Acquired Goodwill and timing of CGT

BigFish75

Hi all,

Two questions outside my comfort zone.

1. I want to know what the correct treatment of acquired goodwill is? If business A (a ltd co) buys the assets of business B (a sole trader) for €100,000 made up of tangible assets (plant and machinery) with a fair market value of €50,000 and goodwill of €50,000. I assume the assets join the balance sheet of A at €50,000 and can be depreciated over their remaining useful life but what about the €50,000 goodwill 'asset'? I believe IFRS 3.51 and 3.54 state that acquired goodwill cannot be amortised but can be 'impaired' with the impairment charged to the P&L. Is this the correct treatment? How is the impairment charge calculated? Is is allowable for corporation tax purposes or does the impairment charge have to be added back for the purposes of calculating corporation tax?

2. If Mr X owns Acme Ltd and agrees to sell it to a 3rd party for €250,000 paid on completion and another €250,000 paid in 25 monthly installments of €10,000 per month giving a total consideration of €500,000. If we assume for simplicity that the full €500,000 is subject to CGT is Mr X liable for the full CGT amount from the date of completion or is it staggered according to the actual receipt of funds? Similarly, if instead of a fixed €250,000 to be paid over 25 months the deal was an uncertain amount which may be less or more than €250,000 to be paid over 25 months depending on the performance of the business over that period of time how would that affect Mr X's CGT liability?

I look forward to hearing from you all!!!

The Fish

hebeegb

BigFish75 wrote: »

Hi all,

Two questions outside my comfort zone.

1. I want to know what the correct treatment of acquired goodwill is? If business A (a ltd co) buys the assets of business B (a sole trader) for €100,000 made up of tangible assets (plant and machinery) with a fair market value of €50,000 and goodwill of €50,000. I assume the assets join the balance sheet of A at €50,000 and can be depreciated over their remaining useful life but what about the €50,000 goodwill 'asset'? I believe IFRS 3.51 and 3.54 state that acquired goodwill cannot be amortised but can be 'impaired' with the impairment charged to the P&L. Is this the correct treatment? How is the impairment charge calculated? Is is allowable for corporation tax purposes or does the impairment charge have to be added back for the purposes of calculating corporation tax?

2. If Mr X owns Acme Ltd and agrees to sell it to a 3rd party for €250,000 paid on completion and another €250,000 paid in 25 monthly installments of €10,000 per month giving a total consideration of €500,000. If we assume for simplicity that the full €500,000 is subject to CGT is Mr X liable for the full CGT amount from the date of completion or is it staggered according to the actual receipt of funds? Similarly, if instead of a fixed €250,000 to be paid over 25 months the deal was an uncertain amount which may be less or more than €250,000 to be paid over 25 months depending on the performance of the business over that period of time how would that affect Mr X's CGT liability?

I look forward to hearing from you all!!!

The Fish

PHew!!!
Well in answer to your first question my opinion is as follows, the sole trader will be taxed on the sale of goodwill, as a capital receipt, and the company will adopt the accounting standards for smaller entities, which is basically writing the goodwill off over 20 years, it’s a depreciation charge to the accounts, and is added back for corporation tax purposes, it’s an intangible asset, this means if you adopt the FRSSE you don’t have to go with the impairment review, though it may depend on whether you consider it will be recovered. is it just a sole trader who is incorporating? Watch for the CGT if it is.

On your second point, I think the tax is due when all the conditions of the contract for sale are satisfied, if there are contingencies on the contract being fulfilled then that has to be taken to account at some stage

Mr. Incognito

A.

Under IFRS 3 Goodwill is no longer amortised (although it may be impaired). Goodwill is recognised on the balance sheet when acquisitions take place and then tested on an annual basis for impairment.
From a tax perspective there will be no change to the tax treatment of goodwill whihc is treated as a capital item and not allowed as a tax deduction.

B.

CGT is payable from the date of completion of the sale regardless of the payment structure. Think about it, if you swapped an asset in consideration of a debt CGT would be payable although no money changes hands.

Cyrus

Mr. Incognito wrote: »

A.

Under IFRS 3 Goodwill is no longer amortised (although it may be impaired). Goodwill is recognised on the balance sheet when acquisitions take place and then tested on an annual basis for impairment.
From a tax perspective there will be no change to the tax treatment of goodwill whihc is treated as a capital item and not allowed as a tax deduction.

B.

CGT is payable from the date of completion of the sale regardless of the payment structure. Think about it, if you swapped an asset in consideration of a debt CGT would be payable although no money changes hands.

you will also need to identify any intangible assets within your goodwill, value them, strip them out and write them off over their useful life.

see ias 38

http://www.iasplus.com/standard/ias38.htm