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Valuation of goodwill - capital employed

Capital employed is an oftentimes used term however is exceptionally hard to characterize in light of the fact that there are such huge numbers of Write my Assignment settings in which it can be used. All definitions for the most part refer to the capital investment necessary for a business to work. Capital investments include stocks and long haul liabilities.



 6 Replies

Jithin

Jithin (Learner)     15 February 2012

Answer to Q No.1

 

Why preference share capital isnt deducted: Because it is part of the capital employed. Simple as that!

 
Why preference share capital is not a liability whereas debunture is a liability: Yeah it is true that preference share capital is repayable(in the case of redeemable pref shares) & provides a fixed amount of periodical payment to its holders, similar to debuntures. But does that make preference share capital a liability like debuntures? Definitely not. There are several factors which distinguish pref. shares from debuntures. But the most simple & striking feature according to me which helps us to identify pref shares  as capital & debuntures as a liability, is the manner of payment to the stakeholders. The interest on debuntures is a charge to P&L a/c & is payable whether the company is making profits or not. On the other hand, pref dividend is an appropriation of profits & can be paid only when adequate profits are available. The return the preference shareholders get on their investment is in the form of a share in the profits of the company. If u invest money in a business entity & get a return in the form of profit share, ur investment is in the nature of capital. This is a fact regardless of the form of the entity in which u r investing, which may be sole proprietorship,partnership,company, etc. Hence the amount contributed by preference shareholders is capital just as in the case of equity shareholders. The fact that they receive a fixed amount of dividend & arent conferred voting rights doesnt make their contribution a liability.
 
Q.No.2
 
Actually the answer lies in ur question itself. We know that FMP is the profits that we expect in future. While estimating FMP, we may use historical data,e.g. FMP calculated as an average of previous years' profits. But it is just because we cant foresee the actual profits we are going to earn in future. If u have info about any of the future events  which will have an impact on the future profits, u should use it in the calculation of FMP. For example, if the tax rate is likely to change in the future, u have to use the revised rate instead of the present rate. But for the purpose of capital employed, u have to use the current tax rate. Here the tax provision cant be calculated at the tax rate likely to prevail in the future ,as in the case of FMP, since we are computing the 'capital employed' of the present & not of the future.
 
 
I didnt get ur 3rd doubt..may be bcoz I havent seen any G/W valuation problem involving income from non-operating assets. But if u elaborate ur doubt a bit thru an example, I will try to answer.
jharna malkani

jharna malkani (Industrial trainee)     08 November 2017

Dear experts can anyone tell me sometimes while calculating capital employed for calculating Goodwill we deduct preference share capital.. and sometimes not.. so what is that hint which would help us to identify when to deduct preference share capital and when to not?

satish

satish (teaching)     09 January 2018

capital employed (asset side), only outside liabilites can be deduct from all asstes. i.e. preference share capital is not liability. so need not to deduct.

Nipun Kasliwal

Nipun Kasliwal (CA Article)     29 October 2018

Dear Satish, Can you please explain y provision for taxation( being a non cash item) is deducted while calculating capital employed??
Rama chary Rachakonda

Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294)     29 October 2018

Capital employed, also known as funds employed, is the total amount of capital used for the acquisition of profits. It is the value of all the assets employed in a business, and can be calculated by adding fixed assets to working capital or by subtracting current liabilities from total assets.

satish

satish (teaching)     29 October 2018

yes. provision for taxation is deductable from total assets.
i.e. provision for taxation (certain) is current liability

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