LAM13220 - Accounting for Part VII Transfers – UK GAAP

A diagram to illustrate the options can be found here.

Transferor

The profit or loss is recognised in the income statement, based on difference between consideration received and carrying value of net assets transferred.

Transferee

The treatment in the accounts of the transferee depends on a number of factors described below. All references to ‘net assets acquired’ includes any Present Value of In-Force business (PVIF). Goodwill is over and above any PVIF recognised by the transferee.

Assets transferred do not represent a business combination

If the assets being transferred do not amount to a business combination then the transferee will recognise a profit or loss recognised in its income statement, based on the difference between consideration paid and net assets acquired.

This profit/loss will not always equal the transferor’s profit or loss due to differences in valuation methods between the companies.

Assets transferred represent a business combination

Where the transfer is done at arm’s length to a 3rd party a purchase method should be used. If the fair value of the consideration exceeds that of the net assets acquired the net debit will be shown on the balance sheet as goodwill. If the fair value of the consideration is less than the fair value of the net assets acquired then the net credit is recognised as negative goodwill on the balance sheet.

If the transfer takes place not at arm’s length, for example intragroup, then there are two options:

Option 1: Purchase method

As with the situation at arm’s length, if the fair value of the consideration exceeds that of the net assets acquired the net debit will be shown on the balance sheet as goodwill. If the fair value of the consideration is less than the fair value of the net assets acquired then the net credit is recognised as negative goodwill on the balance sheet.

Option 2: Merger accounting method

Difference between consideration paid (generally at its fair value) and net assets acquired is recognised in equity. Net assets acquired are measured at book value per the transferor’s accounts, adjusted to achieve uniformity of accounting policies.