CHAPTER I

Introduction
Goodwill in accounting is an intangible asset that arises when one company acquires
another, but pays more than the fair market value of the net assets (total assets - total
liabilities). The goodwill amounts to the excess of the "purchase consideration" (the money
paid to purchase the asset or business) over the total value of the assets and liabilities. It is
classified as an intangible asset on the balance sheet, since it can neither be seen nor touched.
However, according to International Financial Reporting Standards (IFRS), goodwill is never
amortized. Instead, management is responsible for valuing goodwill every year and to
determine if an impairment is required. If the fair market value goes below historical cost
(what goodwill was purchased for), an impairment must be recorded to bring it down to its
fair market value. However, an increase in the fair market value would not be accounted for
in the financial statements.

Modern Meaning
Goodwill is a special type of intangible asset that represents that portion of the entire business
value that cannot be attributed to other income producing business assets, tangible or
intangible.
For example, a privately held software company may have net assets (consisting primarily of
miscellaneous equipment and/or property, and assuming no debt) valued at $1 million, but the
company's overall value (including brand, customers, and intellectual capital) is valued at $10
million. Anybody buying that company would book $10 million in total assets acquired,
comprising $1 million physical assets and $9 million in other intangible assets. And any
consideration paid in excess of $10 million shall be considered as goodwill. In a private
company, goodwill has no predetermined value prior to the acquisition; its magnitude
depends on the two other variables by definition. A publicly traded company, by contrast, is
subject to a constant process of market valuation, so goodwill will always be apparent.
While a business can invest to increase its reputation, by advertising or assuring that its
products are of high quality, such expenses cannot be capitalized and added to goodwill,
which is technically an intangible asset. Goodwill and intangible assets are usually listed as
separate items on a company's balance sheet.

Valuation of Goodwill
When a business is able to earn profits at a rate higher than that at which a similar business
earns, the former business is said to possess goodwill. Goodwill is, therefore, an invisible
asset by the possession of which a business can enjoy super earning. Since it is invisible the
goodwill is called an in tangible asset. But since its existence can be felt through superior
earning power it is a real asset.
There are several causes for which a business may have a goodwill and some of them are:
(1)Possession of a large number of profitable contracts ; (2)Suitable nature of the business ;
(3)Exclusive franchise ; (4)Protected valuable patents and trademarks ; (5)Suitable location
of the business ;(6)Ideal window dressing ; (7)Government patronage ;(8)Reputability,
respectability and reliability of the proprietor or partners or trustees ; (9)Special ability and
skill of the persons in management, etc.
In case of transfer of business, separation of the partners from the business due to retirement,
death, etc, assessment of the value of the business for any reason, goodwill may have to be
valued.
Goodwill means the reputation of a Business concern which enables businessmen to
earn extra profit, as compared to other concern. Goodwill means various advantages of
reputation and connections of a business.
Mr. Kohler defines goodwill as the current value of expected future income in excess or
normal return on the investment in net tangible assets:

NEED FOR VALUATION

The need for valuation of goodwill depends on the form of a business organisation. The
circumstances in which the goodwill is valued are given below.

Form of Business

Need for valuation

Sole proprietor

Sale of business

Partnership firm

Conversion into partnership

Admission of partner Retirement / Death of
partner Change in profit sharing ratio
Amalgamation of firm
Dissolution on account of sale of
business.
Conversion into Private / public

Company

Limited company.
Mergers

Acquisitions of business

Transfer of controlling block

CHARACTERISTICS OF GOODWILL :
1. It is an intangible or invisible asset.
2. Its value is not fixed. It is subject to fluctuation due to internal as well as
external factors in value.
3. It can not valued in isolation.
4. Its valuation is attached to the total value of the business.
5. It has value only on going concern basis.
6. It is either created internally or purchased from outside.
7. Because off Goodwill a firm is able to earn excess profits than the other
firms in the same class of business.
8. value of Goodwill may differ due to different method used. In certain
cases it is not transferable.

CHAPTER II
Methods of Valuation of Goodwill
The three qualitative characteristics most directly concerned with goodwill are reliability,
prudence (not deliberate understatement) and consistency. Although much has been written on
the problem of accounting for goodwill during the past century, a solution remains elusive. The
treatment of goodwill has changed over the years. The four different methods of accounting for
goodwill are discussed in the following paragraphs.
1. Write-off
Under this method, goodwill is immediately written off against an account in the stockholders'
equity section, generally retained earnings. Advocates of this method argue that goodwill is not
measurable and has no true future value. Thus, it should be written off against stockholders'
equity. Another rationale for this method is that overpayment for the assets of an acquired
company represents the expectation of superior future earnings. Since these earnings eventually
endup in the stockholders' equity, they can be offset against the excess acquisition payment.
Writing off goodwill immediately can lead to distorted results when tangible assets are
undervalued allowing goodwill to be overstated. Even though there are some good arguments for
write-off method, it appears that it was used because it was the easiest and most widely used and
not because it was conceptually correct.
2. Capitalization
This approach's proponents argue that if goodwill is as important as asset as many beleive, it
belongs on the balance sheet. One problem with capitalization of goodwill is determining the
proper amount to capitalize. Current practice follows the residuum approach. One way of
correcting the misuse of goodwill is through the hidden assets approach. Under this approach, the
excess purchase price that companies pay over fair market value of the assets is for assets that
are hidden from the balance sheet. Hidden assets should be identified and recorded on the
balance sheet, then amortized over their useful life. If they were, goodwill account would

probably be much smaller than in current practice and financial statements would probably be
more useful.
3. Non-Amortization
Capitalization of goodwill without amortization allows the most advantageous financial reporting
figures. A company gets to record an asset instead of a decrease in stockholders' equity and net
income is not periodically reduced. However, it probably would result in more abuse than any
other method. The rationale for non-amortization is premised on the notion that goodwill does
not decrease in value. High managerial ability, good name and reputation, and excellent staff
generally do not decrease in value but they increase in value. Goodwill could be viewed as an
investment and should stay on the balance sheet unamortized. But, without amortization, abuse
may occur, and the goodwill account will lose what limited significance it has now.
4. Amortization
Amortization enables companies to match the cost of intangible assets over the period deemed to
benefit from their acquisition. Main arguments for amortization are the abuse of nonamortization and the unreliability of earnings without some attempt to recognize the impact.
When amortization became required, the period for write-off became the focus. If the life of the
asset is non determinable, which is normally the case with goodwill, amortization over a
maximum of forty years should be used. This lengthy period was set to allow a minimum impact
to the net income.
Concept Of Retirement Of A Partner And Adjustments Needed To Be Done At The Time Of
Retirement Of A Partner
Concept Of Retirement Of A Partner
A partner or partners may retire from the firm due to the various reasons like old age, better
opportunity, ill health, conflict between the partners and so on. The retirement of partner can
took place in any of the following grounds:
i. In accordance with the constant or consensus among all the members.

ii. In accordance with the partnership agreement which has already been signed.
iii. In accordance with the written notice, if the partnership is at will.
Adjustments
The adjustments that need to be done at the time of retirement of a partner are as follows:
1. Calculation of new profit sharing ratio
2. Revaluation of assets and liabilities
3. Adjustment regarding undistributed profits and losses
4. Adjustment regarding goodwill
5. Adjustment of capital
6. Ascertainment of due amount to retiring partner
7. Mode of payment to the outgoing partners.

1. Calculation Of New Profit Sharing Ratio

When somebody left the firm, his share which left to the firm is gain to remaining partners. After
retirement of someone, if the new profit sharing ratio is not given, then it has to be understand
that they will continue old ratio. The new profit sharing ratio of the remaining partners is
determined in the following way:
Suppose, three partners A,B and C are sharing profits and losses in the ratio of 2:3:1, as there is
no fresh or new agreement between between A and B, the new profit sharing ratio between A and
B will be 2:3 by eliminating the share of C.
In the above calculation, gaining ratio of A and B will be:
A= 2/5-2/6 = 1/15
B = 3/5-3/6 = 1/10

Thus, gaining ratio is calculated by deducting old ratio from new ratio i.e.
Gaining ratio = New profit sharing ratio - Old profit sharing ratio

In the case of new ratio between the remaining partners are given, the gaining ratio calculation
will be the same. However, it should not be confused with the sacrificing ratio which is
calculated at the time of admission of a new partner and change in profit sharing ratio.
Sacrificing ratio is calculated by deducting new ratio from old one. On the other hand, gaining
ratio is computed by subtracting old ratio from new one.

2. Revaluation Of Assets And Liabilities

The retiring partner has the right to share the increase or decrease in value of assets and liabilities
of the firm during the retirement period. To find out the profit or loss, a revaluation account is
opened as in the case of admission of a partner. If there is an increase in the value of any assets
then concerned asset account will be debited and revaluation account will be credited. In the
same way, if there is decrease in the value of any asset then concerned asset will be credited and
revaluation account will be debited. Similarly, if there is an increase in the value of liabilities,
revaluation account is debited and concerned liability account is credited and vice versa. The
profit or loss on revaluation is to be divided among all the remaining and outgoing partners in
their old profit sharing ratio. After the revaluation, the assets and liabilities will appear in the
balance sheet either at original value (book value) or at revised value. If assets and liabilities are
to be recorded at unchanged value then a memorandum revaluation account will have to
prepared.

3. Adjustment Regarding undistributed Profits And Losses

At the time of retirement of a partner, there may be some accumulated profits or losses in the
forms of any reserve or credit balance of profit and loss account or debit balance of profit and
loss account etc. All such amount should be distributed among all the partners, outgoing or
remaining, in their old profit sharing ratio. Sometimes, only the share of outgoing partners may
transfer to his capital account and balance is shown in the balance sheet. Such can be done only
when the remaining partners agreed for it.

4. Adjustment Regarding Goodwill

The valuation of goodwill has been discussed in admission of a partner. The same process should
be followed here too. But during the time of retirement, the retiring partner has the right to get
his share of goodwill of the firm. Therefore, to give effect to the same, the following adjustment
must be carried out.

Dissolution of Partnership firm

The Indian Partnership Act makes a distinction between dissolution of firm and dissolution of
partnership. Section 39 provides that the dissolution of partnership between all the partners of a
firm is called the dissolution of the firm. Therefore, dissolution of the firm denotes complete
breakdown of the contractual relationship between all the partners or termination of the
partnership business. But when the existing contractual relationship is terminated and the
business continues, it is a case of dissolution of partnership. Therefore, in dissolution of
partnership the change in contractual relation of the partners may arise because of admission of
new partners, retirement of partners, expulsion or insolvency or death of a partner etc.
Dissolution of the firm involves dissolution of partnership but dissolution of partnership may not
imply dissolution of firm.
Modes of Dissolution of a Firm:
A partnership firm may be dissolved under the following circumstances:

1. Dissolution by Agreement:
Partnership arises from contract and can come to an end by contract. Therefore, the firm may be
dissolved with the consent of all the partners or in accordance with a contract between the
partners.
2. Dissolution by Notice:
Where the partnership is at will, the firm may be dissolved by any partner giving notice in
writing of his intention to dissolve the firm. The firm is dissolved from the date mentioned in the
notice as the date of dissolution. An individual partner is empowered to bring an end to the firm.
3. Dissolution on the happening of certain contingencies:
Subject to contract between the partners, a firm can be dissolved on the happening of following
circumstances :
i. Expiry of the term when constituted for a fixed term.
ii. Completion of the venture or undertaking when the firm constituted to carry on a venture or
undertaking.
iii. Death of a partner.
iv. Adjudication of a partner as an insolvent.
The partnership agreement may provide that the firm will not be dissolved in any of the above
circumstances.
4. Compulsory Dissolution:
A firm is compulsorily dissolved under any of the following circumstances :
i. When all the partners or all but one are adjudged insolvent.
ii. When the business of the firm becomes unlawful because of happening of some event.

5. Dissolution by the Court:

When the partners are having difference of opinion regarding dissolution of the firm on certain
grounds, a suit can be filed by any partner in the court to dissolve the firm. Depending upon the
merits of the matter, the court may order for dissolution of the firm. Under Section 44 of the Act,
the court may dissolve the firm on the following grounds :
i. Insanity:
When.a partner becomes insane, the court may order to dissolve the firm. The suit can be filed by
any of the other partners or even by any friend of the insane partner.
ii. Permanent incapacity:
When a partner becomes permanently incapable of doing his duties as a partner, the court may
dissolve the firm. The suit for dissolution must be filed by a partner other than the incapacitated
partner.
iii. Misconduct:
When a partner, other than the partner suing is guilty of misconduct and such misconduct is
likely to affect the carrying on of the business, the court may dissolve the firm. The misconduct
may be outside the business (punishment for an offence, adultery of a partner etc.
iv. Persistent breach of agreement:
When a partner persistently or willfully commits breach of agreement or conducts himself in
such a manner that it is impossible on the part of other partners to carry on the business with him,
the court may dissolve the firm. Maintaining wrong accounts, taking away the books of accounts,
continuous quarreling with other partners are good grounds.
v. Transfer of interest:
When a partner transfers his whole interest in the firm to a third party or all his shares are sold or
attached by the court under a decree, the court may dissolve the firm.

vi. Continuous losses:

When the business cannot be carried on except at a loss, the court may dissolve the firm.
vii. Any other ground:
The court may dissolve the firm on any other ground where the court considers it just and
equitable to wind up the business.