Goodwill and Non-Controlling Interest in Consolidation

Understand Goodwill and Non-Controlling Interest

Key rules to remember

Goodwill

Goodwill = Consideration transferred + NCI at acquisition − Fair value of identifiable net assets at acquisition

Use this one layout for both methods. Only the NCI figure changes.

NCI at acquisition (proportionate)

NCI = NCI % × fair value of net assets at acquisition

Gives partial goodwill. No goodwill is attributed to NCI.

NCI at acquisition (fair value)

NCI = Number of NCI shares × subsidiary share price at acquisition

Gives full goodwill. Use the value given in the question, not the parent's price paid per share.

Net assets at acquisition

Share capital + reserves at acquisition date + fair value adjustments

Include any fair value uplift on assets, and deduct fair value reductions.

NCI at reporting date

NCI at acquisition + NCI % × post-acquisition profit of subsidiary (− NCI share of goodwill impairment under the fair value method)

Adjust the post-acquisition profit for fair value depreciation and unrealised profit where relevant.

Consideration transferred

Cash + fair value of shares issued + fair value of deferred consideration

Contingent consideration is also included at fair value. Acquisition costs are expensed, not included.

How to solve Goodwill and Non-Controlling Interest questions

1. 1Identify the acquisition date, the percentage acquired and the percentage held by NCI.
2. 2Work out consideration transferred: cash, shares issued at fair value and deferred consideration at present value. Exclude acquisition costs.
3. 3Decide the NCI method. If the question gives a share price for NCI shares and asks for fair value, use it. Otherwise use the proportionate share of net assets.
4. 4Calculate net assets at acquisition: share capital plus reserves at the acquisition date plus fair value adjustments.
5. 5Set out the goodwill working: consideration, plus NCI, minus net assets. Write each line with a label.
6. 6Calculate NCI at the reporting date: NCI at acquisition plus its share of post-acquisition profits, less its share of any goodwill impairment if full goodwill is used.
7. 7Carry goodwill (less any impairment) to non-current assets and NCI to equity in the statement of financial position.

Quickest way: The goodwill proforma

Common mistakes in Goodwill and Non-Controlling Interest

• Using book value of net assets instead of fair value at acquisition.

  Students take the subsidiary's equity from the statement of financial position and forget the fair value note.

  Fix: Always scan the question for fair value adjustments and add them to net assets before calculating goodwill.

• Using reserves at the reporting date rather than at the acquisition date.

  The reporting-date figure is the first one visible in the question.

  Fix: Find the date of acquisition and use the reserves at that date. Underline it in the question.

• Using the parent's cost per share as the NCI fair value.

  Both are share prices, so they look interchangeable.

  Fix: Use the NCI share value given for the subsidiary. The parent's price often includes a control premium.

• Including acquisition costs in consideration.

  Students treat all costs of the purchase as cost of investment.

  Fix: Under IFRS 3 these costs are expensed to profit or loss. Leave them out of goodwill.

• Ignoring the time value of deferred consideration.

  The amount payable later is simply added at its face value.

  Fix: Discount deferred consideration to present value at the rate given, then add it to consideration.

• Taking all of the goodwill impairment to the parent when full goodwill is used.

  Students forget that NCI holds part of the goodwill.

  Fix: Under the fair value method, share the impairment between parent and NCI in the ownership ratio. Under the proportionate method, the parent bears all of it.

Worked examples