Consolidation: Full vs Partial Goodwill Method and Equity

CFA Level II FRA
#1

Hello to all!

This question pertains to Reading 22, P 184, question 29.

As I interpret it, The question is basically asking for differences in beginning equity under three different conditions:

  1. Consolidation with full goodwill 2. Cosolidation with partial goodwill 3. The Equity Method

According to the answer, consolidation via full or partial goodwill will yield the same beginning equity. Specifically, beginning equity wil be increased by a non-controlling interest of 320, which is the purchase price paid by the acquirer for 50% of the company.

I understand how noncontrolling interest would be 320 via consolidation with full goodwill. Noncontrolling interest would be based on the acquirers fair value and in this case would be = 320 / .5 =640 x .5 (%not owned) = 320.

It is my understanding, however, that noncontrolling interest via partial goodwill would be based off of the fair value of the acquired company’s net assets. Therefore, In this problem, noncontrolling interest would be less than 320 as net assets would be less than the fair value of the acquired company. With noncontrolling interest < 320, equity would therefore also be lower.

Somebody please correct me as to where I am going wrong in this problem.

#2

Maybe I got it wrong but I calculate zero GW under full or partial gw. Full GW = fair value of company (640) - fair value of net assets (640) = 0 good will Partial GW = price paid (320) - 50% of fair value (320) I struggled with it too since I would have thought partial gw would have ended in lower equity. It seems like an unfair question because that is the intuitive response but they make the math work out such that you have to work the problem to get the right answer…Unless I got it wrong!

#3

Thank you Thecodent!

Yes, I was confused with the calculation of goodwill (both full and partial). Indeed, if they are both zero, then there will be no difference in equity between the two methods.

Thanks Again