Valuation Part-2

Topics
 Various purposes of valuation
 IAS
 SARFAESI ACT 2002
 Methods of Recovery
 LARAR Act 2013
 Companies Act
 IBC 2016
 TDR
 RERA
 Timeshare
 Property valuer as an expert witness
Various purposes of valuation
 Bank finance
 Auction reserve
 Building Insurance
 Sale / Purchase
 Valuation disputes in court
 Probate
 Partition
 Rent fixation
 Stamp Duty
 Capital gain
 Tax
 Lease or Mortgage
Auction reserve

 To fix reserve price for auction (Upset or reserve price is an estimate of

minimum price likely to be offered by the bidders in the public auction)
 As per SARFAESI act 2002, wealth tax registered valuer need to provide
value of the property.
Building insurance

 To calculate the premium

 Reinstatement value (replacement cost of similar property) if such clause is
in the policy
Sale/ Purchase

 Seller/ Buyer asks for valuation

 Prepare report assuming client has no idea about property
 Should also provide information like description of property,
accommodation, potentials etc.
Disputes

 1. Court stamp fee –when legal proceedings start in court and subject
matter is immovable property, plant & machinery
 2.valuation is needed in court cases involving froud, damage
 3. In case of dispute arising between the client and the valuer, the court
seeks opinion of another Govt. registered valuer
 4. If govt. reg. valuer gives value in the range of 10% of original value, the
cour twill rule in favour of the first valuer
 5. beyond 10% of original value then third valuer is appointed and among
three those two with minimum difference becomes the basis
 6.The court will decide upon any value ranging between those 2 values as
mutually agreed between the 2 parties.
Probate

 1. to determine the amount of duty payable to Govt. in probate petition of

legal heirs (probate means declaration by court that the will is true)
 2. The duty is charged on the whole of the property as per state stamp act
 3. the valuation is done on the date of filling probate petition to court.
 4. Valuation as per provisions of wealth tax rules
Partition

 Market value is calculated for a common property and then divided

among parties as per shares they are entitled to in law as applicable to
them.
 Property of joint family subject to partition
 Such valuations form the basis of settlement
Rent Fixation

 For central Govt. occupied premises

 CPWD- fixes the rent
 Plinth area rates prescribed by CPWD are used

 Plot area as per the rent control act

Stamp Duty

 1. It is required for calculation of stamp duty payable on the date of

execution of transfer instrument
 2. Stamp duty is charged on actual transaction amount which should not
be less than Circle rate or guideline rate of the property
Capital Gain

 CII and CI
 Long term and short term capital gains
 Base year 1981 for properties sold on or before 31/03/2017and 2001 for
properties sold on or after 1/04/2001
 Finance act 2017 –For long term CG Base year is FY 2001-02
 Assets acquired on or before 1/04/2001 use FMV/Indexed COA
 DOA,cost of Acquisition
 DOI, Cost of improvement
 DOT, Sale consideration
 Indexed cost of Aquision,Improvement
 Capital gain
Capital Gain

 On 10.10.1982, Mr. X acquired a property consisting of 3000 sqft of plot and

4500 sqft of building for a cost of Rs 10,00,000
 In May 1985 he spent Rs 5,00,000 for improvements like deep bore,
compound wall, weathering course, gate, wardrobes, showcases,
overhead water tank, ground level sump etc.
 On 6.02.2017, he sold his property for a sale consideration of 2 crores
 Compute capital gains.
 CII on the date of acquisition 109 (1982-83)
 CIIon the DOI 133(1985-86)
 CII on the date of transfer -1125
 Indexed cost of aquisition= 1125/109)*10,00,000
 =1,03,21,100
 Index cost of improvement=1125/133*5,00,000
 =42,29,323
 Total indexed cost= 1,45,50,423
 Capital Gain=2 crores – 1 cr 45 lacs 50 thousand 423
 =54,49,577
 Capital gain tax = .2* capital gain
 10,89,915
Tax

 Income tax on capital gains

 Tax liability on business enterprise
 To avoid excess payment of wealth tax it is desirable to do valuation of
agricultural land, farm houses, vacant land
 To avoid excess payment of gift tax when the properties are transferred to
relatives as gift
Lease / Mortgage

 Property value = Net annual rent/ Capitalization rate

 Net annual rent- available market data
 Capitalization rate- local market condition, Property location, demand
 For residential properties 4 to 5 %
 For commercial properties 8 to 10%
 Types of mortgage
 1. Simple mortgage
 2.Mortgage by conditional sale
 3.Usufructuary mortgage
 4.Equitable Mortgage
Lease

 When the property is leased out by the owner (lessor)

 Lessor asks for rent with premium which may not be returnable so lease
terms are first to be settled
 Valuation includes present value, estimated future life, annual
maintenance cost and rent it fetches
Indian accounting standerds

 Notified under section133 of companies act 2013

 Single accounting system common For all Indian companies, to converge
with IFRS
 IAS 16 – Property,plant and equipment
 IAS 36- Impairement of assets
 IAS 40- Investment properties
 IAS 113-Fair value measurement
IAS 16

 PPE
 Includes cost to acquire the asset
 Includes cost to bring the asset to working condition
 Deduct Accumulative depreciation
 In case, PPE comprises of parts having different useful lives, depreciation is
calculated on each individual part’s life
 Cost of major inspection over useful life considered checking that it meets
the recognition criteria
IAS 36

 Basic principle
 Asset may not be carried on balance sheet above recoverable amt.
 Recoverable amt. is higher of Fair value minus disposal cost and value in
use
 Carring value i.e. Purchase cost minus depreciation
 If carrying value exceeds recoverable amt. The asset is said to be impaired
 Fair value: 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
 Value in use: the present value of the future cash flows expected to be derived from an asset or cash-
generating unit
 Impairment test is normally done annually however it can be done any time during annual
period, provided it is performed at the same time every year.
 Indications of impairment [IAS 36.12]
 External sources:
• market value declines
• negative changes in technology, markets, economy, or laws
• increases in market interest rates
• net assets of the company higher than market capitalisation
• Internal sources:
• obsolescence or physical damage
• asset is idle, part of a restructuring or held for disposal
• worse economic performance than expected
Factors causing impairment of assets
IAS 40

 Investment property is the one held by an entity to earn rentals or for

capital appreciation
 Initial measurement – cost
 Subsequently depreciation is considered.
IAS 113

 Defination of Fair Value measurement as per As 113 -

Fair Value is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction (Not a liquidation price or forced sale)
between market participants (Market-based measurement rather than an
entity-specific measurement) at the measurement date (Current Price)
 The valuation techniques- Considering the availability of data to develop inputs
and the level of the fair value hierarchy within which the inputs are categorized
i) Market approach
ii) Cost approach
iii) Income approach
 Disclosure in Financial Statement
 Advantage: A primary advantage of fair value accounting is that it provides accurate asset and
liability valuation on an ongoing basis to users of the company's reported financial information.
 Recurring and non recuring fair value measurement
 Recurring fair value measurements relate to those where measurement is required
at the end of each reporting period
 Non-recurring measurements which are driven by a particular event or transaction
The reason for measurement should be disclosed.
SARFAESI ACT 2002
 Securitisation & Reconstruction of financial assets and enforcement of security
interest
 Background of the act
 How it works –
 Bank issues notice to defaulting borrower
 Borrower has to discharge liabilities pay the duces within 60 days
 Borrower fails
 Take possession of security for loan/asset pledged
 Sale/lease/assign the right
 Manage it by appointing a person.

 Rights of Borrowers
 Preconditions
Methods of Recovery
 Establishing Asset reconstruction Companies (ARC) which is regulated by RBI
 Banks, Financial Institutions sale asset to ARC as per the RBI guidelines
 Asset converted into marketable security then sold
 ARC issues receipt , holder has undivided interest no need of registration
 When is the need- Transfer of receipt
 DM assists secured creditors
LARAR Act 2013
 Background : made during British rule in 1894, then replaced in 2013
 Regulating LA
 Laid down rules for granting compensation rehabilitation & resettlement of
people affected
 Public Purpose
 defence, national security, roads, railways, highways
 Compensation
 Markel value as in Indian stamp act
 Avg.
 Administrator
 Collector
 Commissioner
Compensation

 As per the land acquisition law of 2013 , minimum compensation is to

be a multiple of the circle rate, plus value of the assets attached to
the property and a solatium (for forced acquisition) equal to 100% of
the total value of the property being acquired.
 Companies Act 2013
Rule No. Rules under Companies Act, 2013

1. Short title, Commencement and Application

2. Definitions.

3. Eligibility for registered valuers

4. Qualifications and experience

5. Valuation Examination

6. Application for certificate of registration

7. Conditions of Registration

8. Conduct of Valuation

9. Temporary surrender

10. Functions of a Valuer

11. Transitional Arrangement

12. Eligibility for registered valuers organisations RVO

13. Application for recognition

14. Conditions of Recognition

15. Cancellation or suspension of certificate of registration or recognition

16. Complaint against a registered valuer or registered valuers organization

17. Procedure to be followed for cancellation or suspension of registration or recognition certificate

18. Valuation Standards

19. Committee to advise on valuation matters

20. Punishment for contravention

21. Punishment for false statement

Companies Act

 Chapter IV
 Valuation Standards.
 (1) A registered valuer shall make valuations as per the Valuation Standards
notified from time to time by the Central Government.
 (2) Until such time as the Valuation Standards are notified by the Central
Government, a valuer shall make valuations as per-
 (a) an internationally accepted valuation methodology;
 (b) valuation standards adopted by any valuation professional organisation; or
 (c) valuation standards specified by Reserve Bank of India, Securities and
Exchange Board of India or any other statutory regulatory body.
IBC 2016
 Background
 Authorities
 Plea for insolvency
 IR Professionals
 Resolution process - time limit
 Default 1 lacs to 1 crore
 Insolvency Process
 Debtors's business possible to continue
 Liquidation
TDR
 Types
 Criticism
 Purpose
 DRC
 Utilization of DRC
 Cancel the grant of DRC
 Sending & receiving zone
RERA

 Timely Delivery of projects

 Facility to check RERA reg No. on RERA portal
 Escrow Acc
 Ability to verify builder's track record
 Transparency in Advt.
 Clarity on Carpet area
 Strict norms on bld changes
 Facility to check payment plans
 Booking amt. > 10% of total
 Brokers must be registered under RERA
 Reliable mechanism
 Str-defects-
 Land title
 Goodbye to prelaunches
Timeshare
 It is a way for no. of people to share ownership of a property
 Fixed Vs floating weeks.
 Property interest
 shared deeded ownership
 shared leased ownership.
 Timeshare exchange programs , Limitations
 Expenses
 Benefits
 Real estate time share laws & regulations
Property valuer as an expert witness
 Need
 Duties of property valuer
 Special Duties
 Professional negligence
 Court Judgements
 valuer is not competent to certify genuineness of the title
 Liability against a --
 Valuer is not an expert.
 A Valuer is not responsible..
 Valuer has no role to certify ...
Sample Questions
 Sample Questions
Collecting stamp duty for the deeds registered in the registrar’s office is
 a) State subject
 b) Central subject
 c) Quasi government subject
 d) CPWD subject

 Ans: a
 Sample Questions
The borrower’s account becomes NPA. The bank has taken symbolic possession.
Under the SARFAESI act, the bank directs the value to certify the
 a) Realisable value
 b) Upset value
 c) Auction value
 d) Salvage value

 Ans: c
 Sample Questions
A person who mortgages his property in lieu of security payment or loan is called as
 a) Mortgagor
 b) Mortgagee
 c) Borrower
 d) Applicant

 Ans: a
 Sample Questions
Which rate is being adopted by CPWD at the time of fixing rent for the buildings
proposed to be occupied by the Central government departments?
 a) Plinth area rates prescribed by CPWD
 b) Plinth area rates prescribed by State PWD
 c) Plinth area rates prescribed by Supt. Engineer of the district
 d) Prevailing plinth area rates

 Ans: a
 Sample Questions
 If the FMV is to be ascertained as on 01.04.2001, then the cost inflation index for
2001 - 02 is
 a) 520
 b) 426
 c) 100
 d) 626

 Ans: c
 Sample Questions
NPA means
 a) Non - productive account
 b) Non - performing asset
 c) Non - productive asset
 d) No performance asset

 Ans: b
 Sample Questions
The date of determination of market value shall be the
 a) Date of processing
 b) Date of award
 c) Date of notification
 d) Date of appeal

 Ans: c
 Sample Questions
The collector for the purpose of determining the value of trees and plants attached
to the land acquired uses the services of
 a) Land surveyor
 b) Plant & Machinery valuer
 c) Civil engineer
 d) Experienced persons in the field of agriculture

 Ans: d
 Sample Questions
Ownership of a particular property (say a flat) is held for a specified period of time
during a year - is called as
 a) Transferable development right
 b) Temporary ownership
 c) limited ownership
 d) Time share property

 Ans: d
 Sample Questions
The Development Right certificate can be sold to
 a) Neighbour
 b) Any other person
 c) None
 d) Government only

 Ans: b
 Sample Questions
If originating TDR is from residential zone, it cannot be used on plot in industrial or
commercial zone and vice versa. This is
 a) False
 b) True
 c) Not applicable
 d) No such rule

 Ans: b
 Sample Questions
If A has sold a property to B for 20 lakhs through a broker, then the broker is a
 a) Witness of opinion
 b) Witness of fact
 c) Not a witness of fact
 d) Not a witness of opinion

 Ans: b
 Sample Questions
Inadequate physical inspection or doing valuation without inspecting the property
is considered as
 a) Indiscipline of a valuer
 b) Negligence of a valuer
 c) Incompetence of a valuer
 d) Irresponsibility of a valuer

 Ans: b
Thank You !