hidden Goodwill is the difference between future maintenable capital less (old capital).
how can it be justified in a conceptual manner?
I tried looking at various sources, and only partnership accounts have this method of accounting, The goodwill formula is different and almost it’s like ‘new partners capital multiplied by reciprocal of his ratio minus combined capital of all three partners’. This is also known as inferred method of goodwill. The reason why the profit sharing ratio is reciprocated and multiplied with new partners capital is not a plausible explanation because, the capital is overvalued from what the partner had brought into the firm. That is why IndAS does not give any prescribed accounting treatment to partnership firms. I’ll get back to you when I find out why the profit sharing ratio is multiplied with a reciprocal like that.
CAclubindia
