Quick Goodwill Question

CFA Level II FRA
#21

Thanks for pointing it out guys! Here’s the revised version:

EQUITY METHOD:

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

_ Equity reminds me of Book Value_

And then we allocate the above calculated difference (i.e. the excess purchase price) to subsidiary’s those assets whose fair values exceed their book values. What we get after allocation is the goodwill which is essentially same as the difference between subsidiary’s fair value and parent’s proportionate share of net identifiable assets.

ACQUISITION METHOD:

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

#22

Douche bag! lol… unless you’re being serious, if so then you’re wrong!

#23

Thanks, does it mean the way you calculate goodwill is the same between equity and partial?

#24

Equity method you take purchase price less acquiror’s share of BOOK VALUE of EQUITY less amount of excess (i.e. fair value - book) attributed to tangible assets. Purchase - Fair value is not entirely accurate. That just determines excess for the tangible assets. Plus if any intangibles you would need to account for that. The rest of purchase price allocated to book value of equity.

The 2011 Mock Q44 AM makes this crystal clear. If that is wrong and there is documented proof please share so we can all be confident in the answer since this topic will for sure be tested.

#25

Equity method - the way I remember this concept is to see how much of what I purchased justifies the amount I paid for it

Take your % BV

Purchase price - %BV = Amount I need to justify, anything that I can’t justify goes to goodwill.

How do I know what’s justified…

Take the sum of your % of FV - BV

Goodwill = Total amount to justify - Sum

Hope that’s correct, it would be too sad to relearn.

#26

Yes, correct.

Like andynyc said, take a look at the 2011 CFAI Mock Q44 (AM Session).

#27

This topic is indeed confusing. I’d like to add a point here too.

  1. Investment in subsidiary (acquiring >50% of the target):

PARTIAL method (IFRS only):

Goodwill = Purhase price - Fair value of the Net asset of the subsidiary * % acquired.

Minority interest = Net asset of the subsidiary at reporting date * (1 - % acquired)

FULL method (required under US GAAP, permitted under IFRS):

Goodwill = Purchase price* (100 % / acquired %) - Fair value of the Net assets of the subsidiary

Minority interest = Purchase price* (100 % / acquired %)*(1-% acquired)

  1. Investment in associate(acquiring between 20 to 50% of the target)

Same treatment under IFRS and US GAAP:

Goodwill =

(Purhase price - Fair value of the Net asset of the associate * % acquired) - (Fair value of Net asset of associate - Book value of its Net assets) * % acquired

Minority Interest = Nil

#28

Im not sure I understand what you’re saying. But I just had a look at Q44 and redid the question and got it right based on my method. You report the investment account at purchase price which includes $273,000 of Goodwill. That $273,000 comes from excess of purchase price over FV of NIA (Purchase price = $1,365,000 minus ($3,360,000 x 32.5% = $1,092,000) = $273,000. [Notice how I’ve determined goodwill, just like in the answer sheet, without using book value of anything…]

At that point, the only reason you care about previous book value is to depreciate identifiable assets that you have “written up”. In this case, you’ve written up the assets you bought by $234,000 (this is NOT goodwill) and must now deduct 1/10 of that amount as depreciation (less the portion attributable to land as land is not depreciable) from the 2008 NET INCOME allocation of Great Lakes.

In this case, you wrote up $234,000 of assets but only depreciate based on $222,300 (don’t depreciate gain on land). That amount divided by 10 gives you $22,230.

The answer is achieved by looking at purchase price $1,365,000 less depreciation $22,230 plus our share of NI $390,000 less our share of dividends paid $163,800 = $1,568,970.

#29

I think we are saying the same thing but coming to the answer in 2 different ways.

#30

You are probably right, my friend.

As long as we get to the right answer and move on to Level III, that’s all I care about :smiley:

Good luck!

#31

BUMP for magician!

Would you be kind enough to read my second post and comment on its accuracy?

Or if you know of any other magic way of remembering this stuff then please share it away. I really wanna pass this time.

Thanks!

#32

Dear SpyAli,

It’s a bit late, hope you finally had your L2 (the same for ff8789 that was so happy about your memo technique) but you had it wrong on an enormiouse mess :smiley: (this is why I am taking the time):

Equity method correction

  1. No existence of differentiation between Full/Partial on Equity method. I would say only the partial exist.

  2. Then your original post is completely out => FV - BV … as for definition Goodwill is excess Purchase Price (PP) over FV. Where is the PP on your equation?

  3. Then your two corrective frases. For the first => right regarding the excess PP of assets taken out of a first step calculated goodwill using PP - %Share*BV. For the second => false, this is what your frase calculates: FV - %Share*BV. Again no PP… I think what you meant was:

{GOODWILL = PP - %Share*FV} <=> {GOODWILL = PP - %Share*((FV - BV)+BV)}

Its true, seems a bit a complication for nothing but this might be nessesary when you have to depretiate the ammount allocated to depreciable assets.

Aquisition Method:

FULL GOODWILL

There it is missleading! The CFA text uses “fair value of the aquisition” specifing “FV of consideration given” which I think is simply the PP considering you bought 100% of the target, lets call it TPP. So to calculate it I would go for:

TPP = PP / %Share

Considering you are aquiring the target company you will report all the Equity accounting for a minority stake to complete the Equity in case you didn’t bought a 100% of the target. On the Assets and Liabilities you report them ALL even if bought less than 100% at FV. And there we should have an add in the balance of:

FV-Assets + Goodwill = FV-Liabilities + PP + MinorityInterestOnTPP

with

MinorityInterestOnTPP= (1 - %Share) * TPP

PARTIAL GOODWILL

Your Goodwill will be proportionate to the share you bought so:

PP - %Share*FV

For the B/S it is exactly the same but we are reporting a proportionate Goodwill to share aquired:

FV-Assets + %Share*Goodwill = FV-Liabilities + PP + MinorityInterestOnFV-NetAssets

with

MinorityInterestOnFV-NetAssets = (1 - %Share) * FV-NetAssets

There for what we can considerate on the Consolidation Method should be the same…(?)

You are welcome to comment, even more if its false.

Have a good day,