Contemporary Financial Accounting: Partial and Full Goodwill Methods

This article discusses the Partial and Full Goodwill Methods in Contemporary Financial Accounting. It explains the advantages and disadvantages of each method and provides insights into the computation of Goodwill. The article also includes a consolidated income statement and acquisition analysis. Course code, course name, and college/university are not mentioned.

Running head: CONTEMPORARY FINANCIAL ACCOUNTING
Contemporary Financial Accounting
Name of the Student:
Name of the University
Author’s Note

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CONTEMPORARY FINANCIAL ACCOUNTING
Table of Contents
Requirement a:.................................................................................................................................2
Requirement b:.................................................................................................................................2
Requirement c:.................................................................................................................................7
Partial Goodwill Method.............................................................................................................7
Full Goodwill Method.................................................................................................................8
Reference.......................................................................................................................................10

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CONTEMPORARY FINANCIAL ACCOUNTING
Requirement a:
Dr. Cr.
Date Amount Amount
a.i Share Capital 180
General Reserve 270
Retained Earnings 135
Goodwill 153
Business Combination
Valuation Reserve 126
Invetsments 864
a.ii Cash 117
Dividend Revenue 117
a.iii Cash 135
Interim Dividend Revenue 135
Particulars
Requirement b:
Particulars Amount Amount
Consideration Transferred 864
Less:
Share Capital 200
General Reserve 300
Reatined Earnings 150
Land 140
Net Fair Value of Identifable Assets
& Liabilities -790
Add: Non-Controlling Interest @10% 79
Goodwill 153
Acqusition Analysis:

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CONTEMPORARY FINANCIAL ACCOUNTING
Dr. Cr.
Date Amount Amount
b.i Property,Plant & Equipment 200
Business Combination Valuation
Reserve 140
Deferred Tax Liability 60
b.ii Share Capital 20
General Reserve 30
Retained Earnings 15
Business Combination
Valuation Reserve 14
Non-Controlling Interest 79
b.iii Loss on Impairment- Goodwill 10
Accum. Impairment Loss-Goodwill 10
b.iv Sales 350
Cost of Goods Sold 275
Inventory 75
b.v Deferred Tax Assets 22.5
Income Tax Expense 22.5
b.vi Non-Controlling Interest 5.25
NCI Share of Profit 5.25
b.vii Retained Earnings (1/1/x8) 49
Income Tax Expenses 21
Cost of Goods Sold 70
b.viii NCI Share of Profit 4.9
Retained Earnings (1/1/x8) 4.9
b.ix Sales 500
Cost of Goods Sold 500
b.x Dividend Revenue 135
NCI 15
Interim Dividend Paid 150
Particulars

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CONTEMPORARY FINANCIAL ACCOUNTING
Particulars ABC Ltd. XYZ Ltd. Debit Credit Group Debit Credit Parent
Sales 5000 2000 850 6150 6150
Cost of Sales 2570 1025 845 2750 2750
Gross Profit 2430 975 3400 3400
Dividend Revenue 252 0 135 117 117
2682 975 3517 3517
Expenses 2057 300 10 2367 2367
Operating Profit before tax 625 675 1150 1150
Income Tax Expenses 280 260 21 22.5 538.5 538.5
Operating Profit after Tax 345 415 611.5 4.9 5.25 611.85
Retained Earnings (1/1/X8) 294 200 184 310 15 4.9 299.9
Interim Dividend paid -100 -150 -135 -115 -15 -100
Final Dividend Declared -160 -200 -360 -360
Retained Earnings (31/12/x8) 379 265 446.5 451.75
Share Capital 1200 200 180 1220 20 1200
General Reserve 300 270 30 30 0
BCVR 126 140 14 14 0
NCI 0 20.25 79 58.75
Total Equity 1579 765 1710.5 1710.5
Liabilities:
Trade & Other Payables 60 180 240 240
Provision for Final Dividend 160 200 360 360
Deferred Tax Liabilities 60 60 60
Total Liabilities 220 380 660 660
Total Liabilities & Equity 1799 1145 2370.5 2370.5
Assets:
Other Current Assets 385 395 75 705 705
Deferred Tax Assets 22.5 22.5 22.5
Property, Plant & equipment 550 750 200 1500 1500
Investment 864 864 0 0
Goodwill 153 153 153
Accum. Impairment Loss-Goodwill -10 -10 -10
Total Assets 1799 1145 2370.5 2370.5
Adjustment NCI

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CONTEMPORARY FINANCIAL ACCOUNTING
Particulars Group Parent
Sales 6150 6150
Cost of Sales 2750 2750
Gross Profit 3400 3400
Dividend Revenue 117 117
TOTAL REVENUE 3517 3517
Expenses 2367 2367
Operating Profit before tax 1150 1150
Income Tax Expenses 538.5 538.5
Operating Profit after Tax 611.5 611.5
Less: Non-Controlling Interest -0.35
Net Profit attributable to Share holders 611.5 611.85
In the books of ABC Ltd.
Consolidated Income Statement
for the period ended 31/12/X8

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CONTEMPORARY FINANCIAL ACCOUNTING
Particulars Group Parent
ASSETS:
Current Assets:
Other Current Assets 705 705
Deferred Tax Assets 22.5 22.5
Total Current Assets 727.5 727.5
Non-Current Assets:
Property, Plant & Equipment 1500 1500
Goodwill 153 153
Accum.Impairment Loss -10 -10
Total Non-Current Assets 1643 1643
TOTAL ASSETS 2370.5 2370.5
LIABILITIES:
Current Liabilities:
Trade & Other Payables 240 240
Provision for Final Dividend 360 360
Deferred Tax Liabilities 60 60
Total Current Liabilities 660 660
Non-Current Liabilities 0 0
TOTAL LIABILITIES 660 660
NET ASSETS 1710.5 1710.5
EQUITY:
Share Capital 1220 1200
General Reserve 30 0
Retained Earnings 446.5 451.75
BCVR 14
NCI 0 58.75
TOTAL EQUITY 1710.5 1710.5
In the books of ABC Ltd.
Consolidated Income Statement
for the period ended 31/12/X8

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CONTEMPORARY FINANCIAL ACCOUNTING
Requirement c:
Partial Goodwill Method
In the case of Partial Goodwill method, the computation of Goodwill is done by considering the
difference between the purchase consideration which the business has to bear and the share of
fair value of net identifiable assets which is acquired. The partial goodwill method is allowable
only in the case of IFRS framework of accounting and the same is not applicable in the case of
the US GAAP Framework (Baboukardos & Rimmel, 2014). The method also differs from Full
goodwill method when the investments undertaken by the acquirer is less than 100%. The
method considers all assets and liabilities while measuring the goodwill of the business.
Moreover, the share of goodwill which the acquirer has is recognized as part of Goodwill which
is calculated.
The advantages which are associated with the application of partial goodwill method are
discussed below:
1. The method effectively recognizes the controlling interest which is associated with the
computation or measurement of Goodwill.
2. The method has simplicity and is also approved by the IFRS Framework to be effective
in computation of Goodwill for the business.
The disadvantages which are associated with the Partial Goodwill method are shown below:
1. The method does not consider the non-controlling interest in the computation of
Goodwill of the business.

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CONTEMPORARY FINANCIAL ACCOUNTING
2. The method cannot be applied in companies which follow US GAAP framework of
accounting and therefore, it can be said that the method cannot be universally be applied.
Full Goodwill Method
The computation of Goodwill in case of Full Goodwill method considers both the
controlling and non-controlling interest of the business and is basically the difference between
the total fair value of the targeted company and the fair value of the acquirer company’s net
identifiable assets. As per the US GAAP framework, a business should mandatorily apply the
method for the purpose of measuring of goodwill of a business. In addition to this, the IFRS
Framework also allows the application of Full Goodwill method in measuring goodwill of a
business (Tsalavoutas, André & Dionysiou, 2014). Therefore, it can be said that the method is
universally applicable in all business which is the basic advantage of using this method. The
business which uses this method can consider the entire assets and liabilities of the business as
well as the controlling and non-controlling interest of the business for measuring the Goodwill of
the company.
The advantages which is related to the application of Full Goodwill method are explained
below in details:
1. The basic advantage of using this method is that it considers both the controlling interest
and non-controlling interest of the company while measuring goodwill of a business.
2. The method is universally applicable as it is approved by both IFRS Framework and US
GAAP framework for the purpose of measuring the Goodwill of the business.
The disadvantages which are associated with the application of Full Goodwill method are
stated below in details:

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CONTEMPORARY FINANCIAL ACCOUNTING
1. The method is a bit complex as it involves a lot of elements in the effective measurement
of Goodwill.
2. The method is also susceptible to manipulations which can affect the financial statements
of the business and affect the true and fair view principle of the annual report.

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CONTEMPORARY FINANCIAL ACCOUNTING
Reference
Baboukardos, D., & Rimmel, G. (2014, March). Goodwill under IFRS: Relevance and
disclosures in an unfavorable environment. In Accounting Forum (Vol. 38, No. 1, pp. 1-17).
Elsevier.
Tsalavoutas, I., André, P., & Dionysiou, D. (2014). Worldwide application of IFRS 3, IAS 38
and IAS 36, related disclosures, and determinants of non-compliance.