Two methods of measuring NCI
Under IFRS3 Business Combinations there is an accounting policy choice as to how the NCI of a subsidiary is measured at the date of acquisition. The NCI can be measured either at fair value or as a proportion of net assets. When NCI is measured at fair value then the goodwill that arises is said to be a full goodwill, one that is attributable to both the parent and the NCI. However, when NCI is measured as a proportion of net assets it is said that goodwill is partial, and only attributable to the parent company.
Implications for goodwill
How NCI is measured at acquisition has subsequent accounting implications for the treatment of goodwill when it is retranslated or suffers an impairment loss. This is because if goodwill is only attributable to the parent then the foreign exchange differences and impairment losses will be wholly attributable to the parent. Whereas if goodwill is in full, then such gains and losses are split between the parent and the NCI in the normal proportion that they share profits and losses.
How can I understand why goodwill can be only attributable to the parent?
It is true that when NCI is measured as a proportion of net assets that the goodwill arising is only attributable to the parent and that the NCI is ignored. Let me illustrate with numbers to make sure that we all understand WHY this is the case.
Let’s take an 80% investment in a subsidiary that cost $200 and where NCI was measured as a proportion of the net assets which were $100.
The correct way to calculate goodwill is as follows.
|NCI (as a proportion of net assets)||(20% x 100)||20|
|Less Net assets||(100)|
|Goodwill attributable to the parent||120|
However please consider the following explanation of how that $120 goodwill has arisen.
The parent has paid $200 for the controlling interest in the subsidiary. It has paid $200 for an 80% stake in the $100 net assets of the subsidiary. The parent has therefore paid $200 and in return has only got a share of net assets of $80 (80% x $100). So, when we compare what the parent paid ($200) with what the parent has got in return ($80) we see that the premium, the goodwill that it has paid for, is $120. This goodwill of $120 ignores the existence of the NCI, and just concentrates on the parent’s perspective. This proves therefore that when NCI is measured at acquisition as a proportion of net assets the goodwill arising is just belongs to the parent and none is attributable to the NCI. (Read that again – read it out loud – it should make sense).
A final thought
You can now reflect that when NCI is measured as a proportion of net assets and so goodwill is attributable to the parent only, that this is horribly inconsistent with the way that we account and consolidate all the other assets of the subsidiary, because they are all cross-cast in full and have NCI attributable to them.
Tom Clendon FCCA is an online lecturer teaching ACCA SBR.