Full Goodwill Method
Under the full goodwill method, goodwill arising in a business combination is calculated as the difference between the sum of the purchase consideration paid by the parent and the fair value of non-controlling interest, and the fair value of the acquiree’s net identifiable assets.
US GAAP requires calculation of goodwill under the full goodwill method while IFRS allows entities to apply either the full goodwill method or the partial-goodwill method on a case-to-case basis.
The full goodwill is named so because it results in recognition of both the parent and non-controlling interest portions of goodwill. No difference arises between full goodwill method and partial-goodwill method when non-controlling interest is zero. However, when non-controlling interest is there, a question arises as to whether the consolidated financial statement should show its share of the goodwill too. In the full goodwill method, the NCI share of goodwill is shown together with the parent’s share, but in the partial goodwill method, only the parent's share is shown.
Company A acquired 75% shareholding in Company B for $20 million. The book value of the company’s assets is $54 million while the book value of its liabilities is $40 million. The fair values of the assets and liabilities are the same as their book values except accounts receivables which are impaired by $1 million.
The first input that we need for calculation of goodwill under full goodwill method is the fair value of the target, i.e. Company B. It equals the sum of purchase consideration and fair value of the non-controlling interest. If 75% of Company B is worth $20 million, for sake of simplicity we can assume that 100% would be worth $26.67 million (=$20 million/75%). In reality, NCI often has a lower fair value due to lack of control.
The fair value of net identifiable assets of Company B equals the book value of net assets +/- fair value adjustments. In this example, the fair value of net identifiable assets is $13 million (worked out by subtracting the $1 million impairment from net book value of $14 million).
This gives us the necessary figures for calculating goodwill:
Goodwill = Fair value of the Company - FV of net identifiable assets
Goodwill = $26.67 million - $13 million = $13.67 million.
Company A will pass the following journal entry to record the business combination.
|Non-controlling interest||$6.67 M|