Valuation Of Goodwill
Goodwill is an intangible asset. The real value is indeterminable for non-purchased goodwill and based on arbitrary measurement. The valuation of goodwill is often based on the customs of the trade and generally calculated as the number of year's purchases of average profits or super-profits.
- In the case of sole trading concern, goodwill is valued at the time of selling of a business, to take any person as a partner, to convert sole trading concern into a company.
- In the case of a partnership, when there are an admission, retirement, and death of a partner, amalgamation, conversion into a company, and change in profit sharing ratio.
- In the case of a company, goodwill is valued at the time of amalgamation of two or more companies, absorption of company, reconstruction, and holding company. The valuation of goodwill also becomes necessary, if the shares have to be valued based on intrinsic value, market value, or fair value and if the stock exchange quotation of the value of shares of a company is not available.
- For taxation purposes such as wealth tax also, the valuation of goodwill is necessary.
Goodwill refers to a measure of the capacity of a business to earn excess profit which is an intangible asset of the business. Goodwill can be described as the extra saleable value attached to a prosperous business beyond the intrinsic value of net assets. The need for valuation of goodwill arises in various circumstances i.e.
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