9.

ASSUMPTIONS, REFERENCE & REMARKS ON VALUATION

a) Stock statement of unsold Inventory (Purchased during FY 2011-12 till 2019-20) put for valuation was
provided to me by representative of M/s XXX showing date of purchase of Individual item & their cost
of acquisition in the year of purchase.
b) Details of all the unsold Inventory of stock in the statement shared consists of Main Equipments,
Accessories, Spares, Consumables, etc. pertaining to the trade of XXX and are sold/ traded either as
Main Equipments OR as Accessories, Spares, Consumables, etc. meant to be used during repairs or
maintenance of Main Equipments. These items are those either Imported from various Firms from
abroad or those which were assembled at the manufacturing facility of M/s XXX at New Delhi.
c) The valuation problem of unsold Inventory for which valuation has been sought is truly daunting. A
lot of inventory has been built by M/s XXX over a time span with the expectation of high demand of
Main Equipments as well as need of repairs and maintenance of them. However, inventory of number
of Main Equipments got stuck as they could not be sold due to cancellation of Orders or they did not
match with the features as per the expectations of Buyers. Also, inventory of number of Accessories
& Spares and Consumables, etc. used in repairs and maintenance also got struck as Main Equipments
remained unsold.
d) Apart from own assembling of Equipment by buying various parts from different suppliers and then
sold in the market by M/s XXX, Equipments, Spares & Accessories are imported from 30 major other
suppliers from across the globe, details of which is given in Annexure-I of this Report.
f) The Equipment, M/s XXX are dealing with have New Models & Versions frequently with better
performance, configuration, specifications & features. Thus, valuation of old Equipments lying as
Inventory needs to be done scientifically. These Equipments performance has scalar measurement,
i.e. if an old Equipment has 1.0 performance units and the new Equipment might have 1.5
performance units, but we cannot simply divide their performance units to arrive at or compute their
market values. Thus, for revaluation of these kind of inventory, we have taken into consideration
various technical and financial aspects, pertaining to it. With the continuous technical up-gradation
in these Equipments, the market values of Equipments with similar configuration change due to
availability of better versions/ new features. Also, the imported Equipments also loose the
Manufacturer’s Warranty and sometimes become obsolete.
g) As per International Valuation Standards (IVS), 2022 effective 31st January, 2022, under ‘Head’
General Standards IVS 104, ‘Head’ 30.1, Market value is the estimated amount for which an asset or
liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s
length transaction, after proper marketing and where the parties had each acted knowledgeably,
prudently and without compulsion.

“An asset or liability should exchange” refers to the fact that the value of an asset or liability is an
estimated amount rather than a predetermined amount or actual sale price. It is the price in a
transaction that meets all the elements of the market value definition at the valuation date. The
concept of market value presumes a price negotiated in an open and competitive market where the
participants are acting freely.
h) As per International Valuation Standards (IVS), 2022 effective 31st January, 2022, under ‘Head’
General Standards IVS 104, ‘Head’ 50.1, Equitable value is the estimated price for the transfer of an
asset or liability between identified knowledgeable and willing parties that reflects the respective
interests of those parties.
i) As per International Valuation Standards (IVS), 2022 effective 31st January, 2022, under ‘Head’
General Standards IVS 105, ‘Head’ 50.38, If the valuer determines that certain risks included in the
forecast cash flow for the asset / inventory have not been captured in the discount rate, the valuer
must 1) adjust the forecast, or 2) adjust the discount rate to account for those risks not already
captured.

a. When adjusting the cash flow forecast, the valuer should provide the rationale for why the
adjustments were necessary, undertake quantitative procedures to support the adjustments, and
document the nature and amount of the adjustments,
b. The valuer should document why it was not appropriate or possible to adjust the cash flow
forecast, provide the rationale for why such risks are not otherwise captured in the discount rate,
undertake quantitative and qualitative procedures to support the adjustments, and document the
nature and amount of the adjustment. The use of quantitative procedures does not necessarily
entail quantitative derivation of the adjustment to the discount rate. A valuer need not conduct
an exhaustive quantitative process but should take into account all the information that is
reasonably available.

j) Under Head General Standards IVS 105, ‘Head’ 50.39, “The valuer should consider whether market
participants would assess the discount rate for the asset on a standalone basis, or whether market
participants would assess the asset in the context of a broader portfolio and therefore consider the
potential diversification of unsystematic risks.”
k) As per International valuation Standards (IVS), 2022 effective 31st January, 2022, under Head IVS 105,
‘Head’ 80. Depreciation, 80.1 says “In the context of the cost approach, “depreciation” refers to
adjustments made to the estimated cost of creating an asset of equal utility to reflect
the impact on value of any obsolescence affecting the subject asset. This meaning is different from
the use of the word in financial reporting or tax law where it generally refers to a method for
systematically expensing capital expenditure over time.”
‘Head’ 80. Depreciation, 80.2 says “Depreciation adjustments are normally considered for
obsolescence, when making adjustments: External or economic obsolescence: Any loss of utility
caused by economic or locational factors external to the asset.”
‘Head’ 80. Depreciation, 80.6 says “There are two forms of functional obsolescence:
(a) Excess capital cost, which can be caused by changes in design, materials of construction,
technology or manufacturing techniques resulting in the availability of modern equivalent
assets with lower capital costs than the subject asset, and

(b) Excess operating cost, which can be caused by improvements in design or excess capacity
resulting in the availability of modern equivalent assets with lower operating costs than the
subject asset.

‘Head’ 80.7. says “Economic obsolescence may arise when external factors affect an
individual asset- due to ‘adverse changes to demand for the products or services produced by
the asset’ ”
l) As per International valuation Standards, 2022, IVS 230 ‘Inventory’ ‘Head’ 20.5 says “Inventory
valuations are performed for a variety of purposes. It is the valuer’s responsibility to understand the
 purpose of a valuation and whether the inventory should be valued, whether separately or grouped
with other assets”

For financial reporting purposes, valuations of inventory are often required in connection with
accounting for business combinations, inventory purchased and sales, and impairment analysis.
m) As per Accounting Standard (AS) 2 Valuation of Inventories, Inventories are stock in the form of
materials or supplies to be consumed in the production process or in the rendering of services.
Inventories encompass goods purchased and held for resale as maintenance supplies, consumables
and loose tools. Inventories do not include machinery spares which can be used only in connection
with an item of inventory and whose use is expected to be irregular; such machinery spares are
accounted for in accordance with Accounting Standard (AS) 10, Accounting for Inventory. Inventories
should be valued at the lower of cost and net realisable value.

The cost of inventories, should be assigned by using the first-in, first-out (FIFO), consequently the
items remaining in inventory at the end of the period are those most recently purchased or produced.

Net realisable value of inventories: The cost of inventories may not be recoverable if those
inventories are damaged, if they have become wholly or partially obsolete. Inventories are usually
written down to net realisable value on an item- by-item basis. In some circumstances, however, it
may be appropriate to group similar or related items. The practice of writing down inventories
below cost to net realisable value is consistent.

Contingent losses on firm sales contracts in excess of inventory quantities held and contingent losses
on firm purchase contracts are dealt with in accordance with the principles enunciated in Accounting
Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date.
n) Accounting Standard (AS) 4 deals with the treatment in Financial Statements of a) Contingencies; and
b) events occurring after the balance sheet date.

A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known
or determined only on the occurrence, or non-occurrence, of one or more uncertain future events.
The estimates of the outcome and of the financial effect of contingencies are determined by the
judgement of the management of the enterprise. This judgement is based on consideration of
information available up to the date supplemented by experience of similar transactions and, in some
cases, reports from independent experts. The accounting treatment of a contingent loss is
determined by the expected outcome of the contingency. If it is likely that a contingency will result
in a loss to the enterprise, then it is prudent to provide for that loss in the financial statements.