The full goodwill method is a method of accounting for business combinations, in which the acquirer recognizes the entire excess purchase price (the difference between the acquisition cost and the fair value of the identifiable assets and liabilities) as goodwill. Under the full goodwill method, no bargain purchase gain is recognized.
The full goodwill method is used when the acquirer is unable to accurately determine the fair value of any of the assets or liabilities of the acquired company, or when the fair value of the assets and liabilities cannot be reliably measured. In these cases, the acquirer must rely on estimates or assumptions to determine the fair value of the assets and liabilities, which can introduce significant uncertainty into the valuation process.
Here is an example of how the full 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 and liabilities cannot be reliably measured, so the acquirer must use estimates or assumptions to determine their values. The excess purchase price in this case is $10 million, and the acquirer must determine how much of this excess purchase price should be recognized as goodwill.
Under the full goodwill method, the acquirer would recognize the entire excess purchase price as goodwill, as it is unable to accurately determine the fair value of any of the assets or liabilities of the acquired company. As a result, no bargain purchase gain would be recognized.
Overall, the full goodwill method is a useful tool for accounting for business combinations in situations where the fair value of the assets and liabilities of the acquired company cannot be accurately determined or reliably measured. It allows the acquirer to recognize the entire excess purchase price as goodwill, reflecting the inherent value of the business combination. It is important to carefully consider the uncertainty of the fair value estimates when applying the full goodwill method in order to ensure that the financial statements accurately reflect the nature of the business combination.