Intercorporate Investments - Full goodwill

CFA Level II FRA
#1

Hi guys

Quick question regarding the formula for calculating goodwill under the Full Goodwill method.

I’ve read a couple of slightly different formulas in the Schweser book:

(i) Fair value of equity of whole subsidiary - fair value of net identifiable assets of the subsidiary

(ii) Purchase price - fair value of net identifiable assets of the subsidiary

How would you go about answering the following?

Company A paid £500MM for 75% of Company B.

Fair value of assets for company B = £650MM

Fair value of net assets for company B = £705MM.

What’s the value of goodwill under the full goodwill method?

Thanks

PD

#2

500 / 0,75 = 667 M. This is MValue of entire company B.

Fair Value of NAV = 705 M.

GW = 667 M - 705 M = -38. Negative Goodwill means income from bargain purchase under both IFRS and USGAAP.

However, IFRS permit partial GW method.

Thus,

500 M - (0,75)705 = 500 M - 529 M = - 29 M. Negative Goodwill.

Both method differs only if less than 100 % stocks have been purchased.