Friday, 9 March 2012

Amortization of Excess Purchase Price - Equity Method Level II FRA

Amortization of excess purchase price attributable to fixed assets (except land) is carried on over the expected life of the assets using straight line method. Excess purchase price is attributed to the assets by multiplying the ownership interest of the investor with the additional amount over book value (fair value - book value) of the asset. These excess purchase prices over different asset classes are removed from the total excess purchase price to reach to goodwill which is not amortized rather tested for impairment. The excess purchase price over an asset is then amortized by dividing it through the remaining life of the asset.

For instance the ownership stake of the asset is 25% and the fair value of PPoE is 30,000 whereas the book value is 20,000. Excess purchase price can be calculated as:

25% x (30,000 - 20,000) = 2,500

Suppose the remaining life of PPoE is 5 years then amortization of excess purchase price is:
2500 / 5 = 500 per year.

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