Brief Definition
The partial goodwill method is an accounting approach used in business combinations, specifically for recognizing goodwill. Under this method, only the portion of goodwill that is attributable to the acquirer is recognized, based on the acquirer’s ownership interest in the acquiree.
Further Explanation
The partial goodwill method is an accounting approach used in business combinations, specifically for recognizing goodwill. Under this method, only the portion of goodwill that is attributable to the acquirer is recognized, based on the acquirer’s ownership interest in the acquiree. This method contrasts with the full goodwill method, where the total goodwill is recognized, including both the acquirer’s and non-controlling interests’ shares.
Example:
Company A acquires 80 per cent of the shares of Company B for US$8 million. the fair value of Company B’s identifiable net assets is US$9 million. Under the partial goodwill method, goodwill is the excess of the purchase price over the acquirer’s share of the fair value of the net assets.
Acquirer’s share of net assets: 80% of $9.0 million = $7.2 million.
Goodwill: purchase price ($8.0 million) – acquirer’s share of net assets ($7.2 million) = $0.8 million.
Company A recognises goodwill of $0.8 million on its balance sheet.