Presented by:

Mrs. RuchikaAssociate Professor

Commerce DepartmentJ.V.M.G.R.R. COLLEGE

Presentation Outline:

GoodwillIts

features

Factor affecting goodwill

Valuation of

goodwill

Acc. to Lord Lindley

The term goodwill is generally

used to denote the benefit arising

from connections and reputations.

Acc. to Spicer and Pegler

Goodwill may be said to be that element

arising from reputation, connections or other

advantages possessed by a bussiness which

enables it to earn greater higher profits.

Features of

Goodwill

Intangible asset

It is liable to constant fluctuations

It is valuable only entire business is

sold

It is difficult to place an exact value

It may be purchased or non-

purchased.

Factor affecting

goodwill

i. Favourable location of businessii. Efficiency of managementiii. Nature of goodsiv. Monopolistic and other rightsv. Risk involvedvi. Trend of profitvii. Capital requiredviii. Future competitionAnd so many……..!

Methods of valuation of

goodwill

Average Profit Method

Super Profit Method

Capitalisation Method

Purchase Consideration Method

Annuity Method

Average Profit

Method

Before calculating the average profits the following

adjustments should be made in the profits of the firm:

a. Any abnormal profits should be deducted from the net

profits of that year.

b. Any abnormal loss should be added back to the net

profits of that year.

c. Non operating incomes eg. income from investments

etc should be deducted from the net profits of that year.

Goodwill=Average profit * no. of years of purchase

Super profit * no. of years of purchase

Normal profit

Capital

Employed

Normal Rate Of

Return

Super Profit

Method

Where,

Super profit=

Actual profit- Normal

profit

Normal Profit=

Capital employed*

Normal rate of

return

CAPITAL EMPLOYED

Closing capital

employedAverage capital employed

OCE+CCE

2

OCE + ½

of current

year profit

CCE - ½

of current

year profit

OCE = Opening Capital Employed

CCE = Closing Capital Employed

It is assumed that profits are earned evenly during the year.

Capital Employed=

Fixed Assets+Current Assets- Outside Liabilities

Capitalisation

methodCapitalisation

method

Average Profit Method

CapitalisedProfits

Actual Capital

Employed

Super Profit Method

Goodwill= Capitalised Profit- Actual capital employed

Capitalised Profits= Average profits/Normal Rate of return

Average Profits Method:

Goodwill = Super Profits/ Normal Rate of return

Super Profit Method:

Annuity method

Super profit

Annuity value

Goodwill= Super Profit * Annuity

Value

Annuity

Method

For Example: Super profit= 4000

Present value of rs.0.282012 annuity @5% return is 1.

Goodwill= 4000*1/0.282012 = 14184

Purchase Consideration

Method

Purchase Consideration

Method

Purchase Consideration Net assets

Assets-Outstanding

Liabilities

Goodwill=

Purchase Consideration-Net Assets

Need for valuation of

goodwillIn case of sole trade: When the business is to be disposed off

When someone is to be admitted as a partner

For accessing the wealth tax on the death.

In case of Partnership: When a new partner is admitted

When a partner retires or dies

When there is change in the profit sharing ratio

When there is dissolution.

In case of a company: When one company takes over another

When two or more companies amalgamate

When government take over the business

When stock exchange quotations not available,

shares

have to be valued for taxation purpose such as

estate duty, gift tax etc.