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Valuation of goodwill

GITA RAYATATHA (STUDENT) (98 Points)

20 May 2013

When to take average capital employed or closing capital employed while valuing goowill

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2 Replies

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 20 May 2013

Hi,

First of all we need to follow the instuctions of the question, i.e. consider closing capital employed or average capital as may be specified in the question.

And if question is silent then we need to follow these presumptions (These are as per the guidelines of ICAI)-

If you have used weighted average in calculation of Average profit (i.e. Future Maintainable Profits) then use Closing Capital Employed for Goodwill Valuation.

And if you have used Simple Avg. in calculation of Average Profits (i.e. Future Maintainable Profits) then use Average Capital Employed.

(Remember that ICAI wants us to do more work so if used simple avg. in calculation of FMP(Avg Profits) then we need to do more work in calculation of goodwill and so we need to use avg. capital employed......And Vice-Versa)

Hope this settles your doubts. Further queries in this regard are still welcome.

Best Regards

Ashish Pathak