Presentation on Goodwill

Name: Saanvi
Class: XII commerce C
Roll no:
Acknowledgement
I want to extend my sincere gratitude to everyone who has been part
of this project. Thank you to my Teacher and our Principal for their
guidance and support. I am also thankful to my classmates for their
collaboration. Special thanks to my parents for their unwavering
support. Thank you all for making this project a success.
Topics to be covered
• Meaning of Goodwill?
• Types of Goodwill
• Valuation of Goodwill meaning
• Need for valuation of Goodwill
• Factors affecting the value Goodwill
• Methods of Valuation of Goodwill
Meaning of Goodwill
Goodwill is an intangible asset which is not visible or cannot be touched but can be
purchased and traded and is real. The value of an enterprise’s brand name, solid consumer
base, functional consumer associations, good employee associations and any patents or
proprietary technology represent some instances of goodwill
Features Of Goodwill
1.Goodwill is an intangible asset. It is non-visible but it is not a fictitious asset.
2.It cannot be separated from the business and therefore cannot be sold like other
identifiable and separable assets, without disposing off the business as a whole.
3. The value of goodwill has no relation to the amount invested or cost incurred in order
to built it.
4. Valuation of goodwill is subjective and is highly dependent on the judgment of the
valuer.
5. Goodwill is subject to fluctuations. The value of goodwill may fluctuate widely
according to internal and external factors of business.
Types of Goodwill
Purchased Goodwill: Purchased goodwill arises when a business concern is
purchased and the purchase consideration paid exceeds the fair value of the
separable net assets acquired. The purchased goodwill is shown on the assets side
of the Balance sheet.

Non-Purchased Goodwill/Inherent Goodwill: Inherent goodwill is the value of

business in excess of the fair value of its separable net assets. It is referred to as
internally generated goodwill and it arises over a period of time due to good
reputation of a business. The value of goodwill may be positive or negative. Positive
goodwill arises when the value of business as a whole is more than the fair value of
its net assets. It is negative when the value of the business is less than the value
of its net assets.
Valuation of Goodwill Meaning:
First, In the case of a partnership, when there is an admission, retirement,
death or amalgamation, or a change in the profit-sharing ratio take place, the
valuation of goodwill becomes necessary.

Secondly, In the case of a company, when two or more companies amalgamate,

or one company absorbs another company, or one company wants to acquire
controlling interest in another company or when the Government takes over
the business, valuation of goodwill becomes necessary.

Third, In the case of a sole trader concern, goodwill is valued at the time of
selling die business, to decide the purchase consideration.

Finally, In the case of individuals, goodwill is valued for Estate Duty, Death Duty,
etc. On the death of a person.
Need for Valuation of Goodwill
• Valuation of goodwill may make due to any one of the following reasons:

A Company or Firm:

If the goodwill has already been written-off in the past but the value of the same
is to records further in the books of accounts.

An existing company taking with or amalgamated with another existing company.

The Stock Exchange Quotation of the value of shares of the company is not
available to compute gift tax, wealth tax, etc., and.

The shares are valued based on intrinsic values, market value or fair value
methods.
Factors Affecting the Value of Goodwill:

The following factors affect the value of goodwill:

•Location
•Time
•Nature of Business
•Capital Required
•Owner’s Reputation
•Market Situation
•The trend of Profit
•The efficiency of Management
•Special Advantages
Methods of Valuation of Goodwill

Various ways are used in the valuation of goodwill. However, the valuation methods
are based on the situation of an individual company and different practices of the
trade. The top three processes of valuation of goodwill are mentioned below.

A) Average Profits Method – This method is divided into two sub-division. Simple
Average – In this process, goodwill evaluation is done by calculating the average
profit by the number of years it is called years purchase. It can be calculated by
using the formula.

Formula:

Goodwill = Average Profit x No. of years’ of purchase.

Steps Involved under Average Profits
Method:
(i) Calculate past profits before tax.

(ii) Calculate future-maintainable profit before tax after making past adjustments.

(iii) Calculate Average Past adjusted Profits (taking simple average or weighted
average as applicable).

(iv) Multiply Future Maintainable Profits by number of years’ purchase.

Weighted Average
In this method, last year’s profit is calculated by a specific number of weights. It is
used to obtain the value of goods, which is divided by the total number of
weights for determining the average weight profit. This technique is used when
there is a change in profits and giving high importance to the present year’s
profit. It is evaluated by using the formula.

Goodwill = Weighted Average Profit x No. of years’ of purchase Weighted Average

Profit = Sum of Profits multiplied by weights/ Sum of weights
B) Super Profits Method – It is a surplus of expected future maintainable profits
over normal profits. The two methods of these methods are.

The Purchase Method by Number of Years

The goodwill is established by evaluating super-profits by as specific number of

the purchase year. It can be estimated by applying the below formula.

Super Profit = Actual or Average profit – Normal Profit

Goodwill = Super Profit x Number of years purchased

Steps Involved in Calculating Goodwill under
Super Profit Method:
Step 1: Calculate capital employed (it is the aggregate of Share holders’ equity and
long term debt or fixed assets and net current assets).

Step 2: Calculate Normal Profits by multiplying capital employed with normal rate
of return.

Step 3: Calculate average maintainable profit.

Step 4: Calculate Super Profit as follows:

Super Profit = Average maintainable profits – Normal Profits.

Step 5: Calculate goodwill by multiplying super profit by number of year’s

purchase.