VALUATION OF

GOODWILL
SUBMITTED TO
DR.SANJAY KUMAR RAJAK
SUBMITTED BY
SUBHA K.S
M.COM IST SEM
THE PROBLEM
• The monetary value of reputation of the
What is known as Goodwill?
business is known as Goodwill.

How to identify Goodwill? • It is an intangible fixed assets.

Why should this problem be • Goodwill has the extra earning capacity
solved? i.e.higher profit
How will I know goodwill can • It exists only when the firm earns super
be converted in to cash? profit.
CIRCUMSTANCES FOR VALUATION
OF GOODWILL
• In the case of company
At the time of amalgamation and absorption,on the sale of a company
etc.
• In the case of partnership firm
On the admission of a partner,on the death and retirement of a
partner,on the sale of partnership business,on alteration of share of
profit of the partner,on sale of business etc.
METHODES OF VALUATION OF GOODWILL

Average Profit Super Profit Capitalization Annuity

Method Method Method Method

Simple Weighted
Average Average Profit Super profit
average profit Method method
Profit Method method
AVERAGE PROFIT METHOD
• Calculate the amount of goodwill at four years
purchase of the last five years’ average profit

No. of years purchase means the no. of years which the firm likely to earn same amount of profit.
 CALCULATION OF NORMAL PROFIT
Net Profit during the year xxxx
Add Abnormal Losses xxxx
Less Abnormal Gains xxxx
Less Normal Expenses xxxx
Add Normal Gains xxxx
Total Normal Profit/Maintainable Profit xxxx

• Income from non-trading investment should not be added.

• Managerial Remuneration which are not recorded in the books of accounts are deducted.
• Income Tax is deducted on adjusted income at current rate of taxation.
• Income or expenditure expected in the future should be taken into account.
• Over valuation/under valuation of opening or closing stock.
 WEIGHTED AVERAGE PROFIT METHOD
• Calculate the amount of goodwill at four years purchase of the last five
years’ average profit
Year Profit weight Product(Profi Weighted
t × weight)
2001 40000 1 40000
2002 50000 2 = 100000 =
2003 60000 3 180000
2004 50000 4 200000
2005 60000 5 350000 =58000
Total 15 870000

Good   Will = 𝑊𝑒𝑖𝑔h𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑓𝑖𝑡 × 𝑁𝑜 . 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑝𝑢𝑟𝑐h𝑎𝑠𝑒

=58000×4
=232000
 SUPER PROFIT METHOD
• The excess of actual profit over normal profit is termed as Super Profit.Such super profit is
multiplied by the agreed number of year’s purchase to find out the value of goodwill.

Steps of Calculation:
• Calculate the actual /average profit.
• Calculate the Normal Profit.
Normal Profit=
• Super Profit=Actual Profit-Normal Profit
• Goodwill=Super Profit No. of Years Purchase

=
 CAPITAL EMPLOYED(NET
ASSETS)

Capital Employed at the beginning of the year 1 Of Revenue profits of the year
2
 CALCULATION OF AVERAGE
CAPITAL EMPLOYED
Assets Liabilites
Plant and Machinery-2,50000 9%Debentures-200000
Land &Building-1,50000 Trade Payables-60000
Current Assets-260000
Profit(2013-14)-80000

Capital Employed=Total Assets-Total Liabilities

=250000+150000+260000-(200000-60000)
=400000
Average Capital Employed=Capital Employed at the beginning of the year 1 Of Revenue profits of the year
2
=400000)
=360000
CAPITALISATION
METHOD
Capitalisation of average Profit Method
Goodwill is the difference between total capitalized value of
the firm and capital employed(net assets) of the firm.

• Step1:Calculate average normal profit.

• Step2:Calculate total captalised value of the firm
Captalised value of Average Profits=
• Step3:Calculate Capital Employed
• Step4:Goodwill=Capitalised value of Average profits-Capital Employed
CAPITALISATION OF SUPER PROFIT METHOD
• Step1:Calculate Capital Employed.
• Goodwill is the Capitalised value of • Step2:Calculate normal Profits on
Super Profit.This Method is used to
Capital Employed.
assess the capital needed for earning
Super Profit.This Capital is known • Step3:Calculate Average Profit
as Goodwill. • Step4:Calculate Super Profit
• Calculate Goodwill by capitalizing
the Super Profit.
Goodwill=
 ANNUITY METHOD
Goodwill is the present value of future Super Profits to be earned by the Firm.

Goodwill=SuperProfit Present Value=

n =Number of Years
r =Rate of Interest

Steps for calculation:

1.Calculate Super Profit.
2.Find out the present value of Super Profit at certain rate for certain period.
The value can be found out either by Annuity Table or Formule.
3.If present value <1 Goodwill=

𝑆𝑢𝑝𝑒𝑟 𝑃𝑟𝑜𝑓𝑖𝑡
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑛𝑛𝑢𝑖𝑡𝑦
4.If present value >1 Goodwill=Super Profit Present value of Annuity
THANK YOU