I dont understand why shareholders’ equity will be higher under full goodwill. Could someone explain? Thanks!
Partial goodwill < full goodwill. Do you agree? Goodwill shows up on the Asset Side of the Balance sheet - Do you agree? If both above are true - Assets under Full Goodwill > Assets under Partial Goodwill. Assets - Liabs = Equity. Liabs (nothing has changed). So Equity under Full Goodwill > Equity under Partial goodwill.
Thanks CP. Partial goodwill = FV of acquisition price - % of (identifiable assets + Liab + conting.) Full goodwill = FV of the subsidiary - FV of identifiable net assets I dont have enough element to conclude partial goodwill < full goodwill. Could you explain?
Look at the examples in the book as to how each one is calculated. See Example 9…
I’m glad this topic came up cuz I’ve drawn up a few scenerios myself to sort of understand the difference between the two. My understanding is that full goodwill is not always greater than partial goodwill because they will be equal to each other if the ownership stake purchased is 100%, but other than that one circumstance, I THINK full goodwill > partial goodwill, and I will show why by showing the different scenarios. I think of the formulas this way because it helps me summon the right numbers in problems: Partial Goodwill = Purchase Price – Fair Value of acquired Net Assets FULL Goodwill = Fair Value of whole subsidiary – Fair value whole subsidiary’s net assets Circumstance 1: Suppose a subsidiary’s fair value is $100 for a 100% stake, and the fair value of the net assets is only $80 (which is also the book value of the firm’s equity, ie Assets less Liabilities). Here’s how the math looks: Partial Goodwill = 100 - 80 = 20 ; noncontrolling eq interest = 0 Full goodwill = 100 - 80 = 20 ; noncontrolling equity interest = 0 Circumstance 2: Lets suppose now that only an 80% stake is being purchased for $80. Here’s how the math looks: Partial goodwill = 80 - 64 = 16 ; noncontrolling eq interest = .20 x 80 = $16 Full goodwill = 100 - 80 = 20 ; noncontrolling eq interest = .20 x 100 = $20 Circumstance 3 Suppose now that the Fair Value of the target and it’s net assets still remain, respectively, as $100 and $80, but this time, the Purchase Price is $115 for a 100% stake. This is the circumstance where I’m guessing a bit since I can’t find a part of the text that seems to spell it out explicitly, so I’m hoping this is right, someone please correct me if no. here’s what I would do: Partial goodwill = 100 - 80 = 20 ; non controlling interest = 0 loss on acquisition of $15 posted on income statement for that period Full Goodwill = 100 - 80 = 20 ; non controlling interest = 0 loss on acquisition of $15 posted on income statement for that period Circumstance 4 Also doing an educated guess here… in this one, Purchase price is $92 for an 80% stake; value of subsidiary is $100, value of its net Assets is $80. Partial goodwill = 80 - 64 = 16 ; noncontrolling eq interest = .20 x 80 = $16 loss on acquisition of $12 posted on income statement Full goodwill = 100 - 80 = 20 ; noncontrolling eq interest = .20 x 100 = $20 loss on acquisition of $12 posted on income statement Circumstance 5 Subsidiary fair value is $100, net assets worth $80, Purchase Price for 100% stake is $70. There is no goodwill here. Assets and Liabilities all get added to the book at Fair Value (which will mean an increase in net assets of $100), and a gain on acquisition of $30 is put on the income statement. Non controlling interest is 0. This is called a “bargain acquisition”. Circumstance 6 Subsidiary fair value $100, net assets worth $80, Purchase price for 80% stake is $56 (fair value of the stake is $80). No goodwill here. Assets and Liabilities all get added to the book at fair value, and gain on acquisition of $24 is put on the income statement. non controlling interest value of $20 is recognized on balance sheet. This should pretty much cover everything you could possible come across for the acquisition method with Full and Partial Goodwill, and then some. not completely sure about circumstances 3 and 4 tho, but I feel like they’re right.
To answer your initial question, in cases where less than a 100% stake is purchased, the reason the full goodwill method will show a higher value than under partial goodwill is because the non controlling equity value will be higher using the full goodwill method. The value of the equity that will be posted on the consolidated balance sheet will be the parent’s outstanding share value + non controlling interest in the subsidiary. Partial goodwill method: non ctrl eq int = (1-parent’s %ownership)(fair V of sub’s net A) Full goodwill method non ctrl eq int =(1-parent’s %ownership)(Fair V of whole subsidiary) should be clear now
Thanks. For the scenario 3, shouldnt it be: full goodwill = 100 - 80 = 20 partial goodwill = 115 - 80% * 80 = 51 (assuming FV of acquired net assets equals FV of the sub’s net assets, as the former is not given) in which case, partial goodwill > full goodwill? back to my initial question.
I don’t think you’d be allowed to allocate an overpayment like that to goodwill because it would be impaired the second it hit your books, in which case you’d need to immediately bring it back down to fair value anyway. And when I say bring it back down to fair value, I don’t mean the fair value of the net assets (as would be indicated on the subsidiary’s balance sheet), I mean the fair value of the company as a whole, which should be greater than the company’s net assets if it is a profitable or even potentially profitable company. For that reason, I think it makes sense to recognize the loss at acquisition. I think it’s impossible for partial goodwill > full goodwill, and I think most people on the site would agree with that. That concept aside, why did you calculate partial goodwill that way? What is the 80% for? a 100% stake was being purchased in this scenario. Assuming you were allowed to take such a wild overpayment and allocate it to goodwill (which I very highly doubt you are), the partial goodwill would be calculated as follows: Partial Goodwill = Purchase Price – Fair Value of acquired Net Assets = 115 – 80(100%) = 35 But again… you can’t use the full purchase price in this case since the fair value of the overall company is only $100, I’m quite sure that any payment above $100 is just considered a loss on acquisition. Are you still unsure about why Full Goodwill and partial goodwill give different ending equity values? I thought I nailed that query pretty directly, but I guess not.
You did! It was crystal clear. Thanks! I was just confused about the scenario 3… But will let go for now and continue ploughing through pension-aches etc… I have to say the level at which you drill down in each topic is impressive. Are you doing CFAI only?
I have already read through the Stalla notes since I failed last year. This time around I’m using the CFAI books, but trying not to spend too much time reading it. I have study notes that I wrote in my own words based on the Stalla readings. There are 40 word documents to cover all the readings (some of them were combined). What I do now when I approach a “new” reading, is I read my old notes through, and then I try to go through the CFAI reading as quick as I can, and when I feel like I’m ready, tackle the EOC questions. Now what I’m doing is making a sheet of formulas that are handy for solving problems, but aren’t so explicitly written anywhere. For example, Economic Pension Expense doesn’t seem to have a formula written explicitly in the CFAI readings, and although there is one in the Stalla readings, I didn’t find it helpful enough their formula is: Economic Pension Expense = Employer contributions – ∆funded status with that formula, if you’re not sure how to find the change in funded status, you’re screwed, so I wrote this formula immediately below that one: ∆ funded status = (Fund AssetsEnd – DBOEnd) – (Fund AssetsBeg – DBOBeg) And that has been enough for me to solve for Economic Pension in every question I’ve come across that has asked for it so far. My plan is to spend about 15-30 min every few days re-writing formulas on scrap paper so that I have them completely memorized without any doubt come exam time, and I expect to have about at least 300 formulas once I’m through it all. So far I’m finished all of equity, and I’m well into multinational operations hoping to be finished FRA next week, and will probably start on Corporate Finance next, which I should get through quick cuz that was one of my 70+ sections last time around. I don’t have a specific order planned out. My biggest piece of advice is this; come back to old material regularly. at random, do a few EOC questions from a section you did 2 weeks ago, or a month ago, w/e and see how you do. if not well, spend time on that, and you should be back up to speed much quicker than the time it would take you to be up to speed on a new topic. if you wait til may to do review on stuff you learned in january, you’ll find learning it again is extremely slow, or at least that’s what I found. If you’re interested in my notes, I don’t mind sharing, just post your email address.
magicskyfairy, fellow retaker here. Thanks for your offer to share your notes, much appreciated. My email is dapoopa1@yahoo.com
@magicskyfairy : very interesting post. Thanks a lot for the advice. I would highly appreciate to read your notes. omforeverdu83_at_hotmail.com I hope you will pass !
sent. goin to cuba for a week now. happy studying all
send fail for omforeverdu83_at_hotmail.com, tried omforeverdu83_@hotmail.com and omforeverdu83@hotmail.com
magicskyfairy Wrote: ------------------------------------------------------- > Partial Goodwill = Purchase Price – Fair Value of > acquired Net Assets > = 115 – 80(100%) = 35 > > But again… you can’t use the full purchase price > in this case since the fair value of the overall > company is only $100, I’m quite sure that any > payment above $100 is just considered a loss on > acquisition. > You were doing an exceptional job explaining this and I thank you for that, but in the above you lost me. Isn’t goodwill by definition the payment you make on top of fair value? So, even if the company is worth only $100 and you pay $115, that’s not considred a loss, that’s goodwill.
magicskyfairy Wrote: ------------------------------------------------------- > I don’t think you’d be allowed to allocate an > overpayment like that to goodwill because it would > be impaired the second it hit your books, in which > case you’d need to immediately bring it back down > to fair value anyway. > > And when I say bring it back down to fair value, I > don’t mean the fair value of the net assets (as > would be indicated on the subsidiary’s balance > sheet), I mean the fair value of the company as a > whole, which should be greater than the company’s > net assets if it is a profitable or even > potentially profitable company. > > For that reason, I think it makes sense to > recognize the loss at acquisition. I think it’s > impossible for partial goodwill > full goodwill, > and I think most people on the site would agree > with that. > > That concept aside, why did you calculate partial > goodwill that way? What is the 80% for? a 100% > stake was being purchased in this scenario. > > Assuming you were allowed to take such a wild > overpayment and allocate it to goodwill (which I > very highly doubt you are), the partial goodwill > would be calculated as follows: > > Partial Goodwill = Purchase Price – Fair Value of > acquired Net Assets > = 115 – 80(100%) = 35 > > But again… you can’t use the full purchase price > in this case since the fair value of the overall > company is only $100, I’m quite sure that any > payment above $100 is just considered a loss on > acquisition. > > Are you still unsure about why Full Goodwill and > partial goodwill give different ending equity > values? I thought I nailed that query pretty > directly, but I guess not. this i think
goodwill I think is the payment you make above the fair value of the net assets, up to the fair value of the subsidiary as a whole. Goldman sachs, for example, probably doesn’t have that much in terms of its physical identifiable assets. That company as a whole tho, because of its brand power and so on would be worth a whole lot more than those net assets, if you consider it as a whole. but if you pay more than that for it, you would have to consider your goodwill impaired, and drop it down to such an extent that Fair value of net assets + goodwill = fair value of the whole subsidiary If I pay 1 million dollars for a local convenience store with $200,000 in net assets, and a fair value for the business as a whole of $250,000, I don’t get to allocate $800,000 to goodwill; I only get to allocate $50,000 to goodwill. $750,000 is lost.
think about it, if you are doing such a bad job at valuing a company worth FV=200K at 1 Mill… are you doing any sort of due diligence at all? Are you so messed up… in your valuation? This is a highly unlikely situation. If someone comes to the table, tells you their value is 200K are you going to go back and let him know that “hey… you are so undervalued, I valued you at 1M $” ?