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I understand that we never impair the NCI if there is impairment of goodwill and NCI is calculated through proportionate method. however i do not understand the logic behind this. why do we do this and we is it that we impair NCI when it is calculated through fair value approach?
When valued on a proportionate basis, the nci is entitled only to their share of the subsidiary’s fair valued net assets. That is, they are not allocated any goodwill because the subsidiary will not have recorded any and it cannot be recognised by the subsidiary because it is internally generated. So, just their share of the fair valued recognised assets.
Now, if they are not allocated any goodwill, how can it be fair to charge them with a share of the impairment?
The above should be sufficient to answer the second part of your question!
Can you explain how goodwill is treated when it is valued on a fair value basis and how it is different from when it is valued on proportionate basis?
I certainly can …… but, before I start, may I ask if you have a) read the course notes (free on this site) and b) watched the video lectures?
Ok, what exactly do you mean “treated” as in “how goodwill is treated”
I could answer and say that it sits at the top of a Statement of Financial Position and is looked at annually to see if it’s impaired but I doubt that that will satisfy you soplease be more specific with your question
Thank you for that insight Biggles. Whereas we try to encourage participation on the site, this particular page is specifically targeted at the tutor – there’s a hint in the page title.
With that in mind, do you mind if I ask that you restrict your participation to the general forums in future
Thanks
When the question says that the nci is valued on proportionate basis, it means the nci is “entitled to / valued at their proportionate share of the fair valued subsidiary net assets at the date of acquisition and goodwill is not a part of those net assets”
So the nci bought their share of the business at cost?
And when the question says that nci is at fair value say at $100k, we don’t usually question this value as it is given to us but what does it include ?
Cara, despite being “out of order” Biggles actually did ask a pertinent question in the first post! What exactly do you mean by “How is goodwill treated?”
Oh sorry , i didn’t explain myself properly. I know goodwill is att. only to parent when nci is valued on proportionate basis n i wanted to know why. And how is it different from when it is valued at fair value
My mistake, sorry! I was still thinking that I should have said more to Biggles so I missed your post at 8.00!
No, the nci didn’t buy their shares at cost! The parent has bought a majority / controlling interest in shares from the former shareholders of the subsidiary. It is necessary for the parent to put a value on those shares that they were not able to buy and which are now classed as the non-controlling interest.
The directors of the parent have two choices available to them. Either they value them on a proportionate basis or on a full / fair value basis
If it’s proportionate, the directors are saying that they are only going to acknowledge a liability to the nci equal to the nci’s share of the fair valued identifiable net assets of the subsidiary and not credit the nci with any goodwill
If it’s full, fair value, then the directors acknowledge that these “other providers of finance” are entitled to more that just their share of the identifiable net assets so, in their assessment of the nci’s value, the directors include some of the intangible goodwill
In summary, on a proportionate basis, the nci is just share of identifiable fair valued subsidiary net assets whereas, on a full fair value basis, the nci is acknowledged as being valued at at a value that includes goodwill.
Is that ok?
Yes but aren’t they understating the nci thru the proportionate method? if so, isn’t that wrong in any way?
By “wrong ” i mean when calculating goodwill where nci is valued on proportionate basis, if we take “Cost of Investment + Nci” (where nci contains only a proportion of net assets of the subsidiary) then remove “Fv of NA of S + FV adjustments”, are we really following the matching concept?
The idea of including the nci in the “worth” of the subsidiary and the concept of calculating the extent to which the nci is financing the activities of the subsidiary / group is really being done to identify to the shareholders of the parent that there are “others” who are providing this finance.
But if the parent company’s directors have made a policy decision that that is how it shall be done, then ……. that’s how it shall be done.
The nci don’t lose out on the calculation – it’s not as though the parent is stealing from these outside shareholders. When the subsidiary pays a dividend, the nci will get their appropriate proportion and, if the company is put into liquidation, the nci will be entitled to their share of residual assets after all liabilities have been paid off.
What intrigues me more than your question is the situation where the directors decide that the nci on a full fair value basis should be valued at a minimal amount above their proportionate share. Say total goodwill is $50,000 of which the 30% nci is entitled to just $1,000.
Now, impair that goodwill by, say, $20,000. 70% ($14,000) is allocated to the parent and 30% ($6,000) to the nci. But their goodwill (value minus proportionate share) is only $1,000 yet they get “hit” with a $6,000 reduction in their calculated value
Again, they don’t lose out as such because, as above, they still get their proper dividend and their share of residual assets after liabilities have been settled. It just seems a strange situation to me
But that’s the way it is!
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