Goodwill and Valuation of Goodwill

GOODWILL AND VALUATION OF GOODWILL
THE TAMIL NADU NATIONAL LAW SCHOOL,

TIRUCHIRAPPALLI.
ACADEMIC SESSION:
2015-2016
ACCOUNTANCY PROJECT
SUBMITTED TO:
SUBMITTED BY:
PROFF. P.KUMURESAN
PRANAV MUNDRA
TNNLS
B,Com.LL.B(HONS.)
Tiruchirappalli
1|Page ACCOUNTANCY PRO JECT
ROLL NO. bc0140040
ACKNOWLEDGEMENTS
At the outset, I take this opportunity to thank my Professor P. Kumuresan from the bottom of
my heart who has been of immense help during moments of anxiety and torpidity while the
project was taking its crucial shape.
Secondly, I convey my deepest regards to the administrative staff of TNNLS who held the
project in high esteem by providing reliable information in the form of library infrastructure
and database connections in times of need.
Thirdly, the contribution made by my parents and friends by foregoing their precious time is
unforgettable and highly solicited. Their valuable advice and timely supervision paved the
way for the successful completion of this project. Hence as a student, I am extremely
grateful and forever deeply indebted to him.
Finally, I thank the Almighty who gave me the courage and stamina to confront all hurdles
during the making of this project. Words arent sufficient to acknowledge the tremendous
contributions of various people involved in this project--- as I know Words are Poor
Comforters. I once again wholeheartedly and earnestly thank all the people who were
involved directly or indirectly during this project making which helped me to come out with
flying colors.
TABLE OF CONTENTS:
OBJECTIVES4
METHODOLOGY4
DEFINITION OF GOODWILL.5
FACTORS AFFECTING THE CALCULATION OF GOODWILL6
NEED FOR VALUE OF GOODWILL.7
VALUATION OF GOODWILL9
CALCULATION OF GOODWILL OF BHEL THROUGH VARIOUS METHODS...11
CALCULATION OF GOODWILL OF BHEL..15
BIBLIOGRAPHY...19
OBJECTIVES
The objectives of making this project i.e. GOODWILL AND VALUATION OF GOODWILL is
to know about the meaning of goodwill and also how it effect the firms reputation,profit and loss
and also its financial position and this project is mainly concentrated on how to calculate a
companys goodwill.
METHODOLOGY
I have work on this project GOODWILL AND VALUATION OF GOODWILL.I have used the
second hand resources which I have taken from various media,journals etc. and only secondary
data is being used while making this assignment.
DEFINITION OF GOODWILL
Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing
business, but pays more than the fair market value of the net assets (total assets - total liabilities).
The goodwill amounts to the excess of the "purchase consideration" (the money paid to purchase
the asset or business) over the total value of the assets and liabilities. It is classified as an
intangible asset on the balance sheet, since it can neither be seen nor touched or in other words
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 brand, 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.
According to Spicer and Pegler goodwill is defined as, goodwill is said to be that element
rising from the 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 the
net tangible assets employed in the business.

FACTORS AFFECTING THE CALCULATION OF GOODWILL:
Various factors affecting the value of goodwill are as follows:
1. Nature of business. It means the prevailing competition, level of risk involved, govt.
Regulations, nature of demands etc. If the existing business units are earning more than normal
profits and have secured monopolistic position, they will be enjoying more goodwill.
2. Favourable location. It is very well known that certain cities or places are most suitable for
particular industries, business having units falling under same areas can enjoy the goodwill by
selling more products. It must be noted that goodwill arises in a particular locality only because
shopping space is limited in relation to demand for it.
3. Capital requirements. Amount of capital required for a business is also influence the value of
goodwill. The business requiring less capital can realise higher amount of goodwill than another
business earning less profits with a huge amount of capital.
4. Life of the business. Time also increases the value of goodwill. Business running on
profitable lines for the last many year enjoys more goodwill as compared to the recent started
business.
5. Risk involved in the business. The value of goodwill is likely to be higher in the low risk
business. On the contrary, if the business is purely of speculative nature and is very risky, the
goodwill will have very little value.
6. Profit trends. When the last years records of the business shows the constantly increasing
profits, it will lead to attract higher value for its goodwill.
7. Nature and extent of competition. The value of goodwill of a business is is greatly affected
by the degree of competition. If the competition is negligible or if there is no competition, the
value of goodwill will be more or vice-versa.

Need for value of goodwill.
It depends on the form of business organization.
Sole traders: under the sole trade4rs form of business organization the need for the valuation of
goodwill may arise in the following circumstances:
a. When the business is sold.

b. When a new person is admitted in the firm and the firm becomes a partnership firm.
c. When the business is converted into a company.
Partnership firm: Under the partnership form of business organization the need for the valuation
of goodwill may arise in the following circumstances:
a. When a new partner is admitted to a partnership firm.
b. When an existing partner retires or dies.
c. When there exists any change in the profit sharing ratio of the existing partners.
d. When whole of the partnership firm is sold out to any other firm or person.
e. When a partnership firm is converted into a company.
f. When there is a case of amalgamation of two firms.
Companies: In case of a company, the need for valuation of goodwill may arise in the following
circumstances:
a. When there is a situation of amalgamation of two companies.
b. When the business of the company is sold to another existing company.
c. When one class of the shares is converted to another.
d. When a company acquires the controlling interest in the company and becomes a holding
company.
e. When there arises a need for the valuation of the shares of the company.
f. When shares of the company are not listed on the stock exchange and they have to be valued
for taxation purposes.

VALUATION OF GOODWILL
Methods of Valuation of Goodwill

Value of goodwill = Actual/Average Profit x No. of years purchase
(a) Actual/Average Profit = Total Profits / Total number of year for which profit and loss is
given
The following adjustments should be taken into account while calculating and loss average
profit:
(I) Abnormal loss of a year such as loss from fire or theft etc. should be added back to
that profit.
(II) Abnormal income of a year such as income from speculation or lottery etc. should
be deducted out of profit of that year.
(III) Normal expenses of a year, if not deducted out of profits, should be deducted out of
profits of that year.
(IV) Normal income of a year, if not added in the profits, should be added to the profit
of that year.
(V) Remuneration of proprietor of a year should be deducted out of profits of that
year.
(b) Number of years purchase means for how many years, the firm will earn the same
amount of profit because of its previous efforts, after being purchased by another firm.
After making the above adjustment the average profit is known as actual average profit
or average maintainable profit in future.

(ii) Super Profit Method: It is the excess of the average profits over the normal profits based on
normal rate of return for representative firm in industry. For computation of super profit, the
following three factors are required
(a) Actual/Average Profit = Total Profits/No. of years
Normal Profit = Capital Invested x Normal Rate of Return/100
(b) Where Capital Invested = Assets External Liabilities
(c) Super Profit = Actual/Average Profit-Normal Profit
(d) Value of Goodwill= Super profit x No. of years purchase
(iii) Capitalization Method: There are two methods of calculation of goodwill under
capitalization method, viz.
a. Capitalization of average trading profit: |Under this method normal capital employed is be
found out by capitalizing average trading profit. Normal capital employed means the amount of
capital must be invested in the same class of business to earn such average trading profit. But if
actual capital employed is less than the normal capital employed, then such difference will be the
goodwill of the firm.
b. Capitalization of super profit: In this case goodwill is calculated by capitalizing the super
profit at the normal rate of return. This method attempt to determine the amount of capital
needed for earning super profit. Under this method,
Goodwill = super profit x 100/normal rate of return.
(a) Capitalization of actual/average method :
Value of Goodwill = Capitalized value of average profit Actual capital employed (or Net
Assets)
According to this method, the following steps should be adopted:
(I) Actual/ Average profit is calculated in the same manner which has been explained
earlier.
(II) Capitalized value of actual/average profit = Actual/ Average Profit X 100/Normal
rate of return
(III) Actual capital employed (or Net Assets) = Total assets (excluding goodwill) minus
outside liabilities.
10 | P a g e A C C O U N T A N C Y P R O J E C T

(b) Capitalization of Super Profit Method: As the name suggests, this method tries to
assess the capital needed for earning the super profit. This capital is known as goodwill.
Following formula can be used for calculating goodwill :
Value of goodwill = Super profit x 100/ Normal rate of return
CALCULATION OF GOODWILL OF BHEL THROUGH VARIOUS

METHODS:

PROFIT AND LOSS STATEMENT OF BHEL:
Parameters
MAR'15
MAR'14
MAR'13
MAR'12
MAR'11
( Cr.)
( Cr.)
( Cr.)
( Cr.)
( Cr.)
31,104.00
40,451.60
50,328.95
49,825.45
44,017.46
Less :Inter divisional transfers
0.00
0.00
0.00
0.00
0.00
Less: Sales Returns
0.00
0.00
0.00
0.00
0.00
1,145.58
1,627.87
2,211.15
2,094.86
1,980.00
29,958.42
38,823.73
48,117.80
47,730.59
42,037.46
338.04
1,053.65
116.21
823.20
127.35
13,703.99
17,141.26
23,043.84
24,549.35
19,417.59
554.57
603.52
555.78
510.25
402.86
Employee Cost
5,447.91
5,930.68
5,750.10
5,462.66
5,394.68
Other Manufacturing Expenses
4,410.43
5,291.14
5,189.54
4,587.96
4,057.43
General and Administration Expenses
457.60
475.49
496.59
476.78
407.57
Selling and Distribution Expenses
345.14
405.70
601.72
649.85
391.14
4,980.99
4,683.81
4,479.75
3,250.85
4,380.99
0.00
0.00
0.00
0.00
0.00
29,562.59
35,585.25
40,233.53
38,664.50
34,324.91
395.83
3,238.48
7,884.27
9,066.09
7,712.55
Other Income
2,913.15
2,891.37
2,626.83
2,087.45
1,891.74
Operating Profit
3,308.98
6,129.85
10,511.10
11,153.54
9,604.29
91.65
132.63
125.27
51.28
54.73
PBDT
3,217.33
5,997.22
10,385.83
11,102.26
9,549.56
Depreciation
1,077.32
982.92
953.39
800.00
544.12
Profit Before Taxation & Exceptional
2,140.01
5,014.30
9,432.44
10,302.26
9,005.44
0.00
0.00
0.00
0.00
0.00
Profit Before Tax
2,140.01
5,014.30
9,432.44
10,302.26
9,005.44
Provision for Tax
720.72
1,553.52
2,817.71
3,262.30
2,994.24
1,419.29
3,460.78
6,614.73
7,039.96
6,011.20
Gross Sales
Less: Excise
Net Sales
EXPENDITURE:
Increase/Decrease in Stock
Raw Materials Consumed
Power & Fuel Cost
Miscellaneous Expenses
Expenses Capitalised
Total Expenditure
PBIDT (Excl OI)
Interest
Items
Exceptional Income / Expenses
PAT
BALANCE SHEET OF BHEL:
Parameters
MAR'15
MAR'14
MAR'13
MAR'12
MAR'11
( Cr.)
( Cr.)
( Cr.)
( Cr.)
( Cr.)
489.52
489.52
489.52
489.52
489.52
34,084.60
33,047.05
30,444.10
25,373.21
20,153.84
LongTerm Borrowings
0.00
0.00
0.00
0.00
0.00
Secured Loans
0.00
0.00
0.00
0.00
0.00
61.00
104.77
129.20
123.43
102.14
2,220.73
1,968.95
1,550.69
1,546.24
2,163.55
Other Long Term Liabilities
4,657.18
5,835.26
5,033.58
6,941.75
8,758.40
Long Term Trade Payables
701.66
764.91
756.10
616.84
384.00
Long Term Provisions
12,664.67
15,503.88
15,212.25
13,299.17
4,923.23
Total NonCurrent Liabilities
15,863.78
20,239.87
19,580.44
19,434.95
12,004.22
8,798.94
8,717.84
9,675.18
10,254.82
8,095.42
EQUITY AND LIABILITIES

Share Capital
Share Warrants & Outstandings
Shareholder's Funds
Unsecured Loans
Deferred Tax Assets / Liabilities
Trade Payables
Current Liabilities
Other Current Liabilities
9,123.31
11,445.32
13,862.37
15,824.60
14,169.95
Short Term Borrowings
0.00
2,550.00
1,286.00
0.00
0.00
Short Term Provisions
4,285.23
2,829.59
2,998.11
2,635.69
2,673.31
Total Current Liabilities
22,207.48
25,542.75
27,821.66
28,715.11
24,938.68
Total Liabilities
72,155.86
78,829.67
77,846.20
73,523.27
57,096.74
0.00
0.00
0.00
0.00
0.00
12,588.80
12,050.49
10,783.26
9,706.64
8,049.74
8,450.53
7,360.39
6,328.12
5,409.83
4,649.00
0.00
0.00
0.00
0.00
0.00
4,138.27
4,690.10
4,455.14
4,296.81
3,400.74
2.25
2.84
3.35
0.00
0.18
500.50
622.01
1,133.51
1,324.63
1,723.40
17.30
20.11
38.08
22.98
10.36
Preoperative Expenses pending
0.00
0.00
0.00
0.00
0.00
Assets in transit
0.00
0.00
0.00
0.00
0.00
417.67
420.17
429.17
461.67
439.17
NonCurrent Assets
ASSETS
Gross Block
Less: Accumulated Depreciation
Less: Impairment of Assets
Net Block
Lease Adjustment A/c
Capital Work in Progress
Intangible assets under development
Non Current Investments

Long Term Loans & Advances
18,542.16
21,055.28
20,826.93
18,576.43
8,132.65
Other Non Current Assets
0.17
0.32
0.56
0.78
112.38
Total NonCurrent Assets
23,618.32
26,810.83
26,886.74
24,683.30
13,818.88
Total Reserves
33,595.08
32,557.53
29,954.58
24,883.69
19,664.32
0.00
0.00
0.00
0.00
0.00
10,101.66
9,797.55
11,763.82
13,548.73
10,852.05
9,812.70
11,872.93
7,732.05
6,671.98
9,630.15
176.96
254.47
202.62
152.20
311.69
2,222.72
2,021.97
2,026.48
2,110.13
2,380.47
48,537.54
52,018.84
50,959.46
48,839.97
43,277.86
26,330.06
26,476.09
23,137.80
20,124.86
18,339.18
48,537.54
52,018.84
50,959.46
48,839.97
43,277.86
0.00
0.00
0.00
0.00
0.00
Total Assets
72,155.86
78,829.67
77,846.20
73,523.27
57,096.74
Contingent Liabilities
10,305.34
10,460.62
7,711.88
5,874.80
2,870.30
Total Debt
117.83
2,722.45
1,490.44
185.86
157.26
Book Value (in )
139.26
0.00
124.38
103.67
411.71
Adjusted Book Value (in )
139.26
0.00
124.38
103.67
82.34
Current Assets Loans & Advances

Currents Investments
Inventories
Cash and Bank
Other Current Assets
Short Term Loans and Advances
Total Current Assets
Net Current Assets (Including Current
Investments)
Total Current Assets Excluding Current
Investments
Miscellaneous Expenses not written off
CALCULATION OF GOODWILL OF BHEL:
1. CALCULATION OF GOODWILL BY AVERAGE PROFIT METHOD

We know that,
Goodwill=adjusted average profit*no. of year purchase...1
Since,
Profit after tax:
31 march 2015- 1419.29
31 march 2014- 3460.28
31 march 2013 - 6614.73
31 march 2012- 7039.96
31 march 2011- 6011.20
Adjusted average profit for 5 years= 1419.29+3460.28+6614.73+7039.96+6011.20/5

=4909.09.2
No.of year purchase=3 years (assumed)
Goodwill= 4909.09 *3=14727
2. CALCULATION OF GOODWILL THROUGH SUPER PROFIT METHOD:

We know that,
Goodwill= super profit*no.of year purchase
Super profit= adjusted average profit-normal profit
Here,
Adjusted average profit=4909.29(from 2)
Normal profit for year 2015=capital employed in 2015*NRR/100...............3
Capital employed=total assets+(current assets-current liabilities)
Therefore,
Capital employed in 2015= 72155.86-22207.48= 49948.38
Hence,
Normal profit for 2015=2996.88
Therefore,
Super profit in 2015=4909-2996= 1913
Super profit in 2014=4909-3377=1532
Super profit in 2013=4909-3001=1908
Super profit in 2012=4909-2688= 2221
Super profit in 2011=4909-1929= 2980

Goodwill:
For 2015= super profit in 2015* no.of year purchase
= 1913*3=5739
Similarly,
For 2014= 1532*3= 4596
For 2013= 1908*3= 5724
For 2012= 2221*3= 6663
For 2011= 2980*3= 8940
3. CAPITALIZATION METHOD BY AVERAGE PROFIT

Goodwill= Capitalized value-capital employed
Capitalized value of average profit = Average profits x (100 / normal rate of return)
So, capitalized value of average profit= 4909*100/6=81817
Goodwill for 2015= capitalized value capital employed in 2015
= 81817-49948
= 49948.38 = 31869
Goodwill for 2014= Capitalized value capital employed in 2014
= 81817-53286
= 28531
Similarly,
Goodwill for 2013=81817-50024 =31793
Goodwill for 2012=81817- 44808 =37009
Goodwill for 2011= 81817-32158=49659

4. CALCULATION OF GOODWILL BY CAPITALIZATION OF SUPER PROFITS
Goodwill = super profit*100/NRR
Goodwill for 2015 = super profit in 2015*100/NRR
= 1913*100/6
=31883
Goodwill for 2014= super profit in 2014*100/NRR
=1532*100/6
=25533
Goodwill for 2013 =super profit in 2013*100/NRR
=1908*100/6
=31800
=2221*100/6
= 37016
=2980*100/6
=49667

BIBLIOGRAPHY:
VARIOUS BOOKS REFFERED:
ADVANCED ACCOUNTANCY-DR.M.A ARULANANDAM
ACCOUNTANCY-II- TS.GREWAL
BASIC CONCEPTS OF ACCOUNTANCY-HIMALAYA PUBLICATIONS
VARIOUS WEBSITES:
HTTP://WWW.TYROCTY.COM
HTTP://WWW.CLB.NIC.IN
HTTP://WWW.IIMB.ERNET.IN

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THE TAMIL NADU NATIONAL LAW SCHOOL,