Valuation Goodwilll
Valuation Goodwilll
Valuation Goodwilll
On
Nature and Valuation of Goodwill
Goodwill
is sometimes described as a
momentum or a push that keeps the business
going without further effort like the momentum
of a body that continues its motion against a
retarding force till it comes to rest gradually.
When a man pays for goodwill, he pays for
something which places him in the position of
being able to earn more than he would be able
to do by his own unaided efforts.
Goodwill is thus present value of a firms
anticipated super normal earnings. The term
super normal earnings, means the excess of
earnings attributable to operating tangible and
intangible assets over the normal rate of
return.
ACCORDING
TO KOHLER: Goodwill is
the current value of expected future
income in excess of a normal return on
investment in net tangible assets.
Whatever be the nature of
goodwill, one thing is definite about it.
It is treated as an intangible asset in
accounts. One of the basic
characteristic features of assets is that
they help in earning profit for the
business. As a result, every asset is
said to have productivity. Thus,
goodwill is, like any other asset, a store
of prospective revenue.
FEATURES OF GOODWILL
A.
B.
C.
D.
E.
TYPES OF GOODWILL
PURCHASED
NON-PURCHASED
GOODWILL: It arises
CLASSES OF GOODWILL
According to rowland, there are four principal
classes of goodwill,viz.,
RECORDING OF GOODWILL
The following are the circumstances
when goodwill is valued and recorded:
i.
ii.
a)
RECORDING OF GOODWILL
b)
c)
d)
e)
f)
Nature of goods.
Monopolised business.
Trade name.
Risk involved.
Favourable location and site.
Possession of trademarks, patents and copyrights.
Skill to management.
Future competition.
Profit trends.
Money market conditions.
Capital required.
an arbitrary assessment.
By capitalisation of expected net profits
or earnings (or capitalisation method).
By certain number of years purchase of
past average profits or earnings.
By super profits or earnings. This
includes:
purchase of super profit.
Annuity method.
Capitalisation of super profit method.
a)
b)
c)
ILLUSTRATION 1
a)
b)
ILLUSTRATION 1
The profit of the vendor company would in no way be affected by
the sale of its business to the purchasing company and goodwill
existed and was to be paid for on the basis that the vendor
company was a continuing enterprise. Calculate the value of
goodwill by capitalisation of expected future net profits.
SOLUTION:
CALCULATION OF VALUE OF GOODWILL
Average net profit
Add: Non-recurring charges for:
Directors fees
10,000
Rent
20,000
Estimated future maintainable profit
Future profit capitalised at 10% i.e., Rs.1,80,000*100
10
Capitalised profit
Less: Net tangible assets
1,50,000
Rs.
30,000
1,80,000
18,00,000
18,00,000
15,00,000
3,00,000
ILLUSTRATION 2
Ascertain the value of goodwill of P.Co. Ltd. Carrying
on business as retail traders from the following
information according to capitalisation method:
BALANCE SHEET
as on 31st December, 2007
Liabilities
Paid-up capital:
2,500 Shares of
Rs.100 each
Profit and loss
account
Bank Overdraft
Sundry Creditors
Provision for Taxation
Rs.
Assets
Goodwill
2,50,00 Land and Building at cost
0
Plant and Machinery at
cost less Depreciation
56,650 Stock at cost
58,350 Book Debts less Provision
for Doubtful Debts
90,500
19,500
4,75,00
Rs.
25,000
1,10,00
0
1,00,00
0
1,50,00
0
SOLUTION