Goodwill in general, it means reputation of Business.
|Non – Trade Investment||Trade Investment|
Main motive is to earn The main motive is to earn
Business Benefit financial Interest
ROCE and ROI
Return on Capital Employed Return on Investment (ROI)
(Owner’s + Loaner’s) funds Owner’s Fund
Net Profit before Interest Net Profit before Interest
(Owner’s + Loaner’s) funds Loaner’s Fund
For healthy Business ROI should be Greater then ROCE
Note: Own goodwill is never shown in balance sheet. If it is shown then it may be purchase under AS-14(Accounting for Amalgamation) or under AS-26 (Accounting for intangible Assets). Following are the differences between AS-14 and AS-26:
ü Accounted under Amalgamation
ü Resulting due to Negotiation
ü Write off within 5 years
ü Accounted under Intangible Assets
ü Desperately calculated
ü Write off within 10 years
ü While calculating goodwill always assume liquidation.
ü Follow assets approach method. It means sale all assets and settles all Liabilities.
ü Ignore proposed Dividend if given and reverse it back to that account from it is created.ü Ignore non-trade investments only take trade investments.
ü While calculating goodwill if numbers of year is not mention then assume that the goodwill is purchase for 3 year
Market Capitalization Value Future Maintainable Profit
Less: Closing Capital Employed Less:
Normal Profit Returns
ü Market Capitalization Value :
Average Capital Employed * 100
Normal Rate of Return
ü Normal Profit Returns :
Average Capital Employed or closing capital Employed * Normal Rate
ü Closing capital Employed :
All Assets – All Liabilities
ü Future Maintainable Profit :
1. Profit given in Balance sheet is profit after Tax, so convert that profit into PBT.
2. After converting, adjust all abnormal items and also deducted interest income from non-trade Investments.
3. After adjusting all abnormal items, give weights and calculate Future Maintainable Profits.