Quick Goodwill Question

Under GAAP, do you ALWAYS report FULL goodwill under the equity method (investment in associates)?

US gaap. Equity method: goodwill = purchase price - fair value - premium allocated to identifable assets Consolidation: goodwill = purchase price - fair value IFRS: Consolidation: a) full goodwill: same as US gaap consolidaiton b) partial goodwill: purchase price (only for % acquired) - fair value (% of investment)

How would that be different under acquisition method?

Full goodwill is Fair Value - net identifiable assets NOT purchase price - fair value

Full Goodwill: 100% Fair Value - 100% of Fair Value of Identifiable Net Assets

Partial Goodwill: Purchase Price (Proportionate Share of Fair Value) - Proportionate Share of Identifiable Net Assets at Fair Value

In equity method, the goodwill is included in the one line investment account. Its the portion of the purchase price in excess of book value and fair value of identifiable assets and liabilities.

In acquisition menthod, the goodwill is also the excess over fair value of identifiable assets and liabilities but reported as a separate line item due to the full line-by-line consolidation of each account. If less than 100% is held, the balance is minority interest in equity section.

It’s purchase price - book value not fair value.

Q44 2011 AM Mock has a problem with Goodwill for the an Investment in Associates. It takes the Excess paid over Book Value less the amount attributable to tangible assets (which is the the % owned * (fair value - BV of tangible assets). That gets your your goodwill. When calculating the value of your investment going forward, you then amortize that amount attributable to tangible assets.


Full Goodwill --> Fair Value - BOOK Value of Net Identifiable assets (same under IFRS and US GAAP)

Equity reminds me of Book Value


F ull Goodwill --> F air value - F air Value of Net Identifiable assets (same under IFRS and US GAAP)

P artial Goodwill --> P urchase P rice - P arents P roportionate share of Net Identifiable Assets (only under IFRS)

So its FF under F ull goodwill and PPPP under P artial goodwill

Nice one Spyali!

It’s not book value, it’s fair value of net identifiable for the equity method

I agree.

The very definition of goodwill is having a purchase price in excess of fair value of identifiable assets. I do not think it is EVER book value unless book and fair are the same. If you pay more than the fair value of assets, you are paying for intangibles and those intangibles translate to goodwill.

That is how I see and have always seen it…

When you purchase a stake in a company, for say, $100, the fair value of net identifiable assets is 90 and the book value is 50 :

Goodwill is 10 under the equity method, which is technically partial goodwill since you are only reporting your share of the assets. Partial vs full goodwill refers to consolidation.

The difference between 90 and 50 (fair minus book) is allocated to the identifiable assets - you are basically writing up the assets from their old book values - remember assets go on the balance sheet at historical cost and the fair value at the time of acquisition is the ACQUIRER’s historical cost.

Anybody disagree with me? I am confident in my answer but would like to see if someone thinks I’m wrong…

Havent read everything you said. But if I understand you correctly, you were making the point that the excess of the purchase price over book value has two components 1) An allocation to the Fair Value of Net Identifiable Assets and 2) Goodwill (remainder that can’t be allocated) - then I 100% agree with you. Thats whats done in the text book.

Just to be sure. Is it correct to say Under the equity method, we would only allocate the excess to our proportionate share of the fair value differences (such as PPE), and we adjust the income by amortizing this excess. In the acquisition method we would have to use either full or partial goodwill method to determine the amount recognized as goodwill.

You have it bang on, Going_for_…

I think it’s easy to forget that for any year following the acquisition, you must amortize the excess purchase price over original book value (but not over fair value, that is goodwill). You will often see in those questions “at the date of acquisition, the remaining useful life is xx years”… that should be a hint that you need to amortize the excess for any full year.

this is really helpful. thanks!

I honestly think that is wrong for the equity method part… IT IS NOT BOOK VALUE!!

Goodwill is goodwill, regardless of which way you report it. Goodwill is purchase price in excess of fair value of net identifiable assets. No questions.

Nvestn, you are correct. Goodwill under the equity method is: Purchase Price - the Purchaser’s share of Fair Value of Net Identifiable Assets. Another crucial step is that the difference between Fair Value and Book Value is assigned to items whose fair value exceeds book value. If that item is PP&E for example or any other asset subject to depreciation, you must depreciate that excess value over its useful life. This depreciation will reduce your reported income relating to that investment in subsequent years. Make sense?

Goodwill is the amount you report on your income statement that is above the assets fair value. Feel free to message me if you have any questions.

Such a troll, right before exam day too.