IT will help

2. MEANING
The valuation of goodwill essentially mean that the
calculation of these intangible assets is used to
determine the remaining value of a company in the
event it is purchased. The valuation of business takes
into accounts different parameters such as the
reputation of its owners, efficiency in the
management ,situation in the market and special
advantage if any .

3. NEEDS FOR VALUATION
1. In case of Amalgamation of company
2. In case of takeover of one company by another or sold of business of one
company;
3. In case of a company wants to write off or reduce debit balance in its
profit and loss account;
4. In case of a company wants to exercise controlling interest in other
company;
5. In case of valuation of shares of an Unlisted Company;
6. In case of conversion of shares from one class to another class;
7. In case of company’s management has been taken over by Government
and some other events in which valuation of Goodwill held.

4. FACTOR AFFECTING
1. The profitability of company is past and expected profit in future will
affects value of Goodwill;
2. Capital Employed to earn profit;
3. The yield from business as expected by the investors;
4. The longevity of existence of business concern;
5. Market share of products of entity;
6. Quality of services rendered;
7. The edge of concern over its competitions in the market;
8. Relationship between management and staffs;

5. 9. Location of business enterprise;
10. Brand position and efforts taken to establish brand of
the concern;
11. Technical innovation, modern technology, patents,
etc,;
12. Tax Planning;
13. Relationship with Government, Local Bodies;
14. There are some other factors affecting the value of
Goodwill.

6. Methods of Valuation of Goodwill
1. Average Profits Method
i] Simple Average: Under this method, the goodwill is valued at the agreed
number of years’ of purchase of the average profits of the past
years. Goodwill = Average Profit x No. of years’ of purchase
 ii] Weighted Average: Under this method, the goodwill is valued at an
agreed number of years’ of purchase of the weighted average profits
of the past years. We use the weighted average when there exists an
increasing or decreasing trend in the profits giving the highest weight
to the current year’s profit.
 Goodwill = Weighted Average Profit x No. of years’ of purchase
 Weighted Average Profit = Sum of Profits multiplied by weights/
Sum of weights

7.  2. Super Profits Method
i) The Number of Years Purchase Method: Under this method, the
goodwill is valued at the agreed number of years’ of purchase of the
super profits of the firm.
Goodwill = Super Profit x No. of years’ of purchase
 Super Profit = Actual or Average profit – Normal Profit
 Normal Profit = Capital Employed x (Normal Rate of Return/100)
(ii) Annuity Method: This method considers the time value of money.
Here, we consider the discounted value of the super profit.
 Goodwill = Super Profit x Discounting Factor

8.  3. Capitalization Method
 (i) Capitalization of Average Profits: Under this method, the
value of goodwill is calculated by deducting the actual capital
employed from the capitalized value of the average profits on
the basis of the normal rate of return.
 Goodwill = Normal Capital – Actual Capital Employed
 # Normal Capital or Capitalized Average profits = Average
Profits x (100/Normal Rate of Return)
 # Actual Capital Employed = Total Assets (excluding goodwill)
– Outside Liabilities
 (ii) Capitalization of Super Profits: Under this method, Goodwill
is calculated by capitalizing the super profits directly.

9. The profit for the five years ending on 31st March, are as
follows:
Year 2014–₹ 4,00,000 Year 2015–₹ 3,98,000; Year
2016–₹ 4,50,000; Year 2017–₹ 4,45,000; Year 2018–₹
5,00,000.
Calculate goodwill of the firm on the basis of 4 years'
purchase of 5 years' average profit.
ANSWER:
Goodwill=Average Profits×Number of Years' PurchaseAv
erage Profits === Total ProfitsNumber of Years4,00,000+
3,98,000+4,50,000+4,45,000+5,00,000521,93,0005=Rs
4,38,600Goodwill =4,38,600×4=Rs 17,54,400

10. SCHOOL OF BUSINESS
AND MANAGEMENT
Naveen Singh
Bcom Honors
1 year (EAFM)