Goodwill in consolidated accounts - Q.12 Sep 2012

sorry it is Q19. Sep 2012

part (iii) states that goodwill on consolidation reduces the ROCE.
am i correct in assuming that

- in a consolidated statement with the controlling interest a goodwill is part of non-current assets and so yes, it reduces the ROCE thru the denominator.
- in a consolidated statement with a non-controlling interest a goodwill is classified under 'intagibles' and so it does not affect the ROCE? (the numerator deducts intangibles).


I dont 100% understand your qustion here. Remember that goodwill will only appear when a holding company takes a controlling stake in a subsidiary. The consolidated statements for the holding company will contain goodwill (reflecting the amount paid about the net asset value) and the non-controlling stake (the bit they didnt buy). These two are in one set of consolidated accounts.
You are correct that the goodwill is in the intangible section, which increases the asset side of the balance sheet. The non-controlling interest would be shown in the equity capital section, increasing the equity. Goodwill would usually be written off through the profit statement, which will lower profits (and hence ROCE)

there are examples in the CMP however it is not very clear if the amount of goodwill is reflected in the liabilities somehow in the case when a subsidiary is fully consolidated?


No - it should never be in the liabilities section. Goodwill is the amount you pay for a subsidiary above the accounting value. It is assumed that you have paid over the odds because there is value there somewhere that the accounts donbt reflect. So this overpayment is included as an asset in the SFP (balance sheet).

 

how can goodwill reduce the ROCE thru 'profit before income and tax' at acquisition? i thought it is included in the denominator, 'Total assets-intangibles(goodwill)-current assets = equity+long-term debt?


Total assets = equity + long-term debt + current liabilities. If you strip out intangibles from the asset side you end up with something that doesnt balance. When you say goodwill affects the denominator, I think of A) the denominator of ROCE is long term capital, ie either equity capital, or equity + debt capital. Since intengibles are in the asset side there is no clear link. But indirectly, if you have an intangible boosting your assets, it will have to have a corresponding item in the capital or equity section to make things balance. So inditectly there will be a profit somewhere in reserves that reflects the value of that asset.
However, probably the biggest impact of goodwill is that it needs to be written off by the compnay through amortisation. If the company amortises it over 5 years, it will hurt profits over that time. So this definitely reduces ROCE.


in the example on p.7, chapter 11 the goodwill is included in 'non-current assets' while on p.11 it is shown as a separate 'intangible' item in a consolidated statement with a subsidiary. so i was confused that it is part of non-current assets in a wholly owned subsidiary in one example and intangibles in the other.


It will always be in the "intangible asset" section. If a company has no subsidiaries, (like on pg 11, Mr X or Y before consolidation and takeover) there can be no goodwill. Once the takeover occurs, and the holding company has subsidiaries, goodwill balances the SFP, and appears in intangibles. (as per pg 11 consolidated, or as per pg 7)

thank you.

Hope this helps