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Hello sir,
the following formula, is not clear why the NCI added back, also despite the goodwill is a part of the net assets, it has been deducted from the sales proceeds ?
have not the buyer paid for the goodwill?When a company values non-controlling interests at fair value, the formula for calculating the gain or loss on disposal of a subsidiary is shown below.
Sale proceeds
XLess: Carrying amount of goodwill at date of disposal
(X)Less: Net assets at date of disposal
(X)Add back: Non-controlling interest at date of disposal
XGain/loss on disposal
I’m sure the tutor will pick me up on this for being incorrect, but this is the only way I can get my head around it. What I do, is rearrange the formula in my head, by putting the NCI at the top, along with the proceeds figure.
Let’s say a company owns 80% of a subsidiary, and disposes of 50%. The proceeds represent the 50% disposed of, then you also include the fv of the 30% retained. The NCI represents the other 20%, to give 100% effective fv.
The net assets plus goodwill represent 100% of the carrying value of the disposal.
Group proceeds (i.e. everything in the paragraph above) minus carrying value equals group gain/loss.
I hope that makes sense, even if it’s rubbish!
Hi,
When we are disposing of a subsidiary we are looking at what the entire subsidiary is worth as the entire subsidiary is sold (think substance). We don’t therfore just look at the sales proceeds we’ve received as that only relates to our share of the subsidiary. We therefore need to add on the value of the NCI to get the full value of the subsidiary at disposal.
We then deduct the goodwill as in disposing of the subsidiary, we haven[‘t just sold th net assets but also the goodwill, hence it needs to be deducted too to work out the group profit or loss on disposal.
Thanks
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