Traveler 12/11 and johan 12/08

Hi Karen

Under the partial goodwill method (as distinct from the full fair value method, the examiner includes in the goodwill calculation a notional amount attributable to the nci, but not credited to the nci (hence, it’s notional) In this case it’s one quarter of the cost to Traveller because the nci has 20% and Traveller has 80%

We then compute the fair value of the subsidiary net assets at date of acquisition, deduct from this cost figure and arrive at the goodwill value

When we deduct the revised value of the goodwill at the year end, the figure is given as $700, that leaves us with a total impairment of 76.25. But we only own 80% so only 80% of the figure of notional impairment is charged to us ie 80% x 76.25 = 61

The nci isn’t charged with any impairment because …. we never credited the nci with any goodwill. So their involvement in the goodwill calculation and in the impairment calculation is notional only

Johan, you quote “it may be disposed without disposing of the business at the same time” I think we need to put some emphasis on “may” that is it could be disposed of separately but equally it could mean that if we dispose of it, we are selling the business.

When Rolls Royce was bought out by the German car company (was it BMW?) they failed to specify that they were buying the unrecognised assets at the same time as buying the recognised ones. So, after the deal had gone through, the liquidator of Rolls Royce then advertised the unrecognised asset of the brand name (or the goodwill – I can’t now remember!)

“in the case study it states Johan cannot sell the licence- hence does it mean that it is not identifiable?” No, it clearly IS identifiable – it just is not able to be sold separately. Some intangibles are attached to the business and others aren’t. The licence in Johan is attached to the company in that the company cannot operate without it and nor can the company sell it.

“it can also generate economic benefits as the licence can help to generate income from consumers who needs a tv licence” – hmmm, I don’t think we’re talking televisions here, but that’s beside the point. On the purchase of the licence Johan expected growth in its subscriber base (“Johan expects its subscriber base to grow over the period of the licence but is disappointed with its market share for the year to 30 November 2008”) so, yes, Johan is looking for an increase in revenues as a result of expanding its network as a result of buying the licence

I think that answers all your points but, as usual, if you have further questions, do post!

In Johan, it IS separate – it’s a licence acquired separately

Where we have the partial goodwill method, we work out total goodwill by putting a value on the nci even though we are not going to include any of the resulting goodwill in the value of the nci investment.

Do you see, in Traveller, that the notional value of the nci is their proportionate value as compared with the Traveller cost in Captive? (NOT their proportionate value of the fair valued net assets!)

We do this in order to arrive at a “proper” goodwill figure. Traveller’s investment plus the notional value of the nci compared with the fair value of Captive’s net assets gives us a goodwill figure on a “full” basis. IF we were to allocate that goodwill proportionately, the nci would be credited with their 20%. But we’re not!

We are then told that goodwill should be valued at $700 and that gives rise to an impairment of $76.25

IF the nci had been valued on a full, fair value basis, they would have been credited with an element of that $776.25 overall total goodwill. But we didn’t do that. No goodwill was attributed to the nci because they are being valued on a partial goodwill basis.

Well, if they don’t have any goodwill, how can we charge them with any of the goodwill impairment? So, of the $76.25 impairment, IF the nci had had any goodwill attributed to them, they would now have been charged with their 20% share of the impairment and 80% would have been written off the group’s retained earnings

But they didn’t, so their value is unaffected. But we arrived at the goodwill figure by including a notional value for the nci so, when dealing with the impairment of the goodwill, we should notionally allocate the impairment in the proportion of the shareholdings ie 80% to the parent Traveller and a notional 20% to the nci.

(By notional is meant “pretend” or “imagined” ie not really, but we pretend that it is!)

Is that any better?

Good. 🙂