UrbanPro
true

Take ICWA(CMA) Coaching from the Best Tutors

  • Affordable fees
  • 1-1 or Group class
  • Flexible Timings
  • Verified Tutors

Search in

Valuation of Goodwill

Gayatri D.
02/08/2021 0 0

This is one of the introductory chapters at the graduation level as well as in professional exams.

The brief notes on methods and calculation of goodwill in easy steps are presented below:

Methods of Valuation of Goodwill

  1. Average Profits Method
  2. Super Profits Method
  3. Annuity Method
  4. Capitalisation Method
    1. By Average Profits Method
    2. By Super Profits Method

Let us discuss each method in detail.

  1. AVERAGE PROFITS METHOD

STEPS for calculation

  1. Adjusted average annual profits (See note 1)
  2. Number of years of purchase (given in question)
  3. Value of Goodwill= Adjusted average annual profits multiplied by the number of years of purchase

Note :

  • If several years of purchase for goodwill valuation are not given in the question, then the number of years for which data of profit or loss are provided should be taken.

Calculation of Adjusted average annual profits:

Steps for calculating it are as follows:

  • Calculation of Adjusted profits OR Adjusted Future profits OR Future Maintainable Profits

Particulars

Rs.

Profits   (given in Question)

---

Add: All expenses and losses not likely to occur or incur in future (e.g. extraordinary salary of a person, loss from fire or theft, abnormal losses, capital expenses etc.)

---

Add: All profits likely to come in the future

(e.g. profit due to new line of business)

---

Less: All expenses and losses likely to occur in future (e.g. salaries on new appointments etc.)

---

Less: Profits not likely to occur

---

ADJUSTED PROFIT /FUTURE PROFIT

---

  • Calculation of Adjusted average profits

There are two methods:

Simple average method

(If there is fluctuation in the profits for given periods with no specific trend, then use this method). The formula is

 Total adjusted profits of all the given years divided by the number of years.

Weighted average method

(An increasing or decreasing trend in the profits for periods given in the question then use this method). The format for calculating it is as follows.

Profits

weights

Product

(profits for all years

(greater weightage for recent years and less weightage for earlier or past years)

(profits multiplied by weights)

 SUPER PROFITS METHOD

STEPS for calculation

  1. Adjusted average annual profits (See Note below)
  2. Average Capital Employed (See Note below)
  3. Expected Rate of Return (given in question)
  4. Regular Profits = Average Capital Employed multiplied by Normal Rate of Return
  5. Super Profits = Adjusted average annual profits less Normal Profits
  6. Value of Goodwill = Super Profits multiplied by the number of years of purchase

Note

  • Calculation of Adjusted average annual profits (as discussed earlier)
  • Calculation of Average Capital Employed

           There are two ways to ascertain Average Capital Employed. 

Particulars

rupees

Assets (other than non-trading assets , intangible assets and fictitious assets) at market value

---

Less: Liabilities to outsiders at revised values

---

CAPITAL EMPLOYEDAT THE END OF THE YEAR

---

Less: Half of the profit earned during the year

---

AVERAGE CAPITAL EMPLOYED FOR THE YEAR

---

 

Liabilities Based Approach

Particulars

rupees

rupees

Equity Share Capital

 

---

Preference Share Capital

 

---

Reserves and Surplus

 

---

Profit on Revaluation of Assets and Liabilities

 

---

 

 

---

Less: Goodwill at book value

---

 

Accumulated Losses and expenses not yet written off

---

 

Loss on Revaluation

---

---

CAPITAL EMPLOYEDAT THE END OF THE YEAR

 

---

Less: Half of the profit earned during the year

 

---

AVERAGE CAPITAL EMPLOYED FOR THE YEAR

 

---

 ANNUITY METHOD 

STEPS for calculation

  1. Super Profits (Refer Super Profits method )
  2. Annuity Value (given in question)
  3. Value of Goodwill = Super profits multiplied by Annuity Value
  1. CAPITALISATION METHOD

By Average Profits Method

STEPS for calculation

  1. Adjusted average annual profits (See Note below)
  2. Expected Rate of Return (given in question)
  3. Total Value of Business = (Adjusted average annual profits divided by Normal Rate of Return) multiplied by 100
  4. Value of Goodwill = Total Value of Business Less Capital Employed

 Note: Capital Employed = Assets minus Liabilities

By Super Profits Method

 STEPS for calculation

  1. Super Profits (Refer Super Profits method )
  2. Average Rate of Return (given in question)
  3. Value of goodwill = (Super Profits divided by NRR) multiplied by 100
0 Dislike
Follow 3

Please Enter a comment

Submit

Other Lessons for You

Flow chart for Provisions relating to Interest on Capital/ How to understand how much interest on Capital to take?
You have to undertake 3 step verification for identification of provisions relating to interest on capital: 1. Is Interest on capital a Charge in the question mentioned; YES- Take full amount of Interest...

Provisions of Indian Partnership Act 1932- In Absence of Partnership deed
1. Interest on Loan taken by Firm should be 6 percent per annum. 2. Interest on Loan given by the Firm should be nil 3. No partner could be admitted in the firm without the consent of the exisiting partners. 4....



Adam Smith's Economic theory
The classical principle of unfastened marketplace economics, to paintings right, has greater necessities than maximum fans realize of or intentionally pick out to ignore. Several years earlier than he...

Nadeem Khan | 10 Feb

0 0
0

Looking for ICWA(CMA) Coaching Classes?

Learn from Best Tutors on UrbanPro.

Are you a Tutor or Training Institute?

Join UrbanPro Today to find students near you
Sponsored
X

Looking for ICWA(CMA) Coaching Classes?

The best tutors for ICWA(CMA) Coaching Classes are on UrbanPro

  • Select the best Tutor
  • Book & Attend a Free Demo
  • Pay and start Learning

Take ICWA(CMA) Coaching with the Best Tutors

The best Tutors for ICWA(CMA) Coaching Classes are on UrbanPro

Book a Free Demo

UrbanPro.com is India's largest network of most trusted tutors and institutes. Over 55 lakh students rely on UrbanPro.com, to fulfill their learning requirements across 1,000+ categories. Using UrbanPro.com, parents, and students can compare multiple Tutors and Institutes and choose the one that best suits their requirements. More than 7.5 lakh verified Tutors and Institutes are helping millions of students every day and growing their tutoring business on UrbanPro.com. Whether you are looking for a tutor to learn mathematics, a German language trainer to brush up your German language skills or an institute to upgrade your IT skills, we have got the best selection of Tutors and Training Institutes for you. Read more