Part I

Use the following information to answer the next question:
Sterling, GmbH acquires a 60 percent interest in Baker Tooling for €150,000. Baker’s net identifiable assets have a fair value of €225,000 and the fair value of the entire company is €250,000. Sterling reports in accordance with IFRS and accounts for its investment in Baker using partial goodwill under the acquisition method.

i. If goodwill is measured using the partial goodwill method, the amount of goodwill recognized is closest to:

A. €15,000
B. €25,000
C. €45,000

IFRS allows two options to measure goodwill under the acquisition method: partial and full goodwill. Partial goodwill is the fair value of the consideration (the actual purchase price) less the fair value of the share of the net assets purchased. Full goodwill measures the fair value of the entire entity against the fair value of 100 percent of the net assets. See the comparison calculations that follow:

Fair value of consideration

Fair value of net assets (60 percent × €225,000)

Goodwill recognized

Fair value of entity (100 percent)

Fair value of net assets (100 percent)

Goodwill recognized

Part II

If Sterling had reported under U.S. GAAP instead of how it reported the acquisition under IFRS, then its financial statements would most likely show which of the following results?

A. No change in equity ratios.
B. A higher debt‐to‐equity ratio.
C. A lower total asset turnover ratio.

U.S. GAAP only allows the full goodwill method. This method produces a higher goodwill value, which increases total assets and total shareholders’ equity in comparison to the partial goodwill method. The total asset turnover ratio, which is sales divided by average total assets, will be lower in comparison to the partial goodwill method because the denominator in the ratio is greater. Choice A is incorrect because shareholders’ equity is increased, which affects equity ratios. Choice B is incorrect because the debt‐to‐equity ratio will be lower, not higher under the full goodwill method as there is higher equity under the full goodwill method.

Video Explanation