Page 24 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

EXAMPLE: Full goodwill vs. partial goodwill READING 14: INTERCORPORATE INVESTMENTS
Continuing the previous example, suppose that Wood paid
$450 million for 75% of the stock of Pine. Calculate the amount
of goodwill Wood should report using the full goodwill method MODULE 14.8: BUSINESS COMBINATIONS: GOODWILL
and the partial goodwill method.

Full goodwill method: Wood’s balance sheet goodwill is the excess of the fair value of the subsidiary ($450 million / 0.75 = $600 million) over
the fair value of identifiable net assets acquired, just as in the previous example. Acquisition goodwill = $40 million.

Partial goodwill method: Wood’s balance sheet goodwill is the excess of the acquisition price over Wood’s proportionate share of the fair
value of Pine’s identifiable net assets:

Goodwill is lower using the partial goodwill method. How is this reflected on the liabilities-and-equity side of the balance sheet?

The value of noncontrolling interest (NCI) also depends on which method is used:
• FGM -NCI is based on the acquired company’s fair value.
• PGM -NCI is based on the fair value of the acquired company’s identifiable net assets.

In the previous example, NCI using the FGM is 25% of Wood’s fair value of $600 million, or $150 million. Using PGM, NCI is 25% of the fair
value of Pine’s identifiable net assets, or $140 million. The difference of $10 million balances the $10 million difference in goodwill.

FGM (total assets and total equity) > PGM. Thus, ROA, ROE will be lower if the FGM is used.

Goodwill is not amortized. Instead, it is tested for impairment at least annually. However, measuring the fair value of goodwill is complicated
by the fact that goodwill cannot be separated from the business. Because of its inseparability, goodwill is valued at the reporting unit level.