ACCA Taxation (F6) Practice Exam

When transferring assets between connected persons, how are they valued?

1. At actual selling price

2. At nominal value agreed upon by both parties

3. At market value, ignoring the actual selling price

4. At book value on the balance sheet

The correct answer is: At market value, ignoring the actual selling price

When transferring assets between connected persons, such as related parties or individuals who have a close relationship, the assets are valued at market value. This approach is taken to ensure that transactions reflect a fair value, as connected persons may not deal at arm's length and might set prices that don’t accurately represent the true economic value of the asset. Valuing the asset at market value, regardless of the actual selling price, helps to prevent manipulation of income and tax liabilities. This is particularly important in taxation because it ensures that any gains or losses recognized on the transfer align with the fair market conditions, which is crucial for the accuracy of capital gains tax calculations. Other methods of valuation like the actual selling price, nominal value, or book value on the balance sheet do not provide the same level of transparency or fairness, as they may not accurately reflect the market conditions or the true value of the asset being transferred. Thus, market value is the standard used to establish a fair basis for taxation and reporting.