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

Determining the fair values of identifiable assets and liabilities acquired

Principles of recognition and measurement on an acquisition

5 The identifiable assets and liabilities to be recognised should be those of the acquired entity that existed at the date of the acquisition.

6 The recognised assets and liabilities should be measured at fair values that reflect the conditions at the date of the acquisition.

Application of the principles

7 …

8 The application of these principles to specific classes of asset and liability is detailed in paragraphs 9-22 below. Subject to those paragraphs, fair values should be determined in accordance with the acquirer’s accounting policies for similar assets and liabilities.

Tangible fixed assets

9 The fair value of a tangible fixed asset should be based on:

market value, if assets similar in type and condition are bought and sold on an open market; or

depreciated replacement cost, reflecting the acquired business’s normal buying process and the sources of supply and prices available to it. The fair value should not exceed the recoverable amount of the asset.

…

Although the FRS contains specific requirements for determining fair values of different classes of assets and liabilities, the concept of fair value underlying the specific rules is the value at which the asset, or liability, could be exchanged in an arm’s length transaction between informed and willing parties.

Where similar assets are bought and sold on a readily accessible market, the market price will represent the fair value. Where quoted market prices are not available, market prices can often be estimated, either by independent valuations, or valuation techniques such as discounting estimated future cash flows to their present values. In some cases, where quoted market prices are not available, subsequent sales of acquired assets may provide the most reliable evidence of fair value at the time of the acquisition.

Where a fair value is based on a market price, it is important to ensure that such price is appropriate to the circumstances of the acquired business. For example, it may be possible to obtain a price for secondhand plant and machinery of the type used in the business, but the secondhand market may deal in very small volumes; or the items may not be identical in terms of the ability to obtain maintenance or technical support from the manufacturer or for the machinery to be customised to the requirements of the business. In general, unless the acquired business is genuinely able to consider the purchase of second-hand equipment as a viable alternative to purchasing direct from the manufacturer, the fair value of plant and machinery is more appropriately determined from the replacement cost of an equivalent new asset, depreciated where appropriate to reflect its age and condition.

Where reliable market values are obtainable – for example, for quoted investments and certain types of property – fair value would be based on current market values of similar assets. As explained in paragraph 44 above, for many types of fixed assets – for example most plant and machinery, and specialised properties [f/n4] specific to the business – fair value is represented by gross replacement cost reduced by depreciation to take account of the age and condition of the asset…

[f/n4]Whilst no definition of the phrase "specialised properties" appears in FRS7, FRS15 "Tangible fixed assets" imports the definition of that phrase from the RICS "Appraisal and Valuation Manual". The parties are agreed that nursing homes are not "specialized properties" within the meaning of that definition. It will be noted that the RICS guidance generally uses different spelling (“specialized”) but we consider that nothing hangs on the difference. Where that guidance is quoted in this decision, the spelling follows the original.

For completeness, it is important to mention FRS10, entitled “Goodwill and Intangible Assets”. This FRS requires that “purchased goodwill” (such as we are here concerned with) should be capitalised as an asset and then amortised through the profit and loss account on an appropriate basis. HMRC do not raise any issue about how the requirements of FRS10 have been carried through into Nellsar’s accounts, except with regard to the amount of goodwill initially recognised on each acquisition. We do not therefore need to mention it further.