Hi, Need a clarification on calculation of Goodwill. As per my understanding goodwill is calculated as under: Purchase price XXX Less: Net fair value of assets of investee (XX) (Fair value of assets - fairvalue of liabilities) ----------- Excess purchase price XXX Less: Attributable to assets of investee (XX) (i.e investee’s asset is recorded higher by this amt ----------- in the investors books) * XXX Goodwill ======= Now my question is, that once we take the fair value of investees assets/liabilities into consideration for calculation of excess purchase price, how is it considered again in the step marked * Because, fair values of investees assets have already been taken into account in the previous step. I hope my question has some merit to it and I am not purely confused. Thanks.
Goodwill = Purchase Price - Net Assets* * Net Assets = Total Assets - Total Liabilities I think you are making it a little more complicated above.
Sorry to persist PP, But then what do points 3 and 4 under the purchase on pg 128 of schweser notes mean? Also, under bargain purchase on pg 134, they have used the term ‘excess of purchase price’. But under bargain purchase, there is no excess over net fair value of assets. Please help. Thanks
Numbers can do wonders… So say P&G purchsed Gilette and the accounting takes place via the purchase method. P&G pays = $700 as the purchase price for Gilette Gilette’s FV of Assets = 500 & FV of Liability = 100 FV of Gilette = FV of Assets - FV of Liabilities = 500-100 = 400 P&G paid = 700 Excess purchase price = 700 - 400 = 300 Gilette had a patent on thier Mach3Turbo till 2009 which could be valued at = 100 (intangible, yet identifiable asset) So the Excess purchase price got split into 2 parts = separately identifiable intangible asset AND Goodwill Excess Purchase Price = 300 = 100 + Goodwill Goodwill = 300 - 100 = 200 (which, say, is attributable to the Gilette brand in the competitive marketplace over Philips, Panasonic, others…) This Goodwill is tested for annual imapirement.
Thanks a ton swaptiongamma. But my question is will the FV of assets (500) not include the FV of the patent (100) in the first place? The 500 should include tangible and intangible assets taken at their FV. So why reduce the FV again? I hope I am not testing your patience on this. Thanks.
Thanks again guys
You know Daggny, that’s a great question. Can someone of you let us know - if Patent (intangible asset) amount of $100 will be already included in $500 (FV of Assets), then why are we double subtracting it? SuperI, cpk - u there?
The double subtraction – I don’t see it happening here… Look at it --> FMV of Assets of Subsidiary = 500 (Included 100 of Patents, e.g.). FMV Liabs of Subsidiary = 200 Made up numbers above. So Net Assets of Subsidiary = 500 - 200 = 300 Acquirer paid 350 for this. So Goodwill = 350 - 300 = 50. This excess may be assigned to Intangible assets like the Patents of the Subsidiary - or they may be assigned to Tangible PP&E of the Subsidiary that is being acquired as part of the txn. This is something that is between the Acquirer and the Target - and part of their “negotiations”. The 50 Goodwill that is now present is on the Parent’s B/S - no longer on the Sub’s. Sub’s B/S no longer is a valid point of reference. (Or am I missing something here?)
I think you guys are overcomplicating things. The answer simply depends on the information you are given. If they say the FMV of ALL assets is X, then that number will include non-Goodwill intangibles. If they say the FMV of all TANGIBLE assets is X then it doesn’t include the non-Goodwill intangible. The questions should be pretty explicit so that there is no confusion. CPK - If in your example you came up with your net assets by taking the difference in FMV of A and L, not the book value, then you’ve already allocated any amounts to things like tangible PPE (because you used its FMV and not book value). Also, Goodwill can only be created as part of a purchase transaction, so it only appears on the balance sheet of the parent/acquiror, never on the sub’s balance sheet.
Thanks swaptiongamma, cpk123 and super I. One more question. If there is some Goodwill (purchased/internally generated) on the balancesheet of the subs before the purchase, it has to be ignored for the purpose of the purchase. i.e The total fair value of net assets of subs excludes the goodwill already present on the balancesheet of the subs. Is that correct? Thanks
Posted by: swaptiongamma (IP Logged) [hide posts from this user] Date: February 11, 2009 10:52AM You know Daggny, that’s a great question. Can someone of you let us know - if Patent (intangible asset) amount of $100 will be already included in $500 (FV of Assets), then why are we double subtracting it? _____________ In my opinion, the balance sheet of Gillete in this case would not include $100 of value for intangiable of Mach3Turbo cause for Gillete, this is a internally developed patent and therefore not recognized on the Balance sheet. However, when P&G purcahses Gillete, it recognizes the net assets (FV of assets - FV of liabiltities=400) and the $100 of patent because this is a ‘purchase’ transaction. The remaining amount which cannot be allocated to the net assets and identifiable intangiables (like patents) will go towards Goodwill ( which would be $200).
Thanks SuperI for taking out time on this. cpk - It’s true we were confusing a simple concept and nimz raised a very good point. The $100 of Intangible asset due to Mach3Turbo will not e on Gillette’s BS, as it’s internally generated. And thus the complete P&G - Gillette merger transaction works well. I loved the example I created on the fly, and how nicely got confused myself in the mess of numbers. That’s the very beauty of the curriculum