When acquiring a company with less than 100% ownership interest, you have two choices under IFRS that affect your balance sheet, key figures, and future equity transactions.
Full goodwill or partial goodwill method?
Learn about the advantages and disadvantages of both approaches, how they are reflected in the IFRS consolidated financial statements, and which method suits your situation best.
What does goodwill mean?
Goodwill is the difference between the purchase price and the fair value of the net assets acquired. It represents synergies, brand strength, or other intangible benefits that cannot be individually identified. According to IFRS, there is no systematic depreciation for this; instead, you are required to conduct the impairment test annually to verify whether the book value is still justified.
How is goodwill generated?
Let's take a brief look at the two traditional ways to acquire a company.
In an asset deal, you purchase individual assets and liabilities – such as machinery, inventories, or trademark rights. All items acquired are immediately recorded in your individual financial statements at their fair value. If the purchase price exceeds the net assets, the difference is immediately recognized as goodwill and is visible to everyone from day one.
If, on the other hand, you opt for a share deal, you acquire shares in the target company. In the financial statements, you only recognize the book value of the investment; any potential goodwill is still hidden and remains invisible to external analysts. It is only later, when you prepare the consolidated financial statements and offset the book value of the investment against the fair value of the subsidiary's net assets, that the difference appears as goodwill.
IFRS requires you to fully consolidate all assets and liabilities of a controlled subsidiary, even if you have acquired only 70% of the shares. The remaining 30% are reported as non-controlling interests (NCIs). Now the crucial question is: Do you measure these NCIs with or without the proportionate share of goodwill?
Valuation of non-controlling interests
IFRS gives you a choice here, and that choice determines the amount of your goodwill and your balance sheet total.
Option 1: Partial goodwill method
You evaluate the nbA only at their proportionate share of net assets. Goodwill is attributed exclusively to the parent company; none is attributed to the minority. In our 70% example, the existing shareholders would therefore only contribute their 30% share of assets and liabilities – without any markup for synergies or control premiums.
Option 2: Full goodwill method
The contribution in kind of the NCIs is valued based on the proportionate total company value. Since this total value is almost always higher than the net assets alone, additional goodwill is generated on a proportional basis. The 30% minority therefore not only contributes assets and liabilities, but also its share of the synergies expected in the future.
Which approach is right for your situation?
Learn more in our white paper “Full goodwill method vs. partial goodwill method – Capital financial consolidation under the US GAAP, IFRS, and HGB”. You will find:
- A step-by-step calculation example for a 70% acquisition – considering what happens if you later increase it to 100%.
- A direct comparison of the key figures: goodwill, balance sheet total, profit metrics, and more.
- The practical implications of both approaches – ranging from equity impacts to impairment tests and covenants.
