How do you calculate goodwill in a business combination under full and partial goodwill methods?
CFA Level II covers acquisition accounting and I keep getting confused by the goodwill calculation. IFRS allows two methods (full and partial), while GAAP only allows full goodwill. Can someone walk through both methods with the same example so I can see the difference?
Goodwill in a business combination represents the excess of what the acquirer pays (plus non-controlling interest) over the fair value of identifiable net assets. IFRS allows two methods; US GAAP requires full goodwill only.
Example Setup:
Vanguard Holdings acquires 80% of Summit Technologies. Key data:
- Purchase price for 80%: $16,000,000
- Fair value of Summit's identifiable net assets: $17,500,000
- Fair value of Summit as a whole (enterprise value): $20,000,000
- Book value of Summit's net assets: $14,000,000
Method 1 — Full Goodwill (US GAAP required, IFRS option):
Full goodwill measures NCI at fair value, attributing goodwill to both the parent and minority shareholders.
Fair value of NCI (20%) = 20% x $20,000,000 = $4,000,000
| Component | Amount |
|---|---|
| Purchase price (80%) | $16,000,000 |
| + Fair value of NCI (20%) | $4,000,000 |
| = Total consideration + NCI | $20,000,000 |
| - FV of identifiable net assets | $17,500,000 |
| = Full Goodwill | $2,500,000 |
On the consolidated balance sheet:
- Goodwill: $2,500,000
- Non-controlling interest: $4,000,000 (at fair value)
Method 2 — Partial Goodwill (IFRS option only):
Partial goodwill measures NCI at its proportionate share of identifiable net assets, so goodwill only reflects the parent's premium.
NCI at proportionate share = 20% x $17,500,000 = $3,500,000
| Component | Amount |
|---|---|
| Purchase price (80%) | $16,000,000 |
| + NCI at proportionate FV | $3,500,000 |
| = Total | $19,500,000 |
| - FV of identifiable net assets | $17,500,000 |
| = Partial Goodwill | $2,000,000 |
On the consolidated balance sheet:
- Goodwill: $2,000,000
- Non-controlling interest: $3,500,000 (at proportionate share of net assets)
Comparison:
| Item | Full Goodwill | Partial Goodwill |
|---|---|---|
| Goodwill | $2,500,000 | $2,000,000 |
| NCI on B/S | $4,000,000 | $3,500,000 |
| Total assets | Higher by $500K | Lower by $500K |
| Impairment exposure | Higher (more goodwill) | Lower |
Impairment Implications: Under full goodwill, impairment testing includes the NCI's share of goodwill, which can lead to larger write-downs. Under partial goodwill, only the parent's goodwill is tested.
Exam tip: Always check which method the question specifies. If it says US GAAP, use full goodwill. If IFRS, read carefully for which option is being used. The difference between the two methods equals the NCI's implied share of goodwill.
For more acquisition accounting practice, check our CFA Level II question bank.
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