Intercorporate Investments : Goodwill calculations

Hey guys ,

This topic i think its really easy and can be done with just 5 pages , but the way its been presnted in the curriculum or 3rd party books has just made this super confusing now .

So anyways , I am ifnally done with this reading , but I am confused .

Goodwill calculation under equity and Acquisition method is it the same ?

and is there really any difference in IFRS and GAAP goodwill calculations ?

Cause , The only thing i understood about goodwill is :

step 1 : Purchase price - Book Value

Step 2 : approtion Step 1 amount to assets whoes FV > BV

Step 3 : step 1 - step 2 = goodwill .

Can someone help me clear things up about it ?


As I know (according to IFRS) investments in associates (thus equity method applying) are

shown in BS as a single non-current asset item and goodwill is not shown separetly.

There is 2 methods of initial recognition, partial and full method. IFRS permit both while USGAAP only permit full method.

There are also differences in goodwill impairment between standards. IFRS has 1 step approach while in USGAAP 2 step approach impairment test applies.

recognition according partial method is Purchase value - Fair value (not book value), thus in case of negative amount, difference is recognized as income of bargain purchase in P/L in the current period

If Purchasing price is > Fair value (MCap) thus the difference referred to shares purchased (e.g. 80 % of 100 %) is goodwill upon partial method. Upon full method (required by USGAAP) goodwill is calcuted as a difference between full value of equity (100 % emited stocks) and fair value of net asset of the purchased entity.

(a bit later at the same day …)

IFRS - goodwill impairment

Impairment tests - at least annualy.

Impairtment occur when carrying value (book value) > fair value. IFRS here use the term “Cash generating Unit” and this is defined as the smallest part of the entity which can solely generate cash flows. Anyway, if carrying amount (BV) of those CGUs is greater than recoverable amount, goodwill should be impaired.

USGAAP approach is a bit complicated.

Impairment test- when certain events occur.

In the first step goodwill consider to be impaired if carrying value of reporting unit (including goodwill) > fair value of unit.

In the second step, goodwill is impaired by decreasing book value of current (goodwill dated from a date of purchase) in BS to new goodwill amount on value which would be calculated in case of acquisition would happen under circumstances which apply in the moment of impairment.

In 1st step you calculate impairment test using an entity value, in second you make an impairent of goodwill amount.

Goodwill, a topic near and dear to my heart. I can’t speak for IFRS, but for US GAAP here is the backdrop: The aquiring firm will hire a Valuation firm to prepare a valuation report that the accounting department will use for post-acquisition accounting. US GAAP requires that the acquired firm’s assets and liabilities be remeasured to fair value,and any previoulsy unrcorded assets be reported. These previously unrecorded assets are typcially internally generated intangible assets like trademarks.

There is a game here. The acquiring firm will choose the valuation firm primnarily based on their ability to give them the valuation answers that management wants, and being able to defend those answers to the external auditors. How the assets get valued has an accounting impact, thus management has an interest in the valuation. The arithmetic difference between the revalued assets per the valuation report and the price paid for the acquistion is goodwill.

Goodwill, rightly or wrongly, does not get amortized through the P&L under US GAAP. It just sits out on the Balance Sheet indefinitely. It does however get periodically reviewed for impairment. So companies with goodwill create impairment models (typically in Excel that I have seen) that calculate the FV of the “reporting unit” that hss the goodwill. This FV of the “reporting unit” is then compared to the Goodwill value on the Balance Sheet to determine if impairment has occurred. The models of course can produce any answer by adjusting the assumptions.

There you have it. Goodwill in a nutshell.