In this workout we're asked to calculate NCI using the fair value of net assets approach and the fair value of NCI approach So we'll have to compare the two methods together Let's read through the rest of the workout Etna bought 85% of the equity capital of Vesuvius for 27,300 Etna also intended to refinance the debt of Vesuvius as part of the deal The transaction was funded by 140 of balance sheet cash, a debt issuance with a value of 33,500 of debt and the remainder with new equity The PP&E of Vesuvius was valued at 18,500 and it was agreed that intangibles were worth 3,550 So what we've got in those two items there, we've got some changes to the fair value of items (so that's going to affect our goodwill) We've also got the fair value of NCI which is 4,100 We're asked to produce a sources and uses of funds table, a goodwill calculation and the consolidated balance sheet using the information below So we'll start with our sources and uses of funds and the first use of funds is to purchase the equity So the amount spent there was 27,300 given to us in the question But another use of funds was to refinance Vesuvius' debt So I need to sum up the debt items that they've currently got If we scroll down, we can see Vesuvius' balance sheet and they have both short term debt and they had long-term debt as well So the total of their uses of funds is 43,505.3 Great! Well I now need to go find a similar amount for my sources of funds The first one was cash and the amount of cash provided was 140 The amount of debt provided was 33,500, both of those from the question And equity issuance was the remainder, so I take my total uses and subtract out the amounts that I've had already The equity issuance 9,865 and I can see my total sources equals my total uses So that's our first requirement done I'm now going to calculate goodwill and I've got two calculations here I've got firstly a goodwill calculation using the fair value of net assets method And over to the right hand side, we've then got a goodwill calculation using the fair value of NCI method Let's do the first one So goodwill calculation starts with the purchase price 27,300 And we then to go find the equity on the balance sheet, on Vesuvius' balance sheet (we can find that on the bottom) 8801.5 But there are some fair value adjustments First of all we've got a step up of PP&E. PP&E in the question was given to us as 18,500 But we've already included some of that, so let's work out the difference For the PP&E that's been included in equity is 16,434. So basically it's gone up by 2,065.4 Let's look at the step up of brands. In the question that was given to us as 3,050 Where as in the balance sheet intangibles are worth 2,384.8 So it's gone up to 1,165.2 Lastly we need to step down Vesuvius' goodwill of 4,200 So equity at fair value on the balance sheet comes to 7,832.2 But that's not quite what was purchased, only 85% of that was purchased So let's multiply that by 85% and the fair value of equity purchased was 6,657.3 Great! Let's calculate the deal goodwill then, it's the purchase price minus the fair value of the equity purchased, giving me 20,642.7 So let's now consolidate the balance sheet just using that goodwill calculation first We'll then move onto the second calculation on the open right hand side a little bit later So I need to sum up Etna's figures, Vesuvius' figures and any consolidation effects and one of them there is goodwill So I'm going to fill in my combo column and you can see I've already started that I've summed to the left and here are my formulas Let's now start filling in the consolidation effects The first one is the target shareholders' equity, we need to zap that or get rid of it so I subtract of the common stock and the same for the retained earnings, that's now gone Next up, we have the financing We spent 140 of balance sheet cash and we had that noted in our sources and uses of funds We had an equity issuance of 9,865.3 and we had a long-term debt issuance as well, 33,500 But we also had the refinancing of Vesuvius' current debt, so their short term debt gone And their existing long-term debt, that needs to be subtracted off as well Last up then, goodwill! Goodwill, quite a few things happening here. We have an increase in the value of PP&E 2,065.4 An increase in the value of brands We needed to zero out or zap Vesuvius' existing goodwill But we then replaced it with brand new deal goodwill 20,642.7 The last thing we need is the NCI (my non-controlling interest) Now we haven't calculated that yet, so let's go back up and see if we can find that value by looking within our goodwill calculation Here we calculated the fair value of equity 100% and then we found the 85% purchased The remaining 15% must be owned by NCI. So I take the 100%, times it by 15% and I've got my NCI figure So we put that into our goodwill column (press equals). Go up to that NCI figure 1,174.8 and let's now see if our balance sheet balances Total assets of 114,712, total liabilities and equity the same Now that was when we were using our fair value of net assets method What I now want to do is do an alternative. I now want to use the fair value of NCI method So I'm going to clear out this column and we're going to fill in a second combo column here In order to do this we need a couple more figures. So if I scroll up, we're going to redo our goodwill calculation using a different method And for this I'm going to unfreeze my panes. Now the purchase price under our new method is exactly the same as in the previous In fact most of these figures are the same, equity on the balance sheet the same, step up in PP&E, brands, Vesuvius' goodwill and equity at fair value (100%) all the same However under the fair value of NCI method, what we could do, we could take purchase price minus the equity at fair value 100% to get goodwill Hang on, we didn't buy 100%! That would give me slightly too low goodwill You've given me a goodwill at the moment, just below 20,000 Ahh I forget the NCI, we didn't buy that. So actually we've paid more of a goodwill So I need to add in the value of NCI at fair value. That figure was 4,100 given to us in the question So my deal goodwill is now purchase price minus the equity at fair value 100% Then we say "oops sorry", that undervalues the goodwill. We need to add in the value of NCI Getting a new deal goodwill of 23,567.8 Let's put that into a brand new combo column Most of these figures are going to be the same as in the previous column apart from goodwill calculation and the NCI calculation Otherwise let's just say equals the previous column, so cash will be the same A large number of figures will be identical So I'm just going to copy down equals for the left hand column Subtotals will work as normal, so add upwards Equity is normal, adds upwards So now let's put in those two figures that we're missing We first of all need the goodwill. So I'm going to start off by taking Etna's plus Vesuvius' and then I say "oops, sorry I didn't meant to include that, we need to sub that out of course" So we subtract out the 4,200 again and we then add on the brand new deal goodwill that's been calculated And that came to 23,567.8 The only other figure missing is the NCI and we recalculated that further up the page My NCI at fair value came to 4,100 That gives me everything I need, let's check that my balance sheet balances Total assets are 117,637 and total liabilities and equity are the same The only differences we've had, have been the difference in the value of NCI and thus the difference in the value of goodwill