Goodwill of a company-Accounting aspect.


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Goodwill of a company-Accounting aspect.

  1. 1. Valuation of Goodwill<br />Presented by:<br />Ashutosh Mishra<br />MBA-1stsemester<br />
  2. 2. What is Goodwill ?<br /><ul><li>Goodwill is seen as an intangible asset to any company or organization.
  3. 3. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.</li></ul><br /><ul><li>Goodwill is calculated as the difference between the value of entity as a whole & the value of its Net Tangible Assets (NTA).</li></li></ul><li>Valuation of Business<br />Net asset value, discounted cash flow (of future earning estimate), price-earnings multiple, etc are popular options of business valuation.<br />In the service industry we come across EBITDA (Earnings Before Interest Tax Depreciation & Amortisation) multiplied by a commonly used factor (depending on the growth potential, country, etc.) For example, in US labs, the factor is 7 to 8. A lab with an EBITDA of $10 Million per year would sell for around $70 Million. Now if the resale value of all the tangible goods (building, equipment, fixtures, etc) was $45 Million, the difference ($25 Million) accounts for &apos;goodwill&apos;.<br />
  4. 4. Section 55 of the Income Tax Act specifically laid down goodwill as a capital asset, the sale of which would attract capital gains tax. The fact that goodwill is a capital asset gives rise to useful ideas for tax planning.<br />Level of Goodwill Valuation<br />The level of goodwill implied by valuation should always be assessed for reasonableness. A reasonable level of goodwill varies from company to company.<br />
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  6. 6. Real Time Case<br />Here we see the role of goodwill in legal practice,<br />The components which give rise to goodwill are :-<br /><ul><li>name and reputation of the practice
  7. 7. potential to generate future income
  8. 8. client loyalty
  9. 9. partner and staff continuity
  10. 10. practice location.</li></li></ul><li>The circumstances which require the valuation of goodwill are:-<br /><ul><li>incorporation of a legal practice
  11. 11. acquisition/disposal of a practice
  12. 12. partners joining/leaving a practice.</li></ul>Valuation of goodwill is a very subjective matter and in the majority of cases there is no right or wrong answer. In certain instances a low valuation may be more beneficial than a higher one, and vice versa.<br />
  13. 13. Valuations done !<br />In R. C. Cooper vs Union of India (AIR 1970 SC 564), the Supreme Court observed that goodwill is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features.<br />When goodwill is sold, explained the Calcutta High Court in GulaldasMullick Vs. GaneshdasDamani (AIR 1957 Cal 280), it would enable the purchaser to trade as recognised successor to the business.<br />
  14. 14. The International Accounting Standards 22 on business combinations, AS 14 on amalgamations and FRS 10 (UK GAAP) on business combinations deal with problem of accounting for goodwill and other intangible assets. According to IAS 38, internally-generated goodwill should not be recognised as an asset at all. As per IAS 22, cost of goodwill represents a payment made by the buyer in anticipation of future profits. <br />A Noticeable Fact<br />
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  17. 17. Good Will Hunting<br />A Movie directed by Gus Van Sant having Robin Williams,Matt Damon & Ben Affleck as the casts that was released on 4th.Mar1998 in France.<br />The movie won 2 Oscars. Another 16 wins & 35 nominations.<br />“Some people can never believe in themselves, until someone believes in them.”<br />
  18. 18. References<br />The Valuation of Businesses , Shares & other Equity –Wayne Lonergan<br />The Internet<br />