Answer to Question #134526 in Accounting for Pankaj

Question

What are the bases of valuation of goodwill?

Answer 1

Goodwill, by definition, is the value placed on the reputation that a firm has built over time. This value is computed based on the expected profits, which are over and above the profits that the firm is currently making. It is an intangible asset.

Goodwill should only be recorded in the books of the firm if there is consideration/money is paid. For example, when the firm is sold or an equity partner is being brought on board.

There are several bases used in the valuation of goodwill.

1. Average profits method
2. Super profits method
3. Capitalization method