ASSET VALUATION

Faculty of Banking
University of Economics
The University of Danang

Định giá tài sản (Assets Valuation) 1

REFERENCES

❖ Vietnam Valuation Standard set, Ministry of

Finance.

❖ Slides provided by the lecturer

Định giá tài sản (Assets Valuation) 2

CONTACT

❖ ELEARNING
❖ CLASSROOM: Class code
❖ Email: lyhth@due.edu.vn

Định giá tài sản (Assets Valuation) 3

 ASSESSMENT

❖ Component 1 (20%):
▪ Mid-term Writing test (15%): Week 8th. Content: Chapter 1,2. No
materials used during the test
▪ Participation (5%): Participant check + involvement
❖ Component 2 (20%): Report (15%)+ teamwork (5%)
▪ Case study
▪ Group of 4 students
▪ Instruction will be delivered on week 7th
❖ Component 3 (60%):
▪ Final exam. Time: 90 mins
▪ Content: Chapter 3,4,5 và 6. No materials used during the exam
Prerequisites

❖ Financial Math

❖ Accounting Principles

❖ Corporate Finance

Định giá tài sản (Assets Valuation) 6

WEEK 01:

AN INTRODUCTION TO ASSET
VALUATION

7
Content of Week 1

1. Introduction to the class

2. The concept, purpose and role of asset valuation

3. Basic concepts related to asset valuation

4. Asset classification

8
Valuation/Appraisal:

❖ In English, the term Appraisal or Valuation is used to

refer to asset valuation
❖ The origin of both these terms is from French. Valuation
appeared in 1529 and Appraisal from 1817
❖ Means estimate, evaluate and imply to give an expert's
opinion on the value of a certain item
❖ According to the International Valuation Standards
Committee (IVSC), the term “Valuation” can be used to
refer to an estimated value (as a result of a valuation) or
to refer to a preparation for a valuation
❖ In this course, these two terms are identical and
interchangeable

9
Basic elements:
❖ Estimated present value
❖ currency form
❖ Regarding asset/asset rights
❖ On request with certain purpose
❖ Specific space and time.
❖ Availability and reliability of input data

10
The concept of ASSET VALUATION

“Valuation is the art/science of estimating the market

value of asset (asset rights) at a given place, time, for a
certain purpose, according to established standards
recognized as international or national practices”
In Vietnam: “Valuation means the determination of the
monetary value of assets by an agency or organization
in accordance with the Civil Code in accordance with the
market price at a given place and time, serving a certain
purpose according to valuation standards.”
Price Law 2012

11
The concept of ASSET VALUATION

Art + science with the highest reliability

ESTIMATE VALUE = Money
ASSET
ASSET RIGHT

Depend on:
- Market
- Time
- Place
- Standard
- Purpose
12
VALUATION IS AN ESTIMATE JOB
❖What does the valuated amount
say?
▪ Not a known amount
▪ Not a pre-arranged or pre-
determined amount
▪ Not the actual selling price
❖It is the ESTIMATE amount that
most likely will happen in a real
trade.
❖It's a number, but a subjective
number.
Định giá tài sản (Assets Valuation) 13
Purpose of asset valuation

➔ Buy, sell and Determine the selling price, buying price

exchange assets
- Fundamental of Asset exchange
➔ Asset development - Compare investment opportunities
and investment - Assess ability to make investments
- used for mortgage,
- Value assessment for property
➔ Financing
insurance policy
- Contract amount and terms of lease
➔ Corporate - Establish financial statements
governance - Determining business value

➔ State - Determine bid, auction, sale price

Administration - Calculating taxes, division,
compensation or recovery of property
14
Purpose of asset valuation (cont.)

❖ Determining transaction prices and organizing

transactions (procurement, transfer, rental
compensation, insurance, etc.);
❖ Financing and guaranteeing (mobilizing capital to issue
bonds secured by assets, equitization of state-owned
enterprises, borrowing from the Government, borrowing
from abroad with government guarantee,...);
❖ Determining Tax rate
❖ Provide information, support decision-making for
managers (investment decisions, funding decisions,
business decisions, ...)
❖ Making decision on investment projects.

15
Purpose of asset valuation (cont.)

❖ Execute orders related to litigation or adjudication of

disputes over contracts and interests of the parties;
❖ Merger, split, bankruptcy or business dissolution
❖ As a basis for public auction….

16
Role of asset valuation

• Market valuation of resources → rational

resource allocation
For the • Market transparency → promote asset
economy market development
• Globalization and world economic
integration

For
economic • Serving many different purposes (investing,
entities buying, selling, renting, mortgage...).

17
Basic concepts in asset valuation

Price Value

Cost

18
Basic concepts in asset valuation (cont.)

Cost:

❖ Related to the asset creation process

❖ Is the expenditure required to create or acquire an asset
❖ The concept of cost itself does not indicate how much a
buyer is willing to pay to acquire the property, or how much
a seller wants to seek in order to voluntarily sell the asset.

19
Basic concepts in asset valuation (cont.)

Price:

❖ Relating to the process of exchange and transactions in

markets
❖ Is the amount demanded, given or paid for an asset at a
certain time
❖ Established on the market based on the supply and
demand of a certain asset

Định giá tài sản (Assets Valuation) 20

Basic concepts in asset valuation (cont.)

Value:

❖ Not a concept expressed by fact but an opinion

❖Is a monetary expression of the benefits that the asset
brings to a certain subject at a certain time
❖ There are 4 factors associated with each other and
without one of them, the market value of an asset does not
exist, which are: 1) usefulness; 2) scarcity; 3) demand; 4)
transferability.

Định giá tài sản (Assets Valuation) 21

Value basis in asset valuation

Value

Market Value Non-market value

22
Market value

Market price is the price of goods and services formed by

factors that govern and move the market to decide at a
certain time and place.
(Clause 4, Article 1, Law on Prices 2013)

23
Market value (cont.)

“… is the estimated price that will be traded on the

market at the time of valuation and is determined
between a willing buyer and a willing seller; in an
objective and independent transaction, under normal
commercial conditions …”

(Vietnam Valuation Standard No. 1)

24
Market value (cont.)

Market value is the estimated amount of a property at the

time of valuation, between a willing seller on the one hand
and a willing buyer on the other, after a public marketing
process at which each party acts openly, reliably, with
knowledge and without any outside pressure.
(International Valuation Standards - IVS)

25
Market value (cont.)

Objective and
independent A willing
A willing buyer
transaction seller

Normal commercial conditions

Định giá tài sản (Assets Valuation) 26

Non-market value

“… is the estimated price determined on other basics

than the market value or can be bought, sold or
exchanged at prices that do not reflect the market value
such as: the value of the property in the process of use,
investment value, insurable value, special value,
liquidation value, value of assets required to be sold,
enterprise value, value of specialized assets, value of
assets with limited market regime, value for tax
calculation …”
27
(Vietnam Valuation Standard No. 2)
Non-market value (cont.): Types

Assets in
use
Assets with
Tax limited
market

Specialize
Insurance Non- d assets
market
value

Investment Liquidate
assets d assets

Special Compulso
Assets ry to sell

28
Non-market value (cont.): Types

Value of assets in use:

❖ considered from the perspective of a single person using

the property for a particular purpose

❖ Valuation focuses mainly on the aspect of participation,

contribution of assets to the operation of a production line,
a business... not considering the aspect of the best and
optimal use value of the asset or the amount possible
from the sale of the asset on the market.

29
Non-market value (cont.): Types

Value of Assets with limited market:

❖ is the value of an asset that is rarely bought by

customers at a given time.

❖ To sell requires a longer marketing process, which is more

costly and time consuming than other assets..

30
Non-market value (cont.): Types

Value of specialized assets

❖ is the value of a asset due to its special nature, being

used only for a certain purpose or object of use, so it is
limited on the market.

31
Non-market value (cont.): Types

Liquidation value

❖ is the estimated value obtained at the end of the asset's

useful life after deducting estimated disposal costs.

❖ reflects the residual value of an asset (except land) when

the asset has expired and is sold for liquidation.

32
Non-market value (cont.): Types

Value of Asset Compulsory to sell

❖ is the total proceeds from the sale of the assets in the

condition that the transaction period for the sale of the
assets is too short, the seller is not ready to sell, or the
sale is involuntary or forced.

❖ does not reflect market value

33
Non-market value (cont.): Types

Special Value

❖ formed when one asset can be technically or

economically tied to another.

❖ formed due to the location, the special nature of the asset,

or by a particular situation in the market, or due to a bid in
excess of market value by a customer who wishes to
purchase the asset at any price to get the utility of the
asset

34
Non-market value (cont.): Types

Investment value

❖ Is the value of an asset to a certain group of investors

according to their investment objectives.

❖ subjective value

❖ can be above or below market value

35
Non-market value (cont.): Types

Insurance value

❖ is the value of the asset specified in an insurance policy

or contract.

36
Non-market value (cont.): Types

Value for tax calculation

❖ Is the value based on the provisions of law relating to the

assessment of asset value to calculate the amount of tax
payable

37
❖ A shoe polishing machine brings in a profit of 20 million
per year for the business. This machine is estimated to
be used for 10 years. Valuing this machine, knowing the
interest rate of 5%/year

❖ Value of machine = 20mil * (1-(1+i)^-n)/i= 20*(1-(1+5%)^-

10)/5%=154.43mil

Định giá tài sản (Assets Valuation) 38

Popular value pairs in asset valuation

Book value vs. Market value

Intrinsic value vs. Market value

Disposal value vs. Going-concern value

39
Popular value pairs in asset valuation (cont.)

Book value:
❖ the accounting value of assets = the cost of acquiring the
assets - the accumulated depreciation of the assets
❖ book value of business = value of all assets of the
business - value of liabilities and value of preferred stock
Market value:
❖ is the market transaction value of the asset/enterprise.

Định giá tài sản (Assets Valuation) 40

Popular value pairs in asset valuation (cont.)

Intrinsic value:
❖ is the value a security should have based on the factors
involved in valuing the security.
Market value:
❖ is the value of the security when it is traded in the
market.

Định giá tài sản (Assets Valuation) 41

Popular value pairs in asset valuation (cont.)

Disposal value:
❖ is the value or proceeds received from the sale of a
business or asset that is no longer in operation.
Going-concern value:
❖ is the value or money received from the sale of a
business that is still in operation

Định giá tài sản (Assets Valuation) 42

Asset classification

Real estate

Based to the nature

of asset

Movables

43
Asset classification (cont.)

Real estate:
❖ Are assets that cannot be moved
❖ Features: fixed to a certain space, position
Movables:
❖ Are assets that are not real estate
❖ Features: not fixed to a certain space, position, can be
moved

Định giá tài sản (Assets Valuation) 44

Asset classification (cont.)

Real estate rights

Movables rights
Based on
Objects of
asset valuation
Enterprise

Financial benefits

45
Asset classification (cont.)

Property rights:
❖ Is the right to be valued in money according to the
provisions of law
❖ Is a legal concept, including all rights and interests
related to the ownership and use rights that the owner/user
of the property is legally entitled to.
❖ The owner of the property is entitled to all rights attached
to the property as well as all the income generated by the
property in accordance with the law.

Định giá tài sản (Assets Valuation) 46

Asset classification (cont.)

Enterprise:
❖ An economic organization with its own name, assets,
head office, and business registration in accordance with
law for the purpose of conducting business activities.
❖ The classification of assets of the enterprise serves for
the selection and application of valuation methods to
determine the value of the enterprise.

Định giá tài sản (Assets Valuation) 47

Asset classification (cont.)

Financial benefits
❖ Cash
❖ Shares of another enterprise
❖ Rights under contract
❖ The contract will or may be settled with the entity's equity
instruments

Định giá tài sản (Assets Valuation) 48

WEEK 02:

INTRODUCTION TO ASSET VALUATION

(CONT.)

49
Content

1. Basic economic principles of asset valuation

2. Basic valuation approaches

3. Asset valuation in Vietnam and around the world

50
 Basic economic principles of asset valuation

principles related
Supply Concept of to the process of
and highest and using assets
demand best use
Change
Anticipation
principles of future
related to benefit
the market principles
Competition related to
user
Principles Substitution perception

Conformity
Balance

Contribution Increasing
/Decreasi principles related to
Distributing ng returns
returns the process of
forming assets
51
Basic economic principles of asset valuation (cont.)

Principles related to the process of using assets:

❖ Concept of highest and best use
▪ each property be appraised as though it were being
put to its most profitable use (highest possible present
net worth), given probable legal, physical, and
financial constraints
▪ is the reasonable and probable use that will support
the highest present value as of the effective date of
the appraisal

52
Basic economic principles of asset valuation (cont.)

Principles related to the process of using assets:

❖ Concept of highest and best use
▪ Legally permissible: The highest and best use must
be a use that is allowed by government
▪ Physically possible: The highest and best use
depends on physical factors
▪ Financially feasible: The highest and best use must
not be too speculative
▪ Maximally productive: The highest and best use
must be the most productive use

53
Basic economic principles of asset valuation (cont.)

Principles related to user perception

❖ Principle of substitution:
▪ Upper limit of value tends to be set by the cost of
acquiring an equally desirable substitute, assuming no
untimely delays
▪ A prudent investor would pay no more for an income-
producing property than it would cost to build or purchase
a similar property
▪ The prices, rents, and rates of return of a property tend to
be set by the prevailing prices, rents, and rates of return
for equally desirable substitute properties
54
 Basic economic principles of asset valuation (cont.)

Principles related to user perception

❖ Principle of Anticipation of Future Benefits
▪ Property is valuable because of the future benefits it is
expected (anticipated) to provide
▪ A property's value may be defined as the present worth of
the rights to all prospective future benefits, tangible and
intangible, accruing to the ownership of real property.
▪ An appraiser is obligated to consider both the likelihood of
future trends and the impact that such trends will have on
buyers, sellers, and tenants, as expressed in present
market transactions.
55
Basic economic principles of asset valuation (cont.)

Principles related to the process of forming assets

❖ Principle of contribution, AKA Principle of Marginal
Productivity
▪ Value of a property component is measured in terms of
its contribution to the value of the total property rather
than as a separate component
▪ Note that the cost of an item does not necessarily equal
its contributory value. For instance, it may cost $30,000
to build a pool in a 20 unit apartment complex; however,
it may only add $20,000 to the overall value of the
complex.
56
Basic economic principles of asset valuation (cont.)

Principles related to the process of forming assets

❖ Principle of distributing returns
▪ Associated with contributions
▪ Total income comes from the combination of factors of
production (land, capital, labor, management) and can
be distributed to each of these factors.
▪ If the distribution is made according to the principle of
correspondence, then the total income remaining
after distribution to capital, labor and management will
represent the value of the land.

57
Basic economic principles of asset valuation (cont.)

Principles related to the process of forming assets

❖ Principle of Increasing and Decreasing Returns
▪ Increments of the agents of production produce greater
net income (increasing returns) up to a point (surplus
productivity). The point of maximum contribution of the
agents in production (point of decreasing returns) attests
to the proper combination of agents, resulting in the
highest and best use.
▪ Any further increase in the amount of the agents of
production will decrease the margin between the cost of
agents and the gross income they will produce, resulting
in a decrease in the proportionate net income returns 58
Basic economic principles of asset valuation (cont.)

Principles related to the process of forming assets

❖ Principle of Balance
▪ Maximum value is achieved and maintained when all
elements in the agents of production are in economic
balance.
▪ Example: The value of a property depends on the
balance of land, labor, capital, and entrepreneurship

59
Basic economic principles of asset valuation (cont.)

Principles related to the process of forming assets

❖ Principle of Balance
▪ Elements both internal and external to a property
must be in balance for maximum value to be attained.
Internally, the proper combination of land and building
is critical to economic balance. Externally, a property
should be in balance with surrounding properties.
▪ For example, an expensive home built on a low-value
lot in a modest neighborhood may not sell for its full
cost of production

60
 Basic economic principles of asset valuation (cont.)

Principles related to the market

❖ Principle of Supply and Demand
▪ Interaction between the supply of goods and the demand for
goods establishes both the price and the quantity of goods
demanded
▪ If the supply of a good is stable, and demand for that good
increases, sellers of that good tend to increase the price.
▪ Supply in the real estate market takes a long time to create;
therefore, if the demand for real estate increases, the price
of the real estate will also increase, because the supply of
real estate will be slow to adjust.
61
Basic economic principles of asset valuation (cont.)

Principles related to the market

❖ Principle of changes in socioeconomic patterns
▪ The principle of change recognizes the dynamic
nature of asset markets.
▪ In real estate, change affects not only individual
properties, but also neighborhoods, communities, and
regions. The effects of prospective change are
reflected in the market.
▪ The principle of change is closely related to the
principle of anticipation

62
 Basic economic principles of asset valuation (cont.)

Principles related to the market

❖ Principle of Conformity
▪ maximum value is realized when a reasonable degree of
architectural homogeneity exists and land uses are
compatible
▪ This principle implies reasonable similarity, not monotonous
uniformity, tends to create and maintain value.
▪ The highest and best asset use is generally realized under
circumstances of conformity or harmony. The principal
purpose of zoning regulations and private deed restrictions
is to maintain conformity.
63
Basic economic principles of asset valuation (cont.)

Principles related to the market

❖ Principle of competition
▪ Excessively high profits will promote competition,
conversely, excessive competition can reduce profits
and may eventually become unprofitable.
▪ For assets, competitive relationships are also
observed between assets. Thus, the value of the
property is formed as a result of competition in the
market.

64
Basic valuation approaches

Comparative
sales/Market approach

Valuation
approaches

Income approach Cost approach

65
How to choose an asset valuation approach?

Characteristics
of Assets

Purpose of Availability
asset and reliability
valuation of input data

66
Comparative sales/Market approach
❖ 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.

❖ Should be applied and afforded significant weight

under the following circumstances:
▪ the subject asset has recently been sold in a
transaction appropriate for consideration under the
basis of value,
▪ the subject asset or substantially similar assets are
actively publicly traded, and/or
▪ there are frequent and/or recent observable
transactions in substantially similar assets
67
 Comparative sales/Market approach (cont.)
❖ The key steps:
1) identify the units of comparison that are used by
participants in the relevant market,
2) identify the relevant comparable transactions and
calculate the key valuation metrics for those
transactions,
3) perform a consistent comparative analysis of
qualitative and quantitative similarities and differences
between the comparable assets and the subject asset,
4) make necessary adjustments, if any, to the valuation
metrics to reflect differences between the subject asset
and the comparable assets,
5) apply the adjusted valuation metrics to the subject
asset 68
Comparative sales/Market approach (cont.)
❖ Applicable cases:
▪ Assets are commonly traded on the market
(apartment, ordinary machines and devices;…)
❖ Pros and cons:
▪ Pros: simple, easy to apply, based on market
evidence => have a solid basis.
▪ Nhược điểm:
• Information from the market is required.
• Historical data.
• It is difficult to find assets that are traded on the
market highly similar to the subject asset.

69
Cost approach

❖ The cost approach provides an indication of value

using the economic principle that a buyer will pay
no more for an asset than the cost to obtain an
asset of equal utility, whether by purchase or by
construction, unless undue time, inconvenience,
risk or other factors are involved.
❖ The approach provides an indication of value by
calculating the current replacement or reproduction
cost of an asset and making deductions for
physical deterioration and all other relevant forms
of obsolescence.

70
Cost approach (cont.)

❖ Based on Principle of Substitution

❖ The key steps:
1. Estimate the replacement/reproduction costs to
produce and put the asset to use.
2. Estimated Depreciation/Obsolescence (if any)
3. Deduct the accumulated depreciation from the
estimated cost in step 1.

71
Cost approach (cont.)

Replacement cost: cost of a similar /asset offering

equivalent utility
Reproduction cost: the cost to recreating a replica of an
asset
Depreciation adjustments are normally considered for
Physical, Functional and Economic Obsolescence. It
should consider physical and economic life of the asset.
PHYSICAL OBSOLESCENCE can be measured in two
ways:
1. Curable: Cost to cure/fix the obsolescence.
2. Incurable: Adjustment for physical obsolescence is
equivalent to the proportion of the expected total life
consumed

72
Cost approach (cont.)

❖ For example:
Real estate value = Estimated value of the land +
replacement/reproduction cost of the building on the
land – Accumulated depreciation of the building.

Value of machinery and equipment: =

replacement/reproduction cost of machinery and
equipment – Accumulated depreciation (tangible &
intangible)

73
Cost approach (cont.)

❖ Applicable cases:
▪ Assets with little or no common market
transactions;
▪ Used assets;
▪ The asset does not qualify for the market
approach.
▪ Use to supplement/check other valuation methods
▪ Is the method of the tenderer/tender examiner.

74
Cost approach (cont.)

❖ Pros:
▪ Assets that have no basis for comparison in the
market.
❖ Cons:
▪ Cost is not always value;
▪ Must have market data on raw material prices,
depreciation
▪ Calculation of depreciation is subjective;
▪ The appraiser must be experienced.

75
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.
❖ 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 value
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.

76
Income Approach (cont.)

❖ Methods under the income approach are effectively

based on the discounting future amounts of cash flow to
present value.
❖ Key steps:
1) Estimate the average turnover/cash flow of the asset
to be valued;
2) Estimate the expenses;
3) Estimated net income = Revenue – Expenses
incurred. (base: quarterly, yearly, ...)
4) Calculating capitalization rate/discount rate: can be
based on the similar assets traded on the market.
5) Apply the current net income stream formula to
calculate the value of the property.
77
Income Approach (cont.)

❖ Calculation formula (simplified):

Present Value = Net Income / Capitalization Rate
(Discount rate)
❖ Capitalization Rate:
▪ The relationship between income and asset value.
▪ Expected return per year on total value of asset
▪ Impact factors: risk; inflation/deflation; rate of return; supply
and demand of investment funds; tax
❖ Applicable cases: Primarily the valuation of
Investment assets is applied.

78
Income Approach (cont.)

❖ Pros
▪ Simple, easy to apply.
▪ Based on finance theory => scientific method
❖ Cons
▪ The capitalization rate is difficult to determine
accurately
▪ Many input parameters are mainly estimated, not
observed

79
Compare asset valuation approaches

Market Cost Income

Criteria
approach approach approach
Value of
Expected future
Based on comparable Cost
income
asset

• Popular • Assets with

• Investment
trading assets special use
asset
Applicable in the market • Asset does not
• Real estate
cases • Stable market qualify for the
with growth
• High quality market
potential
information approach.

80
Compare asset valuation approaches (Cont.)

Market Income
Criteria Cost approach
approach approach

• Applicable to assets • Based on

• Based on market
have no basis of finance theor
Pros value evidence =>
comparison in the => scientific
have a solid basis.
market method

• Required information
from the market • Cost does not always
• historical data, equal value; • Difficult to
• Not easy to find an • Depreciation is determine
Cons
asset traded on the subjective; capitalization
market that is highly • The appraiser must be rate.
similar as the experienced.
subject asset
Định giá tài sản (Assets Valuation) 81
Valuation activities in Vietnam

❖ Legal documents on Valuation:

▪ Law of Price 11/2012/QH13
▪ Decree 89/2013/ND-CP detailing the implementation
of a number of articles of the price law on price
appraisal.
▪ Vietnam Valuation Standards (13 Standards)
▪ International Valuation Standards (IVSC)
▪ …

82
Hoạt động thẩm định giá tại Việt Nam

❖ Standards of price appraisers (Law on Prices 2013):

▪ Have civil act capacity;
▪ Having moral qualities, integrity, honesty and
objectivity;
▪ Graduated from university with a major related to
valuation;
▪ Having worked continuously for 3 years or more after
having obtained a university diploma in the field of
training;
▪ Having a professional certificate of price appraisal
issued by a competent authority;
▪ Having a price appraiser card according to regulations
of the Ministry of Finance.
83
Several professional valuation organizations

1) International Valuation Standard Committee – IVSC

2) World Association of Valuation Organisation (WAVO)

3) Asean Valuer Association – AVA: Vietnam is a member

84
ASSET VALUATION

END OF CHAPTER 1

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