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What is Goodwill?    Goodwill is excess of              purchase price over share of Net Assets (Fair Value)   Goodwill i...
Methods of valuing Goodwill :      Super profits method      Capitalization method      Annuity method
Super profits method :             Super profit    *    no. of years of purchase   Future                      Normal prof...
Super profits method  Normal profit = capital employed * Normal Rate of                                            Return ...
Capital Employed :     Share Holders Fund Approach                                             Considers Long Term        ...
LONG TERM FUND APPROACH    Asset Side Rule:    Fixed Assets                  XXX    Trading Investments           XXX    C...
Liabilities Side Rule :  Equity Share Capital                                     XXX  Preference Share Capital           ...
Capital Employed Represents the fair value ofnet assets invested in the business for earning profitsInvestment in Associ...
Share Holders Fund approach:    Asset Side Rule:    Fixed Assets                  XXX    Trading Investments           XXX...
Liabilities Side Rule :Equity Share Capital                                       XXXPreference Share Capital             ...
CAPITAL EMPLOYED               Closing capital                                 Average capital employed                   ...
Treatment of proposed dividend : proposed dividend is employed in the businessthrough out the year proposed dividend is ...
Treatment of Provision for Tax:       We pay Tax in form of Advance Tax       It appears to be apportionment from P&L A/...
Future maintainableprofit (FMP) Trend Method Average Method Weighted Average MethodBy taking past years profits apply a...
Adjustments to be made to profits whilecalculating FMP: Extra ordinary items and non recurring items should not beconside...
Capitalization method                     Capitalization                       method                Normal               ...
Capitalization method    Goodwill = Normal Capital Employed –         Actual Capital Employed                NCE – ACE    ...
Annuity method :                     Annuity                     method            Super               Annuity          1 ...
Annuity                        Cristal Clear                                                  methodNo. of yearsof purchas...
Closing Capital Employed Vs Avg Capital Employed   Capitalization method :         Under this method closing   capital emp...
Super Profits Method : Under this method closing capital employed should be generally applied except in following situatio...
Capital                                    employed     2 routes                            2               2 methods     ...
Valuation of goodwill
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Valuation of goodwill

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methods of valuation of goodwill

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  • @SarfarazAhmad4 why we add. dividend at the time of calculating avg. capital employed for goodwill my mail id is pawansahu1992@outlook.com
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  • why we add. dividend at the time of calculating avg. capital employed for goodwill my mail id is pawansahu1992@outlook.com
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  • thank you very much.....
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Transcript of "Valuation of goodwill"

  1. 1. What is Goodwill? Goodwill is excess of purchase price over share of Net Assets (Fair Value) Goodwill is Intangible Asset Goodwill is Reputation , higher earning of income , etcGoodwill = Purchase price – FV of Net Assets acquired as on date of purchase
  2. 2. Methods of valuing Goodwill : Super profits method Capitalization method Annuity method
  3. 3. Super profits method : Super profit * no. of years of purchase Future Normal profit Maintainable Profit Capital Normal Rate Of Employed Return
  4. 4. Super profits method Normal profit = capital employed * Normal Rate of Return Super Profit = FMP – Normal Profit Goodwill = Super Profit * no. of years of purchase
  5. 5. Capital Employed : Share Holders Fund Approach Considers Long Term Asset Side Approach Debt as LIABILITY Liabilities side Approach Long Term Fund Approach Asset Side Approach Considers Long Term Debt as Capital Employed Liabilities side Approach
  6. 6. LONG TERM FUND APPROACH Asset Side Rule: Fixed Assets XXX Trading Investments XXX Current Assets XXX XXXX LESS: Current Liabilities XXX CAPITAL EMPLOYED XXXX
  7. 7. Liabilities Side Rule : Equity Share Capital XXX Preference Share Capital XXX Reserves & Surplus XXX LONG TERM DEBT XXX XXXX LESS: NON TRADE INVESTMENTS XXX Miscellaneous exp not written off XXX CAPITAL EMPLOYED XXXXNon Trade Investments should not form part of Capital Employed (NONOPERATING ASSETS)EX: Fixed Deposit Land (which is not used for business & do not yield any income)
  8. 8. Capital Employed Represents the fair value ofnet assets invested in the business for earning profitsInvestment in Associate , Subsidiary or Jointventure is considered as “Trade investments.” Deduct non trade investments - liability side Ignore non trade investments - asset side
  9. 9. Share Holders Fund approach: Asset Side Rule: Fixed Assets XXX Trading Investments XXX Current Assets XXX XXXX LESS: Current Liabilities XXX *LONG TERM DEBT XXX CAPITAL EMPLOYED XXXX
  10. 10. Liabilities Side Rule :Equity Share Capital XXXPreference Share Capital XXXReserves & Surplus XXX XXXXLESS: NON TRADE INVESTMENTS XXX Miscellaneous exp not written off XXX CAPITAL EMPLOYED XXXX Asset side approach is preferd Capital employed it to be calculated on fair value (don’t consider book values while calculating CE ON FV BASIS)
  11. 11. CAPITAL EMPLOYED Closing capital Average capital employed employed OCE + ½ CCE - ½ OCE+CCE of current of current 2 year profit year profitOCE = Opening Capital EmployedCCE = Closing Capital EmployedIt is assumed that profits are earned evenly duringthe year.
  12. 12. Treatment of proposed dividend : proposed dividend is employed in the businessthrough out the year proposed dividend is current liability but it isapportioned from P&L A/c therefore treat proposed dividend as CapitalEmployed
  13. 13. Treatment of Provision for Tax: We pay Tax in form of Advance Tax It appears to be apportionment from P&L A/c Actually this is not employed in the business asmoney already gone in form of Advance Tax Not considered as Capital Employed
  14. 14. Future maintainableprofit (FMP) Trend Method Average Method Weighted Average MethodBy taking past years profits apply any one of the above tools then we can find FMPWeighted average method is used when there is up or down trendRecent years should be given more weight
  15. 15. Adjustments to be made to profits whilecalculating FMP: Extra ordinary items and non recurring items should not beconsidered. Abnormal items should be eliminated Income from non trade investments should be eliminated Adjust for any change in Accounting Policy Incase of change in tax rate add back – already paid tax reduce – Tax payable in future All above changes should me made to yearly profits. After adjustments ADJUST SPECIAL FUTURE CHANGES
  16. 16. Capitalization method Capitalization method Normal Actual capital capital employed employed FMP NRR
  17. 17. Capitalization method Goodwill = Normal Capital Employed – Actual Capital Employed NCE – ACE NCE = FMP / NRR OR GOODWILL = Super profit / NRR
  18. 18. Annuity method : Annuity method Super Annuity 1 profit value (1+r)^n Super Profit * Annuity value = GOOD WILL
  19. 19. Annuity Cristal Clear methodNo. of yearsof purchase Capitalization Not clear method NRR can be calculated as under also if not directly given in the problem  NRR = 1/PE Ratio
  20. 20. Closing Capital Employed Vs Avg Capital Employed Capitalization method : Under this method closing capital employed should be taken for calculation of GOODWILL unless the problem specifically requires application of Avg Capital employed
  21. 21. Super Profits Method : Under this method closing capital employed should be generally applied except in following situations • Specifically asked in the problem • Information about opening capital is given in problem • No changes prescribed in problem for closing capital employed & FMP is calculated purely based on past profits without adjusting for future changes
  22. 22. Capital employed 2 routes 2 2 methods approachesassets liabilities SHF LTF ACE CCE
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