1

Goodwill by Tom Clendon

It is relevant to ACCA F7 and P2 international streamstudents.


Goodwill

Following the revisions to IFRS3 Business Combinations and IAS27 Consolidated and
Separate Financial Statements in J anuary 2008 there is now two ways of measuring the
goodwill and the non controlling interest (NCI) that arises on the acquisition of a subsidiary.

Traditional / Proportionate method

The traditional measurement of goodwill on the acquisition of a subsidiary is the excess of the
fair value of the consideration given by the parent over the parents share of the fair value of
the net assets acquired. This method can be referred to as the proportionate method. It
determines only the goodwill that is attributable to the parent company. Accordingly the NCI
share of the net assets of the subsidiary determines the NCI without any goodwill being
attributable.

New / Gross method

The new method of measuring goodwill on the acquisition of the subsidiary is to compare the
fair value of the whole of the subsidiary (as represented by the fair value of the consideration
given by the parent and the fair value of the non controlling interest) with all of the fair value
of the net assets of the subsidiary acquired. This method can be referred to as the gross or full
goodwill method. It determines the goodwill that relates to the whole of the subsidiary i.e.
goodwill that is both attributable to the parents interest and the non controlling interest
(NCI). Accordingly the NCI can be determined as the FV of the NCI at acquisition plus the
NCI share of the post acquisition profits.

Consider

Saracens acquires an 80% interest in the equity shares of Borthwick for consideration of $500
when the fair value of the non controlling interest (NCI) is $100.The fair value of the net
assets of Borthwick at acquisition is $400 and is now $550.

Required

1. Calculate the goodwill arising on the acquisition of Borthwick on a
proportionate basis and the NCI at the year-end.

2. Calculate the gross goodwill arising on the acquisition of Borthwick and the NCI
at the year-end.

2
Solution goodwill and NCI on a proportionate basis

1. The proportionate goodwill arising is calculated by matching the consideration that the
parent has given, with the interest that the parent acquires in the net assets of the subsidiary,
to give the goodwill of the subsidiary that is attributable to the parent.

Parents cost of investment at the fair value of consideration
given
$500
Less the parents share of the fair value of the net assets of the
subsidiary acquired
(80% x $400) ($320)
Goodwill attributable to the parent $180

The NCI at the year-end is simply the NCIs share of the year-end net assets.

NCIs % of the year end net assets (20% x $550) $110

Solution - goodwill and NCI on a gross basis

2. The gross goodwill arising is calculated by matching the fair value of the whole business
with the whole fair value of the net assets of the subsidiary to give the whole goodwill of the
subsidiary, attributable to both the parent and to the NCI.

Parents cost of investment at the fair value of consideration
given
$500
Fair value of the NCI $100
Less 100% of the fair value of the net assets of the subsidiary
acquired
(100% x $400) ($400)
Gross goodwill $200

The NCI at the year-end is calculated by updating the fair value of the NCI at acquisition for
their share of the post acquisition profits. The parents share of the post acquisition profits is
part of group profits. The post acquisition profits are the rise in the net assets of the subsidiary
since acquisition i.e. $150 ($550 - $400).

Fair value of the NCI at acquisition $100
Plus the NCIs % of the post acquisition profit (20% x $150) $30
$130

It is of course no co-incidence that with gross goodwill both the goodwill and the NCI are
both $20 larger than when calculated on a proportionate basis. This difference of $20 is the
goodwill attributable to the NCI.

In these examples goodwill is said to be a premiumarising on acquisition. Such goodwill is
positive goodwill and accounted for as an intangible asset in the group accounts, and subject
to an annual impairment review.

3
Gross goodwill and the impairment review

Where goodwill has been calculated gross then any impairment loss will be allocated between
the parent and the NCI in the normal proportion that they share profits and losses.

Consider an impairment review of gross goodwill

At the year-end an impairment review is being conducted on Borthwick when the recoverable
amount of the subsidiary $700.

Required

Determine the outcome of the impairment review.

Solution

The impairment review of goodwill is really the impairment review of the net assets
subsidiary and its goodwill as together they forma cash generating unit for which it is
possible to ascertain a recoverable amount.

Impairment review

Carrying value
Net assets $550
Goodwill $200
$750
Recoverable amount ($700)
Impairment loss $50

The impairment loss will be applied to write down the goodwill, so that the intangible asset of
goodwill that will appear on the group statement of financial position will be $150 ($200 -
$50).

In the equity of the group statement of financial position the accumulated profits will be
reduced by the parents share of the impairment loss on the gross goodwill i.e. $40 (80% x
$50).

In the equity of the group statement of financial position the NCI will be reduced by the
NCIs share of the impairment loss on the gross goodwill i.e. $10 (20% x $50). The NCI that
will appear on the group statement financial position will now be only $120 ($130 - $10).

In the income statement the impairment loss of $50 will be charged as an extra operating
expense. As the impairment loss relates to the gross goodwill of the subsidiary so it will
reduce the profits for the year attributable to the NCI by $10 (20% x $50).

Further studies

Further information on group accounts is contained in TomClendons book A students
guide to group accounts published by Kaplan.

By TomClendon FCCA tutor at Kaplan Financial