Goodwill Question Under Equity Method

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rellison

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In all problems for calculating goodwill I’ve encountered, you amortize the difference between FV and BV of PP&E purchased.
What about if you buy other assets valued over BV? Meaning, I know that goodwill=purchase price-(BV net assets)-(FV-BV PP&E) but what if you buy an asset at FV over BV that’s not PP&E? Do you subtract that to calculate goodwill? Do you amortize that on the balance sheet/income statement under the equity method?
 
Goodwill is the difference between the proportionate share of the investee’s net assets and the purchase price. Whether or not the items are PP&E have no bearing when calculating goodwill.
 
OK that’s what I thought bpdulog, but for some reason PP&E was always the item they said you “purchased at $1500 above BV” or something in the example.
Just checking.
 
two things here
1. goodwill is NEVER amortized in these problems.
Excess Purchase Price = Purchase Price - FMV Net Assets of Sub.
Goodwill = excess Purchase Price - Pro-rata share allocated to Tangible assets.
The Pro-rata share allocated to tangible assets is what is DEPRECIATED.
Goodwill is just a calculation, for kicks. Nothing more is ever done with the Goodwill. It is just an accounting # (figure).
If you looked at the Financial statement of the parent - you would only see a single line item – called Investment in Subsidiary on the Balance sheet and a single line item - called Equity Income on the Income statement.
If you did not have tangible assets where portion of the excess purchase price could be allocated to - you would have a higher goodwill #, and no depreciation reducing your equity income in future years.
 
Not to split hairs, but isn’t the goodwill formula purchase price minus BV net assets minus (difference between FV and BV of assets purchased).
Or is that the same thing as what you wrote,
“Excess Purchase Price = Purchase Price - FMV Net Assets of Sub.
Goodwill = excess Purchase Price - Pro-rata share allocated to Tangible assets.”
 
you are right rellison… messed up a little bit..
but hope the rest of whatever I wrote made sense..
 
@cpk: I think what you said still holds CP, i.e. what you and rellison say are equivalent. Because FMV-Book Value is due to tangible assets (every problem I have seen), so this gets allocated and amortized and goodwill ends up being just purchase price-FMV. If you have seen examples to the contrary please be kind enough to direct me to them.
 
CP,
I think you meant “Excess Purchase Price = Purchase Price - BV(Net Assets of Sub)”.
In my notes, I got goodwill = purchase price - FV(Net asset of sub), as ad said.
This is pretty much like: goodwill = purchase price - BV(net assets) - [FV(net asset)-BV(net asset)].
If the Sub company has a goodwill, the above “net asset” shall be identifiable assets/liabilities (excluding the goodwill).
Corret me if I’m wrong.
 
Didn’t read all the posts…I got a better understanding, though.
 
isn’t it
price paid - fair value of your share of net assets?
diff between your share of fair market value and book value is then depreciated.
can anyone cofirm?
 
rahulv Wrote:
——————————————————-
> isn’t it
>
> price paid - fair value of your share of net
> assets?
>
> diff between your share of fair market value and
> book value is then depreciated.
>
> can anyone cofirm?
Just to make a minor correction: it should be Purchase price - your share of the book value of net assets.
From what I read in my SG, the difference is first allocated to identifiable assets and the rest goes to goodwill?
 
Under equity method, there is no good will, what your referring to is the amortization that is added to equity when you purchase above the fair value. It is not goodwill.
Only purchase method has goodwill
thats how it was presented in stalla
 
bpdulog Wrote:
——————————————————-
> rahulv Wrote:
> ————————————————–
> —–
> > isn’t it
> >
> > price paid - fair value of your share of net
> > assets?
> >
> > diff between your share of fair market value
> and
> > book value is then depreciated.
> >
> > can anyone cofirm?
>
>
> Just to make a minor correction: it should be
> Purchase price - your share of the book value of
> net assets.
>
yes i should have put “(” “)”
diff between your share of (fair market value
and
book value is then” depreciated.
> From what I read in my SG, the difference is first
> allocated to identifiable assets and the rest goes
> to goodwill?
yes thats how you get the fair marrket value of assets
 
@deep2002: that is incorrect take a look at the CFAI books there is a whole section titled equity method with goodwill or something similar to this.
 
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