April 2023
Our man Tom Clendon shows how NCI and goodwill interact.
Question
Please could you clarify why when NCI is measured as a proportion of net assets that the goodwill arising is only attributable to the parent company. I know this is true, but I just don’t quite understand why.
Could you please explain?
Tom’s answer
Good question. Let me just reiterate. It is true that when NCI is measured as a proportion of net assets that the goodwill arising is only attributable to the parent company.
The significance of this means that the impairment loss on the goodwill will only reduce group retained earnings and none will be charge to the NCI. It also means when we are dealing with group exchange differences on the retranslation of such goodwill there will also be no impact for NCI.
Illustration
Let me illustrate with numbers to prove the point.
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:
| $ | |
| Controlling interest | 200 |
| NCI (as a proportion of net assets) (20% x 100) | 20 |
| Less Net assets | (100) |
| Goodwill | 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. So the parent has paid $200 and in return has only got a share of net assets of $80 (80% x $200). So, when comparing what the parent paid ($200) with what the parent got ($80) we see that the premium that it has paid is $120. This goodwill therefore just belongs to the parent (read that again – it should make sense).
In conclusion
I give you this explanation to give you absolute certainty that when NCI is measured as a proportion of net assets, the goodwill is attributable to the parents only.
It still remains the case that where NCI is measured at fair value then the goodwill arising will be in full and so any impairment loss or exchange difference will impact the NCI accordingly.
I urge you always to calculate goodwill the proper way to show the introduction of NCI however it is measured.
- Tom Clendon FCCA is an online lecturer teaching SBR. He loves WhatsApp and can be messaged on 07725 350793. See www.tomclendon.co.uk
