Goodwill
Because it records what someone once paid above the value of identifiable assets, not anything that can be sold on its own.
Net Worth & Solvency Glossary · Net Worth Mechanics
Tangible Net Worth: The Figure Lenders Actually Use
noun · also "TNW"; a lending and tender convention built on net worth, not a term of company law
Definition
Tangible net worth (TNW) is net worth after intangible assets are removed: goodwill, patents, trademarks, brand values and capitalised software. Expenditure not yet written off is left out too; for a company, the net worth figure has already removed it.
It is the part of the owners' funds backed by assets an outsider could identify, value and, if necessary, sell. In banking, TNW is the full form lenders and tender boards most often ask for.
From net worth to tangible net worth
One figure, one movement: the net worth a CA certifies, with the intangibles taken out.
- StartNet worththe section 2(57) figure for a company; the capital account for a firm or proprietor
- lessGoodwillwhat was once paid above the value of identifiable assets
- lessPatents, trademarks, brand valuesat their carrying amount, net of any revaluation uplift
- lessCapitalised software and similarintangible assets still carried in the balance sheet
- equalsTangible net worththe figure a lender or tender board reads
Already out before the walk starts. For a company, the section 2(57) figure has already deducted deferred and miscellaneous expenditure not written off, and already leaves out revaluation reserves. Neither is deducted a second time.
What comes out
01What tangible net worth excludes and why
For a company, section 2(57) of the Companies Act, 2013 defines net worth: paid-up share capital, reserves created out of profits, the securities premium account and the credit balance of the profit and loss account, less accumulated losses, deferred expenditure and miscellaneous expenditure not written off. It excludes reserves created out of revaluation of assets, write-back of depreciation and amalgamation. Because that figure has already deducted deferred and miscellaneous expenditure not written off, and has already left out revaluation reserves, tangible net worth goes one step further and removes only the intangible assets still carried in the balance sheet.
Patents, trademarks and brand values
Rights and names carried in the balance sheet; an outsider cannot identify, value and sell them the way it can plant or stock.
Capitalised software and similar intangible assets
Development cost carried as an asset rather than written off; it has no value separate from the business using it.
Company accounts
Preliminary expenses, deferred revenue expenditure and other expenditure not written off are already out of the section 2(57) figure, so they are not deducted a second time.
A firm's or a proprietor's capital
Where the starting point has not removed them, they come out at this stage instead.
These items are not necessarily worthless. Some are a business's most valuable assets. But a lender assessing what it could recover wants a figure backed by something it can identify, value and sell. Intangibles usually fail at least one of those tests, and goodwill cannot be sold separately from the business that created it.
Not a term of company law. Tangible net worth is a lending and tender convention built on top of net worth, so the exact deductions are set by the lender or the bid document.
The CA's working
02How a CA arrives at the tangible figure on a certificate
The CA starts from the audited or certified net worth and works down.
- 1Identify
each intangible item in the accounts;
- 2Trace
it to the schedule that supports it; and
- 3Deduct
it, showing each deduction on its own line.
When an intangible has been revalued upward
The revaluation reserve is already outside the section 2(57) figure. So the deduction is the intangible's carrying amount less the uplift; deducting the full revalued amount would take the uplift out twice.
The working is attached, so a reader who disputes one deduction can check it in isolation.
No estimates
Where the accounts do not separate intangibles clearly, which is common in smaller accounts, the CA asks the client rather than estimating. A tangible figure built on guesses is not a tangible figure.
This is how a Net Worth Certificate is prepared on a tangible basis, and a Net Worth Certificate for Bank Loan often follows the lender's stated deductions.
Where it is asked for
03Where Indian tender notices and bank sanction letters demand a tangible number
Tender notices
Tender notices often ask for tangible net worth rather than net worth, and the difference is deliberate. A bidder whose balance sheet is carried by goodwill from an acquisition can look substantial while holding very little that could answer a claim.
Public works tenders, empanelment applications and pre-qualification criteria therefore tend to use the tangible measure, and some list the exclusions in the bid document.
Bank sanction letters
Bank sanction letters do the same, especially for working capital limits, and loan covenants are often written against TNW and tested each year.
Read the requirement exactly
A certificate that states net worth when the notice asked for tangible net worth answers a different question, and it will be returned for that reason, not for any error in the arithmetic. The safest course is to take the exact phrase from the document and certify to it.
How to calculate your own figure is covered in a separate guide to the calculation.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
Sources: Companies Act, 2013, section 2(57) (Ministry of Corporate Affairs). This entry describes Indian practice in general terms. The lender's or tender's own definition governs the figure.
Need help with a certificate that uses tangible net worth? See our Net Worth Certificate.