ICAI VALUATION
STANDARDS 2018
Seminar on Valuation Standards and Rules
at ICAI BKC
CA BHAKTI SHAH
24 NOV 2018
INTRODUCTION TO REGISTERED VALUER
• Section 247 of the Companies Act, 2013 (‘Act’) provides:
o Valuation of property, stocks, shares, debentures, securities, goodwill or other
assets/liabilities/networth of a company under the Act
o To be done by a Registered Valuer (RV)
o Appointed by Audit Committee or in its absence the Board of Directors of that company
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REGISTERED VALUER RULES
On 18 Oct 2017, MCA notified the Companies (Registered Valuers and Valuation)
Rules, 2017
Registered
Registered
Valuer
IBBI Valuer
Organization
(‘RV’)
(‘RVO’)
Authority to administer & Organisation to regulate and Individual, Firm, LLP or
perform the functions under impart training to the Company
these Rule Registered Valuers Member of a RVO
Registered with IBBI
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ICAI VALUATION STANDARDS (‘ICAI VS’)2018
• ICAI issued Valuation Standards to address the need for consistent, uniform and
transparent valuation policies.
• Valuation Standards lay down a framework to ensure:
o uniformity in approach; and
o quality of valuation output
• Applicability for Chartered Accountants
o On mandatory basis for valuation reports issued under the Companies Act, 2013 on or after 01 Jul
2018
o On recommendatory basis for valuation under other statutes like Income tax, SEBI, FEMA
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ICAI VS 2018
Framework for Preparation of valuation report in accordance with ICAI VS
ICAI VS 101 • Definitions
ICAI VS 102 • Valuation Bases
ICAI VS 103 • Valuation Approaches and Methods
ICAI VS 201 • Scope of Work, Analyses and Evaluation
ICAI VS 202 • Reporting and Documentation
ICAI VS 301 • Business Valuation
ICAI VS 302 • Intangible Assets
ICAI VS 303 • Financial Instruments
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ICAI VS 102
VALUATION BASES
102
VALUATION BASES
• Indication of the type of value being used in an engagement
• Different valuation bases may lead to different conclusions of value.
Fair Value
Participant
specific
value
Liquidation
Value
Other bases of value
• Relative Value for mergers / demerger
• Agreement/ arrangement between the parties
• Prescribed by statute/ regulations (e.g. Income Tax
Act, SEBI Regulations)
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Q1 FAIR VALUE
The Fair Value (‘FV’) is that would be received to sell an asset or paid to
transfer a liability in an between at the
FV in case of a non-financial asset to be measured assuming highest and best use of
such asset by market participants
Price in the principal / most advantageous market
Specific date at which the valuer estimates the value
Not forced or distress sell
Not entity specific
willing buyers & Able to enter into
Independent Knowledgeable
sellers, not forced transaction
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2 PARTICIPANT SPECIFIC VALUE
• Value estimated after considering specific advantages or disadvantages of
o Owner; or
o Identified Acquirer
• Consider factors which are specific to such parties and may not be applicable to
market participants in general.
• For example:
a) Synergies e.g. backward / forward integration for the acquirer
b) Ability of an acquirer to utilise the tax losses of the seller in an accelerated manner
c) Transfer of stake by a minority shareholder to a shareholder holding 49% stake - consider
aspects such as control premium
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3 LIQUIDATION VALUE
• Three Elements
o value realised on sale of an asset
o business termination
o cost of disposal to be reduced
• Orderly transaction with a typical marketing period or forced transaction with a
shortened marketing period
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102
OTHER VALUATION BASES - RELATIVE VALUE
• In case of mergers and demergers, a relative valuation needs to be carried out
• Relative values are determined by
o using similar valuation approaches / methods; and
o applying similar weightages to values arrived under each approach / method
• Use of different approach / methods may be appropriate in certain cases
• Share exchange ratio for Merger – valuation of shares of Transferor Co and of
Transferee Co
• Share entitlement ratio for Demerger – valuation of Demerged Undertaking and of
Resulting Co
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RELATIVE VALUE
SHARE EXCHANGE RATIO SHARE ENTITLEMENT RATIO
Merger of Co A into Co B Demerger of 'Undertaking X' of Co A into Co B
Co A Co B Undertaking X of Co A Co B
Valuation Approach Value per share Value per share Valuation Approach Value per share Value per share
Weights Weights Weights Weights
(INR) (INR) (INR) (INR)
Asset Approach 25.00 0% 120.00 0% Asset Approach 10.00 0% 120.00 0%
Income Approach 116.00 50% 285.00 50% Income Approach 58.00 50% 285.00 50%
Market Approach 120.00 50% 305.00 50% Market Approach 60.00 50% 305.00 50%
Relative value per share 118.00 100% 295.00 100% Relative value per share 59.00 100% 295.00 100%
Exchange ratio (rounded off) 2.50 Entitlement ratio (rounded off) 5.00
2 (two) equity shares of Co B of face value of INR 10 each fully paid up for every 5 1 (one) equity share of Co B of face value of INR 10 each fully paid up for every 5
(five) equity shares of Co A of face value of INR 100 each fully paid up (five) equity shares of Co A of face value of INR 100 each fully paid up
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102
PREMISE OF VALUE
• Refers to the conditions and circumstances of how an asset is deployed
• Some common premises of value are :
a) Highest and best use
b) As-is-where-is basis
c) Orderly liquidation
d) Forced transaction
e) Going concern value
• Single or multiple premises of value can be adopted depending upon the facts
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102
PREMISE OF VALUE
• Highest and best use (‘HABU’) is the use of a non-financial asset by market
participants that maximises the value of the asset and it is physically possible, legally
permissible and financially feasible
• As-is-where-is premise will consider the existing use of the asset which may or may
not be its highest and best use
• An orderly liquidation refers to the realisable value of an asset in the event of a
liquidation after allowing appropriate marketing efforts and a reasonable period of
time to market the asset on an as-is, where-is basis.
• Forced transaction is a transaction where a seller is under constraints to sell an
asset without appropriate marketing period or effort to market such asset
• Going concern value is the value of a business enterprise that is expected to
continue to operate in the future
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Examples
Purpose Bases Premise
Acquisition of shares / business - Fair Value - HABU (could be as-is-where-is premise and/or
going concern value / orderly liquidation value,
depending on specific circumstances of the asset)
- Participant Specific Value - Premise considering seller (‘as-is’)/ acquirer
specific factors (Synergy/ integration costs)
Financial Reporting for PPA in case Fair Value HABU (could be as-is-where-is premise and/or going
of business acquisition concern value / orderly liquidation value)
Bankruptcy Liquidation Value - Orderly liquidation
- Forced liquidation
Merger / Demergers Relative Value Going concern
Determination of open offer price SEBI Takeover Regulations
(‘Floor Price’)
Transfer of shares Section 56(2)(x) and Section
50CA of IT Act
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ICAI VS 103
VALUATION APPROACHES
AND METHODS
103
VALUATION APPROACHES
Market
Approach
Income
Approach
Cost
Approach
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103
MARKET APPROACH
Uses prices and other relevant information generated by market transactions
involving subject asset or identical / comparable assets (‘market comparables’)
Applicable in following instances: Use other valuation approaches instead of /
in combination with Market approach:
• subject asset or market comparable(s) is • where the asset has fewer market
traded in the active market comparables
• there is a recent, orderly transaction in the • there are material differences between the
subject asset subject asset and the market comparables,
which require significant adjustments
• there are recent orderly transactions in
market comparables and information for • sufficient information on the comparable
the same is available and reliable transaction(s) is not available
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103
MARKET APPROACH
• Market Price Method:
o Applicable in case of valuation of shares of listed company
o Valuation derived from the quoted market prices of shares of the subject company
• Comparable Companies Multiple (CCM) Method:
o Also known as ‘Guideline Public Company Method’
o Valuation determined by using multiples derived from prices of market comparables traded on
active market (for eg. EV/Revenue Multiple, EV/EBIDTA Mutiple, % of AUM in case of AMCs)
o Market comparables to be chosen carefully
o Market multiples to be adjusted for material differences, if any
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103
MARKET APPROACH
• Comparable Transaction Multiple (CTM) Method:
o Also known as ‘Guideline Transaction Method’
o Valuation determined using transaction multiples derived from prices paid in transactions of
subject asset; or in publicly disclosed transactions of market comparables (‘comparable
transactions’)
o Comparables transactions to be chosen carefully
o Transaction multiples to be adjusted for material differences, if any
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103
INCOME APPROACH
Converts maintainable / future amounts (e.g., cash flows / income & expenses)
to a single current amount (i.e. discounted or capitalised)
Applicable in following instances: Use other valuation approaches instead of /
in combination with Income approach:
• subject asset does not have any market • subject asset has not yet started
comparable or comparable transaction generating income or cash flows e.g.
projects under development
• subject asset has fewer relevant market
comparables; or • there is significant uncertainty on the
amount and timing of income/future cash
• Subject asset is an income producing asset flows e.g. start-up companies
for which the future cash flows are
available and can reasonably be projected • client does not have access to information
relating to the asset being valued
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INCOME APPROACH
Business Intangible Assets Financial Instruments
• Discounted Cash • Relief from Royalty • DCF Method
Flow (DCF) Method (RFR) Method • Option pricing
• Multi-Period Excess models such as
Earnings Method Black-Scholes-
(MEEM) Merton formula or
• With and Without binomial (lattice)
Method (WWM) model
• Greenfield Method
• Distributor Method
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COST APPROACH
Reflects the amount that would be required currently to replace the service
capacity of an asset (often referred to as current replacement cost)
Applicable in following instances Use other valuation approaches instead of /
in combination with Income approach:
• an asset can be quickly recreated with • subject asset was recently created
substantially the same utility as the
subject asset • subject asset has not yet started
generating income / cash flows
• in case where liquidation value is to be
determined • an asset can be created but there are
regulatory / legal restrictions and involves
• income approach and/or market approach significant time for recreation
cannot be used
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COST APPROACH
• Replacement Cost Method:
o Also known as ‘Depreciated Replacement Cost Method’
o Cost that would be incurred by a market participant to recreate an asset with substantially the
same utility (comparable utility) as that of the subject asset
o Adjustment for obsolescence – physical, functional (technological) and economic (external)
• Reproduction Cost Method:
o Cost that would be incurred by a market participant to recreate a replica of the subject asset
o Adjustment for obsolescence
• Generally used in case of valuation of :
o property, plant and equipment
o certain intangible assets
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SELECTION OF VALUATION APPROACHES
• Key factors for selection of valuation approach and method are:
a) valuation bases and premises
b) nature of asset to be valued
c) availability of adequate inputs or information and its reliability
d) strengths and weakness of each valuation approach and method
e) valuation approach/method considered by market participants
• No single approach/method may be best suited for valuation in every situation
• Valuer may adopt one distinct valuation approach/method or multiple valuation
approaches/methods as may be appropriate
• If multiple valuation approaches/methods are used, results to be evaluated
considering the range of values indicated by those results
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EXAMPLES
Nature of asset Approach
Knowledge based companies Income / Market
Manufacturing companies Income / Market / Cost
Brand driven companies Income / Market
Investment holding companies Cost (considering fair value of the
underlying investments)
Company going for liquidation Cost (Liquidation value)
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ICAI VS 301
BUSINESS VALUATION
301
NEED FOR VALUATION
Restructuring
Insolvency Purchase /
and Sale of shares
Bankruptcy / business
Code
Purpose of
Valuation
Financial Litigation /
Reporting / Dispute
Purchase Resolution /
Price Family
Allocation Settlement
Fund Raising
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301
BENCHMARKS
•Equity Shareholders + Debt + Minority
Interest + Preference Shareholders -
Enterprise Value Amount of non-operating cash and cash
equivalents
•All shareholders i.e. Equity Shareholders +
Business Value Preference Shareholders
Equity Value •Equity Shareholders value
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VALUATION PROCESS
1 2 3 4
Information Analysis Valuation Recommendation
• Obtaining information • Data Analysis and review Methodologies • Assigning Weights
• Business Understanding • Discussion with the • Selection of method • Recommendation
Management • Conducting sensitivity • Reporting
analysis
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301
COMMON ADJUSTMENTS
• Investments
• Non-operating surplus assets
• Surplus cash
• Contingent liabilities / assets
• Tax concessions
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ICAI VS 302
INTANGIBLE ASSETS
302
NEED FOR VALUATION
Purchase price Impairment Transfer
Taxation
allocation testing pricing
Bankruptcy /
Transaction Financing Litigation
restructuring
Issuance of
Insurance sweat equity
shares
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WHAT IS INTANGIBLE ASSET
• Identifiable – separable or arises from contractual or legal rights
• Non-monetary asset without physical substance
• Grants economic rights and / or benefits to its owner
• Represents legal rights developed or acquired by an owner
• Transferable
• Not Goodwill
Goodwill is the residual amount after ascribing values to identified intangible assets,
other assets and liabilities
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CATEGORIES OF INTANGIBLE ASSET
Customer- Marketing- Contract- Technology-
Artistic-based
based based based based
• Customer • Trademark – • Lease • Patents / • Books
Contracts brand, logo, Agreements Know-how • Films
• Customer service mark • Non- • Trade Secrets • Plays
Relationships • Internet compete • Copyrights • Music
• Customer domain Agreements • Processes
Lists names • Licensing • Software
• Order Agreements
• Designs
Backlog • Royalty
• Formulae
Agreements
• Employment
Contracts
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VALUATION APPROACHES
Market Approach Income Approach Cost Approach
• Price / Valuation • Relief from Royalty • Replacement Cost
Multiples / (RFR) Method Method
Capitalisation Rates • Multi-Period Excess • Reproduction Cost
• Guideline Pricing Earnings Method Method
Method (MEEM)
• With and Without
Method (WWM)
• Greenfield Method
• Distributor Method
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INCOME APPROACH
• RFR Method
o Value determined based on the present value of royalty payments saved by owning the subject
asset instead of taking it on lease over its remaining useful life
• MEEM
o Generally used for valuing intangible asset that is leading or the most significant intangible asset
out of group of intangible assets being valued
o Value determined based on present value of incremental after-tax cash flows (‘excess earnings’)
attributable to the subject asset over its remaining useful life
o Incremental after-tax cash flows are arrived at by reducing contributory asset charges (‘CAC’)
from the after-tax cash flows of the combined group of assets.
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INCOME APPROACH
• WWM
o Value determined based on present value of the difference between projected cash flows over
the remaining useful life of the asset under the following two scenarios:
business with all assets in place including the subject intangible asset to be valued; and
business with all assets in place except the subject intangible asset to be valued
• Greenfield Method
o Value determined as if subject asset is the only asset with all other tangible or intangible assets
being created, leased or acquired
• Distributor Method
o This is a variation of MEEM and is adopted for valuation of customer-based intangible assets
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ECONOMIC USEFUL LIFE
• Intangible assets could have a finite or indefinite life
o Life established by legal (eg. law, contract), functional, economic or technological factors
• Legal and economic factors to be considered together as well as individually
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DISCOUNT RATES
• Return expected by a market participant from a particular investment
o Reflects time value of money
o Reflects risk inherent in subject asset as well as risk inherent in achieving the future cash flows
• Factors to be considered
o Intangible assets are relatively riskier than tangible assets / business
o Intangible assets with longer life are considered to have higher risk
o Intangible assets with ascertainable cash flows have relatively lower risk
• Generally, asset specific risk premium is applied over and above the discount rate of
the business
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TAX AMORTISATION BENEFIT
• Certain intangible assets qualify for tax amortisation, thereby reducing the tax
liability
• Under Income Approach, the present value of tax savings on account of tax
amortisation, known as Tax Amortisation Benefit (‘TAB’), can be added to the value
of such intangible asset, if appropriate
• Tax deductibility of amortisation of intangible asset is dependent upon the tax
legislations of individual countries
• Discount rate to determine present value of TAB
o WACC; or
o discount rate used for valuation of the subject intangible asset
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SELECTION OF METHODS
Type of Asset Valuation Method
Trademarks, Service Marks, Brands RFR Method / MEEM
Non-compete Agreement WWM
Customer relationship and contracts MEEM
Assembled workforce Replacement Cost Method
Technology RFR Method / MEEM
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