Goodwill calculation can change when NCI occurs So when calculating goodwill and NCI is created, companies have the choice of two methods for valuing NCI Method 1 says that you can take the NCI percentage of identifiable net assets So for instance, let's say you bought 80% of a company, then that means the other 20% must be owned by NCI So to value the NCI, you'll take 20% of the company's identifiable net assets Now method 2 is quite different; here you need to find the fair value of NCI and this is found by the acquiring directors They may find that method 1 gives them a value that they think is way off, so instead they find a fair value of NCI Let's look at an example to compare the two methods So here, company A buys 80% of company B for 500 So clearly 20% is now owned by the NCI Company B's identifiable net assets is 400. The fair value of NCI is 90 So let's go through method 1 first, in this one we can ignore the fair value of NCI being 90 We start with the purchase price (500) and we ask, how far above the identifiable net asset value is that? Well the net assets initially have a value of 400 but remember we've only purchased 80% of them So 80% of the 400 is 320 If we've spent 500 on something that's meant to be worth 320, that gives us deal goodwill of 180 Now the net assets were 400 and 80% of them were going to the acquirer (that was the 320) The NCI value is the remaining 20%, so 400 times 20% gives 80 Method 2 is different but it starts off exactly the same as method 1 It starts with the purchase price of 500 You then subtract 80% of the net assets, being 320 giving you goodwill on the acquirer stake which is 180 That's the same as before although we did call it deal goodwill before. Now this is just goodwill on the acquirer stake What we need to do is now add on goodwill on the NCI stake Well we've got fair value of the NCI of 90 But that compares to the book value of NCI of 80 How did we get to that 80? Well you take the net assets of 400 times it by the 20% NCI stake, that gives you the 80 book value So if the fair value of NCI is 90, the book value is 80, that implies a goodwill on the NCI stake of 10 So now to get to final deal goodwill in method 2, you take the 180 goodwill on the acquirer stake, add on the 10 goodwill on the NCI stake to now get to your deal goodwill of 190 Now the only difference between method 1 and 2, is that final deal goodwill In method 1 it was 180, in method 2 it's 190 Why did it come about? Because we used the fair value of NCI of 90 instead of the book value of NCI, being 80