Transfers of an asset under FRS 102

Assets (e.g. a property or items of inventory) are often ‘transferred’ between entities within the same group or otherwise under common control. This helpsheet has been issued by ICAEW’s Technical Advisory Service to assist members in considering the accounting implications of such ‘transfers’ in the context of companies (which are not public benefit entities) reporting under FRS 102.

This helpsheet includes references to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (September 2024) (‘new FRS 102’) which is effective for accounting periods beginning on or after 1 January 2026 (except for paragraphs 7.20B and 7.20C which are effective for accounting periods beginning on or after 1 January 2025). This helpsheet also includes references to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (January 2022) (‘old FRS 102’) which was effective for accounting periods beginning on or after 1 January 2019, or 1 January 2017 for small entities applying Section 1A, following the Triennial review 2017.

Transfers of assets within an entity (e.g. investment property to PPE) are addressed within the helpsheet Transfers between investment property, PPE and inventories under FRS 102.

This helpsheet focusses on the transfer of a single asset or group of similar assets - transfers of businesses or shares are outside the scope of this helpsheet, although members may find the helpsheet Accounting for a hive up under FRS 102 useful in this context.

It is commonplace for an asset(s) of one company (e.g. a property or items of inventory) to be ‘transferred’ into another company, often where there are significant relationships between the shareholders. This helpsheet considers the various ways in which such ‘transfers’ may occur. It is not intended to favour one particular method of ‘transfer’ over another and members should also consider the tax implications, which are not covered within this helpsheet.

Members should be aware that whilst the use of the word ‘transfer’ is fairly common, it does not in itself, adequately explain the transaction and is insufficient to determine the appropriate accounting treatment. It is therefore essential that members involved in the accounting for such transactions review all relevant legal documentation in order to understand how, legally, an asset moves from one entity to another. Where there is any doubt, legal advice should be obtained on the interpretation of a particular agreement.

There are broadly three ways in which an asset can transferred out of a company:

1. Sale
2. Loan
3. Dividend or distribution

Sale

A sale in return for consideration is perhaps the most common way in which an asset is taken out of a company. When such a sale is made, a profit or loss on disposal of the particular asset will usually be recognised in the profit and loss account.

Care should be taken, however, where such transactions are undertaken with related parties as paragraph 2.6A in TECH 02/17 BL Guidance on realised and distributable profits under the Companies Act 2006 highlights that an undervalue transaction with a shareholder or sister company is capable of being a distribution, because it involves in substance an element of gift to the transferee.

Loan

An asset may be loaned to another entity, for example under a lease agreement. Accounting for leases is covered by Section 20 of FRS 102. Members can find additional guidance for entities applying old FRS 102 in the helpsheet Accounting for leases under FRS 102. . For entities applying new FRS 102 the ICAEW Corporate Reporting Faculty has produced a factsheet which contains guidance covering the principles in new FRS 102 for the recognition, measurement and disclosure of right-of-use assets and lease liabilities.

Dividend or distribution

Subject to having sufficient distributable reserves and any provisions within a company’s articles, an asset may be distributed out of a company. Dividends or distributions to owners are not reflected in the profit and loss account, instead they are reflected directly in equity and presented in the statement of changes in equity (if prepared).

Further guidance is available in TECH 02/17 BL Guidance on realised and distributable profits under the Companies Act 2006.

A company may acquire assets (e.g. a property or items of inventory) in a number of different ways including purchase, on loan, in exchange for shares or as a gift from owners. Each of these is discussed in more detail below.

Purchase

Perhaps the most common way in which a company obtains an asset is by way of purchase. Where a company purchases inventory, an investment property, an item of property plant and equipment or an intangible asset, subject to meeting the relevant recognition criteria, these are initially recognised at cost in accordance with old and new FRS 102 paragraphs 13.4, 16.5, 17.9 and 18.9 respectively. Further guidance on what constitutes ‘cost’ can be found in the applicable sections of FRS 102.

Loan

An asset may be loaned from another company, for example under a lease agreement. Accounting for leases is covered by Section 20 of old and new FRS 102. Members can find additional guidance for entities applying old FRS 102 in the helpsheet Accounting for leases under FRS 102. For entities applying new FRS 102 the ICAEW Corporate Reporting Faculty has produced a factsheet which contains guidance covering the principles in new FRS 102 for the recognition, measurement and disclosure of right-of-use assets and lease liabilities.

In exchange for shares

Where an asset is exchanged in return for shares in a company, the fair value of the asset needs to be determined in order to establish the relevant share premium to be recorded. The Companies Act 2006 (s610(1)) requires that where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares must be transferred to an account called the share premium account.

In group scenarios, companies should additionally consider whether group reconstruction relief (Companies Act 2006 s611) applies in their specific circumstances.

Gift from owners

Equity investors of a company (i.e. its shareholders or ‘owners’) may gift an asset into a company. This may be the case, for instance, where they inject cash to the company without an obligation for the company to repay the funds, or where they gift an asset, such as a property, into the company.

Such transactions carried out in their capacity as owners of the company are non-exchange transactions i.e. a transaction whereby an entity receives value from another entity (or in this case a person or persons) without directly giving approximately equal value in exchange (old and new FRS 102 glossary). In such cases, it would be inappropriate for accounting purposes to treat the value of the gift as income which is defined in the glossary to old FRS 102 as follows:

The glossary to new FRS 102 defines income slightly differently, but this doesn’t appear to significantly change the definition, although care should be taken for specific individual circumstances. This new definition is as follows:

As the gift represents a contribution from equity investors, this definition is not met. The value of the gift, therefore, is not recorded in either the profit or loss account or in other comprehensive income (OCI). It is instead reflected directly in equity and presented in the statement of changes in equity (if prepared).

Where items of inventory are gifted to an entity, old and new FRS 102 paragraph 13.5A requires the cost to be measured at the fair value at the date of acquisition.

The situation is less prescriptive where other assets such as an investment property, an item of property, plant and equipment or an intangible asset is gifted to a company by its owners. Neither old nor new FRS 102 contains specific discussion of such circumstances, however, as outlined above, such assets must be initially recognised at cost. The question arises as to what the appropriate cost should be and the entity needs to determine an appropriate accounting policy in accordance with old and new FRS 102 paragraphs 10.4 – 10.6. The following are potential options:

• The cost is the book value in the transferor. This would be consistent with the amount that might be recorded if shares had been issued but the transaction was within the scope of group reconstruction relief. It is also consistent with the treatment of many intragroup transfers of assets in exchange for intragroup debt but in that case the book value is the actual consideration paid.
• The cost is the fair value of the asset (where this can be measured reliably). Note this would not create an obligation to remeasure the investment to fair value in future periods. The initial measurement at fair value is simply a proxy for cost in the context of a non-exchange transaction.

Note the Accounting Regulations define the purchase price (at which an asset should be recorded initially) as being determined by adding to the 'actual price paid' any expenses incidental to its acquisition (Schedule 1 paragraph 27(1)). This is consistent with old and new FRS 102 paragraph 2.34 which defines historical cost as "the amount of cash or cash equivalents paid or the fair value of the consideration given". Therefore, it may seem that cost may be considered to be nil by the recipient company. However, there is an argument that in such circumstances a cost of nil would not reflect the substance of the transaction, which is a requirement of paragraph 2.8 in old FRS 102 and paragraph 2.14 in new FRS 102, or provide a true and fair view as required by old and new FRS 102 paragraph 3.2.

Companies must ensure that a consistent accounting policy is applied and that disclosures are clear, so that users of the accounts fully understand the nature and impact of the transaction.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.