Legal Framework - Council Of Engineers And...

Dr. Adukia has authored various books and more than 100 articles in different journals on Valuation, Insolvency Laws, Insurance Laws, Accounting Standards etc. which has helped numerous students and professionals in their academic and professional growth. These books and articles are highly appreciated and applauded by the readers for its extremely lucid content which gives a practical approach to the reader.

These books include:

Practical Guide for Valuation including Legal Framework in India (Two Editions) •In-depth Analysis of the Insolvency & Bankruptcy Code, 2016, Relevant Rules and Regulations •A Practical guide to Corporate Insolvency •How to pass Limited Insolvency Examination •Corporate Governance for Insurance Companies. •An overview of Indian Accounting Standards (Ind ASs)

Eminent Faculty on Valuation

Dr. Adukia is an eminent faculty and an authoritative speaker on the subject of Valuation. He has addressed more than 250 seminars across the globe including his address to

•Insolvency and Bankruptcy Board of India •Institute of Chartered Accountants of India •Institute of Company Secretaries of India •Institute of Cost and Management Accountants of India •Chamber of Indian Micro Small & Medium Enterprises •Faculty in Indian Institute of Corporate Affairs for courses on Insolvency Laws and Corporate laws. •ASSOCHAM •Dena bank •Central bank

Education

Having graduated from Sydenham College of Commerce & Economics in 1980 as 5th rank holder in Bombay University and he also received a Gold Medal for highest marks in Accountancy & Auditing. He cleared the Chartered Accountancy Examination with 1st Rank in Intermediate and 6th Rank in Final. He also secured 3rd Rank in the Final Cost Accountancy Course. He has been awarded G. P. Kapadia prize for best student of the year 1981. He also holds a Degree in law, PhD in Corporate Governance in Mutual Funds, MBA, Diploma in IFRS (UK), Diploma in Labour Law and Labour Welfare, Diploma in IPR, Diploma in Criminology.

He has done Master in Business Finance, a one year post qualication course by ICAI. He has also done Certicate Courses conducted by ICAI on

•Arbitration•Forensic Audit and Fraud Prevention•Concurrent Audit•Professional Service

Dr. Adukia’s service and contribution to the profession

•Chairman of WIRC of ICAI in 1997-98•International Member of Professional Accountants in Business Committee (PAIB) of International Federation of Accountants (IFAC) from 2001 to 2004•Member of Inspection Panel of Reserve Bank of India•Member of J.J. Irani committee (which drafted Companies Bill 2008)•Member of Secretarial Standards Board of ICSI •Member of Working Group of Competition Commission of India, National Housing Bank, NABARD, RBI, CBI etc. •Independent Director of Mutual Fund Company and Asset Management Company. • Worked closely with the Ministry of Corporate Affairs on the drafting of various enactments.•Actively involved with ICAI as a Central Council Member during the period when the convergence to IFRS was conceptualised in India and has been instrumental in materialising the idea.

Professional Expertise, Training and Authorship

Dr. Adukia’s contribution towards profession expertise and academics is highly acclaimed

•Author of more than 100 books on wide variety of topics ranging from those dealing with valuation, Insolvency, Trade, Taxation, Finance, Real Estate to topics like Time Management and Professional Opportunities. •A successful Chartered Accountant in practice since last 30 years in varied eld of Financial Planning, Taxation and Legal Consulting. •Business advisor for various companies on varied subjects •Travelled across the globe for his professional work and knowledge sharing. He has widely travelled three fourths of globe addressing international conferences and seminar on various international issues like Corporate Social Responsibility, Corporate Governance, Business Ethics etc.

His Contribution in the eld of Accounting Standards

•His two books on IFRS viz. Encyclopaedia on IFRS and Handbook on IFRS have been greatly appreciated. •He has delivered lectures on IFRS at various prestigious forums including National Academy of Audit and Accounts. •He has been associated with numerous corporate and banks (like DENA Bank & Central Bank of India)in their convergence procedure both directly and by giving training on Ind AS to their staff members. •He has also trained staff members of various regulatory bodies like Regional Director and Registrar of Companies, Western Region, Ministry of Corporate Affairs, CBDT and CBEC.

Current Membership:

Dr. Adukia is also a member of:

•CAG Advisory Audit Committee •Insol India National Committee for Regional Affairs •International Financial Reporting Standards (IFRS) Foundation SME Group •Indian Society for Training and Development

Awards and Accolades

He has been felicitated with awards like

• The Jeejeebhoy Cup for prociency and character •State Trainer by the Indian Junior Chamber •“Rajasthan Shree” by Rajasthan Udgosh, a noted Social Organisation of Rajasthan and several other awards as a successful leader in various elds.

To receive regular updates kindly send test e-mail to [email protected]

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Practical Guide for Valuation including Legal Framework

in India(Including Valuation of Land & Buildings, Plant & Machinery, IPR and Other Assets)

DR. RAJKUMAR S. ADUKIAAuthor of 200 plus books

B. Com. (Hons.), FCA, FCS, FCMA, LL.B.,M.B.A, DIPR, Dip IFRS (UK), Dip LL&LW,

Dip in criminology, Ph.D.

Mobile: 98200 61049Email ID: [email protected]

¤ International Valuation/TEGOVA/ RICS/ ASA Standards

¤ Sections 247/447/458/459/469 of The Companies Act, 2013 also incorporating amendment by Companies (Amendment) Act 2017

¤ Companies (Registered Valuers and Valuation) Rules, 2017 as amended by Companies (Registered Valuers and Valuation) Amendment Rules, 2018 (with effect from 9th February 2018)

¤ Valuation of Land & Buildings

¤ Valuation of Plant & Machinery

¤ Valuation of Intellectual Property Rights

¤ Valuation of Business and Other Assets

¤ Checklists, Reports, Documentation and Specimen

¤ Registered Valuers Organisation

¤ Case Studies on Valuation

Highlights

2nd Edition 2018

First Published in India 2018 with 10 model papers and more than 3000 MCQs

Upcoming Books On Valuation

Book your advance copy at ` 4,999 published price ` 5,999

Asset Class:Securities or

Financial Assets

Asset Class:Land &

Building

Asset Class:Plant &

Machinery

How to Pass Valuation ExaminationDR. RAJKUMAR S. ADUKIAAuthor of 200 plus books

B. Com. (Hons.), FCA, FCS, FCMA, LL.B.,M.B.A, DIPR, Dip IFRS (UK), Dip LL&LW, Dip in Criminology, Ph.D.

Mobile: 98200 61049 | Email ID: [email protected] Price ` 999

Author's Profile

FEW OTHER PUBLICATIONS AUTHORED BY DR. RAJKUMAR ADUKIA FEW OTHER PUBLICATIONS AUTHORED BY DR. RAJKUMAR ADUKIA

How to PassLimited

InsolvencyExam

Indian Accounting

(Ind AS)

2015

Real Estate Law, Practice& Procedures

i

Practical Guide for Valuation including Legal Framework in India


(Including Valuation of Land & Buildings, Plant & Machinery, IPR and Other Assets)

Dr. Rajkumar S. AdukiaAuthor of 200 plus books


Dip in Criminology, Ph.D.Mobile: 98200 61049

E-mail ID: [email protected]

ii


DISCLAIMER

The opinions and views expressed in this publication are those of the Contributor.

No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing.

This publication is sold with the understanding that neither the publisher, nor the author will be responsible for the result of any action taken on the basis of this work whether directly or indirectly for any error or omission, to any person whether a buyer of this publication or not.

2nd Edition : March, 2018

Price ` 999/-

ISBN-978-81-935817-9-7

Printed by

Finesse Graphics & Prints Pvt. Ltd. Tel.: 4036 4600 • Fax: 2496 2297

Published by

COMPETENT INSOLVENCY PROFESSIONALS PRIVATE LIMITED1/3, Meridien Apartment, Veera Desai Road, Andheri (W), Mumbai-400058Tel: 022 2676 5506, 022 2676 3179E-mail ID: [email protected]

© All rights including copyrights and rights of translations etc., are reserved and vested exclusively with Dr. Rajkumar Adukia. No part of this book may be reproduced in any form or by any means [Graphic, Electronic or Mechanical], or reproduced on any information storage device, without the written permission of the publishers.

iii


Preface

“Price is What You Pay, Value is What You Get”.

This is quite a true fact quoted by Warren Buffet. Valuation which is an opinion, is the key factor of decision of every transaction. Take it business or individual, valuation has its form and necessity depending upon the transaction. Often, we have question like “is it worth”. It can be defined in a number of different ways, and without carefully defining the term, the results of the valuation can become meaningless.

Valuation is not an exact science. Mathematical certainty is not demanded nor is it possible. It is based upon assumptions, method and the data considered by the Valuer. Moreover, value is also dependent upon the other circumstances like demand, availability uniqueness etc. A fair valuation is spirit of the valuation process.

The inspiration for this book arose from the desire to enlighten and instil a greater appreciation to the valuation profession having a great importance.

Valuations have become much more important in today’s times, than they ever were. The business world undergoes changes with the number of reorganisations of companies. Besides, various laws require a reliable estimate of values of business and its assets for calculating tax liabilities and other purposes.

Valuation as a profession has been around for many years, but the principle of registered valuer incorporated under the Companies Act, 2013, by introduction of Section 247, on October 18, 2017, gave a legal recognition to the profession and led to proper organisation and regulation of the valuation process. The Insolvency and Bankruptcy Board of India was entrusted to be the regulator of the Registered Valuers.

This book covers all the provisions relevant to valuations, from various laws and gives a comprehensive view on the topic. All the latest amendments are also covered for the purpose.

Besides the laws that require valuations, the book also discusses about the history and need of valuation, various standards of valuation, national and international case laws and valuations of different asset classes. Through this book, I have tried to cover all the areas relevant to valuation and necessary to add to the knowledge of the readers.

Also at this juncture, I would like to express my gratitude to all those who helped me. I would like to thank my friends and my wonderful family, my wife Sangeeta, my son CA Rishabh and my daughter-in-law CS Samiksha for their support.


iv


COMPETENT INSOLVENCY PROFESSIONALS PRIVATE LIMITED COMPETENT VALUATION PRIVATE LIMITED

1/3, Meridien Apartment, Veera Desai Road, Andheri W, Mumbai 400058 Tel 022 2676 5506, 022 2676 3179

E-mail ID: [email protected], [email protected]

As an Insolvency Professional, we render the following services:

Act as an Interim Resolution Professional/Resolution Professional.

Representing on behalf of Operational creditor, Workmen or Employee, financial creditor or corporate debtor.

Assisting in formulation and submission of claims by financial creditor /operational creditor and other creditors.

Assisting for Public Announcement.

Preparation of Information Memorandum and Resolution Plan.

Keep track on time management for existing IP in order to complete CIRP within 180 days or such extended days.

Assisting in Auction or Private Sale.

Filing details to Information Utility.

Analysing the financial statements of the Company.

Drafting of Notice and Agenda for convening the meeting of the Committee of Creditors.

Assisting for appointing Registered Valuer in order to determine Liquidation value of the Corporate Debtor.

Managing the affairs of the Corporate Debtor as a going concern.

Studying various business verticals of the Company in which it operates.

Verification of all claims received by the Creditors and determining the amount of claim followed by maintaining the list of creditors.

Exploring various other restructuring options.

Filing an Application with the Adjudicating Authority and Representing before them.

Act as a Liquidator.

Recovery under various relevant Laws.

Factoring, Loan & Sale Documentation.

Assessment of distressed assets, cash position, due diligence and turnaround feasibility;

Advice on optimum utilization of resources.

v


Revival of Companies when the name has been struck off.

Winding up of the Company under the Companies Act, 2013.

Valuation Services

Business Valuation.

Real Estate and Property valuation.

Tangible and Intangible Asset Valuation, Intellectual Property Valuation.

Valuation under Income-tax.

Valuation under the SARFAESI Act, 2002.

Registration of Valuer.

Valuation Examination.

Purchase price allocation in accordance with GAAP, IFRS and Ind AS.

Arbitration and Litigation Support.

Valuation under the Companies Act, 2013:

• Merger/Amalgamation.

• Issue of Securities.

• Non-cash transactions with Directors etc.

• Purchase of minority shareholding.

• Valuing assets for submission of report by Company Liquidator for winding up proceedings.

The Insolvency and Bankruptcy Code, 2016:

• Valuation required under Insolvency Resolution Process, Liquidation Process.

vi


From Gaining Expertise to Authoring Books

Dear Reader,

The road to progress and development doesn’t just end with knowledge and experience gained. Knowledge continues to grow when it is shared among fellow aspirants.

I feel proud of the fact that I am amidst hardworking people who have made their way to the pinnacle of success, by overcoming obstacles and hurdles in their journey through professional life and achieving the most needed knowledge and expertise.

My unquenchable thirst for knowledge has been my constant inspiration to read more and gain more knowledge. It has also been the source of motivation to author books, which has enabled me to author 200 plus books on a wide range of subjects over a period of time.

I find it apt to remember English Historian and Geologist Charles Darwin’s famous quote

“In the long history of humankind those who learn to collaborate and improvise most effectively have prevailed.”

In collaboration lies the spirit of greater achievements and carving a niche for ourselves by setting the most inspiring example for others to follow.

I take this opportunity to invite both budding and established professionals/entrepreneurs/academicians/readers to join me in sharing the knowledge and expertise with our fellow professionals and aspirants by developing knowledge series in the form of books on a wide range of topics for example, business laws, various forms of audits, accounting standards, arbitration and mediation, self-help and self-development and management topics to name a few.

It will be my pleasure to co-author books with esteemed colleagues who will be interested in presenting an innovative approach with respect to any subject within the ambit of finance and its related fields.

You may feel free to contact me at [email protected] or reach me on my mobile phone 9820061049 by WhatsApp for further details and discussions in this regard.


Regards,

Dr. Rajkumar S. Adukia

vii


Contents

Chapters

1 History and Need of Valuation .........................................................................................1

2 Values and Valuation .......................................................................................................12

3 Legal Aspects for Valuers and Valuation under Companies Act, 2013 ........................28

4 Legal Aspects for Valuers and Valuation under Different Laws (Other than the Companies Act, 2013) .....................................................................................................48

5 Valuation under International Financial Reporting Standards (IFRS) & Indian Accounting Standards (Ind AS) ........................................55

6 Valuation Standards .........................................................................................................71

7 General International Valuation Standards ....................................................................82

8 International Valuation Standards for Specific Assets ................................................105

9 Valuation of Land and Building ...................................................................................124

10 Valuation of Plant and Machinery ................................................................................136

11 Valuation of Intellectual Property Rights .....................................................................141

12 Valuation of Business ....................................................................................................184

13 Valuation for Banks and Financial Institutions ...........................................................190

14 Valuation of Startups .....................................................................................................208

15 Checklists for Valuation ................................................................................................213

16 Valuation Report ............................................................................................................218

17 Case Laws – India ..........................................................................................................224

18 Valuation – International Case Laws ............................................................................232

19 Registered Valuers Organisations ..................................................................................238

20 Case Studies on Valuation ............................................................................................242

21 Checklists for Land & Building/Plant & Machinery ....................................................253

viii


Annexures

1 Course for Asset Class – Land & Building ...................................................................256

2 Paper Pattern Asset Class – Land & Building ..............................................................265

3 Course for Asset Class – Plant & Machinery ...............................................................275

4 Paper Pattern for Asset Class – Plant & Machinery .....................................................287

5 Course for Asset Class – Financial Assets ...................................................................299

6 Paper Pattern for Asset Class – Financial Assets .........................................................305

7 Relevant Provisions of Companies Act, 2013 ..............................................................312

8 The Companies (Registered Valuers and Valuation) Rules, 2017 ...............................316

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Chap. 1 – History and Need of Valuation

Chapter 1 History and Need of Valuation

ValueEvery transaction has a value. Value is the worth of something in common parlance. But in business value and valuation play a very critical role in for happening or non-happening of a business event. In any business transaction, it is the value that everyone is concerned about, it may be acquisition, takeover, merger, winding up or any of the basic day-to-day transactions. We may define value of a product or service as its worth in monetary terms.

The prominent dictionaries define the term value in the following manner:

1. Cambridge

• The amount of money that can be received for something

• The importance or worth of something for someone

• How useful or important something is

• To give a judgment about how much money something might be sold for

2. Collins

• The value of something is how much money it is worth

• When experts value something, they decide how much money it is worth

• You use value in certain expressions to say whether something is worth the money that it costs.

3. Oxford

• The material or monetary worth of something

• The worth of something compared to the price paid or asked for it

4. Merriam-Webster

• The monetary worth of something

• A fair return or equivalent in goods, services, or money for something exchanged

• Relative worth, utility, or importance

5. Business Dictionary

• The monetary worth of an asset, business entity, good sold, service rendered, or liability or obligation acquired.

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• The worth of all the benefits and rights arising from ownership. Two types of economic value are (1) the utility of a good or service, and (2) power of a good or service to command other goods, services, or money, in voluntary exchange.

Valuation Valuation is the process of determining the current worth of an asset or a company. Mainly three approaches to valuation are followed which are Asset Approach, Income Approach and Market Based Valuation. In Asset based approach the value of a business is determined based on the fair value of its assets and liabilities held by the entity.

Fair value is an important measurement basis in financial reporting. Fair Value Accounting has been a topic of interest and debate ever since its inception. It provides information about what an entity might realize if it sold an asset or might pay to transfer a liability. In recent years, the use of fair value as a measurement basis for financial reporting has been extended, even though the debate over its usefulness to stakeholders continues.

Determining fair value often requires a variety of assumptions, as well as significant judgment. Thus, it becomes extremely important to provide timely and transparent information about how fair value is measured, its impact on current financial statements, and its potential to impact future periods.

There are numerous items for which fair value measurements are required or permitted. Ind AS 113, ASC 820 and IFRS 13 (“the fair value standards”) provide authoritative guidance on fair value measurement.

History of ValuationThe word “valuation” is basically an opinion. So, from any incident we can say there is an opinion of the question i.e., “Whether pursue particular matter or not”. Valuation in terms of business transaction may be understood as concluding at some numbers and then taking decisions based on it. But in personal area, it is involved in almost everything.

So, keeping this in mind, there are many incidents in the history which make reference to valuation.

The first great landmark in the long and tortuous intellectual struggle with the riddle of value was laid by the philosophers of the Athenian Academy in the 4th Century BC. It was Aristotle (384-322) who held that the source of value was based on need, without which exchange would not take place. Originally, it was he who distinguished between value in use and value in exchange 'of everything which we possess, there are two uses. For example, a shoe is used to wear and it is used for exchange'.

BarterAnother example is the barter system. Trading goods and services without the use of money is called bartering or it is an exchange of products without involvement of money. It is prevailing before the introduction of currency system. It has been used for centuries. People exchanged services and goods for other services and goods in return. The value of

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bartering items can be negotiated with the other party. Early civilizations relied on this kind of exchange. Even cultures in modern society rely on it.

The history of bartering dates all the way back to 6000 BC. Introduced by Mesopotamian tribes, bartering was adopted by Phoenicians. Phoenicians bartered goods to those located in various other cities across oceans. Babylonian's also developed an improved bartering system. Goods were exchanged for food, tea, weapons, and spices. At times, human skulls were used as well. Salt was another popular item exchanged. Salt was so valuable that Roman soldiers' salaries were paid with it. In the middle Ages, Europeans travelled around the globe to barter crafts and furs in exchange for silk and perfumes. Colonial Americans exchanged musket balls, deer skins, and wheat. When money was invented, bartering did not end, it become more organized.

Due to lack of money, bartering became popular in the 1930s during the Great Depression. It was used to obtain food and various other services. It was done through groups or between people who acted similar to banks. If any items were sold, the owner would receive credit and the buyer's account would be debited.

So, in bartering system, one has to ascertain value of his own product as well as the product that is he is going to exchange.

Massachusetts LegislationIn 1858, Massachusetts Legislation Commissioner used to calculate reserves on all policies of all licenced companies.

SaltDuring the late Roman Empire and throughout the Middle Ages salt was a precious commodity carried along the salt roads into the heartland of the Germanic tribes. People created salty ponds in sunny spaces. These could be used to make small salt “factories” for specific people. A person who had a salt pond or pool would be known as one of the richest people in their community.

CustomsThe customs duties known as ashoor imposed on goods passing by the country. It is tenth of the value of the goods imported into the country. This was based upon the real value of the product.

Need of ValuationWe can say valuation is part of every transaction. Its need is obvious to make a decision. This makes the decision meaning that whether the particular decision will be able to meet with our expectation.

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Following are some transactions for which the need of valuation is specified:

• Portfolio Management The role that valuation plays in portfolio management is determined in large part by

the investment philosophy of the investor. Valuation plays a minimal role in portfolio management for a passive investor, whereas it plays a larger role for an active investor. Even among active investors, the nature and the role of valuation is different for different types of active investment. Market timers use valuation much less than investors who pick stocks, and the focus is on market valuation rather than on firm-specific valuation. Among security selectors, valuation plays a central role in portfolio management for fundamental analysts, and a peripheral role for technical analysts.

• Valuation in Acquisition Analysis The bidding firm or individual has to agree on a fair value for the target firm before

making a bid, and the target firm has to determine a reasonable value for itself before deciding to accept or reject the offer.

There are special factors to consider in takeover valuation. First, there is synergy, the increase in value that many managers foresee as occurring after mergers because the combined firm is able to accomplish things that the individual firms could not. The effects of synergy on the combined value of the two firms (target plus bidding firm) have to be considered before a decision is made on the bid. Second, the value of control, which measures the effects on value of changing management and restructuring the target firm, will have to be taken into account in deciding on a fair price. This is of particular concern in hostile takeovers.

Target firms may be over-optimistic in estimating value, especially when the takeover is hostile, and they are trying to convince their stockholders that the offer price is too low. Similarly, if the bidding firm has decided, for strategic reasons, to do an acquisition, there may be strong pressure on the analyst to come up with an estimate of value that backs up the acquisition.

• Valuation in Corporate Finance For small private businesses thinking about expanding, valuation plays a key role

when they approach venture capital and private equity investors for more capital. The share of a firm that a venture capitalist will demand in exchange for a capital infusion will depend upon the value it estimates for the firm. As the companies get larger and decide to go public, valuations determine the price at which they are offered to the market in the public offering. Once established, decisions on where to invest, how much to borrow and how much to return to the owners will be all decisions that are affected by valuation. If the objective in corporate finance is to maximize firm value, the relationship between financial decisions, corporate strategy and firm value has to be delineated.

5


• Valuation for Legal and Tax Purposes Mundane though it may seem, most valuations, especially of private companies, are

done for legal or tax reasons. A partnership has to be valued, whenever a new partner is taken on or an old one retires, and businesses that are jointly owned have to be valued when the owners decide to break up. Businesses have to be valued for estate tax purposes when the owner dies, and for divorce proceedings when couples break up. While the principles of valuation may not be different when valuing a business for legal proceedings, the objective often becomes providing a valuation that the Court will accept rather than the right valuation.

• Property Valuation Property valuation depends upon kind of transaction we are going to make. It may be

required for various purposes like

a) Division of property

b) Providing guarantee

c) Selling

d) Purchasing

e) Stamp duty etc.

• Valuation of shares of Company Valuation of share may be required for many purposes. The common situation may be

restructuring, here a portion of the shares is to be given by a member of proprietary company to another member, when a loan advanced on the security of shares, going public etc.

• Stock Valuation Stock is an integral part of organization. It is the matter which generates revenue. It is

very recommended to know the current value of the stock. While for internal matters like MIS, financial statements for internal circulation, it is not compulsory to go for a valuation by professional. However, in case of creating charge on stock, merger transactions, etc. it requires valuation.

APPROACHES AND METHODS OF VALUATIONApproach can be defined as a “way of dealing with things”, while method is “the way” or “the process”. We can tackle a situation on the basis of our approach towards it, whereas we may succeed or fail in solving the situation on the basis of the method that we use to tackle that situation.

In other words, approaches of valuation mean, a set of rules or assumptions used for the purpose of carrying on the valuation of the business, but method is the procedure that will be used for valuation. There can be various methods under each approach but there cannot be various approaches under each method.

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In case of valuation, there are three approaches;

1. Income approach

2. Market approach

3. Cost approach

Each approach further has different methods. Methods are the procedures to carry out the task at hand.

INCOME APPROACHThe income approach analyses the expected economic benefits that investors anticipate from a real investment. This approach is mainly defined as the valuation method whereby the valuer calculates the present value of future benefits associated with ownership of the equity interest or asset.

Income is of utmost importance for any economic activity. The main reason to carry on a business activity is to generate income. Hence, we can value a business or an asset on the basis of its potential to earn the expected income.

Under income approach valuation is carried out either by

a. Capitalisation method

b. Discounted cash flows method

This approach of valuation is widely accepted because it projects data as per the needs and the stages of business. But the major drawback is that at most times, the future cash flow projections are hypothetical.

This approach is mainly preferred when the income producing ability of the business is the major element and reasonably accurate estimates of future flow of income can be easily made.

1. CAPITALISATION METHOD This method of income approach of valuation calculates the net present value of

the future earnings or cashflows. In this method the business value is calculated by dividing the annual future earnings by the rate of return expected by the business.

2. DISCOUNTED CASHFLOWS METHOD A valuation method used to estimate the absolute value of a company. It uses future

free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. In Discounted Cash Flow (DCF) valuation, the value of an asset is the present value of the expected cash flows on the asset.

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In DCF valuation, we need to estimate the following:

• The life of the asset

Every asset can be used productively for a particular time period, after which it either becomes obsolete, or does not remain beneficial to use. This life of the asset is taken into consideration for calculation of the discounted cashflows.

• The cash flows during the life of the asset

The asset when put to use generates cash flows during its life. The cashflows at various points of time in future are estimated.

• The salvage value or the terminal value of the asset

Each asset has a useful life of certain years and at the end of such useful life, the asset can either be scraped or be converted for some other use. This process involves certain cash inflows and outflows. The net cashflows at the end of the useful life of the asset is called the salvage value or the terminal value of the asset.

• The discount rate to apply to these cash flows to get present value

The discount rate is the expected rate of return of the business for all the activities carried on by it. The discount rate can be calculated in many different ways.

Internal rate of return (IRR)• It is the interest rate at which the net present value of all the cash flows (both positive

and negative) from a project or investment equal zero.

• The internal rate of return is usually used to calculate the profitability of investments made in a financial product or projects.

Weighted average cost of capital (WACC) method• It is the average rate of return a company expects to compensate all its different

investors. (Discount Rate)

• It is calculated by finding out cost of each component of a company’s capital structure, multiplying it with the relevant proportion of the component to total capital and then summing up the proportionate cost of components.

• WACC = r(E) × w(E) + r(D) × (1 – t) × w(D)

• r(E)- cost of equity

• w(E)- weight of equity in the company’s total capital. It is calculated by dividing the market value of the company’s equity by sum of the market values of equity and debt.

• w(D) is the weight of debt component in the company’s capital structure. It is calculated by dividing the market value of the company’s debt by sum of the market values of equity and debt.

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• r(D) × (1 – t) represents the after-tax cost of debt i.e., the after-tax rate of return which the debt-holders need to earn till the maturity of the debt.

Capital Asset Pricing Model• This method explains the relationship between the expected return and the risk of the

business.

• It helps determine a theoretically appropriate rate of return of a business. This rate of return can then be used as the rate of discount for the future cashflows of the business.

VARIATIONS OF DCF

Free cash flow (FCF)• It is a measure of a company's financial performance, calculated as operating cash flow

minus capital expenditures

Net Present Value (NPV)• It is a method of determining the current value of all future cash flows generated by a

project after accounting for the initial capital investment.

• It is calculated by subtracting present value of cash inflows from the present value of cash outflows over a period of time.

• It can be used for either acquisitions or future capital projects.

• It is a core component of corporate budgeting.

• NPV = (Cash inflows from investment) – (cash outflows or costs of investment)

Adjusted Present Value (APV) method• The formula for adjusted present value is:

NPV (of a venture financed solely with equity capital) + PV of financing

Free Cash Flow to Equity method• It is used to calculate the equity available to shareholders after accounting for the

expenses to continue operations and future capital needs for growth.

MARKET APPROACHAs the name suggests, this method is based on the market value of the asset/s in consideration. It can be derived from the value of the same or similar asset.

The market value of an asset or a business can be defined as the value of the same or the similar asset or business, that a buyer is willing to pay and a seller is willing to accept, in an arm’s length transaction. Here, it is assumed that both the parties act in full knowledge of the relevant facts, and no one is under compulsion to strike the deal.

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The market equations play an important role in the valuation of any marketable product. The dynamics of demand and supply correctly values the asset in question.

This approach is widely accepted in the cases where same or similar assets are traded in the open market their values easily available. No adjustments are required to be made.

The major drawback of this approach is that at times there is a lack of sufficient number of companies and data to get the comparable prices. There are two methods under this approach:

a. Comparable transactions method

b. Comparable companies’ method

a) COMPARABLE TRANSACTIONS METHOD Under this method, the value is determined on the basis of multiples derived from

valuations of similar transactions in the industry. This technique is mostly used for valuing a company for M&A, the transaction that have taken place in the industry which are similar to the transaction under consideration are taken into account. The comparable transactions method uses variety of different comparable evidences, which forms the basis of the comparison.

b) COMPARABLE COMPANIES’ METHOD This method uses multiples derived from valuations of listed comparable companies

operating in similar industry. Under this approach businesses of similar size in the same industry are compared for valuation purposes. In this approach, value is determined by comparing the subject company or asset with other companies or assets in the same industry, of the same size, and/or within the same region, based on common variables such as earnings, sales, cash flows, etc. This is because the companies with similar characteristics should trade at similar multiples, other things being equal.

This method of valuations is benefitted by widely available data required for valuation. But at times, this data maybe influenced by the temporary market conditions.

Price-Earnings multiple• The price-earnings ratio is also sometimes known as the price multiple or the earnings

multiple.

• It is the ratio which is calculated by dividing the market value price per share by the earnings per share.

• The most common measure of valuation using a multiple of accounting earnings

Market Price to Book value multiple• It is used to compare a stock's market value to its book value.

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• It is the ratio of market price of a company's shares (share price) over its book value of equity.

• The book value of equity, in turn, is the value of a company's assets expressed on the balance sheet.

Price to Revenue multiple• It compares a company's stock price to its revenues.

• Also known as Price-To-Sales Ratio.

Enterprise value multiple• Enterprise value multiple is the comparison of enterprise value and earnings before

interest, taxes, depreciation and amortization.

• Enterprise Value (EV) = Market Capitalization + Total Debt – Cash

• EV/EBIT (Enterprise Multiple) = Enterprise Value / Earnings Before Interest & Taxes

COST APPROACHThe Cost Approach of Valuations is also known as the Asset Approach of Valuation. The underlying assumption of this approach is that the value of a business is the total value of all of its assets less the liabilities. This value differs on the basis of the life expectancy of the business. The value is much more, when the business is valued on going concern basis than when it is valued for liquidation. This approach of valuation is used when the value of a business is directly based on the value of its underlying tangible assets and investments and not on its ability to generate income. Also, the assets in consideration should be such that they can be recreated quickly, if need be, without any restrictions.

This approach is not suitable when the business has assets that cannot be valued in the monetary terms. Like some inhouse procedures or techniques, which are very important in the business, but which has no monetary value, as it was not purchased. Besides these, necessary adjustments should be made for the additional indirect costs to be incurred and for depreciation.

Following methods are used under this approach:

a) ADJUSTED NET ASSET VALUE The adjusted net asset value method is a business valuation technique that changes the

book values of a company's assets and liabilities to reflect their estimated current fair market values better. By adjusting asset or liability values up or down, the net effect offers values that can be used in going-concern assessments or liquidation scenarios.

The adjusted net asset value method includes all the recorded and unrecorded assets and liabilities of the business after making necessary adjustments. The difference between the fair value of adjusted asset and total fair value of adjusted liabilities is the “adjusted net asset value” of the business.

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This method is generally used in the cases where the business is capital-incentive and valuation on the basis of income or market approach is not feasible.

b) BOOK VALUE The Book Value of an asset is the carrying value of the asset or the liability in the

Balance Sheet or the value at which the asset or liability is recorded in the balance sheet.

The book value is the total of assets less total of liabilities, or the net worth of the business. It is less likely to reflect the intangible assets of the company.

This method is based on the historical cost of the items of the balance sheet. This may not give the clear picture of the fair market value of these items. The fair market value may be much greater or lesser. Hence this method of valuation may not give the accurate answers, but it is useful when the other methods of valuation cannot be used. Also, since the figures for calculations are easily available from the books of the business, this method of valuation does not consume time for data collection and quick calculations are possible.

c) REPLACEMENT COST This method of cost-based valuation takes into account the cost of replacement of an

asset.

Replacement cost is the amount a business will have to spend as on the day of valuation, to replace the asset in question.

This method of valuation can be used only when the same asset as that being valued or as asset similar to the asset being valued is available in the market, or it can be reproduced within reasonable timeframe.

To calculate the replacement cost, first the cost to be incurred to create an asset with the same or similar utility is calculated. Thereafter adjustments in relation to the depreciation on the current asset need to be made. The remaining amount after the adjustment is the cost of replacement of the asset.

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Chapter 2 Values and Valuation

When we look around in a hyper mart we can see millions of products which are for sale to the public. These products on offer differ from each other in characteristic, usage, nature, functions etc. When we as a customer go to a mall and when we are going through the products on display the first thing that comes to our mind is what is the price of the product? What are its uses? What is its value for us? Is it value for money that we are paying for the same?

The difference between the price, cost, and value of a product or service is very negligible, perceived and subtle. When we talk about price it refers to the money which we have to pay to acquire the same. Cost refers to the amount spent or incurred to manufacture the product or service in question.

We can say the value of any product or service for a individual refers perceived utility or use of the product or service for that particular individual. Value of a product or service is always ascertained from the perspective of the ultimate user of the goods or service. The value is estimated through opinion of the user. It differs from user to user. For example, if one is hungry the value of a plate of food is immense to that person. But the same plate of food will be of lesser value if one is not hungry. So the value of a product or service is perceived and is based on individual perception. The value of a product or service is always expressed in monetary terms. The hungry person will pay any amount of money for a plate of food while a person who is not hungry may not pay that kind of money for the same plate of food.

We may define value of a product or service as its worth in monetary terms.

There are various types of values which are used while valuating an asset or product or business. They are:

Assessed Value: It is used to determine ad valorem taxes, or to levy damages on the orders of a court. It is determined by the Government agencies. For example, the value of a property is assessed by the local government to levy the property tax.

Book Value: The value of a security or asset carried on a balance sheet. It is the value of the business as per the audited financial statements. It is calculated from the balance sheet.

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Chap. 2 – Values and Valuation

Book Value = Total Assets less Intangible Assets like patents, goodwill and total liabilities.

For example, according to the balance sheet of Company ABC Ltd., it has total assets of INR 50 Crore and total liabilities of INR 30 Crore, the book value of the company is INR 20 crore. In other words if the company is to be liquidated today the shareholders of the company will have INR 20 million. It is the net worth of the company.

Fair Market Value: Fair market value of an asset is the price at which a buyer is willing to buy the particular asset from a seller who is willing to part with the asset when

(1) Both are unrelated,

(2) Know the relevant facts,

(3) Neither is under any compulsion to buy or sell, and

(4) All rights and benefit inherent in (or attributable to) the item must have been included in the transfer.

Scrap Value: Scrap value is the expected or estimated value of the asset at the end of its useful life. It is the estimated price that can be realized by selling the depreciable asset at the end of its useful life. In accounting parlance it is also known as the residual value, salvage value, or break-up value.

Scrap Value = Cost of Asset – Total Depreciation

Cost of Asset = Purchase Price + Freight + Installation

Intrinsic value: Intrinsic value is the actual value of a company, or an asset or a security determined with reference to fundamental analysis and without reference to its market value or book value. It is also known as the fundamental value of the asset to company or a security.

Liquidation Value: Liquidation value is the price of a company’s tangible assets if it goes out of business and needs to be liquidated within limited period of time. Liquidation value is usually lower than book value but greater than salvage value. In this case the asset sought to be sold has value, but due to the paucity of time the assets are sold off at a loss as compared it’s book value. While calculating the liquidation value intangible assets like good will, copy rights, trademarks etc., are not included.

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Investment Value: Investment value is the value of a property to a particular investor. It is used to determine worth of a business or an asset or a property to a particular investor. It is helpful in calculating future value of an investment. Investment value of an asset may be equal to its market value or fair market value. It is the perceived value of an asset to its owner and the value depends on the investors’ expectations and requirements.

Replacement Value: Replacement value is the cost of replacing an asset of a company. It refers to the actual cost that has to be incurred to replace an asset in its existing condition. An entity would have to pay to replace an asset today, according to its current worth.

Exchange Value: As per the dictionary meaning, exchange value means the quantified worth of one good or service expressed in terms of the worth of another. The exchange value is not necessary to be expressed in terms of monetary value.

Esteem Value: Esteem Value refers to the subjective value that a person attributes to a particular product or service or asset that makes them feel good about owning the product. It is difficult to calculate the Esteem Value of a product or service or asset as its value is subjective and not objective and is based on perception.

ValuationValuation is the process of determining the current worth of an asset or a company. Mainly three approaches to valuation are followed which are Asset Approach, Income Approach and Market Based Valuation. In Asset based approach the value of a business is determined based on the fair value of its assets and liabilities held by the entity.

Fair value is an important measurement basis in financial reporting. Fair Value Accounting has been a topic of interest and debate ever since its inception. It provides information about

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what an entity might realize if it sold an asset or might pay to transfer a liability. In recent years, the use of fair value as a measurement basis for financial reporting has been extended, even though the debate over its usefulness to stakeholders continues.



Ind ASs and Transactions that requires or permits FV measurement• Business Combinations (Ind AS 103)

• Assets acquired and liabilities assumed

• Contingent consideration

• Non-controlling interests in an acquiree

• Previously held interest

• Financial Instruments (Ind AS 109)

• Assets/liabilities eligible for FV option

• Derivatives

• Hybrid financial instruments

• Financial guarantee contracts

• Debt and equity investments

• Employee benefits — post-employment benefit obligations (Ind AS 19)

• Intangible assets — revaluation model (Ind AS 38)

• Investments in associates and joint ventures—held by mutual funds and similar entities (Ind AS 28)

• Property, plant and equipment—revaluation model and exchange of assets (Ind AS 16)

• Noncurrent assets held for sale and discontinued operations (Ind AS 105)

• Agriculture—biological assets (Ind AS 41)

• Impairment of assets — non-financial assets (Ind AS 36)

• Revenue (Ind AS 18)

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• Consolidated and Separate Financial Statements — Investments in subsidiaries by investment entities (Ind AS 27)

• Government Grants – Non-monetary Government grants (Ind AS 20).

Effect of Fair Value AccountingTraditionally our accounting premises are built upon historical cost base. The transition to fair value has lead to a very unique concept of Day 1 gain or loss i.e., the reporting entity may have a gain or incur a loss as soon as it acquires an asset. The fair value standards state that in many cases the transaction price equals fair value, such as when on the transaction date the transaction to buy an asset takes place in the market in which the asset would be sold. In determining whether a transaction price represents the fair value at initial recognition, a reporting entity should take into account factors specific to the transaction and to the asset or the liability. However, a transaction price may not represent fair value in certain situations:

• A related party transaction;

• A transaction under duress or a forced transaction;

• The unit of account for the transaction price does not represent the unit of account for the asset or liability being measured; or

• The market for the transaction is different from the market for the asset or liability being measured.

Under Ind AS, a Day 1 gain or loss on a financial instrument (i.e., upon initial recognition of the instrument) is recognised only when the fair value of that instrument is evidenced by other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets.

Illustration: Suppose an Entity A Ltd, grants loans of Rs 100 lakhs to B Ltd for 5 years at 8% which is below the incremental borrowing rate of B Ltd of 12%.

Fair value of the loan would be determined using present value of future cash flows arising out of interest payments and repayments of the principal amount discounted at market rate of interest.

FV= Rs 85.58 Lakhs. The difference of Rs 14.42 lakhs would be recognised as fair value loss in the profit & loss account. The journal entry in books of A Ltd at the date of granting loan would be as follows:

Loan to B Ltd A/c Dr 85,58,000

Fair Value loss A/c Dr 14,42,000

To Bank A/c Cr 100,00,000

(Day 1 loss on loan grantedto B Ltd recognised)

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Ind AS 113 dealing with Fair Value Measurement has been comprehensively dealt in subsequent chapter pertaining to Financial Instruments.

Certain example of effect of Fair Value Measurements on the Books of Account through Journal Entries

Illustration 1: Biological AssetsOn 15th July, 2015, Livestock Ltd purchased 10 cows at an auction for Rs .90,000. It incurred Rs 2000 to transport the cows to the farm. It estimates transporting cost of Rs 3000 to sell these cows. Other selling costs are estimated at Rs 500 for each cow i.e. Rs. 5000 for 10 cows.

In above example Net Out flow of Livestock Ltd. for this transaction is Rs 90,000 + 2000= Rs 92,000. Fair Value less cost to sell in this case would be Rs. 90000 -3000-5000=Rs. 82,000. Therefore livestock Ltd incurs a loss of Rs 10,000 (92,000- 82,000) at initial recognition. This would be represented by a Journal Entries as follows:

15/07/15 Cows A/c Dr 82,000

Loss on FVM Dr 10,000

To Bank Cr 92,000

(Being purchase of cow recorded at fair value less cost to sell and loss on initial recognition recognised)

15/7/15 Profit & loss A/c Dr 10,000

To Loss on FVM Cr 10,000

(being loss on fair value measurement transferred to P/L)

Now suppose on 31st March, 2015 the Fair Value of cows taking into account the present location and condition has increased to Rs. 1,05,000. Therefore, fair value less cost to sell at the reporting date would Rs 105000-3000-5000= Rs. 97,000. Therefore, value of cows will increase by Rs 15,000. This would be represented by a Journal Entries at 31st March as follows:

31/03/15 Cows A/c Dr 15,000

To Profit on FVM Cr 15,000

(Being gain on FVM recognised)

31/03/15 Profit on FVM Dr 15,000

To Profit & Loss Cr 15,000

(Being fair value gain on re-measurement of cows at closing date transferred to P/L)

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Illustration 2: Revaluation of PPE on Subsequent MeasurementA Ltd revalued its Building whose Original Cost was Rs. 100 crores. Accumulated Depreciation as on 31 March, 2015 was 20 Crores as per the books of accounts. However, as per income tax accumulated depreciation was Rs 30 Crores and applicable tax rate is 30%. The company A Ltd follows revaluation model for subsequent measurement of entire class of the asset and revalues the building to Rs. 90 crores (fair value) as on 31st March 2015. Entity A Ltd would require to pass the following Journal entries:

31/03/15 Building A/c Dr 10,00,00,000

Deferred Tax Expense Dr 3,00,00,000

To Revaluation Surplus Cr 10,00,00,000

To Deferred Tax Liability Cr 3,00,00,000

(Being building being revalued and fair value gain on re-measurement transferred to Revaluation Reserve and deferred tax liability recognised)

31/03/15 Revaluation Surplus Dr 10,00,00,000

To profit & loss (OCI) Cr 10,00,00,000

(Being Revaluation surplus transferred to OCI at year end)

31/03/15 Profit & Loss (OCI) Dr 3,00,00,000

To Deferred Tax Expenses Cr 3,00,00,000

(Being deferred tax expense transferred to OCI)

Illustration 3: Financial InstrumentsCompany A Ltd. purchased 1,00,000 shares of Company B's publicly traded stock on April 1, 2014, when these shares were trading at Rs. 50 per share. However on 31 March, 2015 its value increases to Rs. 55 per share. (Income tax rate assumed to be 30%).

1/04/14 Investment in A ltd Dr 50,00,000

To Cash Cr 50,00,000

(Being purchase of 1,00,000 shares of A ltd at Rs 50 each)

31/03/15 Investment in A ltd Dr 5,00,000

To Fair value gain Cr 5,00,000

(Being gain on fair value measurement of investment in A ltd of 1,00,000 shares @ Rs 5)

31/3/15 Income tax expense Dr 1,50,000

To Deferred Tax Liability Cr 1,50,0000

(deferred tax implication on fair value gains realized)

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31/3/15 Fair Value Gain Dr 5,00,000

To Profit & Loss Cr 5,00,000

(being fair value gains transferred to P/L at year end)

31/3/15 Profit & Loss Dr 1,50,000

To Deferred Tax Expense Cr 1,50,000

Being deferred tax gains transferred to P/L)

Illustration 4: Contingent liability acquired in Business CombinationEat Ltd. plans to acquire Food Ltd. Eat Ltd. identifies 4 law suits. Fair value of obligation that amounting to Rs 10,00,000 might be required to be paid. Food Ltd has provided for Rs 2,00,000 only. One other case is pending, but fair value of obligation that may be required to be paid cannot be measured reliably.

Solution:Food Ltd. will recognise additional provision of Rs 8,00,000 (10,00,000-2,00,000). However, no provision would be made in respect to case for which fair value cannot be measured. It will be disclosed in notes as contingent liability.

Illustration 5: Assets and Liabilities AcquiredSellme Ltd. purchased a group of assets consisting of Plant & Machinery, Furniture, Computers, Software and Licences from Buyme Ltd. At a collective price of Rs. 250 crores. The fair value of these assets measured by applying Ind AS 113 is as follows:

Plant & Machinery Rs. 80 Crores

Furniture Rs. 40 Crores

Computers Rs. 40 Crores

Software Rs. 20 Crores

Licences Rs. 20 Crores

Total Rs. 200 Crores

How Sellme Ltd account for these transactions?

Solution: To determine appropriate value at which these assets would be taken in the books of Sellme Ltd it would be essential to determine whether this group of assets constitute business under Ind AS 103 or not.

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Scenario 1: Group of Assets does not meet business testSince PPE, and Intangible Assets at initial recognition are measured at cost as per Ind AS 16 and Ind AS 38 respectively, the transaction value will be allocated to each asset in proportion to their FV. Therefore, they will be recorded in books of Sellme ltd at following values:

Fair Value Allocated transaction value

Plant & Machinery Rs. 80 Crores Rs. 100 crores

Furniture Rs. 40 Crores Rs. 50 crores

Computers Rs. 40 Crores Rs. 50 crores

Software Rs. 20 Crores Rs. 25 crores

Licenses Rs. 20 Crores Rs.25 crores

Total Rs. 200 crores Rs. 250 crores

Scenario 2: Group of Assets meets business testIn this case Sellme Ltd. will recognise Goodwill in business combination of Rs. 50 crore i.e., the difference between the consideration paid (Rs. 250 Crores) and the Fair Value of assets acquired (Rs. 200 crore) and all assets acquired would be recorded at their respective fair values.

Fair Value Measurement as per Ind AS 113Ind AS 113 defines fair value and set out a single framework for measurement of fair value. It also prescribes disclosure requirements about fair value measurement. It applies when another Ind AS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements).

The essential features of fair value as set out in Ind AS 113 are as follows:

• The Ind AS 113 explains how to measure fair value for financial reporting.

• Fair value is a market-based measurement, not an entity-specific measurement.

• Fair value should be determined based on the Exit price i.e. the price to sell the asset or to transfer the liability (from the perspective of a market participant that holds the asset or owes the liability).

• The transaction forming basis of determination of fair value must be an orderly transaction.

• The transaction forming basis of determination of fair value must take place between market participants at the measurement date under current market conditions.

• When price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs.

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Fair Value is a price received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Requirements of Fair Value MeasurementThe objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions.

Steps in application of Ind AS 113• Step one: Determine unit of account

• Step two: Determine valuation premise

• Step three: Determine markets for basis of valuation

• Step four: Apply the appropriate valuation technique(s)

• Step five: Determine fair value

• Step six: Make appropriate disclosures

Unit of Account Fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity should take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics include, for example, the following:

(a) The condition and location of the asset; and

(b) Restrictions, if any, on the sale or use of the asset.

The determination of the unit of account must be established prior to determining fair value and is defined as the level at which an asset or a liability is aggregated or disaggregated in an Ind AS for recognition purposes. There are few instances in which the unit of account is explicitly defined. However, in some cases, the unit of account may not be clear. Often, it is inferred from the recognition or measurement guidance in the applicable standard and/or from industry practice. Also, there are times when the unit of account varies depending on whether one is considering recognition, initial measurement, or subsequent measurement, including impairments.

Ind AS 113 also includes a “portfolio exception” allowing a specified level of grouping when a portfolio of financial assets and financial liabilities are managed together with offsetting markets risks or counterparty credit risk.

Orderly TransactionA fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the

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measurement date under current market conditions. A transaction is regarded as orderly when it is not a forced transaction like in the case of distress sale or liquidation.

Place of Transaction: MarketFair value measurement under Ind AS 113 assumes that a transaction to sell an asset or to transfer a liability takes place in the principal market (or the most advantageous market in the absence of the principal market). The principal market is the market with the greatest volume and level of activity for the asset or liability. The most advantageous market is the market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs. If there is a principal market, the price in that market must be used, either directly or as an input into a valuation technique. Ind AS 113 does not permit the use of a price in the most advantageous market if a principal market price is available. It is not necessary to perform an exhaustive search of all possible markets to identify the principal market (or, in the absence of a principal market, the most advantageous market). However, all information that is reasonably available should be considered and the basis for conclusions should be documented. There is a presumption in the standard that the market in which the entity normally transacts to sell the asset or transfer the liability is the principal or most advantageous market unless there is evidence to the contrary. Where an entity transacts in various markets, entity should document which particular market price is used and what process was followed to determine the appropriate market to use for determining fair value.

Assumptions of Market Participants in Determining Fair Value of an Asset or LiabilityFair value measurement under Ind AS 113, require an entity to consider the assumptions a market participant, acting in their economic best interest, would use when pricing the asset or a liability. Market participants are defined as having the following characteristics:

• Independent of each other (i.e., unrelated parties)

• Knowledgeable and using all available information.

• Ability of entering into the transaction.

• Willing to enter into the transaction (i.e., not a forced transaction)

The standard requires the entity to put itself in the place of a market participant and exclude any entity-specific factors that might impact the price that it would be willing to accept in the sale of an asset or be paid in the transfer of a liability. Relevant characteristics of an asset might include or relate to the condition and location of the asset; and restrictions, if any, on the sale or use of the asset. Entity must consider the extent to which a market participant would take the above characteristics into account when pricing the asset or liability at the measurement date. The extent to which restrictions on the sale or use of the asset should be reflected in fair value are very much contingent on where the source of the restriction comes from and whether or not the restriction is separable from the asset.

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Price for determination of Fair ValueThe price in the principal (or most advantageous) market used to measure the fair value of the asset or liability should not be adjusted for transaction costs. Transaction costs should be accounted for in accordance with other Ind ASs. It should be noted that the transaction costs do not include transport costs.

Measurement of Non-Financial AssetsFair value measurement of a non-financial assets takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

This requires that fair value be determined based on the highest and best use of the asset from the perspective of a market-participant participants that would maximise the value of the asset or the group of assets and liabilities, within which the asset would be used. Entity considers the current use and any other use that is financially feasible, legally permissible and physically possible. An entity can presume that the current use of an asset is its highest and best use. However, if the asset is being used defensively (e.g., to protect a competitive position), this presumption may be inappropriate.

Normally, the concept of highest and best use does not apply to financial assets and liabilities. However, there is an exception to the valuation premise when an entity manages its market risk(s) and/or counterparty credit risk exposure within a portfolio of financial instruments (including derivatives that meet the definition of a financial instrument),on a net basis. In such cases, Fair Value would be based on the price:

• Received to sell a net long position (i.e., an asset) for a particular risk exposure, or

• To transfer a net short position (i.e., a liability) for a particular risk exposure in an orderly transaction between market participants.

Fair value of this ‘offset group’ of financial assets and financial liabilities is determined consistently with how market participants would price the net risk exposure.

Portfolio offsetting exception can only be used if the entity does all the following:

• Manages the offset group on the basis of net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the entity’s documented risk management or investment strategy.

• Provides information on that basis about the offset group to the entity’s key management personnel, as defined in Ind AS 24 Related Party Disclosures.

• Is required (or has elected) to measure the offset group at fair value in the Balance Sheet at the end of each reporting period.

Moreover, the exception does not relate to presentation and Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors must be applied when using the offsetting exception.

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Financial or Non-Financial LiabilitiesA fair value measurement assumes that a financial or non-financial liability or an entity’s own equity instrument (e.g. equity interests issued as consideration in a business combination) is transferred to a market participant at the measurement date. The transfer of a liability or an entity’s own equity instrument assumes the following:

• A liability would remain outstanding and the market participant transferee would be required to fulfil the obligation.

• An entity’s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument.

Liabilities and equity instruments held by other parties as assetsWhen a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available, then where the identical item is held by another party as an asset, an entity should measure the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date.

Liabilities and equity instruments not held by other parties as assetsWhen a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and the identical item is not held by another party as an asset, an entity should measure the fair value of the liability or equity instrument using a valuation technique from the perspective of a market participant that owes the liability or has issued the claim on equity.

Transaction Price vs. Fair ValueWhen an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (an entry price) In contrast, the fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability (an exit price).

Valuation TechniquesAn entity should use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimizing the use of unobservable inputs.

Types of Valuation Techniques

Three widely used valuation techniques are

• The market approach,

• The cost approach and

• The income approach.

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An entity should use valuation techniques consistent with one or more of those approaches to measure fair value. Valuation techniques used to measure fair value should maximise the use of relevant observable inputs and minimise the use of unobservable inputs.

Fair Value HierarchyTo increase consistency and comparability in fair value measurements and related disclosures, Ind AS 113 establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. A quoted price in an active market provides the most reliable evidence of fair value and should be used without adjustment to measure fair value whenever available except

• When an entity holds a large number of similar (but not identical) assets or liabilities (e.g. debt securities) that are measured at fair value and a quoted price in an active market is available but not readily accessible for each of those assets or liabilities individually (i.e. given the large number of similar assets or liabilities held by the entity, it would be difficult to obtain pricing information for each individual asset or liability at the measurement date).

• When a quoted price in an active market does not represent fair value at the measurement date.

• When measuring the fair value of a liability or an entity’s own equity instrument using the quoted price for the identical item traded as an asset in an active market and that price needs to be adjusted for factors specific to the item or the asset.

Level 2 InputsLevel 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 Inputs include:

(a) Quoted prices for similar assets or liabilities in active markets.

(b) Quoted prices for identical or similar assets or liabilities in market that are not active.

(c) Inputs other than quoted prices those are observable for the asset or liability,

(d) Market-corroborated inputs.

Adjustments to Level 2 Inputs depends on the following factorsa) The condition or location of the asset;

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b) The extent to which inputs relate to items that are comparable to the asset or liability and

c) The volume or level of activity in the markets within which the inputs are observed.

Level 3 Inputs• Level 3 inputs are unobservable inputs for the asset or liability.

• Unobservable inputs should be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

Disclosure Requirements

Minimum Disclosure in Balance Sheet1. For each class of asset and liability measured at Fair Value after initial recognition:

• For recurring and non-recurring FV measurements, the FV measurement at the end of the reporting period, and for non-recurring FV measurements, the reasons for the measurement.

• For recurring and non-recurring FV measurements, the level of the fair value hierarchy within which the FV measurements are categorised in their entirety (Level 1, 2 or 3).

• For recurring FV measurements, the amounts of any transfers between Level 1 and Level 2 of the FV hierarchy, the reasons for those transfers and the entity's policy for determining when transfers between levels are deemed to have occurred. Transfers into each level should be disclosed and discussed separately from transfers out of each level.

• For recurring and non-recurring FV measurements categorised within Level 2 and Level 3 of the FV hierarchy, a description of the valuation technique(s) and the inputs used in the FV measurement.

2. If there has been a change in valuation technique, the entity should disclose that change and the reason(s) for making it.

3. If the highest and best use of a non-financial asset differs from its current use, the fact and the reason thereof.

4. If portfolio exception used, the fact to be disclosed as accounting policy.

5. For a liability measured at FV and issued with an inseparable third-party credit enhancement, the existence of that credit enhancement and whether it is reflected in the FV measurement of the liability, should be disclosed.

6. All the quantitative disclosures required to be presented in tabular format unless another format is more appropriate.

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7. Additional disclosures for Level 3 inputs

• Quantitative information about the significant unobservable inputs;

• A description of the valuation processes used;

• For recurring FV measurement, a reconciliation from the opening balances to the closing balances disclosing separately changes during the period attributable to :

• total gains or losses recognised in P/L, and the line item(s) inP/L in which they are recognised. If attributable to change in unreialised gains or losses amounts to be disclosed separately.

• total gains or losses recognised in other comprehensive income, and the line item(s) which they are recognised

• purchases, sales, issues and settlements

• the amounts of any transfers into or out of Level 3, the reasons for those transfers and the entity's policy for determining when transfers between levels are deemed to have occurred.

• For recurring FV measurement

• a narrative description of the sensitivity of the FV measurement to changes in unobservable inputs if a change in those inputs to a different amount might result in a significantly higher or lower FV measurement.

• for financial A/L, if changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change FV significantly, the fact and the effect of those changes.

mm

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Chapter 3 Legal Aspects for Valuers and

Valuation under Companies Act, 2013

Section 247 under Chapter XVII of the Companies Act, 2013 deals with the concept of Registered Valuer. This concept had been newly inserted under the Companies Act, 2013.

The provisions of Section 247 were recently amended by the Companies (Amendment) Act, 2017, which became an Act on January 3, 2018 and was notified on February 9, 2018. As per the amendment, the responsibilities of the valuer described in sub-section 2(d), will now read as “not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets was conducted by him”, instead of “not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during or after the valuation of assets.”

Also, Section 447 now reads as,

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud involving an amount of at least ten lakh rupees or one per cent of the turnover of the company, whichever is lower, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

Also, a second proviso is inserted in the section, which reads as,

“Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.”

The Ministry of Corporate Affairs (MCA) has notified the provisions governing valuation by registered valuers to come into effect from October 18, 2017. In exercise of the powers conferred by section 247 read with sections 458 and 469 of the Companies Act, 2013, the Ministry of Corporate Affairs (MCA) has issued the Companies (Registered Valuers and Valuation) Rules, 2017 on the same date.

The Companies (Registered Valuers and Valuation) Amendment Rules, 2018, published on February 9, 2018, amends Rule 11, Transitional Arrangement. The revised rule reads

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Chap. 3 – Legal Aspects for Valuers and Valuation under the Companies Act, 2013

as, “any person who may be rendering valuation services under the Act, on the date of commencement of these rules, may continue to render valuation services without a certificate of registration under these rules up to September 30, 2018.”

“provided that, if a company has appointed any valuer before such date and the valuation or any part of it has not been completed before September 30, 2018, the valuer shall complete such valuation or such part within three months thereafter.”

The date of March 31, 2018 is changed to September 30, 2018, at all places, in Rule 11.

In addition, to administer and perform functions under the said rules, the MCA vide notification dated October 23, 2017, has specified the Insolvency and Bankruptcy Board of India (IBBI) as the responsible authority for registration and supervision of registered valuers and concerned matters.

Registered ValuerA person who is registered as a Registered Valuer in pursuance of Section 247 under chapter XVII of the Act with the Central Government can act as a registered valuer.

Valuation by Registered ValuerAny property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provision of this Act shall be valued by registered valuer.

The registered valuer are appointed by the audit committee or in its absence by the Board of Directors of the Company.

ResponsibilitiesAs per Section 247(2) of the Companies Act, 2013 registered valuers are entrusted with following responsibilities-

a. Make an impartial, true and fair valuation of any assets which may be required to be valued;

b. Exercise due diligence while performing the functions as valuer;

c. Make the valuation in accordance with such rules as may be prescribed; and

d. Not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets was conducted by him (amended under the Companies (Amendment) Act, 2017).

The Companies (Registered Valuers and Valuation) Rules, 2017

Structure6 Chapters, 21 Rules, 4 Annexures, 5 Forms in Annexure II

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Chapter Particulars Rules

I PRELIMINARY 1 & 2

II ELIGIBILITY, QUALIFICATIONS AND REGISTRATION OF VALUERS

3 to 11

III RECOGNITION OF REGISTERED VALUERS ORGANISATIONS 12 to 14

IV CANCELLATION OR SUSPENSION OF CERTIFICATE OF REGISTRATION OR RECOGNITION

15 to 17

V VALUATION STANDARDS 18 & 19

VI MISCELLANEOUS 20 & 21

ANNEXURE-IMODEL CODE OF CONDUCT FOR REGISTERED VALUERS

ANNEXURE-II1. FORM-A (Application for registration as a valuer by an individual)

2. FORM-B (Application for registration as a valuer by a partnership entity/Company)

3. FORM-C (CERTIFICATE OF REGISTRATION), For Registered Valuer

4. FORM-D (APPLICATION FOR RECOGNITION) For Registered Valuer Organization

5. FORM-E (CERTIFICATE OF RECOGNITION FOR REGISTERED VALUERS ORGANISATION)

Transition periodThe Companies (Registered Valuers and Valuation) Amendment Rules, 2018 provides for a transition period up to 30th September, 2018 for registration of valuers with the authority. During this transition period any person who may be rendering valuation services under the Companies Act, 2013 may continue to render such services without getting registered under the Rules.

Eligibility to be registered as a Registered ValuerRule 3 of the Companies (Registered Valuers and Valuation) Rules, 2017 prescribes that following person are eligible to be registered as a Registered Valuer:

(a) Is a valuer member of a registered valuers organization

(b) Is recommended by the registered valuers organization of which he is a valuer member for registration as a valuer;

(c) Has passed the valuation examination under Rule 5 within three years preceding the date of making an application for registration under Rule 6;

(d) Possesses the qualifications and experience as specified in Rule 4;

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(e) Is not a minor;

(f) Has not been declared to be of unsound mind;

(g) Is not an undischarged bankrupt, or has not applied to be adjudicated as a bankrupt;

(h) Is a person resident in India;

(i) Has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude, and a period of five years has not elapsed from the date of expiry of the sentence;

(j) Has not been levied a penalty under section 271J of Income-tax Act, 1961 (43 of 1961) and time limit for filing appeal before Commissioner of Income-tax (Appeals) or Income-tax Appellate

(k) Tribunal, as the case may be has expired, or such penalty has been confirmed by Income-tax Appellate Tribunal, and five years have not elapsed after levy of such penalty; and

(l) Is a fit and proper person

Asset classes

Qualification Experience Valuation Examination

Graduate level Post-graduate level

Land and Building

Graduate in Civil E n g i n e e r i n g , Architecture or town planning of a recognized University.

- 5 years of experience in the discipline after completing Graduation.

as per syllabus specified under Rule 5

Graduate in Civil E n g i n e e r i n g , Architecture or town planning of a recognized University.

post-graduate in Civil Engineering, Architecture or town planning of a recognized University.

3 years of experience in the discipline after completing Post Graduation.


Graduate in a discipline specified by the Authority for a registered valuers organization in its conditions of recognition.

post-graduate in valuation of land and building or real estate from a recognized university.



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Asset classes



Any other graduate level qualification in accordance with Rule 4 as may be specified by the Authority for a registered valuers organization in its conditions of recognition.

Any other post graduate level qualification in accordance with Rule 4 as may be specified by the authority for a registered v a l u e r s organization in its conditions of recognition.

At least 5 years and 3 years of experience in case of graduate level degree and post graduate level degree respectively.


Plant and Machinery

Graduate in M e c h a n i c a l or Electrical Engineering of a recognized University.

- 5 years of experience in the discipline after completing Graduation


Graduate in M e c h a n i c a l or Electrical Engineering of a recognized University.

Post Graduate in Mechanical or Electrical Engineering of a recognized University.

3 years of experience in the discipline after completing Post Graduation


Graduate in valuation of machinery and plant from a r e c o g n i z e d university.

Po s t - g r a d u a t e degree in valuation of machinery and plant from a r e c o g n i z e d university.


as per syllabus specified under Rule 5.

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Asset classes



Any other graduate level qualification in accordance with Rule 4 as may be specified by the authority for a registered valuers organization in its conditions of recognition.

Any other post graduate level qualification in accordance with rule 4 as may be specified by the authority for a registered valuers o r g a n i z a t i o n registered valuers organization in its conditions of recognition.


as per syllabus specified under rule 5

Securities or Financial Assets

Graduate in any stream

(1) Member of the Institute of Chartered Accountants or The Institute of Cost Accountants of India or the Institute of Company Secretaries of India;

(2) MBA/PGDBM specialization in finance or;

(3) Post Graduate Degree in Finance

3 years of experience in the discipline after completing graduation.


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Asset classes



Any other graduate level qualification in accordance with Rule 4 as may be specified by the authority for a registered valuers organization in its conditions of recognition.

Any other post graduate level qualification in accordance with Rule 4 as may be specified by the authority for a registered v a l u e r s organization in its conditions of recognition.



Objective of the partnership firm or a Company for obtaining Certificate of RegistrationRule 3(2) of the Companies (Registered Valuers and Valuation) Rules, 2017 contains provisions which should be fulfilled by a partnership entity or a Company for obtaining Certificate of Registration. Partnership firm or Company should incorporate with the object of rendering professional and financial services including valuation services. It should not be undergoing insolvency resolution or undischarged bankrupt.

No partnership entity or company shall be eligible to be a registered valuer if:

(a) It has been set up for objects other than for rendering professional or financial services, including valuation services and that in the case of a company, it is not a subsidiary, joint venture or associate of another company or body corporate;

(b) It is undergoing an insolvency resolution or is an undischarged bankrupt;

(c) All the partners or directors, as the case may be, are not ineligible under clauses (c), (d), (e), (g), (h), (i), (j) and (k) of sub-rule (1);

(d) Three or all the partners or directors, whichever is lower, of the partnership entity or company, as the case may be, are not registered valuers; or

(e) None of its partners or directors, as the case may be, is a registered valuer for the asset class, for the valuation of which it seeks to be a registered valuer.

Qualifications and experience of a registered valuerRule 4 of the Companies (Registered Valuers and Valuation) Rules, 2017 provides that the individual having:

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(a) Post-graduate degree or post-graduate diploma, in the specified discipline, from a University or Institute established, recognized or incorporated by law in India and at least three years of experience in the specified discipline thereafter; or

(b) A Bachelor’s degree or equivalent, in the specified discipline, from a University or Institute established, recognized or incorporated by law in India and at least five years of experience in the specified discipline thereafter; or

(c) Membership of a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession with at least three years’ experience after such membership and having qualification mentioned at clause (a) or (b).

Valuation ExaminationAs per Rule 5 of the Companies (Registered Valuers and Valuation) Rules, 2017, the authority shall, either on its own or through a designated agency, conduct valuation examination for one or more asset classes, for individuals, who possess the qualifications and experience as specified in rule 4, and have completed their educational courses as member of a registered valuers organization, to test their professional knowledge, skills, values and ethics in respect of valuation:

Provided that the authority may recognize an educational course conducted by a registered valuers organization before its recognition as adequate for the purpose of appearing for valuation examination:

Provided also that the authority may recognize an examination conducted as part of a master’s or post graduate degree course conducted by a University which is equivalent to the valuation examination.

The Insolvency and Bankruptcy Board of India shall determine the syllabus for various valuation specific subjects or assets classes for the valuation examination on the recommendation of one or more Committee of experts constituted by the authority in this regard.

Note: The Insolvency and Bankruptcy Board of India vide notification dated December 31, 2017 prescribed the syllabus and educational courses for valuation examination of asset class: Land and Building, Plant and Machinery and Securities or Financial Assets.

Application for certificate of registrationRule 6 prescribes that an application for registration as a registered valuer by an individual and by partnership entity or company is required to be made in Form-A and Form-B respectively prescribed under Annexure-II along with a non-refundable application fee of five thousand rupees and ten thousand rupees respectively in favor of the authority.

The authority shall examine the application, and may grant twenty-one days to the applicant to remove the deficiencies, if any, in the application.

The authority, after being satisfied that the applicant is eligible, may grant a certificate of registration in Form-C.

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Conditions of RegistrationThe valuer shall –

(a) At all times possess the eligibility and qualification and experience criteria;

(b) At all times comply with the provisions of the Act, these rules and the Bye-laws or internal regulations, as the case may be, of the respective registered valuers organization;

(c) In his capacity as a registered valuer, not conduct valuation of the assets or class(es) of assets other than for which he/it has been registered by the authority;

(d) Take prior permission of the authority for shifting his/ its membership from one registered valuers organization to another;

(e) Take adequate steps for redressal of grievances;

(f) Maintain records of each assignment undertaken by him for at least three years from the completion of such assignment;

(g) Comply with the Code of Conduct of the registered valuers organization of which he is a member;

(h) In case a partnership entity or company is the registered valuer, allow only the partner or director who is a registered valuer for the asset class(es) that is being valued to sign and act on behalf of it;

(i) In case a partnership entity or company is the registered valuer, it shall disclose to the company concerned, the extent of capital employed or contributed in the partnership entity or the company by the partner or director, as the case may be, who would sign and act in respect of relevant valuation assignment for the company;

(j) In case a partnership entity is the registered valuer, be liable jointly and severally along with the partner who signs and acts in respect of a valuation assignment on behalf of the partnership entity;

(k) In case a company is the registered valuer, be liable along with director who signs and acts in respect of a valuation assignment on behalf of the company;

(l) In case a partnership entity or company is the registered valuer, immediately inform the authority on the removal of a partner or director, as the case may be, who is a registered valuer along with detailed reasons for such removal; and

(m) Comply with such other conditions as may be imposed by the authority.

Conduct of ValuationRule 8 of the Companies (Registered Valuers and Valuation) Rules, 2017 provides that while conducting a valuation, the registered valuer shall comply with the valuation standards.

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Valuation StandardsAs per Rule 18 of the Companies (Registered Valuers and Valuation) Rules, 2017, the Central Government is empowered to notify and may modify (from time-to-time) the valuation standards on the recommendations of the “Committee to advise on valuation matters”

Until the valuation standards are notified or modified by the Central Government, a valuer shall make valuations as per-

(a) Internationally accepted valuation standards;

(b) Valuation standards adopted by any registered valuers organization.

Committee to advise on Valuation MattersIn terms of Rule 18 of the Companies (Registered Valuers and Valuation) Rules, 2017, the Central Government is empowered to constitute a Committee to advise on valuation matters to make recommendations on formulation and laying down of valuation standards and policies for compliance by companies and registered valuers.

Model Code of Conduct for Registered Valuers

1. Integrity and Fairness A valuer shall, in the conduct of his/its business, follow high standards of

integrity and fairness in all his/its dealings with his/its clients and other valuers.

A valuer shall maintain integrity by being honest, straightforward, and forthright in all professional relationships.

A valuer shall endeavour to ensure that he/it provides true and adequate information and shall not misrepresent any facts or situations.

A valuer shall refrain from being involved in any action that would bring disrepute to the profession.

A valuer shall keep public interest foremost while delivering his services.

2. Professional Competence and due care A valuer shall render at all times high standards of service, exercise due diligence,

ensure proper care and exercise independent professional judgment.

A valuer shall carry out professional services in accordance with the relevant technical and professional standards that may be specified from time-to-time

A valuer shall continuously maintain professional knowledge and skill to provide competent professional service based on up-to-date developments in practice, prevailing regulations/guidelines and techniques.

In the preparation of a valuation report, the valuer shall not disclaim liability for his/its expertise or deny his/its duty of care, except to the extent that the assumptions are based on statements of fact provided by the company or its

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auditors or consultants or information available in public domain and not generated by the valuer.

A valuer shall not carry out any instruction of the client insofar as they are incompatible with the requirements of integrity, objectivity and independence.

A valuer shall clearly state to his client the services that he would be competent to provide and the services for which he would be relying on other valuers or professionals or for which the client can have a separate arrangement with other valuers.

3. Independence and disclosure of interest A valuer shall act with objectivity in his/its professional dealings by ensuring that

his/its decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the valuation assignment or not.

A valuer shall not take up an assignment if he/it or any of his/its relatives or associates is not independent in terms of association to the company.

A valuer shall maintain complete independence in his/its professional relationships and shall conduct the valuation independent of external influences.

A valuer shall wherever necessary disclose to the clients, possible sources of conflicts of duties and interests, while providing unbiased services.

A valuer shall not deal in securities of any subject company after any time when he/it first becomes aware of the possibility of his/its association with the valuation, and in accordance with the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 or till the time the valuation report becomes public, whichever is earlier.

A valuer shall not indulge in “mandate snatching” or offering “convenience valuations” in order to cater to a company or client’s needs.

As an independent valuer, the valuer shall not charge success fee.

In any fairness opinion or independent expert opinion submitted by a valuer, if there has been a prior engagement in an unconnected transaction, the valuer shall declare the association with the company during the last five years.

4. Confidentiality A valuer shall not use or divulge to other clients or any other party any

confidential information about the subject company, which has come to his/its knowledge without proper and specific authority or unless there is a legal or professional right or duty to disclose.

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5. Information Management A valuer shall ensure that he/ it maintains written contemporaneous records

for any decision taken, the reasons for taking the decision, and the information and evidence in support of such decision. This shall be maintained so as to sufficiently enable a reasonable person to take a view on the appropriateness of his/its decisions and actions.

A valuer shall appear, co-operate and be available for inspections and investigations carried out by the authority, any person authorized by the authority, the registered valuers organization with which he/it is registered or any other statutory regulatory body.

A valuer shall provide all information and records as may be required by the authority, the Tribunal, Appellate Tribunal, the registered valuers organization with which he/it is registered, or any other statutory regulatory body.

A valuer while respecting the confidentiality of information acquired during the course of performing professional services, shall maintain proper working papers for a period of three years or such longer period as required in its contract for a specific valuation, for production before a regulatory authority or for a peer review. In the event of a pending case before the Tribunal or Appellate Tribunal, the record shall be maintained till the disposal of the case.

6. Gifts and Hospitality A valuer or his/its relative shall not accept gifts or hospitality which undermines

or affects his independence as a valuer.

A valuer shall not offer gifts or hospitality or a financial or any other advantage to a public servant or any other person with a view to obtain or retain work for himself/ itself, or to obtain or retain an advantage in the conduct of profession for himself/ itself.

7. Remuneration and Costs A valuer shall provide services for remuneration which is charged in a transparent

manner, is a reasonable reflection of the work necessarily and properly undertaken, and is not inconsistent with the applicable rules.

A valuer shall not accept any fees or charges other than those which are disclosed in a written contract with the person to whom he would be rendering service.

8. Occupation, Employability and restrictions A valuer shall refrain from accepting too many assignments, if he/it is unlikely to

be able to devote adequate time to each of his/ its assignments.

A valuer shall not conduct business which in the opinion of the authority or the registered valuer organization discredits the profession.

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Valuation ReportThe valuation report shall contain the following:

(a) Background information of the asset being valued;

(b) Purpose of valuation and appointing authority;

(c) Identity of the valuer and any other experts involved in the valuation;

(d) Disclosure of valuer interest or conflict, if any;

(e) Date of appointment, valuation date and date of report;

(f) Inspections and/or investigations undertaken;

(g) Nature and sources of the information used or relied upon;

(h) Procedures adopted in carrying out the valuation and valuation standards followed;

(i) Restrictions on use of the report, if any;

(j) Major factors that were taken into account during the valuation;

(k) Conclusion; and

(l) Caveats, limitations and disclaimers to the extent they explain or elucidate the limitations faced by valuer, which shall not be for the purpose of limiting his responsibility for the valuation report.

Registered Valuers Organizations

EligibilityAs per Rule 12 of the Companies (Registered Valuers and Valuation) Rules, 2017, the following types of organization may be recognized as a registered valuers organization, if-

i. It has been registered under section 25 of the Companies Act, 1956 or section 8 of the Companies Act, 2013,

ii. A professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession.

Following class of organizations are also eligible for registration as registered valuer organization:

(a) An organization registered as a society under the Societies Registration Act, 1860 or any relevant state law, or;

(b) An organization set up as a trust governed by the Indian Trust Act, 1882.

Such class of organization shall convert into or register itself as a company under section 8 of the Companies Act, 2013, and include in its bye laws the requirements specified in Annexure-III, within one year from the date of commencement of these rules.

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Recognition of Registered Valuers organizationsThe organization shall be recognized if it –

(a) Conducts educational courses in valuation, in accordance with the syllabus determined by the authority, for individuals who may be its valuers members, and delivered in class room or through distance education modules and which includes practical training;

(b) Grants membership or certificate of practice to individuals, who possess the qualifications and experience, in respect of valuation of asset class for which it is recognized as a registered valuers organization;

(c) Conducts training for the individual members before a certificate of practice is issued to them;

(d) Lays down and enforces a code of conduct for valuers who are its members;

(e) Provides for continuing education of individuals who are its members;

(f) Monitors and reviews the functioning, including quality of service, of valuers who are its members; and

(g) Has a mechanism to address grievances and conduct disciplinary proceedings against valuers who are its members.

Recognition by Insolvency and Bankruptcy Board of India (IBBI)Insolvency and Bankruptcy Board of India has granted recognition to three Registered Valuers Organizations, namely:

1. The Institution of Estate Managers and Appraisers in the Asset Class of Land and Building, and

2. The IOV Registered Valuers Foundation in the Asset Classes of:

i. Land and Building

ii. Plant and Machinery, and

iii. Securities or Financial Assets.

3. ICSI Registered Valuers Organization in the Asset Class of:

i. Land and Building

ii. Plant and Machinery, and

iii. Securities or Financial Assets

These Registered Valuers Organizations shall conduct educational courses in valuation, grant membership and certificate of practice to individuals, conduct training for its members and lay down and enforce the Code of Conduct for the registered valuers, who are its members.

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Application for recognitionAn application for recognition as a registered valuers organization is required to be made in Form-D along with a non-refundable application fee of rupees one lakh in favour of the authority.


The authority may require the applicant to submit additional documents or clarification within twenty-one days.

The authority, after being satisfied, may grant a certificate of recognition as a registered valuers organization in Form-E.

Conditions of RecognitionThe registered valuers organization shall-

(a) At all times continue to satisfy the eligibility requirements;

(b) Maintain a register of members who are registered valuers, which shall be publicly available;

(c) Admits only individuals who possess the educational qualifications and experience requirements,

(d) Make such reports to the authority as may be required by it;

(e) Comply with any directions, including with regard to course to be conducted by valuation organization;

(f) Be converted or registered as company under section 8 of the Act, with governance structure and bye laws specified in Annexure-III, within a period of one year from the date of commencement of these rules if it is an organization

(g) Shall have the governance structure and incorporate in its bye laws the requirements specified in Annexure-III within one year of commencement of these rules if it is an organization and existing on the date of commencement of these rules;

(h) Display on its website, the status and specified details of every registered valuer being its valuer members; and

(i) Comply with such other conditions as may be specified by authority.

Cancellation or suspension of certificate of registration or recognitionRule 15 provides that the authority may cancel or suspend the registration of a valuer or recognition of a registered valuers organization for violation of the provisions of the Act, any other law allowing him to perform valuation, these rules or any condition of registration or recognition, as the case may be.

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Complaint against a registered valuer or registered valuers organizationA complaint against a registered valuer or registered valuers organization may be filed before the authority in person or by post or courier along with a non-refundable fee of rupees one thousand in favor of the authority. The authority shall examine the complaint and take such necessary action as it deems fit.

In case the complaint is filed against a registered valuer, who is a partner of a partnership entity or director of a company, the authority may refer the complaint to the relevant registered valuers organization and such organization shall handle the complaint in accordance with its bye-laws.

Procedure to be followed for cancellation or suspension of registration or recognition certificateIn case the complaint is received against the registered valuer and the authorized officer is of the prima facie opinion that sufficient cause exists to cancel or suspend the registration of a valuer or cancel or suspend the recognition of a registered valuers organization, it shall issue a show-cause notice to the valuer or registered valuers organization.

The show-cause notice shall be in writing and shall state–

(a) the provisions of the Act and rules under which it has been issued;

(b) the details of the alleged facts;

(c) the details of the evidence in support of the alleged facts;

(d) the provisions of the Act or rules or certificate of registration or recognition allegedly violated, or the manner in which the public interest has allegedly been affected;

(e) the actions or directions that the authority proposes to take or issue if the allegations are established;

(f) the manner in which the person is required to respond to the show-cause notice;

(g) consequences of failure to respond to the show-cause notice within the given time; and

(h) procedure to be followed for disposal of the show-cause notice.

The show-cause notice shall be served in the following manner by–

(a) sending it to the valuer or registered valuers organization at its registered address by registered post with acknowledgment due; or

(b) an appropriate electronic means to the email address provided by the valuer or registered valuers organization to the authority.

The authorized officer shall dispose of the show-cause notice by reasoned order in adherence to the principles of natural justice and the order in disposal of a show-cause notice may provide for-

(a) no action;

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(b) warning; or

(c) suspension or cancellation of the registration or recognition; or

(d) change in any one or more partner or director or the governing board of the registered valuers organization.

The order passed shall not become effective until thirty days have elapsed from the date of issue of the order unless stated otherwise and person aggrieved by an order of the authorized officer may prefer an appeal before the authority.

Punishment for ContraventionWhere a person contravenes any of the provision of these rules he shall be punishable in accordance with sub-section (3) of section 469 of the Companies Act, 2013.

Punishment for False StatementIf in any report, certificate or other document required by, or for, the purposes of any of the provisions of the Act or the rules made thereunder or these rules, any person makes a statement, -

(a) Which is false in any material particulars, knowing it to be false; or

(b) Which omits any material fact, knowing it to be material,

he shall be liable under section 447 of the Act.

Section 447 of the Companies Act, 2013Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud involving an amount of at least ten lakh rupees or one per cent. of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

Where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Where the fraud involves amount less than ten lakh rupees or one per cent of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.

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Penalty under Sections 247 and 447

Offences Penalty

Contravenes provisions of Section 247 and rules

Minimum-25,000 Maximum- 1,00,000

Intentionally to defraud the company and its member (s.247)

Imprisonment- 1 year, Fine-1,00,000 to 5,00,000

Guilty of fraud under Section 447, where amount involved is at least ten lakh rupees or one percent of turnover of the company

Imprisonment- 6 months to 10 years, Fine- amount of fraud equals to may extend to 3 times of amount of fraud

Guilty of fraud under Section 447, where amount involved is less than ten lakh rupees or one per cent of turnover of the company (does not involve public interest)

Imprisonment – till 5 years or fine up to Rs. 20,00,000 or both

Ideal contents for Valuation Report

Valuation ReportDrafting of valuation report is an exercise based on the observation, inspection, analysis, and calculation. While preparing valuation report, various assumptions are to be made. It is a report that records the basis and purpose of the valuation and the results of the analysis done by the valuation professional.

Basic requirements for the preparation of valuation report

1. Fixation of valuation date

2. Collection of company data, financial and other information

3. Purpose of valuation

4. Analysis of the financial performance and results

5. Meetings with various stakeholders

6. Market analysis

7. SWOT Analysis

8. Analysis of valuation methods and approaches suitable for the business

9. Comparison with similar transactions

10. Comparison with other similar companies

11. Assumption of valuation

12. Discussions with Management

13. Drafting of Report

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14. Conclusions

Contents of Valuation Report (prescribed under Rule 8(3) of the Companies (Registered Valuers and Valuation), Rules, 2017 a. background information of the asset being valued;

b. purpose of valuation and appointing authority;

c. identity of the valuer and any other experts involved in the valuation;

d. disclosure of valuer interest or conflict, if any;

e. date of appointment, valuation date and date of report;

f. inspections and/or investigations undertaken;

g. nature and sources of the information used or relied upon;

h. procedures adopted in carrying out the valuation and valuation standards followed;

i. restrictions on use of the report, if any;

j. major factors that were taken into account during the valuation;

k. conclusion; and

l. caveats, limitations and disclaimers to the extent they explain or elucidate the limitations faced by valuer, which shall not be for the purpose of limiting his responsibility for the valuation report.

Ideal content for Valuation ReportAn ideal valuation report should contain the following key points:

1. Introduction: It should contain the general information about the company such as name of the company operation of business, name of the valuer appointed etc. It should contain the valuation date, disclaimer and other limitations.

2. Scope and purpose of the Report: Secondly, it should contain the basic purpose of the report. Why the valuation is done. There are various purposes for which valuation is done such as for restructuring of business, compromise and arrangement scheme, merger or amalgamation, valuation of goodwill at the time of admission of partner in a partnership firm, valuation of shares at the time of transfer of shares, valuation of business for liquidation, loan for construction of building etc. Such purpose is to be stated in the report. The main objective for which the valuation is done should form part of the valuation report.

Also, the scope of the valuers such as to certify the present value, completion certificate, identification of the property, background check, any violation of rules, etc. should also form part of the valuation report.

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3. Sources of Information: Audited financial statements of the company, projections, details of assets, stock report etc. are the important sources of the company which needs to be mentioned in the report. Other expenses details of the company and other crucial sources of information provided by the company should form part of the valuation. On the basis of these information, the valuation is to be done.

4. Details of share capital and other assets of the company: An ideal valuation report should contain the details of the assets needs to be valued and other assets details. Also, the shareholding pattern of the company are need to be mentioned. A Related party issue, if any are also to be stated in the report. These are vital points which should be included in the report.

5. Valuation approaches and methodologies: The approaches and methods adopted to value the assets of the company should be stated in the report. The approaches and methods to value the assets are the vital factors that need to be considered by the valuer. A thorough analysis are to be done by the valuer in order to conclude the value of the assets. Mainly, there are three approaches i.e. cost market and income approach which are to be stated in detail. There are various methods that has to be adopted for valuation. These methods are considered and are to be stated in the report. Under this heading various judicial pronouncements and views can be stated which are essential for the valuation of the company. In the valuation report, the methods adopted along with their formula and the whole computation process should be stated.

6. Valuation of company: On the basis of above-mentioned methods, the valuation of the company is done and how the value is determined should be stated in detail. Best suitable methods for the valuation of the assets of the company should also be the part of the contents of the report.

7. Conclusion: Finally, the conclusion or value of assets should be stated. The conclusion is made on the basis of the above observations. The valuer should conclude with the opinion by recommending the fair value of assets of the company.

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Chapter 4 Legal Aspects for Valuers and Valuation under Different Laws

(Other than the Companies Act, 2013)

Since valuation is a part of a transaction, its need is embedded into the transaction. The Law of every nation recognizes its importance. Valuation is not necessarily a legal judgment for the value of a business or property or whatever the matter for which valuation is being done. But carries a certain level of responsibility and due care. Certain laws require the valuation for making a legal opinion by the judiciary and regulatory bodies.

The valuation for the taxation purpose has been a common thing for a long. Valuation of properties, gift calculation of income tax, transaction value under Customs and GST are some common examples in this regard. But in taxation, valuation is done for calculation for taxation purpose only. Below is a brief of legislations issued by the Ministry, the apex bank and the SEBI which requires valuation of different assets or business along with the requirement.

Valuation is often required in following cases:

• Mergers

• Acquisitions / Investment

• Fund Raising

• Sale of Businesses

• Voluntary Assessment

• Issue of Preferential Shares, ESOP, etc.

• Insolvency and Bankruptcy Proceeding

• Purchase Price Allocation

• Impairment or Diminution

• FDI and Foreign Exchange Related Transactions

Besides there are certain statutory requirements which require valuation whether by specified technique or by qualified valuer as discussed below:

A. Specific Provisions of Companies Act, 2013 that requires Valuation by Registered Valuer• Section 62(1)(c): Valuation Report for further Issue of Shares

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Chap. 4 – Legal Aspects for Valuers and Valuation under Different Laws . . .

• Section 192(2): Valuation of Assets involved in Arrangement of Non-Cash Transactions with Directors

• Section 230(2): Valuation of shares, property and assets of Company under a scheme of Corporate Debt Restructuring

• Section 230(3): Valuation Report along with Notice of creditors/shareholders meeting- Under scheme of Compromise/ Arrangement

• Section 232(3): The Valuation report made by Tribunal for exit option of transferor company under scheme of Compromise/ Arrangement in case where transferor is Listed and transferee is unlisted company.

• Section 236(2): Valuation of Equity Shares held by Minority Shareholders.

• Section 260(2): Valuation Report in respect of Shares and Assets to arrive at the reserve price for company Administrator

• Section 281(1): Valuing assets for submission of report by liquidator

B. SEBI’s regulatory requirements in respect to Valuation• As per Regulation 8(2) of the Securities and Exchange Board of India (Substantial

Acquisition of Shares and Takeovers) Regulations, 2011, the delisting offer price where the shares are not frequently traded, would be the price determined by the acquirer and the manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies. Further sub-regulation (16) states that the Board may, at the expense of the acquirer, require valuation of the shares by an independent merchant banker other than the manager to the open offer or an independent chartered accountant in practice having a minimum experience of ten years.

• As per Regulation 69E of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, the ‘exit price’ payable to the dissenting shareholders shall be the highest of the following:

a. the volume-weighted average price paid or payable for acquisitions, whether by the promoters or shareholders having control or by any person acting in concert with them, during the fifty-two weeks immediately preceding the relevant date;

b. the highest price paid or payable for any acquisition, whether by the promoters or shareholders having control or by any person acting in concert with them, during the twenty-six weeks immediately preceding the relevant date;

c. the volume-weighted average market price of such shares for a period of sixty trading days immediately preceding the relevant date as traded on the

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recognised stock exchange where the maximum volume of trading in the shares of the issuer are recorded during such period, provided such shares are frequently traded;

d. where the shares are not frequently traded, the price determined by the promoters or shareholders having control and the merchant banker taking into account valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such issuers.

• In terms of the provisions of regulation 73(3) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, where specified securities are issued on a preferential basis to promoters, their relatives, associates and related entities for consideration other than cash, the valuation of the assets in consideration for which the equity shares are issued shall be done by an independent qualified valuer.

• As per Regulation 76 in case of preferential issue price for allotment of Equity Shares would be determined as follows:

(a) If Shares are listed for 26 weeks or more as on the Relevant Date: The Equity Shares shall be allotted at a price which is not less than higher of the average of weekly high/low of volume weighted average prices during:

• 26 weeks prior to the Relevant Date

• 2 weeks prior to the Relevant Date.

Here, Relevant Date is defined as a period 30 days prior to the EGM date where the resolution u/s. 81(1A) is passed.

(b) Shares are Listed for less than 26 weeks as on the Relevant Date: The Equity Shares shall be allotted at a price which is not less than higher of the following:

• IPO Price or value arrived at under Scheme of Arrangement

• Average of weekly high/low of volume weighted average prices during the period prior to the relevant date

• Average of weekly high/low of volume weighted average prices during the 2 weeks prior to the relevant date

Relevant date is defined as a period 30 days prior to the EGM date where the resolution u/s. 81(1A) is passed. The price shall be recomputed on completion of 26 weeks from the date of listing with reference to the average of the weekly high and low of the closing price during the 26 weeks. If such recomputed price is higher than the price of Preferential Allotment, then the difference shall be paid by the allottees to the Issuer Company.

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• As per the Regulation 23 of the SEBI (Delisting of Equity Shares) Regulations, 2009, where equity shares of a company are compulsorily delisted by a recognised stock exchange, the recognized stock exchange should appoint an independent valuer or valuers who shall determine the fair value of the delisted equity shares.

C. FEMA’s Regulatory Requirements in respect to Valuation The FEMA Regulations notified specify a host of valuation requirements for different

purposes. It is interesting to note that in some cases, the valuation methodology has been mandatorily laid down whereas in other similar cases, it has been left to the discretion of the valuer.

1. FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 20171

Regulation 11 which contains Pricing Guidelines stipulates the following

(1) The price of capital instruments of an Indian company issued by such company to a person resident outside India shall not be less than:

a. The price worked out in accordance with the relevant Securities and Exchange Board of India guidelines in case of a listed Indian company or in case of a company going through a delisting process as per the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009;

b. The valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company.

Explanation: In case of convertible capital instruments, the price/ conversion formula of the instrument should be determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with these Regulations.

(2) The price of capital instruments of an Indian company transferred from a person resident in India to a person resident outside India shall not be less than:

a. The price worked out in accordance with the relevant Securities and Exchange Board of India guidelines in case of a listed Indian company;

b. The price at which a preferential allotment of shares can be made under the Securities and Exchange Board of India Guidelines, as applicable, in

1. Notification No. FEMA 20(R)/ 2017-RB issued on November 7, 2017

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case of a listed Indian company or in case of a company going through a delisting process as per the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009;

c. The valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company.

(3) The price of capital instruments of an Indian company transferred by a person resident outside India to a person resident in India shall not exceed:

a. The price worked out in accordance with the relevant Securities and Exchange Board of India guidelines in case of a listed Indian company;

b. The price at which a preferential allotment of shares can be made under the Securities and Exchange Board of India Guidelines, as applicable, in case of a listed Indian company or in case of a company going through a delisting process as per the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009. Provided that the price is determined for such duration as specified in the Securities and Exchange Board of India Guidelines, preceding the relevant date, which shall be the date of purchase or sale of shares;

c. The valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company.

(4) The price of capital instruments of an Indian company in case of swap of capital instruments, subject to the condition that irrespective of the amount, valuation involved in the swap arrangement will have to be made by a Merchant Banker registered with Securities and Exchange Board of India or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.

(5) The price of capital instruments of an Indian company where shares in an Indian company are issued to a person resident outside India in compliance with the provisions of the Companies Act, 2013, by way of subscription to Memorandum of Association, such investments shall be made at face value subject to entry route and sectoral caps.

(6) In case of share warrants, their pricing and the price/ conversion formula shall be determined upfront. Provided these pricing guidelines shall not be applicable for investment in capital instruments by a person resident outside India on non-repatriation basis.

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2. Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 20041. As per Regulation 6, for the purposes direct investment by way of remittance

from India in an existing company outside India, the valuation of shares of the company outside India shall be made,–

a. Where the investment is more than USD 5 (Five) million, by a Category-I Merchant Banker Registered with Securities and Exchange Board of India (SEBI), or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and

b. In all other cases, by a Chartered Accountant or a Certified Public Accountant;

c. For the purposes of investment under direct route by acquisition of shares of an existing company outside India where the consideration is to be paid fully or partly by issue of the Indian party’s shares, the valuation of shares of the company outside India shall in all cases, be carried out by a Category-I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country.

2. Similar condition has been imposed by Regulation 9, where the Indian entity fails to qualify for direct investment and opts for approval route for direct investment in Joint Venture/Wholly Owned Subsidiary outside India, or by way of exchange for shares of a foreign company,

3. Regulation 6A states that a person resident in India being a company incorporated in India or a partnership firm registered under Indian Partnership Act, 1932, may undertake agricultural operations including purchase of land incidental to such activity either directly or through their overseas offices; provided that the valuation of the land is certified by a certified valuer registered with the appropriate valuation authority in the host country.

4. As per Regulation 8, an Indian Party may acquire shares of a foreign company, engaged in bona fide business activity, in exchange of ADRs/GDRs issued to the latter in accordance with the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Central Government, provided that the valuation of the shares of the foreign company is made,

a) As per the recommendations of the Investment Banker if the shares are not listed on any stock exchange; or

b) Based on the current market capitalization of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad

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for the three months preceding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Banker in its due diligence report in other cases.

D. Valuation Requirements under Income-tax Act, 1961• As per section 55A of the Income Tax Act, 1961 with a view to ascertaining the

fair market value of a capital asset, the Assessing Officer may refer the valuation of capital asset to a Valuation Officer in certain circumstances.

• Section 142A also empowers the Assessing Officer for the purposes of assessment or reassessment, make a reference to a Valuation Officer to estimate the value, including fair market value, of any asset, property or investment whether or not he is satisfied about the correctness or completeness of the accounts of the taxpayer.

E. Prohibition of Benami Property Transactions Act, 1988 Under the Prohibition of Benami Property Transactions Act, 1988, the penalties are

based on the fair market value of property held Benami. The Rule 3 of the Prohibition of Benami Property Transactions Rules, 2016, deals with determination of price where open market price of property cannot be determined. According to the said Rule, the price of unquoted equity shares shall be the higher of

a) Its cost of acquisition;

b) The fair market value of such equity shares determined, on the date of transaction, by a merchant banker or an accountant as per the Discounted Free Cash Flow method; and

c) The value, on the date of transaction, of such equity shares as determined in the following manner, namely

The fair market value of unquoted equity shares = (A+B - L)× (PV)/(PE)

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Chap. 5 – Valuation under International Financial Reporting Standards (IFRS) . . .

Chapter 5 Valuation under International Financial Reporting

Standards (IFRS) & Indian Accounting Standards (Ind AS)

Role of Valuers have significantly increased with adoption of Indian Accounting Standards (Ind AS) which are standards issued by Ministry of Corporate Affairs (MCA) now applicable to all listed entities and big corporate houses with net worth of over 250 crores, their subsidiaries and parent companies. Ind ASs are converged standards of International Financial Reporting Standards (IFRS) which are globally accepted accounting standards and India is committed to converge owing to its commitment in G 20.

This conversion will increase the transparency and quality of financial statement and enhance their global comparability and acceptability. However, the consolidated impact of this convergence will result in significant differences in preparation and presentation of the financial statements. One of major reason for this difference would be the significant increase in the focus on fair value accounting since most measurement standards require or provide an option for fair value measurement.

Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognized and reported. Any GAAP makes use of various measurement bases to measure the different elements of financial statements. Though the use of single measurement bases for all elements would make the totals and net totals more understandable, single measurement bases would not be relevant to each element. For instance, a cost based measurement would not provide relevant information about a derivative. The relevance of a particular measurement depends on how investors, creditors and other lenders are likely to assess how an asset or a liability of that type will contribute to the entity’s future cash flows. The selection of a measurement:

(a) For a particular asset should depend on how it contributes to future cash flows; and

(b) For a particular liability should depend on how the entity will settle or fulfil that liability. For the purposes of measurement these are the popular measurement bases in any GAAP:

• Historical cost: A historical cost is a measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. In other words, it is the fair value of consideration agreed upon at the time of acquisition. Similarly, liabilities are recorded at the fair value of the consideration received in exchange for incurring the obligations at the time they were incurred.

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• Net Realizable Value: In case of assets NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Liabilities are recorded at settlement value which may be discounted or undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liability in normal course of business.

• Current Cost: It represent the most economic cost of an asset or of its equivalent productive capacity or service potential. This definition embodies reproduction cost and replacement cost. The concepts of “replacement cost” and “reproduction cost” are presumed to factor in any diminution in amount that would result from wear and tear and obsolescence. They are defined as follows:

• Reproduction cost (of an asset): The most economic current cost of replacing an existing asset with an identical one.

• Replacement cost (of an asset): The most economic current cost of replacing an existing asset with an asset of equivalent productive capacity or service potential.

• Value in Use: Value in use (of an asset): The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

• Fair Value: It is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

• Deprival Value: This measurement bases is nowhere used in Ind AS. Deprival value (or “value to the business”). The loss that an entity would suffer if it were deprived of an asset. The upper boundary is its replacement cost. The lower boundary is recoverable amount (which is the higher of its net realizable value and value in use).

It must be noted herein that the present value is not a measurement basis, but is rather a technique that can be applied to estimate a number of the above measurements in certain circumstances.

Measurement of Assets under Ind AS

Categories of Asset

Ind AS Measurement

Inventories Ind AS 2 Lower of cost or Net Realizable Value

Property, Plant & Equipment

Ind AS 16 Initially at Cost and Subsequently using Cost Model or Revaluation Model

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Categories of Asset

Ind AS Measurement

Finance Lease Assets

Ind AS 17 Lessee: Recognises asset taken as PPE as separate line item

Lessor: Recognises present value of Finance Lease Receivables

E m p l o y e e s Benefit Plan Assets

Ind AS 19 At fair value of planned assets net of fair value of obligations

G o v e r n m e n t Grants

Ind AS 20 Monetary Grants: at the amount of grant

Non-Monetary Grants and concessionary loans: At Fair Value

I n v e s t m e n t in subsidiary, associate and joint venture in Separate F i n a n c i a l Statements

Ind AS 27 At cost or as per Ind AS 109

I n v e s t m e n t in subsidiary, associate and joint venture in Conso l ida t ed F i n a n c i a l Statements

Ind AS 28 Measured applying equity method

I n t a n g i b l e Assets

Ind AS 38 Initially at Cost and subsequently using Cost Model or Revaluation Model

I n v e s t m e n t Property

Ind AS 40 Initially at Cost and subsequently at cost less accumulated depreciation and any accumulated impairment losses. However, the fair value of the investment property is disclosed in the notes.

B i o l o g i c a l Assets

Ind AS 41 At Fair Value less cost to sell

Assets arising out of Business combination

Ind AS 103 Initially at Acquisition Date Fair Value and subsequently as per relevant ASs

Goodwill Initially measured as the difference between the Fair Value of Net asset acquired and Fair Value of consideration paid

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Categories of Asset

Ind AS Measurement

Non-Controlling Interest

Proportionate value of net asset

Contingent Liability acquired in BC

Initially at Fair Value and subsequently at higher of amount recognised as per Ind AS 37 and Amount initially recognised less cumulative amortization

Non-Current Assets held for sale

Ind AS 105 At lower of carrying Amount and Fair Value less costs to sell

Exploration & evaluation assets

Ind AS 106 Initially at Cost and subsequently using cost or revaluation model

Financial Assets Ind AS 109 Initially at Fair Value +/- Transaction Cost in some cases.

Subsequently at Fair Value or Amortized Cost

Measurement of Liabilities

Categories of Liabilities

Ind AS Measurement

Current Tax Liabilities

Ind AS 12 Amount expected to be paid using enacted tax laws

Deferred Tax Liabilities

Ind AS 12 Use expected tax rates at time assets would be realized based on enacted tax laws

Provisions Ind AS 37 Best Estimate of expenditure required to settle the present obligation

Financial Liabilities

Ind AS 109 Initially at Fair Value and subsequently at Amortized Cost or Fair Value

Measurement of Expenses under Ind ASs

Categories of Expenses

Ind AS Measurement

Income Taxes Ind AS 12 Current tax liabilities for current and prior periods should be measured at amount expected to be paid to the taxation authorities, using tax rates that have been enacted or substantially inacted.

Depreciation Ind AS 16 Allocated on systematic basis over useful life.

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Categories of Expenses

Ind AS Measurement

Employees Benefits

Ind AS 19 • Short term employee benefits: undiscounted expenses

• Post employment benefits (defined contribution): Amount of contribution

• Post employment benefits (defined benefit) using projected unit credit method

• Termination benefits in accordance with the nature of employee benefits

Leases Ind AS 17 Operating lease rentals (income): Based on systematic allocation of total lease payments considering time pattern of user’s benefits

Finance Charges or Finance Income: Sytematic allocation that produces constant rate of return on finance lease liability or assets.

Gain/loss on

• translation of Foreign Currency (FC) Transaction

• Translation of Foreign Operations (FO)

Ind AS 21 FC transactions are measured using Spot rate at date of transaction. At subsequent date FC monetary items are translated using closing rate and exchange difference are taken to P/L.

Asset & Liability of FO measured at closing rate and income & expenses at the rate at transaction date. Resulting exchange difference is taken to OCI

Borrowing Costs Ind AS 23 Interest expenses: using effective interest method

Provisions Ind AS 37 The best estimate of present value of expenditure required to settle the present obligation

Growing Significance of Fair ValueFair value is an important measurement basis in financial reporting. Fair Value Accounting has been a topic of interest and debate ever since its inception. It provides information about what an entity might realize if it sold an asset or might pay to transfer a liability. In recent years, the use of fair value as a measurement basis for financial reporting has been extended, even though the debate over its usefulness to stakeholders continues.


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Ind ASs and Transactions that requires or permits Fair Value measurement• Business combinations (Ind AS 103)

• Assets acquired and liabilities assumed

• Contingent consideration

• Non-controlling interests in an acquiree

• Previously held interest

• Financial instruments: Recognition and measurement (Ind AS 39)

• Assets/liabilities eligible for FV option

• Derivatives

• Hybrid financial instruments

• Financial guarantee contracts

• Debt and equity investments

• Employee benefits— post-employment benefit obligations (Ind AS 19)

• Intangible assets— revaluation model (Ind AS 38)

• Investments in associates and joint ventures—held by mutual funds and similar entities (Ind AS 28)

• Property, plant and equipment—revaluation model and exchange of assets (Ind AS 16)

• Non-current assets held for sale and discontinued operations (Ind AS 105)

• Agriculture—biological assets (Ind AS 41)

• Impairment of assets— non-financial assets (Ind AS 36)

• Revenue (Ind AS 18)

• Consolidated and Separate Financial Statements—investments in subsidiaries by investment entities (Ind AS 27)

• Government Grants – Non-monetary Government grants (Ind AS 20).

Ind AS 113 Fair Value MeasurementInd AS 113: Fair Value Measurement, which is in lines with IFRS 13 Fair Value Measurement, exclusively deals with the topic of fair value and has been detailed below.

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Objective & Scope: The objective of Ind AS 113 is to define fair value and set out a single framework for measurement of fair value. It also prescribes disclosure requirements about fair value measurement. It applies when another Ind AS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements).

Discussion on Ind AS 113Fair Value is a price received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Requirements of Fair Value MeasurementThe essential features of fair value as set out in Ind AS 113 are as follows:

• The Ind AS 113 explains how to measure fair value for financial reporting.

• Fair value is a market-based measurement, not an entity-specific measurement.

• Fair value should be determined based on the Exit price i.e., the price to sell the asset or to transfer the liability (from the perspective of a market participant that holds the asset or owes the liability).

• The transaction forming basis of determination of fair value must be an orderly transaction. An orderly transaction assumes :

o Exposure to the market for a period before the measurement date to allow for marketing activities;

o That are usual and customary for transactions involving such assets or liabilities;

o It is not a forced transaction (e.g. a forced liquidation or distress sale).

• The transaction forming basis of determination of fair value must take place between market participants at the measurement date under current market conditions. Market

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participants, i.e., buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:

o They are independent of each other, ie they are not related parties as defined in Ind AS 24,

o They are knowledgeable, having a reasonable understanding about the asset or liability

o They are able to enter into a transaction for the asset or liability.

o They are willing to enter into a transaction for the asset or liability, ie they are motivated but not forced or otherwise compelled to do so.

• When price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs.

The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions.

Steps in application of Ind AS 113• Step one: Determine unit of account

• Step two: Determine valuation premise

• Step three: Determine markets for basis of valuation

• Step four: Apply the appropriate valuation technique(s)

• Step five: Determine fair value

• Step six: Make appropriate disclosures

Unit of Account • Fair value measurement is for a particular asset or liability.

• Therefore, when measuring fair value an entity should take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics include, for example, the following:

(a) The condition and location of the asset; and

(b) Restrictions, if any, on the sale or use of the asset.

The determination of the unit of account must be established prior to determining fair value and is defined as the level at which an asset or a liability is aggregated or disaggregated in an Ind AS for recognition purposes. There are few instances in which the unit of account is explicitly defined. However, in some cases, the unit of account may not be clear. Often, it

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is inferred from the recognition or measurement guidance in the applicable standard and/or from industry practice. Also, there are times when the unit of account varies depending on whether one is considering recognition, initial measurement, or subsequent measurement, including impairments.

Ind AS 113 also includes a “portfolio exception” allowing a specified level of grouping when a portfolio of financial assets and financial liabilities are managed together with offsetting markets risks or counterparty credit risk.

Orderly TransactionA fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. A transaction is regarded as orderly when it is not a forced transaction like in the case of distress sale or liquidation.

Place of Transaction: MarketFair value measurement under Ind AS 113 assumes that a transaction to sell an asset or to transfer a liability takes place in the principal market (or the most advantageous market in the absence of the principal market). The principal market is the market with the greatest volume and level of activity for the asset or liability. The most advantageous market is the market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs. If there is a principal market, the price in that market must be used, either directly or as an input into a valuation technique. Ind AS 113 does not permit the use of a price in the most advantageous market if a principal market price is available. It is not necessary to perform an exhaustive search of all possible markets to identify the principal market (or, in the absence of a principal market, the most advantageous market). However, all information that is reasonably available should be considered and the basis for conclusions should be documented. There is a presumption in the standard that the market in which the entity normally transacts to sell the asset or transfer the liability is the principal or most advantageous market unless there is evidence to the contrary. Where an entity transacts in various markets, entity should document which particular market price is used and what process was followed to determine the appropriate market to use for determining fair value.

Assumptions of Market Participants in Determining Fair Value of an Asset or LiabilityFair value measurement under Ind AS 113, require an entity to consider the assumptions a market participant, acting in their economic best interest, would use when pricing the asset or a liability. Market participants are defined as having the following characteristics:

• Independent of each other (i.e., unrelated parties)

• Knowledgeable and using all available information.

• Ability of entering into the transaction.

• Willing to enter into the transaction (i.e., not a forced transaction)

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The standard requires the entity to put itself in the place of a market participant and exclude any entity-specific factors that might impact the price that it would be willing to accept in the sale of an asset or be paid in the transfer of a liability. Relevant characteristics of an asset might include or relate to the condition and location of the asset; and restrictions, if any, on the sale or use of the asset. Entity must consider the extent to which a market participant would take the above characteristics into account when pricing the asset or liability at the measurement date. The extent to which restrictions on the sale or use of the asset should be reflected in fair value are very much contingent on where the source of the restriction comes from and whether or not the restriction is separable from the asset.

Price for determination of Fair ValueThe standards provide guidance on the price as it relates to Fair value. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability should be adjusted for transportation cost but should not be adjusted for transaction cost.

Transportation costs: If location is a characteristic of the asset or liability being measured, the fair value measurement should incorporate transportation costs. For example, suppose a tea producing entity in Kerala intends to sell its tea by using a futures contract on the Bengal commodity exchange and the contract calls for physical delivery to the Bengal Railway Yard; therefore, because the location of the tea is an attribute of the contract, the company should deduct the cost of physically transporting the tea to the sale location in the calculation of fair value.

Transaction Costs: The costs to sell an asset or transfer a liability in the principal /most advantageous market for the asset or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following criteria:

• They result directly from and are essential to that transaction.

• They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made

Transaction costs are not a characteristic of an asset or a liability; rather, they are specific to a transaction and will differ depending on how an entity enters into a transaction for the asset or liability. While transaction costs are not included in the fair value of the asset or liability, these amounts are included when assessing the net transaction proceeds to determine the most advantageous market. Transaction costs should be accounted for in accordance with other Ind AS. Let us clarify the above using an illustration.

Illustration: Suppose, Entity A has an asset that is sold in two different markets, Market X and Market Y with similar volumes of activities, but with different prices and the entity has access to both the markets. Information from both markets is presented as follows:

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Market X (Rs) Market Y (Rs)

Price 100 90

Transport Cost (10) (5)

90 85

Transaction Cost 10 4

Net Amount Received 80 81

Since none of the market are principal market, entity A should measure fair value using the price in the most advantageous market i.e the one that maximises the amount that would be received after taking into account transaction and transport costs. Hence, Market Y is the most advantageous as net proceeds (Rs.81) are more than in Market X (Rs.80). However, the fair value of the asset would be taken as Rs. 85 i.e. the price in that market Y(Rs. 90), less transport costs (Rs. 5)

Valuation PremisesEntity must assess the valuation premise based on the nature of the asset or liability being measured.

Measurement of Non-Financial Assets• Fair value measurement of a non-financial asset takes into account a market

participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. Here the highest and best use would be the use of a non-financial asset by market participants that would maximize the value of the asset or the group of assets and liabilities, within which the asset would be used. The concept refers to both

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• the different ways of utilizing the individual asset, and

• the valuation premise, whether the maximum value is on a standalone basis or in combination with other assets.

Entity considers the current use and any other use that is financially feasible, legally permissible and physically possible. It is determined from the perspective of market participants, even if the entity intends a different use. For instance, an entity may intend to operate a property as an eating outlet, whereas market participants would pay a higher price to use the asset as a shopping arcade and there is no restriction for this change in use. In this case, the fair value of the property should be based on its highest and best use (in the principal or most advantageous market) as shopping arcade even though entity intends to use it as eating outlet.

An entity can presume that the current use of an asset is its highest and best use. However, if the asset is being used defensively (e.g. to protect a competitive position), this presumption may be inappropriate.

Application of highest and best use for financial assets and liabilities in exceptional casesNormally, the concept of highest and best use does not apply to financial assets and liabilities. However, there is an exception to the valuation premise when an entity manages its market risk(s) and/or counterparty credit risk exposure within a portfolio of financial instruments (including derivatives that meet the definition of a financial instrument), on a net basis. In such cases, Fair Value would be based on the price:

• Received to sell a net long position (i.e., an asset) for a particular risk exposure, or

• To transfer a net short position (i.e., a liability) for a particular risk exposure in an orderly transaction between market participants.

Fair value of this ‘offset group’ of financial assets and financial liabilities is determined consistently with how market participants would price the net risk exposure.

Portfolio offsetting exception can only be used if the entity does all the following:

• Manages the offset group on the basis of net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the entity’s documented risk management or investment strategy.

• Provides information on that basis about the offset group to the entity’s key management personnel, as defined in Ind AS 24 Related Party Disclosures.

• Is required (or has elected) to measure the offset group at fair value in the Balance Sheet at the end of each reporting period.

Moreover, the exception does not relate to presentation and Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors must be applied when using the offsetting exception.

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When using the offsetting exception in case of Market Risk, entity should apply the price within the bid-ask spread that is most representative of fair value in the circumstances to the entity’s net exposure to those market risks and ensure that the market risk (or risks) within the offset group are substantially the same:

• Any basis risk resulting from the market risk parameters not being identical are taken into account in the fair value measurement of the financial assets / liabilities within the offset group

• Similarly, the duration of the entity’s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities of the offset group must be substantially the same.

Financial or Non-Financial LiabilitiesA fair value measurement assumes that a financial or non-financial liability or an entity’s own equity instrument (eg equity interests issued as consideration in a business combination) is transferred to a market participant at the measurement date. The transfer of a liability or an entity’s own equity instrument assumes the following:

• A liability would remain outstanding and the market participant transferee would be required to fulfil the obligation.

• An entity’s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument.

Liabilities and equity instruments held by other parties as assetsWhen a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available, then where the identical item is held by another party as an asset, an entity should measure the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date.

Liabilities and equity instruments not held by other parties as assetsWhen a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and the identical item is not held by another party as an asset, an entity should measure the fair value of the liability or equity instrument using a valuation technique from the perspective of a market participant that owes the liability or has issued the claim on equity.

Fair Value at Initial RecognitionSome standards may require assets to be measured at fair value at initial recognition like in case of financial instruments or in case of assets and liabilities acquired in business combination. Here important consideration is that the transaction price need not be the fair value and hence it is essential to distinguish between the two.

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Transaction Price vs. Fair ValueWhen an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (an entry price) In contrast, the fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability (an exit price). This difference in the transaction price and fair value arises because entities do not necessarily sell assets at the prices paid to acquire them. Similarly, entities do not necessarily transfer liabilities at the prices received to assume them.

While determining whether fair value at initial recognition equals the transaction price, an entity shall take into account following factors/ situations which may indicate that the transaction price might not represent the fair value of an asset or a liability at initial recognition:

• The transaction is between related parties;

• The transaction takes place under duress or the seller is forced to accept the price in the transaction;

• The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value; and

• The market in which the transaction takes place is different from the principal market.

Valuation TechniquesAn entity should use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. Multiple-valuation techniques can be applied. If multiple valuation techniques are used to measure fair value, the results should be evaluated considering the reasonableness of the range of values. Fair value is the point within the range that is most representative of the fair value in the given scenario.

Types of Valuation TechniquesThree widely used valuation techniques are

• The market approach,

• The cost approach and

• The income approach.

An entity should use valuation techniques consistent with one or more of those approaches to measure fair value. However, a change in the valuation technique or application of multiple valuation techniques is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. Valuation techniques used to measure fair value should maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

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Fair Value HierarchyTo increase consistency and comparability in fair value measurements and related disclosures, Ind AS 113 establishes a fair value hierarchy that categorises into three levels, the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. A quoted price in an active market provides the most reliable evidence of fair value and should be used without adjustment to measure fair value whenever available except

• When an entity holds a large number of similar (but not identical) assets or liabilities (e.g., debt securities) that are measured at fair value and a quoted price in an active market is available but not readily accessible for each of those assets or liabilities individually (i.e., given the large number of similar assets or liabilities held by the entity, it would be difficult to obtain pricing information for each individual asset or liability at the measurement date).

• When a quoted price in an active market does not represent fair value at the measurement date.

• When measuring the fair value of a liability or an entity’s own equity instrument using the quoted price for the identical item traded as an asset in an active market and that price needs to be adjusted for factors specific to the item or the asset.

Certain examples of Level I inputs are quoted prices of shares traded on stock exchange, dealer markets and brokered markets.

Level 2 InputsLevel 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 Inputs includes:

a) Quoted prices for similar assets or liabilities in active markets.

b) Quoted prices for identical or similar assets or liabilities in market that are not active.

c) Inputs other than quoted prices those are observable for the asset or liability.

d) Market-corroborated inputs.

Adjustments to Level 2 Inputs depends on the following factorsa) The condition or location of the asset.

b) The extent to which inputs relate to items that are comparable to the asset or liability and

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c) The volume or level of activity in the markets within which the inputs are observed.

However, it should be remembered that if significant adjustments are required in Level 2 inputs, then they should be classified as level 3 inputs.

Level 3 InputsLevel 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs should be used to measure fair value to the extent that relevant observable inputs are not available. This may happen if there is no or very little market activity for the asset or liability at the measurement date. Unobservable inputs must reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk including the risk inherent in a particular valuation technique and inputs used therein. For example, it might be necessary to include a risk adjustment when there is significant measurement uncertainty (e.g. when there has been a significant decrease in the volume or level of activity when compared with normal market activity for the asset or liability, or similar assets or liabilities, and the entity has determined that the transaction price or quoted price does not represent fair value. An entity should develop unobservable inputs using the best information reasonably available in the circumstances, which might include the entity's own data.

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Chap. 6 – Valuation Standards

Chapter 6 Valuation Standards

Valuations are widely used and relied upon in financial and other markets, whether for inclusion in financial statements, for regulatory compliance or to support secured lending and transactional activity.

Valuation of assets, as a field of work is vast and diverse. There are a number of valuer’s associations around the world that are engaged in the process of standardising the methods and approaches to valuations of assets.

It is a general understanding that no two assets are identical and the methods and assumptions for the purpose of valuation used for one asset cannot be followed for the valuation of other assets without modifications. This may lead to difference in the value of an asset arrived at, by two different valuers.

And hence, a need for a standardised process or set of rules arises to regulate all the valuation assignments being carried out.

As is the case with the standards on accounting, various international bodies of valuers have issued standards on Valuation. The major Valuation Standards are listed below:

• International Valuation Standards, 2017, issued by International Valuation Standards Council (IVSC)

• European Valuation Standards, 2016 issued by The European Group of Valuers’ Association (TEGoVA), also known as the Blue Book.

• American Society of Appraisers Business Valuation Standards, approved through November 2009.

• RICS Valuation – Global Standards, 2017 (Red Book), issued by the Royal Institution of Chartered Surveyors (RICS), headquartered in London.

INTERNATIONAL VALUATION STANDARDS, 2017The International Valuation Standards (IVS) are standards for undertaking valuation assignments using generally recognised concepts and principles that promote transparency and consistency in valuation practice.

The International Valuation Standards (IVS) are international standards that consist of various actions required during the undertaking of valuation assignment supported by technical information and guidance.

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The IVS are formulated and published by the International Valuation Standards Council (IVSC). IVSC is an independent, non-profit organization. It was established in 1981, as the International Assets Valuation Standards Committee (TIAVSC). It’s major area of interest was valuation of real property, as the founder members were the professional institutes from that field.

Later, in 1991, the name of the committee was changed to International Valuation Standards Committee, and from late 1990s, membership was also offered to valuation professionals’ organizations for assets other than real property.

The IVSC was again restructured in 2008, and the name was changed to International Valuation Standards Council.

Valuation professionals of different countries come together for discussion on various issues. Also, the members point out the differences in the national and international issues and methods of valuation. These differences are smoothened out when the new version of the IVS are issued.

Its objective is to build confidence and public trust in valuation by producing standards and securing their universal adoption and implementation for the valuation of assets across the world.

The IVS harmonise the practice of valuation by ironing out the differences in the manner the exercise of valuation is carried out across various countries, by members of different professional bodies. When such standardisation is achieved, public trust is gained in the process. The standards laid out by the IVSC assures consistency, transparency and confidence in the valuations carried out on their basis.

Sir David Tweedie, IVSC Chairman, says: “IVS 2017 represents the latest in IVSC’s continuing commitment to developing high-quality valuation standards. The valuation of assets, both tangible and intangible, plays an essential role in financial and real estate markets – and therefore the global economy. IVS 2017 will be instrumental in improving valuation practice and will bring greater efficiency to capital markets.”

As per the IVSC, the International Valuation Standards (IVS) are a fundamental part of the financial system, along with high levels of professionalism in applying them.

The IVSC Standards Board is the body responsible for setting the IVS. The Board has autonomy in the development of its agenda and approval of its publications. In developing the IVS, the Board: -

• Established due process in the development of any new standard, including consultation with stakeholders (valuers, users of valuation services, regulators, valuation professional organisations, etc.) and public exposure of all new standards or material alterations to existing standards,

• Co-ordinate with other bodies that have a standard-setting function in the financial markets,

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• Conducts outreach activities including round-table discussions with invited constituents and targeted discussions with specific users or user groups.

Objective of IVSThe objective of the International Valuation Standards (IVS) is to increase the confidence and trust of users of valuation services by establishing transparent and consistent valuation practices. A standard within IVS will do one or more of the following:

• Identify or develop globally accepted principles and definitions,

• Identify and promulgate considerations for the undertaking of valuation assignments and the reporting of valuations,

• Identify specific matters that require consideration and methods commonly used for valuing different types of assets or liabilities.

The IVS consist of mandatory requirements that must be followed in order to state that a valuation was performed in compliance with the IVS. Certain aspects of the standards do not direct or mandate any particular course of action, but provide fundamental principles and concepts that must be considered in undertaking a valuation.

Arrangement of IVSIVS are generally classified into three parts.

1. Framework

2. General standards

3. Asset specific standards

The Framework describes the applicability of the standards and also defines “Valuer”. It states that the task of valuation should be undertaken with objectivity and competence and also listouts when departures from certain requirements of the standards are allowed and how should they be presented.

General Standards cover the common aspects of a valuation assignment. There are five General Standards of Valuation.

1. IVS 101 – Scope of work

2. IVS 102 – Investigations and Compliance

3. IVS 103 – Reporting

4. IVS 104 – Bases of Value

5. IVS 105 – Valuation Approaches and Methods

Asset Specific Standards are the standards laid down with respect to a particular asset class. In the valuation of all those assets for whom specific standards have been formulated, should be valued as per those standards. There are six asset specific valuation standards. They are:

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1. IVS 200 – Business and Business Interests

2. IVS 210 – Intangible Assets

3. IVS 300 – Plant and Machinery

4. IVS 400 – Real Property Interest

5. IVS 410 – Development Property

6. IVS 500 – Financial Instruments

The current version of IVS 2017 came into effect from July 1, 2017, by replacing IVS 2013.

The website of the International Valuation Standards Council is https://www.ivsc.org/.

All the updates regarding the IVS and drafts and discussions with regard to the new standards being considered, can be accessed from there.

Criteria for becoming member of IVSCAny entity from one of the following categories may apply to the Board of Trustees for membership of the International Valuation Standards Council:

i. Valuation Professional organisations – which shall include valuation professional organisations recognized either by legal decree or general consensus;

ii. Associate Valuation organisations – which shall include organisations at an earlier stage of their development but structured so as to achieve Valuation Professional Organisations status;

iii. Corporate Members – which shall include valuation companies and companies having an interest in valuation;

iv. Client Members – which are entities with an interest in valuation standards and which secure or use valuation services to include but not be limited to lenders, accountants, insurers, asset managers, investment bankers, and others;

v. Institutional Members – which are not-for-profit entities to include but not be limited to government agencies and regulators; and

vi. Academic Members – which shall include but not be limited to universities, colleges, and other institutions offering advanced education.

Applicants for membership shall provide IVSC with any information that IVSC reasonably requests in order to support its application. If IVSC considers that an applicant organisation does not meet its criteria or that its admission to membership of IVSC would be prejudicial to the reputation or objectives of IVSC it may reject any application and return the initial payment. Such a decision is at the absolute discretion of the Board of Trustees, which shall be under no obligation to give reasons for its decision.

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EUROPEAN VALUATION STANDARDS, 2016 (also known as BLUE BOOK)These standards are issued by TEGoVA, The European Group of Valuers’ Association, which is a non-profit association, with a membership of 71 Valuers’ associations from 37 countries. It is the European umbrella organisation of national valuers associations.

The main objective of TEGoVa is the scientific and educational promotion of the profession of Valuer and the creation and spreading of harmonised standards for valuation practice, for education and qualification as well as for corporate governance and ethics for valuers. It supports its member associations in the introduction and implementation of these standards.

The framework and content of EVS 2016, the eighth edition of European Valuation Standards, has been determined by recognition, extensive consultation and feedback.

The major objective of TEGoVA is to maintain its focus on the real estate sector, provide additional guidance and technical information to meet the diverse needs of it member associations and continue to concentrate on high level principles.

EVS 2016 provides harmonised European standards, guidance and technical information for use by all sectors of the European valuation profession. Corporate governance and ethical considerations are embedded within the standards, confirming, for instance, that a valuation produced in accordance with these standards is signed by a qualified professional whose experience, qualification, diligence and ethical behaviour are appropriate to the instruction.

As Mr. Krzysztof Grzesik, Chairman of Board of Directors of TEGoVA says, “The European authorities want reliable valuation standards throughout the Union giving TEGoVA a special responsibility to adapt EVS to the rapid EU mutations in banking supervision. Mortgage Lending Value is a case in point: EVS 2016 continues to provide the authoritative guidance on the assessment of MLV and enhances it with detailed analysis and explanation of the key issues and approaches to be followed. Other systemically key updates are the guidance on Property Valuation for Securitisation Purposes and Property and Market Rating.”

The Group is open to:

• Associations representing valuers of the European Union

• Associations representing valuers from non-EU countries

• Associations admitted on a case-by-case basis

Natural persons cannot be members.

Economic Sectors Covered by Valuation Practices & Standards

• Agriculture

• Banks

• Industry

• Insurance Undertakings

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• Investment Companies

• Property Industry

• Pension Funds

• Trusts

Framework:EVS are generally classified into four parts, with part one further divided into two subparts.

1. A: European valuation standards

B: European Valuation guidance notes

2. European codes

3. European union Legislation and property valuation

4. Technical documents

EVS-6 has been recently introduced. They have all been refined and reinforced beyond those published in previous editions.

Part 1: A: European valuation standards: EVS 1-61. Market value

2. Valuation basis other than market value

3. The qualified valuer

4. The valuation process

5. Reporting the valuation

6. Automated Valuation Models (approved on 28.10.17, and rendered immediately operational)

Guidance Notes (previously referred to as Applications) follow on from the Standards. They have been reinforced to provide detailed analysis and explanation of key issues and approaches to be followed.

B: European Valuation guidance notes EVGN 1-111. Valuation for the purpose of financial reporting

2. Valuation for lending purposes

3. Property valuation for securitisation purposes

4. Assessment of insurable value and damages

5. Assessment of investment value

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6. Cross-border valuation

7. Property valuation in the context of the alternative fund managers directive

8. Property valuation and energy efficiency

9. EMF and TEGoVA commercial loan specification

10. Valuations: compliance with EVS (approved on 28.10.17, and rendered immediately operational)

11. The valuer’s use of Statistical Tools

Part 2: European codes: EC 1-2Two updated and extended codes are provided in EVS, namely, the European Valuers’ Code of Ethics and the European Code of Measurement.

Part 3: European union Legislation and property valuationAs the standards cover all the countries of the European union, this part was introduced in the 2012 edition of the standards. Many local property and real estate laws are applicable to the properties in the different countries of the European union. A complete section is devoted to the body of EU law impacting real estate and valuation with many updates to take account of the EU real estate policy advances over recent years.

Part 4: Technical documents EVIP 1 – 8The technical documents are the information papers. They are up for discussion and feedback.

1. Sustainability and valuation

2. Valuation certainty and market risk

3. Apportionment of value between land and buildings

4. Valuation and other issues for recurrent property tax purposes

5. Valuation methodology

6. Automated valuation models (null and void after 23.10.17, with the introduction of EVS 6)

7. European property and market rating: a valuer’s guide

8. Fair value measurement under IFRS 13.

EVS provides minimum standards that TEGoVA Member Associations (TMAs) must adopt in their own standards, supplementing such additional requirements as are deemed necessary by legislation, regulation or generally accepted practice within a specific state.

EVS 2016 is effective from 1st June, 2016.

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The website of the TEGoVA is http://www.tegova.org/

All the updates regarding the EVS and drafts and discussions with regard to the new standards being considered, can be accessed from there.

ASA BUSINESS VALUATION STANDARDS, 2009These are the standards issued by the American Society of Appraisers (ASA), in November 2009.

ASA is a non-profit organization of individuals that was incorporated in the state of Delaware, in 1952. It was formed by consolidation of The American Society of Technical Appraisers (ASTA) and the Technical Valuation Society (TVS), organized in 1936 and 1939 respectively.

The major purpose for the formation of ASA was to establish an effective professional affiliation of appraisers of all disciplines, working cooperatively to elevate the standards of the appraisal profession.

The objectives of ASA, as outlined in Article II, Sections 1-6, in the April, 2000 constitution are:

1. The society shall promote the exchange of ideas and experiences among its members; cultivate the profession of appraising; establish and maintain principles of appraisal practice and a code of ethics for the guidance of its members; maintain universal recognition that members of the society are objective, unbiased appraisers and consultants of property values; award one or more professional designations to qualified members of the society; and seek to attain recognition of the profession by both public and private enterprise.

2. The society recognizes that there are basic communities of concept, purpose, thought, practice, and standards that are common to the many appraisal fields in which its members engage and that their guided promotion and establishment are vital to each and all such special fields and to the appraisal profession and to the public.

3. The society shall promote research and development in all phases of property economics; co-operate with other appraisal and valuation societies and related professions and with finance, economics, engineering, architecture, accounting, building construction and related interests, real estate, insurance, taxation, and management; and approve and adopt reports of its committees or other groups as to standards, codes, and recommended practices.

4. The society shall forbid the use of its name, emblem, or initials in any manner not in accord with its constitution, byelaws, principles of appraisal practice, and code of ethics.

5. The society shall have the power to do any act or thing necessary to its functioning.

6. The board of governors shall establish an Educational Foundation with the purpose

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that the Educational Foundation shall encourage the advancement in appraising of all classes of property, both real and personal.

ASA is devoted to providing the highest possible standard in all areas of ethics, professionalism, education and designation criteria in the areas of Appraisal Review & Management, Business Valuation, Gems & Jewellery, Machinery & Technical Specialties, Personal Property and Real Property.

The members of the ASA are grouped according to 5 geographical regions, covering countries of Europe, Cananda, Mexico, China, Hong Kong and Japan, besides the United States.

The framework of ASA Business Valuation Standards is as follows:

1. General preamble

2. ASA Business valuation standards

3. Statements on business valuation standards

4. Advisory opinions

5. Procedural guidelines

The general preamble outlines all the areas to which the standards are applicable and the principles from various codes, that are applicable to the valuations of businesses, business ownership interests, securities and intangible assets.

There are 9 ASA Business Valuation Standards (BVS), which provide minimum criteria to be followed by business appraisers in developing and reporting the valuation of businesses, business ownership interests, securities and intangible assets. The ASA BVS are listed below:

1. General requirements for developing a business valuation

2. Financial statement adjustments

3. Asset-based approach to business valuation

4. Income approach to business valuation

5. Market approach to business valuation

6. Reaching a conclusion of value

7. Valuation discounts and premiums

8. Comprehensive written business valuation report

9. Intangible assets valuation

The statements on ASA Business Valuation Standards (SBVS) clarify, interpret, explain or elaborate on Standards and have the full weight of the Standards. There are two SBVSs. They are Guideline Public Company Method and Guideline Transactions Method.

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The fourth part of the standard is the Advisory opinions. It provides advisory opinions to illustrate the applicability of the Standards and Statements in specific situations, offer advice for the resolution of valuation issues and are not binding. There is one Advisory Opinion or (AO) on Financial Consultation and Advisory Services.

The last part with regards to Procedural Guidelines (PG) suggests certain procedures that may be used in the conduct of an assignment and are not binding. There are two procedural guidelines till date. They are:

1. Litigation Support: Role of the Independent Financial Expert

2. Valuation of partial ownership interests.

ASA is devoted to providing the highest possible standard in all areas of ethics, professionalism, education and designation criteria in the areas of Appraisal Review & Management, Business Valuation, Gems & Jewelry, Machinery & Technical Specialties, Personal Property and Real Property.

Membership of ASA provides with first class education and accreditation programs, international and advanced conference events, legislative representations and professional networking.

For the updates regarding the ASA Business Valuation Standards, its website http://www.appraisers.org/ should be visited.

RICS VALUATION – GLOBAL STANDARDS, 2017 (The Red Book)RICS stands for Royal Institution of Chartered Surveyors. It is a professional body that accredits professionals within land, property, construction and infrastructure sectors worldwide.

RICS was founded in London as the Institution of Surveyors after a meeting of 49 surveyors at the Westminster Palace Hotel on 15 June, 1868. It received the Royal Charter as the Surveyors’ Institution in August, 1881. The Surveyors’ Institution became the Chartered Surveyors’ Institution in 1930. In 1946, George VI granted the title “Royal” and in 1947 the professional body became the Royal Institution of Chartered Surveyors. “Confidence through professional standards” is its tagline.

RICS headquarters are in London. It also has regional offices in UK, across mainland Europe, in China, Hongkong, Singapore, Australia, the Middle East, Sub Saharan Africa, North America and Brazil. The members of RICS are spread across 150 countries and it accredits 125,000 qualified and trainee professionals worldwide.

RICS specifies areas of specialism, each with its own professional group, clustered into Land, Property and Construction. Within each professional group there may be further specialisms.

RICS standards and guidance cover all the areas of surveying practice and embody best practice. They fall into the following categories: Professional statements, Practice statements, Codes of practice and Guidance notes.

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The RICS global standards framework is as follows:

1. Introduction

2. Glossary

3. Professional standards

a. PS 1: compliance with standards when a written valuation is provided

b. PS 2: Ethics, competency, objectivity and disclosures

4. Valuation technical and performance standards

a. VPS 1: Terms of engagement, Scope of work

b. VPS 2: Inspections, investigations and records

c. VPS 3: Valuation reports

d. VPS 4: Basis of value, assumptions and special assumptions

e. VPS 5: Valuation approaches and methods

5. Valuation applications

a. Valuation for inclusion in financial statements

b. Valuation of interests in secured lending

c. Valuation of business and business interests

d. Valuation of individual trade related properties

e. Valuation of plant and equipment

f. Valuation of intangible assets

g. Valuation of personal property inclusive of arts and antiques

h. Valuation of real property interests

i. Identification of portfolios, collections and group of properties

j. Matters that give rise to material valuation uncertainty

6. International valuation standards, 2017.

The IVS issued by IVSC is reproduced in full in this part.

RICS updates can be checked on https://www.rics.org

These standards were issued in June 2017, and are effective from 1st July, 2017.

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Chapter 7 General International Valuation Standards

The International Valuation Standards Council (IVSC) is an independent, not-for-profit organisation that acts as the global standard setter for valuation practice and the valuation profession, serving the public interest.

It is a leader in the mission to raise standards of international valuation practice. Its core objectives are to: develop high quality International Valuation Standards (IVS) which underpin consistency, transparency and confidence in valuations across the world, and encourage the adoption of IVS across the globe, along with professionalism provided by Valuation Professional Organisations.

There are eleven valuation standards that are issued by this council. Five of which are general and six of which are assets specific standards.

General Valuation Standards1. IVS 101 Scope of Work

2. IVS 102 Investigations and Compliance

3. IVS 103 Reporting

4. IVS 104 Bases of Value

5. IVS 105 Valuation Approaches and Methods

The general standards are applicable to all the valuations, irrespective of the assets being valued.

IVS 101 Scope of Work

1. Scope A scope of work (also called or referred as “engagement”) describes the fundamental

terms of a valuation engagement, such as:–

a. The asset(s) being valued,

b. Purpose of the valuation and

c. Responsibilities of parties involved in the valuation.

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Chap. 7 – General International Valuation Standards

2. This standard is intended to apply to a wide spectrum of valuation assignments, including:a. Valuations performed by valuers for their own employers (“in-house valuations”),

b. Valuations performed by valuers for clients other than their employers (“third-party valuations”), and

c. Valuation reviews where the reviewer may not be required to provide their own opinion of value.

3. General Requirementsi. All valuation advice and the work undertaken in its preparation must be

appropriate for the intended purpose.

ii. A valuer must ensure that the intended recipient(s) of the valuation advice understand(s) what is to be provided and any limitations on its use before it is finalised and reported.

iii. A valuer must communicate the scope of work to its client prior to completion of the assignment, including the following:

1. Identity of the valuer: like if he or they have any connection or involvement with the asset to be valued or if there are any other factors that could limit the valuer’s ability to provide an unbiased and objective valuation.

2. Identity of the client(s) (if any)

3. Identity of other intended users (if any)

4. Asset being valued – Clear and identified

5. Valuation Currency - This requirement is particularly important for valuation assignments involving assets in multiple countries and/or cash flows in multiple currencies.

6. Purpose for valuation

7. Basis/bases of valuation - As required by IVS 104 Bases of Value, the valuation basis must be appropriate for the purpose of the valuation. The source of the definition of any basis of value used must be cited or the basis explained.

8. Valuation Date - If the valuation date is different from the date on which the valuation report is issued or the date on which investigations are to be undertaken or completed then where appropriate, these dates should be clearly distinguished.

9. The nature and extent of the valuer’s work and any limitations thereon.

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10. The nature and sources of information upon which the valuer relies.

11. Significant assumptions and/or special assumptions.

12. The type of report being prepared

13. Restrictions on use, distribution and publication of the report

14. That the valuation will be prepared in compliance with IVS and that the valuer will assess the appropriateness of all significant inputs.

iv. In certain circumstances, the scope of a valuation engagement may not be clear at the start of that engagement. In such cases, as the scope becomes clear, valuers must communicate and agree the scope of work to their client.

v. A written scope of work may not be necessary.

vi. Some aspects of the scope of work may be addressed in documents such as standing engagement instructions, master services agreements or a company’s internal policies and procedures.

4. Changes to Scope of Work In valuation assignments where the scope of work changes over time, any changes

made over time must be communicated to the client before the assignment is completed and the valuation report is issued.

IVS 102 INVESTIGATIONS AND COMPLIANCE

• Investigations• Investigations made during the course of a valuation assignment must be

appropriate for the purpose of the valuation assignment and the basis(es) of value. References to a valuation or valuation assignment in this standard include a valuation review.

• Sufficient evidence must be collected by means such as inspection, inquiry, computation and analysis to ensure that the valuation is properly supported.

• Limits may be agreed on the extent of the valuer’s investigations. Any such limits must be noted in the scope of work. However, IVS 105 Valuation Approaches and Methods, which requires valuers to perform sufficient analysis to evaluate all inputs and assumptions and their appropriateness for the valuation purpose. If limitations on investigations are so substantial that the valuer cannot sufficiently evaluate the inputs and assumptions, the valuation engagement must not state that it has been performed in compliance with IVS.

• When a valuation assignment involves reliance on information supplied by a party other than the valuer, consideration should be given as to whether the information is credible or that the information may otherwise be relied upon without adversely affecting the credibility of the valuation opinion. Significant

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inputs provided to the valuer (such as, by management/owners), may require consideration, investigation and/or corroboration. In cases where credibility or reliability of information supplied cannot be supported, such information should not be used.

• In considering the credibility and reliability of information provided, valuers should consider matters such as:

a) Purpose of the valuation,

b) Significance of the information to the valuation conclusion.

c) Expertise of the source in relation to the subject matter, and

d) Whether the source is independent of either the subject asset and/or the recipient of the valuation.

• Purpose of the valuation, the basis of value, the extent and limits on the investigations and any sources of information that may be relied upon are part of the valuation assignment’s scope of work that must be communicated to all parties to the valuation assignment.

• If, during the course of an assignment, it becomes clear that the investigations included in the scope of work will not result in a credible valuation, or information to be provided by third parties is either unavailable or inadequate, the valuation assignment will not comply with IVS.

• Valuation Record A record must be kept of the work performed during the valuation process and the

basis for the work on which the conclusions were reached for a reasonable period after completion of the assignment, having regard to any relevant statutory, legal or regulatory requirements.

• Compliance with Other Standardsi. When statutory, legal, regulatory or other authoritative requirements must be

followed that differ from some of the requirements within IVS, a valuer must follow the statutory, legal, regulatory or other authoritative requirements (called a “departure”). Such a valuation has still been performed in overall compliance with IVS.

ii. Other sets of requirements, such as those written by Valuation Professional Organizations, other professional bodies, or firms’ internal policies and procedures, will not contradict IVS and, instead, typically impose additional requirements on valuers. Such standards may be followed in addition to IVS without being seen as departures as long as all of the requirements in IVS are fulfilled.

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IVS 103 REPORTINGIt is essential that the valuation report communicates the information necessary for proper understanding of the valuation or valuation review. A report must provide the intended users with a clear understanding of the valuation. To provide useful information, the report must set out a clear and accurate description of the scope of the assignment, its purpose and intended use (including any limitations on that use) and disclosure of any assumptions, special assumptions, significant uncertainty or limiting conditions that directly affect the valuation.

This standard applies to all valuation reports or reports on the outcome of a valuation review which may range from comprehensive narrative reports to abbreviated summary reports. For certain asset classes, there may be variations from these standards or additional requirements to be reported upon. These are found in the relevant IVS Asset Standards.

General Requirementsi. The purpose of the valuation, the complexity of the asset being valued and the users’

requirements will determine the level of detail appropriate to the valuation report. The format of the report should be agreed with all parties as part of establishing a scope of work.

ii. Compliance with this standard does not require a particular form or format of report; however, the report must be sufficient to communicate to the intended users the scope of the valuation assignment, the work performed and the conclusions reached.

iii. The report should also be sufficient for an appropriately experienced valuation professional with no prior involvement with the valuation engagement to review the report.

Valuation Reportso The report must convey the following, at a minimum:

• the scope of the work performed,

• the approach or approaches adopted,

• the method or methods applied,

• the key inputs used,

• the assumptions made,

• the conclusion(s) of value and principal reasons for any conclusions reached, and

• the date of the report (which may differ from the valuation date).

o Some of the above requirements may be clearly included in a report or incorporated into a report through reference to other documents (engagement letters, scope of work documents, internal policies and procedures, etc.).

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Valuation Review ReportsWhere the report is the result of a valuation review, the report must convey the following, at a minimum:

• Scope of the review performed, including the elements noted in IVS 101 Scope of Work to the extent each is applicable to the assignment,

• the valuation report being reviewed and the inputs and assumptions upon which that valuation was based,

• the reviewer’s conclusions about the work under review, including supporting reasons, and

• the date of the report (which may differ from the valuation date).

IVS 104 BASES OF VALUE

• Introduction1. Bases of value (sometimes called or referred as “standards of value”) describe the

fundamental grounds on which the reported values will be based.

2. Valuer may be required to use bases of value that are defined by statute, regulation, private contract or any other document. Such bases have to be interpreted and applied accordingly.

3. There are many different bases of value used in valuations, most have certain common elements:

• an assumed transaction,

• an assumed date of the transaction and

• assumed parties to the transaction.

4. Depending on the basis of value, the assumed transaction could take a number of forms: -

• a hypothetical transaction,

• an actual transaction,

• a purchase (or entry) transaction,

• a sale (or exit) transaction, and/or

• a transaction in a particular or hypothetical market with specified characteristics.

5. The assumed date of a transaction will influence what information and data a valuer consider in a valuation. Most bases of value prohibit the consideration of information or market sentiment that would not be known or knowable with reasonable due diligence on the measurement/valuation date by participants.

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6. Most bases of value reflect assumptions concerning the parties to a transaction and provide a certain level of description of the parties. In respect to these parties, they could include one or more actual or assumed characteristics, such as: -

• hypothetical,

• known or specific parties,

• members of an identified/described group of potential parties,

• whether the parties are subject to particular conditions or motivations at the assumed date (e.g. duress), and/or

• an assumed knowledge levels.

Bases of ValueIn addition to the IVS-defined bases of value listed below, the IVS have also provided a non-exhaustive list of other non-IVS-defined bases of value prescribed by individual jurisdictional law or those recognized and adopted by international agreement:

IVS-defined bases of value:

• Market Value,

• Market Rent,

• Equitable Value,

• Investment Value/Worth,

• Synergistic Value, and

• Liquidation Value.

Other bases of value (non-exhaustive list):

• Fair Value (International Financial Reporting Standards),

• Fair Market Value (Organization for Economic Co-operation and Development),

• Fair Market Value (United States Internal Revenue Service), and

• Fair Value (Legal/Statutory)

• Model Business Corporation Act, and

• Canadian case law (Manning vs. Harris Steel Group Inc).

Valuers must choose the relevant basis (or bases) of value according to the terms and purpose of the valuation assignment and the source of the definition of any basis of value used must be cited or the basis explained.

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IVS-Defined Basis of Value – Market Value1. The definition of Market Value must be applied in accordance with the following

conceptual framework.

(a) Estimated amount – money payable for the asset in an arm’s length market transaction

(b) An asset or liability should exchange

(c) On the valuation date

(d) Between a willing buyer

(e) And a willing seller

(f) In an arm’s length transaction

(g) After proper marketing

(h) Where the parties had each acted knowledgeably, prudently

(i) And without compulsion

2. The concept of Market Value presumes a price negotiated in an open and competitive market where the participants are acting freely.

3. The Market Value of an asset will reflect its highest and best use (i.e. maximizes its potential and that is possible, legally permissible and financially feasible).

4. The nature and source of the valuation inputs must be consistent with the basis of value, which in turn must have regard to the valuation purpose.

5. The data available and the circumstances relating to the market for the asset being valued must determine which valuation method or methods are most relevant and appropriate.

IVS-Defined Basis of Value – Market Rent1. Market Rent -

• Estimated amount

• For which the property should be leased on

• Valuation date

• Between a willing lessor and

• Willing lessee on appropriate lease terms

• An arm’s length transaction,

• After proper marketing

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• Where the parties had each acted knowledgeably, prudently and without compulsion.

2. Contract Rent is the rent payable under the terms of an actual lease. It may be fixed for the duration of the lease, or variable.

3. In some circumstances the Market Rent may have to be assessed based on terms of an existing lease.

4. In calculating Market Rent, the valuer must consider the following:

• Subject to a lease, the terms and conditions of that lease are the appropriate lease terms unless those terms and conditions are illegal or contrary to overarching legislation, and

• Not Subject to a lease, the assumed terms and conditions are the terms of a notional lease that would typically be agreed in a market for the type of property on the valuation date between market participants.

IVS-Defined Basis of Value – Equitable Value1. Estimated price for the transfer of an asset or liability between identified

knowledgeable and willing parties that reflects the respective interests of those parties.

2. Equitable Value is a broader concept than Market Value.

3. Examples of the use of Equitable Value include:

(a) determination of a price that is equitable for a shareholding in a non-quoted business, where the holdings of two specific parties may mean that the price that is equitable between them is different from the price that might be obtainable in the market, and

(b) determination of a price that would be equitable between a lessor and a lessee for either the permanent transfer of the leased asset or the cancellation of the lease liability.

IVS-Defined Basis of Value – Investment Value/Worthi. Value of an asset to a particular owner or prospective owner for individual

investment or operational objectives.

ii. Investment Value is an entity-specific basis of value.

iii. Although the value of an asset to the owner may be the same as the amount that could be realized from its sale to another party, this basis of value reflects the benefits received by an entity from holding the asset and, therefore, does not involve a presumed exchange. It is often used for measuring investment performance.

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IVS-Defined Basis of Value – Synergistic Value Synergistic Value is the result of a combination of two or more assets or interests

where the combined value is more than the sum of the separate values.

IVS-Defined Basis of – Liquidation Value Amount that would be realized when an asset or group of assets are sold on a

piecemeal basis. Liquidation Value should take into account the costs of getting the assets into saleable condition as well as those of the disposal activity. Liquidation Value can be determined under two different premises of value:

i. Orderly transaction with a typical marketing period, or

ii. Forced transaction with a shortened marketing period.

Other Basis of Value – Fair Value (International Financial Reporting Standards)1. IFRS 13 defines Fair Value as the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between market participants at the measurement date.

2. For financial reporting purposes, over 130 countries require or permit the use of International Accounting Standards published by the International Accounting Standards Board. In addition, the Financial Accounting Standards Board in the United States uses the same definition of Fair Value.

Other Basis of Value – Fair Market Value (Organisation for Economic Co-operation and Development (OECD))(a) The OECD defines Fair Market Value as the price a willing buyer would pay a

willing seller in a transaction on the open market.

(b) OECD guidance is used in many engagements for international tax purposes.

Other Basis of Value – Fair Market Value (United States Internal Revenue Service) For United States tax purposes, Regulation §20.2031-1 states: “The fair market value

is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Other Basis of Value – Fair Value (Legal/Statutory) in different jurisdictions1. Many national, State and local agencies use the Fair Value as a basis of value in

a legal context. The definitions can vary significantly and may be the result of legislative action or those established by courts in prior cases.

2. Examples of US and Canadian definitions of Fair Value are as follows:

a. The Model Business Corporation Act (MBCA) is a model set of law prepared by the Committee on Corporate Laws of the Section of Business

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Law of the American Bar Association and is followed by 24 States in the United States. The definition of Fair Value from the MBCA is the value of the corporation’s shares determined:

• Immediately before the effectuation of the corporate action to which the shareholder objects,

• Using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, and

• Without discounting for lack of marketability or minority status except, if appropriate.

Premise of Value/Assumed Use A Premise of Value or Assumed Use describes the circumstances of how an asset or

liability is used. Different bases of value may require a particular Premise of Value or allow the consideration of multiple Premises of Value.

Some common Premises of Value are:

• highest and best use,

• current use/existing use,

• orderly liquidation, and

• forced sale.

Premise of Value – Highest and Best Use• Use, from a participant perspective, that would produce the highest value for an

asset.

• This concept is applied to non-financial assets

• Must be physically possible (where applicable), financially feasible, legally allowed and result in the highest value.

• The highest and best use for an asset may be its current or existing use when it is being used optimally.

• The highest and best use of an asset valued on a stand-alone basis may be different from its highest and best use as part of a group of assets, when its contribution to the overall value of the group must be considered.

Premise of Value – Current Use/Existing Use Current use/existing use is the current way an asset, liability, or group of assets and/or

liabilities is used. The current use may be, but is not necessarily, also the highest and best use.

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Premise of Value – Orderly Liquidation• An orderly liquidation describes the value of a group of assets that could

be realised in a liquidation sale, given a reasonable period of time to find a purchaser(s), with the seller being compelled to sell on an-as-is, where-is basis.

• The reasonable period of time to find a purchaser (or purchasers) may vary by asset type and market conditions.

1. Premise of Value – Forced Sale In case of a “forced sale”, a seller is under compulsion to sell and as a result, a proper

marketing period is not available and the buyer may not be able to undertake adequate due diligence.

The price that could be obtained in these circumstances will depend upon the nature of the pressure on the seller and the reasons why proper marketing cannot be undertaken.

Unless the nature of, and the reason for, the constraints on the seller are known, the price obtainable in a forced sale cannot be realistically estimated. The price that a seller will accept in a forced sale will reflect its particular circumstances, rather than those of the hypothetical willing seller in the Market Value definition.

A “forced sale” is a description of the situation under which the exchange takes place, not a distinct basis of value.

A forced sale typically reflects the most probable price that a specified property is likely to bring under all of the following conditions:

i. consummation of a sale within a short time period,

ii. the asset is subjected to market conditions prevailing as of the date of valuation or assumed timescale within which the transaction is to be completed,

iii. both the buyer and the seller are acting prudently and knowledgeably,

iv. the seller is under compulsion to sell,

v. the buyer is typically motivated,

vi. both parties are acting in what they consider their best interests,

vii. a normal marketing effort is not possible due to the brief exposure time, and

viii. payment will be made in cash.

ENTITY SPECIFIC FACTORSFor most bases of value, the factors that are specific to a particular buyer or seller and not available to participants generally are excluded from the inputs used in a market-based valuation.

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Examples of entity-specific factors that may not be available to participants include:

• additional value or reduction in value derived from the creation of a portfolio of similar assets,

• unique synergies between the asset and other assets owned by the entity,

• legal rights or restrictions applicable only to the entity,

• tax benefits or tax burdens unique to the entity, and

• an ability to exploit an asset that is unique to that entity.

Whether such factors are specific to the entity, or would be available to others in the market generally, is determined on a case-by-case basis.

ASSUMPTIONS AND SPECIAL ASSUMPTIONSIn addition to stating the basis of value, it is often necessary to make an assumption or multiple assumptions to clarify either the state of the asset in the hypothetical exchange or the circumstances under which the asset is assumed to be exchanged.

These assumptions fall into two categories:

i. assumed facts that are consistent with, or could be consistent with, those existing at the date of valuation,

ii. assumed facts that differ from those existing at the date of valuation.

Where assumed facts differ from those existing at the date of valuation, it is referred to as a “special assumption”. Special assumptions are often used to illustrate the effect of possible changes on the value of an asset.

All assumptions and special assumptions must be reasonable under the circumstances, be supported by evidence, and be relevant having regard to the purpose for which the valuation is required.

IVS 105 VALUATION APPROACHES AND METHODS• The three approaches described and defined below are the main approaches used in

valuation. The principal valuation approaches are:

a) market approach,

b) income approach, and

c) cost approach

• The goal in selecting valuation approaches and methods for an asset is to find the most appropriate method under the particular circumstances. No one method is suitable in every possible situation. The selection process should consider, at a minimum:

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a) the appropriate basis(es) of value and premise(s) of value, determined by the terms and purpose of the valuation assignment,

b) the respective strengths and weaknesses of the possible valuation approaches and methods,

c) the appropriateness of each method in view of the nature of the asset, and the approaches or methods used by participants in the relevant market, and

d) Reliable information.

Market Approach1. This approach provides an indication of value by comparing the asset with

identical or comparable (that is similar) assets for which price information is available.

2. The market approach should be applied and afforded significant weight under the following circumstances:

a) the subject asset has recently been sold in a transaction appropriate for consideration under the basis of value,

b) the subject asset or substantially similar assets are actively publicly traded, and/or

c) there are frequent and/or recent observable transactions in substantially similar assets.

3. The additional circumstances where the market approach may be applied and afforded significant weight:

a) Transactions involving the subject asset or substantially similar assets are not recent enough considering the levels of volatility and activity in the market.

b) The asset or substantially similar assets are publicly traded, but not actively.

c) Information on market transactions is available, but the comparable assets have significant differences to the subject asset, potentially requiring subjective adjustments.

d) Information on recent transactions is not reliable (hearsay, missing information, synergistic purchaser, not arm’s-length, distressed sale, etc).

e) The critical element affecting the value of the asset is the price it would achieve in the market rather than the cost of reproduction or its income-producing ability.

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4. Even in circumstances where the market approach is not used, the use of market-based inputs should be maximized in the application of other approaches (such as, market-based valuation metrics such as effective yields and rates of return).

5. This approach uses market multiples derived from a set of comparable, each with different multiples. The selection of the appropriate multiple within the range requires judgement, considering qualitative and quantitative factors.

Market Approach Methods• The method used under this approach is Comparable Transactions Method. This

method is also known as the guideline transactions method. It utilizes information on transactions involving assets that are the same or similar to the subject asset to arrive at an indication of value.

• The comparable transaction method can use a variety of different comparable evidence, also known as units of comparison, which form the basis of the comparison. For example, a few of the many common units of comparison used for real property interests include price per square foot (or per square metre), rent per square foot (or per square metre) and capitalization rates. A few of the many common units of comparison used in business valuation include EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) multiples, earnings multiples, revenue multiples and book value multiples. A few of the many common units of comparison used in financial instrument valuation include metrics such as yields and interest rate spreads.

• The units of comparison used by participants can differ between asset classes and across industries and geographies.

• The key steps in the comparable transactions method are:

a) identify the units of comparison that are used by participants in the relevant market,

b) identify the relevant comparable transactions and calculate the key valuation metrics for those transactions,

c) perform a consistent comparative analysis of qualitative and quantitative similarities and differences between the comparable assets and the subject asset,

d) make necessary adjustments, if any, to the valuation metrics to reflect differences between the subject asset and the comparable assets,

e) apply the adjusted valuation metrics to the subject asset, and

f) if multiple valuation metrics were used, reconcile the indications of value.

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• A valuer should choose comparable transactions within the following context:

a) evidence of several transactions is generally preferable to a single transaction or event,

b) evidence from transactions of very similar assets (ideally identical) provides a better indication of value than assets where the transaction prices require significant adjustments,

c) transactions that happen closer to the valuation date are more representative of the market at that date than older/dated transactions, particularly in volatile markets,

d) for most bases of value, the transactions should be “arm’s length” between unrelated parties,

e) sufficient information on the transaction should be available to allow the valuer to develop a reasonable understanding of the comparable asset and assess the valuation metrics/comparable evidence,

f) information on the comparable transactions should be from a reliable and trusted source, and

g) actual transactions provide better valuation evidence than intended transactions.

• A valuer should analyze and make adjustments for any material differences between the comparable transactions and the subject asset. Examples of common differences that could warrant adjustments may include, but are not limited to:

a) material characteristics (age, size, specifications, etc.),

b) relevant restrictions on either the subject asset or the comparable assets,

c) geographical location (location of the asset and/or location of where the asset is likely to be transacted/used) and the related economic and regulatory environments,

d) profitability or profit-making capability of the assets,

e) historical and expected growth,

f) yields/coupon rates,

g) types of collateral,

h) unusual terms in the comparable transactions,

i) differences related to marketability and control characteristics of the comparable and the subject asset, and

j) ownership characteristics (such as legal form of ownership, amount percentage held).

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Guideline publicly-traded comparable method1. This method utilises information on publicly-traded comparable that are the same or

similar to the subject asset to arrive at an indication of value.

2. Difference between Comparable transaction method and guideline publicly-traded comparable method:

a) the valuation metrics/comparable evidence are available as of the valuation date,

b) detailed information on the comparables are readily available in public filings, and

c) the information contained in public filings is prepared under well understood accounting standards.

3. The method should be used only when the subject asset is sufficiently similar to the publicly-traded comparables to allow for meaningful comparison.

4. The key steps in the guideline publicly-traded comparable method are to:

a) identify the valuation metrics/comparable evidence that are used by participants in the relevant market,

b) identify the relevant guideline publicly-traded comparable and calculate the key valuation metrics for those transactions,

c) perform a consistent comparative analysis of qualitative and quantitative similarities and differences between the publicly-traded comparable and the subject asset,

d) make necessary adjustments, if any, to the valuation metrics to reflect differences between the subject asset and the publicly-traded comparable,

e) apply the adjusted valuation metrics to the subject asset, and

f) if multiple valuation metrics were used, weight the indications of value.

5. A valuer should choose publicly-traded comparables within the following context:

a) consideration of multiple publicly-traded comparables is preferred to the use of a single comparable,

b) evidence from similar publicly-traded comparables (for example, with similar market segment, geographic area, size in revenue and/or assets, growth rates, profit margins, leverage, liquidity and diversification) provides a better indication of value than comparables that require significant adjustments, and

c) securities that are actively traded provide more meaningful evidence than thinly-traded securities.

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6. A valuer should analyze and make adjustments for any material differences between the guideline publicly-traded comparables and the subject asset. Examples of common differences that could warrant adjustments may include, but are not limited to:

a) material characteristics (age, size, specifications, etc.),

b) relevant discounts and premiums,

c) relevant restrictions on either the subject asset or the comparable assets,

d) geographical location of the underlying company and the related economic and regulatory environments,

e) profitability or profit-making capability of the assets,

f) historical and expected growth,

g) differences related to marketability and control characteristics of the comparable and the subject asset, and

h) type of ownership.

Other Market Approach ConsiderationsThe following are the non-exhaustive list of certain special considerations that may form part of a market approach valuation:

1. Anecdotal or “rule-of-thumb” valuation benchmarks are sometimes considered to be a market approach.

2. adjust for differences between the subject asset and the guideline transactions or publicly-traded securities.

3. Some of the most common adjustments made in the market approach are known as discounts and premiums.

Income Approach1. Under the income approach, the value of an asset is determined by reference to

the value of income, cash flow or cost savings generated by the asset.

2. The income approach should be applied and afforded significant weight under the following circumstances:

a. the income-producing ability of the asset is the critical element affecting

b. value from a participant perspective, and/or reasonable projections of the amount and timing of future income are available for the subject asset, but there are few, if any, relevant market comparables.

3. Additional circumstances where the income approach may be applied and afforded significant weight:

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a) the income-producing ability of the subject asset is only one of several factors affecting value from a participant perspective,

b) there is significant uncertainty regarding the amount and timing of future income-related to the subject asset,

c) there is a lack of access to information related to the subject asset (for example, a minority owner may have access to historical financial statements but not forecasts/budgets), and/or

d) the subject asset has not yet begun generating income, but is projected to do so.

Income Approach Methods

Discounted Cash Flow (DCF) Methodi. The key steps in the DCF method are:

a) choose the most appropriate type of cash flow for the nature of the subject asset and the assignment (i.e., pre-tax or post-tax, total cash flows or cash flows to equity, real or nominal, etc.),

b) determine the most appropriate explicit period, if any, over which the cash flow will be forecast,

c) prepare cash flow forecasts for that period,

d) determine whether a terminal value is appropriate for the subject asset at the end of the explicit forecast period (if any) and then determine the appropriate terminal value for the nature of the asset,

e) determine the appropriate discount rate, and

f) apply the discount rate to the forecasted future cash flow, including the terminal value, if any.

ii. Type of Cash Flow:

a) Cash flow to whole asset or partial interest

b) The cash flow can be pre-tax or post-tax

c) Nominal versus real

d) Currency

iii. Explicit Forecast Period: Valuers should consider the following factors when selecting the explicit forecast period:

a) the life of the asset,

b) a reasonable period for which reliable data is available on which to base the projections,

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c) the minimum explicit forecast period which should be sufficient for an asset to achieve a stabilised level of growth and profits, after which a terminal value can be used,

d) in the valuation of cyclical assets, the explicit forecast period should generally include an entire cycle, when possible, and

e) for finite-lived assets such as most financial instruments, the cash flows will typically be forecast over the full life of the asset.

iv. Cash Flow Forecasts: the projected cash flow will reflect one of the following:

a) contractual or promised cash flow,

b) the single most likely set of cash flow,

c) the probability-weighted expected cash flow, or

d) multiple scenarios of possible future cash flow.

v. Terminal Value: The terminal value should consider:

(a) whether the asset is deteriorating/finite-lived in nature or indefinite-lived, as this will influence the method used to calculate a terminal value,

(b) whether there is future growth potential for the asset beyond the explicit forecast period,

(c) whether there is a pre-determined fixed capital amount expected to be received at the end of the explicit forecast period,

(d) the expected risk level of the asset at the time the terminal value is calculated,

(e) for cyclical assets, the terminal value should consider the cyclical nature of the asset and should not be performed in a way that assumes “peak” or “trough” levels of cash flows in perpetuity, and

(f) the tax attributes inherent in the asset at the end of the explicit forecast period (if any) and whether those tax attributes would be expected to continue into perpetuity.

vi. Valuers may apply any reasonable method for calculating a terminal value. The three most commonly used methods for calculating a terminal value are:

(a) Gordon growth model/constant growth model (appropriate only for indefinite-lived assets),

(b) market approach/exit value (appropriate for both deteriorating/finite-lived assets and indefinite-lived assets), and

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(c) salvage value/disposal cost (appropriate only for deteriorating/finite-lived assets).

vii. Discount Rate:

(a) the capital asset pricing model (CAPM),

(b) the weighted average cost of capital (WACC),

(c) the observed or inferred rates/yields,

(d) the internal rate of return (IRR),

(e) the weighted average return on assets (WARA), and

(f) the build-up method (generally used only in the absence of market inputs).

viii. In developing a discount rate, a valuer should consider:

(a) the risk associated with the projections made in the cash flow used,

(b) the type of asset being valued. For example, discount rates used in valuing debt would be different to those used when valuing real property or a business,

(c) the rates implicit in transactions in the market,

(d) the geographic location of the asset and/or the location of the markets in which it would trade,

(e) the life/term of the asset and the consistency of inputs. For example, the risk-free rate considered would differ for an asset with a three-year life versus a 30-year life,

(f) the type of cash flow being used, and

(g) the bases of value being applied. For most bases of value, the discount rate should be developed from the perspective of a participant.

Cost Approacha) The cost approach should be applied and afforded significant weight under the

following circumstances:

• participants would be able to recreate an asset with substantially the same utility as the subject asset, without regulatory or legal restrictions, and the asset could be recreated quickly enough that a participant would not be willing to pay a significant premium for the ability to use the subject asset immediately,

• the asset is not directly income-generating and the unique nature of the asset makes using an income approach or market approach unfeasible, and/or

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• the basis of value being used is fundamentally based on replacement cost, such as replacement value.

b) Additional circumstances where the cost approach may be applied and afforded significant weight:

• participants might consider recreating an asset of similar utility, but there are potential legal or regulatory hurdles or significant time involved in recreating the asset,

• when the cost approach is being used as a reasonableness check to other approaches (for example, using the cost approach to confirm whether a business valued as a going-concern might be more valuable on a liquidation basis), and/or

• the asset was recently created, such that there is a high degree of reliability in the assumptions used in the cost approach.

Cost Approach MethodsThree cost approach methods:

• replacement cost method: a method that indicates value by calculating the cost of a similar /asset offering equivalent utility,

• reproduction cost method: a method under the cost that indicates value by calculating the cost to recreating a replica of an asset, and

• summation method: a method that calculates the value of an asset by the addition of the separate values of its component parts.

COST CONSIDERATIONS• The cost approach should capture all the costs that would be incurred by a typical

participant. The costs are majorly divided into direct and indirect.

• An asset acquired from a third party would presumably reflect their costs associated with creating the asset as well as some form of profit margin to provide a return on their investment.

• The actual costs incurred in creating the subject asset (or a comparable reference asset) may be available and provide a relevant indicator of the cost of the asset. But a few adjustments must be made so that the cost fluctuations between the date on which the cost was incurred and the valuation date and any exceptional costs or savings that are reflected in the cost data, but would not arise again, can be reflected.

DEPRECIATION/OBSOLESCENCEDepreciation adjustments are normally considered for Physical, Functional and Economic Obsolescence. It should consider physical and economic life of the asset.

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PHYSICAL OBSOLESCENCE can be measured in two ways:

1. Curable: Cost to cure/fix the obsolescence.

2. Incurable: Adjustment for physical obsolescence is equivalent to the proportion of the expected total life consumed.

FUNCTIONAL OBSOLESCENCE• Excess capital costs: caused by changes in design, material, technology, resulting in in

the availability of modern equivalent assets with lower capital costs than the subject asset,

• Excess operating costs: caused by improvements in design or excess capacity resulting in availability of modern equivalent assets with lower capital costs than the subject asset.

ECONOMIC OBSOLESCENCEEconomic obsolescence arises when external factors affect an individual asset or all the assets employed in the business and should be deducted after physical deterioration and functional obsolence.

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Chap. 8 – International Valuation Standards for Specific Assets

Chapter 8 International Valuation Standards for Specific Assets

In total eleven standards have been issued by the International Valuation Standards Council till date. Out of the eleven issued six are asset specific valuation standards. These standards give a detailed guideline in the valuation of the specific asset class. The valuation standards that are asset specific are:

1. IVS 200 Business and Business Interests

2. IVS 210 Intangible Assets

3. IVS 300 Plant and Equipment

4. IVS 400 Real Property Interests

5. IVS 410 Development Property

6. IVS 500 Financial Instruments

IVS 200 BUSINESSES AND BUSINESS INTERESTSThe purpose of valuation decides the definition of business. The value of business might not be the same as that of its assets and liabilities. The excess is the going concern value or goodwill.

Valuers must establish whether the valuation is of the entire entity, shares or a shareholding in the entity (whether a controlling or non-controlling interest), or a specific business activity of the entity. The type of value being provided must be appropriate to the purpose of the valuation and communicated as part of the scope of the engagement (see IVS 101 Scope of Work). It is especially critical to clearly define the business or business interest being valued as, even when a valuation is performed on an entire entity, there may be different levels at which that value could be expressed. For example:

a) Enterprise value: Often described as the total value of the equity in a business plus the value of its debt or debt-related liabilities, minus any cash or cash equivalents available to meet those liabilities.

b) Total invested capital value: The total amount of money currently invested in a business, regardless of the source, often reflected as the value of total assets less current liabilities and cash.

c) Operating Value: The total value of the operations of the business, excluding the value of any non-operating assets and liabilities.

d) Equity value: The value of a business to all of its equity shareholders.

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Valuation Approaches and Methods

1. Market Approach The three most common sources of data used to value businesses and business interests

using the market approach are:

• public stock markets in which ownership interests of similar businesses are traded,

• the acquisition market in which entire businesses or controlling interests in businesses are bought and sold, and

• prior transactions in shares or offers for the ownership of the subject business.

There must be a reasonable basis for comparison with, and reliance upon, similar businesses in the market approach. Factors that should be considered in assessing whether a reasonable basis for comparison exists include:

• similarity to the subject business in terms of qualitative and quantitative business characteristics,

• amount and verifiability of data on the similar business, and

• whether the price of the similar business represents an arm’s length and orderly transaction.

2. Income Approach• The income approach requires the estimation of a capitalization rate when

capitalising income or cash flow and a discount rate when discounting cash flow. In estimating the appropriate rate, factors to be considered are:

o the level of interest rates

o rates of return expected by participants for similar investments

o the risk inherent in the anticipated benefit stream

• Under the income approach, the historical financial statements of a business entity are often used as guide to estimate the future income or cash flow of the business.

• When using an income approach, it may also be necessary to make adjustments to the valuation to reflect matters that are not captured in either the cash flow forecasts or the discount rate adopted.

3. Cost Approach• This approach cannot normally be applied in the valuation of businesses and

business interests.

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• However, the cost approach is sometimes applied in the valuation of businesses, particularly when:

a) the business is in an early stage or start-up business where profits and/or cash flow cannot be reliably determined and comparisons with other businesses under the market approach is impractical or unreliable,

b) the business is an investment or holding business, and/or

c) the business does not represent a going concern and/or the value of its assets in a liquidation may exceed the business’ value as a going concern.

Special Considerations for Businesses and Business InterestsThe following sections address a non-exhaustive list of topics relevant to the valuation of businesses and business interests:

a) Ownership Rights Rights, privileges or conditions that attach the ownership interest, require consideration

in valuation process. In some cases, it becomes necessary to distinguish between legal and beneficial ownership.

Corporate documents may contain restrictions on the transfer of the interest or other provisions relevant to value. In such cases rights of interest being valued need to be considered beforehand.

Rights and obligations inherent to the interest and those that may be applicable only to a particular shareholder should be distinguished.

All the rights and preferences associated with subject business or business interest should be considered in valuation.

b) Business Information The information necessary for the purpose of valuation of business is generally received

from the management, representatives of the management or other experts. A valuer has to use his experience and intuition to decide that the information received is reasonable and appropriate to be relied upon for the purposes of valuation.

With the help of the information reflecting the future expectations and that derived from the historical financial statements, future expected course of business can be charted.

c) Economic and Industry Considerations Awareness of relevant economic developments and industry specific trends is

essential for all valuations. These are necessary in the valuation of businesses and business interests having complex structures involving multiple locations and types of operations.

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d) Operating and Non-Operating Assets In any business entity, there are two types of assets and liabilities. Operating and

non-operating. Operating assets are the one’s which contribute to the profitability of the business. Non-operating assets are the assets that are owned by the business, but many a times not reflected in the books of accounts. E.g., Non-operating plant, fully depreciated machinery, intangible assets, legal liabilities/ lawsuits.

Depending upon the level of value appropriate for the valuation engagement, value of non-operating assets may need to be separately determined and added to the operating value of the business.

The valuer should ensure that the expenses and incomes associated to non-operating assets are excluded from the cash flow measurements and projections used in the valuation.

A similar adjustment is required to be made when using the information from the publicly traded businesses.

e) Capital Structure Considerations Businesses are generally financed by a combination of debt and equity. But the

valuation assignment may not require a complete business valuation. It may require only the value of equity or a particular class of equity. In most of such cases, the enterprise value of the business is determined and then that value is allocated between debt and equity.

When the value of debt is the same as its book value, it may be appropriate to deduct the book value of debt from the enterprise value to get the value of equity.

In circumstances where the value of debt may differ from its book value, valuers should either value the debt directly or use a method that appropriately allocates value to debt and any equity securities such as a probability-weighted expected return method or an option-pricing model.

IVS 210 INTANGIBLE ASSETSIntangible asset valuations are performed for a variety of purposes.

a. For financial reporting purposes

b. For tax reporting purposes

c. Intangible assets may be the subject of litigation, requiring valuation analysis in circumstances such as shareholder disputes, damage calculations and marital dissolutions

d. Other statutory or legal events

e. Valuers are often asked to value intangible assets as part of general consulting, collateral lending and transactional support engagements.

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TYPES OF INTANGIBLE ASSETSThey are differentiated on the basis of their characteristics like ownership, functions, market position and image. Most of the intangible assets fall under one of the following categories:

1) Market related: Such as trademarks, trade names

2) Customer related: Customer lists, customer contracts

3) Artistic related: Right to benefits arising from works such as plays, books, paintings, etc.

4) Contract related: Like licensing and royalty agreements

5) Technology based: Right to use patented technology, formulae, designs, software

Some of the assets may possess characteristics of more than one of the above categories.

In case of an intangible asset like goodwill, its value can be different when calculated for different purposes. Like, when the business is accounted for under IFRS or US GAAP, an intangible asset is only recognized to the extent it is separable or arises from contractual or legal rights.

The intangible assets generally include elements such as:

1) Company specific synergies

2) Opportunities to expand to newer markets

3) Benefit of assembled workforce

4) Benefits to be derived from future assets

5) Assemblage and going concern value


1. Market Approach• Under this approach, the value of an intangible asset is determined by reference

to market activity (for example, transactions involving identical or similar assets).

• Intangible assets for which the market approach is sometimes used include:

a. broadcast spectrum,

b. internet domain names, and

c. taxi medallions.

2. Income Approachi. This approach is used in:

a) technology,

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b) customer-related intangibles (eg, backlog, contracts, relationships),

c) tradenames/trademarks/brands,

d) operating licenses (e.g., franchise agreements, gaming licenses, broadcast spectrum),

e) non-competition agreements.

ii. Income Approach Methods

a) Excess Earnings Method:

This method estimates the value of an intangible asset as: The present value of cashflows attributable to the intangible asset LESS the proportion of cash flows attributable to the other assets (also known as “contributory assets”).

b) Relief-from-Royalty Method:

Under this method the value of the intangible asset is calculated by comparing the amount of royalty expense to be paid to the third party for leasing the asset, saved by owning it.

c) Premium Profit Method or With-and-Without Method

In this method, keeping all the other factors constant, the value of intangible asset is calculated in two different situations: with the use of the intangible asset in question and without the use of the intangible asset in question.

This comparison can be made in two ways:

o Calculating the value of the business under each scenario with the difference in business value being the value of the subject intangible asset, OR

o Calculating the difference between the profits of two scenarios for each future period. The present value of those amounts is then used to reach the value of the subject intangible asset.

The differences in the value between the two scenarios should be reflected solely in the cash flow projections.

d) Greenfield Method

Under this method, the value of the intangible in question is determined using the cash flow projections, assuming that the intangible to be valued is the only asset owned by the business and rest all the tangible and intangible assets must either be bought, built or rented. This method of valuation is frequently used for the valuation of “enabling” intangible assets such as franchise agreements and broadcast spectrum.

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e) Distributor Method:

The Distributor method is a variation of multi period excess earning method, sometimes used to value customer-related intangible assets.

This method is based on the theory that each function of a business generates profits. As the distributors generally perform the function of distribution of products to customers, information on profit margins earned by distributors is used to estimate the excess earnings attributable to customer related intangible assets.

3. Cost Approach Under the cost approach, the value of the intangible asset is determined as the cost of

replacement of a similar asset or an asset providing similar service potential or utility.

The cost approach is commonly used for valuation of acquired third party software; internally developed and internally used, non-marketable software and assembled workforce.

Of the two methods of the cost approach, replacement method of valuation is commonly used for the intangible assets, as these assets do not have any physical form that can be reproduced.

IVS 300 PLANT AND EQUIPMENT

DefinitionPlant and machinery- Tangible assets to be used for the purpose of business, i.e. manufacturing or trading of goods or providing of services.

Owned or leasedBoth sorts of assets are covered by this standard. Valuation differs in both the cases. Useful life of the asset is not the same as the period for which “right to use” is conferred through the lease contract.

Grouping of assetsThe assets that are used together are to be grouped as one and similar set of assumptions and policies are used in its valuation. If the assets from sub groups can be independently separated from the main system, then they may be valued separately.

Intangible assetsSometimes, intangible assets form a part of the tangible asset or the value of tangible asset is affected by that of an intangible asset. Value of dies and patterns is linked with the value of associated intellectual property rights. The process of valuation will have to consider this impact, and in valuation of such cases, where there is a component of intangible asset, Valuer should also follow IVS 210 on Intangible Assets.

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Factors to be considered for valuation of plant and equipment:

(a) Asset-related1. the asset’s technical specification,

2. the remaining useful, economic or effective life, considering both preventive and predictive maintenance,

3. the asset’s condition, including maintenance history,

4. any functional, physical and technological obsolescence,

5. if the asset is not valued in its current location, the costs of decommissioning and removal, and any costs associated with the asset’s existing in-place location, such as installation and recommissioning of assets to its optimum status,

6. for machinery and equipment that are used for rental purposes, the lease renewal options and other end-of-lease possibilities,

7. any potential loss of a complementary asset, e.g., the operational life of a machine may be curtailed by the length of lease on the building in which it is located,

8. additional costs associated with additional equipment, transport, installation and commissioning, etc, and

9. in cases where the historical costs are not available for the machinery and equipment that may reside within a plant during a construction, the valuer may take references from the Engineering, Procurement, Construction (“EPC”) contract.

(b) Environment-related1. the location in relation to the source of raw material and market for the product.

The suitability of a location may also have a limited life, e.g., where raw materials are finite or where demand is transitory,

2. the impact of any environmental or other legislation that either restricts utilisation or imposes additional operating or decommissioning costs,

3. radioactive substances that may be in certain machinery and equipment have a severe impact if not used or disposed of appropriately. This will have a major impact on expense consideration and the environment,

4. toxic wastes which may be chemical in the form of a solid, liquid or gaseous state must be professionally stored or disposed of. This is critical for all industrial manufacturing, and

5. licenses to operate certain machines in certain countries may be restricted.

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(c) Economic-related1. the actual or potential profitability of the asset based on comparison of operating

costs with earnings or potential earnings,

2. the demand for the product manufactured by the plant with regard to both macro- and micro-economic factors could impact on demand, and

3. the potential for the asset to be put to a more valuable use than the current use (i.e. highest and best use).

ATTACHMENT OF ASSET TO BE VALUED WITH OTHER ASSETSAssets maybe permanently attached to land and could not be removed without substantial demolition of the asset or any surrounding structure.

An individual asset may be a part of an integrated production line where its functionality is dependent on other assets.

An asset maybe classified as a part of fixed asset, like heating, ventilation and air conditioning system.

In such cases, all the assumptions made for the purpose of valuation should be clearly stated.

PLANT AND EQUIPMENT INTEGRATED WITH THE BUILDINGCertain plants and equipments required to provide services to the building are integrated to the building. E.g., Elevator, gas and electric lines, etc.

Such assets cannot be valued separately, as their value may not be separately realizable. When different valuation assignments are undertaken to carry out valuation of the real property interest and plant and equipment assets at the same location, care is necessary to avoid either omission or double counting.


1. Market Approach Most of the plants and equipments are homogenous in nature, i.e., latest information on

the market value of similar assets is easily available. So such assets can be valued by this method of valuation. But in case of certain specific assets, where the availability of market information is poor or non-existent, either cost or income method of valuation is to be used.

2. Income Approach Income approach of valuation can be utilized when there are specific cash flows arising

for the asset or asset group, like production of marketable goods. Whenever this method is used, cash flows generated during the life of the asset and its value at the end of its useful life should also be considered.

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But at times, it becomes difficult to separate the cash flows arising from tangible and intangible plants and assets. Also, at times, all the plants and equipments are valued individually. In such cases income approach of valuation is not appropriate.

3. Cost Approach This method is mostly used for individual assets that are specialized or special use

facilities. At first the lower of the replacement or reproduction cost is estimated. This value should be adjusted to reflect the impact on physical, functional, technological and economic obsolescence of value. However, the adjustments made to the replacement cost should be the same as the modern equivalent asset from output and utility point of view.

In certain assets, historical cost of the current asset is used to arrive at the replacement cost of the plant and equipment. In such cases the valuer should consider

a) Timing of the historical expenses

b) The basis of value

c) Specific costs included

d) Non-market components

Cost-to-Capacity MethodIn this method, the replacement cost is deduced by comparing the cost of an asset with actual capacity, with the cost of another asset with different capacity.

It is used in either of the following ways:

• To estimate replacement cost of asset with one capacity where replacement cost of similar asset with different capacity is known, OR

• To estimate the replacement cost for a modern equivalent asset with capacity that matches foreseeable demand where the subject asset has excess capacity.

But in most cases the relationship between cost and capacity is not linear, so some form of exponential adjustment may be required.

Financing Arrangements When the items of plant and equipment are financed by the external sources, the

stability of finance plays a role in the valuation of the asset.

For the purpose of valuation, it may be appropriate to identify any encumbered assets and to report them separately from unencumbered assets.

Certain plants and equipments are obtained on operating leases. They are not the property of the lessee, but may need to be recorded, as their presence may impact on the value of associated assets.

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Hence, before undertaking valuation, the valuer should establish whether the assets are subject to operating lease, finance lease or loan or secured lending.

IVS 400 REAL PROPERTY INTERESTS

Real Property InterestA real property interest is the right of ownership, control, use or occupation of land. There are three main types of interest:

a) The superior interest, i.e., the owner has full right of possession and control of any land and building thereon, subject to any subordinate interest and legally enforceable constraints.

b) A subordinate interest gives total possession and control of certain part of the land and building under the contract of lease.

c) The right to use any property but without any right of exclusive possession or control. Eg. Use of land for specific purposes.

These rights in properties are named differently in different countries, but they are common at all places. Also, land and building being immovable properties, only the legal title of the asset is transferred. So, when undertaking a valuation of the property interest, the valuer should first consider the legal title of the property.

Additional requirements to IVS 101, Scope of Worka) A description of real property interest to be valued,

b) Identification of interests that affect the interest to be valued.

Also, the following matters should be considered:

a) the evidence required to verify the real property interest and any relevant related interests,

b) the extent of any inspection,

c) responsibility for information on the site area and any building floor areas,

d) responsibility for confirming the specification and condition of any building,

e) the extent of investigation into the nature, specification and adequacy of services,

f) the existence of any information on ground and foundation conditions,

g) responsibility for the identification of actual or potential environmental risks,

h) legal permissions or restrictions on the use of the property and any buildings, as well as any expected or potential changes to legal permissions and restrictions.

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1. Market Approach Property interests are heterogeneous and no two properties are completely identical.

But still this is the most common method used in the valuation of the real property interests.

The valuers use generally accepted units of comparison, like price per square foot area of a building or crop yields for land, and this units of comparison should be consistent and should be commonly used in the relevant market.

When two property interests are compared, certain points of differences cannot be overlooked as they too play an important role in the valuation of the subject property interest. A few of these points can be listed as the locations of the property, age and specification of building and quality of land, uses to which the property can be put to, market conditions at the time of transactions and many others.

2. Income approach There are a few different methods under this approach, which are all based on the rent

generated by the real property interest investment, or the rent saved by the ownership of the real property interest. These methods are discussed below:

a) The profits’ method: Where a building is suitable only for a particular type of trading activity, like that of a hospital or a hotel, the actual or potential cash flows that accrue to the owner is considered as the income of that real property interest.

b) Discounted cashflows method: Here the cashflow for the future period is discounted at an appropriate rate to obtain the present value of such cashflows and the total present value is considered to be the capital value of the property.

The discount rate is generally based on the time value of money and the risks involved. When a discount rate is to be selected for the purposes of valuation, the objective of the valuation process should be considered.

I. If the valuation is for a particular individual, present or potential owner, interested in investing, the rate of return expected or the weighted average cost of capital can be used as the discount rate.

II. When the object of valuation is to establish market value of the property interest, then the general market rate of return can be used as the discount rate.

III. Also, an adjusted risk-free return rate can also be considered.

In both the scenarios, guidance contained in IVS 105 on valuation is to be considered.

3. Cost Approach This also is a commonly used approach for the valuation of the real property interests.

It is specifically used where there are no market prices available for similar properties or where no estimates of future income stream are available.

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The first step here is to calculate the replacement cost. It is the cost of replacing the current property with the modern equivalent or replicating the subject building to provide the same utility. All the incidental costs such as design fees, finance cost, developer fees, etc., should also be included.

Thereafter an adjustment should be made to the cost of the modern equipment, for physical, functional, technological and economic obsolescence of the subject property, to know how much less valuable will it be to the potential buyer.

An important point to be noted here is that, at times, the interest in property may be closely associated to the intangible asset (hotel or hospital chain) or the plant and equipments (a manufacturing plant with heavy machinery installed). In such cases, IVS 300 on Intangible assets and IVS 210 on Plant and equipment should also be taken into consideration while carrying on the valuation.

Special Considerations for Real Property Interestsa) Hierarchy of Interests

Different types of property interests are not mutually exclusive.

Absolute interest provides complete ownership and control for perpetuity, but it may be subject to subordinate interest, or, a lease interest may impose a condition to use the subject property for a particular purpose only.

Therefore, it is necessary to identify the nature of rights accruing to the owner, and reflect any constraints or encumbrances imposed by the presence of other interests, when valuing the subject property interest.

Also, it may be noted that the total value of various different interests in the property may be different from the value of unencumbered superior interest.

b) Rent

Rent is considered the basis of value in IVS 104 Bases of value. The valuers must consider the contract rent or the market rent when calculating the value of lease or interest created by lease.

IVS 410 DEVELOPMENT PROPERTY

Development PropertyFor the purpose of this standard, the development properties are defined as interests where redevelopment is required to achieve the highest and best use or where improvements are being carried out as on the valuation date. This includes construction of buildings, redevelopment of previously developed land, improvement/alteration of current building, land allocated for development in statutory plan and land allocated for higher value uses.

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Purposes of valuation The valuation of a development property may be carried out for various purposes

like establishing financial feasibility, tax reporting purposes, for litigations involving shareholder disputes and damage calculations, financial reporting purposes or any other legal or statutory requirements.

It is the responsibility of the valuer to understand the purpose of valuation and select the base and approach of valuation accordingly.

The residual value or the land value of the development asset can be very sensitive to changes in assumptions or projections of income or revenue derived from the completed project or the development costs incurred. Also, in case of construction property, sensitivity impacts changes in the cost of project or construction value on completion.

This sensitivity remains, regardless of the method of valuation used. If the purpose of the valuation is to point out such significant changes, the valuer should highlight the potential effect of disproportionate effect of possible changes. A sensitivity analysis may be done for the purpose, giving suitable explanation.


1. Market Approach This approach is generally useful where the development property is homogenous and

frequently exchanged in the market, leading to sufficient data necessary for valuation.

But this approach is not appropriate in case of larger or more complex development property or smaller property with heterogeneous development. It is also problematic in case of development property where the work is incomplete.

2. Income Approach This approach may be appropriate for establishing the value of completed property as

one of the inputs of residual method.

3. Cost Approach The cost approach may also exclusively be used as a means of indicating the value of

development property such as a proposed development of a building or other structure for which there is no active market on completion.

Special Considerations for a Development Property

a) Residual Method In applying the residual method, a valuer should consider and evaluate the

reasonableness and reliability of the following:

• The source of information on any proposed building or structure, like, any plans and specification that are to be relied on in the valuation, and

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• Any source of information on the construction and other costs that will be incurred in completing the project and which will be used in the valuation.

The following basic elements require consideration in any application of the method to estimate the market value of development property and if another basis is required, alternative inputs may be required.

a. Completed property value,

b. Construction costs,

c. Consultants fees,

d. Marketing costs,

e. Timetable,

f. Finance costs,

g. Development profit,

h. Discount rate.

b) Existing Asset Matters that typically need to be considered for specific investigation when undertaking

a valuation of a development property before a project commences include:

a. whether or not there is a market for the proposed development,

b. is the proposed development the highest and best use of the property in the current market,

c. whether there are other non-financial obligations that need to be considered (political or social criteria),

d. legal permissions or zoning, including any conditions or constraints on permitted development,

e. limitations, encumbrances or conditions imposed on the relevant interest by private contract,

f. rights of access to public highways or other public areas,

g. geotechnical conditions, including potential for contamination or other environmental risks,

h. the availability of, and requirements to, provide or improve necessary services, such as, water, drainage and power,

i. the need for any off-site infrastructure improvements and the rights required to undertake this work,

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j. any archaeological constraints or the need for archaeological investigations,

k. sustainability and any client requirements in relation to green buildings,

l. economic conditions and trends and their potential impact on costs and receipts during the development period,

m. current and projected supply and demand for the proposed future uses,

n. the availability and cost of funding,

o. the expected time required to deal with preparatory matters prior to starting work, for the completion of the work and, if appropriate, to rent or sell the completed property, and

p. any other risks associated with the proposed development.

c) Special Considerations for Financial Reporting Before selecting an appropriate valuation method, classification and the relevant

accounting requirements need to be determined.

d) Special Considerations for Secured Lending Market value is the appropriate basis for valuation for secured lending.

IVS 500 FINANCIAL INSTRUMENTS

Financial Instruments It is a contract that creates rights or obligations between specified parties to receive

or pay cash or other financial consideration. Such instruments include but are not limited to, derivatives or other contingent instruments, hybrid instruments, fixed income, structured products and equity instruments. It can also be created through the combination of other financial instruments in a portfolio to achieve a specific net financial outcome.

Purpose of valuation Valuation of financial instruments are done for many purposes which includes:

a. acquisitions, mergers and sales of businesses or parts of businesses,

b. purchase and sale,

c. financial reporting,

d. legal or regulatory requirements (subject to any specific requirements set by the relevant authority),

e. internal risk and compliance procedures,

f. tax, and

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g. litigation.

The requirement to disclose the valuation approach(es) and reasoning, in the valuation report will differ for different categories of financial instruments. Sufficient information should be provided to allow users to understand the nature of each class of instrument valued and the primary factors influencing the values. In determining the level of appropriate disclosure, regard must be had to the following:

a) Materiality

b) Uncertainty

c) Complexity

d) Comparability

e) Underlying Instruments


1. Market Approach A price obtained from trading on a liquid exchange on, or very close to, the time or

date of valuation is normally the best indication of the market value of a holding of the identical instrument. In cases where there have not been recent relevant transactions, the evidence of quoted or consensus prices, or private transactions may also be relevant.

2. Income Approach Under this approach, discounted cash flow method can be used for valuation of

financial instruments.

In establishing the appropriate discount rate, it is necessary to assess the return that would be required on the instrument to compensate for the time value of money and potential additional risks from, but not limited to the following:

a. the terms and conditions of the instrument, such as, subordination,

b. the credit risk, or the uncertainty about the ability of the counterparty to make payments when due,

c. the liquidity and marketability of the instrument,

d. the risk of changes to the regulatory or legal environment, and

e. the tax status of the instrument.

3. Cost Approach In applying the cost approach, valuers must follow the guidance contained in IVS 105

Valuation Approaches and Methods.

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Special Considerations for Financial Instrumentsa) Valuation Inputs

Valuation inputs may come from a variety of sources. Commonly used valuation input sources are:

• broker quotations,

• consensus pricing services,

• the prices of comparable instruments from third parties and

• market data pricing services.

Implied inputs can often be derived from such observable prices such as volatility and yields.

b) Credit Risk Adjustments

Some of the common factors that need to be considered in establishing and measuring credit risk include the following:

a. Own credit and counterparty risk

b. The valuer also needs to be able to differentiate between the credit risk of the instrument and the credit risk of the issuer and/or counterparty.

c. Subordination

d. Leverage

e. Netting agreements

f. Default protection

c) Liquidity and Market Activity

Liquidity and market activity are different from each other. The liquidity of an asset is a measure of how easily and quickly it can be transferred in return for cash or a cash equivalent. Market activity is a measure of the volume of trading at any given time, and is a relative rather than an absolute measure. Low market activity for an instrument does not necessarily imply the instrument is illiquid.

d) Valuation Control and Objectivity

The following need to be considered while accessing valuation control:

a. establishing a governance group responsible for valuation policies and procedures and for oversight of the entity’s valuation process, including some members external to the entity,

b. systems for regulatory compliance if applicable,

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c. a protocol for the frequency and methods for calibration and testing of valuation models,

d. criteria for verification of certain valuations by different internal or external experts,

e. periodic independent validation of the valuation model(s),

f. identifying thresholds or events that trigger more thorough investigation or secondary approval requirements, and

g. identifying procedures for establishing significant inputs that are not directly observable in the market, e.g., by establishing pricing or audit committees.

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Chapter 9 Valuation of Land and Building

OBJECTIVEThe process of valuation requires the valuer to make impartial judgments as to the reliability of inputs and assumptions. For a valuation to be credible, it is important that those judgments are made in a way that promotes transparency and minimizes the influence of any subjective factors on the process. Judgment used in a valuation must be applied objectively to avoid biased analyses, opinions and conclusions.

NEED OF VALUATION Valuation is needed for the following purpose:

a. Buying or selling property

b. Taxation

c. Rent Fixation

d. Security of loans or mortgage

e. Compulsory acquisition

ROLES AND RESPONSIBILITY OF VALUERa. A valuer must ensure that the intended recipient(s) of the valuation advice

understand(s) what is to be provided and any limitations on its use before it is finalised and reported.

b. A valuer must communicate the scope of work to its client prior to completion of the assignment, including the following:

i. Identity of the valuer: The valuer may be an individual, group of individuals or a firm. If the valuer has any material connection or involvement with the subject asset or the other parties to the valuation assignment, or if there are any other factors that could limit the valuer’s ability to provide an unbiased and objective valuation, such factors must be disclosed at the outset.

ii. Identity of the client(s) (if any): Confirmation of those for whom the valuation assignment is being produced is important when determining the form and content of the report to ensure that it contains information relevant to their needs.

iii. Identity of other intended users (if any): It is important to understand whether there are any other intended users of the valuation report, their identity and their needs, to ensure that the report content and format meets those users’ needs.

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Chap. 9 – Valuation of Land and Building

iv. Asset(s) being valued: The subject asset in the valuation assignment must be clearly identified

v. Valuation currency: The currency for the valuation and the final valuation report or conclusion must be established. For example, a valuation might be prepared in euros or US dollars. This requirement is particularly important for valuation assignments involving assets in multiple countries and/or cash flows in multiple currencies.

vi. Purpose of the valuation: The purpose for which the valuation assignment is being prepared must be clearly identified as it is important that valuation advice is not used out of context or for purposes for which it is not intended. The purpose of the valuation will also typically influence or determine the basis/bases of value to be used.

vii. Basis/bases of value used: The source of the definition of any basis of value used must be cited or the basis explained. This requirement is not applicable to a valuation review where no opinion of value is to be provided and the reviewer is not required to comment on the basis of value used.

viii. Valuation date: The valuation date must be stated. If the valuation date is different from the date on which the valuation report is issued or the date on which investigations are to be undertaken or completed then where appropriate, these dates should be clearly distinguished.

METHODS OF VALUATION FOR LANDValuation of a land can be derived from different methods. The appropriate application of a method of valuation depends on the nature of the property as well as availability of reliable data. The valuation of land is covered under the International Valuation Standard 400 and 101, which is discussed in detail in the previous chapter. The following the methods of valuation being adopted in General practice by a practicing valuer are:

a. Land Building Method (LBM) In this method of valuation building portions being valued separately after allowing

depreciation and the land is valued separately and then added to get the present value of the property:

Present Value of the Property = Value of the building + Value of the land +Value of the amenities & services.

Procedure of Valuationi. Ascertain from the applicant the exact purpose of valuation.

ii. From the document available, note down the measurement of the plot and other details.

iii. Verify the measurements and the extent at site.

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iv. Assess suitable unit rate based upon the prevailing market rate or from the recent comparable sale instances of a similar vacant plot with almost similar characteristics.

v. Arrive the value of building by adopting the procedure.

vi. Addition of value of Land and Building will be the present value of the property.

vii. If the aim of valuation is to assess the market value apply the reduction factor to the value of land.

viii. Add suitable percentage towards any potential value.

ix. Deduct any percentage towards negative factors.

x. Analyze any other points depending upon the individual merits of the case.

b. Rent Capitalization Method This method is generally resorted to in the following situations: -

a. In case the land is fully developed.

b. In the case of fully tenanted property and statutory control of terms and conditions of tenancy.

c. In the case of a property small portion of which is self-occupied and balance large portion is tenanted.

d. In the case of commercial establishment like cinemas and hotels, if the building is given on outright lease / rental basis and rent fetched is reasonable.

The rent which is foundation ingredient of rent capitalization method is net maintainable rent which is the difference of Gross maintainable rent and out goings. The other ingredient of this method is year's purchases or rate of capitalization.

Thus, to determine the fair market value of the property gross income per annum is to be determined. From this income, all the outgoings which are essential to be incurred for maintenance are to be deducted to find out the net maintainable rent or annual letting value. The Annual letting value multiplied by year's purchase gives the fair market value of the property.

Net annual rent income = Gross Annual Rental Income (GARI) – Outgoings Gross Maintainable Rent

a. In case of rented building attracted by Rent Control Act, the actual rent received or receivable should be adopted.

b. In case of a newly rented building, the actual rent if it is nearly equal to the fair and normal market rent prevailing in the area be adopted.

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c. In case the rent fixed a lower level purposely by letting it out to near relations or subsidiary concerned, the prevailing market rent should be adopted. The reasons should be recorded in the report.

d. In case of partly self-occupied building, where rent capitalization method is resorted to, the rent for self-occupied should be equal to prevailing market rent.

e. In case of commercial building, prevailing market rent in the locality should be adopted.

f. In case the Rent Control Act is applicable, the rent should not exceed the standard Rent, whether fixed or not.

g. In case where the property is let throughout the year ending on the valuation date the gross annual maintainable rent shall be the rent received or receivable as indicated in para (a) to (f) above in respect of such year.

h. In case where the property is let for only a part of the previous year (year ending valuation date), the gross annual maintainable rent.

12 months X Rent received during tenancy period = ---------------------------------------------------------------------- Tenancy period

Outgoings = Property Tax, Repairs, Maintenance, Service Charges, Insurance Premium, Rent Collection and Management Charges etc.

c. Development Method (or Residual Method): This method of valuation of large expanse of land is adopted in the following situations:

a. When the comparable sales of large piece are not available but sales of small plot are available.

b. When the land is ripe for use for building purpose it possesses necessary potentialities for urban use.

The complete procedure to determine the fair market value of the large tracts of land, under this method can divided into the following steps.

i. Ascertain the demand for small plots in the area.

ii. Determine the area of land required for development work as per municipal bye laws. Deduct this area from the total area of the plot so as to ascertain the area available for development of small size plots. By rough estimation it works out to 20 to 25% of the total area.

iii. Determine the number of small plots which can be legally carved out from the large tract of land with necessary provisions for infrastructure facilities.

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iv. Determine the cost of development works such as cost of construction of road as per municipal specifications with street lights, cost of laying parks, underground drains, water supply lines, sewer lines, electric lines & substation, earth fitting or cutting, cross drainage works and municipal taxes on open land. As the total amount of development is not paid to the contractor at the commencement of work so defer it for half of the period of construction at certain rate of interest say to 12%. Let the deferred value be (A).

v. Ascertain the total sale price of all the small plots of scheme on the valuation date from the comparable sales of small developed plots. As all these small plots cannot be sold at one time, so estimate the time of disposal of all the plots and defer the total sale price for half of the period of the sale @ 10% to 12%. Let it be of (B).

vi. From the deferred sale price (B) deduct the following.

a. Present value of the cost of development deferred for half of the period of development (A) along with architect or engineers fee for his supervision and getting the scheme approved.

b. Incidental charges such as cost of stamps, registration legal cost, cost of advertisement etc. Normally it is 8% to 10% of (B). If the cost of stamp, registration and legal cost is to be borne by the purchaser then this percentage should be modified accordingly.

c. Developer's profit and risk 15% of (B).

vii. This amount available after above deductions from (B) will represent the fair market value of the large undeveloped plot on the date of valuation.

d. Profit Method In the case of Hotels, Motels, Cinemas, Public houses which falls under the category

of the licensed premises, the F.M.V. depends primarily on the earning capacity of the property. The F.M.V. of such properties is determined by applying profit method provided.

i. The owner runs himself.

ii. The owner gives Hotel or Cinema on conducting agreement to a conductor.

The F.M.V. of the property is determined by capitalizing the net profits (70% tangible + 30% intangible) at certain rate of expenses, owners risk and other outgoings from the gross income. Example – In the case of Cinema the following steps are to be taken to determine its F.M.V.

Gross Income (excluding entertainment tax): The gross income is estimated on the basis of full house capacity less normal vacancies multiplied by the number of shows in a year. The vacancies can be determined from the actual sale of tickets, details of which are available with the owner. Thus, the source of gross income is:

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1. Regular and morning shows.

3. Soda fountains.

4. Advertisement slides/films.

5. Show cases.

6. Any other income.

As the gross income may not be consistent, so the gross income & expenses should be based on the average of last 3 preceding years.

Expenses: Operating expenses can be broadly classified:

1. Entertainment tax if included in gross income.

2. Total show tax.

3. Hire charges of new reels.

4. Other taxes pertaining to cinema business.

5. Octroi, Freight charges.

6. Publicity.

7. Traveling expenses.

8. Printing & stationary.

9. Salaries & bonus, gratuity, provident fund, welfare fund of staff.

10. Carbon electrodes.

11. Any other charges.

e. Direct Comparison When the rental value is not available from the property concerned, this method is

used, but there are evidences of sale price of properties as a whole. The comparison is mainly based on: the location, architectural design, use, dimensions (mainly floor area), construction materials, structural design and construction technology.

Procedure The main task is to collect data on comparable properties. Basically, the factors

influencing value have to be weighed against each other. The best way to compare property would obviously be to inspect it in person. Since this option is very time consuming and not always possible, the next best solution is to search property transaction database. An ideal database will contain information relating to transaction date, price paid, property features and size etc.

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Steps in the sales comparison approach1. Study the market to obtain suitable information relating to sales, listings, pending

sales that are similar to the subject property.

2. Examine the market data to check whether data are factually correct and accurate.

3. Decide relevant units of comparison (e.g., sales price per square meter), and develop a comparative analysis for each.

4. Compare the subject and comparable sales according to the factors of comparison and adjust as appropriate.

5. Reconcile the multiple value indications that result from the adjustment of the comparable sales into a single value indication.

VALUATION FOR BUILDINGValuation of a building depends on the type of the building, its structure and durability, on the situation, size, shape, frontage, width of roadways, the quality of materials used in the construction and present-day prices of materials. Valuation also depends on the height of the building, height of the plinth, thickness of the wall, nature of the floor, roof, doors, windows etc.

The valuation of a building is determined on working out its cost of construction at present day rate and allowing a suitable depreciation.

Different Types of Valuation Method:–a. Accounts Method

b. Plinth Area Rate and Cost Index method

c. Detailed or item wise method

d. Material and labour contract method

e. Comparable method

f. Quantity survey method

a. Accounts Method: This method is generally applicable in case where proper books are maintained by the

assessee and wherein all details are correctly mentioned duly supported by authentic vouchers and no defects are pointed out and the books are not rejected then the figures shown therein have to be followed for determining the cost. If the assessee has produced less vouchers for some of the materials, the same is estimated and added at the market rates.

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Similarly, the quantum of labour payment is assessed and if the assessee has maintained proper account, the total cost is worked out on the basis of details produced by him.

This method yields to a near to perfect valuation, if the accounts are correctly maintained.

b. Plinth Area Rates and Cost Index Method It is commonly used method for determining the cost of a building by comparing with

the known cost of a building. The cost of a building interalia depends on the major factors –

a. Area and specification of the building (covered by the plinth area rate)

b. Cost of materials and labour (covered under cost index)

c. Detailed or Item wise Method: Under this method, the quantities of all items of work are separately calculated.

Thereafter their rates are determined and the cost is arrived at.

This method is applicable only when the detailed construction drawings or completion drawings are available.

d. Materials and Labour Contract Method:a. Owner arranges for materials partly or fully.

b. Work is executed by labour contract which includes supply of material not supplied by the owner.

c. Labour contract may include execution of all items of work of separate contracts be given for main structure, water supply, sanitary, electrical wiring, electrical fitting, flooring, wood work, steel work etc.

For adopting this method valuer needs to find out the cost of all required materials provided by the assessee and the amount of work done by the labour contract, if contractor has provided any material then its cost should be accounted for.

Copies of the labour contract should be obtained. The standard parameters like builder's effort, consultancy charges, supervision charges etc. may be considered.

e. Comparable Method For Built Up Properties:–

(a) (Flats/Shops/Offices) In apartments and multistoried buildings:

The comparable method for valuation of properties like Flats/Shops/Offices in Apartments/Multistoried buildings can be adopted. The sale instances should be noted and tabled in the same manner as that of plots.

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Sr. No

Descrip-tion of

property

Built up

Area in Sqm.

Date of Sale / Trans-

fer

Area of the Plot

FSI/FAR of the plot

Land appur-tenant of Flat

Ap-parent consid-eration

Name of

seller / pur-

chaser

Reg-ister

No. & autori

1 2 3 4 5 6 7 8 9 10

(b) Sale instances for Built Up Properties:

For making the rates of built up properties most comparable with the property under consideration the following factors should be adjusted.

i. Location.

ii. Situation.

iii. Area.

iv. Floor Difference.

v. Specifications.

vi. Facilities / Services.

vii. Time-gap.

viii. Status (Lease or Freehold).

ix. Area of the Building.

x. Floor disposition.

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(c) Floor Disposition:

Fair Market Value of Residential flat/commercial premises should be determined by giving weightage for floor disposition in multistory building as follows:

i. Basement

Used for storage purpose 0.50A

Used otherwise 0.75A to 0. 90A

ii. Ground floor / Ist & Mezzanine floors A

iii. 2nd to 5th floor 0.95A

iv. 6th to 9th floor 0.90A

v. 9th floor and above 0.85A

A is the average unit cost of a flat.

In cities like Mumbai, the position is quite reverse in case of flats and multistoried buildings as the rates of upper floors go on increasing as compared to rate of G.F. and F.F. rates. The floors above Ground floor and Pent houses fetch the most, similarly location of flat in the same building in terms of sea-face view also plays as important role. Hence above factor should be carefully decided keeping in view the local trends and situations. Help of local guidelines for the place may also be considered to decide the floor-wise weightages.

f. Quantity survey method In this method, the property is studied in details and extent of physical deterioration

worked out in an endeavor to calculate depreciation.

INVESTIGATIONSa. Investigations made during the course of a valuation assignment must be appropriate

for the purpose of the valuation assignment and the basis(es) of value. References to a valuation or valuation assignment in this standard include a valuation review.

b. Sufficient evidence must be assembled by means such as inspection, inquiry, computation and analysis to ensure that the valuation is properly supported. When determining the extent of evidence necessary, professional judgement is required to ensure the information to be obtained is adequate for the purpose of the valuation.

c. Limits may be agreed on the extent of the valuer’s investigations. Any such limits must be noted in the scope of work.

d. When a valuation assignment involves reliance on information supplied by a party other than the valuer, consideration should be given as to whether the information is credible or that the information may otherwise be relied upon without adversely affecting the credibility of the valuation opinion. Significant inputs provided to the

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valuer (e.g., by management/owners), may require consideration, investigation and/or corroboration. In cases where credibility or reliability of information supplied cannot be supported, such information should not be used.

e. In considering the credibility and reliability of information provided, valuers should consider matters such as:

i. the purpose of the valuation,

ii. the significance of the information to the valuation conclusion,

iii. the expertise of the source in relation to the subject matter, and

iv. whether the source is independent of either the subject asset and/or the recipient of the valuation.

Eligibility to be registered as a Registered ValuerRule 3 of the Companies (Registered Valuers and Valuation) Rules, 2017 prescribes that following person are eligible to be registered as a Registered Valuer:

i. is a valuer member of a registered valuers organisation

ii. is recommended by the registered valuers organisation of which he is a valuer member for registration as a valuer;

iii. has passed the valuation examination under rule 5 within three years preceding the date of making an application for registration under rule 6;

iv. possesses the qualifications and experience as specified in rule 4;

v. is not a minor;

vi. has not been declared to be of unsound mind;

vii. is not an undischarged bankrupt, or has not applied to be adjudicated as a bankrupt;

viii. is a person resident in India;

ix. has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude, and a period of five years has not elapsed from the date of expiry of the sentence;

x. has not been levied a penalty under section 271J of Income-tax Act, 1961 (43 of 1961) and time limit for filing appeal before Commissioner of Income-tax (Appeals) or Income-tax Appellate Tribunal, as the case may be has expired, or such penalty has been confirmed by Income-tax Appellate Tribunal, and five years have not elapsed after levy of such penalty; and

xi. is a fit and proper person

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Asset classes


Graduate level Post graduate level

Land and Building

Graduate in Civil E n g i n e e r i n g , Architecture or town planning of a recognised University.

- 5 years of experience in the discipline after completing Graduation.


Graduate in Civil E n g i n e e r i n g , Architecture or town planning of a recognised University.

post-graduate in Civil Engineering, Architecture or town planning of a recognised University.



Graduate in a discipline specified by the Authority for a registered valuers organisation in its conditions of recognition.

post-graduate in valuation of land and building or real estate from a recognised university.



Any other graduate level qualification in accordance with rule 4 as may be specified by the Authority for a registered valuers organisation in its conditions of recognition.

Any other post graduate level qualification in accordance with rule 4 as may be specified by the authority for a registered valuers organisation in its conditions of recognition.



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Chapter 10 Valuation of Plant and Machinery

Plant and machinery valuation is a multi-disciplinary subject involving law, engineering, statistics, economics, insurance, industrial process, environment and planning. In addition, it is a complex process which requires multi-disciplinary approach. In setting up of any project or economic activity whose key objective is adding value, the basic starting point is valuation of plant and machinery.

Salient features of Valuation of Plant and Machinery• Complete utility of assets.

• Assess the monetary value of the of existing PME in consideration with the contribution to the profitability, market situation, type of PME & standard of maintenance.

• Determination of such worth is a valuation.

• Valuation majorly depend on the value’s judgment.

• Purpose of valuation.

• Whether condition of machinery can really satisfy the purpose of valuation.

• Assessment – whether any buyer can buy the existing set up as per valuation report or financial institutes can offer loan to existing owner for further expansion as per valuation report.

Factors to be Considered for Valuation • Availability of reliable information needed.

• Appropriateness of method with respect to the nature of asset & purpose of valuation should be given emphasis.

• Respective strength and weakness of possible approach and method

• Observable market information in all these methods is preferred.

Role & Function of a Valueri. Familiar with the process and types of machinery & equipment.

ii. Personally, visit the site and carry out survey.

iii. Take necessary photographs with date, which act as evidence of presence.

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Chap. 10 – Valuation of Plant and Machinery

iv. Description wherever necessary to be added in the form of notes to prepare proper valuation report with required photographs and justification.

v. Total of the stock of all the equipment's /machines in different departments and get the detailed information from the concerned staff/ manager of each section to know in detail about the working, productivity, accuracy, accident history etc.

vi. He needs to get maximum information from people from capital purchase, finance and other related managers to get the complete perspective of the company.

vii. Note down the specific inconsistencies with the supporting details in relation to the purpose of valuation which will help valuer in final report.

Purpose or Requirement of Valuation• Market: Value by comparing asset with identical or similar.

• Takeover: To know the total investment required.

• Merger: To know the exact investment with other plant.

• Sale /Purchase: Sale or purchase the plant against the return.

• Insurance: Amount at which machinery can be insured based on policy. This will call current replacement cost.

• Rating: CRISIL or MOODY rating, stock market rating etc.

• Insolvency: Recovery of loan by selling assets.

• Bank Finance: To get finance for existing or new project.

• Lease Finance: To take or offer plant on lease.

• Scrap: To work out the scrap value of junk machinery

• Liquidation: The net amount that can be realized if business is terminated and assets sold piecemeal on as is where is basis.

Approaches to Valuation of Plant and Machinery

1. Cost Approach This approach is based on the principle of substitution i.e. no prudent investor would

pay anything more for a property than it would cost to produce a substitute with similar utility as the subject. The cost approach for Plant, Machinery and Equipment is similar to the cost approach used in the real estate valuation. Using the cost approach, the appraiser starts with the current replacement or reproduction cost new of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence.

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2. Income Approach The value of a property can be estimated by measuring its expected future benefit to its

owner. This is a widely-accepted concept within the valuation community and among those using valuations.

Discounted Cash Flow, provides the present value of estimated future net income. This obviously involves the selection of an appropriate discount rate and the ability to estimate the future net cash flows with some degree of confidence. Clearly, this method can be applied to the analysis of market sales, but it can also be applied to properties that are rarely if ever sold but where there is an ascertainable future cash flow.

3. Market Approach Value is based on an analysis of market transactions involving similar properties-

plant or machine. This requires an analysis of sale prices and the terms of sales of comparable properties recently sold in the open market. The market comparison approach is generally appropriate for assets for which an established market exists such as motor vehicles, general plant and equipment, residential property etc.

4. Depreciated Replacement Cost An alternative valuation method sometimes employed is replacement cost and

depreciated replacement cost. This is adopted where specialised properties need to be valued on an existing use basis rather than for open market value. 'Existing Use Value' as a basis of valuation is adopted for properties that are not investment properties but are properties occupied for the purposes of the business. Within this definition there is a presumption that the property can be used for the foreseeable future only for the existing use.

5. Comparable Sales approach This approach provides the estimate of the value based on market prices paid and

current market listings. The whole idea is based on the notion that an informed buyer would not pay more for a property than the cost of the existing property with the same utility. The sales are analyzed and adjusted to reflect the conditions of the subject property. This analysis lets us to estimate the market value for the subject.

Phases of Valuation Procedures • Phase I: Terms of reference

• Phase II: Strategy of valuation

• Phase III: Physical verification (survey & inspection)

• Phase IV: Data collection & valuation analysis under different approaches to value.

• Phase V: Reconciliation

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Chap. 10 – Valuation of Plant and Machinery

Valuation StandardsIVS 300 dealing with the valuation of plant and equipment is applicable to the transactions involving plant, machinery and equipment, which has been discussed already in the previous chapter. Also, along with IVS 300, IVS 105 also throws light on the matter.

International Valuation Std. 105• Under, the International Financial Reporting Standards (IFRSs), Property Plant and

Equipment may be included on an entity’s balance sheet at either cost less depreciation less impairment or at fair value at the date of revaluation less depreciation less impairment. (IAS 16, paras. 29, 30 and 31). The fair value of items of plant and equipment is usually their market value determined by Valuer (IAS 16, para. 32). Plant and Equipment, together with other fixed assets, may be subject to other IFRSs, including IAS 2, and GN 3 Valuation of Plant and Equipment from International Valuation Standards Inventories; IAS 17, Leases; IAS 36, Impairment of Assets; IFRS 3, Business Combinations; and IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.

• International Valuation Application (IVA) 1, Valuation for Financial Reporting, sets out the valuation and valuation reporting requirements under the various IFRSs referred to above.

• The valuation approach and assumptions applicable to a valuation of plant and equipment for inclusion in a financial statement may be different from those appropriate for another purpose. A clear distinction should be made if values for different purposes are reported in the same document. Different valuation assumptions may be appropriate under different IFRSs and therefore it is important for the Valuer to be familiar with the basic requirements of the relevant standard, and to discuss the appropriate assumptions with the client before proceeding.

DepreciationDepreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Every asset is subject to wear and tear in the normal course of its use and also with passage of time. The cost of the asset is allocated over time and considered as expense. There are 2 types of computing depreciations used in practice.

a) Straight Line Method

b) Written Down Value Method

Note:– Scrap value is one of the most important consideration in computation of depreciation irrespective of method & more important in case of high value machine.

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Eligibility to be registered as a Registered Valuer for Valuation of Plant and Machinery

Asset classes


Graduate level Post graduate level

Plant and Machinery

Graduate in M e c h a n i c a l or Electrical Engineering of a recognised University.

- 5 years of experience in the discipline after completing Graduation


Graduate in M e c h a n i c a l or Electrical Engineering of a recognised University.

Post Graduate in Mechanical or Electrical Engineering of a recognised University.

3 years of experience in the discipline after completing Post Graduation


Graduate in valuation of machinery and plant from a r e c o g n i s e d university.

Po s t - g r a d u a t e degree in valuation of machinery and plant from a r e c o g n i s e d university.


as per syllabus specified under rule 5.

Any other graduate level qualification in accordance with rule 4 as may be specified by the authority for a registered valuers organisation in its conditions of recognition.

Any other post graduate level qualification in accordance with rule 4 as may be specified by the authority for a registered valuers o r g a n i s a t i o n registered valuers organisation in its conditions of recognition.



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Chap. 11 – Valuation of Intellectual Property Rights

Chapter 11 Valuation of Intellectual Property Rights

Meaning of Intellectual PropertyIntellectual Property is something which is created by mind. It refers to the ownership of intangible and non-physical goods. The concept of intellectual property relates to the fact that certain products of human intellect should be afforded the same protective rights that apply to physical property. Most developed economies have legal measures in place to protect both forms of property.

The unique characteristic of intellectual property is legal protection and this causes it to be a subset of intangibles of a business enterprise. Its purpose is to safeguard the rights of creators and inventors.

Categories of Intangible AssetsThere are different types of intangible assets which are often considered to fall in one or more of the following categories (or goodwill):

(a) Marketing-related: These are used primarily in marketing or promotion of products or services. For example trademarks, trade names, unique trade design and internet domain names.

(b) Customer-related: These include customer lists, backlog, customer contracts, and contractual and non-contractual customer relationships.

(c) Artistic-related: These arise from the right to benefits from artistic works such as plays, books, films and music, and from non-contractual copyright protection.

(d) Contract-related: These represent the value of rights that arise from contractual agreements. For example licensing and royalty agreements, service or supply contracts, lease agreements, permits, broadcast rights, servicing rights, employment contracts and non-competition agreements and natural resource rights.

(e) Technology-based: These arise from contractual or non-contractual rights to use patented technology, unpatented technology, databases, formulae, designs, software, processes or recipes.

Some of the intangible assets can fall in one or more of the above categories depending on its characteristics. For example a brand may represent a combination of the above categories.

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GoodwillGenerally, goodwill is any future economic benefit arising from a business, an interest in a business or from the use of a group of assets which has not been separately recognised in another asset. The value of Goodwill is typically measured as the residual amount remaining after the values of all identifiable tangible, intangible and monetary assets adjusted for actual or potential liabilities, have been deducted from the value of a business. It is often represented as the excess of the price paid in a real or hypothetical acquisition of a company over the value of the company’s other identified assets and liabilities.

Examples of intangibles created by business are stated below.

Intangible Assets created by business i.e. Intangibles which exist without legal protection (Unidentifiable Intangible Assets)

1. Assembled trained work force

2. Advertising programs

3. Distributor networks

4. Training materials

5. Customer loyalty

6. Supplier contracts

7. Management depth and experience

8. Subscriber base

9. Goodwill

Intellectual Property i.e. Intangibles which exist under legal protection* - (Identifiable Intangible Assets)

1. Patents (20 years)

2. Trademarks (10 years + indefinite renewals after 10 years)

3. Copyrights (60 years in General)

4. Industrial designs (10 years + 5 years extension)

5. Trade secrets are protected for unlimited period of time but a substantial element of secrecy must exist so that, except by the use of improper means, there would be difficulty in acquiring the information. Trade secrets are protected without registration.

6. Protection must be granted to trade names in each contracting State without the obligation of filing or registration.

As evident from the above, IP is a fairly broad term and can take many different forms. It is pertinent to understand some of the common types of IP. They are explained herein below:

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1. Patents: Protect functional expressions of an idea – not the idea itself. A machine, method/process, manufacture, compositions of matter, and improvements of any of these items can be patented. Thus, one can patent a design for the needle of a machine, or the method of making the machine, or a new way of assembling the needle in a machine. But one cannot patent the broad “idea” of a machine.

2. Copyrights: Protect the specific creative expression of an idea through any medium of artistic/creative expression – i.e., paintings, photographs, sculpture, writings, software, etc. A copyright protects one’s painting of a vineyard, but it would not prohibit another painter from expressing their artistry or viewpoint by also painting a vineyard.

3. Trademarks: protect any symbol that indicates the source or origin of the goods or services to which it is affixed. While a trademark can be extremely valuable to its owner, the ultimate purpose of a trademark is to protect consumers – that is, the function of a trademark is to inform the consumer where the goods or services originate. The consumer, knowing the origin of the goods, can make purchasing decisions based on prior knowledge, reputation or marketing.

Sometimes, a product can fall into more than one of the above categories. For example, computer software could be protected by all three viz. patent, copyright and trademark. The copyright would protect the artistic expression of the idea i.e., the computer code itself. The patent would protect the functional expression of the idea i.e., making online payment for any purchase. The trademark would indicate who made the computer software.

Another example is a logo of the company. It could be protected by both trademark and copyright. The trademark indicates that all products bearing the logo are from the same source. The copyright would protect the creative and artistic aspects of the logo.

Laws governing Intellectual Property in India (to check, confirm and update):1. The Trade Marks Act, 1999

2. The Copyright Act, 1957

3. The Patent Act, 1970

4. The Designs Act, 2000

5. The Geographical Indications of Goods (Registration and protection) Act, 1999

6. The Semiconductor Integrated Circuits Layout Design Act, 2000

7. The Protection of Plants & Varieties and Farmers Rights Act, 2001

8. The Biological Diversity Act, 2002

Accounting for Intellectual Property in Financial StatementsWhile some of the IP assets are recorded on a company's balance sheet, the true market value of this type of property is often difficult to determine reasonably.

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Some kinds of IP are considered capital assets and may be recorded on a company's balance sheet as intangible assets. Whereas, many forms of IP cannot be listed on the balance sheet as assets, but the value of such property tends to be reflected in the price of the stock. Management's ability to manage these effectively and turn a profit is just an example.

Accounting principles, generally, require that intangible assets such as the aforementioned forms of intellectual property be recorded in financial statements at cost or less. Internally developed intellectual property such as trade secrets or ideas most likely are not recorded on the balance sheet, because they have no directly associated costs or clear value.

Patents, trademarks and copyrights generally have associated costs and are usually capitalized as assets on the balance sheet. These must be amortized over the useful life of the asset. When intellectual property is purchased from another business, it is recorded on the balance sheet at cost and amortized over the remaining useful life of the asset.

Accounting standards require that intellectual property be recorded separately on the balance sheet from goodwill, which is another type of intangible asset.

However, there are certain differences in accounting practices of intangible assets followed under different Accounting Principles. Some of the similarities and/ or differences in accounting practices between Indian Generally Accepted Accounting Principles (IGAAP), International Financial Reporting Standards (IFRS), IFRS converged Indian Accounting Standards (IND AS) and US Generally Accepted Accounting Principles (USGAAP), are stated herein below:

Particulars IGAAP IFRS IND AS USGAAP

Intangible assets- measurement

Measured only at cost

Measured at cost or revalued amounts

Similar to IFRS Measured at cost

Intangible assets- useful life

Useful life may not be indefinite.

It is presumed that useful life will not exceed 10 years from the date it is available for use.

Useful life may be finite or indefinite.

A finite life constituted of the length of or the number of units of production or similar units.

Similar to IFRS Similar to IFRS

Intangible assets ( e x c l u d i n g g o o d w i l l ) - amortisation

Amortised over its useful life.

F i n i t e - l i f e intangible assets are amortised over their useful life.

Similar to IFRS F i n i t e - l i f e intangible assets are amortised over their useful life.

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Intangible assets ( e x c l u d i n g g o o d w i l l ) - revenue based amortisation

The amortisation method should reflect the pattern in which the asset’s economic benefits are consumed. If it is not reliably d e t e r m i n a b l e , straight line a m o r t i s a t i o n method should be used.

IGAAP does not specifically deal with revenue based a m o r t i s a t i o n except that Schedule II to the Companies Act, 2013 allows use of revenue based amortisation in certain cases.

Revenue based amortisation is inappropr ia te , except in certain circumstances.

Similar to IFRS, except on transition to IND AS, revenue based amortisation can be continued in certain specified i n t a n g i b l e s arising from s e r v i c e c o n c e s s i o n a r r a n g e m e n t s recorded in the year immediately preceding first IND AS reporting.

The amortisation method should reflect the pattern in which the asset’s economic benefits are consumed or used up. If it is not reliably d e t e r m i n a b l e , straight line a m o r t i s a t i o n method should be used.

Intangible assets- i m p a i r m e n t testing

At each balance sheet date, if there are indications of i m p a i r m e n t , i m p a i r m e n t testing needs to be carried out.

Both, indefinite life intangible assets and finite life intangible assets are required to be tested annually, or more frequently if there are indications, for impairment.

Similar to IFRS Both, Indefinite life intangible assets and finite life intangible assets are required to be tested annually or more frequently if there are indications, for impairment.

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Intangible assets with useful life exceeding 10 years are tested for impairment a n n u a l l y irrespective of indications being present or not.

For indefinite lived assets which do not generate cash flows i n d e p e n d e n t of other assets, are tested for impairment at the level of cash generating unit (CGU).

An entity may first assess qualitative factors in determining whether further i m p a i r m e n t testing is required.

S e p a r a t e l y r e c o r d e d i n d e f i n i t e lived assets are combined into one single unit of account if they operate as a single asset and tested for i m p a i r m e n t . Indefinite lived asset may not be tested in combination with a definite lived asset or goodwill.

Intangible assets-m e a s u r e m e n t of impairment charge

Impairment loss is identified by estimating the recoverable amount.

I m p a i r m e n t of indefinite lived assets is measured by comparing the r e c o v e r a b l e amount to carrying amount. The recoverable amount is higher of fair value less cost of disposal and value in use. The value in use is calculated with the help of present value of future cash flows.

Similar to IFRS I m p a i r m e n t of indefinite lived assets is measured by comparing the fair value to carrying amount.

I m p a i r m e n t of definite lived assets is measured by comparing its net realisable value to its carrying value (i.e. the u n a m o r t i s e d portion)

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I n t a n g i b l e assets- goodwill a m o r t i s a t i o n or impairment testing

Goodwill arising on amalgamation in the nature of purchase is amortised over five years.

Goodwill is not amortised.

It is tested annually, or more if there are indications, for impairment.

Similar to IFRS

I n t a n g i b l e s - I n t e r n a l l y d e v e l o p e d intangibles i.e. Research and D e v e l o p m e n t costs

Similar to IFRS Costs in research phase are expensed out whereas costs in development phase are c a p i t a l i s e d subject to demonstration of certain criteria.

Similar to IFRS Generally both research and d e v e l o p m e n t costs are expensed out except where specific rules apply in certain areas like development of software for third parties and that for internal use.

I n t a n g i b l e s - A c q u i r e d Research and D e v e l o p m e n t assets

No specific guidance

A c q u i r e d Research and D e v e l o p m e n t assets are recorded if it is probable that they will have future economic benefits. This criterion is g e n e r a l l y assumed to be met for separately a c q u i r e d intangible assets.

Similar to IFRS Research and D e v e l o p m e n t intangible assets acquired in an asset acquisition are capitalised only if they have an alternative future use.

VALUATION OF INTELLECTUAL PROPERTYIntellectual Properties are of a significant importance to a business. The valuation of these intangible assets is required to be done with utmost care. In case of some of the businesses, the value of these intangible asset rights carry value more than the other assets itself. The complexities in the valuation of Intellectual Properties are required to be handled very carefully. For valuing the intangible assets the valuer should follow IVS 210 (already discussed in previous chapter).

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Drivers of IP ValuationIntellectual property valuation is carried out for various reasons/ purposes, some of them being:

Mergers and acquisitions, joint ventures and bankruptcy

Negotiations to sell or license IP Rights

Fund raising through bank loans, venture capital, securitization and collateralization

Pricing

Strategic & internal decision making

Estate planning

Litigations support & arbitration proceedings, divorce proceedings

Financial Reporting

Tax planning and compliance

Parameters for IP valuationIP valuation is derived from a wide range of parameters such as:

market share

barriers to entry

legal protection

IP’s profitability

industrial and economic factors

growth projections

remaining economic life

new technologies

The valuation of IP encompasses an in-depth valuation study, quiet often by an industry expert. It involves:

Gathering relevant information through internal and/ or external sources, being information about the specific business that affects the IP value, the industry and economy in which it operates.

Utilising this information to develop financial models to estimate the IP value which are appropriate to the selected bases of value as mandated by:

• International Valuation Standards (IVS)

• International Financial Reporting Standards (IFRS)

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• Financial Accounting Standards Board (FASB)

• US Generally Accepted Accounting Principles (USGAAP)

• Uniform Standards of Professional Appraisal Practice (USPAP)

APPROACHES TO VALUATION OF IPThere are numerous approaches to Valuation of IP. The three principal valuation approaches mentioned under General Standards of International Valuation Standards (IVS) are:

1. MARKET APPROACH It estimates the fair value of IP based on similar market transactions of identical or

comparable assets. The market approach is based on the economic principle that the demand and supply forces of a free and unrestricted market determine the market price of an asset. It estimates the fair value of IP based on similar market transactions of identical or comparable assets. Data on such similar transactions could be obtained from several public sources, including specialized royalty rate databases.

Significant weight should be applied to market approach under following circumstances:

the subject asset has been recently sold

the subject asset or substantially similar assets are actively publicly traded

there are frequent and/or recent observable transactions in substantially similar assets

Additional circumstances where the valuer should consider application of any of the other approaches and weighing them to corroborate the valuation from market approach are:

transactions involving subject asset or substantially similar assets are not recent enough

the asset or substantially similar assets are publicly traded but not actively

the comparable assets for which information on market transactions is available have significant differences to subject asset

information on recent transactions is not reliable

critical element affecting the value of an asset is its market price rather than the cost of reproduction or its income producing ability

Even in cases where market approach is not used, market-based inputs should be maximised is the application of other approaches. While using market approach, if comparable market information does not relate to the exact or substantially the same asset, necessary adjustments should be made based on comparative analysis of qualitative and quantitative similarities and differences. These adjustments must

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be reasonable and should be documented with reasons. Also, while using market approach, selection of market multiples (which are derived from a set of comparables) requires judgment considering qualitative and quantitative factors.

Market Approach Methods(a) Comparable transactions method: This method uses information on transactions

involving assets that are same or similar to the subject asset. The key steps in Comparable transactions method are:

Identify the units of comparison used by the participants

Identify comparable transactions and calculate key valuation metrics for them

Perform a comparative analysis of qualitative and quantitative similarities and differences between comparable assets and subject asset

Make necessary adjustments to the valuation metrics

Apply adjusted valuation metrics to the subject asset

If multiple valuation metrics were used, reconcile the indications of value

Considerations while choosing comparable transactions:(i) Evidence of several transactions is preferable to a single transaction

(ii) Evidence from transactions of very similar assets provides better indication compared to those which require significant adjustments

(iii) Transactions closer to valuation date are more representative than older transactions

(iv) For most bases of value, the transactions should be arm’s length between unrelated parties

(v) Actual transactions provide better valuation evidence than intended transactions

Common differences between comparable transactions and subject asset that could warrant adjustments are:

• material characteristics (age, size, specifications etc.)

• relevant restrictions on subject asset or comparable asset

• geographical location and related economic and regulatory environments

• profitability

• historical and expected growth

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• yields/ coupon rates

• types of collateral

• unusual terms in comparable transactions

• marketability and control characteristics of the assets

• ownership characteristics (e.g. legal form of ownership, percentage held etc.)

(b) Guideline publicly traded comparable method:

This method uses information on publicly traded comparable that are similar to the subject asset. This method is similar to comparable transactions method except that since comparable are publicly traded, their detailed information is more easily/ readily available from public filings and is prepared under well understood accounting standards.

This method should be used only when subject asset is sufficiently similar to the publicly-traded comparable.

The key steps in Guideline publicly traded comparable method are:

Identify valuation metrics/ comparable evidence used by participants in relevant market

Identify relevant comparable and calculate key valuation metrics for those transaction

Perform comparative analysis of qualitative and quantitative similarities and differences between publicly-traded comparable assets and subject asset

Make necessary adjustments to reflect differences

Apply adjusted valuation metrics to the subject asset

If multiple valuation metrics were used, weight the indications of value

Considerations while choosing publicly-traded comparable(i) Consideration of multiple publicly-traded comparable is preferred to use of

single comparable

(ii) Evidence from similar publicly-traded comparable provides a better indication of value than those requiring significant adjustments

(iii) Actively traded securities provide more meaningful evidence than thinly-traded securities

Common differences between publicly-traded comparable and subject asset that could warrant adjustments are:

• material characteristics (age, size, specifications etc.)

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• relevant discounts and premiums (explained herein below in detail)

• relevant restrictions on subject asset or comparable asset

• geographical location and related economic and regulatory environments

• profitability

• historical and expected growth

• marketability and control characteristics of the assets

• type of ownership

Other Considerations in Market Approach Methods In market approach, the fundamental basis for making adjustments is to adjust

for differences between the subject asset and the comparable asset. Some of the most common adjustments made in market approach are known as discounts and premiums.

(i) Discount for Lack of Marketability (DLOM)

DLOM is applied when the comparable have a superior marketability compared to the subject asset. A readily marketable asset (eg. publicly traded securities) would have a higher value than an asset with long marketing period or restriction on selling (e.g. privately traded securities). DLOMs are generally calculated using option pricing models.

(ii) Control Premiums (or Marker Participant Acquisition Premiums or MPAPs) and Discounts for Lack of Control (DLOC)

MPAPs and DLOCs are generally applied to reflect differences between subject asset and comparables with respect to ability to control.

Control Premiums and DLOC are calculated by:

• analysis of cash flow enhancements or reductions in risk associated with control, or

• comparing prices paid for controlling interest in publicly traded securities to publicly traded price before such transaction is announced.

(iii) Blockage Discounts

Blockage discount is applied when the subject asset is a large block of shares in publicly-traded securities and owner is unable to sell quickly without negatively affecting publicly-traded price. It is quantified using a method which considers time over which subject shares could be sold without negatively impacting the publicly-traded price. While using Fair

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Value (bases of value) for financial reporting purposes, blockage discount is prohibited.

Specific requirements of ‘Intangible Assets’ Standard of IVS with respect to Market approach

• Market approach should be applied only if the following criteria are met:

(a) Information is available on arm’s length transactions involving identical or similar intangible assets on or near the valuation date.

(b) Sufficient information is available to allow the valuer to adjust for all significant differences between the subject intangible asset and those involved in transactions.

• Due to heterogeneous nature of intangible assets, it is rarely possible to find market evidence of transactions involving identical assets. If it is available, it is in respect of similar assets only.

• If evidence of price or valuation multiples is available, it should be adjusted to reflect the differentiating characteristics of the subject asset and the asset involved in the transactions. These differences may only be determinable at the qualitative level. However, if there are significant qualitative adjustments, any other appropriate valuation approach should be considered.

• Examples of cases where market approach is sometimes used are: broadcast spectrum, internet domain names and taxi medallions.

• Guideline transactions method is the only market approach method applicable to intangible assets.

• Guideline public company method is used in rare circumstances where intangible asset is publicly traded. For example Contingent Valuation rights (CVRs) that are tied to the performance of a particular product or technology.

2. INCOME APPROACH It estimates the fair value of IP by converting the future cash flows to a single current

value by using an appropriate discount rate. This approach is based on the principle that the value of an asset is intrinsic to the (expected) income flows it generates. It estimates the fair value of an asset by converting the future cash flows to its present value by using an appropriate discount rate. The most common Income approach method is the Discounted Cash Flow (DCF) method.

The other methods are variants of DCF method which use the same concepts as DCF method. The other methods as mentioned under ‘Intangible Assets’ Standard of International Valuation Standards (IVS) are:

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(a) Excess Earnings Method (EEM)

(b) Relief-from-royalty method

(c) Premium profit method or with-and-without method

(d) Greenfield method

(e) Distributor method

Significant weight should be applied to Income Approach under following circumstances

income producing ability of the asset is critical element from participants’ perspective

reasonable projections are available, but there are few relevant market comparable

Additional circumstances where the valuer should consider application of any of the other approaches and weighing them to corroborate the valuation from income approach are:

income producing ability of the asset is only one of the several factors affecting the value of the asset from participants’ perspective

significant uncertainty about the amount and timing of future income-related to the asset

lack of access to information

the asset has not yet begun generating income

A fundamental basis of income approach is that an investor expects a return on an investment which reflects the perceived level of risk in the investment.

Discounted Cash Flow (DCF) Method In DCF Method, the forecasted cash flows are discounted back to the valuation date to

arrive at the present value of the asset.

In some circumstances, DCF may include Terminal Value which represents the value of the asset at the end of the explicit projection period. In other circumstances, the value of an asset may be calculated solely using terminal value with no explicit projection period. This may be referred to as income capitalisation method.

The key steps in DCF method are:

(i) Choose the type of cash flow

(ii) Determine the explicit period

(iii) Prepare cash flow forecasts

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(iv) Determine whether terminal value is appropriate

(v) Determine discount rate

Concepts used in DCF Method

(i) Type of Cash Flow

The type of cash flow chosen should be in accordance with the participant’s viewpoints. For e.g. Cash flows and discount rates for real property are customarily developed on a pre-tax basis while cash flows and discount rates for businesses are normally developed on a post-tax basis. Also, the discount rate and other inputs must be consistent with the type of cash flow chosen.

The following factors should be considered while choosing the type of cash flow:

• cash flow to whole asset or partial asset- cash flow to whole asset is most commonly used.

• pre-tax or post-tax cash flow- if post-tax basis is used, tax rate should be consistent with basis of value, generally participant tax rate is used rather than owner specific one.

• nominal or real cash flow- nominal cash flows include expectations regarding inflation, unlike real cash flows and while using nominal cash flows, the discount rate should include the same inflation rate.

• currency of cash flows- choice of currency will impact assumptions related to inflation and risk.

When valuation currency is different than the functional currency, one of the two currency translation methods are used: (i) Discount cash flows in functional currency at discount rate appropriate for that functional currency and convert the present value of cash flows at spot rate on the valuation date (ii) Translate functional currency projections to valuation currency projections using currency exchange forward curve and discount these projections using a discount rate appropriate for valuation currency.

(ii) Explicit Forecast period

The choice of explicit forecast period will depend on the purpose of valuation, the nature of asset, the information available and the required bases of value. For eg. For an asset with short life, it is more likely to project the cash flow over its entire life as compared to a long-lived asset.

The following factors should be considered while choosing the explicit forecast period:

• Life of the asset

• Reasonable period for which reliable data is available

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• Minimum explicit period over which the asset will achieve stabilised level of growth and profits, after which a terminal value can be used

• For cyclical assets, one entire cycle should be considered

• For finite-lived assets, forecast over its full life

In some cases, where the asset has achieved stabilised level of growth and profits at the valuation date, an explicit forecast period is not necessary and the terminal value may form the only basis for value (also referred to as income capitalisation method).

The intended holding period of one investor should not determine the explicit forecast period unless if the valuation is undertaken to determine the investment value.

(iii) Cash Flow Forecasts

Cash flow for the explicit forecast period is constructed using prospective financial information (PFI) viz., projected income/ inflows and expenditure/ outflows.

PFI needs to be analysed for appropriateness of its underlying assumptions for the valuation purpose and required bases of value.

Projected cash flow should capture the amount and timing of all future cash inflows and outflows from the perspective appropriate to the basis of value. For example, if basis of value is market value, the cash flow should use PFI anticipated by the market participants and if basis of value is investment value, the cash flow should use PFI from the perspective of a particular investor.

When PFI reflects accounting income and expenses, it is preferable to use cash flow that would be anticipated by participants as the basis of valuations i.e. it should be adjusted by adding back non-cash expenses like depreciation and amortisation and deducting cash out flows relating to capital expenditure or changes in working capital.

Cash flow should be divided in to suitable periodic intervals (e.g. weekly, monthly, quarterly or annually) depending on the nature of asset, pattern of cash flows, data available and length of forecast period.

Different discount rates should be used for different type of cash flows depending on its level of risk.

Different type of cash flows could reflect any of these: (a) contractual or promised cash flow (b) the single most likely set of cash flow (c) the probability-weighted expected cash flow (d) multiple scenarios of possible future cash flow.

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(iv) Terminal Value & methods of calculating Terminal Value

Terminal Value is the estimated value of the asset at the end of forecast period, in cases where the asset is expected to continue beyond the explicit forecast period. The terminal value is then discounted back to valuation date normally using the same discount rate as applied to forecast cash flows.

The following factors should be considered for determining terminal value:

• Deteriorating/ finite lived asset or indefinite-lived asset

• Future growth potential beyond forecast period

• Pre-determined fixed capital expected to be received at the end of forecast period, if any

• Expected risk level at the time of calculating terminal value

• For cyclical assets, cyclical nature of the asset should be considered and accordingly peak or trough levels of cash flows should not be assumed in perpetuity

• Tax attributes at the end of forecast period and whether they would continue into perpetuity

Any reasonable method can be used for calculating Terminal Value. The three most commonly used methods for calculating Terminal Value are:

a. Gordon Growth Model/ Constant Growth Model (appropriate only for indefinite-lived assets): This method assumes that asset grows (or declines) at a constant rate into perpetuity.

b. Market Approach/ Exit Value (appropriate for both deteriorating /finite-lived assets and indefinite-lived assets): This method includes application of a market-evidence based capitalisation factor or a market multiple for calculating terminal value. While using this method, the requirements of market approach and its methods mentioned herein before should be complied with. Appropriate adjustments should be made for expected market conditions at the end of the explicit forecast period.

c. Salvage Value/ Disposal Cost (appropriate only for deteriorating /finite-lived assets): This method determines the terminal value as salvage value less costs to dispose the asset. In case the costs exceed the salvage value, the terminal value is negative and referred to as disposal cost or asset retirement obligation (ARO). This method is generally used in cases where assets have no relationship to the preceding cash flow. For example wasting assets like a mine or an oil well.

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(v) Discount Rate & methods for determining discount rate

The discount rate should reflect the time value of money, the risks associated with the type of cash flow and the future operations of the asset.

There are various methods of determining the discount rate, the most common being:

a. Capital asset pricing model (CAPM)

b. Weighted average cost of capital (WACC)

c. Observed/ inferred rates/ yields

d. Internal rate of return (IRR)

e. Weighted average return on assets (WARA)

f. Build-up method (used only in absence of market inputs)

The following factors should be considered in developing a discount rate:

• Risk associated with the projections in the cash flows

• Type of asset being valued

• Rates implicit in market transactions

• Geographic location of asset or location of markets where it would trade

• Life/ term of the asset and the consistency of inputs (eg. risk free rate for an asset with 3 year life would be different from that of a 30 year old)

• Type of cash flow

• Bases of value applied ( for most bases of value, discount rate should be developed from the participant’s perspective)

Specific requirements of ‘Intangible Assets’ Standard of IVS with respect to Income approach:

• The following Income approach methods are discussed in Intangible Assets Standard of IVS:

a. Excess Earnings Method (EEM)

b. Relief-from-royalty method

c. Premium profit method or with-and-without method

d. Greenfield method

e. Distributor method

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• Each of these methods is further described herein below:

• Excess Earnings Method (EEM):

Under this method, the value of an intangible asset is estimated as the present value of cash flows attributable to the subject intangible asset after excluding the proportion of cash flows that are attributable to other assets required to generate the cash flows (“contributory assets”).

Contributory assets are assets used in conjunction with the subject intangible asset in realisation of prospective future cash flows associated with the subject intangible asset. Contributory assets often include working capital, fixed assets, assembled workforce and identified intangible assets other than the subject intangible asset.

The three EEMs are:

• Multi-period excess earnings method (MPEEM), where excess earnings method is applied using several periods of forecasted cash flows,

• Single-period excess earnings method, where a single period of forecasted cash flows is used

• Capitalised excess earnings method or the Formula method, where a single period of forecasted cash flows is capitalised

Most intangible assets have economic lives exceeding one period, frequently follow non-linear growth/decay patterns and may require different levels of contributory assets over time. So the MPEEM is the most commonly used method as it offers the most flexibility and allows valuers to explicitly forecast changes in such inputs.

The capitalised excess earnings method or formula method is generally only appropriate if the intangible asset is operating in a steady state with stable growth/decay rates, constant profit margins and consistent contributory asset levels/charges.

Irrespective of the method followed, the key steps in applying Excess earning method are:

(i) Forecast the amount and timing of future revenues driven by the subject asset and related contributory asset

(ii) Forecast the amount and timing of expenses that are required to generate the revenue from the subject and related contributory assets

(iii) Exclude the expenses related to creation of new intangible assets that are not required to generate the forecasted revenue and expenses.

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(iv) Identify the contributory assets that are needed to achieve the forecasted revenue and expenses.

(v) Determine the appropriate rate of return on each contributory asset based on an assessment of the risk associated with that asset.

(vi) In each forecast period, deduct the required returns on contributory assets from the forecast profit to arrive at the excess earnings attributable to only the subject intangible asset

(vii) Determine the appropriate discount rate for the subject intangible asset and present value or capitalise the excess earnings, and

(viii) If appropriate for the purpose of the valuation, calculate and add the tax amortisation benefit (TAB) for the subject intangible asset, if available in the subject tax jurisdiction.

Contributory Asset Charges (CACs) should be made for all the current and future tangible, intangible and financial assets that contribute to the generation of the cash flow. Where any such asset is involved in more than one line of business, its CAC should be allocated to the different lines of business involved.

CAC for elements of goodwill: CACs should be applied for elements of goodwill only if facts and circumstances of the situation warrant it. Assembled workforce is typically the only element of goodwill for which a CAC should be taken as it is quantifiable. Hence, there should be a strong basis for applying CACs for any elements of goodwill other than assembled workforce.

CACs are generally computed on an after-tax basis as a fair return on the value of the contributory asset, and in some cases a return of the contributory asset is also deducted. The appropriate return on a contributory asset is the investment return a typical participant would require on the asset. The return of a contributory asset is a recovery of the initial investment in the asset. There should be no difference in value regardless of whether CACs are computed on a pre-tax or after-tax basis.

If the contributory asset is not wasting in nature, like working capital, only a fair return on the asset is required.

For contributory intangible assets that were valued under a relief-from-royalty method, the CAC should be equal to the royalty (generally adjusted to an after-tax royalty rate).

When the company has more than one intangible asset which generates the same revenue, the EEM should be applied only to a single intangible asset for any given stream of revenue and income (generally the primary or most

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important intangible asset) and an alternative method should be used for the other asset.

However, if each of the intangible assets (for example different technology being used by different product lines) generates distinct revenue and profit, the excess earnings method may be applied in the valuation of each of these intangible assets (i.e. different technologies).

• Relief-from-royalty (RfR) method:

Under this method, the value of an intangible asset is determined by reference to the value of the hypothetical royalty payments that would be saved through owning the asset, as compared with licensing the intangible asset from a third party. Conceptually, it would mean the DCF method applied to the present value of cash flows that the owner of the intangible asset could receive through licensing the intangible asset to third parties.

The key steps in applying RfR method are:

(i) Develop projections associated with the subject intangible asset for its life. The most common metric projected is revenue or per-unit royalty in certain cases.

(ii) Develop a royalty rate. The two methods of deriving hypothetical royalty rates are (a) a rate based on market royalty rates, where comparable intangible assets exist and are licensed on an arm’s length basis on a regular basis (b) a rate based on split of profits that would be paid in an arm’s length transaction.

(iii) Apply the selected royalty rate to the projections to arrive at royalty payments avoided by owning the asset.

(iv) Estimate any additional expenses like upfront payments required to be made by the licensee to the licensor. Depending on whether the royalty is “gross” or “net”, the valuation should exclude or include, respectively, a deduction for expenses such as maintenance, marketing or advertising expenses related to the hypothetically licensed asset.

(v) Arrive at after-tax savings associated with ownership of the asset by applying the appropriate tax rate, if hypothetical costs and royalty payments are tax deductible.

(vi) Determine the appropriate discount rate for the subject intangible asset and present value or capitalise the savings associated with ownership of the intangible asset

(vii) Calculate and add tax amortisation benefit (TAB) for the asset, if appropriate, for the valuation purpose.

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The selection of a royalty rate within a range of observed transactions and/or the range of profit available to the subject intangible asset in a profit split method depends on the characteristics of the subject intangible asset and the environment in which it is utilised. Hence, irrespective of the method used to arrive at the royalty rate, its selection should consider the following factors:

Competitive environment,

Importance of the subject intangible asset to the owner and

Life cycle of the subject intangible.

Also, when selecting a royalty rate, the following should be considered:

the royalty rate which the participants would be willing to pay depending on their profit levels and the relative contribution of the licensed intangible asset to that profit.

the specific rights transferred to the licensee and any limitations (when considering observed royalty transactions).

structuring of the payments under the licensing agreement, including whether there are upfront payments, milestone payments, puts/calls to acquire the licensed property outright, etc.

• With-and-Without method or Premium Profit Method

This method estimates the value of an intangible asset by comparing two scenarios: one in which the business uses the subject intangible asset and one in which the business does not use the subject intangible asset (but all other factors are kept constant).

The comparison of the two scenarios can be done in two ways:

(a) value of intangible asset is the difference in the business values under each scenario, and

(b) value of intangible asset is the present value of difference between the profits in the two scenarios for each future period

While valuing under either method, the following factors should be considered:

the impact on the entity’s profit,

differences between the two scenarios in working capital needs and capital expenditures

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The With-and-Without method is more often used in the valuation of non-competition agreements. It is also used in the valuation of other intangible assets in certain circumstances.

The key steps in applying the with-and-without method are to:

(i) prepare cash flows in the “with” scenario i.e., projections of revenue, expenses, capital expenditures and working capital needs for the business assuming the use of all of the assets of the business including the subject intangible asset.

(ii) use an appropriate discount rate to calculate the present value the future cash flows in the “with” scenario, and/or calculate the value of the business in the “with” scenario,

(iii) prepare cash flows in the “without” scenario i.e. projections of revenue, expenses, capital expenditures and working capital needs for the business assuming the use of all of the assets of the business except the subject intangible asset.

(iv) use an appropriate discount rate for the business to calculate, present value the future cash flows in the “without” scenario and/or calculate the value of the business in the “without” scenario,

(v) deduct the present value of cash flows or the value of the business in the “without” scenario from the present value of cash flows or value of the business in the “with” scenario, and

(vi) calculate and add the tax amortisation benefit (TAB) for the subject intangible asset, if appropriate for the purpose of the valuation

(vii) In certain cases, additionally, the difference between the two scenarios may need to be probability-weighted. For example, when valuing a non-competition agreement, the individual or business subject to the agreement may choose not to compete, even if the agreement were not in place.

The cash flow projections should reflect the differences in value between the two scenarios instead of using different discount rates in the two scenarios.

• Greenfield method

Under this method, the value of the subject intangible is determined using cash flow projections that assume the only asset of the business at the valuation date is the subject intangible. All other tangible and intangible assets must be bought, built or rented.

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When considering the cost of building or buying the contributory assets, the cost of a replacement asset of equivalent utility is used rather than a reproduction cost.

This method is frequently used to estimate the value of “enabling” intangible assets like franchise agreements and broadcast spectrum.

The key steps in applying the greenfield method are:

(i) prepare projections of revenue, expenses, capital expenditures and working capital needs for the business assuming the subject intangible asset is the only asset owned by the subject business at the valuation date, including the time period needed to “ramp up” to stabilised levels.

(ii) estimate the timing and amount of expenditures related to the acquisition, creation or rental of all other assets needed to operate the subject business.

(iii) using an appropriate discount rate for the business, present value the future cash flows to determine the value of the subject business with only the subject intangible in place.

(iv) calculate and add the tax amortisation benefit (TAB) for the subject intangible asset, if appropriate for the purpose of the valuation.

• Distributor method or Disaggregated method:

This method is a variation of multi-period excess earnings method. It is sometimes used to value customer-related intangible assets when another intangible asset (for example, technology or a brand) is deemed to be the primary or most significant intangible asset and is valued under MPEEM.

In this method, information on profit margins earned by distributors is used to estimate the excess earnings attributable to customer-related intangible assets, the reason being that distributors generally only perform functions related to distribution of products to customers rather than development of intellectual property or manufacturing. The underlying theory of the distributor method is that businesses that are comprised of various functions are expected to generate profits associated with each function.

The key steps in applying the distributor method are to:

(i) prepare projections of revenue associated with existing customer relationships.

(ii) calculate the profit margins of comparable distributors that have customer relationships similar to the subject business and,

(iii) apply the distributor profit margin to the projected revenue,

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(iv) identify the contributory assets related to performing a distribution function that are needed to achieve the forecast revenue and expenses like working capital, fixed assets and workforce.

(v) determine the appropriate rate of return on each contributory asset based on an assessment of the risk associated with that asset.

(vi) in each forecast period, deduct the required returns on contributory assets from the forecast distributor profit to arrive at the excess earnings attributable to only the subject intangible asset.

(vii) present value the excess earnings using an appropriate discount rate.

(viii) calculate and add the tax amortisation benefit (TAB) for the subject intangible asset, if appropriate for the purpose of the valuation.

3. COST APPROACH It estimates the fair value of IP by calculating the current replacement cost or

reproduction cost of the asset and making deductions for obsolescence. The cost approach is based on the economic principle of substitution that an investor will pay no more for an asset than the cost to obtain, by purchasing or constructing, a substitute asset of equal utility, whether by purchase or by construction. It estimates the value by calculating the current replacement cost or reproduction cost of an asset and making deductions for physical deterioration and obsolescence.

Significant weight should be applied to Cost Approach under the following circumstances:

Participants should be able to recreate an asset with substantially same utility without regulatory or legal restrictions and quickly enough such that the participant would be unwilling to pay any significant premium to use the subject asset immediately.

The asset is not directly income generating thereby rendering Income Approach and Market Approach unfeasible and/or

The bases of value being used is fundamentally based on replacement costs

Additional circumstances where the valuer should consider application of any of the other approaches and weighing them to corroborate the valuation from cost approach are:

There are potential legal or regulatory hurdles or significant time involved in recreating the asset by the participants

When cost approach is being used as a reasonableness check for other approaches

The asset was recently created

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For a partially completed asset, its value generally reflects the costs incurred to date to create it and the expectations of participants regarding its value on completion. But, additional adjustment for profit and risk needs to be made by considering the costs and time needed to complete the asset.

Cost approach Methods:

The most common cost methods are:

(a) Replacement Cost Method:

It indicates fair value by calculating the cost of obtaining a similar asset offering equivalent utility. Replacement cost is the cost relevant to determining the price that a participant would pay as it is based on replicating the utility of the asset and not the exact physical properties of the asset. After adjustments for physical deterioration and obsolescence, it is called depreciated replacement cost.

The key steps in replacement cost method are:

(i) Calculate all of the costs required to create or obtain an asset offering equivalent utility

(ii) Determine depreciation relating to obsolescence associated with subject asset

(iii) Deduct total depreciation from total costs to arrive at the value

Replacement cost is generally that of a modern equivalent asset which provides similar function and equivalent utility as the subject asset, but which is of a current design and made using current cost-effective materials and techniques

(b) Reproduction Cost Method:

It indicates fair value by calculating the cost of recreating a replica of the asset. This method is appropriate only under following circumstances:

- The cost of modern equivalent asset is more than the cost of recreating a replica

- The utility of the subject asset can only be provided by the replica rather than a modern equivalent asset

The key steps in reproduction cost method are:

(i) Calculate all of the costs required to create an exact replica of the subject asset.

(ii) Determine depreciation relating to obsolescence associated with subject asset

(iii) Deduct total depreciation from total costs to arrive at the value

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(c) Summation Method or Underlying Asset Method

It indicates fair value by adding the separate values of the asset’s component parts. This method is generally used for:

• Investment companies,

• Other types of assets or entities for which value of primarily a factor of their holdings

The key steps in reproduction cost method are:

(i) Value each of the component assets that are a part of the subject asset using appropriate valuation approaches and methods

(ii) Add the value of the component assets to arrive at the value

Considerations in Cost Approach Methods

(i) Cost Considerations

Cost Approach should capture all costs that would be incurred by a participant.

Cost elements should include the direct and indirect costs that would be required to replace/ recreate the asset as of the valuation date. Common items of direct costs are material and labour. Common items of indirect costs are transportation, installation, professional fees (design, legal etc.), other fees or commissions, overheads, taxes, finance costs, profit margin.

Caution needs to be exercised while including finance costs and profit margins. Costs are derived from actual, quoted or estimated prices by third parties and these costs will already include a third parties’ desired level of profit.

Adjustments to ‘actual cost incurred to create the subject asset’ may be required to reflect (a) cost fluctuations between the date on which cost was incurred and the valuation date, and (b) any exceptional costs or savings that are reflected in cost data but might not arise in creating an equivalent.

(ii) Depreciation/ Obsolescence

Depreciation referred to in Cost Approach differs from accounting depreciation. Here, depreciation refers to adjustments made to the estimated cost of creating an asset of equal utility to reflect the impact on value of any obsolescence affecting the subject asset.

Depreciation adjustments are required for following types of obsolescence:

(a) Physical obsolescence - It is the loss due to physical deterioration of subject asset. It is measured in two ways curable physical obsolescence and incurable obsolescence.

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(b) Functional obsolescence – It is the loss arising from inefficiencies in subject asset as compared to its replacement. The two types of functional obsolescence are Excess Capital Cost and Excess Operating Cost.

(c) External or Economic obsolescence – It is the loss due to economic or locational factors external to the asset. It may arise when external factor affects an individual asset or all the assets of a business.

Depreciation/ Obsolescence should consider physical and economic life of the asset.

Most of the types of obsolescence (except some types of economic/ external obsolescence), are measured by comparing the subject asset with the hypothetical asset on which the replacement or reproduction cost is based.

Cash or cash equivalents do not suffer obsolescence and are not adjusted.

Marketable assets are not adjusted below their market value determined using market approach.

Specific requirements of ‘Intangible Assets’ Standard of IVS with respect to Cost approach:

There are two main methods that fall under the cost approach: replacement cost and reproduction cost. The replacement cost is most commonly applied to the valuation of intangible assets because most of the intangible assets do not have physical form that can be reproduced and for assets which can be reproduced like software, its value is generally derived from its function/utility rather than its exact lines of code.

The cost approach is used only when no other approach is able to be applied. An attempt should be made to identify an alternative method before applying the cost approach in situations where the subject asset does not meet the criteria for applying significant weight to cost approach in as required by general standards of IVS, mentioned hereinbefore.

The cost approach is commonly used for intangible assets such as the following:

a. acquired third-party software,

b. internally-developed and internally-used, non-marketable software, and

c. assembled workforce.

Considerations while applying the replacement cost method:

(i) the direct and indirect costs of replacing the utility of the asset, including labour, materials and overhead,

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(ii) whether the subject intangible asset is subject to obsolescence - i.e. economic obsolescence in respect of intangible assets as they do not become functionally or physically obsolete,

(iii) whether it is appropriate to include a profit mark-up on the included costs since an asset acquired from a third party would presumably reflect their costs of creating the asset and some form of profit to provide a return on investment. Under bases of value that assume a hypothetical transaction, it may be appropriate to include an assumed profit mark-up on costs. The costs developed based on estimates from third parties would be presumed to already reflect a profit mark-up,

(iv) opportunity costs may also be included, which reflect costs associated with not having the subject intangible asset in place for some period of time during its creation.

Special Considerations for Intangible Assets as mentioned in Intangible Asset Standard of IVS

The following are the special considerations to be addressed for valuation of intangible assets:

(i) Discount Rates/Rates of Return for Intangible Assets:

As observable market evidence of discount rates for intangible assets is rare, selecting discount rates is very challenging and requires significant professional judgment.

An assessment of risk associated with the intangible asset should be carried out and observable discount rate benchmarks should be considered.

Considerations for risk assessment:

a. intangible assets often have higher risk than tangible assets,

b. if an intangible asset is highly specialised to its current use, it may have higher risk than assets with multiple potential uses,

c. single intangible assets may have more risk than groups of assets (or businesses),

d. intangible assets used in risky (sometimes referred to as non-routine) functions may have higher risk than intangible assets used in more low-risk or routine activities,

e. the life of the asset i.e. intangible assets with longer lives generally have higher risk,

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f. intangible assets with more readily estimable cash flow streams, such as backlog, may have lower risk than similar intangible assets with less estimable cash flows, such as customer relationships.

Discount rate benchmarks are rates that are observable based on market evidence or observed transactions. The following are some of the benchmark rates which should be considered while valuing intangible assets:

a. risk-free rates with similar maturities to the life,

b. cost of debt or borrowing rates with maturities similar to the life of the subject intangible asset,

c. cost of equity or equity rates or return for participants,

d. weighted average cost of capital (WACC) of participants or of the company owning/using the subject intangible asset,

e. in contexts involving a recent business acquisition including the subject intangible asset, the Internal Rate of Return (IRR) for the transaction should be considered, and

f. in contexts involving a valuation of all assets of a business, a weighted average return on assets (WARA) analysis should be performed to confirm reasonableness of selected discount rates.

(ii) Intangible Asset Economic Lives:

Economic life is an important consideration in the valuation of an intangible asset, particularly under the income approach. Economic life of an intangible asset is a different than the remaining useful life for accounting or tax purposes.

Economic life may be a finite period limited by legal, technological, functional or economic factors; other assets may have an indefinite life.

Factors to be considered in making an assessment of the economic life:

a. Legal, technological, functional and economic factors: These must be considered individually and together. For example, a patented technology may have a remaining useful (legal) life of 4 years but its economic life may be just two years since a competitor is expected to hit the market with a new and improved technology. Alternatively, the economic life of a patented technology could exceed its useful legal life if the technology has value in production. E.g. Production of a generic drug beyond the expiration of the patent.

b. Pattern of use or replacement of the asset: Certain intangible assets may be abruptly replaced when a new, better or cheaper alternative

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becomes available, while others may be replaced slowly over time, such as when a software developer releases a new version of software every year but only replaces a portion of the existing code with each new release.

c. Attrition: Attrition is a key factor in estimating an economic life and cash flows of/ for valuation of customer-related intangibles. Attrition applied in the valuation of intangible assets is a quantification of expectations regarding future losses of customers. While it is a forward-looking estimate, attrition is often based on historical observations of attrition. There are a number of ways to measure and apply historical attrition:

• a constant rate of loss (as a percentage of prior year balance) over the life of the customer relationships may be assumed if customer loss does not appear to be dependent on age of the customer relationship,

• a variable rate of loss may be used over the life of the customer relationships if customer loss is dependent on age of the customer relationship. In such circumstances, generally younger/new customers are lost at a higher rate than older, more established customer relationships,

• attrition may be measured based on either revenue or number of customers/customer count as appropriate, based on the characteristics of the customer group,

• customers may need to be segregated into different groups based on geography, size of customer and type of product or service purchased, type of end-user customer and

• the period used to measure attrition may vary depending on circumstances. For example, in case a monthly subscriber customer, one month’s absence of revenue may indicate a loss of that customer. In contrast, for larger industrial products, a customer might not be considered “lost” unless there have been no sales to that customer for a year or more.

The application of any attrition factor should be consistent with the way attrition was measured. Correct application of attrition factor in first projection year (and therefore all subsequent years) must be consistent with form of measurement.

a. If attrition is measured based on the number of customers at the beginning-of-period versus end-of-period (typically a year), the attrition factor should be applied using a “mid-period” convention

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for the first projection year (as it is usually assumed that customers were lost throughout the year).

b. If attrition is measured by analysing year-over-year revenue or customer count, the resulting attrition factor should generally be applied without a mid-period adjustment.

Revenue-based attrition may include growth in revenue from existing customers unless adjustments are made. It is generally a best practice to make adjustments to separate growth and attrition in measurement and application. It is a best practice to input historical revenue into the model being used and check how closely it predicts actual revenue from existing customers in subsequent years. If attrition has been measured and applied appropriately, the model should be reasonably accurate.

(iii) Tax Amortisation Benefit (TAB):

In many tax jurisdictions, intangible assets can be amortised for tax purposes, reducing a taxpayer’s tax burden and effectively increasing cash flows. Depending on the purpose of a valuation and the valuation method used, it may be appropriate to include the value of TAB in the value of the intangible.

If the market or cost approach is used to value an intangible asset, the price paid to create or purchase the asset would already reflect the ability to amortise the asset. However, in the income approach, a TAB needs to be explicitly calculated and included, if appropriate.

For some valuation purposes, such as financial reporting, the appropriate basis of value assumes a hypothetical sale of the subject intangible asset. In such cases, generally, a TAB should be included when the income approach is used because a typical participant would be able to amortise an intangible asset acquired in such a hypothetical transaction. For other valuation purposes, the assumed transaction might be of a business or group of assets. For those bases of value, it may be appropriate to include a TAB only if the transaction would result in a step-up in basis for the intangible assets.

Any of the following discount rates could be used for calculating a TAB:

a. a discount rate appropriate for a business utilising the subject asset, such as a weighted average cost of capital (WACC). The reason for using WACC is that, since amortisation can be used to offset the taxes on any income produced by the business, a discount rate appropriate for the business as a whole should be used, or

b. a discount rate appropriate for the subject asset (i.e. the one used in the valuation of the asset). The reason for using this rate is that

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the valuation should not assume the owner of the subject asset has operations and income separate from the subject asset and that the discount rate used in the TAB calculation should be the same as that used in the valuation of the subject asset.

4. DIRECT APPROACH The direct approach is based on the current value of shares of intellectual property in

an Intellectual Property (IP) Share Market.

5. PAY-OFF METHOD Using the pay-off method on top of the four above mentioned methods is a way to

enhance the valuation and analysis of intellectual property.

6. OPTION-BASED METHOD Differently from the other methods, the option methodology takes into consideration the

options and opportunities related to the investment. It relies on option pricing models (e.g., Black-Scholes) for stock options to achieve a valuation of a given intellectual property asset.

QUALITATIVE APPROACH This method, also commonly referred as evaluation, does not rely on analytical data. In fact, the valuation in this method is performed through the analysis of different indicators with the purpose of rating the intellectual property right, i.e. of determining its importance.

The indicators cover all the aspects that can impact the value of an intellectual property asset, covering legal aspects, the technology level of the innovation, market details and company organisation. Commonly, the method is implemented through a questionnaire comprising all these different criteria. Examples of questions included in such questionnaires can be:

• How would you define the intellectual property innovation compared to the actual state of the art?

• Which level of its life cycle has the intellectual property right (e.g. patent) reached?

• What is the geographic coverage of the reference market?

SELECTING THE RIGHT VALUATION METHODSelecting the valuation method to use in a given situation is complex. Several factors should be considered in the procedure, such as the type of intellectual property at stake, the level of development of the technology as well as the purpose of the valuation. The advantages and disadvantages of each methodology should also be weighted. There is no specific rule on this matter. However, there are some situations where certain methods are more likely to be used, even though in theory all methods may be applied.

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The table below gives the situations when which approach should be considered along-with advantages and disadvantages of using each of the approaches and examples of intangible assets with the preferred/ likely valuation approach and/ or method.

Method When/Why Advantages Disadvantages Type of IP & Preferred Approach

QUAN-TITA-TIVE

Market-based Valuation for internal purposes

Valuation for IP transactions

Valuation in litigation situations

Trade mark valuation

Accuracy, since it is close to market reality

Objectivity

May be difficult to gather comparable or similar data, since transactions are often confidential

Market approach is a less preferred approach for valuation of intangibles due to difficulty in getting market evidence of identical asset transactions and requirement of significant adjustments to reflect differences.

Market approach (guideline transactions method-preferred) is sometimes used for valuation of:

(a) Broadcast spectrum,

(b) Internet domain names

(c) Taxi medallions

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Market approach (guideline publicly company method) is sometimes used for publicly traded intangibles:

(d) Contingent Value Rights (CVRs)

Income-based Valuation for fund raising

Analytic May be difficult to use in high risk sectors

Subjective assumptions can be made

Income approach is the most common method used for valuation of intangibles.

Income approach is frequently used for valuation of:

(a) technology,

(b) customer-re-lated intan-gibles (e.g., backlog, contracts, re-lationships),

(c) trade names/ trademarks/brands,

(d) operating licenses (e.g. franchise agreements,

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gaming licenses, broadcast spectrum),

(e) non-competi-tion agree-ments.

Cost-based Valuation of an asset in the early stages of development

Cases where there is no market revenue data

Accounting and tax purposes

Simplicity

Information gathered easily since most of it is in the accounting sheets

May be difficult to isolate the costs related to the intellectual property assets from the other research costs

The economic benefits associated with the assets are not taken into account

Cost approach is generally not preferred for valuation of intangibles.

Only in appropriate circumstances, it is used for valuation of:

(a) Acquired third-party software,

(b) Internally-developed and internally-used, non-marketable software,

(c) Assembled workforce.

Option-based Valuation of an asset in the early stages of development

Sectors of high uncertainty

Deeper analysis since it takes into account the uncertainty of potential cash-flows

Complexity

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QUALI-TATIVE

Qualitative method

Internal management decision making

Simplicity Subjective

ALTERNATE APPROACHES TO THE VALUATION OF INTELLECTUAL PROPERTYIn addition to the traditional methods viz. Market Approach, Income Approach and Cost Approach, used to value intellectual property, several alternative methods are available. Some are modifications of the orthodox approaches with which most are familiar, but many other choices exist to value these complex assets. Below is a summary of these which serves as a brief introduction to alternative intellectual property valuation approaches.

Continuing DevelopmentsAs part of a still developing discipline, there are at least 25 alternative valuation techniques to be employed. Some things in life offer the luxury of “one size fits all,” however, the orthodox valuation measures that most of us are familiar with, namely the market, income and cost approach, are often modified even slightly to meet the needs of both the IP that is being measured, the data available, as well as the context of the valuation. The methods being explained below are frequently associated with a certain IP asset. An example of this is the Venture Capital Method, which is a technique that derives a value for a patent from the cash flows that arise over the asset’s life. Although it is similar to the income approach that utilizes a discount cash flow analysis (DCF), it possesses two differentiating factors: a fixed, non-market based discount rate is used and there is no explicit adjustment for the probability of success.

These have been broken up into two groups:

Group A: Generally accepted and

Group B: Specialized/proprietary.

Group A – Generally Accepted

1. Brand Contribution Methodology The Brand Contribution Methodology is another market-based methodology for valuing

IP. The contribution made by the brand may be separated from the profit contributed from other elements of the business in multiple ways: (1) comparing costs charged by a manufacturer and distributor of the unbranded equivalent (also known as the “utility product”); (2) if one eliminates the value added by other assets, the appropriate return on capital employed with respect to the product may be deducted (this includes assets such as physical distribution systems, fixed assets, etc. ; (3) the rate of return (or “profitability”) of the business can be compared with the rate of return of a

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comparable unbranded business (which is known as the “premium profits” method); and (4) comparing the premium price earned by the brand over the retail price of its comparable generic equivalent (known as the “retail premium” method).

2. Technology Factor Method As the number of digital intangible assets rise, using The Technology Factor Method

becomes all the more common because it is applicable only to technology. By measuring a technology’s contribution to a business’ total revenue, an asset’s value can be determined. Specifically, the Technology Factor Method is another method that is similar to the DCF method with respect to the calculation of an IP’s risk-free net present value. Once the NPV has been calculated, it can then be multiplied with an associated risk factor (what we will refer to as the “technology factor”). The Technology Factor value incorporates the intellectual property’s strengths and weaknesses associated with the related legal, market and economic risks.

3. Venture Capital Method Analyzing the value of future cash flows over an asset’s life is a common technique

used to value intellectual property, which is precisely how the Venture Capital method works. Although similar to the common DCF method, it is different in that a fixed, non-market based discount rate is used (generally, a rate of between 40 to 60 percent used). Additionally, no specific adjustment is made to account for the probability of success (e.g., a patent’s success). Unfortunately, the Venture Capital method’s weakness is such that it does not account well for specific risk factors associated with patents. Moreover, it assumes cash flows are static and the independent risk factors (new patent issuance, patent challenges or declared in valid, patent infringement suits, trade secrets, foreign governments’ failure to comply with Patent Cooperation Treaties, etc.) are marshalled. It is the simplicity of this method that harms its accuracy/credibility.

4. The Concept of Relative Incremental Value This methodology works when one is trying to represent some percentage of value of

an individual asset that is associated with a larger trademark or patent portfolio. For example, if an underlying trademark or brand has a value of $100 million, and the domain name associated with it is generating 10% of revenues (e.g.), then one can allocate a relative value of 10% of the total or $10 million for the domain name.

5. Decremental Cost Savings Valuation This is the method that quantifies a decrease in the level of costs being experienced

by the IP owner / operator. If, in fact, the IP owner can quantify lower levels of capital or operating costs connected directly with the ownership of the IP; then those lower costs can be a direct measurement of the value of the specific IP.

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6. Enterprise Value Enhancement The valuation analyst establishes the value of the IP owner’s overall business enterprise

value as a result of owning the IP – and then compares that to the business enterprise value if the owner did not, in fact, have or control the IP or was not able to use it in its business enterprise. The value of the IP then would be the difference between the total business enterprise value and the business enterprise as calculated without the IP.

7. Imputed Income Analysis A subset of traditional income approach methods, this imputed income analysis can be

used quite effectively in valuing a domain name or sub brand attached to a trademark; or in valuing flanker patents for a core patent portfolio. In the case of a domain name, value is established by looking at the activity generated by the domain name and associated website assets, relative to the overall value of the core trademark and brand bundle. Therefore, one is able to estimate through imputation the relative value of a domain name to its parent trademark.

8. Income Capitalization or Direct Capitalization Methodology This is a method sometimes used to estimate the value for intellectual property that

has no predetermined statutory expiration (like trademarks) and for which net income (royalties or profit) is not expected to vary greatly over time (due to contractually-defined license fees, for example). This involves taking an estimate of expected annual royalty stream (or profit) and multiplying this amount by a factor known as the capitalization rate.

9. Income Differential Analysis This particular variation simply means that a company manufacturing and selling a

product with a particularly strong trademark or unique technology will receive more income than a competitive company producing the same product but without the addition of the specific IP, such as the trademark or patent.

10. Liquidation Value Found most often in bankruptcy situations, as the name implies liquidation value for

any piece of IP is the lowest price that the asset is virtually guaranteed to be sold in a distressed situation. Used almost solely in bankruptcy, other distressed situations or time critical contexts, litigation value scenarios arise most often in a Chapter 7 bankruptcy.

11. Premium Pricing Analysis Of all the variations to the income approach, this is perhaps the most easily understood

– because the value of an asset is established by looking at the difference in the price that it can command in the market, typically at wholesale, compared to the average product in the market. The difference between these two prices is the price premium. This, then, is projected out on an annual basis and a net present value established.

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12. Profit Split Methodology A form of the income approach, it can be tricky to apply accurately: because the profit

split method attributes a share or portion of a company’s profitability to a particular intangible asset. This method requires that the valuation analyst have the ability to understand the IP to such an extent that he or she can isolate and expressly separate the intangible asset’s profit generation potential from all the other business assets – and then allocate that portion of profit split to the company’s operations and capitalize that value over a number of years.

Group B – Specialized/Proprietary

1. Auction Method There are several market-based methods of valuing IP using recent comparable or

similar IP transaction between independent parties (“arm’s-length transactions”). One of these methods is called the “Auction Method.” If a hypothetically perfect auction market existed, several potential buyers that each had all available information regarding the IP would compete with each other to bid on the IP. Through this auction process, a market-based price of the IP would be determined through bidding.

2. DTA (Decision Tree Analysis) Based Methods While many people are familiar with the DCF methods of valuing intellectual property,

it comes with inherent weaknesses because it relies on selecting discount rates appropriate to the risk associated with the various stages in a property’s life. Not only does it require calculating the possible cash flows which might occur, DCF methods do not account for the various possibilities open to project managers (for example, the levels of risk if a patent lapses or is abandoned at differing stages along the process). Unfortunately, there is no “exact science” to be applied for these and experience is necessary to influence these decisions.

Assumptions can be built into the DCF model in an attempt to account for the possible outcomes as the result of management decisions. Using what is known as Decision Tree Analysis, a limited number of such managerial decision possibilities can be accounted for. It is important to note, however, that the Decision Tree Analysis should be based on an underlying DCF analysis of each branch. The recommended way to perform such analysis is to begin with the final decisions and work backwards in time, which will result in a present value.

The Decision Tree Analysis Method offers a big advantage over the DCF analysis: it factors the value of flexibility associated with a project. However, assumptions still need to be made regarding the discount rate (as does the DCF method). It is important to use a discount rate appropriate with the level of risk involved at each stage of a managerial decision associated with the development of a brand or IP.

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3. The Brand Value Equation Methodology (BVEQ™) In this methodology, a core value for the trademark is calculated, and then each of

the individual other assets attached to the core asset have their values calculated. Therefore, the sum of the core brand value plus the incremental assets becomes a total brand value. Expressed in an equation as follows;

BVEQ = CBV + IVE1 + IVE2… IVEn

4. The Competitive Advantage Technique: This technique is best used when the subject company has a complex portfolio of

intellectual property and works on the supposition that the IP is giving its owner an advantage over its competitors because of proprietary patents, technology, trademarks, software or other intangibles.

5. Monte Carlo Analysis of Value This is a method to evaluate how possible future outcomes can affect the decision of

whether or not to use a new piece of IP based on possible value – remember that this methodology is most useful in valuing early stage, non-commercialized technology; and, in particular, where there are many unknowns and numerous scenarios about the future development of the technology.

6. Options Pricing Technique (The Black-Scholes) Patent licensing shares at least one attribute with all other relevant business decisions:

it involves risk. Where decisions involving financial risk are concerned, sound management principles suggest considering ways and vehicles to hedge that risk. One of the central vehicles to hedge risk in modern finance is an “Option.” A patent can be seen as the right to invest in or to license (or enforce through litigation) an underlying technology or product line, during the term of the patent. Therefore, an uncommercialized patent can be valued from this “options” perspective using, for example, methods such as those derived from the famous “Black-Scholes” model.

7. Snapshots of Value Approach This is similar in nature to the business enterprise value approach in that the snapshots

value is based on establishing two different values for a company: one, based on the assumption that the company has full access to the ownership of the intellectual property and intangibles, and the second snapshot of value based on the fact that the company does not have these assets. Measuring the difference between the two snapshots establishes the value of the IP or intangible asset portfolio.

8. Subtraction Method of Value or Benchmark Method of Value Establishing the value of a company against another company by comparing them on a

so-called benchmark basis is the premise of this method of value. In one instance, the benchmark value will be a company that owns a particular trademark or patent and the second value for a comparable company that does not have that same asset.

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9. The ValCalc Methodology A proprietary approach employed by our firm, it is a variation on the return on assets

employed approach (see above). ValCalc establishes the economic return that each intangible asset class should be earning. Calculations of adequate return are applied also to all classes of tangible assets within a company. Then the return for each intangible asset is calculated as a result.

10. Valmatrix Analysis Technique This proprietary system was developed by our firm more than two decades ago and

employs a matrix of the twenty most important predictors of value for a trademark, patent or piece of software. The predictors for each of these types of IP are, of course, unique. They are used in a common manner, however: To score a given IP asset against its peers on a numerical scale. Value is therefore established relative to similar trademarks or patents.

An important side note for the interested reader: whenever possible, we recommend the use of multiple valuation techniques when performing a valuation analysis. This is especially true with intangible assets because active markets may not exist and assumptions need to be relied on in making valuation conclusions. Moreover, uncertainty may develop if one depends on a single methodology to value an IP asset (especially a particularly complex family of technologies or brand assets). History has taught us that, as with any new practice, the evolution of methodologies will be ever-lasting.

ConclusionValuing and analyzing intellectual property is still at a premature stage, the field itself hardly more than a few decades old. As the process continues to evolve and experts refine a multitude of methodologies, the art of valuing IP will continue to witness developments, innovation, revision, and diligent progression of techniques to value intellectual property and intangible assets. In all probability, the techniques listed above will either be outdated or refined further to become industry standards.

While we cannot make any definite suppositions about which techniques will escalate to the forefront of IP valuation, it is safe to assume that some of these methods will become obsolete while others will move the ranks to mainstream.

Valuation Tools available in the market

IPscore IPscore is a unique evaluation tool of the European Patent Office (EPO) developed to provide a comprehensive evaluation of patents and technological development projects. It is a simple, user-friendly tool that can be used by all companies that have a portfolio of patents and development projects.

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(This tool applies a qualitative approach. Further information on this valuation method is provided in part 3 of the Eurpoean IPR Helpdesk Fact sheet Intellectual Property dated June 2015. More information about IPscore, is available in IPR Helpdesk. Check Bulletin number 8, January to March 2013, which is available in their online library.)

IP Tradeportal The Danish Patent and Trademark Office has developed a portal with the purpose of helping businesses to better exploit their knowledge by trading their intellectual property rights. On the portal page you can find a set of tools for trading rights, including on valuation.

(The IP Tradeportal is available at the Danish Patent and Trademark Office: http://www.ip-tradeportal.com/).

IP Panorama IP PANORAMA was developed jointly by the Korean Intellectual Property Office (KIPO), the Korea Invention Promotion Association (KIPA), and the World Intellectual Property Organization (WIPO). It consists of a set of e-learning modules, one of them dedicated to valuation of intellectual property assets.

(The IP Panorama e-learning modules are available at WIPO’s website: http://www.wipo.int/sme/en/multimedia/).

IP Healthcheck As part of the IP Healthcheck series, the UK Intellectual Property Office has published a booklet on agreeing a price for intellectual property rights to help companies on the valuation of their intellectual property assets in the context of business transactions.

(The booklet ‘Valuing your intellectual property’ is available in the UK IPO website at: https://www.gov.uk/valuing-your-intellectual-property.)

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Chapter 12 Valuation of Business

IntroductionBusiness valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to affect a sale of a business. Valuations of businesses are required for different purposes including acquisitions, mergers and sales of businesses, taxation, litigation, insolvency proceedings and financial reporting. Business valuations may also be needed as an input or step in other valuations such as the valuation of stock options, particular class(es) of stock, or debt.

Approaches to Business ValuationThe commonly used methods of valuation can be grouped into one of three general approaches, as follows:

1. Asset Based Approach

a) Book Value Method

b) Adjusted Net Asset Method

• Replacement Cost Premise

• Liquidation Premise

• Going Concern Premise

2. Income Approach

a) Capitalization of Earnings/Cash Flow Method

b) Discounted Earnings/Cash Flows Method

3. Market Approach

a) Guideline Transaction Method

b) Guideline Public Company Method

c) Dividend Paying Capacity Method

4. Other Approaches

a) Income/Asset

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Chap. 12 – Valuation of Business

• Excess Earnings/Treasury Method

• Excess Earnings/Reasonable Rate Method

b) Sanity Checks

• Justification of Purchase

• Rules of Thumb

The Asset Approach to Valuation The most commonly utilized asset-based approach to valuation is the Adjusted Net Asset Method. This balance sheet-focused method is used to value a company based on the difference between the fair market value of its assets and liabilities. Under this method, the assets and liabilities of the company are adjusted from book value to their fair market value

• Book Value Method The book value approach is practically useless. The book value of non-current assets

is based on historical (sunk) costs and relatively arbitrary depreciation. These amounts are unlikely to be relevant to any purchaser (or seller). The book values of net current assets (other than cash) might also not be relevant as inventory and receivables might require adjustment.

• Adjusted Net Asset Method This method is used to value a business based on the difference between the fair

market value of the business assets and its liabilities. Depending on the particular purpose or circumstances underlying the valuation, this method sometimes uses the replacement or liquidation value of the company assets less the liabilities. Under this method the analyst adjusts the book value of the assets to fair market value (generally measured as replacement or liquidation value) and then reduces the total adjusted value of assets by the fair market value of all recorded and unrecorded liabilities. Both tangible and identifiable intangible assets are valued in determining total adjusted net assets. If the analyst will be relying on other professional valuers for values of certain tangible assets, the analyst should be aware of the standard of value used for the appraisal. This method can be used to derive a total value for the business or for component parts of the business.

The Adjusted Net Assets Method is a sound method for estimating the value of a non-operating business (e.g., holding or investment companies). It is also a good method for estimating the value of a business that continues to generate losses or which is to be liquidated in the near future.

The Adjusted Net Assets Method, at liquidation value, generally sets a “floor value” for determining total entity value. In a valuation of a controlling interest where the business is a going concern, there would have to be a reason why the controlling owner would be willing to take less than the asset value for the business. This might

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occur where the assets are underperforming, resulting in a conclusion of value that is less than the adjusted net assets value but more than the liquidation value. Before concluding the Adjusted Net Assets Method has established the floor value, the valuer should consider the potential of overstating the value of assets, existence of non-operating assets, and other omissions in his/her determination.

Income Based Approach The income approach provides an indication of value by converting future cash flow to

a single current value. Under the income approach, the value of an asset is determined by reference to the value of income, cash flow or cost savings generated by the asset. This approach is applied where the income-producing ability of the asset is the critical element affecting value from a participant perspective, and/or where reasonable projections of the amount and timing of future income are available for the subject asset, but there are few, if any, relevant market comparable. Methods in Income based approach are discussed below:

• Capitalization of earning Method (Historical) – The Capitalization of Cash Flow Method is most often used when a company is

expected to have a relatively stable level of margins and growth in the future – it effectively takes a single benefit stream and assumes that it grows at a steady rate into perpetuity.

The price obtained by applying to a business enterprise's established annual earnings base a factor that reflects:

o the risk-free rate of return available to investors in United States Treasury obligations

o the additional rate of return required by the particular risks associated with the business enterprise being priced

o the growth rate that can be expected in the business enterprise's annual earnings in future years

• Discounted Cash Flow Method (Projected Time Value) – The Discounted Cash Flow Method is more flexible than the Capitalization of Cash

Flow Method and allows for variation in margins, growth rates, debt repayments and other items in future years that may not remain static.

The Discounted Earnings Method is sometimes referred to as the Discounted Cash Flow Method, which suggests the only type of earnings to be valued, using this method, would be some definition of cash flow, such as operating cash flow, after-tax cash flow or discretionary cash flow. The Discounted Earnings Method is more general in its definition as to the type of earnings that can be used.

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The price obtained by projecting the expected cash flows produced by the business enterprise during the investment period and determining its present value using a discount rate that reflects:

a. the risk-free rate of return available to investors in United States Treasury obligations

b. the additional rate of return required by the particular risks associated with the business enterprise being priced.

The discount rate differs from the factor applied in the capitalization of earnings pricing method because the projected cash flows directly reflect expected growth in annual earnings.

Market Based ApproachThe Guideline Transaction Method values a business based on pricing multiples derived from the sale of companies that are similar to the subject company. The primary steps in the Guideline Transaction Method include:

1. Finding transactions involving the purchase of comparable companies

2. Selecting the transactions that closely mirror the company’s operations and which occurred in similar industry and economic conditions

3. Applying the indicated pricing multiples from the representative transactions

The market approach provides an indication of value by comparing the asset with identical or comparable (that is similar) assets for which price information is available. It is preferred method in following cases:

• the subject asset has recently been sold in a transaction appropriate for consideration under the basis of value,

• the subject asset or substantially similar assets are actively publicly traded, and/or

• there are frequent and/or recent observable transactions in substantially similar assets.

Guideline Transaction MethodThe Guideline Transaction Method values a business based on pricing multiples derived from the sale of companies that are similar to the subject company. The primary steps in the Guideline Transaction Method include:

1. Finding transactions involving the purchase of comparable companies

2. Selecting the transactions that closely mirror the company’s operations and which occurred in similar industry and economic conditions

3. Applying the indicated pricing multiples from the representative transactions

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Guideline Public Company Method The Guideline Public Company Method values a business based on trading multiples derived from publicly traded companies that are similar to the subject company. The steps in applying the Guideline Public Company Method include:

i. Identifying comparable public companies

ii. Adjusting the guideline public company multiples for differences in the size and risk of these companies compared to the subject company

iii. Applying the adjusted pricing multiples from the representative companies

Dividend Paying Capacity MethodThe Dividend Paying Capacity Method, sometimes referred to as the Dividend Payout Method, is an income-oriented method but is considered a market approach as it is based on market data. It is similar to the capitalization of earnings method. The difference between this method and the capitalization of earnings method lies in the difference in the type of earnings used in the calculations and the source of the capitalization rate. This method of valuation is based on the future estimated dividends to be paid out or the capacity to pay out. It then capitalizes these dividends with a five-year weighted average of dividend yields of five comparable companies.

EXCESS EARNINGS/TREASURY METHODthis method combines the income and asset based approaches to arrive at a value of a closely held business. Its theoretical premise is that the total estimated value of a business is the sum of the values of the adjusted net assets (as determined by the adjusted net assets method) and the value of the intangible assets. The determination of the value of the intangible assets of the business is made by capitalizing the earnings of the business that exceed a “reasonable” return on the adjusted (identified) net assets of the business.

EXCESS EARNINGS/REASONABLE RATE METHOD The Excess Earnings Reasonable Rate Method (formally referred to as “Safe Rate Method”) is another derivative of the Excess Earnings Return on Assets Method. This method has acquired its name from the fact it applies a reasonable rate of return to the adjusted net assets rather than an industry rate of return as in the Treasury Method. Another distinction between this method and the Treasury Method is the reasonable rate of return is applied to the latest year's balance of adjusted net assets rather than to an unweighted or weighted average of net assets (as in the Treasury Method). Similar to the Treasury Method, this method is an income-and-asset oriented approach. It is also based on the theory that the total value of a business is the sum of the adjusted net assets and the value of the intangibles, as determined by capitalizing the “excess” earnings of the business. The amount of earnings capitalized is those earnings which exceed a reasonable rate of return on the adjusted net assets of the business.

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Rule of ThumbsThe limited knowledge of users about the actual transactions upon which the Rules of Thumb Method is based can lead to confusion concerning the property acquired by a buyer during a particular transaction. Buyers may purchase either the assets or the equity of a business. Thus relying on a rule of thumb that produces a value for the assets of a business can fundamentally misstate the value of the equity for the subject business or vice versa.

A valuation rule of thumb relates an operational or financial measure of a company to a measure of value. Most metrics are operational in nature (based on some unit of business activity or volume) or are financial (representing a multiplier to capitalize revenue, cash flow or some other financial benefit stream). There is rule-of-thumb valuation innuendo in almost every industry. In some cases, such information provides useful insight into the mentality and predisposition of what an owner of a business or business interest believes their holding is worth. This is particularly true of industries whose participants adhere to a relatively narrow range of norms in operating, financial, and/or physical composition.

Justification of Purchase MethodThis method represents another sanity check. It raises the question of whether or not a buyer of the business would be able to afford to buy at the estimated fair market value, given certain financing terms and minimum cash flow requirements. A buyer who is looking to buy a job will want to know if the business will provide a living wage.

Selection of MethodsThe goal in selecting valuation approaches and methods for an asset is to find the most appropriate method under the particular circumstances. No one method is suitable in every possible situation. The selection process should consider, at a minimum:

(a) the appropriate basis(es) of value and premise(s) of value, determined by the terms and purpose of the valuation assignment,

(b) the respective strengths and weaknesses of the possible valuation approaches and methods,

(c) the appropriateness of each method in view of the nature of the asset, and the approaches or methods used by participants in the relevant market, and

(d) the availability of reliable information needed to apply the method(s)

International Valuation Standards (IVS) 200 deals with Business and Business Interests, which has been discussed in detail in the previous chapters.

mm

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Chapter 13 Valuation for Banks and Financial Institutions

IntroductionValuation is a science and an art and is based on various basic principles, concepts and methods which every professional valuer is familiar with by virtue of his / her training and experience over the years. Valuation is a multi-disciplinary subject which draws from various core disciplines and the combined knowledge leads to the assessment of the value of the property. International Valuation Standard Council defines valuation as follows: Valuation is the process of determining the “Economic Worth” of an Asset or Company under certain “Assumptions” and “Limiting Conditions” and subject to the “Data” available on the “Valuation Date” -

It is interesting to note that since valuation involves the act or process of developing an opinion of value, it is never a fact but always an opinion on the worth of the business or asset to be valued at a given time in accordance with a specific definition of value.

In Banking Sector valuation becomes very important aspect as banking activity involves lending, which is associated with diverse risks. Banks have to assess the credit requirements of the borrower, the economic and technical viability of the activity and have to exercise a high degree of caution in examining, verifying and investigating the title of the mortgagor and most importantly value of the mortgaged property. With alarming NPA figures at ` 8,29,338 crore as of June-end 2017 in India, the role and accountability of valuers associated with the banks become all the more important so that the Banks do not suffer huge losses when a loan becomes bad. The health of the credit portfolio of Banks in these stringent times depends on the quality of the reports submitted by its Valuers which should be as precise as possible.

Valuing banks, insurance companies and investment banks has always been difficult, but the market crisis of 2008 has elevated the concern to the top of the list of valuation issues. The problems with valuing financial service firm stem from two key characteristics. The first is that the cash flow to a financial service firm cannot be easily estimated, since items like capital expenditures, working capital and debt are not clearly defined. The second is that most financial service firms operate under a regulatory framework that governs how they are capitalized, where they invest and how fast they can grow. Changes in the regulatory environment can create large shifts in value. In this paper, we confront both factors. We argue that financial service firms are best valued using equity valuation models, rather than enterprise valuation models, and with actual or potential dividends, rather than free cash flow to equity. The two key numbers that drive value are the cost of equity, which will be a function of the risk that emanates from the firm’s investments, and the return on equity, which is determined both by the company’s business choices as well as regulatory

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Chap. 13 – Valuation for Banks and Financial Institutions

restrictions. We also look at how relative valuation can be adapted, when used to value financial service firms.

Methods and Approaches of ValuationThere are various ways, methods and approaches of valuations related to banks. The Valuation for banking is a very complex domain. Below are the various popular methods and approaches followed by the valuers while valuating for banks.

The Residual Income Valuation Method In order to verify the derived bank equity (ECF model), an alternative bank valuation model is utilized based on discounted residual income. As mentioned above, the two methods theoretically should lead to the same result when properly applied. The methodological steps for the derivation of the bank’s equity value are described below: First, the residual income (RI) for the analytical period of eight years is calculated. RI is the difference between operating profits after taxes and the cost of equity capital employed. The latter equals the previous year’s total equity multiplied by the cost of equity according to CAPM. Second, the terminal value of the bank in perpetuity is estimated by dividing the residual income of the year following the analytical period with the cost of equity. Third, the derived residual incomes are discounted and the present value of RI is obtained. The final step is to sum the present value of residual income (analytical period and in perpetuity) with the value of bank equity at the beginning of the study period, thus deriving the current value of the equity of the bank.

Asset-based approach The asset-based valuation of a bank requires valuing the loan portfolio of the bank (which comprises its assets) and subtracting the outstanding debt to estimate the value of equity. It is frequently used to establish the liquidation value of a bank for possible legal proceedings. However, the value-based approach is difficult to apply when the bank enters multiple businesses (commercial banking, investment banking, etc.) or regions (countries).

The necessity of the asset-based approach in bank valuation also lies in the testing of the bank’s actual book value until the valuation moment, and, consequently, it is a meaningful instrument at the negotiation (especially, to prove the value of the bank’s intangible assets).

Market approach The market (or relative valuation) approach is probably the simplest way to value a bank. Analysts’ conclusions based on this approach could be easily found in business reports on a regular basis, where reasonably comparable guideline companies are defined primarily by expert opinions and multiples’ comparisons. The most sufficient multiples for bank valuation are the price-earning ratio (P/E) and the price-to-book value ratio (P/BV). P/E ratio, as a function of three variables – the expected growth rates in earnings, the payout ratio, and the cost of equity, depicts some specific characteristics for bank valuation revealed previously.

The choice of comparable banks will include banks with similar historical growth rates and risk profiles. The differences between the subject of valuation and the comparable banks

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should be thoughtfully incorporated into the valuation analysis by several adjustments. Modern banking is a business mix of retail banking, private banking, corporate and investment banking, and trading activities. Also, to find a comparable bank with the same proportions in the banking business model from the outside is relatively hard. As for the P/E ratio specifically, it is liable to a high volatility due to the bank policy to report a profit while creating provisions for credit losses.

Income approach The income approach focuses on the conversion of expected future economic benefits into their present value. The discounted cash flow valuation gets the most play in academic research and comes with the best theoretical credentials. It is relevant to concentrate on cash flow and dividends as cash flow proxies for bank valuation. The common free cash flow on equity (FCEE) method is highly valid for bank valuation, also because it reflects the fact that banks can create value from the liability side of the balance sheet.

Contingent claim valuation Up to this point we have discussed the classical approaches to valuation. In recent years, option pricing models (binomial, Black-Scholes-Merton, etc.), based on more advanced mathematical appliance, have been introduced. We suppose that they might be used for bank valuation as well.

The Equity Cash Flow Valuation Model One of the most appropriate models for valuing financial institutions is that of discounted ECF. The bank’s equity cash flow can be calculated either directly (direct approach) or indirectly (indirect approach), where both approaches lead to the same result. Banks in practice calculate equity cash flow with the indirect method. This is due to the difficulty in allocating cash flow to operating, financial and investment activity.

Sample Format of Valuation Report

FORMAT-A VALUATION REPORT (IN RESPECT OF LAND/SITE AND BUILDING)

I. GENERAL

1. Purpose for which the valuation is made

2. a) Date of inspection :

b) Date on which the valuation is made :

3. List of documents produced for perusal

i) :

ii) :

iii) :

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4. Name of the owner(s) and his/their address(es) with Phone no. (details of share of each owner in case of joint ownership)

:

5. Brief description of the property :

6. Location of property

a) Plot No./ Survey No. :

b) Door No.

c) T.S. No./Village

d) Ward/Taluka

e) Mandal/District

7. Postal address of the property :

8. City/Town :

Residential Area :

Commercial Area :

Industrial Area :

9. Classification of the area

i) High/Middle/Poor :

ii) Urban/Semi Urban/Rural :

10. Coming under Corporation limit/Village Panchay-at/Municipality

:

11. Whether covered under any State/Central Govt. enactment's (e.g., Urban Land Ceiling Act) or notified under agency area/scheduled area/canton-ment area.

:

12. In case it is an agricultural land, any conversion to house site plots is contemplated

:

13. Boundaries of the property :

North :

South :

East :

West :

14. Dimensions of the site : A BAs per the Deed Actuals

North :

South :

East :

West :

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15. Extent of the site :

16. Extent of the site considered for valuation (least of 14a & 14b)

:

17. Whether occupied by the owner/tenant? If oc-cupied by tenant since how long? Rent received per month.

: Rs.

II. CHARACTERSTICS OF THE SITE

1. Classification of locality :

2. Development of surrounding areas :

3. Possibility of frequent flooding/submerging :

4. Feasibility to the Civic amenities like school, Hos-pital, Bus Stop, Market etc.

:

5. Level of land with topographical conditions. :

6. Shape of land :

7. Type of use to which it can be put :

8. Any usage restriction :

9. Is plot in town planning approved layout? :

10. Corner plot or intermittent plot? :

11. Road facilities :

12. Type of road available at present :

13. Width of road -is it below 20 ft. or more than 20 ft.

:

14. Is it a Land – Locked land? :

15. Water potentiality :

16. Underground sewerage system :

17. Power supply is available in the site :

18. Advantages of the site :

1.

2.

19. General remarks, if any like threat of acquisi-tion of land for public service purposes, road widening or applicability of CRZ provisions etc (distance from the sea coast/tidal level must be incorporated)

:

1.

2.

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Part-A (Valuation of land)

1. Size of plot :

North & South :

East & West :

2. Total extent of the plot :

3. Prevailing market rate :

4. Guideline rate obtained from the Registrar's Of-fice (an evidence thereof to be enclosed)

:

5. Assessed/adopted rate of valuation :

6. Estimated value of land :

Part-B (Valuation of Building)

1. Technical details of the building

a) Type of Building (Residential/Commercial/Industrial)

:

b) Type of construction (Load bearing/RCC/Steel Framed)

:

c) Year of construction :

d) Number of floors and height of each floor including basement, if any

:

e) Plinth area floor-wise :

f) Condition of the building :

i) Exterior - Excellent, Good, Normal, Poor :

Specifications of construction (floor-wise) in respect of

S. No.

Description Ground floor Other floors

1. Foundation

2. Basement

3. Superstructure

4. Joinery/Doors & Windows (please furnish details about size of frames, shutters, glazing, fitting etc., and specify the species of timber)

5. RCC Works

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S. No.

Description Ground floor Other floors

6. Plastering

7. Flooring, Skirting, dadoing

8. Special finish as marble, granite, wooden panelling, grills etc.

9. Roofing including weather proof course

10. Drainage

2. Compound Wall :

Height :

Length :

Type of construction :

3. Electrical installation

Type of wiring :

Class of fittings (superior/ordinary/poor) :

Number of light points :

Fan points :

Spare plug points :

Any other item :

4. Plumbing installation

a) No. of water closets and their type :

b) No. of wash basins :

c) No. of urinals :

d) No. of bath tubs :

e) Water meters, taps etc. :

f) Any other fixtures :

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Details of valuation

S. No.

Particulars of item

Plinth Area

Roof height

Age of building

Estimated replacement

rate of construction

Rs.

Replacement cost Rs.

Depreciation Rs.

Net Value after

depreciate on Rs.

Ground floor

First floor

Other floor, if any

Total

Part-C (Extra Items) (Amount in Rs.)

1. Portico :

2. Ornamental front door :

3. Sit out/Verandah with steel grills

4. Overhead water tank :

5. Extra steel/collapsible gates :

Total :

Part-D (Amenities) (Amount in Rs.)

1. Wardrobes :

2. Glazed tiles :

3. Extra sinks and bath tub :

4. Marble/ceramic tiles flooring :

5. Interior decorations :

6. Architectural elevation works :

7. Paneling works :

8. Aluminium works :

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9. Aluminium hand rails :

10. False ceiling :

Total

Part-E (Miscellaneous) (Amount in Rs.)

1. Separate toilet room :

2. Separate lumber room :

3. Separate water tank/sump :

4. Trees, gardening :

Total :

Part-F (Services) (Amount in Rs.)

1. Water supply arrangements :

2. Drainage arrangements :

3. Compound wall :

4. C. B. deposits, fittings etc. :

5. Pavement :

Total

Total abstract of the entire property

Part-A Land : Rs.

Part-B Building : Rs.

Part-C Extra items : Rs.

Part-D Amenities : Rs.

Part-E Miscellaneous : Rs.

Part-F Services Rs.

Total

Say

(Valuation: Here the approved valuer should discuss in detail his approach to valuation of property and indicate how the value has been arrived at, supported by necessary calculations. Also such aspects as I) Salability ii) Likely rental values in future and iii) Any likely income it may generate may be discussed).

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As a result of my appraisal and analysis it is my considered opinion that the present market value of the above property in the prevailing condition with aforesaid specifications is Rs. ______________ ______ ______________ (Rupees_____________________________only). The book Value of the above property as of ---------------------- is Rs.--------------------------------------------Rupees----------------------------------------------------------only) and the distress value Rs.----------------------------(Rupees-------------------------------------------------------only).

Place:

Date:

The undersigned has inspected the property detailed in the Valuation Report dated ___________on _______ .We are satisfied that the fair and reasonable market value of the property is Rs.__________ Rupees ____________________only).

Place:

Date:

Signature

Panel Valuer

FORMAT-B

VALUATION REPORT (IN RESPECT OF AGRICULTURE LAND / SITE AND BUILDING)

I. GENERAL





i) :

ii) :

iii) :

4. Name of the owner(s) and his/their address (es) with Phone no. (details of share of each owner in case of joint ownership)

:


6. Location of property

a) Patta No./ Survey No. :

b) Door No.

c) T.S. No./Village

d) Ward/Taluka

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e) Mandal/District


8. Coming under Village Panchayat Municipality :

9. Whether covered under any State/Central Govt. enactment’s (e.g., Urban Land Ceiling Act) or notified under agency area/scheduled area/cantonment area.

:

10. Is any conversion to house site plots contemplated ?

:


North :

South :

East :

West :


North :

South :

East :

West :



:

15. Whether occupied by the owner/lessee? If cultivated by lessee, since how long and type of tenancy agreement?

:

16. Income receive (per year) : Rs.

II. CHARACTERSTICS OF THE SITE

1. Whether the land under consideration is suitable for cultivation.

:

2. Irrigation facilities – canal/well /bore/rain fed. :

3. Possibility of frequent flooding/submerging :

4. Level of land with topographical conditions :

5. Shape of the land :

6. Is it a land – Locked land? :

7. Whether any cottages/buildings exist in the Land? :

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8. Whether fencing and gates are arranged? :

9. General condition of the land :

10. Quality of soil of the land :

11. Whether the land is situated on a Main/National Highway Road? If not, distance from the Main/Highway Road.

:

12. Type of crops grown :

13. Water supply & electricity facilities :

14. Advantages of the land :

1.

2.

15. Disadvantages of the land

1.

2.

16. General remarks, if any like threat of acquisition of land for publics service purposes, road widening or applicability of CRZ provisions etc (distance from the sea coast/tidal level must be incorporated)

:

III VALUATION OF AGRICULTURAL LAND

1. Size of land :

North & South :

East & West :

2. Total extent of the land :

3. Prevailing market rate (per acre) :

4. Guideline rate obtained from the Registrar’s Office/Mandal Revenue office (an evidence thereof to be enclosed)

:

5. Assessed/adopted rate of valuation :

6. Estimated value of land :

(Valuation: Here the approved valuer should discuss in detail his approach to valuation of property and Indicate how the value has been arrived at, supported by necessary calculations. Also such aspects as i) Salability ii) likely rental values in future and iii) any likely income it may generate may be discussed).

As a result of my appraisal and analysis it is my considered opinion that the present market value of the above property in the prevailing condition with aforesaid specifications is Rs. ______________ ______ ______________ (Rupees_____________________________only). The

202


book Value of the above Property as of ---------------------- is Rs.--------------------------------------------Rupees---------------------------------------------------------Only) and the distress value Rs.----------------------------(Rupees------------------------------------------------------Only).

Place:

Date:

The undersigned has inspected the property detailed in the Valuation Report dated ___________on _______ .We are satisfied that the fair and reasonable market value of the property is Rs.__________ Rupees ____________________only).

Place:

Date:

Signature

Panel Valuer

FORMAT-C

Valuation of Apartment Building

I. GENERAL





i) :

ii) :

iii) :

4. Name of the owner(s) and his/their address (es) with Phone no. (details of share of each owner in case of joint ownership)

:


6. Location of property :

a) Plot No./ Survey No. :

b) Door No.

c) T.S. No./Village

d) Ward/Taluka

e) Mandal/District


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8. City/Town :

Residential area :

Commercial area :

Industrial area :

9. Classification of the area :

i) High/Middle/Poor :

ii) Urban/Semi Urban/Rural :

10. Coming under Corporation limit/Village Panchayat/Municipality

:

11. Whether covered under any State/ Central Govt. enactments (e.g., Urban Land Ceiling Act) or notified under agency area/ scheduled area/ cantonment area.

:


North :

South :

East :

West :


North :

South :

East :

West :



:

16. Whether occupied by the owner/tenant? If occupied by tenant since how long? Rent received per month

:

II. APARTMENT BUILDING

Sr. No.

Description : Remarks

1. Nature of the apartment :

2. Location :

T.S. No. :

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Block No. :

Ward No. :

Village/Municipality/Corporation :

Door No. Street or Road (Pin Code) :

3. Description of the locality Residential/Commercial/Mixed

:

4. Year of Construction :

5. Number of floors :

6. Type of structure :

7 Number of Dwelling units in the building :

8. Quality of Construction :

9. Appearance of the Building :

10. Maintenance of the Building :

11. Facilities available :

Lift :

Protected Water Supply :

Underground Sewerage :

Car Parking - Open/Covered :

Is Compound wall existing? :

Is pavement laid around the Building? :

III FLAT

1. The floor in which the flat is situated :

2. Door No. of the flat :

3. Specifications of the flat :

Roof :

Flooring :

Doors :

Windows :

Fittings :

Finishing :

4. House Tax :

Assessment No. :

Tax paid in the name of :

Tax amount : Rs.

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5. Electricity Service connection No. :

Meter Card is in the name of :

6. How is the maintenance of the flat? :

7. Sale Deed executed in the name of :

8. What is the undivided area of land as per Sale Deed?

:

9. What is the plinth area of the flat? :

10. What is the floor space index (app.) :

11. What is the carpet area of the flat? :

12. Is it Posh/I Class/Medium/Ordinary? :

13. Is it being used for Residential or Commercial purpose?

:

14. Is it Owner-occupied or let out? :

15. If rented, what is the monthly rent? :

IV MARKETABILITY

1. How is the marketability? :

2. What are the factors favoring for an extra Potential Value?

:

3. Any negative factors are observed which affect the market value in general?

V RATE

1. After analyzing the comparable sale instances, what is the composite rate for a similar flat with same specifications in the adjoining locality?

:

2. Assuming it is a new construction, what is the adopted basic composite rate of the flat under valuation after comparing with the specifications and other factors with the flat under comparison (given details).

:

3. Break - up for the rate

i) Building +Services :

ii) Land +others :

4. Guideline rate obtained from the Registrar's office (an evidence thereof to be enclosed)

:

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VI COMPOSITE RATE ADOPTED AFTER DEPRECIATION

a Depreciated building rate :

Replacement cost of flat with Services (v (3) i) :

Age of the building :

Life of the building estimated :

Depreciation percentage assuming the salvage value as 10%

:

Depreciated Ratio of the building :

b Total composite rate arrived for valuation :

Depreciated building rate VI(a) :

Rate for Land & other V(3) ii :

Total Composite Rate :

Details of valuation

Sr. Description Qty. Rate per unit Rs.

Estimated value Rs.

1. Present value of the flat (car parking, if provided)

2. Wardrobes

3. Showcases /

4. Kitchen arrangements

5. Superfine finish

6. Interior Decorations

7. Electricity deposits / electrical fittings, etc.

8. Extra collapsible gates / grill works etc.

9. Potential value, if any

10. Others

Total

(Valuation: Here the approved valuer should discuss in detail his approach to valuation of property and indicate how the value has been arrived at, supported by necessary calculations. Also such aspects as Impending threat of acquisition by Government for road widening/public service purposes, submerging & Applicability of CRZ provisions (distance from the sea coast / tidal level must be incorporated) and their effect on i) Salability ii) Likely rental values in future and iii) any likely income it may generate may be discussed).

As a result of my appraisal and analysis it is my considered opinion that the present market value of the above property in the prevailing condition with aforesaid specifications is Rs.

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__________________________________ (Rupees_____________________________only). The book Value of the above Property as of ---------------------- is Rs.--------------------------------------------Rupees----------------------------------------------------------Only) and the distress value Rs.----------------------------(Rupees-------------------------------------------------------Only).

Place:

Date:

The undersigned has inspected the property detailed in the Valuation Report dated ___________on _______ . We are satisfied that the fair and reasonable market value of the property is Rs.__________ Rupees ____________________only).

Signature

Panel Valuer

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Chapter 14 Valuation of Startups

A startup company or startup is a business endeavour which is basically in an emerging, fast-growing industry vertical and is built around a new and innovative product, service, process or a platform. A startup is usually a company designed to effectively develop and validate a scalable business model.

The failure rates in start ups are very high but those startups which are successful tend to become large and make huge profits for the early investors who believed in the idea and the product and risked their money. Examples of startups can be Amazon, Biju’s, Flipkart, Paytm, Swiggy, Snap deal to name a few.

A Nasscom-Zinov report says that India has added over 1000 tech startups in 2017, taking the total number of tech startups to 5000-5200. India is witnessing a rapid rise in the B2B tech startup landscape, focused on verticals like healthtech and fintech.

India as a country which offers many opportunities for budding entrepreneurs and thanks to the various measures being implemented by the Modi Government the ecosystem that exists currently in our country ideal for startups to start off and flourish.

Startups are looking for seed capital after the promoters have exhausted their investment capacity. To attract investment the startup must have the below mentioned

• A unique, innovative and disruptive product or a service which can add value to the consumers in some way or the other

• The business must have the best talent meaning talent with respect to human resources/

• The valuation of the startup should be just right so that the initial investors are confident of getting a good return on their capital.

Here we would be concentrating on valuation of startups. So how do we valuate a startup which does not have any past data or historical performance to kick start the valuation process? This is a big and important question and let’s try to answer the same.

Startups do not have or may be generating very little revenue or profits and is in their infant stage and are instable at best in their life cycle. It may also be the case that the unique and innovative product or service may not have been launched in the market. In such a situation it is very difficult to arrive at a valuation for the company. The factors that determine the valuation of a startup are:

1. Leverage – It is one of the significant factors that will affect the valuation of a startup. If the startup has some customer base and that too loyal customer, meaning returning customers, the valuation gets a boost up.

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Chap. 14 – Valuation of Startups

2. The track record of the promoters – If the startup is promoted by reputed and experienced professional in their area of expertise, the startup is more likely to attract higher valuation. For example, a promoter who is known for coming up with good and scalable business ideas or has a track record of running successful businesses or the new and innovative the product or service is known in the market the startup will command higher valuation.

3. Revenues – A revenues generating startup, how low or small it may be commands higher valuation. It is especially true for b2b startups rather than b2c startups.

4. Investors willing to invest in the startup – More the number of startups looking for investment than the number of investors who are looking at opportunities to invest will affect the valuation of the startup. Here also the play of demand and supply comes in to play.

5. The medium or channel of sale – The targeted market and the channel through the startup seeks to sell its products or services is an important consideration in the valuation of a startup. A startup with a clear marketing and distribution plan is more likely to get a higher valuation.

6. Industry – A startup in an industry which is in focus and many interesting innovations are happening are more likely to get a higher valuation. It would be in a advantageous position when it comes to attracting investors as investors are keen to get on to the success band wagon in the industry in question.

7. The level of competition – It is common to find startups mimicking the successful product ideas of a earlier successful startups. For example, Ola doing an Uber, a Flipkart doing an Amazon. We can find that the successive valuation of such companies going down and ultimately in some stage they find it difficult to attract more investment. A startup in such heavy competitive market with established players finds it difficult to have good valuation.

Startup Valuation Methods

1. Venture Capital Method The Venture Capital Method (VC Method) is used to arrive at the pre-money valuation

for startups which are yet to generate revenues. This method was conceptualized by Professor Bill Sahlman at Harvard Business School in 1987.

Formulas:

• Return on Investment (ROI) = Terminal Value ÷ Post-money Valuation

• Post-money Valuation = Terminal Value ÷ Anticipated ROI

Terminal value is the expected price of the startup if it is sold in future. The same is arrived at by projecting the revenues expected in the year of sale.

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2. Berkus Method The Berkus Method assigns a range of values to the valuation of the startup based on

the progress that the startup owners have achieved in getting the startup off to a start. The following table is the up to date Berkus Method:

If Exists: Add to Company Value up to:

Sound Idea (basic value) $1/2 million

Prototype (reducing technology risk) $1/2 million

Quality Management Team (reducing execution risk) $1/2 million

Strategic relationships (reducing market risk) $1/2 million

Product Rollout or Sales (reducing production risk) $1/2 million

3. Scorecard Valuation Method Under the Scorecard Valuation Method, the average pre-money valuation of other

startups in the same vertical is arrived at and this valuation is then used to value the startup that is looking for investment. This method uses a scorecard to arrive a valuation for the startup.

The score card is as below:

Strength of the Management Team – 0-30 percent

Size of the Opportunity – 0-25 percent

Product/Technology – 0-15 percent

Competitive Environment – 0-10 percent

Marketing/Sales Channels/Partnerships – 0-10 percent

Need for Additional Investment – 0-5 percent

Other – 0-5 percent

A factor is assigned to each of the above elements based on the target startup. It is then multiplied by the sum of factors by the average pre-money valuation of startup that is being valued.

4. Risk Factor Summation Method Under the Risk Factor Summation Method, the initial value for the pre-revenue startup

is estimated. Then the value so arrived at is adjusted for 12 risk factors inherent to the startup. The 12 risk factors are:

• Management

• Stage of the business

• Legislation/Political risk

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Chap. 14 – Valuation of Startups

• Manufacturing risk

• Sales and marketing risk

• Funding/capital raising risk

• Competition risk

• Technology risk

• Litigation risk

• International risk

• Reputation risk

• Potential lucrative exit

Each risk factor is assessed as follows:

+2 - very positive for growing the company and executing a wonderful exit

+1 - positive

0 - neutral

-1 - negative for growing the company and executing a wonderful exit

-2 - very negative

5. Cost-to-Duplicate Method Under this method the startup is valued based on the cost that it would take to

duplicate the startups assets elsewhere. The basic tenant on which this method is built is that an investor would not invest in the startup more money than it would cost to duplicate the business. This method does not consider the future earning potential of the startup or reputation of the promoters or the need for the product on offer in the market. This method gives a conservative valuation to the startup.

6. Discounted Cash Flow (DCF) Method Under this method the future cash flow is projected based on reasonable expectation

and the same is discounted against a expected rate of investment return on the capital invested. A higher discount rate is applied showing the high risk that the company have a high risk of failing as it is a startup.

7. Valuation by Stage This method of valuation by stage is mostly used by angel investors and venture

capitalists to arrive at a valuation for a startup.

This method recognizes the various stages of funding in deciding risk level that is present while investing in a startup. Lesser the risk that an investor is taking when the startup is at the advanced stage of funding.

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This method recognizes that startups with just a business plan will receive lesser valuation. However, the valuation will increase as the startup grows and meets developmental milestones.

8. Comparable Method Comparable method is a relative valuation method and is based on precedent

transactions and key ratios within a particular sector in which the startup is to operate. Commonly used ratios under this method are EV (enterprise value)/EBITDA and EV (enterprise value) /SALES.

9. The Book Value Method This method considers only the net worth of the company. By net worth we mean only

the tangible assets of the company. This method does not recognize any growth that he startup may achieve in terms of revenue. This method is usually used when the startup is winding down.

10. First Chicago Method This method recognizes the fact that the startup is a high-risk investment and there is

high probability that the startup will grow beyond expectation and have equal chances that it may fail badly. Under this method three valuations are provided, namely

• Worst case scenario

• Normal case scenario

• Best case scenario

mm

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Chap. 15 – Checklists for Valuation

Chapter 15 Checklists for Valuation

For making a valuation accurate and reliable one should make proper checklist considering all the items of the area of valuation. Checklist works as a guide for the process. It should be created with utmost delicacy and care. Checklist for some of the valuation requirements are discussed in this Chapter.

CHECKLIST FOR THE VALUATION OF LAND AND BUILDING

Following points should be kept in mind while valuing land and building:

1. Visit the land and building to be valued in person. Make note of the specific conditions which are unique to the land and building and which will affect the value of the building.

2. Match the land and building visited to the entries in the asset register of the business.

3. Verify the purchase agreement of the land and/or building and ascertain the purchase price.

4. Find out the current market rate for the similar land and building.

5. The information about the current rate can be obtained from the open market through the brokers or from the office of the registrar of properties of the locality in which the asset under valuation is located.

6. Make adjustments to the current market rate, for:

a. Any additional amenities available in the building to be valued as compared to the similar building considered.

b. The age of the building under valuation. Older the building, more will be the cost of maintenance and lesser the value.

c. The location of the building.

7. Compare the value arrived at with the last valuation reports which might have been formulated for the purpose of bank loans and determine the reasons for any major differences in the values as per the report and the current valuation being carried out.

8. List out all the assumptions made and the sources referred to for the purpose of valuation of the land and building.

9. At times, the building is constructed as per the specific requirement of the business in question. In such cases, for the valuation of the portion of land, above steps can

214


be considered. For the valuation of the building, help of experts in the field, like an architect or an engineer can be taken.

10. Certain machinery, like the heating/cooling equipment, elevators, etc., are an intergral part of the building. Values of such machinery should be included in the value of the building, as these cannot be separated from the building and they add value to the building being valued.

11. In case of land, it is at times treated for special purposes, like a farm land may be treated to increase its productivity. These special treatments involve costs, the benefits of which will not be limited to a small-time period, but will be reaped over the time of years. Such values should also to considered when carrying on the valuation of land and building.

12. In certain cases, the building is constructed for a specific purpose. In order to make an alternate use of the land and/or building, the construction has to be demolished and new construction to be undertaken. The costs involved in this has to be considered.

CHECKLIST FOR THE VALUATION OF PLANT AND MACHINERYThe first step in case of valuation of any of the asset should be to check the asset in question physically. In case of plant and machinery, a visit should be made to the place the plant and machinery are installed, and an evaluation of its physical condition should be made.

Plant and machinery can be general, which is easily available in the market, and whose rate can be determined as per the market rates, or it can be very specific made to order machinery. Hence, the valuation has to be done as per the type of plant and machinery in question.

GENERAL PLANT AND MACHINERYIn the cases of small production business, the machinery used will be the ones generally available in the market, which is produced on a bigger scale by the producer. For example, in the business of weaving of the cloth, the type of machinery used is general across the industry. Or in the case of renting of vehicles, the models of the vehicles are the same across the segment.

In such cases, the value of the same or similar machinery will be available from the market. This value is to be adjusted for the depreciation already charged for the plant and machinery to be valued and for any other major repairs or upgradation process undertaken.

SPECIFIC PLANT AND MACHINERYIn many large factories, the plant and machinery used is made to order, specific to that particular factory. In such cases, there will not be any value readily available from the market.

Here, the valuer will have to start with the purchase value of the machinery. It will include the cost of purchase, the installing and erecting the plant, etc.

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Once, an estimate of the value of the machine is made, adjustments will be required to be made after consideration of below mentioned factors.

The value estimated on the basis of the market value or the purchase value of the machine will then be adjusted for the wear and tear of the plant and machinery till date.

Also, the type of maintenance carried out on the machinery will be considered. A well-maintained machine may overrun its expected life estimated at the onset of the use of the machinery, whereas poorly maintained machine may become obsolete even before the end of its estimated useful life.

The remaining useful life will be determined and considered in valuation.

The scrap value of the machine is to be estimated and included in the valuation of the machine.

Also, determine if the functioning of the machinery in question is dependent on some other subsidiary machine. If yes, then, calculate the value of the subsidiary machine and its useful life and how will the absence of that machine affect the value of the main machine. In case, if the subsidiary machine becomes obsolete, can it be replaced with the same or the similar machine? All this is to be considered in the valuation of the main plant and machinery in question.

Certain plants and machineries are required to be fixed to the ground or a platform, specifically built for the purpose, in such a manner that it cannot be detached during the useful life of the machine. They will be uninstalled only at the time of scrapping the machinery. Such machinery valuation should take into consideration the fact that the uninstallation might damage the machine, and also the process will incur certain costs.

When the machinery is fixed to the building, like a lift or a ventilating equipment, such machinery is to be valued along with the valuation of the building it is connected to. It cannot be valued on stand alone basis, as it will be of no use, in the absence of the building.

In this situation, if such plant and machinery is valued on standalone basis, the valuer should put in the note regarding the same. Also, when such assets are valued on standalone basis, their value decreases considerably, because, the utility of the lift will not be the same outside the building it was installed.

Certain plants and machineries are owned for the purpose of leasing out to other businesses. For the purposes of such machines, its useful life depends on the manner in which they are used. In valuation of such machines, their capacity to generate income in the future is to be considered.

At the end of the valuation process, list out the assumptions made and the factors considered in the valuation of the plant and machinery.

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CHECKLIST FOR THE VALUATION OF BUSINESSValuation of Business includes the valuation of all the aspects of the business enterprise. This includes, financial aspects, market position, research and development, effects of fiscal policies on the business and the management and the staff of the business.

• The first step towards the valuation of a business should be to understand the business process. Each business has its own flow of events. Understanding them will give a better insight in carrying on the assignment of valuation.

• Thereafter, study the financials of the business at least for the past three years.

• Collect all the information for all the business assets and liabilities.

• Tally the assets with the asset registers and also verify the assets physically.

• Carry out the valuation of each asset individually or in groups, whichever is feasible, practicable and possible.

• In valuing the assets, their remaining useful life, cost of dismantling and disposing, scrape value, replacement cost, repairs and maintenance and depreciation charged till the day of valuation should be considered and required adjustments should be made.

• The liabilities of the business should be valued with respect to the terms of repayment and the interest rates payable.

• The budget plans should be checked and verified against actual performance. This will help in projecting the future performances of the business and estimate its effects on the business valuations.

• Verify if any huge financial liability may arise in the form of any taxes or penalties and its effect on the business.

• Once, the financial position is cleared, check the market position of the goods or the services dealt in by the business in consideration. Whether the market is up or down with regards to the demands of the products offered, what will be the position for at least next three years, etc.

• The kind of research and development happening in the product line and its impact on the future of the business is to be considered in the valuation of the business. Suppose the current research results show a new and better product on its way, then the existing product of the business may not be able to stand in competition to the new product, that may be introduced. This may adversely affect the valuation of the business. At such times, it would be advisable to also check the business’ plans to counter such competition, and thereafter the valuation should be made.

• An insight is to had into the possible changes in the government policies regarding the licensing and taxes, as this will have effects on the growth and development of the business and hence, will affect the valuation of the business.

• Compensation schedule for the owner should be checked carefully.

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• Check Contingent or off-balance-sheet assets or liabilities (for example, pending lawsuits, compliance agreements, and warranties).

• The type of the market in which the business operates is also of a great importance. The details related to market like barriers to entry in the market, Type of market, competitors, Complexity of business, marketing literature are required to be studied carefully in order to value correctly and efficiently.

• The most important part of any business is the manpower that runs it. A business may or may not be skill oriented. Availability of the required manpower and retention of the same is to be considered. The effects that the key managerial personnel have on the management of the business, and how their absence will affect the business is also to be considered.

• Finally, all the assumptions made for the purpose of valuation and all the factors that are considered for the same are to be listed.

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Chapter 16 Valuation Report

Valuation ReportValuation Report is the comprehensive report prepared by the Valuer for the valuation done with respect to the assets. Valuation may be done mandatorily or voluntarily. The ideal Contents of Valuation report are mentioned as under:

1. Identification of the client and any other intended users.

The Valuation Report should state the engaging client and the intended users of the valuation report. The Valuation Report should also state any limits or exclusion of liability to parties other than the client.

2. Any consent to, or restrictions on, publication.

The Valuation Report should state whether the valuer has provided consent to or restriction on the publication of the Valuation Report. If consent has been provided, the parties or publication to which the Valuation Report could be made available should be stated.

3. Purpose of valuation.

The Valuation Report should state its specific purpose, its terms of reference, and if there are any limitations on its use for other purposes. The Valuation Report should indicate the relevant financial reporting standards under which the valuation exercise is required.

4. Subject of the valuation.

The Valuation Report should state the subject of the valuation, including background of the subject company, asset or liability and the circumstances from which the valuation requirement has arisen.

5. Interest to be valued.

The Valuation Report should state the interest to be valued (e.g., equity stake, tranches of loans, number of warrants issued and outstanding, etc.)

6. Type of asset or liability and how it is used, or classified, by the client.

The Valuation Report should state the type of asset or liability to be valued and the use or classification of such by the client.

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7. Standard and Premise of Value

The Valuation Report should state the standard of value being used clearly, It should also state the premise of value, e.g., whether value is based on a going concern or liquidation.

8. A statement of the valuation approach and reasoning.

The Valuation Report should set out the valuation approaches, the selected approach and the reasoning for the selection. If there is any change in method, the rationale for that change should be set out.

9. Valuation date.

As the valuations are likely to fluctuate over time, the value should ensure that the opinions expressed and the valuation provided is consistent with circumstances as at the valuation date.

10. Disclosure of any material involvement, or a statement that there has not been any previous material involvement;

The Valuation Report should state whether there is any material involvement by the valuer, or that there has not been any previous material involvement.

11. Where appropriate, the currency that has been adopted.

The report should state the currency adopted, the exchange rates applied at the respective dates, and the source of such information.

12. Any assumptions, special assumptions, reservations, special instructions or departures.

The Valuation Report should set out a concise summary setting out the key data and important assumptions made and the conclusions drawn by the valuer, qualified if necessary according to the insufficient or inadequate information. The Valuation report should also set out any special assumptions, reservations, and special instructions from the client, or any departure from instructions.

13. The extent of the valuer’s investigations.

The Valuation Report should state the extent of investigations carried out by the valuer to support or check valuation assumptions and conclusions. It should also state the limitations to the extent of investigation, and the limitations to the valuer’s responsibility to perform investigations.

14. Nature and source of information relied on by the valuer.

The Valuation Report should state all material information and data used. Subject to any confidentiality or regulatory requirements and the need to obtain consents, adequate references to relevant published and unpublished reports and records used must be provided. It may also be necessary to cite reports, data and records that were

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either available or known and were possibly Material but which were not used, and the reasons why there were not used.

15. The opinions of value.

The Valuation Report must state the opinions of value(s) determined. To the extent that it may affect the valuation and if the available data permits, a range (high/low) of values should be determined and sated, reflecting any uncertainties in the data and the interactions of the various key assumptions made. However, the range should not be so wide as to render the valuation meaningless.

16. Disclosure requirements

The Valuation Report shall also contain any information that the reporting entity is required to disclose by the relevant Financial Reporting Standards. Examples of disclosure required about fair value measurements include methods and significant assumptions used in the measurement and, or whether, the measurement was determined by reference to observable prices or recent market transactions. Some standards also require information about the sensitivity of the measurement to changes in significant inputs.

17. Signature (valuer’s individual name) and date of the report.

18. Identity and qualifications of the valuer responsible for the valuation.

The Valuation Report should state the names, qualifications, relevant experience, and relevant professional affiliations of the valuer responsible for the valuation.

List of DocumentsDuring a course of Valuation exercise, the valuation expert collects and prepares numerous documents. The documents so obtained or so prepared may differ from one assignment to another assignment but an indicative list of all the documents to be maintained as given below List of Documents pertaining to the Basic information of client entity i.e. Details about Company Promoters, Key Management professional of the Company, Memorandum of Association, Article of Association, Prospectus, prior three years financial statements. A Copy of the valuation engagement with Clients

• A copy of the previous valuation report of a subject matter of valuation exercise, if any.

• Required documents which are pertaining to such assumptions & limiting the conditions in valuation assignment.

• Information gathered & analyzed to obtain the understanding of matters that may affect the value of the subject interest.

• Documents pertaining to the selection of a Valuation approach used in valuation assignment containing the rationale & support for their own use.

• Any restriction or limitation on scope of a Valuer’s work or the data available for the analysis

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• The Basis for using the valuation assumption during the valuation engagement.

• the documents pertaining to any rule of the thumb used in valuation, source(s) of the data used, as well as how the rule of thumb was applied.

Any other documentation measured relevant to engagement by a Valuer.

***Sample Valuation Report***

Business Valuation Report of

XYS Corporation Ltd

31.09.2017

Engagement of Valuation Assignment

Description of Valuation AssignmentHere brief profile of the Valuer may be given. Profile of organization of valuer may also be provided. If valuer has taken help, opinion from other person, details along with such opinion shall also be stated.

Disclosure of valuer interest or conflict, if anyAlthough, Valuation shall be done by independent person, still if there is any interest or conflict, shall be stated in detail.

Date of appointment for ValuationA formal date of appointment may be stated.

Date of valuationThe date on which value assigned shall be stated.

Purpose of ValuationThe purpose of Valuation may be stated here. It may be valuation of equity, fixed assets etc.

Findings of the ValuationHere brief of finding the valuation may be stated. Like if there is valuation of equity shares, then their value may be stated. A brief of principles adopted may also be included.

Valuation Key AssumptionAssumption taken during course of valuation shall be stated. Valuation standards which were followed shall also be referred.

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Organization’s OverviewOrganization Details which shall be stated here are:

• Legal Identity of the Organization (like LLP, Company etc.)

• Year of Incorporation

• Nature of Business

• Industry Overview

• Rival’s Position

• Brief financial data of Past

• Asset and Liabilities of Organization

• Revenue and Net Profit of Past financial years

• Financial Ratios

• Key Selling points of Organization

• Compliance History

• Details of Management

• Details of Ownership of Organization

Valuation MethodologyValuation methodology shall be stated. Brief may be stated here and details may be stated in Annexures.

Methods of valuation of a business for reference purpose are:

• Net Asset Value method

• Discounted Cash Flow Method

• Comparable Companies Method

• Market Approach

• Asset Based Approach

Basis of ValuationHere data, which derives the valuation shall be stated. The source of data shall also be stated here. The data may be collected from various authorities like Taxation Department, Registrars etc. Data received from Organization’s officials shall be authenticated by the providers. Such Data shall be attached with Valuation Report in Detail.

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Major Factors affecting the ValuationValuation depends upon the transaction and transaction may involve multiple factors like type of assets, location of organization, organization’s revenue generating product etc.

Valuation AnalysisHere analysis of various methods shall be stated. Out the best suitable method, valuation figure shall be stated here.

Usage of ReportSince the valuation is not a legal judgment for every transaction. Its usage limitation shall be explained in report.

DisclaimerCaveats, Limitations and Disclaimers.

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Chapter 17 Case Laws - India

Case Laws on valuation in India Valuation is basically question of fact. Judiciary may not be able to always settle a fact in every transaction.

Court is normally reluctant to interfere with the finding of fact if:

• It is based on relevant material on record and

• Method adopted by the relevant authority for valuation is based on such relevant material.

1. Duncans Industries Ltd vs State of U.P. & Ors Civil Appeal No. 5929 of 1997 on 3 December, 1999, Supreme Court

The facts of the case are that ICI India Ltd executed an agreement of sale agreeing to transfer its fertilizer business in favour of Chand Chhap Fertilizer and Chemicals Ltd (CCFCL) since renamed as Duncans Industries Ltd for a total sale consideration of Rs. 70 crores.

It was agreed that the ownership in respect of the assets and properties comprised in the fertilizer business would be deemed to be vested in CCFCL on and from the transfer date which, according to the agreement means December 1, 1993 or such other date as may be agreed to by and between ICI India and CCFCL.

A deed of conveyance was executed and presented for registration. The Sub-Registrar made a reference to the Collector under Section 47-A(2) of the Stamp Act, 1899.

The reference stated that in the documents under reference all the details required under Section 27 of the Stamp Act, 1899 had not been given, hence valuation and examination are essential. The Collector was accordingly requested to determine the value and to take action to realize the deficit stamp duty and penalty.

Enquiry Committee was set up. The valuations made both by the Enquiry Committee as well as the valuers are mostly based on the documents produced by the appellant-company itself. Hence the argument that the valuation accepted by the Collector and confirmed by the revisional authority is either not based on any material or is a finding arrived at arbitrarily cannot be accepted.

The Supreme Court held that the question of valuation is basically a question of fact and the Supreme Court is normally reluctant to interfere with the finding on such a question of fact if it is based on relevant material on record. It was further held that if the method adopted

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by the relevant authority for the purposes of the valuation is based on relevant material then it will not interfere with such a finding of fact.

2. Dr. Mrs. Renuka Datla vs. Solvay Pharmaceutical B.V. & Ors on 30/10/2003, Supreme Court

Valuer has to give a justification for selecting or rejecting a method.

The Supreme Court held that if the valuer applied the standard method of valuation, considered the matter from all appropriate angles without taking into account any irrelevant material or eschewing from consideration any relevant material, his valuation could not be challenged on the ground of its being vitiated by fundamental error.

In this case, the Datla couple agreed to sell 4.91 per cent of the shares held by them in Duphar Pharma India Ltd (DPIL), renamed Solvay Pharma India Ltd, and Duphar Interfran Ltd (DIL).

Eminent chartered accountant, Mr Y. H. Malegam, was entrusted with the task of evaluating the intrinsic worth of both the companies — DPIL and DIL — as going concerns and the value of the said 4.91 per cent shares held by the Datlas in the two companies by applying the standard and generally accepted method of valuation. His valuation was to be regarded as final and binding an all the parties. The relevant date for valuation was fixed as March 31, 2001. Mr Malegam submitted his valuation report in September 2002. After assessing the intrinsic worth of the two companies as going concerns, he arrived at the value of 4.91 per cent shares at Rs 8.24 crore.

The sellers disputed this valuation.

3. G.L. Sultania And Another vs. SEBI on 16 May, 2007, Supreme CourtThe Supreme Court followed the principles laid down in the case of Dr. Renuka Datla vs. B. V. Solvay Pharmaceuticals and held that valuation of shares is not only a question of fact, but also raised technical and complex issues which may be appropriately left to the wisdom of the experts, having regard to the many imponderables which enter the process of valuation of shares. If the valuer adopts the method of valuation prescribed, or in the absence of any prescribed method, adopts any recognized method of valuation, his valuation cannot be assailed unless it is shown that the valuation was made on a fundamentally erroneous basis, or that a patent mistake had been committed, or the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter. Where a method of valuation is prescribed, the valuation must be made by adopting scrupulously the method prescribed, taking into account all relevant factors which may be enumerated as relevant for arriving at the valuation.

4. Commissioner of Gift Tax, Gujarat vs. Executors & Trustees of The Estate, Civil Appeal No. 982 (NT) of 1975 on 11 December, 1987, Supreme Court

The assessee contended in the gift tax assessment proceedings that the 480 shares in the English Company acquired as gift were not quoted in the stock exchange, that their value be determined on the average break-up value indicated by the balance sheets of the Company

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as on 31.3.1964 and 31.3.1965, and that in view of the decision of the General Body of the Company dated 4.10.1961 to increase its share capital by issue of additional shares the value of the shares constituting the subject matter of the gifts which were transferred "ex-right" would stand depreciated.

The Gift Tax officer valued the shares on the basis of the breakup value yielded by and deducible from the balance sheet as on 31.3.1964

Court established that correct principle of valuation applicable to a given case is a question of law. Parties can agree upon a principle permissible under and recognized by law. If two or more alternative principles are equally valid and available, it might be permissible for parties to agree upon the alternative mode of valuation in preference to another.

The jurisdiction of the Court in sanctioning a claim of merger is not to ascertain mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. It is not required to interfere only because the figure arrived at by the valuer was not as good as it would have been if another method had been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which was being merged.

The Hon’ble Supreme Court held “We do not think that the internal management, business activity or institutional operation of public bodies can be subjected to inspection by the court. To do so, is incompetent and improper and, therefore, out of bounds.”

5. Hindustan Lever & Anr. vs. State of Maharashtra & Anr on 18 November, 2003, Supreme Court

Tata Oil Mills Co. Ltd. (Transferor Company) Hindustan Lever Ltd. (Transferee Company) were amalgamated. The scheme of amalgamation of transferor company with the transferee company was formulated and approved by the Board of Directors of respective companies on 19.3.1993. On 3.3.1994 the scheme of amalgamation of the transferor company with the transferee company was sanctioned with certain modifications by a Single Judge of the High Court.

In view of the stamp duty sought to be levied on the order of amalgamation passed under Section 394 of the Companies Act, 1956 (hereinafter referred to as "the Act") the appellant filed writ petition in the Bombay High Court challenging the constitutional validity of the provisions of Section 2(g)(iv) of the Bombay Stamp Act, 1958 (hereinafter referred to as "the Stamp Act"). By the impugned order the Division Bench of the High Court has dismissed the writ petition. The validity of Section 2(g)(iv) of the Stamp Act has been upheld.

Court held that valuation in respect of the “instrument” of the amalgamation after due verification, is to be determined by the stamp authorities on the basis of the price of the shares allotted to the transferor company and other consideration, if paid, but not by separately valuing the assets and the liabilities.

Courts have held that in the transactions for merger/demerger involving the transfer of assets as well as liabilities, stamp duty is leviable on the value of net assets (i.e. assets less

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liabilities). Where the consideration is discharged by allotting shares, the consideration would be determined based on the fair market value of such shares.

6. Sanjeev Woollen Mills vs. C.I.T. ([2005] 149 Taxman 431 (SC)Assessee was valuing the stock in trade at market price, though its cost was lower, simply to inflate the profits which were exempt in the relevant year under the provisions of Section 80-HHC of the Income-tax Act, 1961.

According to the Court, the familiar and settled accounting practice is that the closing stock has to be valued on cost basis or on the market value basis, only if the market value of the stock is less than the cost value.

The apex Court laid down the principle that if the market value of stock is taken into consideration while arriving at chargeable income,

where such value of the stock is more than the cost of the stock, the profit earned would be notional. This is because there is no transfer of goods and the closing stock remains the opening stock of the next accounting year. Thus, the income which has not been earned by the assessee cannot be said to be income chargeable to tax.

7. Miheer H. Mafatlal vs. Mafatlal Industries Limited (AIR 1997 SC 506, (1997) 1 SCC 579)

Amongst other points, one of the points raised was that of the valuation of shares, and the exchange ratio adopted in the scheme of amalgamation.

In this matter, the court cited the decision of the Gujarat High Court in Kamala Sugar Mills Limited (55 Company Cases P. 308) which dealt with an identical objection about the exchange ratio adopted in the scheme.

“once the exchange ratio of the shares of the transferee-company to be allotted to the shareholders of the transferor company has been worked out by the recognized firm of chartered accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies or to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be determined in their interest.”

Therefore, share exchange ratio fixed by experts who are certified professionals will not be disturbed unless the same is contrary to the provisions of the law.

8. Lal Chand vs. Union of India & Another (CIVIL APPEAL NO. 4945 OF 2006 (along with other appeals arising out of the Delhi high court order dated 27.04.2006, in RFA No. 751/1994 (Jas Rath V Union of India) and other connected cases.) Supreme Court

The appeals relate to determination of market value in regard to lands situated at village Rithala on the outskirts of Delhi, acquired for

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i. Construction of a supplementary drain;

ii. Construction of sewage treatment plant;

iii. Re-modelling of Nangloi drain; and

iv. Planned development of Delhi.

The awards of the reference court were challenged by the landowners. For arriving at the said market value, the High Court relied upon the allotment rates of Delhi Development Authority for plots shown in its Brochure issued on 9.2.1981 in respect of Rohini Residential Scheme (Phase-I), formed by acquiring part of Rithala village and surrounding villages.

Taking note of the fact that considerable expenditure would have been involved for developing the plots, the High Court took the wholesale price of freehold plots and after deducting 60% towards the cost of development and area required for roads etc. The said rate was awarded as compensation for the first three acquisitions.

The appeals were allowed, setting aside the judgment of the High Court and remanded the matter to the High Court for determination of the market value afresh. Supreme Court held: The lease premium in respect of fully developed plots (which was given in the DDA brochure) could not be the basis for determining the freehold market value of undeveloped land, though the undeveloped land may be situated adjacent to the developed plots. Therefore, the DDA brochure rates were not of assistance.

The decision in Ram Phool itself lays down as follows:

'Contemporaneous award no doubt is a useful guide for every court to determine the market value but that award must be taken into evidence in accordance with law by giving an opportunity to the other side for rebutting the same and that has not been done in the case on hand.' In this case while the learned counsel for respondents contended that the lands at Rithala and Poothkalan were similar, the learned counsel for the appellants submitted that the acquired lands in Rithala were far more valuable than the lands in Poothkalan and that Rithala was nearer to the city when compared to Poothkalan.

Neither stand is supported by any evidence or material on record. In the absence of any evidence, we cannot assume that acquired lands in Rithala and lands acquired in Poothkalan were similarly situated. Therefore, decision of the Court in Ram Phool was not a positive determination of market value of Poothkalan lands, but the rejection of a determination of a higher value by High Court for want of acceptable evidence.

It was held that the original compensation be increased and so the appeal of the claimant was partly allowed.

Case Laws on startups in India

1. PepperfryPepperfry is the largest online furniture store in India. It was cofounded by two frineds Ambreesh Murty and Ashish Shah in 2011. They had one common vision that is to be

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the place where the modern Indians shop for their homes. It deals in furniture and home decoration segments like furnishing, lighting and lamps, kitchen appliances etc.

FundingThe company received its first seed funding of US$ 5 million from Norwest Venture Partners in Nov 2011. The second round of funding of US$ 8 million was received by the company in April 2013 in Series B funding from Norwest Venture Partners after the launch of their website www.pepperfry.com. In May 2014, Norwest Venture Partners and Bertelsmann Investments together invested another US$ 15 million in Series C funding.

In December 2014 it launched its first Studio Pepperfry at Kanjurmarg, Mumbai. In July 2015. The Studio offers wide range of service to its customers like expert guidance on space planning, selection of home furniture, and a guide for material and specifications etc.

Norwest Venture Partners and Bertelsmann Investments, Goldman Sachs, and Zodius Venture Partners invested US$ 100 million.

In March 2016 Pepperfry opened its first warehouse, Padgha Warehouse, which the company claims to be the largest furniture warehouse in the country.

This round of funding was followed by another round of funding to the tune of US$ 30 Million by Norwest Venture Partners and Bertelsmann Investments, Goldman Sachs, and Zodius Venture Partners.

As on February 2017 the company has served over 4 million customer orders. As on September 2017 it has launched new offerings to its customers like furniture rentals, Try and Buy Sofas and Furniture Exchange.

Competitors of PepperfryThe competitors to Pepperfry are FabFurnish and Urban Ladder. Today PepperFry and Urban Ladder are the main players in the online furniture market.

In recent times UrbanLadder has attracted more funding and has more yearly revenue. The advantage that Pepperfry is its outreach. It delivers its products to more than 500 cities across the country, which is the highest reach in the online furniture market.

Pepperfry has carved a niche for itself when it comes to furniture and has become the first preference for people living in urban areas for their furniture needs on the back of its ability to deliver in more than 500 cities across India.

2. GrofersGrofers is a low-price online supermarket that gets products across categories like grocery, fruits & vegetables, beauty & wellness, household care, baby care, pet care and meats & seafood delivered to the consumers doorstep. The consumers has the flexibility to choose from over 5,000 products at prices lower than supermarkets and schedule delivery as per their convenience.

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Grofers was founded by two IIT Graduates Saurabh Kumar and Albinder Dhindsa in 2013. Grofers launched its operations in Delhi NCR and currently offers its services in 25 cities across India.

Funding Grofers has raised U$45.50 Million in three rounds of funding:

1. Seed Funding: US$0.50 million from Deepinder Goyal, founder of Zomato, and Sequoia Capital in 2014

2. Series A: US$10 million was raised in February 2015 from Sequoia Capital and Tiger Global

3. Series B: US$35 million was raised in April 2015 from Sequoia Capital and Tiger Global

4. Series C: US$ 120 million was raised in November 2015 from Sequoia Capital and Tiger Global Management, Softbank, Roeding Ventures and Cyriac Roeding

5. Series D: INR 960 million was raised in October 2017 from its parent company Grofers International

Grofers also chose to accelerate its growth through acquisitions. It acquired a Delhi NCR based grocery delivery mobile app, My Green Box, for an undisclosed amount. As part of the acquisition a team of 15 along with Varun Khurana, Founder – My Green Box joined Grofers with Varun Khurana as the CTO.

Social Media usage to further its outreachGrofers engages its customers through social media. Grofers uses facebook and twitter effective to engage its target audience. It promotes its app on facebook and twitter. The advertising strategy of Grofers is to launch its campaigns on twitter and facebook and give exciting offers to their customers and to avail the various offers all that the consumers have to do is download its app.

Grofers started a campaign on Twitter and Facebook offering 30% off to their customers which would eventually bring them new customers and more conversions from existing ones.

They also engages and listens to its customers and encouraged to share their unique ideas and also awards the participants. This helps them creating good awareness and ensures customer engagements. A great example of their engagement of their customers through social media was the #AFewClicksAway campaign. In this campaign they asked people to tweet about the one thing they want to be a few click away from and the top 10 creative answers were awarded with prizes. This trending hashtag bought them amazing response and great number of organic engagements.

On the back of its social media strategy Grofers is growing fast with an increase in number of customers and good engagement rate on social sites. Grofers is now planning to add more categories, products, retailers and accessories which would eventually bring them more customers. Grofers knows its audience and it has used the right approach to engage

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with them through their marketing strategies. It has been constantly evolving around user experience.

3. Zomato Zomato was launched in 2008 and is a restaurant review and discovery service. It is operations in 23 countries. It helps the consumers to decide on the restaurants by providing them information about restaurants near them and their menu and by providing actual public review of the restaurants.

Zomato was founded by Deepinder Goyal and Pankaj Chaddah as Foodiebay in 2008. The same was later renamed in 2010 Zomato.

In 2011 Zomato launched its operation in Pune, Bangalore, Chennai, Hyderabad, and Ahmedabad. Later on it launched its mobile application. In 2012 company collaborated with Citi bank to come out with a print version of its website named “Citibank Zomato Restaurant Guide”. In 2012 Zomato also expanded its operation overseas to UAE, Sri Lanka, Qatar, and the UK etc. and to New Zealand, Turkey, Brazil in next year.

Funding:The company raised around US$ 17 million from Info Edge between 2010 to 2013. In a second round of investment it raised US$ 60 million from Info Edge and Vy capitals in 2014. Another US$ 110 million was raised in 2015. The total funding raised by Zomato is US$ 225 million funding from four investors namely Info Edge, Vy Capitals, Sequoia India, and Temasek Holdings.

Zomato also leveraged its growth by acquisitions. In July 2014 Zomato acquired Menu-Mania for an undisclosed amount, Lunchtime.cz from the Czech Republic and Obedovat.sk from Slovakia. In 2015 the company acquired MapleGragh and a US based table reservation company Nextable.

Business ModelOver 90 million users visit Zomato every month to search for a place to dine or for having food delivered home. It has established itself as the highly targeted place for advertising by restaurant owners and restaurants. Revenue from advertisement is the major revenue stream for Zomato.

From Vancouver to Auckland, Zomato is being used by millions every day to decide where to eat in over 10,000 cities across 24 countries. It has over 2000 employees across 24 countries.

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Chapter 18 Valuation – International Case Laws

1. Singer & Friedlander Ltd. vs. John D. Wood & Co., Watkin J. on June 3 1977 of QUEEN'S BENCH DIVISION of UK

In this action the plaintiffs, Singer & Friedlander Ltd, merchant bankers, claimed £600,000 and interest against the defendants, John D Wood & Co, for alleged breach of a duty of care in carrying out a valuation of Manor Farm, Eastcombe, Gloustershire. The plaintiffs claimed that, as a result of relying on the defendants' valuation, they had lost money which they had lent to Lyon Homes Ltd, land developers, part of a group which failed and went into liquidation.

In the search for accuracy and consistency in valuations, there has been a recurrent problem of identifying the accuracy/consistency benchmark (a maximum acceptable margin of error), beyond which valuations should be considered negligent. Court established that “…the valuation of land by trained, competent and careful professional men is a task, which rarely, if ever admits of precise conclusion. Often beyond certain well-founded facts so many imponderables confront the valuers that he is obliged to proceed on the basis of assumptions. Therefore, he cannot be faulted for achieving a result, which does not admit some degree of error. Thus, two able and experienced men, each confronted with the same task, might come to different conclusions without any one being justified in saying that either of them has lacked competence and reasonable care, still less integrity, in doing his work……. Valuation is an art, not a science. Pinpoint accuracy in the result is not therefore to be expected by he who requested the valuation”.

2. Kenny & Good Pty Ltd vs. MGICA [1999] HCA 25; 199 CLR 413; 163 ALR 611; 73 ALJR 901 (17 June 1999) High Courts of Australia

The appellants were real estate valuers who, for a fee, were engaged by Macquarie Bank Limited to value a residential property in Hunters Hill, a harbourside suburb in Sydney. The valuation was required to enable a decision to be made as to the provision of mortgage finance to the owner, Beca Developments Pty Limited. The Bank's request was for a valuation which "extended to include ... Permanent Custodians MGICA Limited.”

The appellants valued the property while building work was still in progress. They assessed its value as it stood on 18 April 1990 at $5.35 million and at $5.5 million on completion. In May 1990, Permanent Custodians Limited lent $3.575 million to Beca, that being 65 per cent of the valuation of the property on completion. The loan was secured by a first mortgage and insured by MGICA.

It is not now in issue that the value of the property was less than stated by the appellants and that, on 18 April 1990, its true value, on an "as completed" basis, was of the order of

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$3.9 million to $4 million. In June 1991, Beca defaulted under the mortgage and, on 2nd July 1991, Permanent Custodians entered into possession. On 6 January 1992, the property was sold for $2.65 million. It is not suggested that the property could have been sold earlier. Moreover, it is accepted that $2.65 million was its value when sold, there having been a fall in residential property values in Hunters Hill between April 1990 and January 1992.

What if valuation is done wrong by the Valuer?

On appeal to the High Court it was considered that the valuer was liable for the full extent of loss of the financier and mortgage insurer including the loss that resulted from the downturn in the property market. This is because it is considered that the financer would not have entered into the transaction but for the valuers negligent advice.

3. Interchase Corporation Ltd. vs. ACN 010087573 Pty Ltd [2000] QSC 13, Queensland Supreme Court, Australia

Case was appealed from the Queensland Supreme Court to the Queensland Court of Appeal which upheld the decision of the Supreme Court involving the valuation of the Myer Centre in Brisbane. At the time of the valuation of the Myer Centre the property was considered to be quite unique with a lack of comparable market evidence. The case involved the valuation of the Myer centre and the degree of variation by valuers engaged to value the property. Despite the significant variation between the valuers end value for the Myer Centre property the courts in this case looked not to the range of figures to determine negligence but rather to the valuers performances based on their reports and evidence presented to the court.

4. Hipple vs. SCIX, LLC, U.S. District Court, NO. 12-1256, E.D. Pennsylvania pronounced on J. August 13, 2014

This case arose out of the alleged fraudulent transfer of the defendant’s assets, and the proceeds of those assets, to the remaining defendants in a post-divorce related matter. The plaintiff ’s expert completed a “Calculation of the Value of SCIX” to find a reasonably equivalent value for the “transfer of SCIX’s assets as of October 13, 2010.” The defendant argued that the plaintiff ’s expert’s proposed testimony failed both the fitness and reliability restrictions set forth in Daubert because he completed only a limited “calculation of value” rather than a more extensive “opinion of value.” The court rejected the defendant’s argument and concluded that the proposed testimony of the plaintiff’s expert was admissible. It stated that “both a Calculation of Value and Opinion of Value are engagements approved of by the American Institute of Certified Public Accountants.”

5. Ward vs. Ward, Supreme Court of Georgia, pronounced on May 31, 2011 It involved a luxury pet resort, Pampered Paws, located near Wisconsin Dells, Wisc. The respondent-appellant challenged the circuit court’s division of property and maintenance award following a divorce judgment and reconsideration order. He contended that the valuation of resort presented by the petitioner-respondent’s expert failed to make a finding of fair market value for resort in circuit court due to the fact that it was only a calculation of value and not a conclusion of fair market value. The appellate court ruled that “circuit courts are not required to accept any one method of valuation over another.” The petitioner-

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respondent’s expert testified that the calculation of value was the appropriate approach for a business of this type, and the circuit court was persuaded that this methodology produced a reliable indicator of fair market value. The expert used the capitalization of earnings methods with no scope restrictions placed by the client.

6. Merion Capital, LP vs. 3M Cogent, Inc. Civil Action No. 6247-VCP The Court of Chancery of The State of Delaware, pronounced in July 8, 2013, USA

This matter is a post-trial decision from the Delaware Court of Chancery in an appraisal and arising out of a merger in which a global technology corporation and its acquisition subsidiary acquired a biometrics technology company. The petitioners’ expert used a discounted cash flow (DCF) approach to value the company. The respondent’s expert applied a DCF analysis, a comparable trading analysis, and a comparable transactions analysis, weighting each approach by one-third. It appears that both experts submitted detailed reports, as the petitioners’ expert stated that he believed there were no truly comparable companies or transactions to compare, and, to the extent there were any potentially comparable companies and transactions, he lacked sufficient data from which to make comparisons. The court stated that, generally speaking, “it is preferable to take a more robust approach involving multiple techniques.” Furthermore, the court found that the respondent’s comparable trading and comparable transactions analyses were not reliable and gave no weight to either valuation method. The court did, however, decide upon a fair value using the DCF approach that was much closer to the respondent’s estimate than the petitioners’ expert’s estimate.

7. Golden Telecom Inc. vs. Global GT LP No. 392, 22010 Supreme Court of Delaware pronounced on December 29, 2010, USA

The Delaware Supreme Court excluded the respondent’s request that the court adopt “a standard requiring conclusive or, in the alternative, presumptive deference to the merger price in an appraisal proceeding.” Instead, the Supreme Court held in Golden Telecom that requiring deference “to the merger price, even in the face of a pristine, unchallenged transactional process, would contravene the unambiguous language of the statute and the reasoned holdings of our precedent. It would inappropriately shift the responsibility to determine ‘fair value’ from the court to the private parties.”

Golden Telecom appeared to mark a shift away from the deal price in determining fair value. Though the Delaware Supreme Court did not determine that the deal price was irrelevant to fair value, the decision set an expectation among practitioners that the court should choose a value on its own, without taking guidance from the parties’ agreed-upon price.

8. CKx and Ancestry.com, Delaware Court, 2013, USAIn 2011, buyers expressed interest in acquiring CKx. Ultimately, only two bidders appeared: a private equity fund that bid US$5.50/share, and an unidentified bidder, who offered US$5.60/share. The CKx Board accepted the private equity fund’s offer, recognizing that the other bidder had not yet obtained the financing to close the deal. Huff Fund Investment Partnership, among other investors, petitioned for appraisal.

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The Court of Chancery held that the US$5.50/share deal price was the most reliable and probative indicator of fair value, and rejected each party’s expert valuations. In an opinion dated November 1, 2013, it was found that the sales process included “a full market canvas and auction” and that the CKx Board had “instigated a bidding war” for the company. After finding alternative valuation methodologies (including discounted cash flow and comparable companies analyses) unreasonable under the circumstances, Vice Chancellor Glasscock held that the “merger price is the most reliable indicator of value.”

Under Delaware law, “fair value” in the appraisal context is based on the corporation’s stand-alone value, and excludes any premium that is added from the potential synergies of the acquisition.

9. Surgem, LLC and John Hajjar, M.D., vs. Achievmed Inc. and John Seitz [2013 NJ Superior Court, Appellate Division (Oct 16, 2013)] USA

The court instituted the calculation of value report set by the defendant’s expert as inadequate and unreliable to establish the fair value husband’s interest in Surgem, LLC. The defendant’s expert testified that limited procedures were agreed upon with the defendant to develop the report and indicated that the client limited accessibility to information. The expert was limited, and the court found the report unreliable.

Calculations of value reports have the potential to put forward serviceable information when prepared without scope limitations. The sentiment that a detailed conclusion of value should be the only type of valuation report used for disputes in the deposition and court environment seems misguided. It may therefore be time for regulators to update valuation standards to provide additional levels of valuation reporting.

10. Spencer vs. Commonwealth of Australia [2010] HCA 28 5 CLR 418 High Court of Australia

Amongst other points, one of the point of dispute was the valuation of the land acquired by the respondent under the provisions of the Property for Public Purposes Acquisition Act, 1901, for public purposes.

By Section 6 of that Act land might be acquired by the publication of a notice in the Gazette. Persons claiming compensation in respect of any land so acquired were within a prescribed time to serve a notice on the Minister of the Department concerned and the Attorney-General (s 13). If a prima facie case for compensation was disclosed, the Minister was required to cause a valuation to be made of the land, and to inform the claimant of the amount of the valuation (s 14 (2)). If the claimant and the Minister did not agree as to the amount, the claimant might institute proceedings in the High Court in the form of an action for compensation against the Commonwealth (s 15), which was to be tried by a single Justice without a jury (s 16). In determining the amount of compensation the Justice was not to be bound by the amount of the valuation notified to the claimant (ibid If judgment were given for a sum equal to or less than the amount of the valuation notified to the claimant, he was to pay the costs of the action unless the Justice otherwise ordered, but, if the judgment were for a sum one third less than that amount, the claimant was to pay the costs in any event

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(s 17). Either party might move for a new trial or to set aside the finding in accordance with the practice of the High Court (ibid). The Act did not contain any other special provisions as to procedure. In my opinion the direction that the proceedings were to be by action incorporated the general practice of the Court relating to actions, so far as no other practice is substituted.

One of the questions raised upon the appeal was whether the learned Justice was wrong in assessing the value of the land at a sum not exceeding PD3,000. The answer depends partly upon the principles to be applied in estimating the value of the land, and partly upon the evidence in the case.

The test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring "What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?"

It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.

This was not the evidence and the decision of the learned Justice, the test which was applied by him or by the witnesses upon whose testimony he relied. On this ground, it was held that his assessment of the value was open to be reviewed.

11. Johann T. and Johanna Hess vs. Commissioner of Internal Revenue T. C. Memo. 2003-251 United States Tax Court

The point of dispute was the fair market valuation u/s 2501 of Internal Revenue Code, of 10 shares of stock in certain company, Hess Industries Inc. , that Mr. Hess gave to an irrevocable trust for the benefit of his daughter.

The value of property for the gift tax purposes is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. Generally, in valuing shares of a closely held corporation, actual arm’s length sales of stock in normal course of business within a reasonable time before or after the valuation date are the best indicators of the fair market value.

In this case, experts were called by both the parties and they used various methods of valuation for the purpose of valuation of the shares in question. The company, HII, was into a business that experienced cyclical trends and accounted on completion of contract basis.

The experts derived the share values per share, in the range of $104,000 to $380,000.

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It was held, that because valuation necessarily results in an approximation, the valuation figures we determine need not be one as to which there is specific testimony as long as it’s within the range of values that may be properly arrived at from consideration of all the evidence. Hence, in this case the average of the various values was considered, and the value of shares of HII stock was decided to be $200,000 per share.

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Chapter 19 Registered Valuers Organisations

Section 247 under Chapter XVII of the Companies Act, 2013 deals with the concept of Registered Valuer. This Section along with the Companies (Registered Valuers and Valuation) Rules, 2017 has been made effective from October 18, 2017.

The Companies (Amendment) Act, 2017, notified on February 9, 2018, has amended Section 247 and The Companies (Registered Valuer and Valuation) Amendment Rules, 2018 were also notified on the same day.

Eligibility

As per Rule 12 of the Companies (Registered Valuers and Valuation) Rules, 2017, the following types of organization may be recognized as a registered valuers organization, if-

i. it has been registered under section 25 of the Companies Act, 1956 or section 8 of the Companies Act, 2013,

ii. a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession.

Following class of organizations are also eligible for registration as registered valuer organization:

(a) an organization registered as a society under the Societies Registration Act, 1860 or any relevant state law, or;

(b) an organization set up as a trust governed by the Indian Trust Act, 1882.

Such class of organization shall convert into or register itself as a company under section 8 of the Companies Act, 2013, and include in its bye-laws the requirements specified in Annexure-III, within one year from the date of commencement of these rules.

Recognition of Registered valuers organizations

The organization shall be recognized if it –

(a) conducts educational courses in valuation, in accordance with the syllabus determined by the authority, for individuals who may be its valuers members, and delivered in class room or through distance education modules and which includes practical training;

(b) grants membership or certificate of practice to individuals, who possess the qualifications and experience, in respect of valuation of asset class for which it is recognized as a registered valuers organization;

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(c) conducts training for the individual members before a certificate of practice is issued to them;

(d) lays down and enforces a code of conduct for valuers who are its members;

(e) provides for continuing education of individuals who are its members;

(f) monitors and reviews the functioning, including quality of service, of valuers who are its members; and

(g) has a mechanism to address grievances and conduct disciplinary proceedings against valuers who are its members.

Application for Recognition

An application for recognition as a registered valuers organization is required to be made in Form-D along with a non-refundable application fee of rupees one lakh in favour of the authority.


The authority may require the applicant to submit additional documents or clarification within twenty-one days.

The authority, after being satisfied, may grant a certificate of recognition as a registered valuers organization in Form-E.

Conditions of Recognition

The registered valuers organization shall-

(a) at all times continue to satisfy the eligibility requirements;

(b) maintain a register of members who are registered valuers, which shall be publicly available;

(c) admits only individuals who possess the educational qualifications and experience requirements,

(d) make such reports to the authority as may be required by it;

(e) comply with any directions, including with regard to course to be conducted by valuation organization;

(f) be converted or registered as company under section 8 of the Act, with governance structure and bye laws specified in Annexure-III, within a period of one year from the date of commencement of these rules if it is an organization

(g) shall have the governance structure and incorporate in its bye laws the requirements specified in Annexure-III within one year of commencement of these rules if it is an organization and existing on the date of commencement of these rules;

(h) display on its website, the status and specified details of every registered valuer being its valuer members; and

(i) comply with such other conditions as may be specified by authority.

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Cancellation or suspension of Certificate of Registration or Recognition

Rule 15 provides that the authority may cancel or suspend the registration of a valuer or recognition of a registered valuers organization for violation of the provisions of the Act, any other law allowing him to perform valuation, these rules or any condition of registration or recognition, as the case may be.

Complaint against a Registered Valuer or Registered Valuers Organization

A complaint against a registered valuer or registered valuers organization may be filed before the authority in person or by post or courier along with a non-refundable fee of rupees one thousand in favour of the authority. The authority shall examine the complaint and take such necessary action as it deems fit.

In case the complaint is filed against a registered valuer, who is a partner of a partnership entity or director of a company, the authority may refer the complaint to the relevant registered valuers organization and such organization shall handle the complaint in accordance with its bye laws.

Procedure to be followed for cancellation or suspension of registration or recognition certificate

In case the complaint is received against the registered valuer and the authorized officer is of the prima facie opinion that sufficient cause exists to cancel or suspend the registration of a valuer or cancel or suspend the recognition of a registered valuers organization, it shall issue a show-cause notice to the valuer or registered valuers organization.

The show-cause notice shall be in writing and shall state-









The show-cause notice shall be served in the following manner by-

(a) sending it to the valuer or registered valuers organization at its registered address by registered post with acknowledgment due; or

(b) an appropriate electronic means to the email address provided by the valuer or registered valuers organization to the authority.

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The authorized officer shall dispose of the show-cause notice by reasoned order in adherence to the principles of natural justice and the order in disposal of a show-cause notice may provide for-

(a) no action;

(b) warning; or


(d) change in any one or more partner or director or the governing board of the registered valuers organization.

The order passed shall not become effective until thirty days have elapsed from the date of issue of the order unless stated otherwise and person aggrieved by an order of the authorised officer may prefer an appeal before the authority.

Punishment for contravention

Where a person contravenes any of the provision of these rules he shall be punishable in accordance with sub-section (3) of Section 469 of the Companies Act, 2013.

Recognized Registered Valuer’s Organisations

As of now, IBBI has recognized three registered valuers organization. Details of these organization are given below.

S. No.

RVO Recognition

Number

Name of RVO

Asset Class Address of RVO Website of RVO Name of Chairperson/

President

Contact Details

1. IBBI/RVO/2017/001

Institution of Estate Managers and Appraisers

Land and Building

HA 245, Salt Lake, Kolkata- 700097

Under Construction Sh.Indranath Chakravorti

+91 33 65402677 [email protected]

2. IBBI/RVO/2017/002

IOV Registered Valuers Foundation

Land and Building

Plant and Machinery


IOV Headquarters, 2nd Floor, Plot No. 3, Parwana Road, Pitampura, New Delhi- 110034

http://www.institutionofvaluers.net/

Justice Shri S Rajeshwaran (Retired)

+91- 8870479660 [email protected]

3. IBBI/RVO/2018/003

ICSI Registered Valuers Organisation

Land and Building

Plant and Machinery


Fourth Floor, ICSI House, 22, Institutional Area, Lodhi Road New Delhi- 110003

Under Construction Mr.Ajay Kumar Gupta

011-45341003

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Chapter 20 Case Studies on Valuation

Case 1Wizard Inc. has developed a software for business, which can be termed as a one stop solution for all the business record keeping needs. It includes everything from daily employee logs to book-keeping to reminders for vendor payments and order placements, with minimum human intervention.

This software is termed to be one of its kind, and at least 3 levels advance to the other software available in the market. Predictions have been made that this software will reign the markets and will be the most used software, when it will be launched.

The company had planned to launch the software under its name, after spending next 2 months in publicity and advertisements, but due to some unfavourable circumstances, it cannot mass produce the software and hence, it has decided to sell the software design and the rights of development.

Wizard Inc., has quoted Rs. 10 crores as the sale price for the design and rights of development of the software.

Wincom Ltd. is the rival of Wizard Inc., and it is willing to purchase the software in question. It feels that before deciding to purchase, it should try and evaluate the probable profits that may arise in future, and for the purpose, it has appointed you as the valuer.

Answer the following questions, with regards to the above.

1. Which is the most appropriate valuation approach for this case?a. Income approach

b. Cost approach

c. Market approach

d. Both a. and b.

Ans. A. Income approach is most appropriate as the asset to be valued is an intangible asset, software, which has no comparable market value and the cost of development of which is unknown to the purchaser.

2. Wincom Ltd. has estimated the possible cash inflows due to the sale of the software of Wizard Inc. and it estimates that the useful life of the asset, before it needs any upgradation is 3 years. Which of the following is correct.

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a. It is appropriate to use Excess Earnings Method to value the asset.

b. Premium Profit Method should be used

c. Both a. and b. can be used.

d. None of the above.

Ans. C. Both a. and b. can be used.

3. Wincom Ltd. had a plan to develop a similar software, but it did not materialise. It still wants to revive its plan, instead of purchasing from Wizard Inc. what would be your advice?

a. Wincom should purchase from Wizard as the time required for development could be turned into earning opportunity by immediately starting the sale of Wizard’s software.

b. Wincom should go ahead with the plan of development, because since Wizard cannot mass produce its software, it won’t be a threat of competition.

c. Wincom should neither purchase, nor develop that particular software and venture into some different field.


Ans. A. though wizard cannot mass produce, it will surely sell the software to someone.

4. In the valuation of the software, what all factors should be considered?a. Future cashflow related to the software sales

b. Probable competition from other companies.

c. Life of the asset

d. All of the above.

Ans. D. all of the above.

Case 2:Emee Ltd. is majorly involved in the business of investments in the stocks of start up companies, which are placed privately. As on 31st March, 2017, it held following stocks:

1. Avee Corp. – 510 shares purchased at Rs. 1000 each = Rs. 5,10,000

2. Banjo Ltd. – 20,000 shares purchased at Rs. 45 each = Rs. 9,00,000

3. Guitar Co. Pvt. Ltd. – 15750 shares purchased at Rs. 125 each = Rs. 19,68,750

4. Sitar Inc. – 7650 shares purchased at Rs. 190 each = Rs. 1453500

5. Tabla Ltd. – 780 shares purchased at Rs. 750 each = Rs. 5,85,000

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The stocks are recorded at the purchase price. All the investments are older than 12 months. Due to changes in the tax laws, Emee Ltd. is required to find the value of all its holdings as on 31st March 2017. For the said purpose, it has appointed you as the valuer. Answer the following questions.

1. What will be the most appropriate approach of valuation?a. Income approach

b. Cost approach

c. Market approach

d. None of the above

Ans. B. Cost approach, because since the stocks are privately placed, there is no market value available.

2. Since all the stocks are that of startups, they are not older than 3 years, and till date there has not been any dividend payments on these stocks. In the process of valuation, it is assumed that there will not be any dividend payments for two more years.

a. The assumption of non-payment of dividend should be mentioned in the valuation report.

b. Assumptions can be randomly made. They need not be reported.

c. No assumptions can be made by the valuer. He must go by facts.

d. The assumption made is communicated orally to Emee Ltd., but it need not be given in writing.

Ans. A. the assumption of non-payment of dividend should be mentioned in the valuation report.

3. Banjo Ltd. has reported losses for the past two years and it is facing financial crisis. It may shut down operations and go into dissolution.

a. This information does not affect the valuation of stocks

b. This is a vital information and valuation should be done at the amount recoverable instead of using other methods.

c. Putting a note in the valuation report regarding the financial position of the company is enough.


Ans. B. This is a vital information and valuation should be done at the amount recoverable instead of using other methods.

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4. Emee Ltd. had asked you to perform valuation for the purpose of tax laws, but since it has the report, it uses the same report to submit to the bank for the purpose of borrowing loans.

a. Yes, it is perfectly alright for Emee Ltd. to use the report for the purpose of bank loan.

b. No, Emee Ltd. cannot use the valuation report prepared for tax law purposes for any other purpose.

c. No, Emee Ltd. cannot use the report for any purpose other than tax laws, as the valuer has clearly limited the scope of the report by mentioning in the report the purpose for which it was prepared.

d. Both a. and c.

Ans. D. Both a. and c.

Because, if the valuer has not mentioned the scope for which the report was prepared, then Emee Ltd. can use it for any purpose, whatsoever. And if the valuer mentions in the report that it cannot be used for any other purpose, then, the report can be presented only for the purpose for which it was prepared. In this case, for the purpose of tax laws.

Case 3Tintin Pvt. Ltd. is a company with a business in the field of manufacturing machine parts used for machines in textile industry. Due to recessionary conditions and due to changes in technology, the company is not in good financial health.

The company has four directors. Two of them are of the view that they should liquidate the business and payoff the debts, while the other two believe they should keep the business going and with the change in the market trends the business will turnaround.

The fixed assets of the company mainly comprise of the plant and machinery and other office equipment. The premises from where the company operates is leased.

Questions:

1. What should be the appropriate assumption for the valuation of the business?a. The valuation should be done on going concern basis.

b. The valuation should be done to find the liquidation value of the asset.

c. Valuation should be made with both the assumptions as in a. and b.

d. None of the above

Ans. C. Valuation should be made with both the assumptions as in a. and b.

2. If the business is to be reorganised, and the valuation is to be done accordingly, which approach of valuation to be selected?

a. Cost approach

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b. Income approach

c. Market approach

d. Any of the above based on available information

Ans. D. Any of the above based on information available.

3. The company owns a few assets which are kept at the residence of one of the directors. These assets were not made available to you for the purpose of valuation. In such a situation, what should be your stand?

a. Mention the limitation in carrying out valuation due to lack of inspection of the asset in the valuation report.

b. Value those assets on the basis of the books of the business.

c. Accept the value as stated by the directors and give the valuation report accordingly.

d. Both a. and c.

Ans. A. Mention the limitation in carrying out valuation due to lack of inspection of the asset in the Valuation report.

4. What should be the bases of value in this valuation, if it is to be valued as a going concern?

a. Market value

b. Liquidation Value

c. Investment Value


Ans. A. Market Value. Because, since the business is being valued as a going concern, liquidation value is of no use. Investment value is generally used for the purpose of finding out returns on investment.

Case 4:Orange Ventures is a start up in the field of home delivery of groceries based on orders through mobile apps. The company is in business since past ten months and has started gaining the market with the timely deliveries and pleasant customer experiences.

They want to expand their services to new areas of the city and to include more products to their order lists.

For the purpose, they need to infuse finance from outside sources and before they could approach a party to invest in its business, it need to establish the value of its running business and get some insight into the future possible growth, by implementing the expansion plans.

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The company had appointed a valuer Mr. Supandi for the purpose, who valued the running business at Rs. 1.5 Crore. But the promoters of the company are not satisfied with the valuation and they approach you to review the valuation done by the other valuer.

Questions

1. In this valuation, what should be the bases on which the assets of the company can be valued by Mr. Supandi?

a. Market value

b. Investment Value

c. Liquidation Value

d. Both a. and b.

Ans. D. both a. and b.

2. Amongst the following, which will be the most appropriate technique from Income approach, for the valuation of the business of Orange Ventures?

a. Discounted Cashflow method

b. Comparable transactions method

c. Gordon Growth model


Ans. A. Discounted Cashflow method.

3. You have been appointed to review the valuation done by Mr. Supandi. As per your understanding a review assignment is reviewing the work of the previous valuer, but the clients may not have a similar understanding.

a. You will issue a written scope of work statement listing out your scope of work for the assignment and give it to the client at the onset of the assignment.

b. You will communicate the scope of your work orally to the client.

c. You will mention the scope of work done in the valuation report to be issued.

d. Both a. and c.

Ans. D. Both a. and c.

4. As a valuer, you have completed the review assignment and given the report for the same.

a. You will do away with all the working papers by putting them through the shredder.

b. You will file all the working papers in an appropriate manner for future reference and preserve them for a reasonable period.

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c. You will give all your working papers to the client along with your valuation report.

d. Preservation of working papers differs for each case and it is not necessary in this particular case of valuation, as it was the review assignment.

Ans. B. You will file all the working papers in an appropriate manner for future reference and preserve them for a reasonable period.

Case 5:Random Agencies Ltd. is a business venture of two dynamic young ladies in the field of recreation activities for children. They own a huge commercial place in the prime location and have developed it into a children soft play area. They have set up many equipments and toys for the children to play. They sell timeslots to the parents for a fixed fee to allow the children in the play area.

While the children play, the parents or accompanying adults can relax in the café built adjacent to the play area.

As a part of upgradation of their business, they are planning to take a franchise of a famous coffee chain and serve that coffee at their café. They feel that by doing so, they can lure the parents to the coffee chain’s famous concoctions and it can be an additional reason for the parents’ being tempted to visit the play area more frequently.

But as it happens before taking the big step, Random Agencies Ltd. are looking to get a valuation done to analyse the amount that they should pay to obtain the franchise and the effects of taking the franchise, and for the said purpose, they have approached you.

Questions

1. What will the first thing that you will do, after agreeing to take up the appointment?a. Start with the valuation of the proposal of franchise.

b. Obtain the details about the current business model and carry on the inspection of the premises.

c. Issue a written letter, clarifying the scope of work and terms of engagement to the company.


Ans. C. Issue a written letter, clarifying the scope of work and terms of engagement of the company.

2. Which approach to valuation will be the most appropriate in the case under valuation?

a. Income approach

b. Market approach

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c. Cost approach

d. Both a. and b.

Ans. D. Both a. and b. Income approach can be used, because the future cashflows can be predicted and discounted to justify the amount to be paid to obtain the franchises. Also, the data relating to comparable transactions of franchise can be obtained, so market approach can also be used.

3. Which technique of valuation cannot be used for this valuation?a. Comparable transactions method.

b. With-or-Without method

c. Greenfield method

d. Replacement cost method

Ans. D. Replacement cost method

4. Suppose the method of valuation selected for this assignment is with-or-without. In this case

a. You will calculate the value of business after obtaining the franchise and without the franchise and find the cash value of the projections.

b. You will calculate the value of business after obtaining the franchise and take it as the value of future cashflows.

c. You will find out the differential earnings due to obtaining franchise and discount it to get the current value.


Ans. A. you will calculate the value of business after obtaining the franchise and without the franchise and find the cash value of the projections.

Case 6Rotoboto Inc. is an automated bottling plant. They are into the business of bottling of liquid oxygen. The investment in machinery is the major investment in the business. The plant is in operation since five years and the useful life of the machinery was estimated at ten years at the time of installation.

The company has always been particular to have its assets properly insured. The insurance cover of the plant and machinery expires within a month and it has to be renewed and the insurance company has asked for a valuation report from a registered valuer to obtain the insurable value.

The company has come to you to get the valuation report on the insurable value of its plant and machinery.

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Questions

1. What will be the most appropriate technique for the valuation of insurable value?a. The Comparable Transactions method

b. The Greenfield Method

c. The Replacement Cost Method

d. The Summation Method

Ans. C. The Replacement Cost Method

2. Rotoboto Inc. also wants the valuation of its business be done for financial purposes and it communicates the same to you.

a. You will issue a single report of valuation for both the purposes and both the values will be the same.

b. You will issue two different reports for both the valuation purposes, also mentioning the scope of both the reports separately.

c. You will prepare a single valuation report and mention different values for both the valuations.


Ans. B. You will issue issue two different reports for both the valuation purposes, also mentioning the scope of both the reports separately.

3. For the purpose of valuation of the assets in question, you had to make certain special assumptions,

a. The assumptions can be made as and when required.

b. There cannot be any assumptions in the assignment of valuation of assets.

c. The valuer can make reasonable assumptions in the assignment of valuation, and the same should be mentioned in the valuation report.


Ans. C. The valuer can make reasonable assumptions in the assignment of valuation and the same should be mentioned in the valuation report.

4. Which is the best approach to valuation in case of valuation for insurance purposes?a. Cost approach

b. Market approach

c. Income approach

d. Both a. and c.

Ans. A. Cost approach.

251


Case 7Arjmeer Textiles Pvt. Ltd. is one of the leading dying and printing units in its locality. The directors of the company are planning reverse integration by starting a weaving unit attached to the current facility. They have checked the feasibility of profitability of the venture and are keen to start work on the same as soon as possible.

The directors had originally planned to raise the required funds internally, by investing private savings and getting unsecured loans. But before any moves can be finalised or implemented, state government announced interest subsidy on the weaving units.

For the purpose of obtaining subsidy, the loan had to be from nationalised banks only. The directors approached a nationalised bank for the loan. Amongst the requirements of the documents to be submitted, the bank had listed a valuation report of the existing business of the entities seeking loans.

You were approached by Arjmeer Textiles Pvt. Ltd.’s directors to carry out the valuation assignment and issue them with the report on the same.

Questions:

1. Which is the most appropriate approach of valuation for this assignment?a. Cost approach

b. Market approach

c. Income approach

d. All of the above

Ans. D. All of the above.

Because, this valuation is possible by the cost approach, as we can easily estimate the replacement or reproduction cost of the assets, market parallels also can be easily found as it is a textiles business, and most of the machines used are general in the industry. Also the future income and cashflows can be predicted. Hence, any of the approach can be used.

2. Suppose, the valuation is carried out by the Comparable Transactions Method. Which of the following steps will be included in the valuation process?i. Identify the units of comparison that are used by the participants in the relevant

market.

ii. Apply the adjusted valuation metrices to subject assets.

iii. Choose the most appropriate type of cashflow for the nature of subject asset and the assignment.

iv. Make necessary adjustments, if any, to the valuations metrics to reflect differences between the subject asset and the comparable assets.

252


a. All of i, ii, iii, iv

b. i, iii, iv

c. i, ii, iv

d. ii, iv

Ans. C. The third point “choose the most appropriate type of cashflow for the nature of subject asset and the assignment” is a part of discounted cashflow method.

3. What can be the differences that may require adjustments between the comparable transactions and the subject asset?

a. Material characteristics.

b. Historical and expected growth

c. Geographical location


Ans. D. All of the above.

4. Which of the following are the techniques of Income approach to valuation?a. Comparable Transaction Method

b. Greenfield Method

c. Reproduction Cost Method

d. Summation Method

Ans. B. Greenfield Method.

mm

253

Chap. 21 – Checklists for Land & Building/Plant & Machinery

Chapter 21 Checklists for Land & Building/Plant & Machinery

CHECKLIST FOR THE VALUATION OF LAND AND BUILDING1. Verify the purchase agreement of the land and/or building and ascertain the purchase

price.

2. Find out the current market rate for the similar land and building.

3. The information about the current rate can be obtained from the open market through the brokers or from the office of the registrar of properties of the locality in which the asset under valuation is located.

4. Make adjustments to the current market rate, for:

a. Any additional amenities available in the building to be valued as compared to the similar building considered.

b. The age of the building under valuation. Older the building, more will be the cost of maintenance and lesser the value.

c. The location of the building.

5. Compare the value arrived at with the last valuation reports which might have been formulated for the purpose of bank loans and determine the reasons for any major differences in the values as per the report and the current valuation being carried out.

6. List out all the assumptions made and the sources referred to for the purpose of valuation of the land and building.

7. At times, the building is constructed as per the specific requirement of the business in question. In such cases, for the valuation of the portion of land, above steps can be considered. For the valuation of the building, help of experts in the field, like an architect or an engineer can be taken.

8. Certain machinery, like the heating/cooling equipment, elevators, etc., are an intergral part of the building. Values of such machinery should be included in the value of the building, as these cannot be separated from the building and they add value to the building being valued.

9. In case of land, it is at times treated for special purposes, like a farm land may be treated to increase its productivity. These special treatments involve costs, the benefits of which will not be limited to a small time period, but will be reaped over the time of

254


years. Such values should also to considered when carrying on the valuation of land and building.

10. In certain cases, the building is constructed for a specific purpose. In order to make an alternate use of the land and/or building, the construction has to be demolished and new construction to be undertaken. The costs involved in this has to be considered.

CHECKLIST FOR THE VALUATION OF PLANT AND MACHINERYPlant and machinery can be general, which is easily available in the market, and whose rate can be determined as per the market rates, or it can be very specific made to order machinery. Hence, the valuation has to be done as per the type of plant and machinery in question.

GENERAL PLANT AND MACHINERY In the cases of small production business, the machinery used will be the ones

generally available in the market, which is produced on a bigger scale by the producer. For example, in the business of weaving of the cloth, the type of machinery used is general across the industry. Or in the case of renting of vehicles, the models of the vehicles are the same across the segment.

In such cases, the value of the same or similar machinery will be available from the market. This value is to be adjusted for the depreciation already charged for the plant and machinery to be valued and for any other major repairs or upgradation process undertaken.

SPECIFIC PLANT AND MACHINERY In many large factories, the plant and machinery used is made to order, specific to that

particular factory. In such cases, there will not be any value readily available from the market.

Here, the valuer will have to start with the purchase value of the machinery. It will include the cost of purchase, the installing and erecting the plant, etc.

Once, an estimate of the value of the machine is made, adjustments will be required to be made after consideration of below mentioned factors.

The value estimated on the basis of the market value or the purchase value of the machine will then be adjusted for the wear and tear of the plant and machinery till date.

Also, the type of maintenance carried out on the machinery will be considered. A well-maintained machine may overrun its expected life estimated at the onset of the use of the machinery, whereas poorly maintained machine may become obsolete even before the end of its estimated useful life.

The remaining useful life will be determined and considered in valuation.

255

Chap. 21 – Checklists for Land & Building/Plant & Machinery

Also, determine if the functioning of the machinery in question is dependent on some other subsidiary machine. If yes, then, calculate the value of the subsidiary machine and its useful life and how will the absence of that machine affect the value of the main machine. In case, if the subsidiary machine becomes obsolete, can it be replaced with the same or the similar machine? All this is to be considered in the valuation of the main plant and machinery in question.

Certain plants and machineries are required to be fixed to the ground or a platform, specifically built for the purpose, in such a manner that it cannot be detached during the useful life of the machine. They will be uninstalled only at the time of scrapping the machinery. Such machinery valuation should take into consideration the fact that the uninstallation might damage the machine, and also the process will incur certain costs.

When the machinery is fixed to the building, like a lift or a ventilating equipment, such machinery is to be valued along with the valuation of the building it is connected to. It cannot be valued on stand alone basis, as it will be of no use, in the absence of the building.

In this situation, if such plant and machinery is valued on standalone basis, the valuer should put in the note regarding the same. Also, when such assets are valued on standalone basis, their value decreases considerably, because, the utility of the lift will not be the same outside the building it was installed.

Certain plants and machineries are owned for the purpose of leasing out to other businesses. For the purposes of such machines, its useful life depends on the manner in which they are used. In valuation of such machines, their capacity to generate income in the future is to be considered.

mm

256


Annexure 1 Course for Asset Class - Land & Building

Insolvency and Bankruptcy Board of India

31st December, 2017

Sub: Educational Courses for asset class: Land and BuildingIn pursuance of the first proviso to rule 5 (1) of the Companies (Registered Valuers and Valuation) Rules, 2017, the Insolvency and Bankruptcy Board of India, being the Authority, hereby specifies the details of educational courses for the Asset Class of Land and Building as under:

i. The curriculum for the educational course shall be as under:

Asset Class: Land and Building

Sl. No.

Topics Hours of Training

a. Principles of Economics

• Micro-Economics

- Consumption: Indifference Curve, Consumer’s Surplus, Elasticity.

- Price Mechanism: Determinants of Price Mechanism, Individual and Market Demand Schedules, Law of Demand & its Conditions, Exceptions and Limitations of Law of Demand, Individual and Market Supply Schedules, Conditions and Limitations, Highest, Lowest and Equilibrium Price, Importance of Time Element.

- Pricing of Products under different market conditions: Perfect and Imperfect Competition, Monopoly.

- Factors of Production and their pricing – Land, Labour, Capital, Entrepreneur and other factors

- Theory of Rent, Theory of Wages

- Capital and Interest – Types of Capital, Gross Interest, Net Interest

5

257

Ann. 1 – Course for Asset Class - Land & Building

Sl. No.


- Organisation and Profit – Functions of Entrepreneur, Meaning of Profit and Theories of Profit.

• Macro-Economics

- Functions & Role of Money.

- Inflation: Types of Inflation, Causes, Effects, Inflationary Gap, Control of Inflation, Monetary, Fiscal and Direct Measures.

- Deflation: Causes, Effects, Deflationary Gap, Measures to Control Deflation, Deficit Financing.

- Savings and Investment: Savings and Types of Savings, Determinants of Savings, Investment, Types of Investment, Determinants of Investment, Relationship between Savings and Investment.

- Components of Economy: Primary Sector, Secondary Sector, Tertiary Sector, Informal Sector in Urban Economy, Parasitic Components in Urban Economy.

- Concepts of GDP and GNP, Capital Formation.

- Parallel Economy: Definition of Parallel Economy, Causes and Effects of Parallel Economy on Use of Land and its Valuation - Its Impact on Real Estate Market - Construction Industry and Parallel Economy.

b. Book Keeping and Accountancy

- The meaning and objects of Book Keeping, Double Entry Book Keeping.

- Books of Prime Entry and Subsidiary Books: Cash Book, Bank Book, Journal, Ledger, Purchase and Sale Books, Debit and Credit Notes Register, Writing of Books, Posting and Closing of Accounts.

- Trading Account, Profit and Loss Account, Income and Expenditure Account,

- Preparation of Balance Sheet for Individuals and Companies and Disclosure Requirements.

- Cost, Costing and Elements of Cost, Fixed Expenses, Variable Expenses, Break-Even Point.

2.5

258


Sl. No.


c. Laws General

- Indian Legal System: Salient Features of the Indian Constitution, Fundamental Rights, Directive Principles of the State Policy.

- Government: Executive, Legislature and Judiciary

- Laws of Contract: Formation of a Contract, Parties, Void, Voidable and Unenforceable Contract, Contingent Contract, Misrepresentation and Fraud and Effect thereof, Termination of Contract, Remedies for Breach, Performance of Contract, Indemnity and Guarantee, Law of Agency.

- Tort: General Principles of Tort, Tort affecting Valuation.

- Law of Arbitration and Conciliation: Salient Features.

- Auction: Authority of Auctioneer, Duties of Vendor, Purchaser and Public, Misdescription and Misrepresentation, Advertisements, Particulars and Catalogues, Statements on the Rostrum, Conduct of Sale, Reservation of Price and Right to Bid, Bidding Agreements. Memorandum of the Sale. The Deposit, Rights of Auctioneer against Vendor and Purchaser.

- Laws of Evidence: Burden of Proof, Presumptions, Conclusive Proof.

- Salient Features of the Insolvency and Bankruptcy Code, 2016 concerning Valuation.

- Salient Features of the Companies (Registered Valuers And Valuation) Rules, 2017

- Salient Features of the Securitization and Reconstruction of the Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) concerning Valuation.

- Section 5(n) of the Banking Regulation Act, 1949 on “Secured Loan or Advance”.

- The Companies Act 2013: Sections 192(2), 230 (1,2,3), 231, 232, 247(1), 281(1).

3

d. Introduction to Statistics

- Data Classifications and Processing, Graphical Representation of Data, Frequency Distributions.

2

259


Sl. No.


- Measures of Central Tendency, Dispersion and Skewness.

- Elementary Theory of Probability and Probability Distributions, Sampling and Sampling Distributions, Estimation.

- Simple Test of Significance, Regression and Co-relation, Multiple Correlation Coefficient.

- Time Series

- Index Numbers

e. Environmental Issues in Valuation

- Environment and Valuation - Differences between the ‘Market Price and the Negative Value Consequent on Environmental Impact.

2

- Environmental Issues of Air Pollution, Water Pollution, Environmental Factors and their effects, Measures to Restore the Damage, Cost to Cure.

- Outlines of Environmental Legislations: The Forest Act, 1927, Laws related to Industrial Health & Safety.

- The Water (Prevention and Control of Pollution) Act, 1974, The Air (Prevention and Control of Pollution) Act, 1981, The Environment (Protection) Act, 1986

f. Professional Ethics and Standards

- Model Code of Conduct as notified by MCA under the Companies (Registered Valuers and Valuation) Rules, 2017

- Other Engagement Considerations

2

g. Law – Real Estate

- Land Acquisition – The Right to Fair Compensation and Transparency in the Land Acquisition, Rehabilitation and Resettlement Act, 2013.

- Provisions for Acquisition of Land under the Municipal Laws

- Building Rules and Regulations of Local Bodies as well as Development Control Rules & Regulations of different urban development authorities for feasibility of Development/Redevelopment on the Land – Rules for Open Space, FSI and Plinth Area Restrictions.

5

260


Sl. No.


- Transferable Development Rights.

- Rent Control Laws: Sections pertaining to Occupancy Rights of Tenants, Freezing of Rent and Protection against Eviction of Tenant and its effect on value of property.

- Right of Way, Section 52 – Licences under the Indian Easements Act, 1882.

- Salient features of the Real Estate (Regulation and Development) Act, 2016 and Real Estate Regulating Authorities established under the Act.

• The Transfer of Property Act, 1882:

- Transfer of Immovable Property: Sale, Mortgage, Gift, Exchange, Assignment, Charge, Lien, Tenancies/Sub-Tenancies.

- Lease of Immovable Property, Lease granted by Private and Statutory Bodies – Impact of each on Valuation.

- Sections: 3, 5, 6, 7, 25, 53 and 53A

• Laws Relating to Inheritance/Succession:

- Mohammedan – Personal Law

- The Hindu Succession Act, 1956, the Hindu Succession (Amendment) Act, 2005 (39 of 2005)

- The Indian Succession Act, 1925: Law of succession for person other than Hindu and Mohammedan

- Will & Testament; Succession Certificate

h. Valuation of Real Estate

- Cost, Price and Value

- Types of Value

- Basic elements of Value – Marketability, Utility, Scarcity, and Transferability

- Factors affecting Valuation – Physical, Economic, Legal and Social

- Highest and Best Use, Value in Use, Value in Exchange

6.5

261


Sl. No.


- Real Property: Rights and Interests in Real Estate, Types of ownerships and Types of occupancy in Real Estate

- Annuities, Capitalization, Rate of Capitalization, Years Purchase, Sinking Fund, Redemption of Capital, Reversionary Value

- Construction and use of Valuation Tables

- Urban Infrastructure and its influence on Value of Real Estate

- Real Estate Market and its characteristics, Investment in Real Estate, Factors influencing Demand and Supply Schedule in Real Estate

• Income Approach to Value

- Relation between Income and Value

- Valuation of Property affected by the Rent Control Act, Licensed property under the Easement Act, 1882 and Leasehold properties under the Transfer of Property Act, 1882.

- Derivation of Yield Rate from Market Derived Data.

- Remunerative Rate of Interest and Accumulative Rate of Interest.

- Types of rent: Outgoings, Income, Yield, Years’ Purchase.

- Determination of Market Rent and Standard Rent

- Lease: lessor and lessee: Types of Lease, Lease provisions and Covenants.

- Valuation of Lessor’s Interest, Lessee’s Interest including Sub-Lease in Leased Property. Premature Termination of Lease or Surrender of Lease.

- Real Estate as an Investment, Yield from Real Estate vis-à-vis other forms of Investments – Sound Investment Comparison.

- Investment Decisions: Discounted Cash Flow Techniques-Internal Rate of Return (IRR) and Net Present Value (NPV).

- Profit Method: Valuation of Special Properties: Hotels, Cinema, Mall, Petrol Pump, Hill resorts.

3.5

• Market Approach to Value

- Types of Market, Demand and Supply Curve, Bell Curve for Overall Sales Performance (Probability Distribution),

2.5

262


Sl. No.


- Market Survey & Data Collection, Sources of Sale Transactions.

- Comparison of Sale Instances – Factors of comparison and weightages for adjustment in value,

- Hedonic Model and Adjustment Grid Model under Sales Comparison Method.

- Land characteristics and its effect on Land Values.

- Hypothetical Plotting Scheme for value of large size land.

- Residue Technique and other development methods.

- Valuation for Joint Venture Development of property.

• Cost Approach to Value

- Methods of Cost Estimates for Buildings

- Life of Building: Economic/Physical/Legal.

- Factors affecting life of the building.

- Total Life, Age, Estimating Future Life.

- Various methods of Computation of Depreciation, Functional, Technological and Economic Obsolescence.

- Reproduction Cost/Replacement cost, Depreciated Replacement Cost (DRC) working, adopting DRC as Value subject to Demand and Supply aspect.

- Land Value by Market Approach and Building Value by Cost Estimation Method for Owner Occupied Bungalows, Factories, Public Buildings.

2.5

• Various purposes of Valuation

- Valuation of properties for purposes such as: Bank Finance, Auction Reserve, Building Insurance, Sale, Purchase, Valuation Disputes in Court, Probate, Partition, Rent Fixation, Stamp Duty, Capital Gain Tax, Lease and Mortgage of Property. Any other purposes not referred above.

- Asset Valuation under the SARFAESI Act, 2002, the LARAR Act, 2013, the Companies Act 2013, the Insolvency and Bankruptcy Code, 2016

3

263


Sl. No.


- Concept of Transferable Development Rights (TDR), Concept of Time Share Interest in Real Property. Valuation of TDR, Time Share Interest and Easement Rights.

- Study of Indian Accounting Standards (Ind AS) as applicable to Valuation of Real Estate.

- Study of International Valuation Standards (IVS) as applicable to Valuation of Real Estate.

• Valuer as an Expert witness in Court.

• Valuers’ Functions & Responsibilities, Error of Judgement and Professional Negligence.

• Code of Conduct for valuers and Professional Ethics for valuers.

• Important Case Laws on principles of valuation of Real Estate:

- K. P. Varghese vs. ITO (1981) 131 ITR 597(SC)

- Gold Coast Trust Ltd. vs. Humphray (1949) 17 ITR 19

- Rustam C. Cooper vs. Union of India AIR 1970 SC 564

- Hays Will Trust vs. Hays and Others (1971) 1 WLR 758

- V. C. Ramchandran vs. CWT (1979) 126 ITR 157 Karnataka HC

- Subh Karan Choudhury vs. IAC (1979) 118 ITR 777 Kotkata HC (Special Value/ FMV)

- Wenger & Co. vs. DVO (1978) 115 ITR 648 Delhi HC (Combination of Methods)

- Sorab Talati vs. Josheph Michem Appeal 101 of 1949 - Vol. - 2 of SOC- page 162 (Bombay) (Invest Theory of Rent)

- CWT vs. P. N. Sikand (1977) 107 ITR 922 SC

- SLAO (Eluru) vs. Jasti Rohini (1995) 1SCC 717 SC

- Shubh Ram and Others vs. State of Haryana (2010) 1SCC 444

- Jawaji Nagnathan vs. REV. DIV. Officer (1994) SCC - 4 Page 595 SC

- Chimanlal Hargovinddas vs. SLAO- Pune, AIR 1988 SC 1652

1

264


Sl. No.


i. Principles of Insurance and Loss Assessment

- Principles and legal concepts in relation to Insurance of buildings. The Contract of Insurance. Insurable Interests and Liability to Insure. Duties of the Insurer and the Insured.

- The types of Fire Policies, Reinstatement Cost Policy and policies for other perils, Terms and Conditions, Perils, Beneficial and Restrictive Clauses.

- Value at Risk, Sum Insured and Condition of Average, Over and Under Insurance, Inflation Provisions, other contents, Depreciation, Obsolescence and Betterment.

- Preparation of Claim for Damages due to Insured Perils.

- Obligations and Rights of Insurer and Insured.

2.5

k. Report writing

- Reports - Quality, Structure, Style.

- Report writing for various purposes of valuation - Sale, Purchase, Purchase, Mortgage, Taxation, Insurance, Liquidation

- Contents of the report: Instruction of Clients, Valuation Date, Site Inspection, Location, Ownership History, Data Collection and Analysis, Type of Construction, Valuation Method, Value Estimation, Conclusion

1

l. Case Study

On valuation of Land and Building mentioned at Point – (h) above. 6

Total 50

ii. The educational course for the asset class shall be delivered by the registered valuer organisation in not less than 50 hours.

iii. A candidate having the required qualification and experience and having completed the education course specified above shall be eligible for registration as a valuer on passing the valuation examination of the asset class conducted by the Authority.

2. The educational course will be reviewed on a yearly basis.

mm

265

Ann. 2 – Paper Pattern Asset Class - Land & Building

Annexure 2 Paper Pattern Asset Class - Land & Building


31st December, 2017

Subject: Valuation Examination for Asset Class – Land and Building In pursuance of the rule 5 (3) of the Companies (Registered Valuers and Valuation) Rules, 2017, the Insolvency and Bankruptcy Board of India, being the Authority, hereby publishes the syllabus, format and frequency of the ‘Valuation Examination’ for the asset class: Land and Building.

I. Syllabus

Sl. No.

Coverage Weight (%)


• Micro-Economics

- Consumption: Indifference Curve, Consumer’s Surplus, Elasticity.

- Price Mechanism: Determinants of Price Mechanism, Individual and Market Demand Schedules, Law of Demand & its Conditions, Exceptions and Limitations of Law of Demand, Individual and Market Supply Schedules, Conditions and Limitations, Highest, Lowest and Equilibrium Price, Importance of Time Element.

- Pricing of Products under different market conditions: Perfect and Imperfect Competition, Monopoly.

- Factors of Production and their pricing – Land, Labour, Capital, Entrepreneur and other factors.

- Theory of Rent, Theory of Wages.

- Capital and Interest – Types of Capital, Gross Interest, Net Interest.

- Organisation and Profit – Functions of Entrepreneur, Meaning of Profit and Theories of Profit.

10

266


Sl. No.

Coverage Weight (%)

• Macro-Economics

- Functions & Role of Money.

- Inflation: Types of Inflation, Causes, Effects, Inflationary Gap, Control of Inflation, Monetary, Fiscal and Direct Measures.

- Deflation: Causes, Effects, Deflationary Gap, Measures to Control Deflation, Deficit Financing.

- Savings and Investment: Savings and Types of Savings, Determinants of Savings, Investment, Types of Investment, Determinants of Investment, Relationship between Savings and Investment.

- Components of Economy: Primary Sector, Secondary Sector, Tertiary Sector, Informal Sector in Urban Economy, Parasitic Components in Urban Economy.

- Concepts of GDP and GNP, Capital Formation.

- Parallel Economy: Definition of Parallel Economy, Causes and Effects of Parallel Economy on Use of Land and its Valuation - Its Impact on Real Estate Market - Construction Industry and Parallel Economy.


- The meaning and objects of Book Keeping, Double Entry Book Keeping.

- Books of Prime Entry and Subsidiary Books: Cash Book, Bank Book, Journal, Ledger, Purchase and Sale Books, Debit and Credit Notes Register, Writing of Books, Posting and Closing of Accounts.

- Trading Account, Profit and Loss Account, Income and Expenditure Account.

- Preparation of Balance Sheet for Individuals and Companies and Disclosure Requirements.

- Cost, Costing and Elements of Cost, Fixed Expenses, Variable Expenses, Break-Even Point.

5

267


Sl. No.

Coverage Weight (%)

c. Laws – General

- Indian Legal System: Salient Features of the Indian Constitution, Fundamental Rights, Directive Principles of the State Policy.

- Government: Executive, Legislature and Judiciary.



- Law of Arbitration and Conciliation: Salient Features.

- Auction: Authority of Auctioneer, Duties of Vendor, Purchaser and Public, Misdescription and Misrepresentation, Advertisements, Particulars and Catalogues, Statements on the Rostrum, Conduct of Sale, Reservation of Price and Right to Bid, Bidding Agreements. Memorandum of the Sale. The Deposit, Rights of Auctioneer against Vendor and Purchaser.



- Salient Features of the Companies (Registered Valuers And Valuation) Rules, 2017.

- Salient Features of the Securitization and Reconstruction of the Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) concerning Valuation.

- Section 5(n) of the Banking Regulation Act, 1949 on “Secured Loan or Advance”.

- The Companies Act, 2013: Sections 192(2), 230 (1, 2, 3), 231, 232, 247(1), 281(1).

6

268


Sl. No.

Coverage Weight (%)


- Data Classifications and Processing, Graphical Representation of Data, Frequency Distributions.

- Measures of Central Tendency, Dispersion and Skewness.

- Elementary Theory of Probability and Probability Distributions, Sampling and Sampling Distributions, Estimation.

- Simple Test of Significance, Regression and Co-relation, Multiple Correlation Coefficient.

- Time Series.

- Index Numbers.

4


- Environment and Valuation –Differences between the ‘Market Price and the Negative Value Consequent on Environmental Impact.

4

- Environmental Issues of Air Pollution, Water Pollution, Environmental Factors and their effects, Measures to Restore the Damage, Cost to Cure.

- Outlines of Environmental Legislations: The Forest Act, 1927, Laws related to Industrial Health & Safety.

- The Water (Prevention and Control of Pollution) Act, 1974, The Air (Prevention and Control of Pollution) Act, 1981, The Environment (Protection) Act, 1986.


- Model Code of Conduct as notified by MCA under the Companies (Registered Valuers and Valuation) Rules, 2017.

- Other Engagement Considerations.

4

g. Law – Real Estate

- Land Acquisition – The Right to Fair Compensation and Transparency in the Land Acquisition, Rehabilitation and Resettlement Act, 2013.

- Provisions for Acquisition of Land under the Municipal Laws.

10

269


Sl. No.

Coverage Weight (%)

- Building Rules and Regulations of Local Bodies as well as Development Control Rules & Regulations of different urban development authorities for feasibility of Development/Redevelopment on the Land – Rules for Open Space, FSI and Plinth Area Restrictions.

- Transferable Development Rights.

- Rent Control Laws: Sections pertaining to Occupancy Rights of Tenants, Freezing of Rent and Protection against Eviction of Tenant and its effect on value of property.

- Right of Way, Section 52 – Licences under the Indian Easements Act, 1882.

- Salient features of the Real Estate (Regulation and Development) Act, 2016 and Real Estate Regulating Authorities established under the Act.

• The Transfer of Property Act, 1882:

- Transfer of Immovable Property: Sale, Mortgage, Gift, Exchange, Assignment, Charge, Lien, Tenancies/Sub-tenancies.

- Lease of Immovable Property, Lease granted by Private and Statutory Bodies – Impact of each on Valuation.

- Sections: 3, 5, 6, 7, 25, 53 and 53A

• Laws Relating to Inheritance/Succession:

- Mohammedan – Personal Law.

- The Hindu Succession Act, 1956, the Hindu Succession (Amendment) Act, 2005 (39 of 2005).

- The Indian Succession Act, 1925: Law of succession for person other than Hindu and Mohammedan.

- Will & Testament: Succession Certificate.

270


Sl. No.

Coverage Weight (%)

h. Valuation of Real Estate

- Cost, Price and Value

- Types of Value

- Basic elements of Value - Marketability, Utility, Scarcity, and Transferability

- Factors affecting Valuation – Physical, Economic, Legal and Social

- Highest and Best Use, Value in Use, Value in Exchange

- Real Property: Rights and Interests in Real Estate, Types of ownerships and Types of occupancy in Real Estate



- Urban Infrastructure and its influence on Value of Real Estate

- Real Estate Market and its characteristics, Investment in Real Estate, Factors influencing Demand and Supply Schedule in Real Estate

13

• Income Approach to Value

- Relation between Income and Value

- Valuation of Property affected by the Rent Control Act, Licensed property under the Easement Act, 1882 and Leasehold properties under the Transfer of Property Act, 1882.

- Derivation of Yield Rate from Market Derived Data.

- Remunerative Rate of Interest and Accumulative Rate of Interest

- Types of rent: Outgoings, Income, Yield, Years’ Purchase

- Determination of Market Rent and Standard Rent

- Lease: lessor and lessee: Types of Lease, Lease Provisions and Covenants.

- Valuation of Lessor’s Interest, Lessee’s Interest including Sub-Lease in Leased Property. Premature Termination of Lease or Surrender of Lease.

- Real Estate as an Investment, Yield from Real Estate vis-à-vis other forms of Investments – Sound Investment Comparison.

7

271


Sl. No.

Coverage Weight (%)

- Investment Decisions: Discounted Cash Flow Techniques-Internal Rate of Return (IRR) and Net Present Value (NPV)

- Profit Method: Valuation of Special Properties: Hotels, Cinema, Mall, Petrol Pump, Hill resorts

• Market Approach to Value

- Types of Market, Demand and Supply Curve, Bell Curve for Overall Sales Performance (Probability Distribution),

- Market Survey & Data Collection, Sources of Sale Transactions,

- Comparison of Sale Instances – Factors of comparison and weightages for adjustment in value,

- Hedonic Model and Adjustment Grid Model under Sales Comparison Method.

- Land characteristics and its effect on Land Values

- Hypothetical Plotting Scheme for value of large size land

- Residue Technique and other development methods

- Valuation for Joint Venture Development of property

5

• Cost Approach to Value

- Methods of Cost Estimates for Buildings

- Life of Building: Economic/Physical/Legal.

- Factors affecting life of the building.

- Total Life, Age, Estimating Future Life

- Various methods of Computation of Depreciation, Functional, Technological and Economic Obsolescence

- Reproduction Cost/Replacement Cost, Depreciated Replacement Cost (DRC) working, adopting DRC as Value subject to Demand and Supply aspect

- Land Value by Market Approach and Building Value by Cost Estimation Method for Owner Occupied Bungalows, Factories, Public Buildings.

5

272


Sl. No.

Coverage Weight (%)

• Various purposes of Valuation

- Valuation of properties for purposes such as: Bank Finance, Auction Reserve, Building Insurance, Sale, Purchase, Valuation Disputes in Court, Probate, Partition, Rent Fixation, Stamp Duty, Capital Gain Tax, Lease and Mortgage of Property. Any other purposes not referred above.

- Asset Valuation under the SARFAESI Act, 2002, the LARAR Act, 2013, the Companies Act, 2013, the Insolvency and Bankruptcy Code, 2016

- Concept of Transferable Development Rights (TDR), Concept of Time Share Interest in Real Property. Valuation of TDR, Time Share Interest and Easement Rights.

- Study of Indian Accounting Standards (Ind AS) as applicable to Valuation of Real Estate.

- Study of International Valuation Standards (IVS) as applicable to Valuation of Real Estate

• Valuer as an Expert witness in Court.

• Valuers’ Functions & Responsibilities, Error of Judgment and Professional Negligence

• Code of Conduct for valuers and Professional Ethics for valuers

6

• Important Case Laws on principles of valuation of Real Estate:

- K. P. Varghese vs. ITO (1981) 131 ITR 597(SC)

- Gold Coast Trust Ltd. vs. Humphray (1949) 17 ITR 19

- Rustam C. Cooper vs. Union of India AIR 1970 SC 564

- Hays Will Trust vs. Hays and Others (1971) 1WLR 758

- V. C. Ramchandran vs. CWT (1979) 126 ITR 157 Karnataka HC

- Subh Karan Choudhury vs. IAC (1979) 118 ITR 777 Kotkata HC (Special Value/ FMV)

- Wenger & Co. vs. DVO (1978) 115 ITR 648 Delhi HC (Combination of Methods)

- Sorab Talati vs. Josheph Michem Appeal 101 of 1949 - Vol. - 2 of SOC- page 162 (Bombay) (Invest Theory of Rent)

2

273


Sl. No.

Coverage Weight (%)

- CWT vs. P. N. Sikand (1977) 107 ITR 922 SC

- SLAO (Eluru) vs. Jasti Rohini (1995) 1SCC 717 SC

- Shubh Ram and Others vs. State of Haryana (2010) 1SCC 444

- Jawaji Nagnathan vs. REV. DIV. Officer (1994) SCC - 4 Page 595 SC

- Chimanlal Hargovinddas vs. SLAO- Pune, AIR 1988 SC 1652


- Principles and legal concepts in relation to Insurance of buildings. The Contract of Insurance. Insurable Interests and Liability to Insure. Duties of the Insurer and the Insured.

- The types of Fire Policies, Reinstatement Cost Policy and policies for other perils, Terms and Conditions, Perils, Beneficial and Restrictive Clauses.

- Value at Risk, Sum Insured and Condition of Average, Over and Under Insurance, Inflation Provisions, other contents, Depreciation, Obsolescence and Betterment.

- Preparation of Claim for Damages due to Insured Perils.

- Obligations and Rights of Insurer and Insured.

5

k. Report writing

- Reports - Quality, Structure, Style.

- Report writing for various purposes of valuation-Sale, Purchase, Mortgage, Taxation, Insurance, Liquidation.

- Contents of the report: Instruction of Clients, Valuation Date, Site Inspection, Location, Ownership History, Data Collection and Analysis, Type of Construction, Valuation Method, Value Estimation, Conclusion.

2

l. Case Study

This section will have case study for application of valuation techniques. There will be comprehension(s) narrating the transaction based on which questions will be asked from the case.

12

Total 100

Note: Wherever any Law, Act of Parliament or any Rule is referred in the syllabus, the same shall be taken as updated as on 31st December, 2017.

274


II. Format of Examination The format of examination is as under:

a. The examination is conducted online (computer-based in a proctored environment) with objective multiple-choice questions;

b. The duration of the examination is 2 hours;

c. A candidate is required to answer all questions;

d. A wrong answer attracts a negative mark of 25% of the marks assigned for the question;

e. A candidate needs to secure 60% of marks for passing;

f. A successful candidate is awarded a certificate by the Authority;

g. A candidate is issued a temporary mark sheet on submission of answer paper; and

h. No workbook or study material is allowed or provided;

i. A candidate may use a non-memory based calculator. No mobile phone is allowed.

III. Frequency of Examination The frequency of Examination is as under:

a. The examination is available from a number of locations in the country;

b. The examination is available on every working day;

c. A candidate needs to provide PAN and Aadhaar to enrol for the examination.

Further details about the examination will be provided subsequently.

mm

275

Ann. 3 – Course for Asset Class – Plant & Machinery

Annexure 3 Course for Asset Class – Plant & Machinery


31st December, 2017

Sub: Educational Courses for asset class: Plant and Machinery In pursuance of the first proviso to rule 5(1) of the Companies (Registered Valuers and Valuation) Rules, 2017, the Insolvency and Bankruptcy Board of India, being the Authority, hereby specifies the details of educational courses for the Asset Class of Plant and Machinery as under:


Asset Class: Plant and Machinery

Sl. No.



• Micro-Economics

- Consumption: Indifference Curve, Consumer’s Surplus, Elasticity

- Price Mechanism: Determinants of Price Mechanism, Individual and Market Demand Schedules, Law of Demand & its Conditions, Exceptions and Limitations of Law of Demand, Individual and Market Supply Schedules, Conditions and Limitations, Highest, Lowest and Equilibrium Price, Importance of Time Element

- Pricing of Products under different market conditions: Perfect and Imperfect Competition, Monopoly



- Capital and Interest - Types of Capital, Gross Interest, Net Interest

- Organisation and Profit - Functions of Entrepreneur, Meaning of Profit and Theories of Profit

5

276


Sl. No.


• Macro-Economics

- Functions & Role of Money

- Inflation: Types of Inflation, Causes, Effects, Inflationary Gap, Control of Inflation, Monetary, Fiscal and Direct Measures

- Deflation: Causes, Effects, Deflationary Gap, Measures to Control Deflation, Deficit Financing

- Savings and Investment: Savings and Types of Savings, Determinants of Savings, Investment, Types of Investment, Determinants of Investment, Relationship between Savings and Investment

- Components of Economy: Primary Sector, Secondary Sector, Tertiary Sector, Informal Sector in Urban Economy, Parasitic Components in Urban Economy

- Concepts of GDP and GNP, Capital Formation

- Parallel Economy: Definition of Parallel Economy, Causes and Effects of Parallel Economy on Use of Land and its Valuation - Its Impact on Real Estate Market - Construction Industry and Parallel Economy


- The meaning and objects of Book Keeping, Double Entry Book Keeping

- Books of Prime Entry and Subsidiary Books: Cash Book, Bank Book, Journal, Ledger, Purchase and Sale Books, Debit and Credit Notes Register, Writing of Books, Posting and Closing of Accounts

- Trading Account, Profit and Loss Account, Income and Expenditure Account

- Preparation of Balance Sheet for Individuals and Companies and Disclosure Requirements

- Cost, Costing and Elements of Cost, Fixed Expenses, Variable Expenses, Break-Even Point

2.5

277


Sl. No.


c. Law – General

- Indian Legal System: Salient Features of the Indian Constitution, Fundamental Rights, Directive Principles of the State Policy


3

- Laws of Contract: Formation of a Contract, Parties, Void, Voidable and Unenforceable Contract, Contingent Contract, Misrepresentation and Fraud and Effect thereof, Termination of Contract, Remedies for Breach, Performance of Contract, Indemnity and Guarantee, Law of Agency

- Tort: General Principles of Tort, Tort affecting Valuation

- Law of Arbitration and Conciliation: Salient Features

- Auction: Authority of Auctioneer, Duties of Vendor, Purchaser and Public, Misdescription and Misrepresentation, Advertisements, Particulars and Catalogues, Statements on the Rostrum, Conduct of Sale, Reservation of Price and Right to Bid, Bidding Agreements. Memorandum of the Sale. The Deposit, Rights of Auctioneer against Vendor and Purchaser

- Laws of Evidence: Burden of Proof, Presumptions, Conclusive Proof

- Salient Features of the Insolvency and Bankruptcy Code, 2016 concerning Valuation


- Salient Features of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) concerning Valuation

- Section 5(n) of the Banking Regulation Act, 1949 on “Secured Loan or Advance”

- The Companies Act 2013: Sections 192(2), 230 (1,2,3), 231, 232, 247(1), 281(1)

278


Sl. No.



- Data Classifications and Processing, Graphical Representation of Data, Frequency Distributions

- Measures of Central Tendency, Dispersion and Skewness

- Elementary Theory of Probability and Probability Distributions, Sampling and Sampling Distributions, Estimation

- Simple Test of Significance, Regression and Co-relation, Multiple Correlation Coefficient

- Time Series

- Index Numbers

2


- Environment and Valuation - Differences between the ‘Market Price and the Negative Value Consequent on Environmental Impact

2

- Environmental Issues of Air Pollution, Water Pollution, Environmental Factors and their effects, Measures to Restore the Damage, Cost to Cure

- Outlines of Environmental Legislations: The Forest Act, 1927, Laws related to Industrial Health & Safety

- The Water (Prevention and Control of Pollution) Act, 1974, The Air (Prevention and Control of Pollution) Act,1981, The Environment (Protection) Act, 1986


- Model Code of Conduct as notified by MCA under the Companies (Registered valuers and valuation) Rules, 2017


2

g. Valuation of Plant and Machinery

- Role, Functions and Responsibilities of a Plant and Machinery Valuer

- Cost, Price, Value and Valuation

- Types of Market, Demand and Supply Curve, Bell Curve for overall sales performance (Probability Distribution)

2.5

279


Sl. No.




• Definitions of the various terms

- Plant and Machinery, Furniture, Fixtures and Fittings – the judicial interpretation of these terms

- Market value, Highest and Best Use Value

• Meaning of the terms

- Basis of Valuation, Value in Use, Value in Exchange, Value to the Buyer, Value to the Seller, Value to the Occupier, Value in Existing Use In-Situ, Value in Existing Use in Ex-Situ, Value in Alternative Use In-Situ, Value in Alternative Use in Ex-Situ, Liquidation Value In-Situ/Ex-Situ, Orderly Liquidation Value, Forced Sale Value

- Investment Property, Marketable Non-Investment Property, Non-Marketable -Non-Investment Property with their characteristics and approaches to Value

- Factors having direct bearing on Value (Valuation Maxims) like Physical, Legal, Social, Economic, Utility, Marketability, Transferability, Scarcity, Present Worth of Future Benefits and Intangible Rights

• Identification of Plant and Machinery/Physical Verification of Plant and Machinery

- Inventory (Listing of Machinery) and data to be collected while taking inventory

- Importance of Technical Specifications of Plant and Machinery in Valuation Exercise

- Assessment of Condition of PME based on Visual Inspection

- Comparing Inventory with Plant and Machinery Records maintained by the Company

- Ascertaining Discrepancy

- Identification of Productive, Non-Productive, Surplus and Off-Balance Sheet Assets

2.5

280


Sl. No.


- Age, Effective Age, Total Economic Life, Economic Balance Life, Physical Life and their importance in Valuation

- Factors affecting Life both in terms of years or hours used based on Type of Assets, Sources of Economic Useful Life, Study of Maintenance Schedules of Plant

- Difference Between Historical Cost, Acquisition Cost, Book Cost, Written Down Value and Net Book Value

- The Items of Building to be treated as Plant and Machinery – like Chimneys to the Boiler, Brick, Concrete or RCC Foundation for Plant and Machinery, Water and Sewerage Installations, Effluent Treatment Plant etc.

• Depreciation under Income Tax Act, 1961 as well as Companies Act, 2013

- Useful Lives to compute depreciation as per Schedule II of Companies Act, 2013

- Factors to be considered for Componentization of Assets.

• Installed Capacity of the Plant, Actual Production, Raw Material Availability, Level of Technology used such as Current or Obsolete, Issues if any regards to these

• Part, Fraction and Whole Valuation

• Relationship of Earnings and Assets

• Difference Between Business Specific Economic Viability and Economic Obsolescence

• Efficiency of Plant Layout, Imbalances in different production sections and their relevance in valuation

Three Approaches to Value – Cost, Market and Income

• Cost approach

- Reproduction Cost New, Replacement Cost New, Depreciated Reproduction Cost/Depreciated Replacement Cost (DRC), Difference and similarity in DRC and Market Value

- Difference between Reproduction Cost New and Replacement Cost New

- Methods of Computation of Reproduction Cost New

4

281


Sl. No.


- Market Inquiry of Current Cost of Brand New Machine with Identical Specifications from same manufacturer i.e. Replica

- Indexation and its limitations

- Cost to Capacity Method and its limitation

- Methods of Computation of Replacement Cost New when Identical Machine/Plant is not available i.e. Machine/Plant of like Kind and Type – Factors to be taken into consideration

- Direct and Indirect Costs for Estimation of Reproduction New /Replacement Cost New

- Meaning of the term Depreciation for Wear and Tear, Factors influencing Depreciation – its measurements and application by Valuers of Plant and Machinery. Concept of Salvage Value and Scrap Value along with the basis of the same

- Methods of Depreciation – Observed Deterioration, Straight Line, Diminishing Balance (WDV)

- Difference between Accounting and Technical Depreciation

- Factors to be taken into consideration for selection of Depreciation Method

- Obsolescence-Technological, Functional and Economic

- DRC subject to Potential Profitability

- Limitations of Cost Approach

• Market Approach – Sales comparison method

- Data Collection

- Elements of Comparability and application of appropriate Weightages to Identified Comparable to Estimate Value of Subject Plant and Machinery Asset being valued. Instances when Sales Comparison Method is not feasible and limitations of Sales Comparison Method

1

• Income Approach

- The concept of Income Approach

- Gross Income - Outgoings, Net Income and Year’s Purchase

- Actual Income vs Potential Income

- Terminal Income

1.5

282


Sl. No.


- Remunerative and Accumulative Rates of Interest and various methods of determining the same

- Capitalization of Earnings Method

- Discounted Future Earnings Method (DCF Technique)

- Pitfalls of DCF Technique

• Process of Valuation

- Check List for Valuation of Plant and Machinery, documents to be studied prior to Plant Visit/Inspection, ABC analysis

1.5

- The items to be treated as Plant and Machinery

- The items to be treated as Land and Buildings

- Physical Verification (Survey and Inspection)

- Data Collection and Valuation Analysis under Replacement Cost New Method (Cost Approach)

• Broad categories of machines to be encountered by plant and machinery valuers in actual practice

- Valuation of a machine for which current cost of identical brand-new machine is available

- Valuation of a machine for which current cost of identical brand-new machine is not available

- Valuation of a machine which is no longer manufactured

• The reasons for the differences in the prices of the machines with same technical specifications and features by different manufacturers

• The factors to be considered while adopting Cost Approach

• Data Collection and Valuation Analysis under-Cost, Market and Income Approaches

2

• Leasing of plant and machinery

- Definition of Lease

- Leasing, Hiring and Renting

- Obligations of Supplier of Asset, User of Asset, Hire Purchase Company/Lessor in cases of Loan, Supplier’s Credit, Hire Purchase and Leasing

6

283


Sl. No.


- Leasing as an Instance of Bailment, Nature of the Bailment Agreement, Features of Bailment, Contracts Law on Bailment

- Leasing Rules

- Types of Leases and their characteristics

- Steps in the structuring of a Lease Contract

- Leasing from point of view of Lessor/Lessee

- Limitations of Leasing

- The structure of a Lease Agreement

- Treatment of Leased Assets in Company Accounts – Accounting Practice for Leased Plant and Machinery as per Indian Accounting Standard

- Assessment of Lease related risk

- Risk and Return trade-off

• Valuation of leased plant and machinery

• Valuation of machine tools, factory and utility equipment

• Valuation of plant and machinery for following purposes:

- Mergers and Acquisitions (including Purchase Price Allocation)

- Financial Statements

- Impairment

- Auction

- Insurance

- Leasing

- Disposal

- Capital Raising

- Corporatization and Privatization

- Stamp Duty

284


Sl. No.


- Any other purpose not referred above

• Impact of Indian Accounting Standards, International Valuation Standards and Standards to be published by Ministry of Corporate Affairs, Government of India on Valuation of Plant and Machinery

• Case laws

- Fixture - Holland vs. Hodgson (1872) L.R.7C.P.328 AT 335

- Plant and Machinery in nature of Land and Buildings - Duncan’s case - AIR 2000 SC 355

- Obsolescence – Westingshouse Electric Corporation US 1993 NCApp.710.379 S.E.2D 37(1989)

0.5

- Just because a Plant and Machinery are fixed in the Earth for better functioning it does not automatically become an Immovable Property - Sirpur Paper Mills Pvt. Ltd. vs. The Collector of Central Excise 1998(1) SCC 400

- Plant and Machinery in nature of Land and Buildings – Official Liquidator vs. Sri Krishna Deo and Ors. (AIR 1959 All 247)

- Valuation of specialized Plant and Machinery by Cost Approach is subject to Potential Profitability - Symex Holdings Ltd. vs. Commissioner of State Revenue, Victoria, Australia (2007 VSC 159)

h. Law - Plant and Machinery

- Sale of Goods and Agreements to Sell, Seller’s Obligations as to delivery Time, Title, Description, Fitness, Quality and Quantity; Exclusion of Obligations, Sales by Sample, Passing of Property in Goods; Transfer of Title by Non-owner, Remedies for Breach of Contract; Rights of Unpaid Seller against Goods.

- Licensing of Industries and regulation of industrial activities under various laws; viz. Industrial Licensing Laws etc.

- Salient features of various acts such as the Factory Act, 1948, the Electricity Act, 2003, Labour laws with regards to regulatory measures for industrial undertakings.

1.5

285


Sl. No.



- Principles and legal concepts in relation to Insurance of Plant & Machinery. The Contract of Insurance. Insurable Interests and Liability to Insure. Duties of the Insurer and the Insured

- The types of Fire Policies, Reinstatement Cost Policy and policies for other perils, Terms and Conditions, Perils, Beneficial and Restrictive Clauses

- Value at Risk, Sum Insured and Condition of Average, Over and Under Insurance, Inflation Provisions, other contents, Depreciation, Obsolescence and Betterment

- Preparation of Claim for Damages due to Insured Perils

- Obligations and Rights of Insurer and Insured

2

j. Industrial Processes

- Factory Planning and layout: Types of Plant Layout, Production Techniques, Automation, Mass Production, Batch and One-Off Production

- Principles of Industrial Processes: Material flow, process sequences, automation and process control

- Industrial Processes: The Normal Processes, Methods of Manufacture, Plant and Machinery utilised, Flow Diagrams and Inventory Compilation for the following specific industries:

2.5

o Textiles, Dairy, Vegetable Oil, Iron, Steel & Non-Ferrous Metal Production, Chemical and Pharmaceutical, Plastic and Rubber, Paper and Paper Products, Printing, Binding and Publishing, Food and Drink

- The nature and function of trade specific machinery in any of the above industries

k. Report writing

- Reports-Quality, Structure, Style

- Report writing for various purposes like Sale/Purchase, M & A, Insurance, Liquidation and any other purposes for which a valuer is normally called upon for advice in general practice

0.5

286


Sl. No.


- Contents of the report: The Instructions (including basis of valuation) received from the clients showing scope of work, Date as on which valuation is required, Date of Valuation, Date of Report, Date of Inspection, Purpose of Valuation, Location of Assets, Valuation Definition considered, Approach/Method of Valuation, Procedure Adopted, Summary of Valuation, Assumptions and Limiting Conditions including Caveats, Schedule of Plant and Machinery with Make, Model, Description, Year, Condition, Values

l. Case Study

On valuation of plant and machinery mentioned under Part – (g) above.

3

Total 50




mm

287

Ann. 4 – Paper Pattern for Asset Class – Plant & Machinery

Annexure 4 Paper Pattern for Asset Class – Plant & Machinery


31st December, 2017

Subject: Valuation Examination for Asset Class – Plant and Machinery In pursuance of the Rule 5(3) of the Companies (Registered Valuers and Valuation) Rules, 2017, the Insolvency and Bankruptcy Board of India, being the Authority, hereby publishes the syllabus, format and frequency of the ‘Valuation Examination’ for the asset class: Plant and Machinery.

I. Syllabus

Sl. No.

Coverage Weight (%)


• Micro-Economics

- Consumption: Indifference Curve, Consumer’s Surplus, Elasticity

- Price Mechanism: Determinants of Price Mechanism, Individual and Market Demand Schedules, Law of Demand & its Conditions, Exceptions and Limitations of Law of Demand, Individual and Market Supply Schedules, Conditions and Limitations, Highest, Lowest and Equilibrium Price, Importance of Time Element

- Pricing of Products under different market conditions: Perfect and Imperfect Competition, Monopoly



- Capital and Interest - Types of Capital, Gross Interest, Net Interest

- Organisation and Profit - Functions of Entrepreneur, Meaning of Profit and Theories of Profit

10

288


Sl. No.

Coverage Weight (%)

• Macro-Economics

- Functions & Role of Money

- Inflation: Types of Inflation, Causes, Effects, Inflationary Gap, Control of Inflation, Monetary, Fiscal and Direct Measures

- Deflation: Causes, Effects, Deflationary Gap, Measures to Control Deflation, Deficit Financing

- Savings and Investment: Savings and Types of Savings, Determinants of Savings, Investment, Types of Investment, Determinants of Investment, Relationship between Savings and Investment

- Components of Economy: Primary Sector, Secondary Sector, Tertiary Sector, Informal Sector in Urban Economy, Parasitic Components in Urban Economy

- Concepts of GDP and GNP, Capital Formation

- Parallel Economy: Definition of Parallel Economy, Causes and Effects of Parallel Economy on Use of Land and its Valuation - Its Impact on Real Estate Market - Construction Industry and Parallel Economy


- The meaning and objects of Book Keeping, Double Entry Book Keeping

- Books of Prime Entry and Subsidiary Books: Cash Book, Bank Book, Journal, Ledger, Purchase and Sale Books, Debit and Credit Notes Register, Writing of Books, Posting and Closing of Accounts

- Trading Account, Profit and Loss Account, Income and Expenditure Account

- Preparation of Balance Sheet for Individuals and Companies and Disclosure Requirements

- Cost, Costing and Elements of Cost, Fixed Expenses, Variable Expenses, Break-Even Point

5

289


Sl. No.

Coverage Weight (%)

c. Law-General

- Indian Legal System: Salient Features of the Indian Constitution, Fundamental Rights, Directive Principles of the State Policy


6



- Law of Arbitration and Conciliation: Salient Features

- Auction: Authority of Auctioneer, Duties of Vendor, Purchaser and Public, Misdescription and Misrepresentation, Advertisements, Particulars and Catalogues, Statements on the Rostrum, Conduct of Sale, Reservation of Price and Right to Bid, Bidding Agreements. Memorandum of the Sale. The Deposit, Rights of Auctioneer against Vendor and Purchaser




- Salient Features of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) concerning Valuation

- Section 5(n) of the Banking Regulation Act, 1949 on “Secured Loan or Advance”

- The Companies Act 2013: Sections 192(2), 230 (1,2,3), 231, 232, 247(1), 281(1)

290


Sl. No.

Coverage Weight (%)


- Data Classifications and Processing, Graphical Representation of Data, Frequency Distributions

- Measures of Central Tendency, Dispersion and Skewness

- Elementary Theory of Probability and Probability Distributions, Sampling and Sampling Distributions, Estimation

- Simple Test of Significance, Regression and Co-relation, Multiple Correlation Coefficient

- Time Series

- Index Numbers

4


- Environment and Valuation - Differences between the ‘Market Price and the Negative Value Consequent on Environmental Impact

4

- Environmental Issues of Air Pollution, Water Pollution, Environmental Factors and their effects, Measures to Restore the Damage, Cost to Cure

- Outlines of Environmental Legislations: The Forest Act, 1927, Laws related to Industrial Health & Safety

- The Water (Prevention and Control of Pollution) Act, 1974, The Air (Prevention and Control of Pollution) Act,1981, The Environment (Protection) Act, 1986


- Model Code of Conduct as notified by MCA under the Companies (Registered Valuers and Valuation) Rules 2017


4

g. Valuation of Plant and Machinery

- Role, Functions and Responsibilities of a Plant and Machinery Valuer

- Cost, Price, Value and Valuation

- Types of Market, Demand and Supply Curve, Bell Curve for overall sales performance (Probability Distribution)

6

291


Sl. No.

Coverage Weight (%)



• Definitions of the various terms

- Plant and Machinery, Furniture, Fixtures and Fittings – the judicial interpretation of these terms

- Market value, Highest and Best Use Value

• Meaning of the terms

- Basis of Valuation, Value in Use, Value in Exchange, Value to the Buyer, Value to the Seller, Value to the Occupier, Value in Existing Use In-Situ, Value in Existing Use in Ex-Situ, Value in Alternative Use In-Situ, Value in Alternative Use in Ex-Situ, Liquidation Value In-Situ/Ex-Situ, Orderly Liquidation Value, Forced Sale Value.

- Investment Property, Marketable Non-Investment Property, Non-Marketable -Non-Investment Property with their characteristics and approaches to Value.

- Factors having direct bearing on Value (Valuation Maxims) like Physical, Legal, Social, Economic, Utility, Marketability, Transferability, Scarcity, Present Worth of Future Benefits and Intangible Rights

• Identification of Plant and Machinery/Physical Verification of Plant and Machinery

- Inventory (Listing of Machinery) and data to be collected while taking inventory

- Importance of Technical Specifications of Plant and Machinery in Valuation Exercise

- Assessment of Condition of PME based on Visual Inspection

- Comparing Inventory with Plant and Machinery Records maintained by the Company

- Ascertaining Discrepancy

- Identification of Productive, Non-Productive, Surplus and Off-Balance Sheet Assets

5

292


Sl. No.

Coverage Weight (%)

- Age, Effective Age, Total Economic Life, Economic Balance Life, Physical Life and their importance in Valuation

- Factors affecting Life both in terms of years or hours used based on Type of Assets, Sources of Economic Useful Life, Study of Maintenance Schedules of Plant

- Difference Between Historical Cost, Acquisition Cost, Book Cost, Written Down Value and Net Book Value

- The Items of Building to be treated as Plant and Machinery-like Chimneys to the Boiler, Brick, Concrete or RCC Foundation for Plant and Machinery, Water and Sewerage Installations, Effluent Treatment Plant etc.

• Depreciation under Income-tax Act, 1961 as well as Companies Act 2013.

- Useful Lives to compute depreciation as per Schedule II of Companies Act, 2013

- Factors to be considered for Componentization of Assets

• Installed Capacity of the Plant, Actual Production, Raw Material Availability, Level of Technology used such as Current or Obsolete, Issues if any regards to these

• Part, Fraction and Whole Valuation

• Relationship of Earnings and Assets

• Difference Between Business Specific Economic Viability and Economic Obsolescence

• Efficiency of Plant Layout, Imbalances in different production sections and their relevance in valuation

4

Three Approaches to Value – Cost, Market and Income

• Cost approach

- Reproduction Cost New, Replacement Cost New, Depreciated Reproduction Cost/Depreciated Replacement Cost (DRC), Difference and similarity in DRC and Market Value

- Difference between Reproduction Cost New and Replacement Cost New

- Methods of Computation of Reproduction Cost New

8

293


Sl. No.

Coverage Weight (%)

- Market Inquiry of Current Cost of Brand New Machine with Identical Specifications from same manufacturer i.e. Replica

- Indexation and its limitations

- Cost to Capacity Method and its limitation

- Methods of Computation Of Replacement Cost New when Identical Machine/Plant is not available i.e. Machine/Plant of like Kind and Type-Factors to be taken into consideration

- Direct and Indirect Costs for Estimation of Reproduction New /Replacement Cost New

- Meaning of the term Depreciation for Wear and Tear, Factors influencing Depreciation-its measurements and application by Valuers of Plant and Machinery. Concept of Salvage Value and Scrap Value along with the basis of the same

- Methods of Depreciation – Observed Deterioration, Straight Line, Diminishing Balance (WDV)

- Difference between Accounting and Technical Depreciation

- Factors to be taken into consideration for selection of Depreciation Method

- Obsolescence-Technological, Functional and Economic

- DRC subject to Potential Profitability

- Limitations of Cost Approach

• Market Approach-Sales comparison method

- Data Collection

- Elements of Comparability and application of appropriate Weightages to Identified Comparable to Estimate Value of Subject Plant and Machinery Asset being valued. Instances when Sales Comparison Method is not feasible and limitations of Sales Comparison Method

2

• Income Approach

- The concept of Income Approach

- Gross Income-Outgoings, Net Income and Year’s Purchase

- Actual Income vs. Potential Income

- Terminal Income

3

294


Sl. No.

Coverage Weight (%)

- Remunerative and Accumulative Rates of Interest and various methods of determining the same

- Capitalization of Earnings Method

- Discounted Future Earnings Method (DCF Technique)

- Pitfalls of DCF Technique

• Process of Valuation

- Check List for Valuation of Plant and Machinery, documents to be studied prior to Plant Visit/Inspection, ABC analysis

- The items to be treated as Plant and Machinery

3

- The items to be treated as Land and Buildings

- Physical Verification (Survey and Inspection)

- Data Collection and Valuation Analysis under Replacement Cost New Method (Cost Approach)

• Broad categories of machines to be encountered by plant and machinery valuers in actual practice

- Valuation of a machine for which current cost of identical brand-new machine is available

- Valuation of a machine for which current cost of identical brand-new machine is not available

- Valuation of a machine which is no longer manufactured

• The reasons for the differences in the prices of the machines with same technical specifications and features by different manufacturers

• The factors to be considered while adopting Cost Approach

• Data Collection and Valuation Analysis under - Cost, Market and Income Approaches

4

• Leasing of plant and machinery

- Definition of Lease

- Leasing, Hiring and Renting

12

295


Sl. No.

Coverage Weight (%)

- Obligations of Supplier of Asset, User of Asset, Hire Purchase Company/Lessor in cases of Loan, Supplier’s Credit, Hire Purchase and Leasing

- Leasing as an Instance of Bailment, Nature of the Bailment Agreement, Features of Bailment, Contracts Law on Bailment

- Leasing Rules

- Types of Leases and their characteristics

- Steps in the structuring of a Lease Contract

- Leasing from point of view of Lessor/Lessee

- Limitations of Leasing

- The structure of a Lease Agreement

- Treatment of Leased Assets in Company Accounts – Accounting Practice for Leased Plant and Machinery as per Indian Accounting Standard

- Assessment of Lease related risk

- Risk and Return trade-off

• Valuation of leased plant and machinery

• Valuation of machine tools, factory and utility equipment

• Valuation of plant and machinery for following purposes:

- Mergers and Acquisitions (including Purchase Price Allocation)

- Financial Statements

- Impairment

- Auction

- Insurance

- Leasing

- Disposal

- Capital Raising

- Corporatization and Privatization

- Stamp Duty

296


Sl. No.

Coverage Weight (%)

- Any other purpose not referred above

• Impact of Indian accounting standards, International Valuation Standards and Standards to be published by Ministry of Corporate Affairs, Government of India on Valuation of Plant and Machinery

• Case laws

- Fixture - Holland vs. Hodgson (1872) L.R.7C.P.328 AT 335

- Plant and Machinery in nature of Land and Buildings - Duncan’s case - AIR 2000 SC 355

- Obsolescence – Westingshouse Electric Corporation US 1993 NCApp.710.379S.E.2D 37(1989)

- Just because a Plant and Machinery are fixed in the Earth for better functioning it does not automatically become an Immovable Property - Sirpur Paper Mills Pvt. Ltd vs. The Collector of Central Excise 1998(1) SCC 400

1

- Plant and Machinery in nature of Land and Buildings - Official Liquidator vs. Sri Krishna Deo and Ors. (AIR 1959 All 247)

- Valuation of specialized Plant and Machinery by Cost Approach is subject to Potential Profitability - Symex Holdings Ltd. vs. Commissioner of State Revenue, Victoria, Australia (2007 VSC 159)

h. Law - Plant and Machinery

- Sale of Goods and Agreements to Sell, Seller’s Obligations as to delivery Time, Title, Description, Fitness, Quality and Quantity; Exclusion of Obligations, Sales by Sample, Passing of Property in Goods; Transfer of Title by Non-owner, Remedies for Breach of Contract; Rights of Unpaid Seller against Goods

- Licensing of Industries and regulation of industrial activities under various laws; viz., Industrial Licensing Laws etc.

- Salient features of various acts such as the Factory Act, 1948, the Electricity Act, 2003, Labour laws with regards to regulatory measures for industrial undertakings.

3


- Principles and legal concepts in relation to Insurance of Plant & Machinery. The Contract of Insurance. Insurable Interests and Liability to Insure. Duties of the Insurer and the Insured

4

297


Sl. No.

Coverage Weight (%)

- The types of Fire Policies, Reinstatement Cost Policy and policies for other perils, Terms and Conditions, Perils, Beneficial And Restrictive Clauses

- Value at Risk, Sum Insured and Condition of Average, Over and Under Insurance, Inflation Provisions, other contents, Depreciation, Obsolescence and Betterment

- Preparation of Claim for Damages due to Insured Perils

- Obligations and Rights of Insurer and Insured

j. Industrial Processes

- Factory Planning and layout: Types of Plant Layout, Production Techniques, Automation, Mass Production, Batch and One-Off Production

- Principles of Industrial Processes: Material flow, process sequences, automation and process control

- Industrial Processes: The Normal Processes, Methods of Manufacture, Plant and Machinery utilised, Flow Diagrams and Inventory Compilation for the following specific industries:

o Textiles, Dairy, Vegetable Oil, Iron, Steel & Non-Ferrous Metal Production, Chemical and Pharmaceutical, Plastic and Rubber, Paper and Paper Products, Printing, Binding and Publishing, Food and Drink

5

- The nature and function of trade specific machinery in any of the above industries

k. Report writing

- Reports-Quality, Structure, Style.

- Report writing for various purposes like Sale/Purchase, M & A, Insurance, Liquidation and any other purposes for which a valuer is normally called upon for advice in general practice

- Contents of the report: The Instructions (including basis of valuation) received from the clients showing scope of work, Date as on which valuation is required, Date of Valuation, Date of Report, Date of Inspection, Purpose of Valuation, Location of Assets, Valuation Definition considered, Approach/Method of Valuation, Procedure Adopted, Summary of Valuation, Assumptions and Limiting Conditions including Caveats, Schedule of Plant and Machinery with Make, Model, Description, Year, Condition, Values.

1

298


Sl. No.

Coverage Weight (%)

l. Case Study

On valuation of plant and machinery mentioned under Part - g above. (This section will have a case study for application of valuation techniques. There will be a comprehension narrating the transaction based on which questions will be asked from the case.)

6

Total 100

Note: Wherever any Law, Act of Parliament or any Rule is referred in the syllabus, the same shall be taken as updated as on 31st December, 2017.









h. No workbook or study material is allowed or provided.







mm

299

Ann. 5 – Course for Asset Class – Financial Assets

Annexure 5 Course for Asset Class – Financial Assets


30th December, 2017

Sub: Educational Courses for asset class: Securities or Financial Assets In pursuance of the first proviso to rule 5(1) of the Companies (Registered Valuers and Valuation) Rules, 2017, the Insolvency and Bankruptcy Board of India, being the Authority, hereby specifies the details of educational courses for the Asset Class of Securities or Financial Assets as under:


Asset Class: Securities or Financial Assets

Sl. No.


a. Macro Economics

- National Income Accounting

- Basics of Fiscal Policy

- Basics of Monetary Policy

- Understanding Business cycles

2

b. Finance

- Basic Concepts of Finance

- Decisions in Finance

- Financial Markets and Securities Markets

1

c. Professional Ethics and Standards

- Model Code of Conduct as notified by MCA


1.5

300


Sl. No.


d. Financial Statement Analysis

- Assets, Liabilities, Income and Expenses

- Performance Analysis, Capital Structure Analysis

- Credit Analysis

- Cash Flow Analysis

2

e. General laws and Judicial Pronouncements

• Registered Valuers and Valuation Rules, 2017

- Valuation Standards

- Registered Valuers Organisation

- Registration of Valuers

- Asset Classes

• Indian Contract Act, 1872

- Offer, Acceptance and Revocation

- Legal Contract, Void and Voidable Contracts

- Contingent Contracts

- Performance of Contracts

- Consequences of Breach of Contract

- Agency Agreements

• The Sale of Goods Act, 1930

- Contract of Sale

- Definition of Goods

- Price of Goods

- Conditions and Warranties

- Unpaid Seller

• The Transfer of Property Act, 1882

- Definition of Immovable Property

- Transfer and Sale of Property

- Rights and Liabilities of Buyer and Seller

9.5

301


Sl. No.


- Mortgage of Property

- Rights and Liabilities of Mortgager and Mortgagee

- Gift of Immovable Property

- Lease

• Indian Stamps Act, 1899

- Basics of Indian Stamp Act

- Valuation for Duty

- Instruments on which duty is levied

• Income-tax Act, 1961

- Taxes on Individuals

- Taxes on Companies and other entities

- Heads of Income - Salary, House Property, Business Income, Capital gains and Income from other sources

- Clubbing and Set off provisions

• Insolvency and Bankruptcy Code, 2016

- Corporate Insolvency Resolution

- Corporate Liquidation

• Judicial pronouncements

- Important Judicial Precedents of Valuation

f. Overview of Valuation

- Meaning of Value

- Premise of Valuation

- Purpose of Valuation

- Valuation Engagements

- Valuation Process

- Valuation Report

- Documentation

2

302


Sl. No.


g. Valuation Approaches and Methodologies

- Income Approach

- Market Approach

- Cost Approach

2

h. Valuation Application

• Equity/Business Valuation –

- Analysis of Business Environment

- Entity’s Business Strategy Analysis

- Business Combination – Amalgamation, Merger, Demerger, Arrangement & Restructuring

- Forecasting


- Appropriate Cost of Capital/Rate of Return

- Valuation Adjustments

18

• Fixed Income Securities

- Types of Fixed Income Securities

- Types of Different Debt Instruments

- Terms used in Fixed Income Securities

- Credit Rating of Bonds

- Embedded Options

- Interest Rate Derivative Products

- Related FIMMDA Circulars

• Option valuation

- General Principles

- Option Valuation Models – Black and Scholes Valuation Methodology, Black and Scholes Merton Option Pricing Method

- Binomial Tree Method, Monte Carlo Simulation

303


Sl. No.


• Valuation of other Financial Assets and Liabilities

• Intangible Assets –

- Nature and Classification of Intangibles

- Identification of Nature of Intangible Assets

- Purpose of Intangibles Valuation

- Valuation Approaches

• Valuation Application: Situation Specific Valuation


- Distressed Asset Valuation

- Start-up Entities Valuation

- Valuation of Small and Medium Enterprises

- Valuation of Cyclical Firms

- Valuation of Investment Entities

- Valuation for Insurance Coverage

i. Laws and Regulations relevant to Financial Assets Valuation

• Financial Reporting

- Financial Reporting (Indian Accounting Standards), Ind AS 113

• The Companies Act, 2013

- Chapter IV – Share Capital and Debenture

- Chapter XV – Compromise Arrangements and Amalgamation and Relevant Rules

- Chapter XX – Winding Up

• SEBI Regulations

- SEBI (ICDR), 2009

- SEBI (LODR), 2015

9

304


Sl. No.


- SEBI (Mutual Fund) Regulations, 1996

- SEBI (Share based Employee Benefits) Regulation, 2014

- SEBI (SAST) Regulations, 2011

- SEBI (Delisting) Regulations

- ESOP Valuation

• RBI and FEMA Regulations

- FEMA (Transfer or Issue of Security by a Person Resident Outside India), Regulations, 2017

- Foreign Direct Investment (Pricing Guidelines)

- Direct Investment by Residents in Joint Venture/ Wholly Owned Subsidiary abroad.

- Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks.

- Guidelines on Sale of Stressed Assets by Banks

- SARFESI Act, 2002

• Income Tax and Other Statutes

- Capital Gains on Transfer of Assets

- Taxation on Income of Corporate Entities, Partnership

- Carry Forward of Losses

- Compliance of DTAA Agreements

j. Case Studies on application of valuation techniques. 3

Total 50




mm

305

Ann. 6 – Paper Pattern for Asset Class – Financial Assets

Annexure 6 Paper Pattern for Asset Class – Financial Assets


30th December, 2017

Subject: Valuation Examination for Asset Class – Securities or Financial Assets In pursuance of the rule 5(3) of the Companies (Registered Valuers and Valuation) Rules, 2017, the Insolvency and Bankruptcy Board of India, being the Authority, hereby publishes the syllabus, format and frequency of the ‘Valuation Examination’ for the asset class: Securities or Financial Assets.

I. Syllabus

Sl. No.

Coverage Weight (%)

a. Macro Economics

- National Income Accounting

- Basics of Fiscal Policy

- Basics of Monetary Policy

- Understanding Business cycles

4

b. Finance

- Basic Concepts of Finance

- Decisions in Finance

- Financial Markets and Securities Markets

3

c. Professional Ethics and Standards

- Model Code of Conduct as notified by MCA


5

306


Sl. No.

Coverage Weight (%)

d. Financial Statement Analysis

- Assets, Liabilities, Income and Expenses

- Performance Analysis, Capital Structure Analysis

- Credit Analysis


3

e. General laws and Judicial Pronouncements

• Registered Valuers and Valuation Rules, 2017

- Valuation Standards

- Registered Valuers Organisation

- Registration of Valuers

- Asset Classes

• Indian Contract Act, 1872

- Offer, Acceptance and Revocation

- Legal Contract, Void and Voidable Contracts

- Contingent Contracts

- Performance of Contracts

- Consequences of Breach of Contract

- Agency Agreements

• The Sale of Goods Act, 1930

- Contract of Sale

- Definition of Goods

- Price of Goods

- Conditions and Warranties

- Unpaid Seller

• The Transfer of Property Act, 1882

- Definition of Immovable Property

18

307


Sl. No.

Coverage Weight (%)

- Transfer and Sale of Property

- Rights and Liabilities of Buyer and Seller

- Mortgage of Property

- Rights and Liabilities of Mortgager and Mortgagee

- Gift of Immovable Property

- Lease

• Indian Stamps Act, 1899

- Basics of Indian Stamp Act

- Valuation for Duty

- Instruments on which duty is levied

• Income-tax Act, 1961

- Taxes on Individuals

- Taxes on Companies and other entities

- Heads of Income – Salary, House Property, Business Income, Capital gains and Income from other sources

- Clubbing and Set off provisions

• Insolvency and Bankruptcy Code, 2016

- Corporate Insolvency Resolution

- Corporate Liquidation

• Judicial Pronouncements

- Important Judicial Precedents of Valuation

f. Overview of Valuation

- Meaning of Value

- Premise of Valuation

- Purpose of Valuation

- Valuation Engagements

5

308


Sl. No.

Coverage Weight (%)

- Valuation Process

- Valuation Report

- Documentation

g. Valuation Approaches and Methodologies

- Income Approach

- Market Approach

- Cost Approach

5

h. Valuation Application

• Equity/Business Valuation

- Analysis of Business Environment

- Entity’s Business Strategy Analysis


- Forecasting

- Cash flow Analysis

- Appropriate Cost of Capital/Rate of Return

- Valuation Adjustments

• Fixed Income Securities

- Types of Fixed Income Securities

- Types of Different Debt Instruments

- Terms used in Fixed Income Securities

- Credit Rating of Bonds

- Embedded Options

- Interest Rate Derivative Products

- Related FIMMDA Circulars

• Option Valuation

- General Principles

33

309


Sl. No.

Coverage Weight (%)

- Option Valuation Models – Black and Scholes Valuation Methodology, Black and Scholes Merton Option Pricing Method

- Binomial Tree Method, Monte Carlo Simulation

• Valuation of other Financial Assets and Liabilities

• Intangible Assets

- Nature and Classification of Intangibles

- Identification of Nature of Intangible Assets

- Purpose of Intangibles Valuation

- Valuation Approaches

• Valuation Application: Situation Specific Valuation


- Distressed Asset Valuation

- Start-up Entities Valuation

- Valuation of Small and Medium Enterprises

- Valuation of Cyclical Firms

- Valuation of Investment Entities

- Valuation for Insurance Coverage

i. Laws and Regulations relevant to Financial Assets Valuation

• Financial Reporting

- Financial Reporting (Indian Accounting Standards), Ind AS 113

• The Companies Act, 2013

- Chapter IV – Share Capital and Debenture

- Chapter XV – Compromise Arrangements and Amalgamation and Relevant Rules

- Chapter XX – Winding Up

• SEBI Regulations

- SEBI (ICDR), 2009

- SEBI (LODR), 2015

10

310


Sl. No.

Coverage Weight (%)

- SEBI (Mutual Fund) Regulations, 1996

- SEBI (Share based Employee Benefits) Regulation, 2014

- SEBI (SAST) Regulations, 2011

- SEBI (Delisting) Regulations

- ESOP Valuation

• RBI and FEMA Regulations

- FEMA (Transfer or Issue of Security by a Person Resident Outside India), Regulations, 2017

- Foreign Direct Investment (Pricing Guidelines)

- Direct Investment by Residents in Joint Venture/Wholly Owned Subsidiary abroad.

- Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks.

- Guidelines on Sale of Stressed Assets by Banks

- SARFESI Act, 2002

• Income Tax and Other Statutes

- Capital Gains on Transfer of Assets

- Taxation on Income of Corporate Entities, Partnership

- Carry Forward of Losses

- Compliance of DTAA Agreements

j. Case Studies (This section will have 2 case studies for application of valuation techniques. There will be two comprehensions narrating the transaction based on which questions will be asked from each case.)

14

Total 100





311






h. No workbook or study material is allowed or provided.







mm

312


Annexure 7 Relevant Provisions of Companies Act, 2013

The Companies Act, 2013 consists of 29 chapters covering 470 sections, and 7 schedules. Besides this, 37 rules based on different chapters of the Companies Act have been notified till date.

Chapter XVII deals with the provision related to the Registered Valuers, and consists only of section 247. Besides this, the other relevant provisions of the Companies Act, 2013, are Section 447, 458, 459 and 460. These sections are covered by Chapter XXIV, Miscellaneous chapter.

CHAPTER XVII REGISTERED VALUERS

247. Valuation by registered valuers. (1) Where a valuation is required to be made in respect of any property, stocks, shares,

debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provision of this Act, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company.

(2) The valuer appointed under sub-section (1) shall,—

(a) make an impartial, true and fair valuation of any assets which may be required to be valued;

(b) exercise due diligence while performing the functions as valuer;

(c) make the valuation in accordance with such rules as may be prescribed; and

(d) not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets was conducted by him (amended under the Companies (Amendment) Act, 2017, with effect from February 9, 2018).

(3) If a valuer contravenes the provisions of this section or the rules made thereunder, the valuer shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees: Provided that if the valuer has contravened such provisions with the intention to defraud the company or its members, he shall be punishable with imprisonment for a term which may extend to one year

313

Ann. 7 – Relevant Provisions of Companies Act, 2013

and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

(4) Where a valuer has been convicted under sub-section (3), he shall be liable to—

(i) Refund the remuneration received by him to the company; and

(ii) Pay for damages to the company or to any other person for loss arising out of incorrect or misleading statements of particulars made in his report.

CHAPTER XXIX MISCELLANEOUS

447. Punishment for fraud.Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud involving an amount of at least ten lakh rupees or one per cent of the turnover of the company, whichever is lower, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Explanation: For the purposes of this section—

i. “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

ii. “Wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;

iii. “Wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

“Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.” (inserted by The Companies (Amendment) Act, 2017, with effect from February 9, 2018.)

314


458. Delegation by Central Government of its powers and functions.(1) The Central Government may, by notification, and subject to such conditions,

limitations and restrictions as may be specified therein, delegate any of its powers or functions under this Act other than the power to make rules to such authority or officer as may be specified in the notification:

Provided that the powers to enforce the provisions contained in section 194 and section 195 relating to forward dealing and insider trading shall be delegated to Securities and Exchange Board for listed companies or the companies which intend to get their securities listed and in such case, any officer authorised by the Securities and Exchange Board shall have the power to file a complaint in the Court of competent jurisdiction.

(2) A copy of every notification issued under sub-section (1) shall, as soon as may be after it is issued, be laid before each House of Parliament.

459. Powers of Central Government of Tribunal to accord approval, etc., subject to conditions and to prescribe fees on applications.

(1) Where the Central Government or the Tribunal is required or authorised by any provision of this Act—

(a) to accord approval, sanction, consent, confirmation or recognition to, or in relation to, any matter; or

(b) to give any direction in relation to any matter; or

(c) to grant any exemption in relation to any matter,

then, the Central Government or the Tribunal may in the absence of anything to the contrary contained in that provision or any other provision of this Act, accord, give or grant such approval, sanction, consent, confirmation, recognition, direction or exemption, subject to such conditions, limitations or restrictions as it may think fit to impose and may, in the case of a contravention of any such condition, limitation or restriction, rescind or withdraw such approval, sanction, consent, confirmation, recognition, direction or exemption.

(2) Save as otherwise provided in this Act, every application which may be, or is required to be, made to the Central Government or the Tribunal under any provision of this Act—

(a) in respect of any approval, sanction, consent, confirmation or recognition to be accorded by that Government or the Tribunal to, or in relation to, any matter; or

(b) in respect of any direction or exemption to be given or granted by that Government or the Tribunal in relation to any matter; or

(c) in respect of any other matter,

shall be accompanied by such fees as may be prescribed:

315

Ann. 7 – Relevant Provisions of Companies Act, 2013

Provided that different fees may be prescribed for applications in respect of different matters or in case of applications by different classes of companies.

469. Power of Central Government to make rules(1) The Central Government may, by notification, make rules for carrying out the

provisions of this Act.

(2) Without prejudice to the generality of the provisions of sub-section (1), the Central Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provision is to be or may be made by rules.

(3) Any rule made under sub-section (1) may provide that a contravention thereof shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first during which such contravention continues.

(4) Every rule made under this section and every regulation made by Securities and Exchange Board under this Act, shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or regulation or both Houses agree that the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule or regulation.

mm

316


Annexure 8 The Companies (Registered Valuers and Valuation) Rules, 2017

As amended by Companies (Registered Valuers and Valuation) Amendment Rules, 2018 (with effect from 9th February 2018)

MINISTRY OF CORPORATE AFFAIRS

NOTIFICATION New Delhi, the 18th October, 2017/ amended on 9th February 2018

G.S.R 1316(E).- In exercise of the powers conferred by section 247 read with sections 458, 459 and 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules, namely:-

CHAPTER I PRELIMINARY

1. Short title and commencement.(1) These rules may be called the Companies (Registered Valuers and Valuation) Rules,

2017.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. Definitions.(1) In these rules, unless the context otherwise requires –

(a) “Act” means the Companies Act, 2013 (18 of 2013);

(b) “authority” means an authority specified by the Central Government under section 458 of the Companies Act, 2013 to perform the functions under these rules;

(c) “asset class” means a distinct group of assets, such as land and building, machinery and equipment, displaying similar characteristics, that can be classified and requires separate set of valuers for valuation;

(d) “certificate of recognition” means the certificate of recognition granted to a registered valuers organisation under sub-rule (5) of rule 13 and the term “recognition” shall be construed accordingly;

(e) “certificate of registration” means the certificate of registration granted to a valuer under sub- rule (6) of rule 6 and the term “registration” shall be construed accordingly;

317

Ann. 8 – The Companies (Registered Valuers and Valuation) Rules, 2017

(f) “partnership entity” means a partnership firm registered under the Indian Partnership Act, 1932 (9 of 1932) or a limited liability partnership registered under the Limited Liability Partnership Act, 2008 (6 of 2009);

(g) “Annexure” means an annexure to these rules;

(h) “registered valuers organisation” means a registered valuers organisation recognised under sub-rule (5) of rule 13;

(i) “valuation standards” means the standards on valuation referred to in rule 18; and

(j) “valuer” means a person registered with the authority in accordance with these rules and the term “registered valuer” shall be construed accordingly.

(2) Words and expressions used but not defined in these rules, and defined in the Act or in the Companies (Specification of Definitions Details) Rules, 2014, shall have the same meanings respectively assigned to them in the Act or in the said rules.

CHAPTER II ELIGIBILITY, QUALIFICATIONS AND REGISTRATION OF VALUERS

3. Eligibility for registered valuers.(1) A person shall be eligible to be a registered valuer if he-

(a) is a valuer member of a registered valuers organisation;

Explanation.– For the purposes of this clause, “a valuer member” is a member of a registered valuers organisation who possesses the requisite educational qualifications and experience for being registered as a valuer;

(b) is recommended by the registered valuers organisation of which he is a valuer member for registration as a valuer;

(c) has passed the valuation examination under rule 5 within three years preceding the date of making an application for registration under rule 6;

(d) possesses the qualifications and experience as specified in rule 4;

(e) is not a minor;

(f) has not been declared to be of unsound mind;

(g) is not an undischarged bankrupt, or has not applied to be adjudicated as a bankrupt;

(h) is a person resident in India;

Explanation.– For the purposes of these rules ‘person resident in India’ shall have the same meaning as defined in clause (v) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999) as far as it is applicable to an individual;

318


(i) has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude, and a period of five years has not elapsed from the date of expiry of the sentence:

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be registered;

(j) has not been levied a penalty under section 271J of Income-tax Act, 1961 (43 of 1961) and time limit for filing appeal before Commissioner of Income-tax (Appeals) or Income-tax Appellate Tribunal, as the case may be has expired, or such penalty has been confirmed by Income-tax Appellate Tribunal, and five years have not elapsed after levy of such penalty; and

(k) is a fit and proper person:

Explanation.– For determining whether an individual is a fit and proper person under these rules, the authority may take account of any relevant consideration, including but not limited to the following criteria-

(i) integrity, reputation and character,

(ii) absence of convictions and restraint orders, and

(iii) competence and financial solvency.

(2) No partnership entity or company shall be eligible to be a registered valuer if-

(a) it has been set up for objects other than for rendering professional or financial services, including valuation services and that in the case of a company, it is not a subsidiary, joint venture or associate of another company or body corporate;

(b) it is undergoing an insolvency resolution or is an undischarged bankrupt;

(c) all the partners or directors, as the case may be, are not ineligible under clauses (c), (d), (e), (g), (h), (i), (j) and (k) of sub-rule (1);

(d) three or all the partners or directors, whichever is lower, of the partnership entity or company, as the case may be, are not registered valuers; or

(e) none of its partners or directors, as the case may be, is a registered valuer for the asset class, for the valuation of which it seeks to be a registered valuer.

4. Qualifications and experience.An individual shall have the following qualifications and experience to be eligible for registration under rule 3, namely:-

(a) post-graduate degree or post-graduate diploma, in the specified discipline, from a University or Institute established, recognised or incorporated by law in India and at least three years of experience in the specified discipline thereafter; or

319


(b) a Bachelor’s degree or equivalent, in the specified discipline, from a University or Institute established, recognised or incorporated by law in India and at least five years of experience in the specified discipline thereafter; or

(c) membership of a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession with at least three years’ experience after such membership and having qualification mentioned at clause (a) or (b).

Explanation-I.– For the purposes of this clause the ‘specified discipline’ shall mean the specific discipline which is relevant for valuation of an asset class for which the registration as a valuer or recognition as a registered valuers organisation is sought under these rules.

Explanation-II.– Qualifying education and experience and examination or training for various asset classes, is given in an indicative manner in Annexure–IV of these rules.

5. Valuation Examination. (1) The authority shall, either on its own or through a designated agency, conduct

valuation examination for one or more asset classes, for individuals, who possess the qualifications and experience as specified in rule 4, and have completed their educational courses as member of a registered valuers organisation, to test their professional knowledge, skills, values and ethics in respect of valuation:

Provided that the authority may recognise an educational course conducted by a registered valuers organisation before its recognition as adequate for the purpose of appearing for valuation examination:

Provided also that the authority may recognise an examination conducted as part of a master’s or post graduate degree course conducted by a University which is equivalent to the valuation examination.

(2) The authority shall determine the syllabus for various valuation specific subjects or assets classes for the valuation examination on the recommendation of one or more Committee of experts constituted by the authority in this regard.

(3) The syllabus, format and frequency of the valuation examination, including qualifying marks, shall be published on the website of the authority at least three months before the examination.

(4) An individual who passes the valuation examination, shall receive acknowledgement of passing the examination.

(5) An individual may appear for the valuation examination any number of times.

6. Application for certificate of registration.(1) An individual eligible for registration as a registered valuer under rule 3 may make

an application to the authority in Form-A of Annexure-II along with a non-refundable application fee of five thousand rupees in favour of the authority.

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(2) A partnership entity or company eligible for registration as a registered valuer under rule 3 may make an application to the authority in Form-B of Annexure-II along with a non-refundable application fee of ten thousand rupees in favour of the authority .

(3) The authority shall examine the application, and may grant twenty one days to the applicant to remove the deficiencies, if any, in the application.

(4) The authority may require the applicant to submit additional documents or clarification within twenty-one days.

(5) The authority may require the applicant to appear, within twenty one days, before the authority in person, or through its authorised representative for explanation or clarifications required for processing the application.

(6) If the authority is satisfied, after such scrutiny, inspection or inquiry as it deems necessary, that the applicant is eligible under these rules, it may grant a certificate of registration to the applicant to carry on the activities of a registered valuer for the relevant asset class or classes in Form-C of the Annexure-II within sixty days of receipt of the application, excluding the time given by the authority for presenting additional documents, information or clarification, or appearing in person, as the case may be.

(7) If, after considering an application made under this rule, the authority is of the prima facie opinion that the registration ought not be granted, it shall communicate the reasons for forming such an opinion within forty-five days of receipt of the application, excluding the time given by it for removing the deficiencies, presenting additional documents or clarifications, or appearing in person, as the case may be.

(8) The applicant shall submit an explanation as to why his/its application should be accepted within fifteen days of the receipt of the communication under sub- rule (7), to enable the authority to form a final opinion.

(9) After considering the explanation, if any, given by the applicant under sub-rule (8), the authority shall either -

(a) accept the application and grant the certificate of registration; or

(b) reject the application by an order, giving reasons thereof.

(10) The authority shall communicate its decision to the applicant within thirty days of receipt of explanation.

7. Conditions of Registration.The registration granted under rule 6 shall be subject to the conditions that the valuer shall –

(a) at all times possess the eligibility and qualification and experience criteria as specified under rule 3 and rule 4;

(b) at all times comply with the provisions of the Act, these rules and the bye-laws or internal regulations, as the case may be, of the respective registered valuers organisation;

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(c) in his capacity as a registered valuer, not conduct valuation of the assets or class(es) of assets other than for which he/it has been registered by the authority;

(d) take prior permission of the authority for shifting his/ its membership from one registered valuers organisation to another;

(e) take adequate steps for redressal of grievances;

(f) maintain records of each assignment undertaken by him for at least three years from the completion of such assignment;

(g) comply with the Code of Conduct (as per Annexure-I of these rules) of the registered valuers organisation of which he is a member;

(h) in case a partnership entity or company is the registered valuer, allow only the partner or director who is a registered valuer for the asset class(es) that is being valued to sign and act on behalf of it;

(i) in case a partnership entity or company is the registered valuer, it shall disclose to the company concerned, the extent of capital employed or contributed in the partnership entity or the company by the partner or director, as the case may be, who would sign and act in respect of relevant valuation assignment for the company;

(j) in case a partnership entity is the registered valuer, be liable jointly and severally along with the partner who signs and acts in respect of a valuation assignment on behalf of the partnership entity;

(k) in case a company is the registered valuer, be liable alongwith director who signs and acts in respect of a valuation assignment on behalf of the company;

(l) in case a partnership entity or company is the registered valuer, immediately inform the authority on the removal of a partner or director, as the case may be, who is a registered valuer along with detailed reasons for such removal; and

(m) comply with such other conditions as may be imposed by the authority.

8. Conduct of Valuation(1) The registered valuer shall, while conducting a valuation, comply with the valuation

standards as notified or modified under rule 18:

Provided that until the valuation standards are notified or modified by the Central Government, a valuer shall make valuations as per-

(a) internationally accepted valuation standards;

(b) valuation standards adopted by any registered valuers organisation.

(2) The registered valuer may obtain inputs for his valuation report or get a separate valuation for an asset class conducted from another registered valuer, in which case he shall fully disclose the details of the inputs and the particulars etc., of the other

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registered valuer in his report and the liabilities against the resultant valuation, irrespective of the nature of inputs or valuation by the other registered valuer, shall remain of the first mentioned registered valuer.

(3) The valuer shall, in his report, state the following:-

(a) background information of the asset being valued;

(b) purpose of valuation and appointing authority;

(c) identity of the valuer and any other experts involved in the valuation;

(d) disclosure of valuer interest or conflict, if any;

(e) date of appointment, valuation date and date of report;

(f) inspections and/or investigations undertaken;

(g) nature and sources of the information used or relied upon;

(h) procedures adopted in carrying out the valuation and valuation standards followed;

(i) restrictions on use of the report, if any;

(j) major factors that were taken into account during the valuation;

(k) conclusion; and

(l) caveats, limitations and disclaimers to the extent they explain or elucidate the limitations faced by valuer, which shall not be for the purpose of limiting his responsibility for the valuation report.

9. Temporary surrender.(1) A registered valuer may temporarily surrender his registration certificate in accordance

with the bye-laws or regulations, as the case may be, of the registered valuers organisation and on such surrender, the valuer shall inform the authority for taking such information on record.

(2) A registered valuers organisation shall inform the authority if any valuer member has temporarily surrendered his/its membership or revived his/ its membership after temporary surrender, not later than seven days from approval of the application for temporary surrender or revival, as the case may be.

(3) Every registered valuers organisation shall place, on its website, in a searchable format, the names and other details of its valuers members who have surrendered or revived their memberships.

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10. Functions of a Valuer.A valuer shall conduct valuation required under the Act as per these rules and he may conduct valuation as per these rules if required under any other law or by any other regulatory authority.

11. Transitional Arrangement.Any person who may be rendering valuation services under the Act, on the date of commencement of these rules, may continue to render valuation services without a certificate of registration under these rules upto 30th September, 2018, (as amended by The Companies (Registered Valuers’ and Valuation) Amendment Rules, 2018, with effect from 9th February, 2018).

Provided that if a company has appointed any valuer before such date and the valuation or any part of it has not been completed before 30th September, 2018, (as amended by The Companies (Registered Valuers’ and Valuation) Amendment Rules, 2018, with effect from 9th February, 2018), the valuer shall complete such valuation or such part within three months thereafter.

Explanation.– It is hereby clarified that conduct of valuation by any person under any law other than the Act, or these rules shall not be effected by virtue of coming into effect of these rules unless the relevant other laws or other regulatory bodies require valuation by such person in accordance with these rules in which case these rules shall apply for such valuation also from the date specified under the laws or by the regulatory bodies.

CHAPTER III RECOGNITION OF REGISTERED VALUERS ORGANISATIONS

12. Eligibility for registered valuers organisations.(1) An organisation that meets requirements under sub-rule (2) may be recognised as a

registered valuers organisation for valuation of a specific asset class or asset classes if –

(i) it has been registered under section 25 of the Companies Act, 1956 (1 of 1956) or section 8 of the Companies Act, 2013 (18 of 2013) with the sole object of dealing with matters relating to regulation of valuers of an asset class or asset classes and has in its bye laws the requirements specified in Annexure-III;

(ii) a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession;

Provided that, subject to sub-rule (3), the following organisations may also be recognised as a registered valuers organisation for valuation of a specific asset class or asset classes, namely:-

(a) an organisation registered as a society under the Societies Registration Act, 1860 (21 of 1860) or any relevant state law, or;

(b) an organisation set up as a trust governed by the Indian Trust Act, 1882 (2 of 1882).

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(2) The organisation referred to in sub-rule (1) shall be recognised if it –

(a) conducts educational courses in valuation, in accordance with the syllabus determined by the authority, under rule 5, for individuals who may be its valuers members, and delivered in class room or through distance education modules and which includes practical training;

(b) grants membership or certificate of practice to individuals, who possess the qualifications and experience as specified in rule 4, in respect of valuation of asset class for which it is recognised as a registered valuers organisation ;

(c) conducts training for the individual members before a certificate of practice is issued to them;

(d) lays down and enforces a code of conduct for valuers who are its members, which includes all the provisions specified in Annexure-I;

(e) provides for continuing education of individuals who are its members;

(f) monitors and reviews the functioning, including quality of service, of valuers who are its members; and

(g) has a mechanism to address grievances and conduct disciplinary proceedings against valuers who are its members.

(3) A registered valuers organisation, being an entity under proviso to sub-rule (1), shall convert into or register itself as a company under section 8 of the Companies Act, 2013 (18 of 2013), and include in its bye laws the requirements specified in Annexure-III, within one year from the date of commencement of these rules.

13. Application for recognition.(1) An eligible organisation which meets the conditions specified in rule 12 may make an

application for recognition as a registered valuers organisation for asset class or classes to the authority in Form-D of the Annexure-II along with a non-refundable application fee of rupees one lakh in favour of the authority.

(2) The authority shall examine the application, and may grant twenty-one days to the applicant to remove the deficiencies, if any, in the application.

(3) The authority may require the applicant to submit additional documents or clarification within twenty-one days.

(4) The authority may require the applicant to appear, within twenty-one days, before the Authority through its authorised representative for explanation or clarifications required for processing the application.

(5) If the authority is satisfied, after such scrutiny, inspection or inquiry as it deems necessary that the applicant is eligible under these rules, it may grant a certificate of recognition as a registered valuers organisation in Form-E of Annexure-II.

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(6) If, after considering an application made under sub-rule (1), the authority is of the prima facie opinion that recognition ought not to be granted, it shall communicate the reasons for forming such an opinion within forty-five days of receipt of the application, excluding the time given by it for removing the deficiencies, presenting additional documents or clarifications, or appearing through authorised representative, as the case may be.

(7) The applicant shall submit an explanation as to why its application should be accepted within fifteen days of the receipt of the communication under sub-rule (6), to enable the authority to form a final opinion.

(8) After considering the explanation, if any, given by the applicant under sub-rule (7), the authority shall either -

(a) accept the application and grant the certificate of recognition; or

(b) reject the application by an order, giving reasons thereof.

(9) The authority shall communicate its decision to the applicant within thirty days of receipt of explanation.

14. Conditions of Recognition.The recognition granted under rule 13 shall be subject to the conditions that the registered valuers organisation shall-

(a) at all times continue to satisfy the eligibility requirements specified under rule 12;

(b) maintain a register of members who are registered valuers, which shall be publicly available;

(c) admits only individuals who possess the educational qualifications and experience requirements, in accordance with rule 4 and as specified in its recognition certificate, as members;

(d) make such reports to the authority as may be required by it;

(e) comply with any directions, including with regard to course to be conducted by valuation organisation under clause (a) of sub-rule (2) of rule 12, issued by the authority;

(f) be converted or registered as company under section 8 of the Act, with governance structure and bye laws specified in Annexure-III, within a period of one year from the date of commencement of these rules if it is an organisation referred to in proviso to sub-rule (1) of rule 12;

(g) shall have the governance structure and incorporate in its bye laws the requirements specified in Annexure-III within one year of commencement of these rules if it is an organisation referred to in clause (i) of sub-rule (1) of rule 12 and existing on the date of commencement of these rules;

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(h) display on its website, the status and specified details of every registered valuer being its valuer members including action under rule 17 being taken against him; and

(i) comply with such other conditions as may be specified by authority.

CHAPTER IV CANCELLATION OR SUSPENSION OF CERTIFICATE OF

REGISTRATION OR RECOGNITION

15. Cancellation or suspension of certificate of registration or recognition.The authority may cancel or suspend the registration of a valuer or recognition of a registered valuers organisation for violation of the provisions of the Act, any other law allowing him to perform valuation, these rules or any condition of registration or recognition, as the case may be in the manner specified in rule 17.

16. Complaint against a registered valuer or registered valuers organisation.A complaint may be filed against a registered valuer or registered valuers organisation before the authority in person or by post or courier along with a non-refundable fees of rupees one thousand in favour of the authority and the authority shall examine the complaint and take such necessary action as it deems fit:

Provided that in case of a complaint against a registered valuer, who is a partner of a partnership entity or director of a company, the authority may refer the complaint to the relevant registered valuers organisation and such organisation shall handle the complaint in accordance with its bye-laws.

17. Procedure to be followed for cancellation or suspension of registration or recognition certificate.

(1) Based on the findings of an inspection or investigation, or a complaint received or on material otherwise available on record, if the authorised officer is of the prima facie opinion that sufficient cause exists to cancel or suspend the registration of a valuer or cancel or suspend the recognition of a registered valuers organisation, it shall issue a show-cause notice to the valuer or registered valuers organisation:

Provided that in case of an organisation referred to in clause (ii) of sub-rule (1) of rule 12 which has been granted recognition, the authorised officer shall, instead of carrying out inspection or investigation, seek the information required from the registered valuers organisation within the time specified therein and in the case of a default, give one more opportunity to provide the information within specified time failing which or in the absence of sufficient or satisfactory information provided, either initiate the process under this rule or refer the matter to the Central Government for appropriate directions.

(2) The show-cause notice shall be in writing and shall state–


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(3) The show-cause notice shall be served in the following manner by-

(a) sending it to the valuer or registered valuers organisation at its registered address by registered post with acknowledgment due; or

(b) an appropriate electronic means to the email address provided by the valuer or registered valuers organisation to the authority.

(4) The authorised officer shall dispose of the show-cause notice by reasoned order in adherence to the principles of natural justice.

(5) The order in disposal of a show-cause notice may provide for-

(a) no action;

(b) warning; or


(d) change in any one or more partner or director or the governing board of the registered valuers organisation.

(6) An order passed under sub-rule (5) cancelling the recognition of a registered valuers organisation, shall specify the time within which its members may take membership of another registered valuers organisation recognised for valuation of relevant asset class without prejudice to their registration.

(7) The order passed under sub-rule (5) shall be issued to the concerned person immediately, and published on the website of the authority.

(8) The order passed under sub-rule (5) shall not become effective until thirty days have elapsed from the date of issue of the order unless stated otherwise.

(9) Any person aggrieved by an order of the authorised officer under sub-rule (5) may prefer an appeal before the authority.

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Explanation.– For the purposes of this rule, the authorised officer shall be an officer as may be specified by the authority.

CHAPTER V VALUATION STANDARDS

18. Valuation Standards.The Central Government shall notify and may modify (from time-to-time) the valuation standards on the recommendations of the Committee set up under rule 19.

19. Committee to advise on valuation matters.(1) The Central Government may constitute a Committee to be known as “Committee to

advise on valuation matters” to make recommendations on formulation and laying down of valuation standards and policies for compliance by companies and registered valuers.

(2) The Committee shall comprise of-

(a) a Chairperson who shall be a person of eminence and well versed in valuation, accountancy, finance, business administration, business law, corporate law, economics;

(b) one member nominated by the Ministry of Corporate Affairs;

(c) one member nominated by the Insolvency and Bankruptcy Board of India;

(d) one member nominated by the Legislative Department;

(e) up to four members nominated by Central Government representing authorities which are allowing valuations by registered valuers;

(f) up to four members who are representatives of registered valuers organisations, nominated by Central Government.

(g) Up to two members to represent industry and other stakeholder nominated by the Central Government in consultation with the authority.

(3) The Chairperson and Members of the Committee shall have a tenure of three years and they shall not have more than two tenures.

CHAPTER VI MISCELLANEOUS

20. Punishment for contravention.Without prejudice to any other liabilities where a person contravenes any of the provision of these rules he shall be punishable in accordance with sub-section (3) of section 469 of the Act.

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21. Punishment for false statement.If in any report, certificate or other document required by, or for, the purposes of any of the provisions of the Act or the rules made thereunder or these rules, any person makes a statement,—

(a) which is false in any material particulars, knowing it to be false; or

(b) which omits any material fact, knowing it to be material, he shall be liable under section 448 of the Act.

ANNEXURE-I MODEL CODE OF CONDUCT FOR REGISTERED VALUERS

[See clause (g) of rule 7 and clause (d) of sub-rule (2) of rule 12]

Integrity and Fairness1. A valuer shall, in the conduct of his/its business, follow high standards of integrity and

fairness in all his/its dealings with his/its clients and other valuers.

2. A valuer shall maintain integrity by being honest, straightforward, and forthright in all professional relationships.

3. A valuer shall endeavour to ensure that he/it provides true and adequate information and shall not misrepresent any facts or situations.

4. A valuer shall refrain from being involved in any action that would bring disrepute to the profession.

5. A valuer shall keep public interest foremost while delivering his services.

Professional Competence and Due Care6. A valuer shall render at all times high standards of service, exercise due diligence,

ensure proper care and exercise independent professional judgment.

7. A valuer shall carry out professional services in accordance with the relevant technical and professional standards that may be specified from time to time

8. A valuer shall continuously maintain professional knowledge and skill to provide competent professional service based on up-to-date developments in practice, prevailing regulations/guidelines and techniques.

9. In the preparation of a valuation report, the valuer shall not disclaim liability for his/its expertise or deny his/its duty of care, except to the extent that the assumptions are based on statements of fact provided by the company or its auditors or consultants or information available in public domain and not generated by the valuer.

10. A valuer shall not carry out any instruction of the client insofar as they are incompatible with the requirements of integrity, objectivity and independence.

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11. A valuer shall clearly state to his client the services that he would be competent to provide and the services for which he would be relying on other valuers or professionals or for which the client can have a separate arrangement with other valuers.

Independence and Disclosure of Interest12. A valuer shall act with objectivity in his/its professional dealings by ensuring that his/

its decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the valuation assignment or not.

13. A valuer shall not take up an assignment if he/it or any of his/its relatives or associates is not independent in terms of association to the company.

14. A valuer shall maintain complete independence in his/its professional relationships and shall conduct the valuation independent of external influences.

15. A valuer shall wherever necessary disclose to the clients, possible sources of conflicts of duties and interests, while providing unbiased services.

16. A valuer shall not deal in securities of any subject company after any time when he/it first becomes aware of the possibility of his/its association with the valuation, and in accordance with the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 or till the time the valuation report becomes public, whichever is earlier.

17. A valuer shall not indulge in “mandate snatching” or offering “convenience valuations” in order to cater to a company or client’s needs.

18. As an independent valuer, the valuer shall not charge success fee.

19. In any fairness opinion or independent expert opinion submitted by a valuer, if there has been a prior engagement in an unconnected transaction, the valuer shall declare the association with the company during the last five years.

Confidentiality20. A valuer shall not use or divulge to other clients or any other party any confidential

information about the subject company, which has come to his/its knowledge without proper and specific authority or unless there is a legal or professional right or duty to disclose.

Information Management21. A valuer shall ensure that he/ it maintains written contemporaneous records for any

decision taken, the reasons for taking the decision, and the information and evidence in support of such decision. This shall be maintained so as to sufficiently enable a reasonable person to take a view on the appropriateness of his/its decisions and actions.

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22. A valuer shall appear, co-operate and be available for inspections and investigations carried out by the authority, any person authorised by the authority, the registered valuers organisation with which he/it is registered or any other statutory regulatory body.

23. A valuer shall provide all information and records as may be required by the authority, the Tribunal, Appellate Tribunal, the registered valuers organisation with which he/it is registered, or any other statutory regulatory body.

24. A valuer while respecting the confidentiality of information acquired during the course of performing professional services, shall maintain proper working papers for a period of three years or such longer period as required in its contract for a specific valuation, for production before a regulatory authority or for a peer review. In the event of a pending case before the Tribunal or Appellate Tribunal, the record shall be maintained till the disposal of the case.

Gifts and hospitality.25. A valuer or his/its relative shall not accept gifts or hospitality which undermines or

affects his independence as a valuer.

Explanation.– For the purposes of this code the term ‘relative’ shall have the same meaning as defined in clause (77) of Section 2 of the Companies Act, 2013 (18 of 2013).

26. A valuer shall not offer gifts or hospitality or a financial or any other advantage to a public servant or any other person with a view to obtain or retain work for himself/ itself, or to obtain or retain an advantage in the conduct of profession for himself/ itself.

Remuneration and Costs.27. A valuer shall provide services for remuneration which is charged in a transparent

manner, is a reasonable reflection of the work necessarily and properly undertaken, and is not inconsistent with the applicable rules.

28. A valuer shall not accept any fees or charges other than those which are disclosed in a written contract with the person to whom he would be rendering service.

Occupation, employability and restrictions.29. A valuer shall refrain from accepting too many assignments, if he/it is unlikely to be

able to devote adequate time to each of his/ its assignments.

30. A valuer shall not conduct business which in the opinion of the authority or the registered valuer organisation discredits the profession.

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ANNEXURE-II FORM-A

[See sub-rule (1) of rule 6)] Application for registration as a valuer by an individual

To

The Authority

[Insert address]

From

[Name and address]

Subject: Application for registration as a valuer

Sir/Madam,

I, having been enrolled as a member with the (please write the name of the Registered Valuers Organisation), hereby apply for registration as a valuer under section 247 of the Companies Act, 2013 read with sub-rule (1) of rule 6 of the Companies (Registered Valuers and Valuation) Rules, 2017 for the following class(es) of assets:-

(a)

(b)

My details are as under:

A. PERSONAL DETAILS

1. Title (Mr./Mrs./Ms.):

2. Name:

3. Father’s Name:

4. Mother’s Name:

5. Date of Birth:

6. PAN No.:

7. AADHAAR No.:

8. Passport No.:

9. Address for Correspondence:

10. Permanent Address:

11. E-mail Address

12. Mobile No:

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B. EDUCATIONAL, PROFESSIONAL AND VALUATION EXAMINATION QUALIFICATIONS

1. Educational Qualifications[Please provide educational qualifications from Bachelor’s degree onwards]

Educational Qualification

Year of Passing

Marks (Per cent)

Grade/ Class University/College

Remarks, if any

2. Professional Qualifications [excluding valuation specific courses]

Professional Qualification

[excluding valuation specific education/

courses]

Institute/ Professional

Body

Membership No. (if

applicable)

Date of enrolment

Remarks, if any

3(a) Details of valuation examination passed

Date of examination Asset class, if any Marks secured Percentage

3(b) Valuation Qualifications

Valuation specific qualification/

course

Recognised Registered Valuers Organisation

Asset class Membership No. in Registered

Valuers Organisation

Remarks, if any.

Name Recognition No

C. WORK EXPERIENCE1. Are you presently in practice / employment? (Yes or No)

2. Number of years in practice or of work experience in the relevant profession or in valuation (in years and months):

3. If in practice, address for professional correspondence:

4. Number of years in employment (in years and months):

5. Experience Details

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Sl. No.

From date

To date Employment/ Practice

If employed, Name of

Employer and Designation

If in practice, experience in the relevant profession/ valuation

Area of work

D. REGISTERED VALUERS ORGANISATION1. Please give details of the registered valuers organisation of which you are a member.

2. Please state your membership number.

E. ADDITIONAL INFORMATION1. Have you ever been convicted for an offence? Yes or No. If yes, please give details.

2. Are any criminal proceedings pending against you? (Yes or No) If yes, please give details.

3. Have you ever been declared as an undischarged bankrupt, or applied to be adjudged as Bankrupt? (Yes or No) If yes, please give details.

4. Please provide any additional information that may be relevant for your application.

F. ATTACHMENTS1. Copy of proof of residence.

2. Copies of documents in support of educational qualifications, professional qualifications and Registered Valuation Examination qualifications.

3. Copies of documents demonstrating practice or work experience for the relevant period.

4. Copies of certificate of employment by the relevant employer(s), specifying the period of such employment.

5. Income Tax Returns for the last three years.

6. Copy of proof of membership with a registered valuers organisation.

7. Passport-size photo.

8. Evidence of deposit/payment of five thousand rupees.

G. AFFIRMATIONS1. Copies of documents, as listed in section F of this application form have been attached/

uploaded. The documents attached/ uploaded are ……

I undertake to furnish any additional information as and when called for.

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2. I am not disqualified from being registered as a valuer under the Companies (Registered Valuers and Valuation) Rules, 2017.

3. This application and the information furnished by me along with this application is true and complete. If found false or misleading at any stage, my registration shall be summarily cancelled.

I hereby undertake to comply with the requirements of the Companies Act, 2013, the rules made thereunder, the directions given by the authority, and the bye-laws, directions and guidelines issued or the resolutions passed in accordance with the bye-laws by the registered valuers organisation with which I am enrolled.

4. The applicable fee has been paid.

Name and Signature of applicant

Place:

Date:

VERIFICATION BY THE REGISTERED VALUERS ORGANISATION

We have verified the above details submitted by … who is our member with membership no. … and confirm these to be true and correct.

We recommend registration of … as a valuer.

(Name and Signature) Authorised Representative of the Registered Valuers Organisation

Seal of the Registered Valuers Organisation

Place:

Date:

FORM-B (See sub-rule (2) of rule 6)

Application for registration as a valuer by a partnership entity/Company

To

The Authority,

[Insert address]

From

[Name and address]

Subject: Application for registration as a valuer

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Sir/Madam,

I, being a partner/director (strike off whichever is not applicable), being duly authorised for the purpose by the partnership entity/company through a resolution/deed (strike out whichever is not applicable) apply on behalf of [ name and address of applicant partnership entity/company], and on behalf of its partners/directors, for registration as a valuer under section 247 of the Companies Act, 2013 read with sub-rule (2) of rule 6 of the Companies (Registered Valuers and Valuation) Rules, 2017 for the following class(es) of assets :-

(a) The details are as under:

A. DETAILS OF THE PARTNERSHIP ENTITY/COMPANY1. Name:

2. Registration Number/ LLP Number/CIN Number:

3. PAN No.:

4. Address for Correspondence or registered office:


6. E-mail Address

7. Telephone No.:

8. Others:

B. PERSONAL DETAILS OF EACH PARTNER/DIRECTOR Title (Mr./Mrs./Ms.):

1. Name:

2. Father’s Name:

3. Mother’s Name:

4. Date of Birth:

5. PAN No.:

6. AADHAAR No.:

7. Passport No.:

8. Address for Correspondence:


10. E-Mail Address

11. Mobile No.:

12. Others:

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C. EDUCATIONAL, PROFESSIONAL PARTNERS/DIRECTORS AND VALUATION EXAMINATION QUALIFICATIONS OF

1. Educational Qualifications[Please provide educational qualifications from Bachelor’s degree onwards for each partner/director]

Educational Qualification

Year of Passing Marks (per cent)

Grade/ Class

University/College

Remarks, if any

2. Professional Qualifications for each partner/director

Professional Qualification

Institute/ Professional Body/ registered valuers

organisation

Membership No. (if

applicable)

Date of enrolment Remarks, if any

3(a) Details of valuation examination passed (for all partners/directors who are registered valuers)

Date of examination Asset class, if any Marks secured Percentage

3(b) Valuation Qualifications (for all partners/directors who are registered valuers)

Valuation specific qualification/course

Recognised Registered Valuers Organisation

Asset class Membership No. in

Registered Valuers

Organisation

Remarks, if any.

Name Recognition No

D. REGISTERED VALUERS ORGANISATION1. Please give details of the registered valuers organisation of which you are a

member. Please state your membership number.

2. Please give details of the registered valuers organisations of which your partners are members. Please state your membership number.

E. ADDITIONAL INFORMATION1. Have you or any of your partners/directors ever been convicted for an offence?

(Yes or No). If yes, please give details.

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2. Are any criminal proceedings pending against you or your partners/directors? (Yes or No). If yes, please give details.

3. Are you or any of your partners/directors undischarged bankrupt, or have applied to be adjudged as a bankrupt? (Yes or No)

If yes, please give details.

4. Please provide any additional information that may be relevant for your application.

F. ATTACHMENTS1. Copy of proof of residence of itself and its partners/directors.

2. Copies of documents in support of educational qualifications, professional qualifications and valuation qualifications of partners/directors.

3. Financial statements/ Income Tax Returns for the last three years.

4. Copy of proof of membership with a registered valuers organisation .

5. Passport-size photo.

6. Evidence of deposit / payment of ten thousand rupees.

G. AFFIRMATIONS1. Copies of documents, as listed in section F of this application form have been

attached/ uploaded. The documents attached/ uploaded are ……

I undertake to furnish any additional information as and when called for.

2. I am not disqualified from being registered as a valuer under the Companies (Registered Valuers and Valuation) Rules, 2017.

3. This application and the information furnished by me along with this application is true and complete. If found false or misleading at any stage, the registration of the applicant shall be summarily cancelled.

4. I hereby undertake that the partnership entity/company and its partners/directors shall comply with the requirements of the Companies Act, 2013, the rules made thereunder, the directions given by the authority, and the bye-laws, directions and guidelines issued or the resolutions passed in accordance with the bye-laws by the registered valuers organisation with which I am enrolled.

5. The applicable fee has been paid.

Place: Name and Signature of applicant’s representative

Date:

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VERIFICATION BY THE REGISTERED VALUERS ORGANISATION

We have verified the above details submitted by … who is our member with membership no. … and confirm these to be true and correct. We recommend registration of … as a valuer.

(Name and Signature) Authorised Representative of the Registered Valuers Organisation

Seal of the Registered Valuers Organisation

Place:

Date:

FORM-C (See sub-rule (6) of rule 6)

CERTIFICATE OF REGISTRATION

VALUER REGISTRATION NO.1. In exercise of the powers conferred by Section 247 of the Companies Act, 2013 read

with sub-rule (6) of rule 6 of the Companies (Registered Valuers and Valuation) Rules, 2017 the Authority hereby grants a certificate of registration to [insert name], to act as a valuer in respect of [insert asset class] in accordance with these rules.

2. This certificate shall be valid from [insert start date].

Date : (Name and Designation)

Place : For and on behalf of the Authority

APPENDIX FORM-D

(See sub-rule (1) of rule 13) APPLICATION FOR RECOGNITION

To

The Authority

[Insert address]

From

[Name and address]

Subject: Application for grant of certificate of recognition as a registered valuers organisation

Madam/Sir,

1. I, being duly authorised for the purpose, hereby apply on behalf of [name and address of the applicant] for grant of certificate of recognition as a registered valuers organisation in respect of the following class(es) of assets:

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(a)

(b)

and enclose a copy of the board resolution authorising me to make this application and correspond with the authority in this respect.

2. Copies of the articles of association, memorandum of association, trust deed, bye-laws and code of conduct, as applicable, of the applicant are enclosed.

3. I, on behalf of [insert name], affirm that the applicant is eligible to be recognised as a registered valuers organisation for the abovementioned class(es) of assets.

4. I, on behalf of [insert name], hereby affirm that –

(a) All information contained in this application is true and correct in all material respects,

(b) No material information relevant for the purpose of this application has been suppressed, and

(c) Recognition granted in pursuance of this application may be cancelled summarily if any information submitted is found to be false or misleading in material respects at any stage.

5. If granted recognition, I, on behalf of [insert name], undertake to comply with the requirements of the Act, the rules, directions or guidelines issued by the authority, and such other conditions and terms as may be contained in the certificate of recognition or be specified or imposed by the authority subsequently, including the requirement to convert into a company registered under section 8 of the Companies Act, 2013 within the required period, if applicable.

Yours faithfully,

Authorised Signatory

(Name) (Designation)

Date :

Place :

APPENDIX TO FORM-D PART GENERAL

1. Name of the applicant.

2. Address of registered office and principal place of business of the applicant.

3. Corporate Identification Number (CIN)/ PAN/ Other Identification Number.

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4. Name, designation and contact details of the person authorised to make this application and correspond with the authority in this respect.

PART II STRUCTURE AND GOVERNANCE

1. Please provide brief details of the applicant’s-

(i) Form of establishment

(ii) Ownership structure

(iii) Governance structure

PART III MEMBERSHIP AND EXAMINATION

1. Please provide brief details of the

(i) Number of members who practice valuation and are already registered with the applicant

(ii) Specific discipline (in terms of rule 4):

(iii) Other criteria/ qualifications for and manner of registration with the applicant

Note: In case of organisations referred to in clause (ii) of sub-rule (1) of rule 12, in lieu of information at (i), they may provide brief details of the number of members who have passed the valuation specific course conducted by the organisation.

2. Please provide brief details of any examination conducted for registration of members with the applicant.

3. Please provide brief details of the requirements of continuous education of the applicant’s members.

PART IV CODE OF CONDUCT

1. Please state if the Code of Conduct of the applicant is in compliance with the Companies (Registered Valuers and Valuation) Rules, 2017.

2. Please specify the clause number of the provisions of the Code of Conduct which are in addition to the provisions of the model Code of Conduct specified in the Companies (Registered Valuers and Valuation) Rules, 2017 (if any).

PART V MONITORING AND DISCIPLINE

1. Please provide details mechanisms employed by the applicant to monitor its members.

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2. Please provide details of mechanisms employed by the applicant to redress grievances against its members and itself.

3. Please provide details of disciplinary mechanisms employed by the applicant. Please provide any other details you consider relevant in support of the application.

Authorised Signatory.

(Name) (Designation)

Date :

Place:

FORM-E (See sub-rule (5) of rule 13)

CERTIFICATE OF RECOGNITION/REGISTERED VALUERS ORGANISATION RECOGNITION NO.

1. In exercise of the powers conferred by sub-rule (5) of rule 13 of the Companies (Registered Valuers and Valuation) Rules, 2017 the Registration hereby grants a certificate recognising [insert name], as a registered valuers organisation for the valuation of [insert class(es) of assets].

Conditions of Recognition

2. [Insert Name] shall admit as members who possess the educational qualifications and experience as specified herein under:

3. Conditions as laid down in rule 14 [give in detail]

4. This certificate of recognition shall be valid from [insert start date].

Date: (Name and Designation) For and on behalf of the Authority

Place :

ANNEXURE - III (See sub-rule (3) of rule 12 and clauses (f) and (g) of rule 14)

Governance Structure and Model Bye Laws for registered valuers organisation Part I

1. Governance Structure No person shall be eligible to be recognised as an registered valuers organisation unless

it is a company registered under section 8 of the Companies Act, 2013 with share capital, and –

(a) Its sole object is to carry on the functions of a registered valuers organisation under the Companies Act, 2013;

(b) It is not under the control of person(s) resident outside India,

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(c) Not more than forty-nine per cent of its share capital is held, directly or indirectly, by persons resident outside India; and

(d) It is not a subsidiary of a body corporate through more than one layer:

Explanation: “Layer” in relation to a body corporate means its subsidiary;

(e) Itself, its promoters, its directors and persons holding more than ten percent. of its share capital are fit and proper persons.

2. Registered Valuers Organisation to have Bye-Laws(1) The registered valuers organisation shall submit to the authority its bye-laws along

with the application for its registration as a registered valuers organisation.

(2) The bye-laws shall provide for all matters specified in the model bye-laws in Part II.

(3) The bye-laws shall at all times be consistent with the model bye-laws.

(4) The registered valuers organisation shall publish its bye-laws, the composition of all committees formed, and all policies created under the bye-laws on its website.

3. Amendment of bye-Laws(1) The Governing Board may amend the bye-laws by a resolution passed by votes in

favour being not less than three times the number of the votes, if any, cast against the resolution, by the directors.

(2) A resolution passed in accordance with sub-bye law (1) shall be filed with the authority within seven days from the date of its passing, for its approval.

(3) The amendments to the bye-laws shall come into effect on the seventh day of the receipt of the approval, unless otherwise specified by the authority.

(4) The registered valuers organisation shall file a printed copy of the amended bye-laws with the authority within fifteen days from the date when such amendment is made effective.

4. Composition of the Governing Board.(1) The Governing Board shall have a minimum of ____ [Insert number] directors.

(2) More than half of the directors shall be persons resident in India at the time of their appointment, and at all times during their tenure as directors.

(3) Not more than one fourth of the directors shall be registered valuers.

(4) More than half of the directors shall be independent directors at the time of their appointment, and at all times during their tenure as directors:

Provided that no meeting of the Governing Board shall be held without the presence of at least one independent director.

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(5) An independent director shall be an individual –

(a) Who has expertise in the field of finance, law, management or valuation;

(b) Who is not a registered valuer;

(c) Who is not a shareholder of the registered valuers organisation; and

(d) Who fulfils the requirements under sub-section (6) of section 149 of the Companies Act, 2013.

(6) The directors shall elect an independent director as the Chairperson of the Governing Board.

Explanation – For the purposes of bye laws, any fraction contained in

(a) ‘More than half’ shall be rounded off to the next higher number; and

(b) ‘Not more than one-fourth’ shall be rounded down to the next lower number.

PART II MODEL BYE-LAWS OF A REGISTERED VALUERS ORGANISATION

I. GENERAL1. The name of the registered valuers organisation is “ _______________________”

(hereinafter referred to as the ‘Organisation’).

2. The ‘Organisation’ is registered as a company under section 8 of the Companies Act, 2013 (18 of 2013) with its registered office situated at [provide full address].

3. These bye-laws may not be amended, except in accordance with this Annexure.

II. DEFINITIONS4. (1) In these bye-laws, unless the context otherwise requires -

(a) “certificate of membership” means the certificate of membership of the Organisation granted under bye- law 10;

(b) “Act” means the Companies Act, 2013 (18 of 2013);

(c) “Governing Board” means the Board of Directors or Board of the Organisation as defined under clause (10) of section 2 of Companies Act, 2013 (18 of 2013);

(d) “relative” shall have the same meaning as assigned to it in clause (77) of section 2 of the Companies Act, 2013 (18 of 2013);

(2) Unless the context otherwise requires, words and expressions used and not defined in these bye-laws shall have the meanings assigned to them in the Companies Act, 2013 (18 of 2013).

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III. OBJECTIVES5. (1) The Organisation shall carry on the functions of the registered valuers

organisation under the Companies (Registered Valuers and Valuation) Rules, 2017, and functions incidental thereto.

(2) The Organisation shall not carry on any function other than those specified in sub-clause (1), or which is inconsistent with the discharge of its functions as a registered valuers organisation.

IV. DUTIES OF THE ORGANISATION6. (1) The Organisation shall maintain high ethical and professional standards in the

regulation of its members.

(2) The Organisation shall -

(a) ensure compliance with the Companies Act, 2013 and rules, regulations and guidelines issued thereunder governing the conduct of registered valuers organisation and registered valuers;

(b) employ fair, reasonable, just, and non-discriminatory practices for the enrolment and regulation of its members;

(c) be accountable to the authority in relation to all bye-laws and directions issued to its members;

(d) develop the profession of registered valuers;

(e) promote continuous professional development of its members;

(f) continuously improve upon its internal regulations and guidelines to ensure that high standards of professional and ethical conduct are maintained by its members; and

(g) provide information about its activities to the authority.

V. COMMITTEES OF THE ORGANISATION

Advisory Committee of Members.7. (1) The Governing Board may form an Advisory Committee of members of the

Organisation to advise it on any matters pertaining to-

(a) the development of the profession;

(b) standards of professional and ethical conduct; and

(c) best practices in respect of Valuation.

(2) The Advisory Committee may meet at such places and times as the Governing Board may provide.

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Other Committees of the Organisation.8. (1) The Governing Board shall constitute–

(a) one or more Membership Committee(s) consisting of such members as it deems fit;

(b) a Monitoring Committee consisting of such members as it deems fit;

(c) one or more Grievance Redressal Committee(s), with not less than three members,;

(d) one or more Disciplinary Committee(s) consisting of at least one member nominated by the authority.

(2) The Chairperson of each of these Committees shall be an independent director of the Organisation.

VI. MEMBERSHIP

Eligibility for Enrolment.9. No individual shall be enrolled as a member if he is not eligible to be registered as a

registered valuer with the authority:

Provided that the Governing Board may provide additional eligibility requirements for enrolment:

Provided further that such additional requirements shall not discriminate on the grounds of religion, race, caste, gender, place of birth or professional affiliation.

Process of Enrolment as Member.10. (1) An individual may apply for enrolment as a member by submitting an application

in such form, in such manner and with such fees as may be specified by the Organisation.

(2) The Organisation shall examine the application in accordance with the applicable provisions of the rules, regulations and guidelines thereunder.

(3) On examination of the application, the Organisation shall give an opportunity to the applicant to remove the deficiencies, if any, in the application.

(4) The Organisation may require an applicant to submit additional documents, information or clarification that it deems fit, within reasonable time.

(5) The Organisation may reject an application if the applicant does not satisfy the criteria for enrolment or does not remove the deficiencies or submit additional documents or information to its satisfaction, for reasons recorded in writing.

(6) The rejection of the application shall be communicated to the applicant stating the reasons for such rejection, within thirty days of the receipt of the application, excluding the time given for removing the deficiencies or presenting additional documents or clarification by the Organisation, as the case may be.

347


(7) The acceptance of the application shall be communicated to the applicant, along with a certificate of membership.

(8) An applicant aggrieved of a decision rejecting his application may appeal to the Membership Committee of the Organisation within thirty days from the receipt of such decision.

(10) The Membership Committee shall pass an order disposing of the appeal in the manner it deems expedient, within thirty days of the receipt of the appeal.

Membership Fee.11. The Organisation may require the members to pay a fixed sum of money as its annual

membership fee.

Register of Members.12. (1) The Organisation shall maintain a register of its professional members, containing

their-

(a) name;

(b) proof of identity;

(c) contact details;

(d) address;

(e) date of enrolment and membership number;

(f) date of registration with the authority and registration number;

(g) details of grievances pending against him with the Organisation;

(h) details of disciplinary proceedings pending against him with the Organisation; and

(i) details of orders passed against him by the authority or Disciplinary Committee of the Organisation.

(2) The records relating to a member shall be made available for inspection to-

(a) the authority,

(b) any other person who has obtained the consent of the member for such inspection.

VII. DUTIES OF MEMBERS13. (1) In the performance of his functions, a member shall–

(a) act in good faith in discharge of his duties as a registered valuer;

(b) discharge his functions with utmost integrity and objectivity;

348


(c) be independent and impartial;

(d) discharge his functions with the highest standards of professional competence and professional ethics;

(e) continuously upgrade his professional expertise;

(f) comply with applicable laws in the performance of his functions; and

(g) maintain confidentiality of information obtained in the course of his professional activities unless required to disclose such information by law.

14. The Organisation shall have a Code of Conduct that shall be consistent with, and that shall provide for all matters in the Code of Conduct as specified in the Annexure-I.

VIII. MONITORING OF MEMBERS15. The Organisation shall have a Monitoring Policy to monitor the professional activities

and conduct of members for their adherence to the provisions of the Act, rules, regulations and guidelines issued thereunder, these bye- laws, the Code of Conduct and directions given by the Governing Board.

16. A member shall submit information about ongoing and concluded engagements as a registered valuer, in the manner and format specified by the Organisation, at least twice a year stating inter alia, the date of assignment, date of completion and reference number of valuation assignment and valuation report.

17. The Monitoring Committee shall review the information and records submitted by the members in accordance with the Monitoring Policy.

18. The Monitoring Policy shall provide for the following -

(a) the frequency of monitoring;

(b) the manner and format of submission or collection of information and records of the members, including by way of inspection;

(c) the obligations of members to comply with the Monitoring Policy;

(d) the use, analysis and storage of information and records;

(e) evaluation of performance of members; and

(f) any other matters that may be specified by the Governing Board.

19. The Monitoring Policy shall –

(a) have due regard for the privacy of members,

(b) provide for confidentiality of information received, except when disclosure of information is required by the authority or by law, and

(c) be non-discriminatory.

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20. The Organisation shall submit a report to the authority in the manner specified by the authority with information collected during monitoring, including information pertaining to –

(a) the details of the appointments made under the Act/these Rules,

(b) the transactions conducted with stakeholders during the period of his appointment;

(c) the transactions conducted with third parties during the period of his appointment; and

(d) the outcome of each appointment.

IX. GRIEVANCE REDRESSAL MECHANISM21. (1) The Organisation shall have a Grievance Redressal Policy providing the procedure

for receiving, processing, redressing and disclosing grievances against the Organisation or any member of the Organisation by-

(a) any member of the Organisation;

(b) any person who has engaged the services of the concerned members of the Organisation; or

(c) any other person or class of persons as may be provided by the Governing Board.

(2) The Grievance Redressal Committee, after examining the grievance, may-

(a) dismiss the grievance if it is devoid of merit; or

(b) initiate a mediation between parties for redressal of grievance.

(3) The Grievance Redressal Committee shall refer the matter to the Disciplinary Committee, wherever the grievance warrants disciplinary action.

22. The Grievance Redressal Policy shall provide for–

(a) the format and manner for filing grievances;

(b) maximum time and format for acknowledging receipt of a grievance;

(c) maximum time for the disposal of the grievance by way of dismissal, reference to the Disciplinary Committee or the initiation of mediation;

(d) details of the mediation mechanism

(e) provision of a report of the grievance and mediation proceedings to the parties to the grievance upon dismissal or resolution of the grievance;

(f) action to be taken in case of malicious or false complaints;

350


(g) maintenance of a register of grievances made and resolutions arrived at; and

(h) periodic review of the Grievance Redressal Mechanism.

X. DISCIPLINARY PROCEEDINGS23. The Organisation may initiate disciplinary proceedings by issuing a show-cause notice

against members–

(a) based on a reference made by the Grievances Redressal Committee;

(b) based on monitoring of members;

(c) following the directions given by the authority or any court of law; or

(d) suo moto, based on any information received by it.

24. (1) The Organisation shall have a Disciplinary Policy, which shall provide for the following -

(a) the manner in which the Disciplinary Committee may ascertain facts;

(b) the issue of show-cause notice based on the facts;

(c) disposal of show-cause notice by a reasoned order, following principles of natural justice;

(d) timelines for different stages of disposal of show cause notice; and

(e) rights and obligations of the parties to the proceedings.

(2) The orders that may be passed by the Disciplinary Committee shall include-

(a) expulsion of the member;

(b) suspension of the member for a certain period of time;

(c) admonishment of the member;

(d) imposition of monetary penalty;

(e) reference of the matter to the authority, which may include, in appropriate cases, recommendation of the amount of restitution or compensation that may be enforced by the authority; and

(f) directions relating to costs.

(3) The Disciplinary Committee may pass an order for expulsion of a member if it has found that the member has committed–

(a) An offence under any law for the time being in force, punishable with imprisonment for a term exceeding six months, or an offence involving moral turpitude;

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(b) A gross violation of the Act, rules, regulations and guidelines issued thereunder, bye-laws or directions given by the Governing Board which renders him not a fit and proper person to continue acting as a registered valuer.

(4) Any order passed by the Disciplinary Committee shall be placed on the website of the Organisation within seven days from passing of the said order, with one copy each being provided to each of the parties to the proceeding.

(5) Monetary penalty received by the Organisation under the orders of the Disciplinary Committee shall be used for the professional development.

25. (1) The Governing Board shall constitute an Appellate Panel consisting of one independent director of the Organisation, one member each from amongst the persons of eminence having experience in the field of law and field of valuation, and one member nominated by the authority.

(2) Any person aggrieved of an order of the Disciplinary Committee may prefer an appeal before the Appellate Panel within thirty days from the receipt of a copy of the final order.

(3) The Appellate Panel shall dispose of the appeal in the manner it deems expedient, within thirty days of the receipt of the appeal.

XI. SURRENDER OF MEMBERSHIP AND EXPULSION FROM MEMBERSHIP Temporary Surrender of Membership.

26. (1) A member shall make an application for temporary surrender of his membership of the Organisation at least thirty days before he-

(a) becomes a person not resident in India;

(b) takes up employment; or

(c) starts any business, except as specifically permitted under the Code of Conduct;

and upon acceptance of such temporary surrender and on completion of thirty days from the date of application for temporary surrender, the name of the member shall be temporarily struck from the registers of the Organisation, and the same shall be intimated to the authority.

(2) No application for temporarily surrender of membership of the Organisation shall be accepted if -

(a) there is a grievance or disciplinary proceeding pending against the member before the Organisation or the authority, and he has not given an undertaking to cooperate in such proceeding; or

352


(b) The member has been appointed as a registered valuer for a process under the Companies Act, 2013, and the appointment of another registered valuer may be detrimental to such process.

(3) A member may make an application to revive his temporarily surrendered membership when the conditions for temporary surrender as provided in sub-clause (1) cease to be applicable, and upon acceptance of the application for revival, the name of the member shall be re-inserted in the register of the Organisation, and the same shall be intimated to the authority.

Surrender of Membership27. (1) A member who wishes to surrender his membership of the Organisation may do

so by submitting an application for surrender of his membership.

(2) Upon acceptance of such surrender of his membership, and completion of thirty days from the date of such acceptance, the name of the member shall be struck from the registers of the Organisation, and the same shall be intimated to the authority.

28. Any fee that is due to the Organisation from a member surrendering his membership shall be cleared prior to his name being struck from the registers of the Organisation.

29. The Organisation may refuse to accept the surrender of membership by any member if –

(a) there is any grievance or disciplinary proceeding pending against the member before the Organisation or the authority; or

(b) the member has been appointed as a registered valuer process under the Companies Act, 2013, and the appointment of another registered valuer may be detrimental to such process.

Expulsion from Membership.30. A member shall be expelled by the Organisation–

(a) if he becomes ineligible to be enrolled under bye-law 9;

(b) on expiry of thirty days from the order of the Disciplinary Committee, unless set aside or stayed by the Appellate Panel;

(c) upon non-payment of membership fee despite at least two notices served in writing;

(d) upon the cancellation of his certificate of registration by the authority;

(e) upon the order of any court of law.

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ANNEXURE-IV Indicative Matrix on requisite qualifications/experience in specified discipline

(See Explanation II to rule 4)

Asset Class Educational qualification in specified discipline

Experience in specified discipline

Valuation Specific Education Course

Graduate level Post Graduate level(I) (II) (III) (IV) (V)

Land and Building

(A) Graduate in Civil Engineering, Architecture or town planning of a recognised University

------- Five years of experience in the discipline after completing Graduation

Courses as per syllabus specified under rule 5

(B) Graduate in Civil Engineering, Architecture or town planning of a recognised University

post-graduate in Civil Engineering, Architecture or town planning of a recognised University

Three years of experience in the discipline after completing Post Graduation


(C) Graduate in a discipline specified by the Authority for a registered valuers organisation in its conditions of recognition

post-graduate in valuation of land and building or real estate from a recognised university

Five years of experience in the discipline after completing Post Graduation


Any other graduate level qualification in accordance with rule 4 as may be specified by the Authority for a registered valuers organisation in its conditions of recognition.


At least five years and three years of experience in case of graduate level degree and post graduate level degree respectively.


Plant and Machinery

(A) Graduate in Mechanical or Electrical Engineering of a recognised University

---------- Five years of experience in the discipline after completing Graduation


(B) Graduate in Mechanical or Electrical Engineering of a recognised University

Post Graduate in Mechanical or Electrical Engineering of a recognised University

Three years of experience in the discipline after completing Post Graduation


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Asset Class Educational qualification in specified discipline

Experience in specified discipline

Valuation Specific Education Course

Graduate level Post Graduate level(I) (II) (III) (IV) (V)

(C) Graduate in valuation of machinery and plant from a recognised university

Post-graduate degree in valuation of machinery and plant from a recognised university

Three years experience in discipline completing Graduation



Any other post graduate level qualification in accordance with rule 4 as may be specified by the authority for a registered valuers organisation registered valuers organisation in its conditions of recognition.




Graduate in any stream

(1) Member of the Institute of Chartered Accountants or The Institute of Cost Accountants of India or the Institute of Company Secretaries of India;(2) MBA/PGDBM specialisation in finance or;(3) Post Graduate Degree in Finance

Three years of experience in the discipline after completing graduation.






Any other asset class along with corresponding qualifications and experience in accordance with rule 4 as may be specified by the authority for a registered valuers organisation in its conditions of recognition.

[File No. 1/27/2013-CL-V] AMARDEEP SINGH BHATIA,

Jt. Secy.

mm

FEW OTHER PUBLICATIONS AUTHORED BY DR. RAJKUMAR ADUKIA FEW OTHER PUBLICATIONS AUTHORED BY DR. RAJKUMAR ADUKIA

How to PassLimited

InsolvencyExam

Indian Accounting

(Ind AS)

2015

Real Estate Law, Practice& Procedures

Dr. Adukia has authored various books and more than 100 articles in different journals on Valuation, Insolvency Laws, Insurance Laws, Accounting Standards etc. which has helped numerous students and professionals in their academic and professional growth. These books and articles are highly appreciated and applauded by the readers for its extremely lucid content which gives a practical approach to the reader.

These books include:

Practical Guide for Valuation including Legal Framework in India (Two Editions) •In-depth Analysis of the Insolvency & Bankruptcy Code, 2016, Relevant Rules and Regulations •A Practical guide to Corporate Insolvency •How to pass Limited Insolvency Examination •Corporate Governance for Insurance Companies. •An overview of Indian Accounting Standards (Ind ASs)

Eminent Faculty on Valuation

Dr. Adukia is an eminent faculty and an authoritative speaker on the subject of Valuation. He has addressed more than 250 seminars across the globe including his address to

•Insolvency and Bankruptcy Board of India •Institute of Chartered Accountants of India •Institute of Company Secretaries of India •Institute of Cost and Management Accountants of India •Chamber of Indian Micro Small & Medium Enterprises •Faculty in Indian Institute of Corporate Affairs for courses on Insolvency Laws and Corporate laws. •ASSOCHAM •Dena bank •Central bank

Education

Having graduated from Sydenham College of Commerce & Economics in 1980 as 5th rank holder in Bombay University and he also received a Gold Medal for highest marks in Accountancy & Auditing. He cleared the Chartered Accountancy Examination with 1st Rank in Intermediate and 6th Rank in Final. He also secured 3rd Rank in the Final Cost Accountancy Course. He has been awarded G. P. Kapadia prize for best student of the year 1981. He also holds a Degree in law, PhD in Corporate Governance in Mutual Funds, MBA, Diploma in IFRS (UK), Diploma in Labour Law and Labour Welfare, Diploma in IPR, Diploma in Criminology.

He has done Master in Business Finance, a one year post qualication course by ICAI. He has also done Certicate Courses conducted by ICAI on

•Arbitration•Forensic Audit and Fraud Prevention•Concurrent Audit•Professional Service

Dr. Adukia’s service and contribution to the profession

•Chairman of WIRC of ICAI in 1997-98•International Member of Professional Accountants in Business Committee (PAIB) of International Federation of Accountants (IFAC) from 2001 to 2004•Member of Inspection Panel of Reserve Bank of India•Member of J.J. Irani committee (which drafted Companies Bill 2008)•Member of Secretarial Standards Board of ICSI •Member of Working Group of Competition Commission of India, National Housing Bank, NABARD, RBI, CBI etc. •Independent Director of Mutual Fund Company and Asset Management Company. • Worked closely with the Ministry of Corporate Affairs on the drafting of various enactments.•Actively involved with ICAI as a Central Council Member during the period when the convergence to IFRS was conceptualised in India and has been instrumental in materialising the idea.

Professional Expertise, Training and Authorship

Dr. Adukia’s contribution towards profession expertise and academics is highly acclaimed

•Author of more than 100 books on wide variety of topics ranging from those dealing with valuation, Insolvency, Trade, Taxation, Finance, Real Estate to topics like Time Management and Professional Opportunities. •A successful Chartered Accountant in practice since last 30 years in varied eld of Financial Planning, Taxation and Legal Consulting. •Business advisor for various companies on varied subjects •Travelled across the globe for his professional work and knowledge sharing. He has widely travelled three fourths of globe addressing international conferences and seminar on various international issues like Corporate Social Responsibility, Corporate Governance, Business Ethics etc.

His Contribution in the eld of Accounting Standards

•His two books on IFRS viz. Encyclopaedia on IFRS and Handbook on IFRS have been greatly appreciated. •He has delivered lectures on IFRS at various prestigious forums including National Academy of Audit and Accounts. •He has been associated with numerous corporate and banks (like DENA Bank & Central Bank of India)in their convergence procedure both directly and by giving training on Ind AS to their staff members. •He has also trained staff members of various regulatory bodies like Regional Director and Registrar of Companies, Western Region, Ministry of Corporate Affairs, CBDT and CBEC.

Current Membership:

Dr. Adukia is also a member of:

•CAG Advisory Audit Committee •Insol India National Committee for Regional Affairs •International Financial Reporting Standards (IFRS) Foundation SME Group •Indian Society for Training and Development

Awards and Accolades

He has been felicitated with awards like

• The Jeejeebhoy Cup for prociency and character •State Trainer by the Indian Junior Chamber •“Rajasthan Shree” by Rajasthan Udgosh, a noted Social Organisation of Rajasthan and several other awards as a successful leader in various elds.


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Practical Guide for Valuation including Legal Framework

in India(Including Valuation of Land & Buildings, Plant & Machinery, IPR and Other Assets)

DR. RAJKUMAR S. ADUKIAAuthor of 200 plus books


Dip in criminology, Ph.D.

Mobile: 98200 61049Email ID: [email protected]

¤ International Valuation/TEGOVA/ RICS/ ASA Standards

¤ Sections 247/447/458/459/469 of The Companies Act, 2013 also incorporating amendment by Companies (Amendment) Act 2017

¤ Companies (Registered Valuers and Valuation) Rules, 2017 as amended by Companies (Registered Valuers and Valuation) Amendment Rules, 2018 (with effect from 9th February 2018)

¤ Valuation of Land & Buildings

¤ Valuation of Plant & Machinery

¤ Valuation of Intellectual Property Rights

¤ Valuation of Business and Other Assets

¤ Checklists, Reports, Documentation and Specimen

¤ Registered Valuers Organisation

¤ Case Studies on Valuation

Highlights

2nd Edition 2018

First Published in India 2018 with 10 model papers and more than 3000 MCQs

Upcoming Books On Valuation

Book your advance copy at ` 4,999 published price ` 5,999

Asset Class:Securities or

Financial Assets

Asset Class:Land &

Building

Asset Class:Plant &

Machinery

How to Pass Valuation ExaminationDR. RAJKUMAR S. ADUKIAAuthor of 200 plus books

B. Com. (Hons.), FCA, FCS, FCMA, LL.B.,M.B.A, DIPR, Dip IFRS (UK), Dip LL&LW, Dip in Criminology, Ph.D.

Mobile: 98200 61049 | Email ID: [email protected] Price ` 999

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