Patricia (C.S.- Professional) (sdd) (197 Points)
24 November 2009Hi. How to determine Goodwill by Annuity method. Pl advise in simple language.
thanks.
Monika Singhal
Ashish Ojha
(Chartered Accountant)
(469 Points)
Replied 24 November 2009
1 Rupee today in not equal to 1 rupee one year later.. This is The Concept of Time value of money. In calculating the goodwill by Annuty method the same concept is used.. We take a discount rate which takes into effect inflation, risk & other factors.. then we discount our future super profits/ Future maintainable profits by this Rate... Then we sum up all the discounted figures..
There are mathematical Formulas for above computation...
Goodwill = FMP/ Future Super profits * PVAF ( No of years, rate of discount)
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.
25 Hours GST Scrutiny of Return and Notice Handling(With Recording)
Survey, Search and Seizure under Income Tax Act 1961
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