With the acquisition method, when reporting non-controlling (minority) interest on the balance sheet, we use: % of subsidiary not owned x ?? 1) Subsidiary’s equity 2) Fair value of subsidiary (full goodwill method) or Fair value of identifiable net assets (partial goodwill). When do we use subsidiary’s equity and when do we use full/partial goodwill method? I have seen both used and am unclear on when to use 1) or 2).
Book values comes into play for both equity and aquisitions. I’ll try to explain:
When you aquire a stake in a company, you record the full value of the company as if you bought the entire company. If you purchases a 40% stake in a company for 100 dollars, the assets on your books are implied to be $250, offset by minority interest of $150 recorded in equity.
Of the $250 in assets, you have to determine how much of this is Goodwill( purchase price - FV of identifiable net assets) * % aquired for partial good will or 100% of the aquired companies assets for full goodwill. This amount is recorded as an asset with an amount based on your use of full goodwill, or partial goodwill.
Goodwill is an asset, NCI is an equity entry to balance out the the equation A = L + E
As you consolidate a subsidiary, the excess portion to the value of the firm is goodwill (under full goodwill method you would generally have higher assets). NCI identifies the portion of the equities that do not belong to you (so naturally, you have higher equity under full goodwill method).
Under full goodwill
Goodwill = fair value of subsidiary - fair value of subsidiary identifiable assets
NCI = % that do not belong to you x fair value of subsidiary
Under partial goodwill
Goodwill = price paid - % that you own x fair value of subsidiary identifiable assets
NCI = % that do not belong to you x fair value of subsidiary identifiable assets
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I understand the full goodwill and partial goodwill calculations. It’s just that for minority interest, i have seen subsidiary equity used, like the following example: Company P acquires 80% of the common stock of company S by paying 8,000 in cash. - Company S pre-acquisition balance sheet Common stock = 6,000 Retained earnings = 4,000 - So under the acquistion method, minority interest on P balance sheet = (6,000 + 4,000+ x 0.2 = 2,000) So here, subsidiary equity was used, and not goodwill?
Is the example in the CFA curriculum?
Normally, equity would be equal to net identifiable asset (asset - liabilities).
So the NCI is % that do not belong to you x net identifiable asset (or sub’s equity can be used to arrive at the same answer) under partial goodwill method.
This is from Schweser text, reading 19. The question does not mention anything about IFRS or U.S GAAP: Company S: Current assets = 16,000 Other assets = 8,000 Total = 24,000
Current liabilities = 14,000 Common stock = 6,000 Retained earnings = 4,000 Total 24,000 I’m still unsure as to when we use Equity x % not owned or full/partial goodwill?
Under partial goodwill
you use % not own x equity (or net identifiable assets)
Under full goodwill
you use % not own x fair value of asset
You can only use sub’s equity (net identifiable assets) to calculate NCI when you use partial goodwill.
Okay, i get that. But the question doesn’t mention IFRS or US GAAP, so how do we know to use partial goodwill and not full goodwill? They tell us P acquires 80% of S for 8,000, so we could use full goodwill as well.
What page from the schweser is that question from?
This is from Schweser, 2014, Reading 19, book 2, pg 82, but I have provided all the info above. Just wondering why they have used: the subsidiary’s equity x % not controlled to get minority interest. They make no note of full goodwill/partial goodwill or IFRS/GAAP, so unsure how we know to just use equity method.
Can someone please confirm, for minority interest, when do we use: 1) % not controlled x subsidiary’s equity 2) % not controlled x partial/full goodwill The example i gave above uses subsidiary equity, and doesn’t mention IFRS/GAAP or full/partial.