The Valuation Standards have been issued by the Institute of Chartered Accountants of India to set up concepts, principles and procedures which are generally accepted internationally having regard to legal framework and practices prevalent in India.
Applicability of Valuation Standards:
These Indian Valuation Standards will be applicable for all valuation engagements on mandatory basis under the Companies Act 2013. In respect of Valuation engagements under other Statutes like Income Tax, SEBI, FEMA etc, it will be on recommendatory basis for the members of the Institute. These Valuation Standards are effective for the valuation reports issued on or after 1st July, 2018.
In formulating the Valuation Standards, ICAI considered best valuation practices followed globally as well as in India, uniqueness of Indian conditions, current practices in India alongwith their advantages and disadvantages and various purposes for which valuations might be required over and above the requirements of Companies Act.
Note: These Indian Valuation Standards will be effective till Valuation Standards are notified by the central Government under Rule 18 of the Companies (Registered Valuers and Valuation) Rules, 2018.
Indian Valuation Standard 103 – Valuation Approaches and Methods
| Valuation Method Employed for Valuation | Description |
| A) Market Price Method | Market approach is a valuation approach that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities or a group of assets and liabilities, such as a business The following are some of the instances where a valuer applies the market approach: (a) where the asset to be valued or a comparable or identical asset is traded in the active market; (b) there is a recent, orderly transaction in the asset to be valued; or (c) there are recent comparable orderly transactions in identical or comparable asset(s) and information for the same is available and reliable. |
| A.1) Comparable Companies Multiple (CCM) Method | Comparable Companies Multiple Method, also known as Guideline Public Company Method, involves valuing an asset based on market multiples derived from prices of market comparables traded on active market.
The following are the major steps in deriving a value using the CCM method: (a) identify the market comparables; (b) select and calculate the market multiples of the identified market comparables; (c) compare the asset to be valued with the market comparables to understand material differences; and make necessary adjustments to the market multiple to account for such differences, if any; (d) apply the adjusted market multiple to the relevant parameter of the asset to be valued to arrive at the value of such asset; and (e) if value of the asset is derived by using market multiples based on different metrics/parameters, the valuer shall consider the reasonableness of the range of values. |
| A.2) Comparable Transaction Multiple (CTM) Method | Comparable Transaction Multiple Method, also known as ‘Guideline Transaction Method’ involves valuing an asset based on transaction multiples derived from prices paid in transactions of asset to be valued /market comparables (comparable transactions).
The following are the major steps in deriving a value using the CTM method: (a) identify comparable transaction appropriate to the asset to be valued; (b) select and calculate the transaction multiples from the identified comparable transaction; (c) compare the asset to be valued with the market comparables and make necessary adjustments to the transaction multiple to account where differences, if any existed; (d) apply the adjusted transaction multiple to the relevant parameter of the asset to be valued to arrive at the value of such asset; and (e) if valuation of the asset is derived by using transaction multiples based on different metrics or parameters, the valuer shall consider the reasonableness of the range of values and exercise judgement in determining a final value. |
| A.3) Discount for Lack of Marketability | DLOM is based on the premise that an asset which is readily marketable (such as frequently traded securities) commands a higher value than an asset which requires longer marketing period to be sold (such as securities of an unlisted entity) or an asset having restriction on its ability to sell (such as securities under lock-in-period or regulatory restrictions). Generally, restrictions on marketability that are only inherent in the asset to be valued shall be considered while valuing the asset. Marketability restrictions that are specific to a particular owner of the asset are not generally considered for discount adjustment. |
| A.4) Discount for Lack of Control (DLOC) | Control Premium generally represents the amount paid by acquirer for the benefits it would derive by controlling the acquiree’s assets and cash flows. Control Premium is an amount that a buyer is willing to pay over the current market price of a publicly-traded company to acquire a controlling interest in an asset. It is opposite of discount for lack of control to be applied in case of valuation of a noncontrolling/ minority interest. Under the CCM method, the value of the asset is on a minority interest/non-controlling interest as the market multiples of market comparables are derived from their respective traded price in the active market. The traded price of such comparables may not include the benefit derived from controlling the market comparable’s assets and cash flows. Therefore, while applying the CCM method to value the asset having controlling interest, a control premium may be considered. Under the CTM method, the transaction price generally includes price paid for control premium. Therefore, while valuing the asset for a non-controlling/minority interest, DLOC may be considered. |
| B) Income Approach | Income approach is a valuation approach that converts maintainable or future amounts (e.g., cash flows or income and expenses) to a single current (i.e., discounted or capitalised) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts. |
| B.1) Discounted Cash Flow (DCF) Method | The DCF method values the asset by discounting the cash flows expected to be generated by the asset for the explicit forecast period and also the perpetuity value (or terminal value) in case of assets with indefinite life. The following are important inputs for the DCF method: (a) Cash flows; (b) Discount rate; and (c) Terminal value The length of the period of projections (explicit forecast period) shall be determined based on the following factors:(a) Nature of the asset- where the business is of cyclical nature, explicit forecast period should ordinarily consider one entire cycle (for example cement business).(b) Life of the asset- In case of asset with definite life, explicit period should be for the entire life of the asset (for example, debt instruments, Build Operate Transfer (BOT) road projects). (c) Sufficient period- The forecast period should have a length of time that is sufficient for the asset to achieve stable levels of operating performance. |
| B.2) Relief from Royalty (RFR) Method | RFR Method is a method in which the value of the asset is estimated based on the present value of royalty payments saved by owning the asset instead of taking it on lease. It is generally adopted for valuing intangible assets that are subject to licensing, such as trademarks, patents, brands, etc. The following are the major steps in deriving a value using the RFR method: (a) obtain the projected income statement associated with the intangible asset to be valued over the remaining useful life of the said asset from the client or the target; (b) analyse the projected income statement and its underlying assumptions to assess the reasonableness; (c) select the appropriate royalty rate based on market-based royalty rates for similar intangible assets or using the profit split method; (d) deduct costs associated with maintaining licencing arrangements for the intangible asset from the resultant royalty savings; (e) apply the selected royalty rate to the future income attributable to the said asset; (f) use the appropriate marginal tax rate or such other appropriate tax rate to arrive at an aftertax royalty savings; (g) discount the after-tax royalty savings to arrive at the present value using an appropriate discount rate; and (h) Tax amortisation benefit, if appropriate, should be added to the overall value of the asset. |
| B.3) Multi-Period Excess Earnings Method (MEEM) | MEEM is generally used for valuing intangible asset that is leading or the most significant intangible asset out of group of intangible assets being valued. The following are the major steps in deriving a value using the MEEM : (a) obtain the projections for the entity or the combined asset group over the remaining useful life of the said intangible asset to be valued from the client or the target to determine the future after-tax cash flows expected to be generated; (b) analyse the projections and its underlying assumptions to assess the reasonableness of the cash flows; (c) Contributory Asset Charges (CAC) or economic rents to be reduced from the total net after-tax cash flows projected for the entity/combined asset group to obtain the incremental after-tax cash flows attributable to the intangible asset to be valued; (d) the CAC represent the charges for the use of an asset or group of assets (e.g., working capital, fixed assets, assembled workforce, other intangibles) based on their respective fair values and should be considered for all assets, excluding goodwill, that contribute to the realisation of cash flows for the intangible asset to be valued; (e) discount the incremental after-tax cash flows attributable to the intangible asset to be valued to arrive at the present value using an appropriate discount rate; and (f) Tax amortisation benefit, if appropriate. |
| B.4) With and Without Method (WWM) | Under WWM, the value of the intangible asset to be valued is equal to the present value of the difference between the projected cash flows over the remaining useful life of the asset under the following two scenarios:(a) business with all assets in place including the intangible asset to be valued; and(b) business with all assets in place except the intangible asset to be valued.The following are the major steps in deriving a value using the WWM :(a) obtain cash flow projections for the business over the remaining useful life of the said asset to be valued under the following two scenarios: (i) business with all assets in place including the intangible asset to be valued; and (ii) business with all assets in place except the intangible asset to be valued. (b) analyse the projections and its underlying assumptions to assess the reasonableness of the cash flows; (c) discount the difference between the projected cash flows under two scenarios to arrive at the present value using an appropriate discount rate; and (d) Tax amortisation benefit, if appropriate. |
| B.5) Option Pricing Models | There are several methods to value options, of which the Black-Scholes-Merton Model and Binomial Model are widely used. The important inputs required in these models are as under: (a) current price of asset to be valued; (b) exercise price; (c) life of the option; (d) expected volatility in the price of the asset; (e) expected dividend yield; and (f) risk free interest rate. |
| C) Cost Approach | Cost approach is a valuation approach that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). |
| C.1) Replacement Cost Method | Replacement Cost Method, also known as ‘Depreciated Replacement Cost Method’ involves valuing an asset based on the cost that a market participant shall have to incur to recreate an asset with substantially the same utility (comparable utility) as that of the asset to be valued, adjusted for obsolescence. The following are the major steps in deriving a value using the Replacement Cost method: (a) estimate the costs that will be incurred by a market participant for creating an asset with comparable utility as that of the asset to be valued; (b) assess whether there is any loss on account of physical, functional or economic obsolescence in the asset to be valued; and (c) adjust the obsolescence value, if any as determined under (b) above from the total costs estimated under (a) above, to arrive at the value of the asset to be valued. |
| C.2) Reproduction Cost Method | Reproduction Cost Method involves valuing an asset based on the cost that a market participant shall have to incur to recreate a replica of the asset to be valued, adjusted for obsolescence.
The following are the major steps in deriving a value using the Reproduction Cost method: (a) estimate the costs that will be incurred by a market participant for creating a replica of the asset to be valued; (b) assess whether there is any loss of value on account of physical, functional or economic obsolescence in the asset to be valued; and (c) adjust the obsolescence value, if any as determined under (b) above from the total costs estimated under (a) above, to arrive at the value of the asset to be valued. |
| C.3) Obsolescence | Under the Replacement Cost Method or the Reproduction Cost Method, the estimated cost of creating an asset is required to be adjusted for depreciation on account of obsolescence in the asset to be valued.
(a) Physical obsolescence represents the loss in value on account of decreased usefulness of the asset as the useful life expires. (b) Functional (technological) obsolescence represents the loss in value on account of new technological developments; whereby the asset to be valued becomes inefficient due to (c) Economic (external) obsolescence represents the loss in value on account of decreased usefulness of the asset caused by external economic factors such |
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