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Consolidation and goodwill, worked through an acquisition
When one company buys another, the premium it pays over the net assets becomes goodwill. Here is how goodwill is calculated on consolidation, worked step by step through an acquisition.
Updated September 2026 · 8 min read
When a parent company buys a controlling stake in another, it consolidates that subsidiary into the group accounts. The first thing to calculate is goodwill: the amount the parent paid over and above the fair value of what it actually bought. It sounds abstract until you put numbers to it, so let us work an acquisition through.
What goodwill is
Goodwill is the premium in an acquisition, the value of things that do not sit on the balance sheet: the customer base, the brand, the workforce, the expected synergies. It is calculated as what was paid plus the non-controlling interest, less the fair value of the subsidiary's net assets at the date of acquisition:
Goodwill = consideration transferred + non-controlling interest − fair value of net assets acquired.
The scenario
Kestrel Holdings acquires 80% of the shares of Tamar Ltd for £900,000. At the date of acquisition, the fair value of Tamar's net assets is £750,000, made up of share capital of £400,000 and retained earnings of £350,000. Because Kestrel bought only 80%, the other 20% is a non-controlling interest (NCI), and there are two accepted ways to measure it.
The two NCI methods
Under the fair value (full goodwill) method, the NCI is measured at its own fair value, given here as £190,000. Under the proportionate method, the NCI is measured at its share of the net assets: 20% × £750,000 = £150,000. The choice changes the goodwill figure, so the exam will tell you which to use.
Calculating goodwill both ways
Under the full goodwill method, goodwill is £900,000 + £190,000 − £750,000 = £340,000. Under the proportionate method it is £900,000 + £150,000 − £750,000 = £300,000.
The £40,000 difference is the non-controlling interest's share of the goodwill. The full method counts the whole of the goodwill, including the NCI's slice, which is why its NCI figure is higher and its goodwill larger. The proportionate method counts only the parent's share of goodwill. Same deal, two permitted presentations.
Where this comes up in ACCA
Consolidation is the single biggest source of marks in Financial Reporting (FR), and a group question is almost always in Section C, with goodwill as the opening calculation. It goes further, into complex groups, in Strategic Business Reporting (SBR). Getting this goodwill calculation automatic is the foundation of every group question.
The best way to make it stick is to work full consolidations, not read about them. The free ACCA FR course on Clevernest teaches the group accounts inside a real business, with hands-on exercises as you go.
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Frequently asked questions
How do you calculate goodwill on consolidation?
Goodwill = consideration transferred + non-controlling interest - fair value of the subsidiary's net assets at acquisition. In our example, using the full goodwill method, £900,000 + £190,000 - £750,000 = £340,000.
What is the difference between the full goodwill and proportionate methods?
They measure the non-controlling interest differently. The full goodwill (fair value) method measures NCI at its own fair value and so includes the NCI's share of goodwill; the proportionate method measures NCI at its share of net assets. In our example goodwill is £340,000 under the full method and £300,000 under the proportionate method.
What is a non-controlling interest?
When a parent buys less than 100% of a subsidiary, the non-controlling interest is the stake owned by the other shareholders. In our example the parent bought 80%, so the non-controlling interest is the remaining 20%.
What is goodwill in simple terms?
It is the premium a buyer pays over the fair value of a business's identifiable net assets, representing things not on the balance sheet such as brand, customer relationships and expected synergies. On consolidation it is recognised as an asset and tested for impairment.
Where is consolidation tested in ACCA?
It is a major topic in Financial Reporting (FR), where a group question is nearly always in Section C, and it goes deeper into complex groups in Strategic Business Reporting (SBR).