Full Goodwill Method vs Partial Goodwill Method
Goodwill is an intangible asset that the company obtains when purchasing another company. Goodwill is considered to have an indefinite life so it is not amortized. Full goodwill and partial goodwill methods are the methods that the company can use to calculate the goodwill amount.
Usually, when a company purchases another company as its subsidiary, the purchase price of the subsidiary is usually higher than the fair value of the identifiable net assets of the subsidiary, and different amount between the two is recognized as goodwill.
Goodwill can be determined and recorded by using full goodwill method or partial goodwill method, depending on which acceptable accounting standard the company is using. For instance, IFRS gives option the company to use either one while US GAAP allows only full goodwill method.
Formula Full vs Partial Goodwill Method
Full goodwill method formula:
Goodwill = fair value of subsidiary – fair value of the subsidiary’s identifiable net assets
Partial goodwill method formula:
Goodwill = fair value of subsidiary – fair value of ownership of the subsidiary’s identifiable net assets
Example Full vs Partial Goodwill Method
For example, the fair value of ABC’s net assets is $300 million and we pay $ 260 million to acquire 80% of the company ABC.
How much goodwill is recorded in the balance sheet using 1) full goodwill method and 2) partial goodwill method?
Under full goodwill method
Fair value of ABC = $260 million x 100% ÷ 80% = $325 million
Fair value of ABC’s identifiable net assets = $300 million
Goodwill = $325 million – $300 million = $25 million
So, we will record $25 million as the goodwill on the balance sheet under the full goodwill method.
Under the partial goodwill method
Purchase price of ABC = $260 million
Fair value of ownership of subsidiary’s identifiable net assets = $300 million x 80% = $240 million
Goodwill = $260 million – $240 million = $20 million
So, we will record $20 million as the goodwill on the balance sheet under the partial goodwill method.
It is useful to note that the total goodwill is $25 million in both methods, the difference is how we record it on the balance sheet. Under full goodwill method, all amount of goodwill which is $25 million is recorded on the balance sheet while under partial goodwill method, only our ownership part of goodwill which is $20 million ($25 million x 80%) is recorded on the balance sheet.
Below is the summary of the difference between full goodwill method and partial goodwill method:
| Full goodwill method | Partial goodwill method | |
|---|---|---|
| Accounting standards | Allowed under both US GAAP and IFRS (optional) | Allowed under IFRS, but not allowed under US GAAP |
| Recording on balance sheet | All goodwill of subsidiary | Only ownership part of goodwill |
| Assets and equity | Higher assets and equity | Lower assets and equity |
| ROA and ROE | Lower ROA and ROE | Higher ROA and ROE |