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Presented by: Presented for:
Prajal, Prateekshya, Bidhyabaridhi Sigdel
Pravin, Priya, Instructor
Rikesh and Rubina
Financial Reporting and Analysis

Example:

Net Value of business Business overall
is 10 million value is 15 million

5 million extra is for
Brand Name
+
The customers
+
The suppliers
+
Its workforce

= Goodwill

“Goodwill is an intangible asset linked to an established
business built over time, as a business gains favorable
reputation for maintaining good customers-suppliers
relationship and effective branding as it is expected to
make profit year after year.”

1. Good Public Relation
2. Regular Customers
3. Quality Maintenance
4. Management Skills
5. Location
6. Good Relation with Suppliers
7. Employees

Good Will (+)

BAD
Good Will (-)

 Positive Goodwill

Cost of
Acquisition > Net Book Value of
Business Net Assets

 Negative Goodwill / Badwill

Cost of
Acquisition < Net Book Value of
Business Net Assets

1. Average Profits Method

2. Super Profits Method

3. Capitalization Method

Goodwill =
Average Profits
X Number of years of Purchase

 Before calculating the average profits the
following adjustments should be made in the
profits of the firm:
a) Any abnormal profits should be deducted from the net
profits of that year.
b) Any abnormal loss should be added back to the net
profits of that year.
c) Non-operating incomes e.g. income from
investments etc should be deducted from the net profits
of that year.

 Goodwill is calculated on the basis of Super
Profits i.e. the excess of actual profits over
the average profits.

 For example if the normal rate of return in a
particular type of business is 20% and your
investment in the business is Rs10,00,000
then your normal profits should be Rs
2,00,000 . But if you earned a net profit of Rs
2,30,000 then Rs 2,30,000 – Rs 2,00,000 = Rs
30,000 are your super profits.

 For calculating Goodwill,
 Super Profits are multiplied by the number of year
of purchase.
i. Normal profits = Capital Invested × Normal rate
of return/100
ii. Super Profits = Actual profits – Normal Profits
iii. Goodwill = Super Profits × No. of years purchased

1. Capitalization of Average Profits Method

2. Capitalization of Super Profits Method

 Under this method we calculate the average
profits and then assess the capital needed for
earning such average profits on basis of normal
rate of return. such capital is called capitalization
value of average profit.


 Goodwill = capitalized value of the firm - net assets

 Capitalized value
= average profit/normal rate of return*100
 Net assets =total assets-external liabilities


 Example:
▪ A firm earns Rs.65000 as its average profits. The
usual rate of earnings is 10%.the total assets of
the firm amounted to Rs.680000 and liabilities
are Rs.180000.

 Calculation:
▪ Total Capitalization Value=65000/10*100 =
650000
▪ Net Assets = 680000-180000 = 500000
▪ Goodwill = Total Capitalization Value - Net Assets
= 650000 - 500000
= 150000

 we calculate the Super Profits and then calculate
the capital needed for earning such super profits
on the basis of normal rate of return
 Goodwill
= Super Profits X (100/ Normal Rate of Return)

 Example:
▪ Verma Brothers earn a profit of Rs. 90,000 with
a capital of Rs. 4, 00,000. The normal rate of
return in the business is 15%.

 Calculation
▪ Normal Profit = Rs. 4, 00,000 x 15/100 = Rs. 60,000
▪ Super Profit = Rs. 90,000 – Rs. 60,000 = Rs. 30,000
▪ Goodwill = Super Profit x 100/Normal Rate of Return
= Rs. 30,000 x 100/15 = Rs. 2, 00,000

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Goodwill

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