VALUATION OF GOODWILL

Goodwill may be defined as the value of the reputation of a business house in respect of profits expected in future over and above the normal level of profits earned by undertakings belonging to the same class of business. In other words, goodwill is the present value of a firm’s anticipated super normal earnings. The term ‘super normal earnings’ means the excess of earnings attributable to operating tangible and intangible assets (other than goodwill) over and above the normal rate of return earned by representative firms in the same industry. Thus, goodwill may be described as the value attaching to a prosperous business because of factors that other firms do not possess to the same degree.

In his “A Dictionary for Accountants”, Kohler defines goodwill as
“the current value of expected future income in excess of a normal return on the investment in net tangible assets…..”.