Goodwill is 'an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised' (IFRS 3 Appendix A). In simple terms, goodwill is measured as the difference between:

• the consideration paid plus any NCI, and
• the acquisition–date fair value of identifiable net assets acquired
  Thus, the measurement of NCI impacts on the calculation of goodwill. IFRS 3 gives entities the option, on an individual transaction basis, to measure NCIs at the fair value of their proportion of identifiable assets and liabilities (partial method), or at full fair value (full method).

EXAMPLE 

Missile acquires a subsidiary on 1 January 2008. The fair value of the identifiable net assets of the subsidiary was $2,170m. Missile acquired 70% of the shares of the subsidiary for $2.145m. The NCI was fair valued at $683m.

Requirement:
Compare the value of goodwill under the partial and full methods.

Solution
Goodwill based on the partial and full goodwill methods under IFRS 3 (Revised) would be:

1) Partial goodwill                 

                                                                                        $m
Purchase consideration                                             2,145
NCI (30% x 2,170)                                                        651
Fair value of identifiable net assets                         (2,170)
Goodwill                                                                       626

2) Full goodwill 

                                                                                        $m
Purchase consideration                                             2,145
NCI                                                                                 683
Total                                                                               2,828
Deduct: Fair value of identifiable net assets         (2,170)
Goodwill                                                                      658

It can be seen that goodwill is effectively adjusted for the change in the value of the NCI, which represents the goodwill attributable to the NCI of $32m ($658m – $626m). Choosing this method of accounting for NCI only makes a difference in an acquisition where less than 100% of the acquired business is purchased. The full goodwill method will increase reported net assets on the statement of financial position, which means that any future impairment of goodwill will be greater. Although measuring NCI at fair value may prove difficult, goodwill impairment testing is likely to be easier under full goodwill, as there is no need to gross-up goodwill for partially owned subsidiaries.

Fair valuing assets and liabilities

IFRS 3 (Revised) requires all of the identifiable assets and liabilities of the acquiree to be included in the consolidated statement of financial position. Most assets are recognised at fair value, with exceptions for certain items such as deferred tax and pension obligations. 

The International Accounting Standards Board provided additional clarity that has resulted in more intangible assets being recognised than previously. Acquirers are required to recognise brands, licences and customer relationships, and other intangible assets.
Contingent assets are not recognised, and contingent liabilities are measured at fair value. 

After the date of the business combination, contingent liabilities are re-measured at the higher of the original amount and the amount in accordance with the relevant standard.

The ability of an acquirer to recognise a liability for terminating or reducing the activities of the acquiree is severely restricted. A restructuring provision can be recognised in a business combination only when the acquiree has, at the acquisition date, an existing liability for which there are detailed conditions in IAS 37, but these conditions are unlikely to exist at the acquisition date in most business combinations.

An acquirer has a maximum period of 12 months from the date of acquisition to finalise the acquisition accounting. The adjustment period ends when the acquirer has gathered all the necessary information, subject to the 12-month maximum. There is no exemption from the 12-month rule for deferred tax assets or changes in the amount of contingent consideration. The revised standard will only allow adjustments against goodwill within this one-year period.

Where NCI is measured at fair value, the valuation methods used for determining that value require to be disclosed; and, in a step acquisition, disclosure is required of the fair value of any previously held equity interest in the acquiree, and the amount of gain or loss recognised in the statement of profit or loss resulting from re-measurement.