Corporate Accounting ACT305 Assignment: Full vs Partial Goodwill

This assignment solution addresses the concept of Non-Controlling Interest (NCI) in corporate accounting, specifically within the context of ACT305. It explains NCI as the equity in a subsidiary not attributable to the parent company, emphasizing its separate presentation in consolidated financial statements. The solution outlines two primary methods for calculating NCI: the Full Goodwill Method and the Partial Goodwill Method, providing a detailed example with hypothetical figures to illustrate each approach. It compares and contrasts these methods, highlighting the advantages of the Full Goodwill Method for better valuation and reporting, especially for listed companies. The assignment also references relevant IFRS standards and discusses the implications of choosing a particular method, particularly regarding goodwill and potential future impairments. The solution concludes by emphasizing the importance of the Full Goodwill method in reflecting the correct value of NCI for future transactions and accounting simplicity.

Running Head: Corporate Accounting 0
Corporate Accounting
(Student Name)

Corporate Accounting 1
Question 4
Non-Controlling Interest means the equity part in a subsidiary which is not attributable to the
parent and it is to be identified and presented separately in the consolidated financial
statements of the parent, within Equity Section but separately from parent’s own equity
(Casajus and Labrenz, 2017).
NCI is the contributor to the parent’s subsidiary and it cannot be termed as a liability. They
are entitled to all the profits/losses of the subsidiary but restricted up to their share in the
subsidiary.
George Ltd has invested in 60% shares of Orwell Ltd thereby making it it’s subsidiary, it is
bound to consolidate its accounts with its own financial statements.
There are broadly two methods for calculation of NCI :
1. Full Goodwill Method
2. Partial Goodwill Method
Full Goodwill Method is the method where Goodwill amount is also recorded in the share of
NCI.
Partial Goodwill Method is where we recognize goodwill but only the amount which is
associated with the controlling interest in the company.
For example, if the Fair Value or the Net Assets of Orwell is $2,000,000, George acquired
60% stake for $1,900,000 and the fair value of remaining 40% worth NCI is $9,00,000.
Under partial goodwill method NCI will be calculated based on the fair value of Orwell Ltd,
i.e. 40% of $2,000,000 i.e. $8,00,000. Net assets for George comes up to $2,000,000 -
$8,00,000 = $1,200,000 and George paid $1,900,000 so, goodwill comes up to $1,900,000 -
$1,200,000 = $7,00,000
Under Full goodwill method NCI will be calculated based on the fair value of NCI. Net
Assets then comes up to $2,000,000 - $9,00,000 = $1,100,000 and George paid $1,900,000 so
goodwill comes up to $1,900,000 - $1,100,000 = $8,00,000
Both the methods are accepted under IFRS, but for better valuation and reporting aspect, full
goodwill should be recognised rather than partial. And as the Orwell Limited is a listed
company its shares must be traded on stock markets and the fair value of its shares is easy to
fetch. So the NCI fair valuation can be done easily rather than the companies which are
private limited. In the years after acquisition there is not much effect with the choice of
method of goodwill, with full goodwill method the assets are larger in value and hence the
future impairments will be larger as well, but on the positive side as noticed by the trend that
George Ltd fully purchases all its subsidiaries it will soon purchase the NCI of Orwell Ltd
also in future and for that if the full goodwill method is used it will reflect the correct value of
NCI in its books included with the goodwill which will help George Ltd to value the NCI to
decide how much to pay for this share and the accounting aspect of recording this will
simplify (Li and Sloan, 2017).

Corporate Accounting 2
References
Casajus, A. and Labrenz, H. (2017) Recognition of Non-Controlling Interest in Consolidated
Financial Statements Based on Property Rights. Review of Law & Economics, 13(3).
Li, K.K. and Sloan, R.G. (2017) Has goodwill accounting gone bad?. Review of Accounting
Studies, 22(2), pp.964-1003.