## What is a Full Goodwill Method?

Under the full goodwill method, the goodwill that arises in the business combination is mainly calculated as the existing difference between the purchase consideration that is paid by the parent company (the one that is acquiring the other company), and the existing fair value of the non-controlling interest, as well as the fair value of the net identifiable assets (of the company that is being acquired).

Under the full goodwill method, both the parent, and the non-controlling interests are recognized.

Therefore, it incorporates all the different parts of the goodwill and then clubs them all together to be represented as the total and the final value of the goodwill.

Therefore, the formula for calculating goodwill using the full goodwill method is as follows:

Goodwill = fair value of the subsidiary (the company being acquired) – fair value of the subsidiary’s identifiable net assets

Speaking of the impact of using the full goodwill approach to calculate and record goodwill, it can be seen that in the balance sheet, the entire value of the goodwill (the goodwill of the acquired firm, and the goodwill of the subsidiary) is included.

It also gets a chance to report higher assets and equity. In terms of ROA and ROE, full goodwill methods report a lower ROA and ROE – because of the fact that the total assets increase in a higher proportion using this particular method.

The main idea and rationale behind the full goodwill method is the fact that it focuses on ensuring that all the fair value of assets (and liabilities) are included in the overall analysis, including the goodwill.

In theory, this is justified by the fact that companies look to include all the goodwill, because they tend to capitalize on all the resources that would now be clubbed, as a result of the acquisition.

## What is a Partial Goodwill Method?

As far as Partial Goodwill Method is concerned, it comprises of measuring assets and liabilities, but only recognize goodwill that is relevant to the controlling interest in the company.

The reason behind goodwill being included in a partial manner is mainly vested on the grounds of the fact that it makes sense to include only that proportion of the goodwill, that is being acquired, or that is relevant to the overall deal that is taking place.

Partial Goodwill is calculated using the following formula:

Goodwill = fair value of the subsidiary (the company being acquired) – fair value of ownership of the subsidiary’s identifiable net assets

As far as the overall impact of the partial goodwill method is concerned, it can be seen that the partial goodwill method includes only the identifiable ownership part of the goodwill, and therefore, it generally reports lower assets and equity relevant to the process.

In the same manner, it reports a subsequently higher ROE and ROA, because the value of total assets of the firm does not increase as much as it does in the case of the full goodwill method.

## Example – Full vs Partial Goodwill Method

The calculation and methodology involved in full vs partial goodwill method can be described using the following example:

*The fair value of Sub Inc. assets accumulated to be around $200,000. The price paid by Parent Co. for acquiring 70% of the shares was $180,000.*

__Calculation of Goodwill under the Full Goodwill Method__

In the case where Parent Co. used full goodwill method, it can be seen that the following methodology is going to be adopted.

Fair Value of assets = 200,000

Purchase Consideration = 180,000 / 70% * 100% = 257,143

Therefore, the goodwill under the full goodwill method is going to be calculated as the difference between the purchase consideration (the valuation of the company, depending on the price at which the respective share has been acquired), and the fair value of assets.

Hence, goodwill is calculated as:

Goodwill = 257143 – 200000 = 57,143.

__Calculation of Goodwill under the Partial Goodwill Method__

On the other hand, if Parent Co. uses partial goodwill method, they would then use the following methodology in order to calculate goodwill.

Fair Value of Assets = 200,000

Purchase Price (Price paid by Parent Co. to acquire 70% share) = 180,000

Fair Value of Assets corresponding to 70% share = 200,000 * 70% = 140,000

Goodwill = 180,000 – 140,000 = 40,000

Hence, it can be seen that there is a difference between the calculations of goodwill under both the methodologies, because of which the final goodwill answer also tends to be different.