Reading the EOC I’m quite confused by how goodwill in acquisition method is reported. Will we add a line separate in asset ? If we record full goodwill, it will effectively increase our total asset? How bout equity side, how to make it balance in two case of full and partial goodwill?
GAAP utilises full good will and under IFRS a choice can be made between either full good will or partial.
Full Good Will: Excess of fair value of company over fair value of net asset. Company A purchase 75% of Company B for 450m where its fair net asset value is 560 m. Fair value is thus 450/0.75 = $600m. Good will be $40 m (600 - 560) under both equity and acquisition. Take note that good will is already accounted for within the investment account under equity method (ie good will is not a separate asset in addition of investment account). For acquisition method, all target company B asset and liability will be included in company A balance sheet together with an additional good will item of $40m. Thus the increase in $40m good will in asset will see a similar $40m increase in the minority interest. Minority interest without goodwill originally (excess purchase price) is $110m (560-450). Thus after including good will of $40m the minority interest is $150m. This can also be calculated as minority interest * fair value of company ([1-0.75]*600)
Partial Good Will Example: Excess of purchase price over proportional fair value of net asset. Company A purchase 75% of Company B for 450m where its fair net asset value is 560 m. Good will be $30 m (450 - 560*0.75) under both equity and acquisition. Similarly good will is already accounted in the investment account for equity method. Noticed the lesser value in good will. For acquisition method, all target company B asset and liability will be included in company A balance sheet together with an additional good will item of $30m. Thus the increase in $30m good will in asset will see a similar $30m increase in the minority interest. Minority interest without goodwill originally (excess purchase price) is $110m (560-450). Thus after including good will of $30m the minority interest is $140m. This can also be calculated as minority interest * fair value net asset ([1-0.75]*560)
In general, the addition of Good will for acquisition method implies a similar addition in the minority interest. For equity, you just need to take note of that good will is always included within investment account.
[made some corrections to my calculations above]
FRA is my weak spot but i thought that full goodwill meant a larger minority interest (to make the balance sheet balance)?
not necessarily. A company could have a strong asset base and a very low MV for some reason or another. in the full goodwill the min. interest = % * MV. in the partial it equals % FV of net assets.
I believe MV could be < FV of net assets. in which case partial goodwill has a greater min. interest.
Yes you are correct. I’ve made some amendments to my explanations earlier.
nice explanation g3r!
Thanks g3r. Just. Small question : is minority interest counted total equty when we calculate ROE? I assume yes, right?
Yes the equity in ROE comprise of all equity not just common stock or retained earnings.