Essay Example on How Nature of Consideration Affects the Calculation of Goodwill

The nature of the consideration affects the calculation of goodwill during business combination. There are two methods of calculating goodwill, the full and the partial methods (Iasplus.com, 2017). The full method includes both the non-controlling interest and the acquired portion of the business (purchase consideration - Identifiable assets (fair value)) (Ramirez, 2017, p. 279). On the other hand, the partial goodwill method identifies the amount of goodwill of the controlling interest only (purchase consideration - Identifiable assets (fair value) less the non controlling interest) (Zemplinerova, 2013).A consideration can use different methods such as net assets method, net payment method, share exchange method and lump sum method. The various forms of considerations affect the calculation of goodwill. The effects in the calculation of the goodwill vary because of the valuation of the assets fair value and the purchase consideration determined (Joe Ben Hoyle, 2012). The recognition of the nets assets also differs from one method to the other, and the variation also affects the value of the goodwill calculated (Malthus, 2011).

Using the purchase consideration used by expander plc, the calculation of the goodwill will be affected by the value of the purchase consideration which would be the value of the cash amount plus the value of shares issued. The cost of the Target plc would vary depending on the shares issued depending on the profitability of Target plc as per the conditions highlighted during purchase. According to IFRS 3, contingent consideration affects the value of the goodwill because it is considered at the date of acquisition (Jeter and Chaney, 2011) (Picker, 2016). The three chances of the set conditions being met would affect the value of the goodwill of the acquisition. In the first event, if the profit of target plc does not meet the conditions, the value of the goodwill would be the lowest because the number of funds used to purchase the business would be the lowest. In the event Expander Plc pays one share for every one share acquired, the goodwill would be relatively higher than when no shares are issued at a later date. Finally, the goodwill would be highest if the company issues for two shares every share issued because of the high purchase consideration. The value of the goodwill for the three options would be as calculated as shown below for the three options.

When no Additional Shares are Issued at the End of Two Years

Partial Goodwill

Purchase consideration Cash as at 2017 $ 5,000.00 Cash payable in 2019 $ 1,100.00 Ordinary expander shares $ 4,900.00 $ 11,000.00

Less the net assets acquired Ordinary shares $ 400.00 Retained earning $ 1,460.00 $ 1,860.00

Non-controlling interest $ (558.00)

Controlling interest $ 1,302.00

Goodwill $ 9,698.00

Full Method Goodwill

Purchase consideration Cash as at 2017 $ 5,000.00 Cash payable at 2019 $ 1,100.00 Ordinary expander shares $ 4,900.00 Purchase value $ 11,000.00

Value of the company $ 15,714.29

less the net assets acquired ordinary shares $ 400.00 Retained earning $ 1,460.00 $ 1,860.00

Full goodwill $ 13,854.29

If Expander Plc Issues One Share for One Purchased Share

Partial Goodwill

Purchase consideration Cash as at 2017 $ 5,000.00 cash as payable at 2019 $ 1,100.00 Ordinary expander shares $ 4,900.00 Ordinary share issuable in 2019 $ 4,900.00 $ 15,900.00

less the net assets acquired ordinary shares $ 400.00 Retained earning $ 1,460.00 $ 1,860.00

Non-controlling interest $ (558.00)

Controlling interest $ 1,302.00

Partial goodwill $ 14,598.00

Full Goodwill Method

Purchase consideration Cash as at 2017 $ 5,000.00 Cash as payable at 2019 $ 1,100.00 Ordinary expander shares $ 4,900.00 Ordinary share issuable in 2019 $ 4,900.00 Purchase value $ 15,900.00

Value of the company $ 22,714.29

less the net assets acquired ordinary shares $ 400.00 Retained earning $ 1,460.00 $ 1,860.00

Full goodwill $ 20,854.29

If Expander Plc Issues Two for Each Share Bought

Partial Goodwill

Purchase consideration Cash as at 2017 $ 5,000.00 cash as payable at 2019 $ 1,100.00 Ordinary expander shares $ 4,900.00 Ordinary share issuable in 2019 $ 9,800.00 $ 20,800.00

less the net assets acquired ordinary shares $ 400.00 Retained earning $ 1,460.00 $ 1,860.00

Non-controlling interest $ (558.00)

Controlling interest $ 1,302.00

Partial goodwill $ 19,498.00

Full Goodwill Method

Purchase consideration Cash as at 2017 $ 5,000.00 Cash as payable at 2019 $ 1,100.00 Ordinary expander shares $ 4,900.00 Ordinary share issuable in 2019 $ 9,800.00 Purchase value $ 20,800.00

Value of the company $ 29,714.29

less the net assets acquired ordinary shares $ 400.00 Retained earning $ 1,460.00 $ 1,860.00

Full goodwill $ 27,854.29

As can be seen from the above, the goodwill of the purchase of Target Plc is affected by the contingent considerations. The different considerations affect the goodwill differently. The calculation of the goodwill would also consider the net assets as per the ordinary shares and the retained earnings because the fair value of the liabilities is not given. Goodwill can be calculated using one of the two methods above, full and partial goodwill methods.

Is Use of Full Goodwill as Preferred by IFRS 3 Business Combinations Mandatory?

Full goodwill method is the one preferred by the IFRS 3 (Cotter, 2012). It gives entities an option to report the total goodwill in a subsidiary. It means that the non-controlling interest is included in the goodwill of the parent books (Sandretto, 2012). The option of reporting full goodwill is not mandatory as per the IFRS 3, but it the one which is preferred (Krol, Nguyen and Shirai, 2017). Though the method is not mandatory as per the IFRS, in some countries like the US it is mandatory as per the GAAP (Generally Accepted Accounting Principles) (Dunn and Stewart, 2014). In the preparation of the statements of financial statements of the parent company, all assets except the goodwill are recognized in the books of account at their full value (Zulch, 2014). The non-controlling interest in the assets is later excluded but initially included in the value of the assets. The recognition of the goodwill is however relatively different because of its nature and the way it arises during a business combination. For example, in the acquisition of Target Plc, Expander Plc would recognize the assets bought at their values such as trade names and internet domain names at $ 5000 million. The assets would be in the books of Target Plc and during business combination, their value would be recognized at it is in the books of Expender plc. On the other hand, goodwill would not appear in books of Target Plc, and hence the room for the acquirer to choose on the best method to use in recognizing the goodwill as per the IFRS 3. IFRS 3 leaves it open as it was in the previous version before it was revised, but it makes the use of the full goodwill method the recommended one. The countries which have made it mandatory such as US base the reason behind the recognition of other assets from a subsidiary in full. However, because it is not compulsory for all accountants in the world to use the full goodwill method as per IFRS 3, those who use the partial method base their reason behind the fact that goodwill is an exceptional asset that arises during combination. It is also the one identified in the most reasonable to use because of the purchase consideration factor do not involve the non-controlling interest.

The Effect of selecting the full goodwill method rather than the proportion of net asset method

The use of full goodwill method over partial goodwill method leads to recognition of the higher value of goodwill (Mehta et al., 2013). For example, in the case of Expander Plc in the option where the company would issue two shares for each share acquired, the full goodwill was $ 27854 million while the partial was $ 19,498 million. The two methods show the full method was higher by $ 8,356 million. In comparing the results with the case of no shares issued at the end of the two years, the full goodwill method had a value of $ 13,854.29 while the partial goodwill method had a value of $ 9,698. In this case, the full goodwill method had a higher value exceeding the partial one by $ 4,156.29. The difference in the two scenarios shows that the full goodwill, when selected, leads to higher value of assets as well as the goodwill itself. It also means that in the impairment of the goodwill, the value is higher than when the partial goodwill method is used (Van Mourik and Walton, 2013) (Ltd, 2017). The use of the full goodwill method affects the value of the non-controlling interest recognized in the financial statements of Expander Plc (Lawrence and Klimberg, 2010) (Malthus, 2011). The amount of the non-controlling interest is higher than the one recognized in a financial statement prepared using the partial goodwill method (Burton and Jermakowicz, 2015). The full goodwill recognition on top of leading to the higher amount of reported goodwill also makes the amount the reporting of goodwill match the accounting for other assets. It is because all assets acquired by the parent company in the acquisition of the subsidiary are reported at their values but not the controlling interest alone. The full goodwill shows that total goodwill that was payable for acquisition of a subsidiary which is relatively reasonable for other investors in evaluating a business combination. A group financial statement prepared using the full goodwill method is easily comparable to other businesses because the goodwill does not only represent the proportion owned by the parent which may vary from one parent company to the other. It means the full goodwill method enhances the comparability of the financial statements of the company.

The Most Appropriate Accounting Policy to Adopt in Measuring Non-Controlling Interest at Acquisition

Non-controlling interest is the proportion of a subsidiary company that the acquirer did not purchase. Just like the goodwill recognition, there are two methods identified by IFRS 3, business combinations (Jeter and Chaney, 2011) (Kalashyan, 2017). During business combination, a company should decide on the method they will use the two ways. In the case of expander plc, it is advisable for the board of directors to choose to use the full method of recognizing the noncontrolling interest. The method should go hand in hand with the method picked in recognition of the goodwill. The full method is the most appropriate because it gives the company an overview of the assets and liabilities of the company and the portion that belongs to other shareholders (Weetman, 2016). The method matches with other recommended ways of accounting for assets (Spasic, 2012) (Hitchner, Hyden and Mard, 2013). For example, in the recognition of the assets, the total values of the assets in the subsidiary are recognized. It is reasonable for the board of Expanders Plc to match the other rules of business combination in reporting assets and liabilities. The method would make it possible for the board to make comparisons with other business in the analysis without making further adjustments. The noncontrolling interest would also benefit because they would quickly identify their position in the whole group in the financial statements. It would also be easier for the non-accountants to understand the non-controlling interest account because of it is relatively straightforward....