When a company buys a subsidiary, the group accounts do not take over the subsidiary’s book values. Each identifiable asset and liability is restated to its fair value at the acquisition date, deferred tax is provided on the uplifts, and goodwill is whatever is left of the price. Every pound added to net assets by a fair value adjustment reduces goodwill by the acquirer’s share of it, and the uplifts then flow through group profit as extra depreciation or cost of sales.

Why are the subsidiary’s assets restated at all?

From the group’s point of view, buying a company’s shares is buying its assets and liabilities. Their cost to the group is what they were worth when the group bought them, not what the subsidiary paid years earlier. Company law requires it: Schedule 6 paragraph 9(2) to SI 2008/410 says the identifiable assets and liabilities of the undertaking acquired must be included in the consolidated balance sheet at their fair values at the date of acquisition. FRS 102 paragraph 19.14 allocates the cost of the combination by recognising the acquiree’s identifiable assets, liabilities and provisions for contingent liabilities at fair value, and IFRS 3 paragraph 18 has the equivalent rule. The broader purchase method is covered in FRS 102 Section 19 business combinations and goodwill; this page focuses on the adjustments and what happens to them afterwards.

The adjustments are made on consolidation. The subsidiary’s own accounts normally keep their existing book values, which is why the same adjustments have to be carried forward in the consolidation workings every year.

What does fair value mean here?

FRS 102 Section 2A sets the measurement objective: the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date (paragraph 2A.2). Paragraph 2A.3 makes it a market based measurement, not an entity specific one, so the buyer’s own plans for an asset are not relevant. A buyer that intends to close a factory still records it at what market participants would pay. IFRS groups apply IFRS 13, which uses the same concept; see IFRS 13 fair value measurement.

Which items usually need adjusting?

  • Property. Freehold property carried at depreciated historical cost are often well below market value.
  • Stock. Finished goods are typically worth more to a market participant than their production cost, because some of the selling profit has already been earned.
  • Intangible assets not on the subsidiary’s balance sheet. Paragraph 19.15G applies paragraph 18.8: intangibles must be recognised separately from goodwill if they meet the recognition criteria, arise from contractual or legal rights and are separable. A group may choose to recognise further classes that meet only one of the last two conditions, applied consistently. See intangible assets under FRS 102.
  • Contingent liabilities. Paragraph 19.15F requires a present obligation from past events to be recognised if its fair value can be measured reliably, even if an outflow is not probable. This is stricter than the normal rule in Section 21.
  • Leases. Paragraph 19.19A requires right of use assets and lease liabilities to be recognised for the acquiree’s leases, remeasured as if new at the acquisition date, with exemptions for leases ending within 12 months and low value assets.

Some things are deliberately kept out. Paragraph 19.15 prohibits recognising a contingent asset. Paragraph 19.15D allows restructuring provisions only where the subsidiary already had a liability at the acquisition date, and bans provisions for future losses or costs expected as a result of the combination. Deferred tax, employee benefits and share based payments are measured under their own sections rather than at fair value (paragraphs 19.15A to 19.15C).

How do the adjustments change goodwill?

Goodwill under paragraph 19.22 is the cost of the combination less the acquirer’s interest in the net identifiable assets, liabilities and contingent liabilities. A fair value uplift increases the net assets, so it reduces goodwill by the acquirer’s percentage of it. Where the subsidiary is not wholly owned, the other part of the uplift goes to the non controlling interest, which under paragraph 19.14A is measured at its share of the same fair values. If the adjustments push net assets above the price, the result is negative goodwill, and paragraph 19.24 requires the values to be reassessed before it is recognised.

Why does deferred tax arise on the uplifts?

On a share purchase the subsidiary’s tax position does not change; it still claims capital allowances and deductions on its own historical figures. The group accounts now show higher carrying amounts than the tax bases, so FRS 102 paragraph 29.11 requires a deferred tax liability for the additional tax that will be paid on that difference (or an asset where a liability is uplifted), and says the amount attributed to goodwill is adjusted by the deferred tax recognised. Goodwill itself is excluded. HMRC’s guidance at CIRD11070 confirms that goodwill arising only in consolidated accounts on a share purchase does not appear in any company’s balance sheet and is outside the corporate intangibles regime, so no tax relief follows it.

Deferred tax is measured at enacted rates expected to apply when the difference reverses (paragraph 29.12). For a UK subsidiary paying the main rate, that is currently 25% for the financial year beginning 1 April 2026. See deferred tax under FRS 102.

What happens to the adjustments after the acquisition?

Paragraph 19.16 says the group’s profit and loss account includes the subsidiary’s income and expenses based on the cost to the acquirer. Its example is depreciation: after acquisition, depreciation on the subsidiary’s assets is based on their fair values. IFRS 10 paragraph B88 says the same. In practice:

  • a building uplift is depreciated over the building’s remaining useful life, as an extra consolidation charge each year;
  • a stock uplift is charged to group cost of sales as the stock is sold, usually within months;
  • a recognised intangible is amortised over its own useful life;
  • the related deferred tax liability unwinds as a credit in the tax charge in step with the extra charges.

An ACCA article on consolidation errors notes that fair value depreciation reduces both non current assets and the subsidiary’s post acquisition net assets, so it reduces the non controlling interest’s share of profit as well as the parent’s. For a foreign subsidiary, FRS 102 paragraph 30.23 treats fair value adjustments as assets and liabilities of the foreign operation, translated at the closing rate.

What if the valuations are not finished by the year end?

Paragraph 19.19 allows provisional amounts. Within 12 months of the acquisition date, the provisional figures are adjusted retrospectively, as if made at the acquisition date, for new information about facts and circumstances that existed then, with a matching change to goodwill. After 12 months, changes are made prospectively and do not alter goodwill, unless they correct a material error. Paragraph 19.25B requires disclosure that the accounting is incomplete and of the line items affected. IFRS 3 paragraph 45 has a similar measurement period of no more than one year.

How does it work in numbers?

Illustration only. Parent buys 100% of Sub for £2,000,000. Sub’s book net assets are £1,200,000. Valuers identify a property worth £300,000 more than book value (remaining life 30 years), stock worth £50,000 more than cost, and a customer contract intangible of £150,000 (life 5 years). Assume deferred tax at 25% on all three.

Item Amount
Book net assets £1,200,000
Fair value uplifts (£300,000 + £50,000 + £150,000) £500,000
Deferred tax on uplifts (25% × £500,000) (£125,000)
Fair value of net identifiable assets £1,575,000
Goodwill (£2,000,000 less £1,575,000) £425,000

Without the adjustments goodwill would have been £800,000. In the first year the group charges an extra £10,000 depreciation on the property, £30,000 amortisation on the intangible and £50,000 cost of sales as the stock is sold, with a deferred tax credit of £22,500 on those charges, on top of goodwill amortisation under paragraph 19.23.

What mistakes come up?

  • Forgetting deferred tax, which overstates net assets and understates goodwill.
  • Booking a provision for planned redundancies or integration costs as part of the acquisition.
  • Making the adjustment at acquisition but not charging the extra depreciation in later years.
  • Leaving identifiable intangibles inside goodwill, which changes the amortisation pattern.
  • Adjusting goodwill for valuation changes more than 12 months after acquisition.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.