Goodwill Valuation: Super Profit Method Steps
📌 The primary focus is calculating goodwill using the Super Profit Method, which involves six main sequential steps.
⚙️ Goodwill is valued based on a specified number of years' purchase of the super profit, such as 2-year purchase in the example provided.
🧾 Key inputs required for this method include the Normal Rate of Return (NRR), typically 10% in the context given.

Step 1: Calculation of Capital Employed
💰 Capital Employed is generally calculated as Total Assets minus Current Liabilities, excluding goodwill if calculating the base for valuation.
🚫 Fictitious assets like preliminary expenses must be deducted when determining the capital base.
💡 Non-trading investments should be included in the calculation of Capital Employed if they are not part of the firm's core trading activities.

Step 2: Calculation of Average Capital Employed
⚖️ Average Capital Employed is derived by adjusting the Capital Employed with half of the current year's profit (either before or after tax, depending on the convention used).
📈 The decision between using before-tax or after-tax profit affects subsequent profit calculations; the speaker leans towards using before-tax profit for the adjustment.

Step 3: Calculation of Average Maintainable Profit
📉 Average Maintainable Profit is found by taking the Average Profit and adjusting it for any expected future changes (e.g., removing past extraordinary items or adding expected future income).
🤔 If the average profit calculated is based on *after-tax* figures, it must be converted back to a before-tax equivalent before further use, potentially involving tax rate considerations (e.g., 30% or 35%).

Step 4: Calculation of Normal Profit
🌟 Normal Profit is calculated by applying the Normal Rate of Return (NRR) to the Average Capital Employed: $\text{Normal Profit} = \text{Average Capital Employed} \times \text{NRR}$.
🎯 Using the example's NRR of 10%, this step establishes the expected profit benchmark.

Step 5: Calculation of Super Profit
➕ Super Profit is the excess of the firm's profitability over the normal return: $\text{Super Profit} = \text{Average Maintainable Profit} - \text{Normal Profit}$.
⭐ This positive surplus represents the extra earning power that justifies the value placed on goodwill.

Step 6: Final Goodwill Valuation
💲 Goodwill is calculated by multiplying the Super Profit by the agreed number of years' purchase: $\text{Goodwill} = \text{Super Profit} \times \text{Number of Years' Purchase}$.
✅ For the scenario described, goodwill is $\text{Super Profit} \times \mathbf{2}$ (for 2-year purchase).

Key Points & Insights
➡️ Memorize the six sequential steps of the Super Profit Method to ensure correct goodwill valuation application.
➡️ Ensure the correct treatment of non-trading investments and fictitious assets when calculating the initial Capital Employed.
➡️ Be consistent in whether adjustments to profit (Step 3) are made on a before-tax or after-tax basis when calculating Average Maintainable Profit.

📸 Video summarized with SummaryTube.com on Oct 16, 2025, 13:51 UTC