Accounting for valuation of share

Accounting Treatment of Goodwill

• Goodwill is an intangible asset that is recognized in the financial statements when one company acquires another
• Goodwill is not amortized, but rather tested for impairment annually or when a triggering event occurs
• Impairment loss is recognized when the carrying value of goodwill exceeds its recoverable amount
• Goodwill is presented as a separate line item on the balance sheet, typically under the heading "Intangible Assets"

Goodwill Calculation

• There are two methods to calculate goodwill:
  1. Purchase Method: Goodwill is calculated as the excess of the purchase price over the net assets acquired
     • Goodwill = Purchase Price - Net Assets Acquired
  2. Capitalization Method: Goodwill is calculated by capitalizing the excess earnings of the acquired business
     • Goodwill = Excess Earnings / Capitalization Rate
• Excess Earnings: The earnings of the acquired business in excess of a normal rate of return on the net assets employed
• Capitalization Rate: The rate of return that a prudent investor would expect to earn on an investment with a similar level of risk
• Net Assets Acquired: The fair value of the assets acquired, minus the fair value of the liabilities assumed

Accounting Treatment of Goodwill

• Goodwill is an intangible asset recognized in financial statements when one company acquires another
• Goodwill is not amortized, but tested for impairment annually or when a triggering event occurs
• Impairment loss is recognized when goodwill's carrying value exceeds its recoverable amount
• Goodwill appears as a separate line item on the balance sheet under "Intangible Assets"

Goodwill Calculation

• Two methods to calculate goodwill:

Purchase Method

• Goodwill = Purchase Price - Net Assets Acquired
• Calculates excess of purchase price over net assets acquired

Capitalization Method

• Goodwill = Excess Earnings / Capitalization Rate
• Calculates goodwill by capitalizing excess earnings of acquired business
• Excess Earnings: Earnings of acquired business in excess of normal rate of return on net assets employed
• Capitalization Rate: Rate of return a prudent investor would expect to earn on investment with similar risk
• Net Assets Acquired: Fair value of assets acquired minus fair value of liabilities assumed

Calculation of share, valuation of share