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Valuation of goodwill

CA PARTH SHAH (In Practice) (1951 Points)

28 October 2011

Hello I am the student of final C.A. I. Have following query 1) while finding capital employed under circumstances we have to use terminal capital employed instead of closing capital employed? 2) while calcilating future maintainable profit, what treatment is to be give regarding Writing off of fictitious asset when balance shhet of 2 years are given" 3) when balance sheet for 2 years is given and. If it is found that loan amout is repaid partly then whether effect of reduction/ saving of interest expense is to be given while calculating future maintainable profit?

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9 Replies

Prashanth (Chartered Accountant) (2322 Points)
Replied 28 October 2011

1.Can u repeat the question

2.Take the difference and deduct

3.Yes,add back that portion of interest

1 Like

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 28 October 2011

First of all closing capital employed and terminal capital employed are one and the same

Miscallaneous expenditure is to be added back to PBT to arrive at adjusted profit

Loan repayment not sure that it requires adjustement to PBT to arrive at adjusted profit as it is of operational nature only

waiting for other experts and students to comment

CA PARTH SHAH (In Practice) (1951 Points)
Replied 28 October 2011

My first question is that while we calculate capital employed when should we use terminal capital employed instead of closing capital employed? Terminal capital employed means closing capital employed + 1/2 of dividend distributed - 1/2 current year profit No clarification regarding this is given in modules of ca final. .

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 28 October 2011

This is the rule when we have to use closing capital employed or average capital employed

If the given question specifies to use either closing capital employed or average capital employed use it accordingly as per question

If the question does not specify then FMP is the basis

If FMP is calculated using projection method -use closing capital employed

If FMP is calculated using Trend Line use Closing Capital employed

If FMP is calculated using Weighted Average use Closing Capital employed

If FMP is calculated using Simple Average use Average Capital employed

Hope this calrifies your doubt on what circumstances you have to use closing capital employed and Average Capital Employed

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Sriram Kumar (Finance Manager) (30 Points)
Replied 28 October 2011

Hi Parth,

I dont think there is any difference between "closing capital employed" and "terminal capital employed". Both are same. The formula what you have given i.e. closing capital employed+1/2 of dividend distributed-1/2 of current year profit is NOT for terminal capital employed. Infact its for "average capital employed". The simple formula for Avg Cap employed is [Opg Cap Emp + Clg Cap Emp] / 2. The formula what you have given is just an alternate formula. So both are same. Pls try with a small example for this. You can find out.

The rules given by Sivaram are good. You can follow that.

Thanks.

3 Like