Page 23 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

Under the acquisition method, the purchase price is READING 14: INTERCORPORATE INVESTMENTS
allocated to the identifiable assets and liabilities of the
acquired firm on the basis of fair value. Any remainder is MODULE 14.8: BUSINESS COMBINATIONS: GOODWILL
reported on the balance sheet as goodwill. Goodwill is
said to be an unidentifiable asset that cannot be
separated from the business.

• Under U.S. GAAP, goodwill is the amount by which the fair value of the subsidiary is greater than the fair value of the acquired
company’s identifiable net assets (full goodwill).
• Under IFRS, goodwill is the excess of the purchase price over the fair value of the acquiring company’s proportion of the acquired
company’s identifiable net assets (partial goodwill). However, IFRS permits the use of the full goodwill approach also.

Full goodwill (required under U.S. GAAP; allowed under IFRS):

• Full goodwill method (FGM)= (fair value of equity of whole subsidiary) − (fair value of net identifiable assets of the subsidiary)

• Partial goodwill method (PGM) (only allowed under IFRS):
partial goodwill = purchase price − (% owned × FV of net identifiable assets of the subsidiary)
or
partial goodwill = % owned × full goodwill

EXAMPLE: GOODWILL: Wood Corporation paid $600 million for all of the outstanding stock of Pine Corporation. At the acquisition date, Pine reported
the condensed balance sheet below:

Goodwill is equal to the excess of purchase
price over the fair value of identifiable
assets and liabilities acquired. The plant
and equipment was written-up by $120
million to reflect fair value. The goodwill
reported on Pine’s balance sheet is an
unidentifiable asset and is thus ignored in
the calculation of Wood’s goodwill.
The FV of the plant and equipment was $120 million
more than its recorded book value. The FVs of all other
identifiable assets and liabilities were equal to their
recorded book values. Calculate the amount of goodwill
Wood should report in its consolidated balance sheet.