Full and partial goodwill methods

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pierrewoodman_fan

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Does anyone know why we use the 2 methods? Can you clarify the differences of each method? Which is better for ratio analysis?
 
IFRS give and option to use either full goodwill or partial goodwill method
GAAP allows only full goodwill method
these methods are basically used only when we have control and using consolidation/acquisition method. there are basically 3 things:
1. purchase price of subsidiary
2. Fair value of subsidiary
3. fair value of subsidiary’s identifiable net assets
Full Goodwill Method:
GW = FV of subsidiary - FV of subsidiary’s identifiable net assets
Partial Goodwill Method:
GS = Purchase price - ownership percentage of (FV of subsidiary’s identifiable net assets)
hope it helps.
 
pierrewoodman_fan wrote:why isnt the valueof goodwill the same in both methods?
Click to expand...
It is.
What’s different is the portion of the value you record on your books.
 
Gypsy wrote:
Full Goodwill Method:
GW = FV of subsidiary - FV of subsidiary’s identifiable net assets
Partial Goodwill Method:
GS = Purchase price - ownership percentage of (FV of subsidiary’s identifiable net assets)
hope it helps.
Click to expand...
^ This.
But also, remember the effects of which method is selected. Full will always recognize an amount equal to or greater than partial. For that reason, assets are higher (more GW) and equity is higher. Therefore, leverage is lower under full. Also, due to higher equity, ROE is lower under full.
Summarized, full results in more GW, higher Assets and Equity, lower leverage, and lower ROE.
 
pierrewoodman_fan wrote:
S2000magician wrote:
pierrewoodman_fan wrote:why isnt the valueof goodwill the same in both methods?
Click to expand...
It is.
What’s different is the portion of the value you record on your books.
Click to expand...
Can you clarify
Click to expand...
Suppose that the fair market value of a company’s assets is $500 million, and you pay $390 million for 75% of the company. That corresponds to a price of $520 million for 100% of the company ($390 million × 100% ÷ 75% = $520 million), so the total goodwill is $20 million (= $520 million – $500 million).
Under the full goodwill method you record the entire $20 million in goodwill on your balance sheet. Under the partial goodwill method you record 75% × $20 million = $15 million in goodwill on your books. The value of the goodwill is the same in both cases – $20 million – the only difference is whether you record 100% of it or 75% of it.
 
S2000magician wrote:
pierrewoodman_fan wrote:
S2000magician wrote:
pierrewoodman_fan wrote:why isnt the valueof goodwill the same in both methods?
Click to expand...
It is.
What’s different is the portion of the value you record on your books.
Click to expand...
Can you clarify
Click to expand...
Suppose that the fair market value of a company’s assets is $500 million, and you pay $390 million for 75% of the company. That corresponds to a price of $520 million for 100% of the company ($390 million × 100% ÷ 75% = $520 million), so the total goodwill is $20 million (= $520 million – $50 million).
Under the full goodwill method you record the entire $20 million in goodwill on your balance sheet. Under the partial goodwill method you record 75% × $20 million = $15 million in goodwill on your books. The value of the goodwill is the same in both cases – $20 million – the only difference is whether you record 100% of it or 75% of it.
Click to expand...
damn you are a magician
 
the other thing I dont get is when the question includes something like a equipment whose fair value and book value are different and then its got depreiciation, what are they trying to do?
 
pierrewoodman_fan wrote:
S2000magician wrote:
pierrewoodman_fan wrote:
S2000magician wrote:
pierrewoodman_fan wrote:why isnt the valueof goodwill the same in both methods?
Click to expand...
It is.
What’s different is the portion of the value you record on your books.
Click to expand...
Can you clarify
Click to expand...
Suppose that the fair market value of a company’s assets is $500 million, and you pay $390 million for 75% of the company. That corresponds to a price of $520 million for 100% of the company ($390 million × 100% ÷ 75% = $520 million), so the total goodwill is $20 million (= $520 million – $50 million).
Under the full goodwill method you record the entire $20 million in goodwill on your balance sheet. Under the partial goodwill method you record 75% × $20 million = $15 million in goodwill on your books. The value of the goodwill is the same in both cases – $20 million – the only difference is whether you record 100% of it or 75% of it.
Click to expand...
damn you are a magician
Click to expand...
Uh … yeah.
 
pierrewoodman_fan wrote:the other thing I dont get is when the question includes something like a equipment whose fair value and book value are different and then its got depreiciation, what are they trying to do?
Click to expand...
Complicate things.
Sounds as though they’re succeeding.
(Be sure to include your proportional share – 75%, above – of the excess depreciation.)
 
Sir can you incorporate that extra info into your numerical problem and give a solution
 
If the book value of the depreciable assets were, say, $800 million, and the fair market value of the depreciable assets were, say, $840 million, then there would be an extra $40 million to depreciate. If you bought 75% of the company, then you would depreciate 75% × $40 million = $30 million. If the remaining useful life of those assets were 10 years and you use straight-line depreciation, you would have $30 million ÷ 10 years = $3 million/yr in excess depreciation.
 
S2000magician wrote:
If the book value of the depreciable assets were, say, $800 million, and the fair market value of the depreciable assets were, say, $840 million, then there would be an extra $40 million to depreciate. If you bought 75% of the company, then you would depreciate 75% × $40 million = $30 million. If the remaining useful life of those assets were 10 years and you use straight-line depreciation, you would have $30 million ÷ 10 years = $3 million/yr in excess depreciation.
Click to expand...
does the 3 million affect the goodwill amount?
 
pierrewoodman_fan wrote:
S2000magician wrote:If the book value of the depreciable assets were, say, $800 million, and the fair market value of the depreciable assets were, say, $840 million, then there would be an extra $40 million to depreciate. If you bought 75% of the company, then you would depreciate 75% × $40 million = $30 million. If the remaining useful life of those assets were 10 years and you use straight-line depreciation, you would have $30 million ÷ 10 years = $3 million/yr in excess depreciation.
Click to expand...
does the 3 million affect the goodwill amount?
Click to expand...
Nope.
The $40 million is the difference between the fair market value of the assets and the book value of the assets. The amount of goodwill is the difference between the purchase price and the fair market value of the net assets, so the $40 million is already subtracted out to arrive at goodwill.
 
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