From this it can be seen that the carrying amount of the CGU is now $540, which is less than the recoverable amount ($550) of the CGU. This is because the recoverable amount takes into account the unrecognised goodwill of the NCI which would be $10 (goodwill of $200 – $150 impairment) x 20%).
The problem with this methodology is that goodwill (or what is subsumed within it) is a very complex item. If asked to describe goodwill, traditional aspects such as product reputation, skilled workforce, site location, market share, and so on, all spring to mind. These are perfectly valid, but in an acquisition, goodwill may contain other factors such as a premium to acquire control, and the value of synergies (cost savings or higher profits) when the subsidiary is integrated within the rest of the group. While non-controlling interests may legitimately lay claim to their share of the more traditional aspects of goodwill, they are unlikely to benefit from the other aspects, as they relate to the ability to control the subsidiary.
*Thus, it may not be appropriate to value non-controlling interests on the same basis (proportional to) as the controlling interests (see method (i) below).
IFRS 3 illustrates the calculation of consolidated goodwill at the date of acquisition as:
Consideration paid by parent + non-controlling interest – fair value of the subsidiary’s net identifiable assets = consolidated goodwill.
The non-controlling interest in the above formula may be valued at its fair value (method (i)) or its proportionate share of the subsidiary’s net identifiable assets (method (ii)).
Subsequent to acquisition the carrying amount of the non-controlling interest (under either method) will change in proportion it is share of the post acquisition profits or losses of the subsidiary. Consolidated goodwill (under either method) will remain the same unless impaired.
The standard recognises that there may be many ways of calculating the fair value of the non-controlling interest (method (i)), one of which may be to use the market price of the subsidiary’s shares prior to the acquisition (where this exists). In the DipIFR exam this is the most common method; an alternative would be to simply give the fair value of the non-controlling interests in the question.
EXAMPLE 3
This comprehensive example is an adaptation of Question 1 a previous Financial Reporting exam, and calculates goodwill based on the fair value of the non-controlling interests (method (i) above) by valuing the non-controlling interests using the subsidiary’s share price at the date of acquisition (see note (iv) of the question).
On 1 October 20X6, Plateau acquired the following non-current investments:
Three million equity shares in Savannah by an exchange of one share in Plateau for every two shares in Savannah, plus $1.25 per acquired Savannah share in cash. The market price of each Plateau share at the date of acquisition was $6, and the market price of each Savannah share at the date of acquisition was $3.25.
Thirty per cent of the equity shares of Axle at a cost of $7.50 per share in cash.
Only the cash consideration of the above investments has been recorded by Plateau. In addition, $500,000 of professional costs relating to the acquisition of Savannah are included in the cost of the investment.
The summarised draft statements of financial position of the three companies at 30 September 20X7 are:
