Study Zone

Measuring Goodwill

Following the revisions to IFRS3 Business Combinations and IAS27 Consolidated and Separate Financial Statements in January 2008 there is now a new way of measuring the goodwill that arises on the acquisition of a subsidiary.

Gross goodwill
The new method of measuring goodwill on the acquisition of the subsidiary is to compare the fair value of the whole of the subsidiary (as represented by the fair value of the consideration given by the parent and the fair value of the non controlling interest at acquisition) with the whole of the fair value of the net assets of the subsidiary at acquisition. This method can be referred to as the gross or full goodwill method. It determines the goodwill that relates to the whole of the subsidiary i.e. goodwill that is both attributable to the parent’s interest and the non controlling interest (NCI).
Consider
Manchester acquires an 80% interest in the equity shares of Leeds for consideration of $600 when the fair value of the non controlling interest (NCI) is $100.The fair value of the net assets of Leeds at acquisition is $400.
Required - Calculate the gross goodwill arising on the acquisition of Leeds.
Solution
The gross goodwill arising is calculated by matching the fair value of the whole business with the whole fair value of the net assets of the subsidiary to give the whole goodwill of the subsidiary, attributable to both the parent and to the NCI.
Parent’s cost of investment at the fair value of consideration given $600
Fair value of the NCI $100
Less 100% of the fair value of the net assets of the subsidiary acquired (100% x $400) ($400)
Gross goodwill $300
In this example goodwill is said to be a premium arising on acquisition. Such goodwill is positive goodwill and accounted for as an intangible asset in the group accounts, and is subject to an annual impairment review.
In the event that there is a bargain purchase i.e. negative goodwill arises, then this is regarded as a profit and immediately recognised in income.
*Tom Clendon is PQ’s current lecturer of the year and the author of “A student’s guide to group accounts”

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