METHODS OF VALUATION OF GOODWILL

Average Profit Method Super Profit Method Capitalisation Method

Adjusted Average Profit = Average Profit

Adjusted by Deducting Abnormal Gains
and by adding Abnormal Losses
Simple Average Weighted Average
Profit Method Profit Method Capitalisation of Average Capitalisation of
Normal Profit Super Profit
Determine Capital Employed,
if not given
Determine Normal Profit*
Determine Normal Profit* Calculate Capital
Determine Normal Profit and Capitalised Value Employed
Normal Rate of Return (NRR), 100
Assign weight to each year if not given = Average Normal Profit ×
NRR
Average Profit =
Calculate Normal Profit
Total Normal Profit Normal Profit = Average on Capital Employed
Determine Weighted Profit:
Number of Years Normal Profit × Weight Assigned NRR Net Assets
Capital Employed ×
100 = All Assets (Other Than Goodwill,
Non-trade Investments and Calculate Average
Total the Weights and Fictitious Assets) at their Current
Total of Weighted Profit (Product) Super Profit = Adjusted Profit of Past Years
Number of Years’ Purchase Values minus Outsiders’ Liabilities
Average Profit – Normal Profit

Weighted Average Profit = Calculate Super Profit,

Numbers of Years’ Purchase i.e., Actual Average
Total of Weighted Profit (Product) Goodwill = Capitalised Value – Net Assets
Goodwill = Average Profit × Profit – Normal Profit
Number of Years’ Purchase Total of Weights
Goodwill = Super Profit ×
Number of Years’ Purchase
Number of Years’ Purchase Goodwill =
100
Super Profit ×
NRR

Goodwill = Weighted Average

Profit × Number of Years’
Purchase

*Normal Profit = Net Profit is adjusted by adding abnormal losses and by deducting abnormal gains of past years to determine Normal Profit.