GOODWILL NATURE AND VALUATION

VALUATION OF  GOODWILL:-

THERE ARE THREE METHODS TO CALCULATE THE GOODWILL:-

1)  AVERAGE PROFIT METHOD

2)  SUPER PROFIT METHOD

3)  CAPITALISATION METHOD

AVERAGE PROFIT METHOD:-  THERE ARE TWO APPROACHES  OF AVERAGE PROFIT
METHOD
    a) SIMPLE AVERAGE PROFIT =  SUM OF PROFITS OF LAST YEARS/SUM OF YEARS.

GOODWILL = AVERAGE PROFIT* YEARS PURCHASE PRICE

2     
        b) WEIGHTED AVERAGE PROFIT = PRODUCT OF TOTAL PROFIT/ SUM OF WEIGHTS.

   

GOODWILL = WEIGHTED AVERAGE PROFIT* YEARS PURCHASE PRICE.

SUPER PROFIT METHOD:- IN THIS METHOD GOODWILL WILL BE CALCULATED BY THE SUPER PROFIT OF A FIRM.

SUPER PROFIT:- SUPER PROFIT IS THE EXCESS OF AVERAGE PROFIT OVER NORMAL PROFIT.

TO CALCULATE THE SUPER PROFIT OF A FIRM WE NEED TO FIND THE AVERAGE PROFIT AND THE NORMAL PROFIT OF A FIRM.

AVERAGE PROFIT CAN BE CALCULATED BY THE METHODS MENTION ABOVE.

CALCULATION OF NORMAL PROFIT:- NORMAL PROFIT IS THAT CERTAIN PROFIT WHICH ANY FIRM CAN MAKE WITH MINIMUM CAPITAL INTRODUCED RELATED TO THAT BUSINESS.

NORMAL PROFIT = AVERAGE CAPITAL EMPLOYED * NORMAL RATE OF RETURN/100

CAPITAL EMPLOYED:- CAPITAL EMPLOYED IS THAT MINIMUM  AMOUNT, WHICH NEED  TO BE  INTRODUCED TO START SAME TYPE OF A BUSINESS IN A MARKET.

 CALCULATION OF CAPITAL EMPLOYED:-

ASSETS SIDE APPROACH = ALL ASSETS – GOODWILL – FICTITIOUS ASSETS – NON TRADE INVESTMENT- OUTSIDE LIABILITIES

LIABILITY SIDE APPROACH:-

CAPITAL + RESERVE - FICTITIOUS ASSETS – NON-TRADE INVESTMENT

SUPER PROFIT = AVERAGE PROFIT – NORMAL PROFIT

GOODWILL = SUPER PROFIT * YEARS PURCHASE PRICE

CAPITALISATION METHOD:- IN CAPITALISATION METHOD WE CALCULATE A CERTAIN AMOUNT OF CAPITAL, WHICH IS REQUIRE TO MAKE A CERTAIN AMOUNT OF PROFIT IN THE SAME BUSINESS.

 THERE ARE TWO METHODS UNDER CAPITALISATION METHOD:-
      

         a) CAPITALISATION OF AVERAGE PROFIT:-

CAPITALISED VALUE OF AVERAGE PROFIT = AVERAGE PROFIT * 100/ NORMAL RATE OF RETURN

GOODWILL = CAPITALISED VALUE OF AVERAGE PROFIT – NET ASSETS

b)  CAPITALISATION OF SUPER PROFIT:- THE FOCUS OF THIS METHOD IS THAT, HOW MUCH CAPITAL IS REQUIRE TO EARN THE SUPER PROFIT. IN THIS METHOD WE HAVE TO CALCULATE THE SUPERPROFIT FIRST ACCORDING TO THE SUPER        PROFIT METHOD. THEN APPLY THIS FORMULA:-

GOODWILL = SUPER RPOFIT * 100/ NORMAL RATE OF RETURN