ED/Ind VS- 102/2018-2019/10
Exposure Draft
of
Indian Valuation Standard 102, Valuation Bases
(Last date for Comments: May 12, 2018)
Issued by Valuation Standards Board
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up under an Act of Parliament)
Exposure Draft
Indian Valuation Standard 102
Valuation Bases
Following is the Exposure Draft of Valuation Bases issued by the Valuation Standards Board of the Institute of Chartered Accountants of India, for comments.
The Board invites comments on any aspect of this Exposure Draft. Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording.
Comments can be submitted using one of the following methods, so as to be received not later than May 12, 2018.
1. Electronically: Click on http: https://goo.gl/forms/yiulMF3BrxCRQAez2tosubmit comments (Preferred method)
2. Email: Comments can be sent to commentsvsb@icai.in
3. Postal: Secretary, Valuation Standards Board, The Institute of Chartered Accountants of India, ICAI Bhawan, A- 29, Sector- 62, Noida — 203209.
Further clarifications on any aspect of this Exposure Draft may be sought by e-mail to valuationstandards@icai.in.
Exposure Draft
of
Indian Valuation Standard 102, Valuation Bases
| CONTENTS | PARAGRAPH |
| OBJECTIVE | 1-4 |
| SCOPE | 5-9 |
| SIGNIFICANT ELEMENTS | 10-13 |
| VALUATION BASES | 14-36 |
| Fair Value | 17-3 1 |
| Price | 20-22 |
| Orderly transaction | 23 |
| Market participants | 24 |
| Valuation date | 25-27 |
| Highest and best use | 28-31 |
| Participant Specific Value | 32-33 |
| Liquidation Value | 34-3 5 |
| PREMISE OF VALUE | 36- 50 |
| Highest and Best Use | 3 8-43 |
| Going Concern Value | 44-45 |
| As-is-where-is basis | 46 |
| Orderly Liquidation | 47-48 |
| Forced Transaction | 49-50 |
| OTHER CONSIDERATION | 5 1-60 |
| Participant specific factors | 51-52 |
| Synergies | 53-55 |
| Integration Costs | 56 |
| Assumptions | 57-5 8 |
| Transaction Costs | 59-60 |
| EFFECTIVE DATE | 61 |
Exposure Draft
Indian Valuation Standard 102
Valuation Bases
The Exposure Draft of the Indian Valuation Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles. (This Exposure Draft of the Indian Valuation Standard should be read in the context of Framework for the Preparation of Valuation Report in accordance with Indian Valuation Standards)
Objective
1. This Standard:
(i) defines the major valuation bases;
(ii) prescribes the measurement assumptions in a valuation or the fundamental assumption on which the value will be based; and
(iii) explains the premises of values.
2. The objective of this Standard is to define the major valuation bases which represent the fundamental principle on which professional valuations are based.
3. This Standard covers the measurement assumptions in a valuation and/or the fundamental assumption on which the value will be based.
4. The principles enunciated in this Standard shall be applied in conjunction with the principles prescribed and contained in the Framework for the Preparation of Valuation Report in accordance with Indian Valuation Standards.
Scope
5. A valuer should follow the requirements of this standard in selecting the appropriate valuation bases except as specified in paragraph 6.
6. The valuation bases defined in this Standard do not apply in valuation where a valuer is required to adopt valuation bases that are prescribed by:
(i) the statute, regulations; or
(ii) agreement/ arrangement between the parties.
In such cases, the bases as prescribed are required to be applied considering the relevant regulations, agreement or arrangement, as the case may be and adequate information for user’s understanding of the selected base should be disclosed appropriately in the report.
7. In some engagements, a valuer is required to adopt valuation base that is prescribed by regulations or agreement/ arrangement between the parties. In those cases, considering the relevant regulations, agreement or arrangement, such bases need to be applied, for example as per the requirements under:
(i) Income Tax Act;
(ii) SEBI Regulations; or
(iii) The Insolvency and Bankruptcy Code.
Further, in case of certain transactions (eg – merger! demerger of companies or businesses), the consideration is often discharged primarily in the form of issue of securities (having equity characteristics) of the acquirer or transferee entity. In such a case, for determining the securities exchange ratio! securities entitlement ratio, the purpose is not to arrive at the absolute value of the securities! businesses of the transferor company and the transferee company but at their relative values.
Such relative values are generally arrived at considering a valuation approach! combination of valuation approaches, as appropriate. Where a combination of valuation approaches! methodologies are adopted, appropriate weightages are assigned to arrive at a single value. Relative value of securities! businesses of the transferor company and the transferee company are usually arrived at adopting (same) similar valuation approach! methodologies and similar weightages, unless, different valuation methodologies! weights can be justified, considering the circumstances (eg. merger of a listed and an unlisted company, where market price method would not be applicable for an unlisted company).
8. Valuation base selected shall be appropriate considering the terms and purpose of the engagement, as valuer is required to adopt the valuation approach and other assumptions as required or guided by the valuation bases.
9. A valuer shall establish the purpose for which the valuation is required before using the valuation base.
Significant Elements
10. Most of the valuation bases include the following key elements:
(a) an actual/ possible transaction;
(b) valuation date; and
(c) the parties (actual or likely) to the transaction.
11. The valuation date will determine what information can be considered in a valuation. Usually, information which is not available to the market participant at the valuation date is not considered for the purpose of valuation.
12. The valuation bases depend on the nature and extent of the information needed to perform the analysis which will depend on, but not limited to, the following:
(a) nature of the asset to be valued;
(b) scope of the valuation engagement;
(c) valuation date! measurement date;
(d) intended use of the valuation;
(e) applicable standard of value;
(f) applicable premise of value;
(g) assumptions and limiting conditions; and
(h) applicable governmental regulations or Code of Conduct, i.e., Professional standards.
13. A valuer shall gather, analyse and adjust the relevant information necessary to perform a valuation appropriate to the nature or type of the engagement. For example, for valuation of business, in accordance with Indian Valuation Standard 301Business Valuation, the information shall include but not limited to the following:
(a) non-financial information;
(b) ownership details;
(c) financial information; and
(d) general information.
Valuation Bases
14. Valuation base means the indication of the type of value being used in an assignment. Business interests are valued in a variety of contexts and for a variety of purposes. Different valuation bases may lead to different conclusions of value. Therefore, it is most important for the valuer to identify a standard or bases of value pertinent to the case. This Standard defines the following valuation bases:
(i) Fair value;
(ii) Participant specific value; and
(iii) Liquidation value
15. A valuer is responsible for selecting the appropriate valuation base considering the terms of engagement and the intended purpose of the valuation.
16. A valuer shall not select a valuation base which is not appropriate for the intended purpose of the valuation. A valuer is responsible for understanding the relevant regulation(s) relating to the valuation bases which are selected and used.
Fair Value
17. Fair value is 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 valuation date.
18. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.
19. Fair value or Market value is usually synonymous to each other except in certain circumstances where characteristics of an asset translate into a special asset value for the party (ies) involved.
Price
20. Fair value assumes that the price is negotiated in a free market (which may be domestic or international).
21. Fair value reflects characteristics of an asset which are available to market participants in general and do not consider advantages! disadvantages which are available! applicable only to particular participant(s).
22. The price in the principle (or most advantageous) market used to measure the fair value of the asset shall not be adjusted for transaction costs.
Orderly transaction
23. Orderly transaction is a transaction that assumes exposure to the market for a period before the valuation date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities and it is not a forced transaction. The length of exposure time will vary according to the type of asset and market conditions.
Market participants
24. Market participants are willing buyers and willing sellers in the principle (or most advantageous) market for the asset or liability that have all of the following characteristics:
(a) they are independent of each other, that is, they are not related parties as defined under applicable accounting framework and set of reporting/ accounting standards therein, identified by the valuer, although the price in a related party transaction may be used as an input to a fair value measurement if the entity has evidence that the transaction was entered into at market terms;
(b) they are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligent efforts that are usual and customary;
(c) they are able to enter into a transaction for the asset or liability; and
(d) they are willing to enter into a transaction for the asset or liability, i.e., they are motivated but not forced or otherwise compelled to do so.
Valuation date
25. Valuation date is the specific date at which the valuer estimates the value of the underlying asset and concludes on his estimation of value.
26. Valuation is time specific and can change with the passage of time due to changes in the condition of the asset to be valued and/ or market. Accordingly, valuation of an asset as at a particular date can be different from other date(s)
27. The valuation date is sometimes also referred to as measurement date. Highest and best use
28. The highest and best use is the use of a non- financial asset by market participants that would maximise the value of the asset or the group of assets (e.g., a business) within which the asset would be used.
29. Highest and best use is usually for non- financial assets. The fair value of anon-financial asset will reflect its highest and best use in accordance with paragraphs 39-44.
30. The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible.
31. Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. The highest and best use of an asset may be its existing use or a different use.
Participant Specific Value
32. Participant specific value is the estimated value of an asset or liability considering specific advantages or disadvantages of either of the owner or identified acquirer or identified participants.
33. Participant specific value may be measured for an existing owner or for an identified acquirer or for a transaction between two identified parties and consider factors which are specific to such party(ies) and which may not be applicable to market participants in general. For example:
(a) participant specific value for a potential acquirer in connection with acquisition of a manufacturing facility will consider aspects such as location specific advantage or synergies which may not be available to market participants in general.
(b) participant specific value for transfer of 2% stake by a minority shareholder to a shareholder holding 49% stake will consider aspects such as minority discount and control premium
Liquidation Value
34. Liquidation value is the amount that will be realisedon sale of an asset or a group of assets when the business is terminated.
35. The net amount is determined after considering estimated cost of disposal.
Premise of Value
36. Premise of Value refers to the conditions how an asset is deployed.
37. Different valuation bases may require a particular premise of value or allow the consideration of multiple premises of value. Some common premises of value are as follows:
(a) highest and best use;
(b) going concern value;
(c) as is where is basis;
(d) orderly liquidation; or
(e) forced transaction.
Highest and Best Use
38. The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible. as follows:
(a) a use that is physically possible takes into account the physical characteristics of the asset that market participants would take into account when pricing the asset (eg the location or size of a property);
(b) a use that is legally permissible takes into account any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (eg the zoning regulations applicable to a property);
(c) a use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that use.
39. Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. However, an entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset.
40. To protect its competitive position, or for other reasons, an entity may intend not to use an acquired non-financial asset actively or it may intend not to use the asset according to its highest and best use. Nevertheless, the valuer shall measure the fair value of a non-financial asset assuming its highest and best use by market participants.
41. The highest and best use of a non-financial asset establishes the valuation premise used to measure the fair value of the asset, as follows:
(a) the highest and best use of a non-financial asset might provide maximum value to market participants through its use in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities (eg a business).
(i) if the highest and best use of the asset is to use the asset in combination with other assets or with other assets and liabilities, the fair value of the asset is the price that would be received in a current transaction to sell the asset assuming that the asset would be used with other assets or with other assets and liabilities and that those assets and liabilities (ie its complementary assets and the associated liabilities) would be available to market participants;
(ii) liabilities associated with the asset and with the complementary assets include liabilities that fund working capital, but do not include liabilities used to fund assets other than those within the group of assets;
(iii) assumptions about the highest and best use of a non-financial asset shall be consistent for all the assets (for which highest and best use is relevant) of the group of assets or the group of assets and liabilities within which the asset would be used.
(b) the highest and best use of a non-financial asset might provide maximum value to market participants on a stand-alone basis. If the highest and best use of the asset is to use it on a stand-alone basis, the fair value of the asset is the price that would be received in a current transaction to sell the asset to market participants that would use the asset on a stand-alone basis.
42.Where the highest and best use is different from the existing use, costs, to be incurred, if any for conversion of an asset to its highest and best use need to be considered for determination of value based on highest and best use.
43. In certain cases, assessment of highest and best use may involve considerable subjectivity/ technical aspects and the valuer may base his assessment considering inter-alia relevant inputs from the client, information available in public domain, etc.
Going Concern Value
44. Going concern value is the value of a business enterprise that is expected to continue to operate in the future.
45. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, the necessary licenses, systems, and procedures in place etc.
As-is-where-is basis
46. As-is-where-is basis will consider the existing use of the asset which may or may not be its highest and best use.
Orderly Liquidation
47. 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.
48. The reasonable period of time to market the asset would vary based on the market conditions, nature of the asset, etc.
Forced transaction
49. Forced transaction is a circumstance where a seller is under constraints to sell an asset without appropriate marketing period or effort to market such asset.
50. Sale in the market that is not active cannot be presumed to be forced transaction without assessing the seller specific circumstances.
Other Considerations
Participant specific consideration
5.1 Certain examples of participant specific considerations which may be considered depending on valuation bases adopted include:
(a) acquirer specific considerations on account of other assets owned! operated by such entity or ability to utlilise an asset in an unique manner; and
(b) legal/ tax implications which are specific to a participant (eg. implication of the Competition Act or an ability of an acquirer to utilise the available tax losses in an accelerated manner);
52. Whether certain valuation considerations are applicable only to particular participant(s) or market participants in general, it shall be analysed on a case to case basis.
Synergies
53. Synergies means when the combining effect of two or more assets or group of assets and liabilities or two or more entities in terms of their value and benefits is greater than that of their individual values on a standalone basis.
54.Synergy is a term that is most commonly used in the context of mergers and acquisitions.
55. Synergy results from incremental benefits that accrue to the acquirer on account of economies of scale or other post acquisition factors, such as realisation of increased discretionary cash flow (as a result of the combinations of two or more business operations over and above the aggregate discretionary cash flow of the two business viewed separately), or reduced risk in attaining same.
Integration Costs
56. Integration costs refer to additional one time! recurring expenses which may need to be incurred by an acquirer eg, alignment of employment terms! remuneration for employees of the target entity with the acquiring entity.
Assumptions
57. Sometimes, a valuer may make assumptions to derive the value as per the chosen valuation
58. A valuer may make assumptions which are appropriate having regard to the circumstances and terms of engagement.
Transaction Costs
59. Transaction costs are the costs to sell an asset or transfer a liability in the principle (or most advantageous) market for the asset that are directly attributable to the disposal of the asset or transfer of liability and which meet both the following criteria:
(a) they result directly from and are essential to that transaction;
(b) they would not have been incurred by the entity, had the decision to sell the asset or transfer the liability not been made.
60. Transaction costs are not a characteristic of an asset or a liability; rather, they are specific to a transaction and will differ depending on how an entity enters into a transaction for the assets or
Effective Date
6.1 Indian Valuation Standard 102 Valuation Bases, shall be applied for the valuation reports issued on or after , 2018.
