IFRS 3 (Revised)- Groups of Entities (D-2.1)

How to calculate goodwill

Goodwill is the excess of a company's purchase price over its net assets' fair value. It can be calculated using two methods:  

1. Proportionate Method:

• Calculates goodwill attributable only to the parent company.
• Formula: Goodwill = (Consideration Given - Parent's Share of Net Assets Acquired)

2. Gross or Full Goodwill Method:

• Calculates goodwill for the entire subsidiary, including the parent's and non-controlling interest  
• Formula: Goodwill = (Consideration Given + Fair Value of Non-Controlling Interest - Fair Value of Net Assets Acquired)

Calculations:

Given:

• Parent's Consideration: $500
• Parent's Share: 80%
• Fair Value of Net Assets: $400
• Fair Value of NCI: $100

(1) Goodwill (Proportionate Method):

$$\text{Goodwill} = 500 - (80\% \times 400) = 500 - 320 = 180$$

(2) Gross (Full) Goodwill Method):

$$\text{Goodwill}=(500+100)-400=600-400=200$$

Results:

1. Proportionate Goodwill: $180
2. Full Goodwill: $200

Goodwill and Bargain Purchase:

1. Goodwill Attribution:

   • Gross Goodwill: Includes goodwill for both the parent and the NCI.
   • Goodwill Breakdown: The NCI’s share of goodwill is calculated as the difference between gross goodwill and the parent’s share of goodwill.
   • Example: If gross goodwill is $200 and the parent’s goodwill is $180, the NCI’s goodwill is $20.

2. Accounting for Goodwill:

   • Positive goodwill is considered an acquisition premium.
   • It is recognized as an intangible asset in the group's financial statements and subjected to annual impairment reviews.

3. Negative Goodwill (Bargain Purchase):

   • Occurs when the purchase consideration is less than the fair value of net assets acquired.
   • Treated as a profit and immediately recognized in the income statement.

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