1. GOODWILL
 Used to describe the 'good name' or 'reputation'
earned by a firm as it trades.
 To express the intangible but quantifiable "prudent
value" of an ongoing business beyond its assets.
 The value of an entity over and above the value of
its assets.
 The difference between the purchase price and the
sum of the fair value of the net assets is by
definition the value of the "goodwill" of the
purchased company.
 Hopefully have a positive impact on the future
turnover and profits of the business.
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 1
Mobile:+91- 9760-888-626

2. CHARACTERISTICS OF GOODWILL
It belongs to the category of intangible assets.
It is a valuable asset.
It contributes to the earning of excess profits.
Its value is liable to constant fluctuations.
Its value is only realised when a business is sold
or transferred.
It is difficult to place an exact value on goodwill
and it will always involve expert judgement.
There can be effect of personal ability for
valuation of goodwill.
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 2
Mobile:+91- 9760-888-626

3. KEY FACTORS AFFECTING GOODWILL
 The nature of the business. The goodwill relating to a service based
business is likely to be different than that of a manufacturing
business.
 Favorable location. If a business is situated in a good location it will
generally have a positive affect on the value of goodwill.
 Longevity of the business. If a business has been trading for a long
period it may have had more time to develop a good solid
reputation, and more goodwill.
 Possession of licenses or technical know- how.
 After sales services and general customer care.
 Business risk involved.
 Future competition and new entrants into a specific business
marketplace.
 Management's attitude towards the fulfillment of commitments.
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 3
Mobile:+91- 9760-888-626

4. NEED OF VALUATION OF GOODWILL
 When the business is sold as a going concern.
 When the business is amalgamated with another
firm.
 When business is converted into private or public
company.
 When there is a change in the profit-sharing ratio
amongst the existing partners.
 When a new partner is admitted.
 When a partner retires or dies or reconstruction.
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 4
Mobile:+91- 9760-888-626

5. GOODWILL VALUATION
• Average Profit Method
Past Profits of a number of years are taken into consideration.
Average Profit = Total Profits/ No. of Years
Goodwill = Average Profit * No. of Years Purchased
Why Average Profit & No. of Years Purchased
 A buyer wishes to get advantage of it in future, that is uncertain.
 The estimate for the future depends upon the past performance.
 Profits in future depends upon its Average Performance in past.
 For some years to come the business will earn profit entirely due
to seller’s efforts. Hence,
 The buyer compensates the seller for the few years profit which
the buyer gets because of seller’s efforts.
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 5
Mobile:+91- 9760-888-626

6. GOODWILL VALUATION
• Calculation of Average Profit
Profit of the year
ADD :
Abnormal Loss
Income that will arise in future
Expenses that will not occur in future
LESS :
Abnormal Gain
Non-Operating Income
Remuneration to the Proprietors
Income that will not arise in future
Expenses that will occur in future
Income Tax
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 6
Mobile:+91- 9760-888-626

7. GOODWILL VALUATION
• Weighted Average Profit Method
• Past Profits of a number of years are taken into
consideration.
• Weighted Average Profit = Total of Products/ Total of Weighted
• Goodwill = Weighted Average Profit * No. of Years Purchased
• Why Weighted Average Profit
• It gives weightage to latest profit which is likely to be
maintained in the future.
 It is applicable when profits shows sufficient Rising or
Falling trend.
 In case of Rising- more weightage is given to Recent years.
 In case of Falling- more weightage is given to Past years.
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 7
Mobile:+91- 9760-888-626

8. GOODWILL VALUATION
• Super Profit Method
It assumes that if a business earns Super Profit,
it has a goodwill, otherwise not.
Super Profit = Actual Average Profit – Normal Profit
Where,
Normal Profit = Average Capital Employed * Normal Rate of Return
Normal Rate of Return = current Interest Rate + Risk Factor Rate
Goodwill = Super Profit * No. of Years Purchased
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 8
Mobile:+91- 9760-888-626

9. GOODWILL VALUATION
• Net Capital Employed =
Tangible Fixed Assets at Market Value
+ Intangible Assets at Realisation Value
+ Current Assets at Market Value
- All Outside Liabilities
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 9
Mobile:+91- 9760-888-626

10. GOODWILL VALUATION
 From Assets Side:
 Tangible Fixed Assets (Included) such as Land & Building,
Plant & Machinery, Furniture.
 Intangible Assets (Included) such as Patent, Trade-Marks,
Copyrights.
 Current Assets (Included) such as Cash in Hand, Cash at
Bank, Sundry Debtors, B/R
 Goodwill (Excluded)
 Investment (Excluded)
 Fictitious Assets (Excluded) such as Preliminary Exp., Advt.
Exp., Underwriting Commission, Discount on Issue of
Shares or Debentures, Dr. Balance of P&L A/C.
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 10
Mobile:+91- 9760-888-626

11. GOODWILL VALUATION
From Liabilities Side:
 Outside Liabilities (Deducted) such as
Debentures, Creditors, Loan, Bank Overdraft,
B/P, Provision for Income Tax.
 Share Capital (Excluded)
 Reserves & Surplus (Excluded)
 Credit Balance of P&L A/C (Excluded)
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 11
Mobile:+91- 9760-888-626

12. GOODWILL VALUATION
• Average Capital Employed =
Capital Employed in the beginning + Capital Employed in the end
2
Capital Employed in the end = Capital Employed in the beginning + Net Profit of the year
Hence We can write,
or Capital Employed in the end - Current Year’s Profit
2
or Capital Employed in the beginning + Current Year’s Profit
2
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 12
Mobile:+91- 9760-888-626

13. GOODWILL VALUATION
• Capitalisation of Average Profit Method
 Actual Average Profit is capitalised at Normal Rate of Return.
 It tells us, How much capital is needed for earning this
Actual Average Profit.
Capitalised Value of Average Profit =
100
X Actual Average Profit
Normal Rate of Returns
Goodwill = Capitalised Value of Average Profit – Actual Capital Employed
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 13
Mobile:+91- 9760-888-626

14. GOODWILL VALUATION
• Capitalisation of Super Profit Method
 This method tries to access the Capital needed for earning
the Super Profit.
 It tells us, How much capital is needed for earning the Super
Profit.
 This Capital is known as Goodwill.
Goodwill =
100
X Super Profit
Normal Rate of Returns
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 14
Mobile:+91- 9760-888-626