Goodwill = Super Profit X Present Value of Annuity
Here,
Super Profit = average maintainable profit after tax – normal/reasonable return on capital employed
Calculation of maintainable profit (Example)
|
|
2004
|
2005
|
2006
|
|
Profit before tax
|
***
|
***
|
***
|
|
Add: Abnormal Loss
|
***
|
***
|
***
|
|
Less: Abnormal Income
|
***
|
***
|
***
|
|
Add/Less: Stock Adjustment
|
***
|
***
|
***
|
|
Add: Capital Expenditure charged to revenue
|
10000.00
|
|
|
|
(-) depreciation – say 10%
|
(1000.00)
|
(900.00)
|
(810.00)
|
|
Less: Income from non trade investment
(shares, securities, bond, certificate)
|
***
|
***
|
***
|
|
Less: Estimated future expenditure
|
***
|
***
|
***
|
|
Maintainable profit before tax
|
***
|
***
|
***
|
|
|
Traditional
Approach
|
Leverage
Approach
|
|
Average Maintainable profit before tax(simple/weighted)
|
***
|
***
|
|
Less: Provision for taxation (Assume 50%, if not mentioned)
|
***
|
***
|
|
Add: Debenture Interest
|
Net of Tax
|
Full Interest
|
|
Average Maintainable Profit after Tax
|
***
|
***
|
Calculation of Capital Employed
|
|
|
Rs.
|
|
Fixed Assets (Revalued Figure)
|
|
***
|
|
Trade Investment (Market Value)
|
|
***
|
|
Current Assets (Revalued Figure)
|
|
***
|
|
Less: Current Liabilities
(creditor, bills payable, outstanding expenses, Bank OD etc.)
|
|
***
|
|
Capital Employed
|
|
***
|
|
Less: ½ of current year profit after tax
|
|
***
|
|
Average Capital Employed
|
|
***
|
Note:
1. Income from non – trade investment is not to be considered in calculating maintainable profit
2. Debenture being long term liability, it is a part of capital employed. Hence, debenture interest is to be added back with maintainable profit
3. Current year profit should not include income from non-trade investment
4. Average capital employed is calculated when current year profit given in the balance sheet or undistributed.