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Goodwill that is acquired in a business combination must be assigned to one or more reporting units as of the acquisition date. Goodwill is assigned to the reporting units that are expected to benefit from the business combination, regardless of whether other assets or liabilities of the acquired entity are also assigned to those reporting units. An entity’s methodology for determining the amount of acquired goodwill to assign to a reporting unit should be reasonable, supportable, and applied in a consistent manner in accordance with ASC 350-20-35-41. In addition, the methodology should be consistent with the objectives of the approaches described in ASC 350-20-35-42 through ASC 350-20-35-43, which describes two approaches an entity might follow when assigning goodwill to reporting units: an acquisition method approach and a “with-and-without” approach. The use of any approach to assigning goodwill is dependent on facts and circumstances.
In the simplest of acquisitions, a new reporting unit will be created in connection with an acquisition, and the assets and liabilities of the acquired entity will be assigned to the new reporting unit. If no synergies with other existing reporting units are expected from the acquisition, all the goodwill arising from the acquisition would be assigned to the new reporting unit.
Many times, though, the specific assets and liabilities of an acquired entity will be assigned to one or more of the acquiring entity’s existing reporting units and, perhaps, new reporting units that are created in connection with the acquisition. If the assets and liabilities that are assigned to reporting units constitute businesses, the goodwill arising from the acquisition may be assigned to the reporting units based on the excess of the fair values of the individual businesses acquired over the fair value of the sum of the individual assets acquired and liabilities assumed that are assigned to the reporting units. This is considered an acquisition method approach.
In some business combinations, synergies may be expected to be realized by existing reporting units that are not assigned any of the acquired assets or assumed liabilities. When synergies are expected in one or more of the entity’s other reporting units, the entity may assign goodwill to the reporting units expecting to benefit from the synergies using a with-and-without approach. The with-and-without approach generally considers the difference between the fair value of the existing reporting unit before and after the acquisition in determining the amount of goodwill to assign to that reporting unit.
Example BCG 9-6 and Example BCG 9-7 illustrate the acquisition method approach and with-and-without approach, respectively for purposes of assigning goodwill to reporting units.
EXAMPLE BCG 9-6
Acquisition method approach
Company X acquires Company Y for $1,500. The fair value of the identifiable net assets acquired is $1,000. Company X assigns the identifiable net assets of the acquired entity with fair values of $200 and $800 to new Reporting Units A and B, respectively. The net assets assigned represent businesses whose fair values are $500 and $1,000, respectively. No other reporting units are expected to benefit from acquisition-related synergies.
How should goodwill be assigned to Reporting Units A and B?
Analysis
Goodwill should be assigned to Reporting Units A and B as follows:
Reporting Unit A
Reporting Unit B
Total acquisition
Fair value of acquired businesses
$500
$1,000
$1,500
Fair value of identifiable net assets assigned to reporting units (excluding goodwill)
(200)
(800)
(1,000)
Goodwill assigned
$300
$200
$500
EXAMPLE BCG 9-7
With-and-without approach
Company X acquires Company Y for $1,500. The fair value of the identifiable net assets acquired is $1,000. The acquiring entity includes the entire acquired business in a new reporting unit—Reporting Unit D. Although existing Reporting Unit C has not been assigned any of the acquired assets or assumed liabilities, the acquiring entity expects Reporting Unit C to benefit from synergies related to the acquisition (e.g., Reporting Unit C is expected to realize higher sales of its products because of access to the acquired entity’s distribution channels). Prior to the acquisition, the fair value of Reporting Unit C was $1,900. After the acquisition, the fair value of Reporting Unit C is $2,000.
How should goodwill be assigned to Reporting Units C and D?
Analysis
Goodwill should be assigned to Reporting Units C and D as follows:
Reporting Unit C
Reporting Unit D
Total acquisition
Fair value of acquired entity
$1,500
Fair value of identifiable net assets (excluding goodwill)
$1,000
(1,000)
Fair value of unit C with acquisition
$2,000
Fair value of unit C without acquisition
(1,900)
Goodwill assigned
$100
$400
$500
The application of this approach must reflect a reasonable assignment among the reporting units.

Although it is expected that most entities will use one of the approaches noted above to assign goodwill upon an acquisition, an entity may also employ other methods when assigning goodwill to its reporting units, provided that the attribution methodology is reasonable, supportable, and does not result in the immediate impairment of goodwill. See BCG 9.9.2 for further information. Further, an entity’s chosen methodology should be consistent with the basis for and method of determining the purchase price of an acquired entity and any synergies that management expects from the acquisition.

9.4.1 Recognition of goodwill in partial acquisitions

Goodwill is the residual element in a business combination and cannot, by itself, be determined and measured. In the acquisition of 100% of a business, goodwill results from comparing the fair value of the consideration transferred for the acquired business with the aggregate amounts assigned to the acquired identifiable net assets. In acquisitions of a controlling interest but less than all of the ownership interests in the entity (partial acquisitions), ASC 805 requires that the acquired net assets be recognized at their fair value, regardless of the ownership percentage acquired. Goodwill is then determined as the aggregate fair value of (1) the consideration transferred, (2) the noncontrolling interest, and (3) in a step acquisition, the previously held equity interest, less the recognized amount of the identifiable net assets of the acquired entity measured based on the acquisition method guidance of ASC 805. See Example BCG 5-1.

9.4.2 Goodwill attributable to controlling interests and NCI

In partial acquisitions, goodwill is recognized for the controlling and the noncontrolling interests. Any future impairment loss will need to be allocated to the controlling and the noncontrolling interests on a rational basis in accordance with ASC 350-20-35-57A. See Example BCG 9-21, Example BCG 9-22, and Example BCG 9-23 for illustrations of acceptable methods of allocating any impairment loss.
Example BCG 9-8 illustrates a rational method of attributing goodwill to the controlling and noncontrolling interests for purposes of allocating a potential future goodwill impairment loss.
EXAMPLE BCG 9-8
Goodwill attributable to controlling and noncontrolling interests
Company A obtains control of Company B by purchasing 80% of the equity interests in Company B for total consideration of $800 million. The net aggregate value of Company B’s identifiable assets and liabilities measured in accordance with ASC 805 is determined to be $700 million, and the fair value of the noncontrolling interest is determined to be $200 million. Accordingly, $300 million of goodwill is recognized by Company A on the acquisition date.
How would goodwill be attributed to the controlling and noncontrolling interests?
Analysis
The total goodwill of $300 million would be attributed as follows (in millions):
Fair value of the noncontrolling interest
$200
Noncontrolling interest’s share of the recognized net assets
(140) 1
Goodwill attributable to the noncontrolling interest
$60
Fair value of the consideration transferred
$800
Controlling interest’s share of the recognized net assets
(560) 2
Goodwill attributable to the controlling interest
$240
View table

1 The noncontrolling interest’s share of the recognized net assets acquired represents the noncontrolling ownership interest multiplied by the acquisition-date amounts of the net assets acquired, measured in accordance with ASC 805 (20% × $700).
2 The controlling interest’s share of the recognized net assets acquired represents its ownership interest multiplied by the acquisition-date amounts of the net assets acquired, measured in accordance with ASC 805 (80% × $700).

9.4.3 Determination of fair value for the NCI

While the fair value of the ownership interest acquired by the acquirer may be determined based on the consideration transferred, the determination of the fair value of the noncontrolling interest in transactions when less than all the outstanding ownership interests are acquired may present certain challenges to the acquirer. The consideration transferred for the controlling interest may provide a reliable indication of the fair value of the noncontrolling interest; however, an acquirer will need to consider factors that might cause this not to be the case. For example, an acquirer will need to consider the impact of any control premium that may be included in the amounts transferred for the controlling interest or further synergies that may be achievable in obtaining control. In some situations, the fair value of the noncontrolling interest may need to be established through other valuation techniques and methods. See BCG 5.3.4 and FV 7.3.5 for further information on these techniques and methods.

9.4.4 Reassigning goodwill as acquirer’s reporting structure changes-updated November 2022

As an entity’s operations evolve over time (through acquisitions, disposals, and/or reorganizations), the entity will be required to track its reporting units’ goodwill, as well as the reporting units’ other assets and liabilities, to facilitate goodwill impairment testing.
When an entity reorganizes its reporting structure in a manner that changes the composition of one or more of its reporting units, the entity should first reassign assets and liabilities (excluding goodwill) to the reporting units affected. In accordance with ASC 350-20-35-45, goodwill should then be reassigned to the affected reporting units by using a relative fair value approach similar to the approach used when an entity disposes a portion of a reporting unit, regardless of whether or not the transferred assets meet the definition of a business. As a result, the amount of goodwill attributed to each reporting unit is determined based on the relative fair values of (1) the elements transferred and (2) the elements remaining within the original reporting units.
Events affecting a reporting unit, such as a change in the composition or carrying amount of its net assets due to a reorganization, may trigger the need to perform a goodwill impairment test. An entity should establish that a change in composition of net assets or reorganization did not otherwise prevent recognition of an impairment that existed prior to the change or reorganization. It would not be appropriate for an entity to reorganize its reporting structure simply to avoid an impairment charge.
When reporting units are reorganized subsequent to the period-end, but prior to the issuance of the financial statements, the reporting structure in place at period-end should be used to perform goodwill impairment testing.
Example BCG 9-9 and Example BCG 9-10 illustrate the reassignment of goodwill.
EXAMPLE BCG 9-9
Basic principle of goodwill reassignment
Company X transfers a portion of Reporting Unit A’s operations into two newly formed reporting units, B and C (which each meet the definition of a business), in connection with a corporate restructuring. The fair value of the transferred operations was determined to be $50 million, with $20 million assigned to the operations transferred to Reporting Unit B and $30 million to the operations associated with Reporting Unit C. The fair value of the remaining elements in Reporting Unit A is $150 million. Total goodwill assigned to Reporting Unit A before the restructuring was $40 million.
How should goodwill be reassigned for each reporting unit?
Analysis
The goodwill reassignment would be as follows ($s in millions):
Reporting Unit A
Reporting Unit B
Reporting Unit C
Total
Fair values of the operations
$150
$20
$30
$200
Relative fair value
75%
10%
15%
100%
Goodwill
$30
$4
$6
$40
View table
EXAMPLE BCG 9-10
Reassignment of goodwill when reporting structure changes
Company Z has 2 reporting units, Reporting Unit 1 and Reporting Unit 2, with goodwill of $1 million and $2 million, respectively. Company Z reorganizes its business and creates a new reporting structure. As a consequence, operations in Reporting Unit 1 are transferred into 4 newly created reporting units (Reporting Unit A, Reporting Unit B, Reporting Unit C, and Reporting Unit D). A small portion of operations in Reporting Unit 2 are transferred to Reporting Unit D and the remainder of Reporting Unit 2 is renamed Reporting Unit E. The relative fair values of the operations transferred due to the restructuring are as follows:
New Reporting Units
A
B
C
D
E
Relative fair value transferred from reporting unit 1
40%
40%
15%
5%
Relative fair value transferred from reporting unit 2
10%
90%
View table
How should goodwill be reassigned to each reporting unit when Company Z’s reporting structure changes?
Analysis
As a result of the change in the composition of its reporting structure, Company Z is required to reassign its goodwill using a relative fair value approach similar to that used when a portion of a reporting unit is disposed of (see ASC 350-20-35-45).
In accordance with the guidance in ASC 350-20, Company Z should first reassign assets and liabilities (excluding goodwill) from legacy reporting units, Reporting Unit 1 and Reporting Unit 2, to the new reporting units. Then, goodwill should be reassigned to the new reporting units using the relative fair value approach. Therefore, the amount of goodwill attributed to each new reporting unit would be determined based on the relative fair values in the legacy reporting units of (1) the elements transferred and (2) the elements remaining within the original reporting units. The goodwill of each reorganized reporting unit should be separately reattributed to the new reporting units (i.e., goodwill should not be aggregated for each reorganized reporting unit before the reattribution).
In this case, $1 million of goodwill from Reporting Unit 1 should be reattributed to Reporting Units A, B, C, and D based on the relative fair value of operations transferred from Reporting Unit 1 (i.e., 40%, 40%, 15%, and 5%, respectively). $2 million of goodwill from Reporting Unit 2 should be attributed to Reporting Unit D and Reporting Unit E based on relative fair values of 10% and 90%, respectively.
New Reporting Units
A
B
C
D
E
Total
Goodwill reattribution of Reporting Unit 1
$400,000
$400,000
$150,000
$50,000
$1,000,000
Goodwill reattribution of Reporting Unit 2
200,000
$1,800,000
2,000,000
Total
$400,000
$400,000
$150,000
$250,000
$1,800,000
$3,000,000
View table

9.4.5 Translation of goodwill denominated in a foreign currency

Acquisition accounting adjustments attributable to a foreign entity but recorded in the parent’s accounting records need to be considered in the translation process as if those adjustments were pushed down and recorded at the foreign entity level.
Example BCG 9-11 illustrates the translation of goodwill assigned to a foreign entity.
EXAMPLE BCG 9-11
Translation of goodwill assigned to a foreign entity
Company A acquired European Business X, whose functional currency is the Euro. On the acquisition date, goodwill was determined to be €100 million, which was the equivalent of $150 million, and was recorded at the parent level and not pushed down to Business X’s general ledger. At period-end, the exchange rate is 1€ for $1.25.
At period-end, how would goodwill assigned to Business X be translated in Company A’s consolidated financial statements?
Analysis
In translating Business X’s assets and liabilities at period-end for the purpose of preparing Company A’s consolidated financial statements, the €100 million goodwill determined at the acquisition date would be recorded as $125 million with a corresponding charge to other comprehensive income of $25 million.

After goodwill assigned to foreign entities is translated to the reporting currency, any associated changes in the goodwill balance should be assigned to the reporting units where the respective goodwill resides.
While Example BCG 9-11 addresses circumstances in which the reporting entity acquires a business that is entirely a foreign entity, translating goodwill as if it were pushed down to a foreign subsidiary applies in other circumstances as well. For example, the reporting entity may acquire a multinational company domiciled in the United States with foreign operations that give rise to a portion of the overall goodwill recorded in the business combination. In this circumstance, an appropriate portion of the goodwill should be considered in the translation process for the relevant foreign subsidiaries as if a portion of the goodwill had been pushed down to those foreign entities. See FX 5.2 and FX 8.2.1 for additional information on translation procedures and the translation of goodwill, respectively.
Example BCG 9-12 illustrates an acceptable method to assign a change in goodwill due to the effects of changes in foreign exchange rates.
EXAMPLE BCG 9-12
Assigning changes in goodwill due to changes in foreign exchange rates
Company A acquired European Business X, whose functional currency is the Euro. On the acquisition date, goodwill was determined to be €100 million, which was the equivalent of $150 million, and was recorded at the parent level and not pushed down to Business X’s general ledger. At period-end, the exchange rate is 1€ for $1.25.
Company A assigned Business X to Reporting Unit 1 but determined that €20 million of its goodwill was synergistic to Reporting Unit 2 and, accordingly, assigned €80 million to Reporting Unit 1, and €20 million to Reporting Unit 2 at the acquisition date. Both reporting units reside in Europe and have the Euro as their functional currency.
How would the decrease in goodwill of $25 million be assigned to each reporting unit?
Analysis
The $25 million decrease in goodwill resulting from foreign currency translation would be assigned, $20 million ($25 × €80 / (€20 + €80)) to Reporting Unit 1 and $5 million ($25 × €20 / (€20 + €80)) to Reporting Unit 2.

9.4.6 Documentation to support goodwill assignment

ASC 350-20-35-41 requires that the methodology used to determine the assignment of goodwill to a reporting unit be reasonable, supportable, and applied in a consistent manner. ASC 350-20-35-40 addresses how an entity should consider assigning assets used in multiple reporting units to its reporting units. ASC 350-20-35-40 also requires that the basis for and method of determining the fair value of an acquiree and other related factors (such as the underlying reasons for the acquisition and management’s expectations related to dilution, synergies, and other financial measurements) be documented at the acquisition date.

9.4.7 The impact on goodwill of litigation from a business combination

Generally, any economic consequences of legal claims between the acquirer and the former owners of the acquiree in a business combination should be reflected in earnings of the acquirer in the postcombination period.
In a 2003 speech, the SEC staff indicated that the settlement of litigation regarding the acquisition price should only be accounted for as an adjustment to the initial acquisition accounting in situations where there is a clear and direct link between the litigation and the acquisition price. For example, litigation initiated by the acquirer seeking the enforcement of escrow or escrow-like arrangements, such as those that specify the requirement of a minimum amount of working capital as of the closing date in an acquired business, may establish a clear and direct link to the acquisition price. In contrast, litigation between the acquirer and the acquiree asserting that one party misled the other party as to the value of the acquiree or that a provision of the acquisition agreement is unclear is not the type of litigation that establishes a clear and direct link to the acquisition price, and therefore, its settlement is generally reflected in current earnings.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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