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Valuation of Goodwill

This document discusses three methods for valuing goodwill in a business: 1. The average profits method, which values goodwill as a multiple of average or weighted average historical profits. 2. The super profits method, which values goodwill as a multiple of profits above a normal rate of return on capital employed. 3. The capitalization method, which values goodwill as the difference between a business's normal capital value and its actual capital employed.

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Komal Sharma
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39 views1 page

Valuation of Goodwill

This document discusses three methods for valuing goodwill in a business: 1. The average profits method, which values goodwill as a multiple of average or weighted average historical profits. 2. The super profits method, which values goodwill as a multiple of profits above a normal rate of return on capital employed. 3. The capitalization method, which values goodwill as the difference between a business's normal capital value and its actual capital employed.

Uploaded by

Komal Sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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TECHNICAL SHIVAM <shivampathak63527@gmail.com> Tue, 26 Feb 2019 at 10:52 pm


Draft to: kbsworld@123.com

1. Average Profits Method


i] Simple Average: Under this method, the goodwill is valued at 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 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 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
2. Super Profits Method
(i) The Number of Years Purchase Method: Under this method, the goodwill is valued at 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.

Goodwill = Super Profit x Discounting Factor


3. Capitalization Method
(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

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