The Super Profit Method is a key approach used to value the goodwill of a business. Goodwill, considered an intangible asset, reflects the non-physical elements that enhance a company’s market value, especially during mergers and acquisitions. Essentially, it’s the extra amount paid by an acquiring company over the market value of the business.

What is Super Profit?

Super profit refers to the excess of estimated future profits over normal profits, indicating the additional earnings a business generates. To calculate goodwill using this method, you multiply the super profits by a specific number representing the years of purchase.

Steps to Calculate Goodwill Using the Super Profit Method:

1. Calculate Total Capital: Sum all net current and fixed assets plus shareholder equity.

2. Determine Normal Profit: Multiply total capital by the normal rate of return.

3. Calculate Average Estimated Profit: Find the average profit the business is expected to earn.

4. Calculate Super Profit: Subtract normal profit from the average estimated profit.

5. Calculate Goodwill: Multiply super profit by the number of years of purchase.

The formula looks like this:

• Normal Profit = Capital Employed x (Normal Rate of Return / 100)
• Super Profit = Average Estimated Profit – Normal Profit
• Goodwill = Super Profit x No. of Years of Purchase

Example of the Super Profit Method:

Consider ABC Ltd, which has employed Rs. 1,000,000 as capital. If investors expect a return of 30% but the actual profit is Rs. 400,000, the calculations would be as follows:

• Normal Profit = 30% of Rs. 1,000,000 = Rs. 300,000
• Actual Profit = Rs. 400,000
• Super Profit = Rs. 400,000 – Rs. 300,000 = Rs. 100,000

In conclusion, understanding the Super Profit Method is vital for valuing goodwill effectively. Stay tuned for more insightful articles from Eduacademy!