The partial goodwill method is a method of accounting for business combinations, specifically for situations in which the acquirer is unable to accurately determine the fair value of all of the assets and liabilities of the acquired company. Under the partial goodwill method, the acquirer recognizes a portion of the excess purchase price (the difference between the acquisition cost and the fair value of the identifiable assets and liabilities) as goodwill, and the remainder as a bargain purchase gain.
The partial goodwill method is used when the acquirer is unable to accurately determine the fair value of certain assets or liabilities of the acquired company, such as intangible assets that are not yet fully developed or liabilities that are not yet fully incurred. In these cases, the acquirer must use estimates or assumptions to determine the fair value of the assets and liabilities, which can introduce uncertainty into the valuation process.
Here is an example of how the partial goodwill method would be applied:
Suppose Company A acquires Company B for a total cost of $10 million. The fair value of Company B’s identifiable assets is determined to be $6 million, and the fair value of its liabilities is determined to be $2 million. The excess purchase price in this case is $2 million ($10 million – $6 million – $2 million), and the acquirer must determine how much of this excess purchase price should be recognized as goodwill and how much should be recognized as a bargain purchase gain.
Under the partial goodwill method, the acquirer may choose to recognize a portion of the excess purchase price as goodwill, based on the relative uncertainty of the fair value estimates used in the valuation process. For example, if the acquirer believes that the fair value estimates for certain intangible assets are particularly uncertain, it may choose to recognize a larger portion of the excess purchase price as goodwill. Conversely, if the fair value estimates for the acquired company’s assets and liabilities are more certain, the acquirer may recognize a smaller portion of the excess purchase price as goodwill.
Overall, the partial goodwill method is a useful tool for accounting for business combinations in situations where the fair value of certain assets and liabilities cannot be accurately determined. It allows the acquirer to recognize a portion of the excess purchase price as goodwill, while also recognizing a bargain purchase gain to reflect the value of the identifiable assets and liabilities that were acquired. It is important to carefully consider the relative uncertainty of the fair value estimates when applying the partial goodwill method in order to ensure that the financial statements accurately reflect the nature of the business combination.