Professional Documents
Culture Documents
Dr. Adukia Valuation 09032018
Dr. Adukia Valuation 09032018
Dr. Adukia Valuation 09032018
Valuation including
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
Legal Framework
•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
in India
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
(Including Valuation of Land & Buildings,
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
Plant & Machinery, IPR and Other Assets)
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 Highlights
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. ¤ International Valuation/TEGOVA/ RICS/ ASA ¤ Valuation of Land & Buildings
Professional Expertise, Training and Authorship Standards
¤ Valuation of Plant & Machinery
Dr. Adukia’s contribution towards profession expertise and academics is highly acclaimed ¤ Sections 247/447/458/459/469 of The
•Author of more than 100 books on wide variety of topics ranging from those dealing with valuation, Insolvency, Trade, Taxation, Finance, Real Companies Act, 2013 also incorporating ¤ Valuation of Intellectual Property Rights
Estate to topics like Time Management and Professional Opportunities. •A successful Chartered Accountant in practice since last 30 years in amendment by Companies (Amendment) Act ¤ Valuation of Business and Other Assets
varied eld of Financial Planning, Taxation and Legal Consulting. •Business advisor for various companies on varied subjects •Travelled 2017
across the globe for his professional work and knowledge sharing. He has widely travelled three fourths of globe addressing international ¤ Checklists, Reports, Documentation and
conferences and seminar on various international issues like Corporate Social Responsibility, Corporate Governance, Business Ethics etc. ¤ Companies (Registered Valuers and Valuation) Specimen
His Contribution in the eld of Accounting Standards Rules, 2017 as amended by Companies
(Registered Valuers and Valuation) ¤ Registered Valuers Organisation
•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 Amendment Rules, 2018 (with effect from ¤ Case Studies on Valuation
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 9th February 2018)
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:
2015
Real Estate
Law, Practice
& Procedures
Practical Guide for Valuation including Legal Framework in India
i
Practical Guide for Valuation including Legal Framework in India
Price ` 999/-
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Electronic or Mechanical], or reproduced on any information storage device, without the written permission
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No part of this publication may be reproduced or transmitted in any form or by any means without the
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Practical Guide for Valuation including Legal Framework in India
Preface
iii
Practical Guide for Valuation including Legal Framework in India
iv
Practical Guide for Valuation including Legal Framework in India
v
Practical Guide for Valuation including Legal Framework in India
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 rajkumar@drrajkumaradukia.com or reach me on my
mobile phone 9820061049 by WhatsApp for further details and discussions in this regard.
To receive regular updates kindly send test e-mail to rajkumarfca+subscribe@googlegroups.com
Regards,
Dr. Rajkumar S. Adukia
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Practical Guide for Valuation including Legal Framework in India
Contents
Chapters
1 History and Need of Valuation..........................................................................................1
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
6 Valuation Standards..........................................................................................................71
12 Valuation of Business.....................................................................................................184
14 Valuation of Startups......................................................................................................208
16 Valuation Report.............................................................................................................218
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Practical Guide for Valuation including Legal Framework in India
Annexures
viii
Chap. 1 – History and Need of Valuation
Chapter 1
History and Need of Valuation
Value
Every 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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Practical Guide for Valuation including Legal Framework in India
• 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 Valuation
The 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'.
Barter
Another 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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Chap. 1 – History and Need of Valuation
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 Legislation
In 1858, Massachusetts Legislation Commissioner used to calculate reserves on all policies
of all licenced companies.
Salt
During 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.
Customs
The 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 Valuation
We 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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Practical Guide for Valuation including Legal Framework in India
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.
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Chap. 1 – History and Need of 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.
• 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.
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Practical Guide for Valuation including Legal Framework in India
INCOME APPROACH
The 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.
6
Chap. 1 – History and Need of Valuation
7
Practical Guide for Valuation including Legal Framework in India
• 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.
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
MARKET APPROACH
As 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.
8
Chap. 1 – History and Need of Valuation
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
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
9
Practical Guide for Valuation including Legal Framework in India
• 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.
COST APPROACH
The 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:
10
Chap. 1 – History and Need of Valuation
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.
mm
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Practical Guide for Valuation including Legal Framework in India
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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Practical Guide for Valuation including Legal Framework in India
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
14
Chap. 2 – Values and Valuation
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.
15
Practical Guide for Valuation including Legal Framework in India
16
Chap. 2 – Values and Valuation
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 Assets
On 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:
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Practical Guide for Valuation including Legal Framework in India
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Chap. 2 – Values and Valuation
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.
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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Practical Guide for Valuation including Legal Framework in India
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Chap. 2 – Values and Valuation
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.
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 Transaction
A 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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Practical Guide for Valuation including Legal Framework in India
22
Chap. 2 – Values and Valuation
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Practical Guide for Valuation including Legal Framework in India
Valuation Techniques
An 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.
24
Chap. 2 – Values and Valuation
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.
Level 2 Inputs
Level 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.
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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 Sheet
1. 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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Chap. 2 – Values and Valuation
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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 Valuer
A 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.
Responsibilities
As 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).
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ANNEXURE-I
MODEL CODE OF CONDUCT FOR REGISTERED VALUERS
ANNEXURE-II
1. 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 period
The 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.
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Chap. 3 – Legal Aspects for Valuers and Valuation under the Companies Act, 2013
Valuation Examination
As 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.
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Conditions of Registration
The 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 Valuation
Rule 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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Chap. 3 – Legal Aspects for Valuers and Valuation under the Companies Act, 2013
Valuation Standards
As 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.
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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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Chap. 3 – Legal Aspects for Valuers and Valuation under the Companies Act, 2013
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.
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Valuation Report
The 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.
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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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(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.
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Practical Guide for Valuation including Legal Framework in India
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.
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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:
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Chap. 4 – Legal Aspects for Valuers and Valuation under Different Laws . . .
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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.
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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.
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Measurement of Liabilities
Categories of Ind AS Measurement
Liabilities
Current Tax Ind AS 12 Amount expected to be paid using enacted tax laws
Liabilities
Deferred Tax Ind AS 12 Use expected tax rates at time assets would be realized
Liabilities based on enacted tax laws
Provisions Ind AS 37 Best Estimate of expenditure required to settle the present
obligation
Financial Ind AS 109 Initially at Fair Value and subsequently at Amortized Cost
Liabilities or Fair Value
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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.
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).
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Chap. 5 – Valuation under International Financial Reporting Standards (IFRS) . . .
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).
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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.
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 Transaction
A 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.
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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.
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Chap. 5 – Valuation under International Financial Reporting Standards (IFRS) . . .
Valuation Premises
Entity must assess the valuation premise based on the nature of the asset or liability being
measured.
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Application of highest and best use for financial assets and liabilities in exceptional cases
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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Chap. 5 – Valuation under International Financial Reporting Standards (IFRS) . . .
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.
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Valuation Techniques
An 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.
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Level 2 Inputs
Level 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.
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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 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.
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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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.
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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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Objective of IVS
The 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 IVS
IVS 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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• 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.
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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
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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.
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Chapter 7
General International Valuation Standards
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3. General Requirements
i. 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.
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• 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.
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General Requirements
i. 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 Reports
o 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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Bases of Value
In 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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• 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.
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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.”
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Market Approach
1. 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.
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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.
Income Approach
1. 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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Cost Approach
a) 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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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/OBSOLESCENCE
Depreciation adjustments are normally considered for Physical, Functional and Economic
Obsolescence. It should consider physical and economic life of the asset.
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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 OBSOLESCENCE
Economic 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
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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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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.
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2. Income Approach
i. This approach is used in:
a) technology,
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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.
Owned or leased
Both 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 assets
The 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 assets
Sometimes, 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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(a) Asset-related
1. 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-related
1. 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-related
1. 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).
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 Method
In 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.
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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.
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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.
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.
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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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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
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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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.
mm
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Chapter 9
Valuation of Land and Building
OBJECTIVE
The 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
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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.
Procedure of Valuation
i. 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.
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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.
2 months X Rent received during tenancy period
1
= ----------------------------------------------------------------------
Tenancy period
Outgoings = Property Tax, Repairs, Maintenance, Service Charges, Insurance
Premium, Rent Collection and Management Charges etc.
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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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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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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.
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. Descrip- Built Date of Area of FSI/ Land Ap- Name Reg-
No tion of up Sale / the Plot FAR of appur- parent of ister
property Area in Trans- the plot tenant consid- seller / No. &
Sqm. fer of Flat eration pur- autori
chaser
1 2 3 4 5 6 7 8 9 10
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INVESTIGATIONS
a. 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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Chapter 10
Valuation of Plant and Machinery
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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.
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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.
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Valuation Standards
IVS 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.
Depreciation
Depreciation 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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Chap. 11 – Valuation of Intellectual Property Rights
Chapter 11
Valuation of Intellectual Property Rights
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Goodwill
Generally, 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
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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:
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Drivers of IP Valuation
Intellectual 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
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APPROACHES TO VALUATION OF IP
There 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.
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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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• 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) 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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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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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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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?
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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.
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Continuing Developments
As 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.
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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.
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Conclusion
Valuing 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.
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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
Introduction
Business 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.
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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.
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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.
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Rule of Thumbs
The 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.
Selection of Methods
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:
(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
Introduction
Valuation 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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restrictions. We also look at how relative valuation can be adapted, when used to value
financial service firms.
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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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.
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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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
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(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
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) :
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) Patta No./ Survey No. :
b) Door No.
c) T.S. No./Village
d) Ward/Taluka
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e) Mandal/District
7. Postal address of the property :
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 ?
11. Boundaries of the property :
North :
South :
East :
West :
12. Dimensions of the site : A B
As per the Deed Actuals
North :
South :
East :
West :
13. Extent of the site :
14. Extent of the site considered for valuation (least :
of 12a & 12b)
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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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) :
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 :
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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.
12. Boundaries of the property :
North :
South :
East :
West :
13. Dimensions of the site : A B
As per the Deed Actuals
North :
South :
East :
West :
14. Extent of the site :
15. Extent of the site considered for valuation (least :
of 13a & 13b)
16. Whether occupied by the owner/tenant? :
If occupied by tenant since how long? Rent
received per month
II. APARTMENT BUILDING
Sr. Description : Remarks
No.
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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Chapter 14
Valuation of Startups
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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.
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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:
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• 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.
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.
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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.
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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.
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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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Chapter 16
Valuation Report
Valuation Report
Valuation 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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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 Documents
During 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
Date of valuation
The date on which value assigned shall be stated.
Purpose of Valuation
The purpose of Valuation may be stated here. It may be valuation of equity, fixed assets etc.
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Organization’s Overview
Organization 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 Methodology
Valuation 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 Valuation
Here 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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Valuation Analysis
Here analysis of various methods shall be stated. Out the best suitable method, valuation
figure shall be stated here.
Usage of Report
Since the valuation is not a legal judgment for every transaction. Its usage limitation shall
be explained in report.
Disclaimer
Caveats, Limitations and Disclaimers.
mm
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Chapter 17
Case Laws - India
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 Court
The 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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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.
Funding
The 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 Pepperfry
The 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. Grofers
Grofers 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.
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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 Model
Over 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.
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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.
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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.
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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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
(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 authorised
officer may prefer an appeal before the authority.
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Chapter 20
Case Studies on Valuation
Case 1
Wizard 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.
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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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.
d. None of the above.
Ans. A. though wizard cannot mass produce, it will surely sell the software to someone.
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.
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.
d. None of the above.
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 3
Tintin 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.
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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.
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
d. All of the above.
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.
d. None of the above.
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.
Case 6
Rotoboto 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.
d. None of the above.
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.
d. None of the above.
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.
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Case 7
Arjmeer 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.
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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
d. All of the above.
Ans. D. All of the above.
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Chapter 21
Checklists for Land & Building/Plant & Machinery
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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.
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Annexure 1
Course for Asset Class - Land & Building
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Annexure 2
Paper Pattern Asset Class - Land & Building
I. Syllabus
Sl. Coverage Weight
No. (%)
a. Principles of Economics
• Micro-Economics 10
- 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.
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Ann. 3 – Course for Asset Class – Plant & Machinery
Annexure 3
Course for Asset Class – Plant & Machinery
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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
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Annexure 4
Paper Pattern for Asset Class – Plant & Machinery
I. Syllabus
Sl. Coverage Weight
No. (%)
a. Principles of Economics 10
• 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
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Ann. 5 – Course for Asset Class – Financial Assets
Annexure 5
Course for Asset Class – Financial Assets
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Annexure 6
Paper Pattern for Asset Class – Financial Assets
I. Syllabus
Sl. Coverage Weight
No. (%)
a. Macro Economics 4
- National Income Accounting
- Basics of Fiscal Policy
- Basics of Monetary Policy
- Understanding Business cycles
b. Finance 3
- Basic Concepts of Finance
- Decisions in Finance
- Financial Markets and Securities Markets
c. Professional Ethics and Standards 5
- Model Code of Conduct as notified by MCA
- Other Engagement Considerations
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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.
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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
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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
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Provided that different fees may be prescribed for applications in respect of different
matters or in case of applications by different classes of companies.
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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)
CHAPTER I
PRELIMINARY
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;
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(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
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(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.
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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.
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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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CHAPTER III
RECOGNITION OF REGISTERED VALUERS ORGANISATIONS
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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.
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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
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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
CHAPTER VI
MISCELLANEOUS
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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]
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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.
Confidentiality
20. 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 Management
21. 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.
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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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1. Educational Qualifications
[Please provide educational qualifications from Bachelor’s degree onwards]
C. WORK EXPERIENCE
1. 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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E. ADDITIONAL INFORMATION
1. 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. ATTACHMENTS
1. 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. AFFIRMATIONS
1. 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:
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:
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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 Recognised Registered Asset class Membership Remarks, if
qualification/course Valuers Organisation No. in any.
Registered
Valuers
Organisation
Name Recognition
No
E. ADDITIONAL INFORMATION
1. 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. ATTACHMENTS
1. 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. AFFIRMATIONS
1. 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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FORM-C
(See sub-rule (6) of rule 6)
CERTIFICATE OF REGISTRATION
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 :
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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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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.
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.
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PART II
MODEL BYE-LAWS OF A REGISTERED VALUERS ORGANISATION
I. GENERAL
1. 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. DEFINITIONS
4. (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. OBJECTIVES
5. (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.
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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.
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(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.
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Ann. 8 – The Companies (Registered Valuers and Valuation) Rules, 2017
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.
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(g) maintenance of a register of grievances made and resolutions arrived at; and
(h) periodic review of the Grievance Redressal Mechanism.
X. DISCIPLINARY PROCEEDINGS
23. 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.
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(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 Membership
27. (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.
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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 Experience in Valuation Specific
discipline specified discipline Education Course
Graduate level Post Graduate level
(I) (II) (III) (IV) (V)
Land and (A) Graduate in ------- Five years of Courses as per
Building Civil Engineering, experience in syllabus specified
Architecture or the discipline under rule 5
town planning after completing
of a recognised Graduation
University
(B) Graduate in post-graduate in Three years of Courses as per
Civil Engineering, Civil Engineering, experience in the syllabus specified
Architecture or Architecture or discipline after under rule 5
town planning town planning of a completing Post
of a recognised recognised University Graduation
University
(C) Graduate in a post-graduate in Five years of Courses as per
discipline specified valuation of land and experience in the syllabus specified
by the Authority building or real estate discipline after under rule 5
for a registered from a recognised completing Post
valuers organisation university Graduation
in its conditions of
recognition
Any other graduate Any other post At least five years Courses as per
level qualification graduate level and three years syllabus specified
in accordance with qualification in of experience in under rule 5
rule 4 as may be accordance with rule case of graduate
specified by the 4 as may be specified level degree and
Authority for a by the authority for post graduate level
registered valuers a registered valuers degree respectively.
organisation in organisation in
its conditions of its conditions of
recognition. recognition.
Plant and (A) Graduate ---------- Five years of Courses as per
Machinery in Mechanical experience in syllabus specified
or Electrical the discipline under rule 5
Engineering of after completing
a recognised Graduation
University
(B) Graduate Post Graduate in Three years of Courses as per
in Mechanical Mechanical or experience in the syllabus specified
or Electrical Electrical Engineering discipline after under rule 5
Engineering of of a recognised completing Post
a recognised University Graduation
University
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354
FEW OTHER PUBLICATIONS AUTHORED BY DR. RAJKUMAR ADUKIA FEW OTHER PUBLICATIONS AUTHORED BY DR. RAJKUMAR ADUKIA
2015
Real Estate
Law, Practice
& Procedures
2018 Practical Guide for Valuation including Legal Framework in India
Author's Profile 2nd Edition 2018
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
Valuation including
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
Legal Framework
•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
in India
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
(Including Valuation of Land & Buildings,
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
Plant & Machinery, IPR and Other Assets)
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 Highlights
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. ¤ International Valuation/TEGOVA/ RICS/ ASA ¤ Valuation of Land & Buildings
Professional Expertise, Training and Authorship Standards
¤ Valuation of Plant & Machinery
Dr. Adukia’s contribution towards profession expertise and academics is highly acclaimed ¤ Sections 247/447/458/459/469 of The
•Author of more than 100 books on wide variety of topics ranging from those dealing with valuation, Insolvency, Trade, Taxation, Finance, Real Companies Act, 2013 also incorporating ¤ Valuation of Intellectual Property Rights
Estate to topics like Time Management and Professional Opportunities. •A successful Chartered Accountant in practice since last 30 years in amendment by Companies (Amendment) Act ¤ Valuation of Business and Other Assets
varied eld of Financial Planning, Taxation and Legal Consulting. •Business advisor for various companies on varied subjects •Travelled 2017
across the globe for his professional work and knowledge sharing. He has widely travelled three fourths of globe addressing international ¤ Checklists, Reports, Documentation and
conferences and seminar on various international issues like Corporate Social Responsibility, Corporate Governance, Business Ethics etc. ¤ Companies (Registered Valuers and Valuation) Specimen
His Contribution in the eld of Accounting Standards Rules, 2017 as amended by Companies
(Registered Valuers and Valuation) ¤ Registered Valuers Organisation
•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 Amendment Rules, 2018 (with effect from ¤ Case Studies on Valuation
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 9th February 2018)
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: