Accounting for goodwill in China : a case study of two-step acquisitions

We use a case study to illustrate how different acquisition methods can result in different amounts of goodwill recognised on financial statements in China. China Merchants Bank adopted a two-step acquisition method: first, it acquired 53% of the shares of Hong Kong's Wing Lung Bank to gain corporate control in 2008; second, it acquired the remaining 47% of shares in 2009. Using this method, China Merchants Bank recognised the acquisition premium as goodwill only in the first step and recognised the acquisition premium in the second step as a decrease in additional paid-in capital. This two-step acquisition method significantly reduces the amount of goodwill shown on financial statements and lowers the likelihood and amount of subsequent goodwill impairment. Different acquisition methods can lead to different amounts of goodwill initially recognised when accounting standards permit the partial goodwill method and regard the transactions between the parent and non-controlling shareholders as equity transactions.