Valuation of goodwill

Valuation means an estimation of the worth of something which is carried out by a professional valuer.

In context of finance items that are usually valued are financial asset (marketable securities, patent , goodwill) or liability (bond issued by company)

1. VALUATION OF GOODWILL SUNAINA KUMARI ASSISTANT PROFESSOR St. Xavier’s College , Mahuadanr

2. Valuation Valuation means an estimation of the worth of something which is carried out by a professional valuer. In context of finance items that are usually valued are financial asset (marketable securities, patent , goodwill) or liability (bond issued by company)

3. Need of valuation For investment analysis Capital budgeting Merger Acquisition transactions Financial reporting For determining tax liability In litigation

4. Goodwill What is goodwill ?? Goodwill is excess of purchase over share on net asset (fair value) Goodwill is intangible asset Goodwill is reputation , for the earning of income etc Goodwill = purchase – fair value of net asset acquired as on date of purchase

5. Characteristics of goodwill It belong to the category of intangible asset. It is valuable asset contributing to excess profit It’s value is realised only when a business is sold or transferred

6. Method of valuation of Goodwill

7. AVERAGE PROFIT METHOD FUTURE MAINTAINABLE PROFIT IS CALCULATED ON THE BASIS OF AVERAGE PROFIT OF THE FEW PAST YEAR . TWO METHODS COMES UNDER IT SIMPLE AVERAGE PROFIT SAP = AVERAGE PROFIT OF GIVEN YEAR / NO OF YEARS WEIGHTED AVERAGE METHOD = SUM OF THE PRODUCT OF THE PROFIT OF A YEAR WITH RESPECTIVE WEIGHT / TOTAL NO OF WEIGHT GOODWILL= AVERAGE PROFIT * NO OF YEARS

8. SUPER PROFIT METHOD

9. CALCULATION OF GOODWILL BY SUPER PROFIT METHOD SUPER PROFIT = AVERAGE PROFIT – NORMAL PROFIT NORMAL PROFIT = CAPITAL EMPLOYED *RATE OF RETURN AVERAGE PROFIT= TOTAL PROFIT OF VARIOUS YEARS/ NO OF YEARS SUPER PROFIT GOODWILL NO OF YEARS OF PURCHASE

10. Capital Employed(ASSET BASIS) STEP PARTICULARS AMOUNT 1 Assets(Fixed + current) Less: External Liabilities *** (***) 2 Net Tangible Assets Less: Non-Trading assets *** (***) 3 Trading capital Employed Less:1/2 of net profit Earned during year *** (***) 4 Average Capital Employed during year ***

11. steps particulars amount 1 Share capital (equity + preference) Add : Reserve and Surplus Capital reserve(gain on revaluation of net asset Less: profit & Loss a/c(Dr) balance, if any Misc Exp Not w/o, if any Loss on revaluation , if any *** *** *** (***) (***) (***) 2 Net Assets Less: Goodwill(if appearing in balance sheet *** (***) 3 Tangible Capital Employed Less: Non trading Assets *** (***) 4 Trading Capital Employed Less:1/2 of profit earned during the year *** (***) 5 Average Capital Employed *** Capital Employed (Liability basis)

12. Problem 1 Q. Balance sheet of vishnu limited , is as follow

13. Working notes

14. Capitalisation method

15. Thanks