Goodwill under the partial method will always be lower than goodwill under the full method. Is it true?
I mean, can acquisition price be higher than the market value?
Of course it can in case current shareholders want premium to sell their shares to acquitter.
If cost of acquisition is higher than fair value, acquitter will show a goodwill position in its ledger. If is lower than FV, acquitter must immediately recognize an income from a bargain purchase.
Two methods above differ if not 100 % shares of target company has been acquitted.
Fair value and market value may differ.
Goodwill arises when the purchase price exceeds the net book value (NBV) of the portion of the company that is purchased.
Partial goodwill is the excess over the NBV of the fraction purchased.
Full goodwill is the same percentage excess over the NBV of the entire company.
Some percentage of 100% (entire company) is greater than that same percentage of less than 100% (fraction purchased).
Full goodwill is always greater than partial goodwill.
It isn’t. If acquirer overtakes 100 % of company. Full goodwill method calculation results in a greater goodwill than by partial goodwill method by the non-controlling interest percentage of GW. If there is not NCI, both methods result in same GW amount.
True.
My statement assumed the purchase of less than 100% of the company (talking about partial goodwill doesn’t make much sense if you purchase the entire company). I should have been explicit about that.
Come to think of it, I was:
No problem. You really have large knowledge basis among various disciplines.
Very helpful, thanks. I was solving example 9 (Non-controlling asset valuation, CFAI curriculum page 26-27). So, if investee requires premium over the market value, goodwill under the partial goodwill method will be higher that in good will under full goodwill method. I am right?
Partial goodwill will _ never _ be higher than full goodwill.
Under both methods, the framework for applying GW is the fair value of the subsidiary’s identifiable net assets.
Under full goodwill, the difference between full value of subsidiary’s identifiable net assets and price of acquisition applied to all shares in company is GW.
Under partial method, you deduct pro rata amount in % of acquired shares applied to subsidiary’s identifiable net assets from acquistion price for % shares in target company.
Example
Acquirer purchases $650.000 for an 65% shares in target. Net assets fair value is $800.000. The fair value of all company shares is $1000.000.
Partial GW
Purchasing price $650.000 for 65 % of shares
65% of FV of net assets is 0,65 ($800.000) = $520.000
GW = $650.000 - $520.000 = $130.000
Full GW
Market value of entire target (calculated on basis what is Acquirer willing to pay for 65 % of stocks, $650.000 / 0.65 = $1000.000
$1000.000
FV of net asset of entire target $800.000
GW = $1000.000 - $800.000 = $200.000
Partial GW is on pro rata basis so there is no case it may be higher than GW calculation under full GW method. Premiums are calculated in market price under both method. Simply, Acquirer wants to pay more than fair value for company and this is called goodwill.
If acquisition price were higher than $720, say for example the acquirer purchased 65% of shares at $750;
GW in partial method = 230
GW in full method = 200
I was wondering what I am missing!
Cannot be. Same example, different purchasing price.
If acquirer purchased 65% of shares for $750 M.
Partial
65% of FV of net assets is still 0,65 ($800.000) = $520.000
GW = $750.000 - $520.000 = $230.000
Full method
MV = $750.000 / 0.65 = $1.153.846
FV of net asset of entire target $800.000
GW = $1.153.846 - $800.000 = $353.846
I get it now. So, if acquisition price is higher than the market value; the we will use acquisition price in the full method, not the market value.
Thanks for your valuable explanation.
Market value = the price what acquirer exactly pay for % shares on pro rata basis under partial method.
Market value = the price for entire target company based on % what acquirer exactly pay for the target under full method.
Fair value = the intrinsic value of the company, often determined after taken due diligence, calculated on pro rata basis on shares purchased by acquirer under partial method or FV of entire target company under full method.
In case MV < FV, this is so called negative goodwill what is exactly an income from a bargain purchase because in this case an acquirer would pay less for target than its intrinsic value.
Full goodwill = partial goodwill ÷ fraction purchased
Excellent explanations. Thanks a lot.