CORPORATE

ACCOUNTING
Faheem Mohammed
22BCFTA12
2nd B.COM FTA
 TOPIC:

METHODS OF VALUATION
OF GOODWILL
WHAT IS GOODWILL
In accounting, goodwill is an intangible asset recognized when a
firm is purchased as a going concern. It reflects the premium that
the buyer pays in addition to the net value of its other assets.
Goodwill is often understood to represent the firm's intrinsic
ability to acquire and retain customer business, where that ability
is not otherwise attributable to brand name recognition,
contractual arrangements or other specific factors.
METHODS OF GOODWILL
There are several methods which can be implemented
for valuation of goodwill which is as follows:
1. Average Profit Method
2. Super Profit Method
3. Capitalization Method
4. Annuity Method
 AVERAGE PROFIT METHOD
Goodwill’s value in this method is considered by multiplying the Average Future
profit by a certain number of year’s purchase.
Goodwill = Future maintainable profit after tax x No. of years purchase
Steps Involved under Average Profits Method:
• Calculate past profits before tax.
• Calculate the future profit before tax after making past adjustments.
• Calculate the average past adjusted profits.
• Multiply the future profits to be maintained by the number of years’ purchase.
 SUPER PROFIT METHOD
This super profit method is the additional estimated future maintainable profits over the normal
profits.
Steps Involved in Calculating Goodwill under Super Profit Method:
• Calculate capital employed (always should the aggregate of Shareholders’ equity and long-term debt
or fixed assets and net current assets).
• Calculate the Usual Profits by multiplying employed capital with normal return rate.
• Calculate average maintainable profit.
• Calculate Super Profit as follows:
Super Profit = Maintainable Average profits – Normal Profits.
• Calculate goodwill by multiplying super profit by the number of year’s purchase.
 CAPITALIZATION METHOD
Goodwill under this method can be calculated by capitalizing average normal profit or
capitalizing super profits. Following are those:-
(i) Capitalisation of Average Profit Method:
Under this particular system, goodwill can be discovered by deducting actual Capital
Employed (i.e., valuation date of Net Assets) from the capitalised value of the average
profits. It should be on the basis of the normal rate of Return (also known as the value of
the firm or capitalised value of business)
Goodwill = Capitalised Value – Net Assets of Business
 ANNUITY METHOD
In the annuity method, goodwill can be calculated by taking average super profit.
This particular profit is the value of an annuity over a certain number of years.
Computation of the present value of this annuity is done by discounting it at the
given rate of interest, i.e. on the normal rate of return. Valuation of goodwill is this
discounted present value of the annuity.
If the value of the annuity is not given, it can be calculated with the help of
following formula:
CONCLUSION
Since goodwill contains all these characteristics, we can conclude that it
is an intangible asset. It must have characteristics of assets. This means
that it must have some clearly identifiable value. The asset must have
future economic benefits.Valuation of goodwill is essential during
business combination, amalgamation, etc. When a business is sold or
transferred, goodwill is recognized as an intangible asset, regardless of
the time and work required to build it.
THANK
YOU!