INTRODUCTION:

Goodwill in accounting is an intangible asset that arises once a purchaser acquires

an existing business. Goodwill represents assets that aren't on an individual basis
identifiable. Goodwill doesn't embody identifiable assets that are capable of being
separated or divided from the entity and oversubscribed, transferred, licensed,
rented, or changed, either singly or alongside a connected contract, identifiable
plus, or liability notwithstanding whether or not the entity intends to try and do,
therefore. Goodwill additionally doesn't embody written agreement or different
legal rights, notwithstanding whether or not those square measures transferable or
dissociable from the entity or different rights and obligations. Samples of
identifiable assets that aren't goodwill embody a company's brand, client
relationships, creative intangible assets, and any patents or proprietary technology.
The goodwill amounts to the surplus of the "purchase consideration" (the cash paid
to buy the plus or business) over the full price of the assets and liabilities. We will
study The Method Of Valuation Of Goodwill Accounting Treatment In Case Of
Admission, Retirement, Or Death Of A Partner.

Goodwill also does not include contractual or other legal rights regardless of
whether those are transferable or separable from the entity or other rights and
obligations. Goodwill is also only acquired through an acquisition; it cannot be
self-created. Examples of identifiable assets that are goodwill include a company’s
brand name, customer relationships, artistic intangible assets, and any patents or
proprietary technology. The goodwill amounts to the excess of the "purchase
consideration" (the money paid to purchase the asset or business) over the net
value of the assets minus liabilities. It is classified as an intangible asset on the
balance sheet, since it can neither be seen nor touched. Under US GAAP and IFRS,
goodwill is never amortized, because it is considered to have an indefinite useful
life. Instead, management is responsible for valuing goodwill every year and to
determine if an impairment is required. If the fair market value goes below
historical cost (what goodwill was purchased for), an impairment must be recorded
to bring it down to its fair market value. However, an increase in the fair market
value would not be accounted for in the financial statements. Private companies in
the United States, however, may elect to amortize goodwill over a period of ten
years or less under an accounting alternative from the Private Company Council of
the FASB.

Modern meaning
Goodwill is a special type of intangible asset that represents that portion of the
entire business value that cannot be attributed to other income producing business
assets, tangible or intangible.
For example, a privately held software company may have net assets (consisting
primarily of miscellaneous equipment and/or property, and assuming no debt)
valued at $1 million, but the company's overall value (including customers and
intellectual capital) is valued at $10 million. Anybody buying that company would
book $10 million in total assets acquired, comprising $1 million physical assets
and $9 million in other intangible assets. And any consideration paid in excess of
$10 million shall be considered as goodwill. In a private company, goodwill has no
predetermined value prior to the acquisition; its magnitude depends on the two
other variables by definition. A publicly traded company, by contrast, is subject to
a constant process of market valuation, so goodwill will always be apparent.
While a business can invest to increase its reputation, by advertising or assuring
that its products are of high quality, such expenses cannot be capitalized and added
to goodwill, which is technically an intangible asset. Goodwill and intangible
assets are usually listed as separate items on a company's balance sheet.
 Goodwill Valuation

A well-established firm earns a good name in the market, builds trust with the
customers and also has more business connections as compared to a newly set up
business. Thus, the monetary value of this advantage that a buyer is ready to pay is
termed as Goodwill. The buyer who pays for Goodwill expects that he will be able
to earn super profits as compared to the profits earned by the other firms. Thus,
goodwill exists only in the case of firms making super profits and not in the case of
firms earning normal profit or loss

Goodwill is recorded in the books only when some consideration in money or

money’s worth is paid for it. Thus, in the context of a partenership firm, the need for
valuation of goodwill arises at the time of:

1. Change in the profit sharing ratio amongst the existing partners

2. Admission of a new partner
3. The retirement of partener
4. Death of a partner
5. dissolutionf a firm where business is sold as going concern.
6. Amalgamation of partnership firms
 METHOD AND METHODOLOGY:

The method used to gather the required information on the project is an internet
survey method. The Internet has extensive information on this subject. It has a vast
collection of data on the topic of goodwill accounting. The survey has unveiled
information about goodwill accounting, and major few points are listed below,
which are explained in the detailed report of the project.

• What is goodwill accounting

• Various methods of valuation of goodwill accounting • Need for valuation of

goodwill accounting

• Factors affecting goodwill accounting

1. Average Profits Method:

Under this methodology, the worth of Goodwill is calculated by multiplying the

typical Future profit by an exact range of year's purchase.
Goodwill = Future reparable profit when tax x No. of years purchase
The first step below this methodology is that the calculation of average profit
supported the past few years' profits. Past profit is adjusted in respect of any
abnormal things of profit or loss, which can affect future profit. Average profit
could also be supported easy average or weighted average. If profits are constant,
equal weight-age could also be given in hard the typical profits, i.e., the easy
average could also be calculated. However, if the trend shows increasing or
decreasing profit, it's necessary to administer a lot of weight-age to the profits of
recent years.

i] Simple Average: Under this method, the goodwill is valued at the agreed
number of years’ of purchase of the average profits of the past years. Goodwill =
Average Profit x No. of years’ of purchase

ii] Weighted Average: Under this method, the goodwill is valued at an agreed
number of years’ of purchase of the weighted average profits of the past years. We
use the weighted average when there exists an increasing or decreasing trend in the
profits giving the highest weight to the current year’s profit.

 Goodwill = Weighted Average Profit x No. of years’ of purchase

 Weighted Average Profit = Sum of Profits multiplied by weights/ Sum of

weights
Explore more about Treatment of Goodwill

Treatment of goodwill

Accounting treatment of goodwill- death /retirement of partner-

 Accounting treatment of goodwill- change in PSR.

 Accounting treatment of goodwill in case of admission of partner

 Concept of Goodwill

Steps concerned below Average Profits Method:

1. Calculation of past profits before tax.

2. Calculate future-maintainable profit before tax when creating past changes.

3. Calculate Average Past adjusted Profits (taking the easy average or weighted
average as applicable).

4. Multiple Future reparable Profits by a range of years' purchase.

Value of Goodwill = Future reparable Profits x No. of years' purchase.

2. Super Profits Method
(i) The Number of Years Purchase Method: Under this method, the
goodwill is valued at the agreed number of years’ of purchase of the super profits of
the firm.

 Goodwill = Super Profit x No. of years’ of purchase

 # Super Profit = Actual or Average profit – Normal Profit

 # Normal Profit = Capital Employed x (Normal Rate of Return/100)

(ii) Annuity Method : This method considers the time value of money. Here, we
consider the discounted value of the super profit.

 Super profit is that the more than predictable future rectifiable profits over
traditional profits. An enterprise might possess some benefits that change it
to earn additional profits over and on top of the conventional profit that may
be attained if the capital of the business was endowed in another business
with similar risks. The goodwill below this methodology is observed by
multiplying the super profits by a bound range of year's purchase.

 Steps concerned in calculative Goodwill below Super Profit Method:

 Step 1: Calculate capital used (it is that the combination of Shareholders'

equity and future debt or fastened assets and current internet assets).

 Step 2: Calculate traditional Profits by multiplying capital used with a

traditional rate of come back.

 Step 3: Calculate average rectifiable profit.

 Step 4: Calculate the Super Profit as follows:

 Super Profit = Average rectifiable profits - traditional Profits.

 Step 5: Calculate goodwill by multiplying super profit

 Goodwill = Capitalized worth - net assets of the

 business.
  3. Capitalization Method

 The goodwill below this technique is observed by capitalizing the super

profits on the premise of the traditional rate of come back. This technique
assesses the capital required for earning the super profit.

(i) Capitalization of average Profits: Under this method, the value of

goodwill is calculated by deducting the actual capital employed from the capitalized
value of the average profits on the basis of the normal rate of return.

 Goodwill = Normal Capital – Actual Capital Employed

 # Normal Capital or Capitalized Average profits = Average Profits x

(100/Normal Rate of Return)

 # Actual Capital Employed = Total Assets (excluding goodwill) – Outside

Liabilities
(ii) Capitalization of Super Profits: Under this method, Goodwill is
calculated by capitalizing the super profits directly.

 Steps in calculating goodwill by

capitalisation of average profit method
 Step 1: Calculate average estimated profits
 Step 2: Calculate the capitalised average profits
 Step 3: Calculate the value of Actual capital employed or net assets of the
business
 Step 4: Calculate goodwill by subtracting the actual capital employed from
the capitalised average profit


  4. Annuity Method:
Under this methodology, goodwill is calculated by taking average super profit
because of the worth of a regular payment over an explicit variety of years. The
current worth of this annuity is computed by discounting at the given rate of
interest (normal rate of return). This discounted gift worth of the annuity is that the
worth of goodwill. The worth of annuity for Rupee one is often noted by relation to
the annuity tables.

If the value of annuity is not given, it can be calculated with the help of following formula :
 AIMS AND OBJECTIVES:

This project aims to study the method of goodwill accounting treatment in case of
admission, retirement, or death of a partner.

There are many objectives for this project. Major few objectives are given below.

Objectives:

• To understand what is goodwill accounting

. To know the purpose behind goodwill accounting

• To understand the various methods of goodwill accounting

• To know the importance of goodwill accounting

To ascertain any doubts regarding the various methods of valuation of goodwill

• To understand the need for goodwill accounting
Need for valuation of goodwill accounting

Whenever there's any amendment within the existing relationship of the partners
bury see, some partners ought to sacrifice their future profit, and a few others
would gain. Those people who are sacrificing future profit ought to be salaried by
the others who are gaining. This adjustment of the partnership rights could arise
because of the admission of a brand new partner, amendment within the portion
quantitative relation, retirement or death of a partner, and dissolution of the
partnership. The partners, who gain in terms of profit-sharing magnitude relation,
ought to buy such gain as a proportion to the worth of goodwill. The partners, who
lose in terms of portion quantitative relation, receive payments for the sacrifice as a
proportion to the worth of goodwill
. Factors affecting goodwill accounting

1. Nature of business: A firm that deals with smart quality merchandise or has
stable demand for its product is in a position to earn additional profits and so has
additional worth.

2. Location of business: A business that is found within the main market or at an

area wherever there's additional client traffic tends to earn an additional profit and
additionally additional goodwill.

3. Owner's reputation: an owner, who incorporates a smart personal name within

the market, is honest and trustworthy, attracts additional customers to the business,
and makes additional profits and additionally goodwill.

4. Efficient management: a corporation with economic management has high

productivity and value potency. This offers it multiplied profits and, additionally,
high goodwill.

5. Market situation: The organization having a monopoly right or condition within

the market or having restricted competition, permits it to earn a high profit that
successively ends up in the higher worth of goodwill.

6. Special blessings: A firm that has special

advantages like import licenses, patents, trademarks, copyrights, assured an offer

of electricity at low rates, subsidies for being placed in an exceedingly special
economic zona (SEZs), etc. possess a better worth of goodwill.
 DISCUSSON:

Goodwill to the undisciplined person may sound like one thing straightforward and
abstract, but this can be a posh issue that's difficult multiple firms and accounting
corporations.

The quality of it involves tons of problems - recognizing the honest price of assets
in an exceedingly business combination whereas being purchase, recognizing the
thought

transferred (and its honest value). Once the acquisition date, the impairment check
is done annually that will cause goodwill impairment (consistent with IFRS
impairment loss is allotted initially to goodwill) can even be quite difficult.

The retiring or the deceased partner won't be sharing future profits. Thus all
continued partners pay to retire partner the share of Goodwill in gaining magnitude
relation. It's honest to compensate the retiring or deceased partner for an
equivalent. At the time of retirement or death of a partner, we tend to worth the
goodwill on the premise of agreement among the partners.
SUGGESTION:

There are a few opinions and suggestions by family and friends whom I discussed
my project findings with; they are given below:

Goodwill accounting should be taken seriously in any partnership firm.

IOI 4.00

Goodwill accounting says a lot about the partner's professional life.

• Awareness about this topic should be generated through the youth as it might
help them enrich their own professional life.
 ACKNOWLEDGMENT:

My profound gratitude to all the faculty members of the Department for their
timely assistance and encouragement throughout my research work.

I duly acknowledge the encouragement and support from the research scholars in
the department, and all my colleagues and friends.

It gives me immense pleasure to take the opportunity to all the people who are
directly or indirectly involved in the completion of my project based on Studying
The Method Of Valuation Of Goodwill Accounting Treatment In Case Of
Admission, Retirement, Or Death Of A Partner.

With deep reverence, I offer my deepest gratitude without whom this project could
not have been fulfilled.

Lastly, I thank Almighty, my parents, family members, friends, and teachers for
their constant encouragement and support, without which this project would not be
possible.