CORPORATE ACCOUNTING

STUDY ON
VALUATION OF GOODWILL OF TATA
MOTORS
Submitted in partial fulfilment of the requirements
for the award of the degree B.COM., LL.B. (Hons)
Submitted by

M.MANOJ
BCO150013
Submitted to

DR.P.KUMARESAN

TAMIL NADU NATIONAL LAW SCHOOL

TIRUCHIRAPPALLI 620 009

9.4.2016
VALUATION OF GOODWILL

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DECLARATION
I hereby declare that the project entitled STUDY ON VALUATION OF GOODWILL OF TATA
MOTORS submitted to Dr.P.Kumaresan, M.Com. M.Phil., Ph.D.,in the partial fulfillment for
the award of the degree of B.COM L.L.B and the project has not previously formed the basis for
any other degree, diploma or other title.

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ACKNOWLEDEMENT
With our sincere regards, we wish to acknowledge our indebtedness and gratitude to the
contribution of people who helped us at every stage of the project.

We are very much like to express our gratitude and profoundest thank to
Dr.P.Kumaresan,M.Com., M.Phil., Ph.D.for their sustained guidance, invaluable suggestion
and constant encouragement without which it would not have been possible for me to complete
this project.

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CORPORATE ACCOUNTING

INDEX
CONTENT
INTRODUCTION
RESEARCH METHODOLOGY
GOODWILL
TYPES OF GOODWILL
NEED FOR VALUING GOODWILL
METHOD FOR VALUATION OF GOODWIL
TATA MOTORS
BALANCE SHEET OF TATA MOTORS
VALUATION OF GOODWILL OF TATA MOTORS
CONCLUSION
BIBLIOGRAPHY

PG .NO

INTRODUCTION
Goodwill in simple word, mean the good name or the reputation of the business which attract
more customers and therefore, help in earning more profit in future. It is an intangible real asset
and not a fictitious one. It is perhaps the most intangible of intangibles. Good is a valuable
asset if the concern is profitable, on the other hand, it is valueless if the concern is a losing one.
Therefore, it can be stated that goodwill represents the value of the reputation of a frim.

The capacity of a business to earn profit in future is basically what is meant by the term
goodwill
-J.O.Magee
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Goodwill is the present value of a frims anticipated excess earning
-Dr.Canning
According to the Institute of Chartered Accountant of India, goodwill is an intangible asset
arising from business connection or trade name or reputation

Mr.P.D. leake has classifid goodwill as under:

a) Dog - goodwill

b) Cats - goodwill

c) Rat - goodwill

Dogs are attached to the person and hence,

such customer lead to personal goodwill which
is not transferable
Since cats prefer to live in the old home,
similarly such customer give rise to locality
goodwill
The other varity of customer has attached
neither to the person nor to the place which in
other word is known as fugitive goodwill

Financial advisers are often asked to value goodwill within a corporate transaction environment.
These goodwill valuations may be performed in the due diligence phase of the corporate
transaction for transaction pricing and structuring purposes. These goodwill valuations may be
performed in the consummation phase of the corporate transactionas part of the preparation of
a transaction fairness opinion or solvency opinion. And, these goodwill valuations may be
performed within the controversy phase of the corporate transactionto defend against
dissenting shareholder appraisal rights claims or claims that the transaction resulted in a
fraudulent transfer. For some transaction-related purposes, financial advisers may value goodwill
as a residual amount (i.e., the residual of a total business or professional practice value minus the
value of all identifiable tangible assets and intangible assets). For other transaction-related
purposes, financial advisers may value goodwill as an individual, income-producing intangible
asset. This discussion summarizes the generally accepted goodwill valuation approaches,
methods, and procedures.
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RESEARCH METHODOLOGY
RESEARCH: Project is made out of secondary data collected from various source like
newspaper, magazines, from the official website of TATA MOTORS

VALUATION OF GOODWILL

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OBJECTIVE: This project helps me to understand what all about valuation of goodwill .It
helped in knowing the goodwill of the TATA MOTORS. This research leads to gain more
information and idea about role of goodwill in the company.

PROBLEM:

GOODWILL
Goodwill is an intangible asset since it cannot be seen or felt. However, it is not fictious in the
case of profitable concern. It can be sold, though a sale will be possible only among with the sale
of business itself. Sometime, goodwill is more valuable than the tangible assest.
Assets can be classified as real or financial assets. Financial assets include assets such as shares;
bonds etc and real assets include physical assets such as plant & machinery, furniture etc.
Valuation is an important criterion while choosing investment portfolio, in deciding the price to
be paid or to be received in case of a takeover, merger, amalgamation, and sale /transfer of
entities and in making investment. The basic premise of valuation is to make an approximate
estimate of the value of assest.

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Goodwill is an intangible asset. Goodwill can be defined as value of reputation or position of an
enterprise; it consists of the benefits a business enjoys in connection with its employees,
customers or third party.

Characteristics of Goodwill:
1. Goodwill is a real intangible asset.
2. Goodwill can be sold only with the entire business. It cannot be sold in part or in isolation
except on admission or retirement of a partner when the new partner compensates the old
partners or the retiring partner gives up his rights in favour of remaining partners.
3. The value of goodwill fluctuates from time to time and hence it is difficult to place an
exact cost on goodwill.
4. The value of goodwill is based on subjective judgement of the valuer.
5. Goodwill may be negative for a firm. It happens when the purchase price of the acquired
firm is less than its net assets.

Sources of goodwill

The location of the business premises e.g., a retail shop located in a busy market
centre.
The reputatuion of the article sold arising from the high standard or quality of the
good themselves.
The personality and reputation of the owner or management, arising through
his/its skills and influence, as in the case of a professional man. For example, a
chartered accountant.
Possession of trade marks, patent or copyrights.
Possession of advantageous contracts or complete or partial monopoly.
Development of the business and shopopping facilities with the changing
condition of the market e.g, provision for the visitors room.

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Any government or any legislative or any other special advantage enjoyed by the
frim. E.g., inclusion in the list of approved suppliers to government, Municipals
Corporation or C.P.W.D etc.

Goodwill is not generally recorded in the book of accounts everenthough it does exist in a
business firm. In fact, goodwill should not apear in the book of a business unless:

It has been purchased and paid for.

It is necessary to bring it into the book of account in connection with admission of a new
partner or retirement or death of an existing patner. Moreover, to write up a created
goodwill is regarded as contrary to good accounting practice. In a way it is a sort of secret
reserve.

TYPES OF GOODWILL
Goodwill may be of two types:

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PURCHASED GOODWILL
It is defined as the excess of purchase consideration paid over the fair of net assets acquired.
Accounting for fixed Assets state that goodwill should be recorded in the book only when some
consideration in money or moneys worth has been paid for it.

NON PURCHASED GOODWILL:

Non purchased goodwill is any goodwill other than purchased goodwill. It is generated (or
raised) internally by the business over a period of time. No cost is placed on such goodwill and
its valuation is the subjective judgment of valuer.
Internally generated goodwill should not be recognized as an asset.

NEED FOR VALUING GOODWILL

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CORPORATE ACCOUNTING
In the case of a going concern, when the business is going to be sold, the mutual rights of the
parties concerned are changed. A party which is making sacrifice must be compensated and that
is normally on the basis of goodwill.
Goodwill is to be valued in the following circumstances:
a)
b)
c)
d)
e)
f)
g)
h)

When a new partner is admitted;

When a partner retires or dies;
When there is a change in profit ratio;
When the business of the company taken over by another company e.g., in case of
amalgamation or absorption.
When the companys shares not quoted on the stock exchange and their value is to be
determined for the purpose of estate duty and wealth tax etc.
When a person want to purchase a large block of the companys shares with a view to
acquire control over the management of the company.
When the business of the company taken over by the government.
When the management wants to write back goodwill which it wrote off earlier to reduce
or elimination the debit balance in the profit & Loss Account.

The need for valuation of goodwill depends on the form of business organization.
1. Sole Traders: the need for valuation of good will arises when:
The business is sold off.
The business is converted into a partnership firm or company.

2. Partnership firm: for a partnership firm the valuation of goodwill arises under following
circumstances: Admission of a new partner to the firm.
Retirement or death of an existing partner.
Change in then profit sharing ratio of the existing patners.
Amalgamation of two firms.
The existing firm is sold or converted into private limited company.

3. Joint stock company: In case of a company, the need for the valuation of goodwill arises
on:
Amalgamation or merger of two companies.
Acquisition of controlling interest in another company.
Valuation of shares, when the stock exchange quotations are not available.
VALUATION OF GOODWILL

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When one class of shares are converted into another class of shares.

METHOD OF VALUATION OF GOODWILL:

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AVERAGE PROFIT METHOD

Under this method, goodwill is valued on the basis of an agreed number of years purchase of the
average annual profit, calculated by reference to recent years and having regard to the probable
maintenance of such profit in future years. Here are two important steps in the consumption.
a) Average normal profit of the past three or four years must be computed. Any
abnormal or non recurring losses and gain should be removed from the profit.
Then any future expected saving or additional expenses should be adjusted from
the average profit
b) The years of profit should be determined, which depends on the capacity of the
firm to maintain future profit.
Goodwill is the product of average profit multiplied by the number of years.

In this method, the averages of actual profits of previous years have to be adjusted in accordance
with future events, such profits are known as future maintainable profit.

SUPER PROFIT METHOD:

Average profit of the firm is compared with the normal profit on the invested capital in the firm.
Excess of average profit over normal profit is known as super profit. Defined in another way
super profit is the excess of profit which can be expected in future year over and above what is
VALUATION OF GOODWILL

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necessary for paying a fair return on capital employed, having regard to the risk involved in that
of business and fair managerial remuneration.
This method thus presumes normal profit to cover interest on capital and managerial
remuneration and the profit of a business in excess of the normal yield are called super profit.
Super profit refers to the excess of future maintainable profit over the normal profit based on the
normal rate of return of the company.

ANNUITY METHOD
Under this method, super profit is being considered as the value of annuity aver a certain number
of years and for this purpose, compound interest is calculated at a certain respective percentage.
The present value of the said annuity will be the value of goodwill. This method is based on the
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logic that the purchaser should pay now for goodwill only at the proper rate of interest. The
present value of the annuity for a given number of years at a particular rate of interest can be
ascertained by reference to annuity table.
As per the annuity method, value of goodwill is the present value of an annuity of the annual
super profits which the purchaser will recover over a time. Goodwill is calculated by multiplying
the future super profit with appropriate discount rate.

Usually reference to the annuity table will give the present value of annuity for a given number
of years and at the given rate of interest.

GOODWILL = AVERAGE ANNUAL SUPER PROFIT * ANNUITY RATE

CAPITALISATION METHOD
Under this method, the total value of the business (or) capitalized value of business is found out
by capitalizing the expected average profit on the basis of normal rate of return. The value of

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goodwill is the difference between the capitalized value of the business so found out and the
actual capital employed in the business.
There are two methods for calculating the value of goodwill in this method
a) Capitalization of super profit
b) Capitalization average profit

A. Capitalization of super profit: In this method, the super profit, the super profit are
capitalized at the normal rate of return to obtain the value of goodwill.

B. Capitalization of average profit: In this method the value of the goodwill is the
difference between captilalised value of future maintainable profit and actual employed in
the business

TATA MOTORS
VALUATION OF GOODWILL

CORPORATE ACCOUNTING
Tata motors limited is a multinational automotive manufacturing company headquartered in
Mumbai, Maharashtra, India, and a subsidiary of the Tata Group. Its product includes passenger
cars, trucks, vans, coaches, buses, construction equipment and military vehicles. It is the worlds
17th largest motor vehicle manufacture, and second-largest bus manufacture by volume.
Tata Motors has auto manufacturing and assembly plants in Jamshedpur, Pantnager, Lucknow,
Sanand, Dharwad, and pune in india, as well as in argentina, south Africa, Thailand, and the
united kingdom. It has research development centres in pune, Jamshedpur, lucknow, and
Dharwad, India and in south Korea, Spain, and the united kingdom. Tata Motors principal
subsidiaries purchased the British premium car maker jaguar land rover and the South Korean
commercial vechile manufacturer Tata Daewoo. Tata Motors has a bus manufacturing joint
venture with Macropolo .S.A a construction equipment manufacturing joint venture with
Hitachi and a joint venture with fiat Chrysler which manufactures automotive components and
fiat Chrysler and Tata branded vehicle.
Founded in 1945 as a manufacturer of locomotive, the company manufactured its first
commercial vehicle in 1954 in collaboration with Daimler-Benz AG, which ended in 1969. Tata
Motors entered the passengers vehicle market in 1991 with the launch of the Tata Sierra,
becoming the first Indian manufacturer to achieve the capability of developing a competitive
indigenous automobile. In 1998, Tata launched the first fully indigenous Indian passanger car,
the Indica, and in 2008 launched the Tata Nano, the worlds cheapest car. Tata Motors acquired
the South Korean truck manufacturer Daewoo Commercial Vehicle Company in 2004 and
purchased jaguar land Rover from ford in 2008.
Tata Motors is listed on the Bombay Stock Exchange, where it is a constituent of the BSE
SENSEX index, the National Stock Exchange. The company is ranked 226th on the Fortune
Global 500 list of the worlds biggest corporation as of 2016.

BALNCE SHEET OF TATA MOTORS

VALUATION OF GOODWILL

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Particulars

Mar'16

Mar'15

Mar'14

Mar'13

Mar'12

12 Months

12 Months

12 Months

12 Months

12 Months

679.18

643.78

643.78

638.07

634.75

Reserves & Surplus

21666.03

14195.94

18510.00

18473.46

18967.51

Net Worth

22368.08

14862.59

19176.65

19134.84

19626.01

3717.42

4803.26

4450.01

5877.72

6915.77

Unsecured Loan

10322.26

15277.71

10065.52

8390.97

4095.86

TOTAL LIABILITIES

36407.76

34943.56

33692.18

33403.53

30637.64

Gross Block

29204.83

27973.79

26130.82

25190.73

23676.46

(-) Acc. Depreciation

13440.86

12190.56

10890.25

9734.99

8656.94

Net Block

15741.10

15760.36

15217.70

15432.43

14995.77

6480.89

6040.79

6355.07

4752.80

4036.67

Investments

18711.46

16987.17

18458.42

19934.39

20493.55

Inventories

4902.20

4802.08

3862.53

4455.03

4588.23

Sundry Debtors

1568.46

1114.48

1216.70

1818.04

2708.32

Cash and Bank

452.08

944.75

226.15

462.86

1840.96

Loans and Advances

4547.19

4270.67

4374.98

5305.91

5832.03

Total Current Assets

11469.93

11131.98

9680.36

12041.84

14969.54

Current Liabilities

13393.95

12282.33

13334.13

16580.47

20280.82

2624.54

2717.28

2708.11

2200.77

3600.82

Total Current Liabilities

16018.49

14999.61

16042.24

18781.24

23881.64

NET CURRENT ASSETS

-4548.56

-3867.63

-6361.88

-6739.40

-8912.10

.00

.00

.00

.00

.00

36407.76

34943.56

33692.18

33403.53

30637.64

Liabilities
Share Capital

Secured Loan

Assets

Capital Work in Progress

Provisions

Misc. Expenses
TOTAL ASSETS(A+B+C+D+E)

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VALUATION OF GOODWILL