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Valuation of Goodwill PDF
Valuation of Goodwill PDF
INTRODUCTION
1. Fixed Assets
As. 6. : Depreciation
Total
=
Profit No.
of years
Particulars ` `
Average Trading profit after tax X
Add: Income Tax X
+
⎡ W.P.A.T. x Tax Rate ⎤
X
Income tax rate ⎥
⎣ z ⎦ X
Average Profit before Tax X
Add: Increase in profit in X
X
Future i) Saving in expenses X
(x
ii) Additional income likely to earn in future X
)
Less : i) Additional Exp. likely to incurred in future X
X
ii) Income earned in past but not expected
to earn. X
iii) Abnormal gain credited to profit & Loss Y
A/c (X
F. M. P. before Tax )
Note
Less :: Goodwill
Income Tax can be classified X
(Revised)
as i) F.
Purchased
M. P. after
Goodwill X
Tax ii) Internet Goodwill
iii) Goodwill due to various associate with Govt. /
political parties etc.
NORMAL RATE OF RETURN [N. R. R.]
OR
` `
All tangible trading Assets at revised X
value
Otherwise at book value recorded as will as X
unrecorded assets (except goodwill, non trade X XX
investment, fictitious assets, differed revenue
expenditure)
Less: Third parties liabilities payable recorded as
well as unrecorded, e.g. debentures loans, X
current liabilities provisions etc. X (X
Tangible capital employed at the end of the )X
year.
Less : Half of the profit earned during the year. (X)
Note: Half of profit earned should be deducted only when profit was
not withdrawn.
`
Paid up share capital (equity + Preference xxx
share- capital)
Add: Reserves and surplus (accumulated profits) xxx
Add : Revaluation OR Profits xxx
xxx
Less : i) Revaluation loss
X ii) Fictitious assets
X iii) Non Trading Assets
X xxx
Trading capital employed at the end of the year xxx
Less : Half of the profit earned should be deducted (xx)
only if profit was not withdrawn
Average capital employed xxxx
METHODS OF VALUATION OF GOODWILL
Under this method net profit of past few years is worked out.
Goodwill is valued either by adding the profit of post three years or
by considering average trade net profit.
Goodwill = Average adjusted Trade net profit X no. of years
purchase.
• NO. OF YEARS OF PURCHASE OF
FUTURE
Normal Profit
`
First Rs. 25,000 say three years purchases 75,000
(25,000 x 3)
Second Rs. 25,000 for two years purchases 50,000
(25,000 x 2)
Third Rs. 25,000 one years purchases 25,000
(25,000 x 1)
Goodwill ` 1,50,000
100
Step 2: Capitalised value of F. M. P. = F. M. P. ×
N.R.R.
Step 4: Goodwill
= Capitalized value of F.M.P. - Net Tangible Trading Assets.
Note : The value of Goodwill remains the same in case of
capitalization of super profit or capitalization of F. M. P.
VALUATION OF SHARES AND BUSINESS