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Hello Mike
Hope you are well
I am really struggling with partial and proportionate method.
I understand the general idea that in this situation the nci is calculated as a their % multiply by NET ASSETS and this is then added to FV of consideration. Then we deduct NET ASSETS from this total to get goodwill.
However the problem for me comes when it comes to impairment.
Lets say we have recoverable amount for a subsidiary as 200 and (year-end Net assets plus goodwill before impairment) is 400
Then impairment should be 400 – 200 = 200
The double entry should be
Debit Retained earnings (parent only) 200
Credit Goodwill 200
Nothing to do with NCI
However what I don’t understand is why in exam answers they have sometimes grossed up goodwill to calculate impairment?
Also in another question I saw the solution suggesting 200 * parents share.
I thought we have to charge the whole 200 from Parent?
Can you please help
Hi,
If we value NCI using the fair value method then the goodwill consists of the parent’s and NCI’s share of the goodwill. Any impairment must therefore be allocated across both group retained earnings and the NCI.
If we value the NCI using the proportionate share of net assets method then the the goodwill is therefore the parent’s share only. Any impairment must therefore be allocated to the group retained earnings only.
In calculating the impairment in the subsidiary then the issue is that in calculating the carrying value of the subsidiary we take the net assets in full to which the goodwill needs to be added on. If the NCI is measured using the proportionate share of net assets method the goodwill is just the parent’s share and in order to add like to like we need to gross it up to get the total goodwill, i.e. the parent’s and NCI’s goodwill.
If the NCI is valued using the fair value method then we don’t need to concern ourselves with grossing up the goodwill as it already consists of the parent’s and NCI’s share of goodwill.
Hope this clears up any confusion.
Thanks
hello Mike
please see this question December 2011. Captives impairment is 76.25 however the suggested solution has deducted 80% of 76.25 from Captives goodwill rather than the full 76.25.
we did we multiply 80% of 76.25?
Hi,
Isn’t it because the goodwill is calculated using the proportionate share of net assets method. The impairment calculated is the impairment of the entire subsidiary and the goodwill calculated relates to our share of it only, so therefore we deduct our share of teh impairment,
Thanks
Hi Mike,
In the lecture on ‘Associate companies and Joint Ventures’ you start with the third way in which the examiner can ask to value the NCI where he can give the NCI’s share of goodwill and we then need to work backwards to calculate the value of the NCI’s investment.
In your example our cost was 200,000, fair value of subsidiary net assets was 220,000 and the NCI’s share of goodwill was 8,000.
I worked it out as:
8000/0.2= 40,000 (to get the total goodwill by grossing it up)
Then solving it mathematically (assuming NCI value as x and solving for it):
(200000+x) – 220000 = 40000
Therefore x = 60000.
But that’s not the correct answer. Where am I wrong?
Thanks a ton!
Its just an example that you give at the start of the video where you explain the third way of NCI calculation if goodwill figure is already given. Start watching the video from 03:35.
Thanks.
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