Upper Tribunal Tax and Chancery Chamber

UT-2023-000116; - [2025] UKUT 00164 (TCC)

Fecha: 05-Mar-2025

MR JUSTICE MELLOR

MR JUSTICE MELLOR

JUDGE GUY BRANNAN

UPPER TRIBUNAL JUDGES

Release date:

APPENDIX 1 – FINANCIAL REPORTING STANDARDS MATERIAL: EXTRACTS FROM THE FTT DECISION (using paragraph numbering from the Decision)

91.

The statutory foundation of GAAP for present purposes is paragraph 9(2), Schedule 4A, Companies Act 1985 (“CA85”), which set out “the acquisition method of accounting” as requiring that:

The identifiable assets and liabilities of the undertaking acquired shall be included in the consolidated balance sheet at their fair values at the date of acquisition. In this paragraph the “identifiable” assets or liabilities of the undertaking acquired means the assets or liabilities which are capable of being disposed of or discharged separately, without disposing of a business of the undertaking.

92.

FRSs 6 and 7 build on this statutory foundation. It is important to remember that the scheme of acquisition accounting set out in CA85 was addressed specifically at how acquisitions were to be accounted for by groups of companies, most particularly in the consolidated balance sheet. The extension of the scheme to acquisitions of unincorporated businesses by singleton companies was effectively introduced by FRS 6.

93.

The starting point is FRS 6 “Acquisitions and Mergers”. It is common ground that all the acquisitions in this appeal were subject to “acquisition accounting” under this FRS. As is stated in paragraph 4 of FRS 6 (“Scope”):

Financial Reporting Standard 6 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 the FRS is framed in terms of an entity becoming a subsidiary undertaking of a parent company that prepares consolidated financial statements, it also applies where an individual company or other reporting entity combines with a business other than a subsidiary undertaking.

94.

This statement provides a direct link back to the “true and fair view” requirements of the companies legislation, and also makes it clear that acquisition accounting applies to acquisitions of businesses (such as those involved in the present appeals), and not just to acquisitions of companies. In considering the terms of the FRS and associated commentary, however, it is important to remember that its primary concern (and the statutory foundation on which it builds) is to address the situation of groups of companies and their consolidated balance sheet.

95.

As to the specific detail of acquisition accounting, this is set out in paragraph 20 of FRS 6:

Under acquisition accounting, the identifiable assets and liabilities of the companies acquired should be included in the acquirer’s consolidated balance sheet at their fair value at the date of acquisition… The difference between the fair value of the net identifiable assets acquired and the fair value of the purchase consideration is goodwill, positive or negative.

96.

Acquisition accounting therefore proceeds on the basis of establishing “the fair value” of “the identifiable assets… acquired”. For this purpose, a slightly amended definition of “identifiable assets” set out in CA85 (see [91] above, see also [101] below for the amended version) clearly applies.