Valuation of goodwill

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Binita (Querist)

09 April 2017 When shall we use average capital employed in valuation of Goodwill by super profit method?
There are some questions in practice manual solved by calculating average capital employed while some are solved using closing capital employed.

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

09 April 2017 Its basically assumption only, depends on the business nature, if the profit of the business earned evenly for the entire period then applying average capital is reasonable. for exam point of view the details provided in the problem you can work out the same

CA Gopal Somani

CA Gopal Somani (Expert)

10 April 2017 Yes, there is a lot of confusion around that.

If specified in Question (Closing or Average) - Use as specified.

If not specified then use on the basis of FMP -
If we are calculating FMP on the basis of future projection or Trend or Weighted Average method then better to use 'Closing Capital Employed'
If FMP is calculated on the basis of 'Simple Average' then better to use Average Capital Employed.

In ICAI Module/PM no consistent approach is followed, So While answering the question in exam It better to write a note "since nothing is specified in question we have used Closing /Average capital employed".

I hope it will be helpful. Let me know if you have any further doubts.

I have also posted various videos on youtube explaining various concepts of Accounts CA Final (Amalgamation, Consolidation, Validation of Goodwill) . you can check the same from below link -

https://www.youtube.com/channel/UCJ3kfF_y1TWkfomAJvjWjTw

Binita

Binita (Querist)

10 April 2017 Yes, PM doesn't have consistent approach. So I was confused.
Thank you so much.

CA Gopal Somani

CA Gopal Somani (Expert)

10 April 2017 welcome..Happy to help !

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