Q.Why are abnormal items and non-trade income excluded while computing the average profit for goodwill valuation?

The average profit used for goodwill is meant to represent what the firm can be expected to earn from its normal trading activity year after year, so anything that will not recur, or that did not come from trading at all, has to be stripped out first. …

Goodwill is valued as a multiple of the profit the firm is expected to keep earning in the future from its ordinary trading operations. If the profit figures used for averaging include items that will not recur, or that did not arise from trading at all, the resulting average profit — and therefore the goodwill value — would be misleading.

• Abnormal losses (like a fire, theft, or strike) reduce a particular year's profit, but there is no reason to expect the same loss to happen again; leaving it in would understate the firm's normal earning capacity, so it is added back.
• Abnormal gains (like profit on the sale of a fixed asset) inflate a particular year's profit through a one-time event unrelated to trading; leaving it in would overstate normal earning capacity, so it is deducted.
• Interest on non-trade investments is income the firm earns from money invested outside the business (e.g., in shares or securities unrelated to its trade); it has nothing to do with the firm's trading performance, so including it would overstate the profit that the firm's goodwill (its trading reputation) is actually responsible for. …

Students sometimes say abnormal items are excluded simply because they are 'unusual', without explaining why that matters for goodwill specifically — the real reason is that goodwill values future, repeatable ear …