Good will

Basically, we are calculating self generated goodwill. is that disclosure purpose?

No. self generated goodwill need not be diclosed in the books. But why we need to calculate self generated goodwill?

When any company wants to know value of business, then company will calculate Goodwill.

Under different situations company will measure the value of business.

One of the situation is: when company wants to sell entire business.

Purchasing company has to pay for not only recorded assets and liabilities, but also for unrecorded items like goodwill(self).

in that case purchasing company has to pay Excess earning capacity of the vendor company for the future period. i.e. they are purchasing the number of years of Future excess earning capacity (goodwill) of the vendor company. Number of years of purchase is the term as per purchasing company point of view.

The number of year’s purchase indicates the time required by the new business to come at a level equal to the old settled business. And the selection of the number of years is based purely on an estimate or the trend of the industry concerned.

For example, A purchases B’s business and he estimates that had he started a new business it would have taken him around 3 years to start earning a profit of $ 10 million p.a. But since he has purchased B’s business he will be able to earn this profit right from the beginning and that is due to B’s past hard work. Hence in order to compensate B for this he pay a lumpsum of $ 30 millions(i.e. the equivalent profits of the 3 years) to B at the time of purchase as the price for Goodwill.

Source:https://studytesttime.com/about-goodwill/number-of-years-purchase-meaning