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Valuation of good will

CMA Vamshi Raghavendra (Student) (192 Points)

28 November 2012

WHILE ARRIVING GOODWILL THROUGH NET ASSETS METHOD -

1- IN ONE CASE THEY ARE CONSIDERING CAPITAL EMPLOYED (ASSETS - LIABILITIES) BUT

2- IN SOME CASES IT IS PUBLISHED AS AVERAGE CAPITAL EMPLOYED (ASSETS-LIB-1/2 C.Y PRFT)

WHEN SHOULD WE CONSIDER AVG.CAP.EMPLOYED - A BIG CONFUSING QUESTION FOR ME

PLS HELP ME OUT

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9 Replies

Lalatendu Bal (CA) (49 Points)
Replied 28 November 2012

method of capital employed is computed as given the question so it depends as what is asked in the qustion or if the parameters such as CY profit is given then average capital employed needs to be followed.

CMA Vamshi Raghavendra (Student) (192 Points)
Replied 28 November 2012

Thank you....

But in every problem Current year profit is mentioned

Can we adopt straight away Avg cap. employed?

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 28 November 2012

Hello Vamshi Raghavendra,

If nothing is specified in the question regarding this follow following suggestions as accepted by ICAI for examination purposes-

We compute goodwill using simple Capital Employed in cases where we arrived Future Maintainable Profit (Average Profit) by weighted average method.

And

In other cases we use Average Capital Employed.

Hope this settles your doubts.

Regards

CMA Vamshi Raghavendra (Student) (192 Points)
Replied 28 November 2012

Thank you Ashish.......

SO FINALLY IT DEPENDS UPON FMP CALCULATION : IF IT IS BY WEIGHTED AVG MTHD THEN SIMPLE CAPTIAL EMPLOYED

IF FMP IS NOT WEIGHTED AVG THEN WE SHOULD COMPUTE BY AVG CAPITAL MTHD .

Hope i am correct,,, Pls dont resist to reply me...

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 28 November 2012

Yes bro. Absolutely right. Remember institute expects us to do more work... So if in calculation of FMP we used simple average then we got to do extra work for cap employed and so average cap AND vice versa :) Study hard. God bless you.

CMA Vamshi Raghavendra (Student) (192 Points)
Replied 29 November 2012

Great explanation

Thank you so much ASHISH PATHAK

ASHISH PATHAK

Read more at: /forum/valuation-of-good-will-229146.asp#.ULbxi-xHVsg

ASHISH PATHAK

Read more at: /forum/valuation-of-good-will-229146.asp#.ULbxi-xHVsgA

Nithin Chettoor (Assistant Manager) (388 Points)
Replied 29 November 2012

Its always average capital employed, since thats the right way to approach it. In absence of information regarding current profit, then we may opt for terminal capital employed.

Rishabh Mishra (Student CA Final ) (44 Points)
Replied 21 December 2012

yup..

always we have to take average

it shows true image

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 21 December 2012

You are right Nithin and Risabh average capital employed should be considered but what i have discussed above is the convention followed by ICAI for examination purposes.