February 2022
Top tutor Tom Clendon answers another of your questions, this time on non-controlling interest and goodwill.
Question
Please can you explain why when non-controlling interest (NCI) is a proportion of net assets, the goodwill arising is just attributable to the parent?
Tom’s answer
Let me just reiterate. It is true that when NCI is measured as a proportion of net assets that the goodwill arising is only attributable to the parent company. The significance of this means that the impairment loss on such goodwill will only reduce group’s retained earnings and none will be charged to the NCI.
This is in contrast to when NCI is measured at fair value, because then goodwill is said to be in full. In these circumstances the impairment loss on goodwill is split: it will be allocated to the group’s retained earnings and the NCI in the proportion that they share profits and losses.
But let’s get back to the question which is WHY when NCI is a proportion of net assets, the goodwill is only proportional and just attributable to the parent?
Let me illustrate with numbers to prove the point!
Let’s take an 80% investment in a subsidiary that $200 and assume NCI was measured as a proportion of the net assets which were $100.
The correct way to calculate goodwill is as follows,
| $ | |||
| Parent’s investment (the controlling intertest) | 200 | ||
| NCI as a proportion of net assets | (20% x 100) | 20 | |
| Less Net assets | (100) | ||
| Goodwill attributable to the parent | 120 |
Another Way
There is an alternative way of considering the same calculation.
The parent has a controlling interest, an 80% stake in the net assets of the subsidiary. The parent has paid $200 for a share of net assets that is $80, (80% x $100). Thus, when we compare what the parent paid ($200) with what the parent got ($80) we see that the difference of $120 is the premium that arises – the goodwill is $120. This goodwill just belongs to and is attributable to the parent. After all, no mention has been made of the NCI in determining that number!
| $ | |||
| Parent’s investment (the controlling asset) | 200 | ||
| Less the parent’s share of net assets | (80% x 100) | (80) | |
| Goodwill attributable to the parent | 120 | ||
Conclusion
I give you this explanation to give you absolute certainty that when NCI is measured as a proportion of net assets, the goodwill that arises is attributable to the parent only. I urge you however always to calculate goodwill the proper way so as to show the introduction of NCI.
• Tom Clendon teaches students to pass the ACCA SBR exam online and is a podcaster. See www.tomclendon.co.uk
