Valuation of Goodwill

Valuation of Goodwill is an important function of the finance department of an organization. Good will is an intangible asset but not fictitious. Although it is not tangible and it is not used like plant and machinery, furniture and fixtures, land and building, but like other tangible asset it contributes to the profit earning capacity of the business. It is the benefit and advantage of the good name, reputation and connection of a business. In an accountant’s point of view goodwill is said to be that element arising from reputation, connection or other advantages possessed by a business which enables it to earn greater profits than the return normally to be expected on the capital represented by net tangible assets employed in the business.

Types and Factors contributing to the Goodwill of a firm

Goodwill of a business may arise in two ways,

  • It may be inherent to the business, which is generated internally.
  • It may be acquired while purchasing any concern; Purchased goodwill can be defined as being the excess of fair value of the purchase consideration over the fair value of the separable net assets acquired.

There are various factors which contribute to the Goodwill of An organization.

  • Secret or patented manufacturing
  • Good labor relations
  • Outstanding credit rating
  • Good public image
  • Favorable association with another company
  • Discovery of talent or resources
  • Favorable attitudes of customers
  • Good relations with the suppliers

Methods for Goodwill Valuation

There are two accounting methods for goodwill valuation.

  • Capitalization Method: Under this method future maintainable profit is capitalized applying normal rate of return to arrive at the normal capital employed. Goodwill is taken as the excess of normal capital employed over the actual capital employed.
  • Super Profit Method: Excess of future maintainable profit over normally expected profit is called super profit. Under this method goodwill is taken as the aggregate super profit of the future years for which such super profit is expected to be maintained.

Goodwill is a long-term asset categorized as an intangible asset. Goodwill arises when a company acquires another company. The amount of goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets that can be identified, and the liabilities obtained in the purchase. The experts at Emirates Chartered Accountants Group assist the clients to value their goodwill. For more information contact us info@emiratesca.com

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