is normally its estimated market value. For certain assets it is not easy to determine current replacement cost; neither is it possible to estimate the value of the future services that an asset can provide through its continued use, because of the inherent subjectivity of such a valuation. In such circumstances the historical cost of the asset updated by the use of price indices may be the most reliable means of estimating replacement cost. Where prices have not changed materially it would be acceptable to use a carrying value based on historical cost as a reasonable proxy for fair value.

Impaired Assets - Effect on Fair Value

Where the replacement cost of an acquired asset is not recoverable in full (owing, for example, to lack of profitability, under-utilisation or obsolescence), the fair value is the estimated recoverable amount. The FRS requires that a valuation at recoverable amount should reflect the condition of the asset on acquisition but not any impairments resulting from subsequent events. In some cases the recoverable amount can be determined only by considering as a whole a group of assets that are used jointly, rather than by attempting to determine the recoverable amount of each identifiable asset in that group. Aggregation in such cases serves to facilitate the attribution of cash flows to the assets that help to generate them.

Valuation of assets

Where valuation of intangible assets is an issue see CIRD10240.


The equivalent IAS standard is IFRS3. No departures from FRS7 that are material for CTA09/PART8 have been noted.