When to use various goodwill methods (FRA)

CFA Level II
#1

In the FRA book there are different methods for finding goodwill.

One is under the heading 5.2 “Investment Costs that Exceed the Book Value of the Investee”

The other (Full Goodwill Method and Partial Goodwill Method) is found under 6.2.5. “Recognition and Measurement of Goodwill.” This reading says it has to do with IFRS. Is the other one above for GAAP?

#2

The first one is related to Equity Method, for investment in Associates

=> You don’t recognize goodwill itself, it is included in the one-line item in equity.

The second one is related to Acquisition Method, for Business Combinations

=> You have 2 methods here : a) Full Goodwill (IFRS+US GAAP) b) Partial Goodwill (IFRS only)

Here is a small resume i put up yesterday to help me remember :

EQUITY METHOD

Purchase price

  • % Book value Net Assets

———

= Excess purchase price

  • Excess to net assets (% * excess = FV - BV )

  • Goodwill

———

= 0

ACQUISITION : FULL GOODWILL

FV Entity - FV identifiable assets = Goodwill

And : Non Controlling Interest = (1-%) * FV entity

ACQUISITION : PARTIAL GOODWILL

Purchase Price - % FV identifiable net assets = Goodwill

And NCI = (1-%) * FV identifiable assets

GOODWILL IMPAIRMENT : IFRS

CV unit - Recoverable amount unit = Impairment loss

GOODWILL IMPAIRMENT : US GAAP

  1. FV entity < CV entity

  2. FV entity - FV net identifiable net assets = Implied Goodwill

  3. CV goodwill - Implied goodwill = Impairment loss

#3

Thanks gnrocks, nicely laid out.