Goodwill by Tom Clendon Sample Essay

Following the alterations to IFRS3 Business Combinations and IAS27 Consolidated and Separate Financial Statements in January 2008 there is now two ways of mensurating the good will and the non commanding involvement ( NCI ) that arises on the acquisition of a subordinate. Traditional / Proportionate method

The traditional measuring of good will on the acquisition of a subordinate is the surplus of the just value of the consideration given by the parent over the parent’s portion of the just value of the net assets acquired. This method can be referred to as the proportionate method. It determines merely the good will that is attributable to the parent company. Consequently the NCI portion of the net assets of the subordinate determines the NCI without any good will being attributable.

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New / Gross method
The new method of mensurating good will on the acquisition of the subordinate is to compare the just value of the whole of the subordinate ( as represented by the just value of the consideration given by the parent and the just value of the non commanding involvement ) with all of the just value of the net assets of the subordinate acquired. This method can be referred to as the gross or full good will method. It determines the good will that relates to the whole of the subordinate i. e. good will that is both attributable to the parent’s involvement and the non commanding involvement ( NCI ) . Consequently the NCI can be determined as the FV of the NCI at acquisition plus the NCI portion of the station acquisition net incomes.

See
Saracens acquires an 80 % involvement in the equity portions of Borthwick for consideration of $ 500 when the just value of the non commanding involvement ( NCI ) is $ 100. The just value of the net assets of Borthwick at acquisition is $ 400 and is now $ 550.

Required
1. Calculate the good will originating on the acquisition of Borthwick on a proportionate footing and the NCI at the year-end.
2. Calculate the gross good will originating on the acquisition of Borthwick and the NCI at the year-end.

Solution – good will and NCI on a proportionate footing
1. The proportionate good will originating is calculated by fiting the consideration that the parent has given. with the involvement that the parent acquires in the net assets of the subordinate. to give the good will of the subordinate that is attributable to the parent. Parent’s cost of investing at the just value of consideration given

Less the parent’s portion of the just value of the net assets of the subordinate acquired
Goodwill attributable to the parent

$ 500
( 80 % ten $ 400 )

( $ 320 )
$ 180

The NCI at the year-end is merely the NCI’s portion of the year-end net assets. NCI’s % of the twelvemonth terminal cyberspace assets

( 20 % ten $ 550 )

$ 110

Solution – good will and NCI on a gross footing
2. The gross good will originating is calculated by fiting the just value of the whole concern with the whole just value of the net assets of the subordinate
to give the whole good will of the subordinate. attributable to both the parent and to the NCI.

Parent’s cost of investing at the just value of consideration given
Fair value of the NCI
Less 100 % of the just value of the net assets of the subordinate acquired
Gross good will


$ 500

( 100 % ten $ 400 )

$ 100
( $ 400 )
$ 200

The NCI at the year-end is calculated by updating the just value of the NCI at acquisition for their portion of the station acquisition net incomes. The parent’s portion of the station acquisition net incomes is portion of group net incomes. The station acquisition net incomes are the rise in the net assets of the subordinate since acquisition i. e. $ 150 ( $ 550 – $ 400 ) .

Fair value of the NCI at acquisition
Plus the NCI’s % of the station acquisition net income

( 20 % ten $ 150 )

$ 100
$ 30
$ 130

It is of class no co-incidence that with gross good will both the good will and the NCI are both $ 20 larger than when calculated on a proportionate footing. This difference of $ 20 is the good will attributable to the NCI.

In these illustrations good will is said to be a premium arising on acquisition. Such good will is positive good will and accounted for as an intangible plus in the group accounts. and capable to an one-year damage reappraisal.

Gross good will and the damage reappraisal
Where good will has been calculated gross so any impairment loss will be allocated between the parent and the NCI in the normal proportion that they portion net incomes and losingss. See an damage reappraisal of gross good will

At the year-end an damage reappraisal is being conducted on Borthwick when the recoverable sum of the subordinate $ 700.
Required
Determine the result of the damage reappraisal.
Solution
The impairment reappraisal of good will is truly the damage reappraisal of the net assets subordinate and its’ good will as together they form a hard currency bring forthing unit for which it is possible to determine a recoverable sum.



Impairment reappraisal
Transporting value
Net assets
Good will
Recoverable sum
Impairment loss




$ 550
$ 200
$ 750
( $ 700 )
$ 50



The impairment loss will be applied to compose down the good will. so that the intangible plus of good will that will look on the group statement of fiscal place will be $ 150 ( $ 200 $ 50 ) . In the equity of the group statement of fiscal place the accrued net incomes will be reduced by the parent’s portion of the impairment loss on the gross good will i. e. $ 40 ( 80 % ten $ 50 ) .

In the equity of the group statement of fiscal place the NCI will be reduced by the NCI’s portion of the impairment loss on the gross good will i. e. $ 10 ( 20 % ten $ 50 ) . The NCI that will look on the group statement fiscal place will now be merely $ 120 ( $ 130 – $ 10 ) . In the income statement the impairment loss of $ 50 will be charged as an excess operating disbursal. As the impairment loss relates to the gross good will of the subordinate so it will cut down the net incomes for the twelvemonth attributable to the NCI by $ 10 ( 20 % ten $ 50 ) . Further surveies

Further information on group histories is contained in Tom Clendon’s book “A pupils guide to group accounts” published by Kaplan.
By Tom Clendon FCCA coach at Kaplan Financial

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