How do I calculate goodwill in a business combination?

Question

AcadiFi · Accepted Answer

Under the acquisition method, goodwill equals consideration transferred plus the fair value of any noncontrolling interest plus the fair value of any previously held equity interest, minus the fair value of the identifiable net assets acquired. If the result is negative, the acquirer recognizes a bargain purchase gain instead of negative goodwill.

Example: Norfield Diagnostics acquires 80 percent of a target for $1,040,000 cash. The fair value of the remaining 20 percent noncontrolling interest is $250,000. The target's identifiable assets have fair value of $1,900,000 and liabilities have fair value of $780,000, so identifiable net assets equal $1,120,000. Goodwill is $1,040,000 + $250,000 - $1,120,000 = $170,000. If Norfield had already owned a 10 percent interest worth $110,000 at fair value, that amount would also be included in the numerator.

The exam trap is subtracting book value instead of fair value for the acquired net assets. Another common mistake is ignoring noncontrolling interest in a partial acquisition. FAR acquisition problems become much easier if you write the full goodwill formula first and then plug in the parts one by one. Practice more in our CPA FAR question bank.

How do I calculate goodwill in a business combination?

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