Introduction
The partial goodwill method is commonly used due to its simpler approach in valuing non-controlling interest (NCI), particularly for private companies which values may not be readily determinable. However, when accounted for impairment under this method, it often is not done correctly, yet it is not inherently complicated.
When goodwill is proportionately calculated, it’s necessary to include ‘notional goodwill’ attributed to the NCI during impairment reviews. Any impairment losses are first allocated against both recognized and unrecognized goodwill. Losses written off against notional goodwill don’t impact consolidated financial statements or NCI, whereas losses related to parent’s share of goodwill do.
If impairment losses exceed the goodwill amounts, the excess is allocated to other assets on a pro-rata basis, shared between the parent and NCI, based on their ownership ratio.
Example of partial goodwill impairment
Consider an example where the NCI holds 33.3% ownership of the relevant entity acquired under the partial goodwill method, and this goodwill amounts to $100 prior to the impairment test. Net carrying value of assets amount to $3,500. In this example, it has been determined that the entity is correctly considered as one cash-generating unit (CGU), and the fair value less cost to sell and value in use are correctly determined at $3,450 and $3,470 respectively.
IAS 36 dictates that impairment loss should first reduce goodwill’s carrying amount, then other assets’ carrying amounts on a pro-rata basis. Assets should not be reduced below their measurable fair value less cost of disposal, value in use, or zero.
| Net carrying value of assets | 3,500 |
| Partial goodwill | 100 |
| Goodwill – grossed up (100 / 66.7%) | 150 |
| Recoverable amount (higher of Fair Value Less Costs to Sell and Value in Use) | 3,470 |
| Full carrying value of the CGU | 3,650 |
| Impairment on a full basis | 180 |
Initially, a full amount of partial goodwill is booked out ($100). Next, the notional amount of goodwill attributable to non-controlling interest is deducted, albeit has no impact on the books ($50). There is now only a remaining of $30 that needs to be allocated. In this case, if total impairment loss exceeds the combined recognized and notional goodwill, the excess is allocated to other assets pro-rata, with the loss shared between the parent and NCI as usual. Consequently, the following represents what occurs:
| Reduction of a booked partial goodwill, attributable to parent | 100 |
| Reduction of a booked partial goodwill, attributable to NCI | -50 |
| Allocation of the remainder of the impairment to individual non-current assets of the company on a pro rata basis | -30 |
| Equity: attributable to the group | -20 |
| Equity: attributable to the non-controlling interest | -10 |
Therefore the resulting booking of the impairment will look as follows:
| Debit | Credit | |
| Goodwill | 100 | |
| Non-current assets | 30 | |
| Group retained earnings | 120 | |
| Non-controlling interest | 10 |
Complexities in practice
Entities must track the NCI’s share of goodwill for each acquisition to apply this method correctly. The initial NCI percentage at acquisition is crucial, and changes in NCI percentage due to events like partial disposals don’t alter the goodwill amount or gross-up percentage. Tracking becomes more complex in scenarios like multiple CGUs, different NCI percentages across acquisitions, or disposal of CGU components with allocated goodwill.
Conclusion
The article shows how to calculate and account for impairment with the partial goodwill method, particularly when the impairment exceeds the goodwill and needs to be allocated to other non-current assets.