Reading 17 Intercorporate Investments End of Chapter question 29

[Argbey]

Hi there, I have a question regarding EOC Question 29 of Official Volume 2 (Reading 17). In the answer explanation (please see below), it states “Under either of the consolidations, beginning equity is 1,750 since it includes the 320 noncontrolling interest.”. This is telling me that the noncontrolling interest (and as the result the equity) is the same regardless of whether the client is implementing partial or full goodwill. But from my understanding, I thought that the “noncontrolling interest” amount for Full vs Partial goodwill are not the same and the overall equity under Full goodwill should be higher than if it were under Partial goodwill. Can anyone shed some light on this please? thanks!
Question:
Based on Byron’s forecast, NinMount’s 2009 return on beginning equity most likely will be the same under:


a. either of the consolidations, but different under the equity method.


b. the equity method, consolidation with full goodwill, and consolidation with partial
goodwill.


c. none of the equity method, consolidation with full goodwill, or consolidation with
partial goodwill.
Answer:
A is correct. Net income is the same using any of the choices. Beginning equity under the equity method is £1,430. Under either of the consolidations, beginning equity is £1,750 since it includes the £320 noncontrolling interest. Return on beginning equity is highest under the equity method.

 

[Alex74]

Hi Argbey,
this is my first post here and I hope that I don’t mess it up
I think the reason for this is that there is no goodwill at all. There difference between partial and full goodwill arises because of the difference between the market price and the net asset fair value.
To make it more concrete:
In this case the purchase price was 320 million for 50% - or 640 million for the whole company (100%). The fair value was exactly the same: 580 million for the net total assets PLUS 60 million for the licenses.
This means that there is no goodwill left. The whole purchase amount is reflected by asset positions on the balance sheet (including the newly identified licenses). Therefore NinMount paid not more than the fair value of the company and no goodwill asset is created.
Just think about it what would have happened if the licenses wouldn’t have existed. In that case NinMount would have paid 320 million for 50% of a company that’s only worth 580 million. This would have led to different results between full and partial goodwill:
* For the full goodwill method the goodwill would be: 640 million (“fair value”; 320 million x 2) - 580 million = 60 million. The noncontrolling interest would still be 320 million (50% x 640 million). The goodwill would be 60 million (as written before).
* For the partial goodwill method the goodwill would be: 320 million (purchase price) - 290 million (fair value of net assets) = 30 million . The NCI would be calculated as: 50% x 580 million (identifiable net assets / fair value of net assets) = 290 million.
To sum it up: The reason why there’s no difference between these two methods is due to the fact that the purchase price for 50% of the company is exactly 50% of the net asset fair value (==> goodwill = 0). If that wouldn’t have been the case (as it would be normally) the methods would have led to different results for equity and goodwill.
Hope that helps…

 

[Argbey]

thanks Alex, this certainly helps. For some reasons I kept thinking that the extra 60M paid is considered a goodwill but now you have certainly clarified this for me. Appreciated your help.

 

[dealdone]

Argbey thanks for the question & Alex thanks for a very clear explanation.
I had same doubt.