Revenue, leases, and combinations
The Combination Engine
Goodwill is a residual: consideration plus fair-value NCI over identifiable net assets, then sweep out every intercompany effect.
How the exam words it
- -The stem gives the consideration, the fair value of NCI, and the fair value of identifiable net assets and asks for goodwill.
- -It shows the combined fair value below identifiable net assets and asks about a bargain purchase gain.
- -It gives an intercompany sale with a gross profit rate and ending inventory and asks for the unrealized profit to defer.
- -It asks how to eliminate an intercompany note, or whether a party must consolidate a variable interest entity.
The playbook
- 1Compute goodwill as consideration transferred plus the fair value of NCI plus any prior interest, minus the fair value of identifiable net assets, using the full-goodwill method when NCI fair value is given.
- 2If that residual is negative after reassessment, record a bargain purchase gain in earnings rather than negative goodwill, and expense acquisition-related costs as incurred.
- 3Defer unrealized profit as the gross profit rate times the intercompany inventory still on hand, increasing cost of goods sold and reducing inventory.
- 4Eliminate intercompany balances against each other, and consolidate a VIE when the party has power over its key activities and exposure to its losses or benefits.
The trap
Pro-rating goodwill by ownership when NCI fair value is given, or capitalizing acquisition costs. ASC 805 requires the full-goodwill method and expenses those costs.
How the exam varies it
The same pattern, re-skinned along these axes:
Goodwill versus a bargain purchase gainThe acquisition-date measurement versus the intercompany eliminationsA voting-interest consolidation versus the VIE primary-beneficiary model
Drill this pattern
8 questions of The Combination Engine from across the AUD topics. Clear it by getting 5 right with a streak of 3.