The 2 ways of NCI measurement explained

[@gshaouna3458]

This is such a great small and well explained video. Very exam relevant as well. Great stuff Tom 👏

[@tomclendonaccasbronlinelec7226]

Glad you liked it!

[@oliviacheekymonkey9682]

Thank you so much for all your videos and your dedication to teach! Your recordings helped me to pass SBR :) It was my second attempt and I know my technique to answer the questions improved dramatically after watching your videos 😊

[@tomclendonaccasbronlinelec7226]

That's great to know - well done. Onwards and upwards

[@graceli9671]

This is really useful, thank you Tom!

[@libertydhobhi2869]

Thanks Tom

[@Epic-1224]

But what is the logic behind not allocating goodwill on NCI when using the proportionate method?

[@tomclendonaccasbronlinelec7226]

the logic is that where NCI is measured as a pp of net assets then it is all attributable to the parent - there is no NCI interest in the goodwill

[@Epic-1224]

@@tomclendonaccasbronlinelec7226 but I don't understand why then when NCI is measured at fair value, the goodwill has to allocate to both CI and NCI. Why does the difference between fair value and pp method, causes the difference to the allocation of goodwill?

[@tomclendonaccasbronlinelec7226]

@@Epic-1224 Good Q
Let me just reiterate. It is true that when NCI is measured as a proportion of net assets that the goodwill arising is only attributable to the parent company. The significance of this means that the impairment loss on the goodwill will only reduce group retained earnings and none will be charged to the NCI.
Let me illustrate with numbers to prove the point.
Let’s take an 80% investment in a subsidiary that cost $200 and that NCI was measured as a proportion of the net assets which were $100.
The correct way to calculate goodwill is as follows.
$
Controlling interest 200
NCI as a pp of NA (20% x 100) 20
Less Net assets. (100)
Goodwill 120
However please consider the following.
The parent has paid $200 for the controlling interest. It has paid $200 for an 80% stake in the $100 net assets of the subsidiary. So the parent has paid $200 for a share of net assets of $80 (80% x $100). So we can compare what the parent paid ($200) with what the parent got ($80) we see that the difference is the goodwill of $120 that just belongs to the parent.
I give you this explanation to give you absolute certainty that when NCI is measured as a proportion of net assets, the goodwill is attributable to the parent only, and that is why when that goodwill is written off, all is charged against the parent and none against the NCI.
I urge you however, always to calculate goodwill the proper way to show the introduction of NCI.
When NCI is at FV goodwill is in full and the impairment loss will impact the NCI

[@Epic-1224]

@@tomclendonaccasbronlinelec7226 thank you. I think goodwill on NCI at propotionate is easy to grasp, but I never understand the share of goodwill on both parent and NCI when NCI is at fair value.
Goodwill by definition, is the reputation acquired by an entity in a business combination when paying in excess of its net assets. So technically it should belong all to the parent. So how does NCI ever have a share of reputation and how does measuring NCI at fair value contributes to a share of goodwill being recorded for NCI? What does the goodwill portion for NCI even represents?

[@MrPadkel]

@@Epic-1224 I suppose it is the balancing figure to get from market value of nci to share of net assets owned by nci.
That balancing figure + parent balancing figure = full goodwill

[@roxxymiller]

No proportion of impairment or goodwill on NCI using the proportionate method?!

[@tomclendonaccasbronlinelec7226]

That is right. When NCI is measured as a proportion of net assets then the goodwill is attributable to the parent only so no loss is charged against the NCI