Corporate Accounting Theory

Unit 3 : VALUATION OF INTERNAL

ASSETS AND SHARE
CONCEPT OF GOODWILL :
Goodwill is the present value of the firm’s anticipated excess
earnings.

The Institute of Chartered Accountants of India defines goodwill

as ‘an intangible asset arising from business connections or trade
name or reputation of an enterprise’.

Characteristics of Goodwill :-
a. Goodwill has the ability to generate additional income for the
business.

b. Goodwill is an intangible fixed asset and not a fictitious asset.

c. Valuation and existence of goodwill depends upon the

subjective judgement of the valuer.

d. Presence of goodwill helps in earning excess profits i.e. super

profits.

e. Goodwill generally does not appear in the accounts of a

company except where the company has actually paid for it when
purchasing a business.
ACCOUNTING STANDARDS AND GOODWILL :
Accounting Standard 10 issued by the Institute of Chartered
Accountants of India on ‘Accounting for fixed Assets’ has
prescribed that goodwill for which no money is paid, should not
be recorded

As per Para 35 of AS-26 “Internally generated goodwill is not

recognised as an asset because it is not an identifiable resource
controlled by the enterprise that can be measured reliably at
cost.”

NEED FOR VALUATION OF GOODWILL :-

1. When there is change in profit sharing ratio among the
partners;

2. When a new partner is admitted;

3. When a partner retires or dies;

4. When a firm sells its business to a company or converts itself

into a company’

5. When a firm is amalgamated with another firm.

CLASSIFICATION OF GOODWILL :
 Purchased Goodwill :- This type of goodwill arises only
when a business is acquired by another business as a going
concern and the price paid is more than the net asset
acquired, such goodwill is recognised and is shown in the
balance sheet as an asset
 Non Purchased/Self -generated :- This goodwill arises
only when a business generates its own goodwill
 (image/reputation) over a period of time. As per AS -26,
internally generated goodwill is not recognised as an asset,
i.e., is not to be recorded in the books.

CONCEPT OF VALUATION OF SHARES :

Valuation of shares refers to that value of shares on which shares
are purchased, sold, transferred and tax is levied

The mode of valuation of shares depends on the purpose for

which the valuation is being made. The following are the
particular instances, where the need of valuation of shares may
arise:

1. At the time of amalgamation, absorption and reconstruction of

companies value of shares need to be calculated.

2. When unquoted shares are to be bought or sold.

3. At the time of conversion of preference shares or debentures

into equity shares.

4. At the time of assessment by the income tax authorities for the

purpose of estate duty, capital gain, wealth tax and gift tax.

5. For calculating compensation payable by the government at

the time of nationalisation of a company.

6. When a company acquires majority shares of another company

for the purpose of acquiring a controlling interest in another
company.

7. When shares are pledged as a security against a long term loan.