Partial Goodwill Method
In the partial goodwill method, goodwill is calculated as the difference between the purchase consideration paid and the acquirer's share of the fair value of the net identifiable assets. In partial goodwill method, only the acquirer's share of the goodwill is recognized. Goodwill under full goodwill method exceeds goodwill under partial goodwill method by the non-controlling interest share of the goodwill.
Partial goodwill method is not allowed under US GAAP but it is allowed as an option under IFRS (besides the full goodwill method).
Goodwill under partial goodwill method differs from goodwill under full goodwill method only in situations in which investment by the acquirer is less than 100%.
Let's follow the same example that we discussed in full goodwill method.
Company A acquired 75% shareholding in Company B for $20 million. Book value of net identifiable assets of Company B is $14 million. The fair value of Company B's asset is the same as their book value except accounts receivables which are impaired by $1 million. Book value of assets is $54 million while book value of liabilities is $40 million.
The purchase consideration is the cash paid to acquire 75% ownership and it equals $20 million.
Fair value of net identifiable assets is $13 million ($54 million book value minus $1 million on account if impairment in accounts receivable minus liabilities of $40 million). The acquirer's share of the net identifiable assets equals 75% of $13 million which equals $9.75 million. Goodwill is hence $20 million minus $9.75 which equals $10.25 million.
Company A will pass the following journal entry to record the business combination.
|Non-Controlling Interest||$3.25 M|
Non-controlling interest is calculated as 25% of fair value of net identifiable assets. It equals $3.25 ($13 million multiplied by 0.25). It can also be arrived at the balancing figure: (goodwill under full goodwill method + assets acquired − liabilities assumed − cash paid).
Total goodwill under full goodwill method was $13.67 and non-controlling interest was $6.67 million. The difference is non-controlling interest in case of partial goodwill is only because in partial goodwill method the non-controlling interest share of goodwill is not recorded which equals $3.42 million (0.25 of ($26.67 minus $13 million)).
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