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216 Corporate Finance BRILLIANT’S

Note: It is a generally accepted practice to ZmoQ>… AH$mC§qQ>J {gñQ>‘ ‘| nM©oñS> JwS>{db H$mo nhMmZZm
recognize, only the purchased goodwill in the ñdrH$m¶© Aä¶mg h¡&
accounting system.
Therefore, goodwill should be recorded in AV… JwS>{db H$mo EH$ Ho$ ‘yë¶ Ho$ E{³d{OeZ ‘|
the books of account of a business only at the BgHo$ {bE {ZYm©[aV ‘yë¶ Ho$ g§~§Y ‘| EH$ ì¶mnma H$s
price paid at the time of acquisition of a busi- AH$mC§Q²>g ~wH$ ‘| à{dîQ> {H$¶m OmZm Mm{hE&
ness.
Valuation of Goodwill JwS>{db H$m ‘yë¶m§H$Z

Goodwill is recorded only when it has a AH$mC§qQ>J ‘| JwS>{db H$mo [aH$m°S>© Ho$db V^r {H$¶m
value. When a business is purchased and some OmVm h¡ O~ BgH$m EH$ ‘yë¶ hmoVm h¡& O~ EH$ ì¶mnma
additional amount is paid over and above the nM}g {H$¶m OmVm h¡ VWm Hw$N> A{V[a³V H$m ^wJVmZ {H$¶m
amount of net assets, then this additional OmVm h¡ Omo ZoQ> AgoQ²>g H$s am{e go A{YH$ hmoVm h¡ Vmo ¶h
amount is called Goodwill. A{V[a³V am{e JwS>{db H$hbmVr h¡&
Following are the methods of valuation of JwS>{db Ho$ ‘yë¶m§H$Z H$s {d{Y¶m§ {ZåZ h¢…
Goodwill:
1. Average Profit Method. 1. EdaoO àm°{’$Q> ‘oWS>
2. Super Profit Method 2. gwna àm°{’$Q> ‘oWS>
3. Capitalization of Profit Method 3. àm°{’$Q> H$s H¡${nQ>bmBOoeZ ‘oWS>
4. Annuity Method 4. Eݶy{Q> ‘oWS>
1. Average Profit method: Under this 1. EdaoO àm°{’$Q> ‘oWS>… Bg {d{Y Ho$ A§VJ©V {nN>bo
method profits of last few years are totalled Hw$N> dfm] Ho$ àm°{’$Q²>g H$m ¶moJ {H$¶m OmVm h¡ VWm dfm] H$s
and divided by respective number of years, g§~§{YV g§»¶m go ^mJ {X¶m OmVm h¡, {Ogo EdaoO àm°{’$Q>
which is known as Average Profit. H$hm OmVm h¡&
At the time of calculating average profit, EdaoO àm°{’$Q> H$s JUZm H$aVo g‘¶ bm^ ¶m hm{Z
precaution must be taken in respect of any ab- H$s {H$gr Agm‘mݶ dñVw Ho$ g§~§Y ‘| gmdYmZr aIZm
normal items of profit or loss which may affect
future profit. It should be mentioned that av- Amdí¶H$ h¡& ¶h ~Vm¶m OmZm Mm{hE {H$ EdaoO àm°{’$Q>
erage profit may be based on simple average qgnb EdaoO ¶m doQ>oS> EdaoO na AmYm[aV hmo gH$Vm h¡&
or weighted average.
After Calculating average profit. It is EdaoO àm°{’$Q> H$s JUZm H$aZo Ho$ níMmV² Bgo EH$
multiplied by a number (3 or 4, i.e., three or g§»¶m (3 ¶m 4 AWm©V² VrZ ¶m Mma df©) go JwUm {H$¶m
four years), as agreed. The result will be the OmVm h¡ O¡gr gh‘{V hmo& ¶h n[aUm‘ JwS>{db H$m ‘mZ
value of the goodwill. hmoJm&
2. Super Profit Method: The method of 2. gwna àm°{’$Q> ‘oWS>… JwS>{db H$s JUZm Ho$ {bE
super profit for calculation of goodwill is more gwna àm°{’$Q> ‘oWS> EdaoO àm°{’$Q> ‘oWS> go A{YH$ g§VmofOZH$
satisfactory than the average profit method. In
general terms, the super profit is that profit, h¡& gm‘mݶ eãXm| ‘| gwna àm°{’$Q> dh bm^ h¡ Omo ì¶mnma Ho$
which is over and above the profit earned by Cgr joÌ ‘| bJr à{V¶moJr ì¶mnma BH$mB© Ûmam A{O©V bm^
competitive business unit engaged in the same
field of business. go D$na h¡&