This document discusses the valuation of goodwill. It defines goodwill as the present value of a firm's anticipated excess earnings above a normal rate of return. Goodwill is an intangible asset that arises from factors like business reputation, customer loyalty, and trade name. The document outlines several reasons why goodwill needs to be valued, such as when a business is sold, partners are added or retired, or a firm is converted to a company. It then describes different methods that can be used to value goodwill, including average profits methods, super profits methods, and capitalization methods.

1. VALUATION OF GOODWILL
R S UDAPUDI
BLDEA’s College Jamkhandi

2. Meaning and Definitions:
• The present value of firm’s anticipated excess earnings.
• The Institute of Chartered Accountants of India, goodwill is “an intangible asset arising
from business connections or trade name or reputation of an enterprise”.
• Kohler “ Goodwill is the current value of expected future income in excess of normal
return on investment in net tangible assets”.
• SSAP-22,U.K. Accounting Standard , “ Goodwill is the difference between the value of a
business as a whole and the aggregate of the fair values of its separable net assets”.

3. Features of Goodwill:
• Goodwill is an intangible asset. But not a fictitious asset.
• It is non-separable asset. It cannot be separated from the business and therefore
cannot be sold like any other separable and identifiable assets without selling the
business.
• The value of goodwill has no relation to the amount invested or cost incurred in
order to build it.
• Valuation of goodwill is subjective and is highly dependent on the judgement of the
valuer.
• Goodwill is subject to fluctuations. The value of goodwill may fluctuate widely
according to internal and external factors of the business.
• Indian Accounting Standard-10 states that only purchased goodwill should be
recognised in the accounts.

4. Need for Valuation of Goodwill:
A) In case of a sole trader:
• If the existing business of a sole trader is sold to another person
• If sole proprietor takes any person as a partner and
• If it is converted into a company
B) In case of partnership firm:
• At the time of admission of a new partner
• On the retirement of old partner of the firm
• On the death of a partner
• Change in the profit sharing ratio
• A partnership firm is sold or amalgamates with any other firm
• Conversion of partnership firm into a limited company

5. C) In case of a limited company:
• The business of one company sold to another company
• Amalgamation of two or more company by nature of purchase(but not by merger)
• Any company wants to acquire controlling interest in the affairs of any other
company
• Acquisition of a company by government
• When a person wants to purchase large block of shares for the purpose of acquiring
controlling interest

6. Factors affecting valuation of Goodwill:
• High quality and reliable product or service
• If business is located at a favourable place , it enhance the value of business
• Good connection with suppliers, investors ,customers, employees etc
• Efficient management team
• Possession of trademark, copyright, patents etc
• Contended, loyal , efficient and sincere workforce
• Regular research and development
• Good and sound public image
• Effective sales promotion methods

7. Types of Goodwill:
• Purchased Goodwill: Purchased goodwill arises when a business concern is purchased
and the purchase consideration paid exceeds the fair value of the separable net assets
acquired.
Cost of goodwill = Purchase price – Net assets purchased
( Net assets = Total assets - Outside liabilities)
• Non-Purchased Goodwill: non-purchased goodwill is one which is generated by the
business enterprise itself internaly. Inherent goodwill is the value of business in excess
of the fair value of its separable net assets.
The value of goodwill may be positive or negative. Positive goodwill arises when the
value of business as a whole is more than the fair value of its net assets. It is negative
when the value of the value of the business is les than the value of its net assets.

8. Difference between Purchased goodwill and Non purchased goodwill:
sl.no Purchased goodwill Non-purchased goodwill
1.
2.
3.
4.
5.
Arises when one business enterprise
purchases another business enterprise
It represents the excess amount
payable over and above the fair value
of the net assets on purchase of a
business
It is reflected by purchase transaction
of the business
The cost of goodwill depends upon
the future maintainable profits
Recognised by AS-10, shown in the
balancesheet
Goodwill arises when the business itself
generates its own goodwill over a period of
time
In this case goodwill is developed
internally, no cost can be placed on the
same
It is self generated so no question of
purchase arises
The value of goodwill depends on
subjective judgement of the valuer
It is not recognised goodwill, soo not
shown in the balancesheet

9. Methods of Valuation of Goodwill:
1) Average Profits Method:
2) Super Profits Method:
3) Capitalisation Method:

10. Methods of Valuation Of Goodwill: 1) Average Profits Method
A) Simple Average Profit Method:
Average Profit = Total Profits of all given years/ Number of Years
Value of Goodwill= Average Profit x No. of years purchased
B) Weighted Average Profit Method:
Weighted Average Profit= Total Product of weighted profits/ Total Number of
Weights
Value of Goodwill = Weighted Average Profit x No. of Years Purchase

11. Valuation of Good Will: 2) Super Profit Method
Super Profit= Average Profit – Normal Profit
i) Average profit= Total of profits of given number of past years/Number of years
ii) Normal profit = Average Capital Employed x Normal Rate of Return/100
iii)Average Capital Employed:
Asset side approach=Assets at market value-Outside liabilities-1/2 of c .y profits
Liability side approach= Share Capital(E&P)-Goodwill , losses etc-1/2 c. y profits

12. Methods of Goodwill based on Super Profit:
i) Purchase of Super Profit Method
Goodwill= Super profit x Number of years purchase
ii) Sliding scale of Super Profit Method
The amount of super profit goes on decreasing year by year , so grading scale is
applied to super profit
iii) Annuity Method
Goodwill= Super Profit x Annuity Value
iv) Capitalisation of Super Profit Method
Goodwill= Super Profit x 100/Normal Rate of Return

13. Thank you……..