CALCULATING PURCHASED GOODWILL: PART 2

Continuing from Part 1 of this article, we are now going to look at some illustrations on how to calculate purchased goodwill using the proportion of net assets method and the full goodwill method.
 

Illustration 1

Washington acquired 80% of Westin on 1 January 20X4 for a consideration of $1 million. On this date the fair value of the net assets of Westin was $1.2 million.

Required: 

Calculate the goodwill arising on the acquisition of Westin using the proportion of net assets method.

Solution

The goodwill arising on the acquisition of Westin is calculated as follows:

							$000
Cost of investment							1,000
For 80% x $1,200,000							(960)
Goodwill							40

 
Illustration 2

Washington acquired 80% of Westin on 1 January 20X4 for a consideration of $1 million. On this date the fair value of the net assets of Westin was $1.2 million and the fair value of the NCI was $250,000. 

Required: 

Calculate the amount of goodwill arising on the acquisition of Westin using the full goodwill method.

Solution

The goodwill arising on the acquisition of Westin is calculated as follows:

						$000		$000
Cost of investment								1,000
For 80% x $1,200,000								(960)
Parent's goodwill								40
Fair value of NCI at acquisition date						250
20% x $1,200,000						(240)		10
Total goodwill								50

Note that the NCI's share of Westin's net assets, i.e. $240,000 is simply the remainder of the parent's share of those net assets. In this case, Washington's share of net assets acquired is 80% x $1.2 million. Therefore,  Westin would have the remainder, i.e. 20% x $1.2 million. If Washington had purchased 70% of Westin, then Westin's share of the net assets for NCI calculation purposes would be 30% x $1.2 million.

Illustration 3

Washington acquired 80% of Westin on 1 January 20X4 for a consideration of $1 million. On this date the fair value of the net assets of Westin was $1.2 million. The goodwill attributable to NCI is $12,000.

Required: 

Calculate the amount of goodwill arising on the acquisition of Westin using the full goodwill method.

Solution

The goodwill arising on the acquisition of Westin is calculated as follows:  

							$000
Cost of investment							1,000
For 80% x $1,200,000							(960)
Parent's goodwill							40
Goodwill attributable to NCI							12
Total goodwill							52

Notice that in this question the goodwill attributable to NCI is already calculated at $12,000. Therefore, we simply add it to the parent's goodwill to derive the total goodwill. There is no need for extended calculations like in Illustration 2. Be aware of the terms used in the question. In Illustration 2, the 'fair value of NCI at acquisition' is given, whereas in this illustration, the 'goodwill attributable to NCI' is given. The former is simply the fair value while the latter is the goodwill itself.

Illustration 4

Washington acquired 80% of Westin on 1 January 20X4 for a consideration of $1 million. Westin has a share capital of 500,000 $1 ordinary shares. On this date the fair value of the net assets of Westin was $1.2 million and the market value of its ordinary shares was $2.60 per share.

Required: 

Calculate the amount of goodwill arising on the acquisition of Westin using the full goodwill method.

Solution

The goodwill arising on the acquisition of Westin is calculated as follows:  

					$000		$000
Cost of investment							1,000
For 80% x $1,200,000							(960)
Parent's goodwill							40
Fair value of NCI at acquisition date (20% x 500,000 x $2.60)					260
20% x $1,200,000					(240)		20
Total goodwill							60

In this question, the fair value of NCI is not given. Neither is the goodwill attributable to NCI. Instead, the fair value of Westin's shares is given. Therefore, we need to calculate the fair value of NCI based on Westin's share price. The NCI number of shares is 20% x 500,000 = 100,000 shares. As the fair value of each share is $2.60, the fair value of NCI would be 100,000 shares x $2.60 = $260,000.

When calculating purchased goodwill, the first thing to determine is the policy chosen by the parent company, i.e. whether the group is using the proportion of net assets method or the full goodwill method. The former is straightforward, but for the latter, we need to identify what information is given in the question in order to determine the goodwill attributable to NCI.

In Part 3, we will be discussing the different types of cost of investment (purchase consideration) on the acquisition of a subsidiary and how they should be accounted for, which will ultimately affect the calculation of goodwill.