Goodwill can be termed as the present value of expected future income in excess of a normal return on the investment in tangible assets, or, for the excess of price paid for a business as a whole over the book value, or, over the computed or agreed value of all tangible net assets purchased.
Characteristics of goodwill: The characteristics of goodwill emerge as mentioned below:
It is an intangible asset but not a fictitious asset;
It cannot have an existence separate from the organization; 3.
It's value depends on the subjective judgment of the valuer; 4.
It is difficult to place a cost on goodwill and it fluctuates with the changes in fortunes of the business; 5.
It helps in earning higher profits;
It is an attractive force which brings in customers to old place of business; and 7.
It comes into existence due to various factors such as locational advantage, favorable contracts, long term contracts for rare raw materials etc.
Nature of goodwill: Goodwill is an intangible asset since it cannot be seen or felt; however, it is not fictitious in the case of profitable concerns. It can be sold, though a sale will be possible only along with the sale of business itself. Sometimes, goodwill is more valuable than the tangible asset.
Need for valuing the goodwill: In the case of going concerns, when business is not to be sold it becomes necessary to value goodwill whenever the mutual rights of the partners change. A party which is making a sacrifice must be compensated and that is normally on the basis of the goodwill. Thus in a partnership, the need for valuation of goodwill arises in the following circumstances:
a) When there is a change in the profit sharing ratio; b) When a new partner is admitted;
c) When a partner retires or dies;
d) When the business is sold or the partnership is converted into a joint stock company and e) When two firms are amalgamated.
Factors affecting the...
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