Please could someone help with goodwill, I am preparing the first year of limited company accounts and would like to know how to calculate goodwill on incorporation and what the implications of this are?
Many thanks in advance.
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Maybe a bit late but...
Firstly, if you search on here for incorporation & goodwill, you'll come up with a wealth of advice as this topic must rank in the top 5 for popularity.
The main point to make is that if an individual or partnership transferred business goodwill to a Ltd company on incorporation it will result in an entry in the personal tax return(s) and, obviously, the company accounts. So, in your case I'm wondering what happened with the tax return(s)? I should also say that it is usually best to get HMRC's agreement to the value as soon after the transfer took place, ie before entry on tax returns.
As to valuing goodwill, if you have not done it before, then you need to do quite a bit of research and make sure you understand all the potential issues surrounding, in particular, which method best suits your client and any element of personal goodwill (that can't be transferred). The ACCA published some really helpful factsheets on this (and business valuation in general) in May/June last year however (as usual) their website is thowing a wobbly, but I think the link is: http://www2.accaglobal.com/members/publications/technical_factsheets
The IOD & ICAEW also published papers but they are nowhere as detailed.
If you feel you can not handle it and the risk to the client is too great then, depending on the sort of figure you think may be involved, it might be worth finding a firm to do it for you.
Oh dear
Very late ro be considering this now - did you not consider at the date of incorporation?
I was not involved with the incorporation of the company, I have been asked to prepare accounts and want to know whether its possible to include an amount in these for goodwill and how this would be calculated.
Yes but
Yes, you can incorporate goodwill into the accounts but I'd not do it without evidence that it had been declared to HMRC by the person transferring it, not to do so, to my mind could put you at risk of money laundering problems.
If you are now being asked to value it then almost certainly the correct process has not been followed plus it's far more difficult to put a value on something many months after the event.
With regard to how to value it, I can only repeat what I said above, it's like posting a question "I've been asked to prepare a set of accounts can someone tell me how to do it".
The first port of call is to see perhaps 3-4 years accounts (including balance sheets) and gather other facts & history about the business before the transfer, including details of customers, staff, suppliers, products, services, systems etc. Once you've done this you consider the various methods available to value it.
These can sometimes be determined by the type of business or whether there are substantial other assets and/or profits. In the majority of cases, you'd look to value the whole business by looking at a post tax profit multiple and deduct the market value of other assets at the time, the theory being that the number you are left with will be goodwill.
As I say far more detail in the ACCA factsheets, which the above link will now take you to.
Goodwill
Another thing you might care to look at is the HMRC WEB site. Type in Goodwill in the search box and look for Incorporation relief
I would be interest to get some guideance on the "mulitple factor"
And bear in mind the first £10K capiatl gain is tax free