IFRS 3 offers two measurements of the minority's stake, partial and full goodwill. The acquirer's own goodwill is the same either way; what changes is the balance sheet, the impairment and the enterprise value.
Non-controlling interest is the part of a subsidiary's equity the acquirer does not own, and IFRS 3 lets you measure it at acquisition in one of two ways: the minority's share of the fair value of net identifiable assets, or the fair value of the minority stake itself. Buying 80 per cent for 400 of a company with 375 of net identifiable assets gives NCI of 75 and goodwill of 100 on the first method, and NCI of 90 and goodwill of 115 on the second. US GAAP allows only the second.
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The choice is made deal by deal under IFRS, and it changes goodwill, equity and every later impairment test. It also changes the enterprise value anyone should compute for the group afterwards, because the consolidated EBITDA includes 100 per cent of a company the shareholders own 80 per cent of.
| Input | Value |
|---|---|
| Stake acquired / left with minority holders | 80% / 20% |
| Consideration paid for the 80% | 400 |
| Target's book net assets | 300 |
| Fair value step-up on identifiable intangibles | 100 |
| Tax rate for the deferred tax on the step-up | 25% |
| Fair value of 100% on a minority basis (no control premium) | 450 |
1. Fair value of net identifiable assets. Add the step-up and deduct the deferred tax liability it creates.
Deferred tax liability = 100 × 25% = 25
Net identifiable assets at fair value = 300 + 100 − 25 = 375
2. Measure NCI, then goodwill.
Goodwill = consideration + NCI − net identifiable assets at fair value
Partial goodwill: NCI = 20% × 375 = 75; goodwill = 400 + 75 − 375 = 100
Full goodwill: NCI = 20% × 450 = 90; goodwill = 400 + 90 − 375 = 115
Excel: =Price+(1-Stake)*FVNA-FVNA and =Price+NCI_FV-FVNA
The acquirer's own share of goodwill is the same 100 either way: 400 paid for 80 per cent of 375, which is 300. The full goodwill method adds 15 that belongs to the minority holders.
3. Use a minority value, not the deal price, for the NCI. The acquirer paid 400 for 80 per cent, an implied 500 for the whole. The minority does not hold control, so its 20 per cent is worth 20 per cent of 450, which is 90, not 100. The 500 includes a control premium of 11.1 per cent over the minority basis that the minority holders will never receive.
| Line | Partial goodwill | Full goodwill |
|---|---|---|
| Consideration for 80% | 400 | 400 |
| Non-controlling interest | 75 | 90 |
| Less net identifiable assets at fair value | 375 | 375 |
| Goodwill | 100 | 115 |
After the deal, the consolidated income statement includes all of the target's profit, and NCI takes its share below the line: of a target profit of 50, 10 goes to the minority and 40 to the parent. On the balance sheet, NCI is a separate line within equity.
Partial goodwill gives a smaller balance sheet and a higher return on equity; full goodwill gives a larger goodwill figure and, for the same later write-down, a larger impairment charge, part of which is allocated to the minority. Under the partial method IAS 36 grosses goodwill up notionally for impairment testing, 100 divided by 80 per cent, or 125, so the test is run on a grossed-up figure either way, and only the parent's share of any write-down is recognised.
| Stake | Consideration | NCI, proportionate | Goodwill, partial | NCI, fair value | Goodwill, full |
|---|---|---|---|---|---|
| 51% | 255.0 | 183.8 | 63.8 | 220.5 | 100.5 |
| 60% | 300.0 | 150.0 | 75.0 | 180.0 | 105.0 |
| 70% | 350.0 | 112.5 | 87.5 | 135.0 | 110.0 |
| 80% | 400.0 | 75.0 | 100.0 | 90.0 | 115.0 |
| 90% | 450.0 | 37.5 | 112.5 | 45.0 | 120.0 |
| 100% | 500.0 | 0.0 | 125.0 | 0.0 | 125.0 |
The smaller the stake, the further apart the two methods: at 51 per cent, partial goodwill is 63.8 and full goodwill 100.5. At 100 per cent there is no minority and the methods agree at 125.
Leaving NCI out of the enterprise value of the group. Suppose the combined group has a market capitalisation of 2,000, net debt of 600 and consolidated EBITDA of 300, which includes all of the target's EBITDA. Without NCI, enterprise value is 2,600 and the multiple 8.67x. Adding NCI at book on the proportionate basis gives 2,675 and 8.92x; at fair value, 2,690 and 8.97x. The EBITDA is 100 per cent, so the claims on it have to be 100 per cent too; the bridge items are set out in the enterprise value to equity value bridge.
The second mistake is valuing the minority at the price per share the acquirer paid. That loads the control premium into NCI: 100 instead of 90, and goodwill of 125 instead of 115. Measure fair value from the minority's own position, typically the quoted price before the offer or a valuation without control.
The book's own allocation of the price, with the deferred tax on the intangibles that IFRS 3 requires, is live in the free workbooks for this case. The goodwill calculation for a 100 per cent acquisition is in how to calculate goodwill in an acquisition.
Partial goodwill measures non-controlling interest at its share of net identifiable assets, so goodwill is only the acquirer's: 100 on an 80 per cent purchase for 400 of a company with 375 of net assets. Full goodwill measures NCI at fair value, 90 here, and adds the minority's share of goodwill, giving 115. IFRS allows either per deal; US GAAP requires full goodwill.
No. The acquirer's price includes a premium for control that minority holders do not enjoy. Paying 400 for 80 per cent implies 500 for the whole, but on a minority basis the company is worth 450, so the 20 per cent minority stake is 90, not 100. Using the deal price overstates goodwill by 10.
Because consolidated EBITDA includes 100 per cent of a subsidiary the shareholders own only in part. On the illustrative group with a 2,000 market capitalisation, 600 of net debt and 300 of EBITDA, omitting NCI gives 2,600 and 8.67x; including it at fair value gives 2,690 and 8.97x.
This article is one calculation from Mergers and Acquisitions. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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