Goodwill allocation to NCI in consolidation at the date of acquisition

All topics related to IFRS Standards.
Post Reply
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Goodwill allocation to NCI in consolidation at the date of acquisition

Post by Leo »

Hi everyone,

I have a quick question related to the value of the goodwill allocated to NCI or not when there is an acquisition. Because in practice I've seen two different mothodology, so I'd like to know which one is correct or do we have the choice to choose between both.


Imagine Mother, which has 100 LC in bank and 100 LC in issued capital, acquires 60% of Child A,

The Net asset of Child A is 100 LC, and Mother paid 100 LC for the 60% of shares.

Should the goodwill be 40 LC : considerations paid (100 LC) - 60% of net assets (100 LC) = 40 LC or

66.67 LC : considerations paid (100 LC) / 60% = fair value of the entity at 100% (166.67 LC) - 100% of net assets (100 LC) = 66.67 LC


In the consolidated FS, with the first solution, you'd end up with :

Goodwill : 40 LC Capital : 100 LC

Assets : 100 LC NCI : 40 LC



with the second solution, it'd be :

Goodwill : 66.67 Capital : 100 LC

Assets : 100 LC NCI : 66.67 LC


Thank you for your help !
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: Goodwill allocation to NCI in consolidation at the date of acquisition

Post by JRSB »

You have the choice, FV or proportion of net assets.
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: Goodwill allocation to NCI in consolidation at the date of acquisition

Post by Leo »

Thanks JRSB, by proportion of the net assets, it is proportion of the fair value of the net assets right ?

Because, in the example I'd given, it I twisted it by saying the fair value of the net assets is 100 LC, it would be the same right ?
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: Goodwill allocation to NCI in consolidation at the date of acquisition

Post by JRSB »

For a business combination, IFRS 3 allows the acquirer (or parent) to measure NCI in the acquiree either at fair value (the fair value approach, also known as the full goodwill method) or at the NCI’s proportionate share of the acquiree’s identifiable net assets (the proportionate share approach, also
known as the partial goodwill method).
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: Goodwill allocation to NCI in consolidation at the date of acquisition

Post by Leo »

I thought the full or partial method doesn't make the goodwill different or am I wrong ? I just twisted one fact here compared to the original example,
Accounting Carrying amount of net asset this time is 80 LC and the fair value of the net asset is 100 LC (revaluation at fair value of an intangible asset for 20 LC)

Imagine Mother, which has 100 LC in bank and 100 LC in issued capital, acquires 60% of Child A,

The carrying amount of Net asset of Child A is 80 LC, and Mother paid 100 LC for the 60% of shares. An intangible asset has been identified to bear a fair value of +20 LC.

Should the goodwill be 40 LC : considerations paid (100 LC) - 60% fair value of net assets (100 LC) = 40 LC or

66.67 LC : considerations paid (100 LC) / 60% = fair value of the entity at 100% (166.67 LC) - 100% of fair value of net assets (120 LC) = 66.67 LC

In the consolidated FS, with the first solution, you'd end up with :

Full method :

Goodwill : 40 LC Capital : 100 LC

Assets : 100 LC NCI : 40 LC

Partial method :

Goodwill : 40 LC Capital : 100 LC

Assets : 92 LC NCI : 32 LC (Carrying amount of net asset 80 LC * 40%)

with the second solution, it'd be :

Full method :

Goodwill : 66.67 Capital : 100 LC

Assets : 100 LC NCI : 66.67 LC

Partial method :

Goodwill : 66.67 Capital : 100 LC

Assets : 92 LC NCI : 58.67 LC (Carrying amount of net asset 80 LC * 40% + allocation of 40% of the goodwill)

So, now, amongst those 4 options which one is correct ?
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: Goodwill allocation to NCI in consolidation at the date of acquisition

Post by JRSB »

Yes goodwill can be higher with the full method
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: Goodwill allocation to NCI in consolidation at the date of acquisition

Post by Leo »

Thanks Marek! Thanks JRSB

Quick question, why 50/70% * 30% is not equal to 21?
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: Goodwill allocation to NCI in consolidation at the date of acquisition

Post by JRSB »

It's saying that figure isn't a calculation but a fair value eg maybe an observed value.
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: Goodwill allocation to NCI in consolidation at the date of acquisition

Post by Leo »

Understood! Thanks
Post Reply