under this what do you mean by goodwill and what are the methods of goodwill , how to measure and why we need to measure?

2. Presentation Outline:
Goodwill
Its
features
Factor
affecting
goodwill
Valuation
of
goodwill

3. Acc. to Lord Lindley
The term goodwill is generally
used to denote the benefit arising
from connections and reputations.

4. Acc. to Spicer and Pegler
Goodwill may be said to be that element
arising from reputation, connections or other
advantages possessed by a bussiness which
enables it to earn greater higher profits.

5. Features of
Goodwill
 Intangible asset
 It is liable to constant fluctuations
 It is valuable only entire business is
sold
 It is difficult to place an exact value
 It may be purchased or non-
purchased.

6. Factor affecting
goodwill
i. Favourable location of business
ii. Efficiency of management
iii. Nature of goods
iv. Monopolistic and other rights
v. Risk involved
vi. Trend of profit
vii. Capital required
viii. Future competition
And so many……..!

7. Methods of valuation of
goodwill
Average Profit Method
Super Profit Method
Capitalisation Method
Purchase Consideration Method
Annuity Method

8. Average Profit
Method
Before calculating the average profits the following
adjustments should be made in the profits of the firm:
a. Any abnormal profits should be deducted from the net
profits of that year.
b. Any abnormal loss should be added back to the net
profits of that year.
c. Non operating incomes eg. income from investments
etc should be deducted from the net profits of that year.
Goodwill=Average profit * no. of years
of purchase

9. Super profit * no. of years of purchase
Normal profit
Capital
Employed
Normal Rate Of
Return
Super Profit
Method
Where,
Super profit=
Actual profit- Normal
profit
Normal Profit=
Capital employed*
Normal rate of
return

10. CAPITAL EMPLOYED
Closing capital
employed
Average capital employed
OCE+CCE
2
OCE + ½
of current
year profit
CCE - ½
of current
year profit
OCE = Opening Capital Employed
CCE = Closing Capital Employed
It is assumed that profits are earned
evenly during the year.
Capital Employed=
Fixed Assets+Current Assets- Outside Liabilities

11. Capitalisation
method
Capitalisation
method
Average
Profit Method
Capitalised
Profits
Actual
Capital
Employed
Super Profit
Method

12. Goodwill= Capitalised Profit- Actual capital employed
Capitalised Profits= Average profits/Normal Rate of return
Average Profits Method:
Goodwill = Super Profits/ Normal Rate of return
Super Profit Method:

13. Annuity
method
Super
profit
Annuity
value
Goodwill= Super Profit * Annuity
Value
Annuity
Method
For Example: Super profit= 4000
Present value of rs.0.282012 annuity @5% return is 1.
Goodwill= 4000*1/0.282012 = 14184

14. Purchase Consideration
Method
Purchase
Consideration
Method
Purchase
Consideration Net assets
Assets-
Outstanding
Liabilities
Goodwill=
Purchase Consideration-Net Assets

15. Need for valuation of
goodwill
In case of sole trade:
 When the business is to be disposed off
 When someone is to be admitted as a partner
 For accessing the wealth tax on the death.
In case of Partnership:
 When a new partner is admitted
 When a partner retires or dies
 When there is change in the profit sharing ratio
 When there is dissolution.

16. In case of a company:
 When one company takes over another
 When two or more companies amalgamate
 When government take over the business
 When stock exchange quotations not available,
shares
have to be valued for taxation purpose such as
estate duty, gift tax etc.