Struggling with the concept of accounting for goodwill? Then Tom Clendon is here to help.
Question
Can you explain how the measurement of NCI will impact on the measurement of goodwill and the way that is subsequently accounted?
Tom’s answer
Let’s start by reminding ourselves how goodwill is calculated and conclude with a worked example.
On the acquisition of a subsidiary, it is necessary to determine the goodwill arising on consolidation. The intangible asset of goodwill arises in the group accounts adjustment when on the acquisition of a subsidiary the aggregate of the fair value of the consideration given by the parent for its investment in the subsidiary (the controlling interest) and the non-controlling interest (NCI) exceeds the fair value of the identifiable net assets acquired.
Such goodwill is treated as an intangible asset in the group accounts and is subject to an annual impairment review.
| $ | |
| Parent’s investment in the subsidiary | XX |
| NCI | XX |
| Less FV of the Sub’s net assets | (XX) |
| Goodwill | XX |
There are many potential issues around this calculation – for example, how to account for a step acquistion and how to determine the fair value of the net assets of the subsidiary at the date of acquistion. However, let us just focus on the measurement of the NCI at the date of acquistion.
A policy decision has to be made as to whether to initially measure the NCI as a proportion of net assets or at fair value. How NCI is measured at acquistion impacts on the initial measurement of goodwill and on the subsequent accounting treatment of any impairment losses.
NCI measured at fair value
This method can be referred to as full goodwill method. It results in goodwill that is attributable to both the parent and the NCI.
Accordingly, when the goodwill is impaired, the NCI is charged with their share of the impairment loss in the normal proportions to which the parent and the NCI share the subsidiary’s post acquistion profits and losses.
When NCI at acquistion is measured at fair value it is based on the share price.
Share price of the subsidiary x number of subsidiary shares x NCI% = FV of the NCI. NCI measured as a proportion of net assets
This method can be referred to as the proportionate method. It results in goodwill that is only attributable to the parent company.
Accordingly, when the goodwill is impaired none of the impairment loss will be charged against the NCI.
When NCI at acquistion is measured as a proportion of net assets, it is based on the FV of the net assets of the subsidiary. NCI% x FV of the subsidiary’s net assets at acquistion = NCI as a proportion of net assets.
Example
Borough acquired 80% of High’s 1,000,000 equity shares paying consideration of $800,000. The fair value of the net assets of High at the date of acquisition was $500,000 and its share price was $0.80.
Required
Calculate the goodwill arising at acquistion on the basis that:
a) NCI is measured at fair value
b) NCI is measured as a proportion of net assets
Solution a) to the calculation of goodwill with NCI measured at fair value.
| $000 | ||
| Parent’s investment in the subsidiary | 800 | |
| CI – at FV (based on share price) | ($0.8 x 20% x 1,000,000) | 160 |
| Less FV of the Sub’s net assets | (500) | |
| Goodwill | 460 |
When NCI is measured at FV then goodwill can be referred to as full goodwill. When full goodwill is impaired, NCI is charged with their share of the impairment loss.
Solution b) to the calculation of goodwill with NCI measured as a proportion of net assets
| $000 | ||
| Parent’s investment in the subsidiary | 800 | |
| NCI (proportion of net assets) | (20% x 500) | 100 |
| Less FV of the Sub’s net assets | (500) | |
| Goodwill | 400 |
When NCI is measured at as a proportion of net assets then goodwill can be referred to as proportional goodwill as it is only attributable to the parent. It is therefore no surprise that such goodwill is smaller than the full goodwill.
When goodwill that is only attributable to the parent is impaired, NCI is not charged.
- Tom Clendon is a triple PQ award winning independent online tutor and podcaster who helps ACCA students pass the SBR exam. Go to www.tomclendon.co.uk or WhatsApp him on 07725 350793
