Exposure Draft

of

Indian Valuation Standard 201
Scope of Work, Analyses and Evaluation

(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 201 Scope of Work, Analyses and Evaluation

Following is the Exposure Draft of the Indian Valuation Standard 201 Scope of Work, Analyses and Evaluation 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/YBpkWG40NVOfrVyH3 to submit 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
Indian Valuation Standard 201

Scope of Work, Analyses and Evaluation

Contents Paragraph
OBJECTIVE 1-4
SCOPE 5-9
SIGNIFICANT ELEMENTS 10-15
SCOPE OF WORK/ TERMS OF ENGAGEMENT 16-24
CONFIDENTIALITY OF REPORT 25
ANALYSES AND EVALUATION 26-35
Analysis of asset to be valued 29-3 5
Non-financial Information 31
Ownership Details 32
Financial Information 33-34
General Information 35
SUBSEQUENT EVENTS 36-43
RELIANCE ON THE WORK OF OTHER EXPERTS 44-47
EVIDENCE 48-49
EFFECTIVE DATE 50

Exposure Draft
Indian Valuation Standard 201, Scope of Work, Analyses and
Evaluation

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 prescribes the basis for:

(a) determining and documenting the scope/terms of a valuation engagement, responsibilities of the valuer and the client;

(b) the extent of analyses and evaluations to be carried out by the valuer; and

(c) responsibilities of the valuer while relying on the work of other experts.

2. The objective of this Standard is to prescribe the minimum requirements in respect of terms of the
engagement of valuation.

3. This Standard provides guidance to the valuer in relation to his responsibility for a valuation

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 shall follow the requirement of this Standard while accepting an engagement of valuation. The valuer and the client should agree on the terms of engagement before commencement of the engagement.

6. The agreed terms shall be recorded in the engagement letter.

7. This Standard is applicable to all valuation assignments performed giving reference to any of the Indian Valuation Standards.

8. The valuation engagement includes valuation to be carried out for third parties (clients), employers and valuation reviews.

9. A valuer shall carry out the assignment in accordance with the principles laid in the Indian
Valuation Standards, as applicable to the purpose and terms of engagement.

Significant Elements

10. Scope of work describes the work to be performed, responsibilities and confidentiality obligations of the client and the valuer respectively, and limitation of the valuation engagement.

11. The terms of engagement shall be mutually agreed between the valuer and the client. The valuer shall ensure that the terms of the engagement provide a reasonable framework to perform the valuation in accordance with the Indian Valuation Standards.

12. The terms shall be reviewed by the valuer and the client and modified suitably, if required, to meet the changed circumstances.

13. A valuer shall be responsible for the methods and assumptions used by him.

14. The valuation shall not be constituted as an audit in accordance with the auditing standards applicable in India, due diligence or forensic/investigation services, and shall not include verification work.

15. The client should keep the valuer informed of any material development relating to the business or operations which may have a bearing on the engagement.

Scope of Work/Terms of Engagement

16. The following are the key elements of the engagement:

(a) scope;

(b) responsibility;

(c) authority;

(d) confidentiality;

(e) limitations;

(f) reporting; and

(g) compliance with Indian Valuation Standards.

17. There should be clarity of terms of the valuation engagement between the valuer and the client to avoid misunderstanding as to any aspect of the engagement.

18. The terms of the valuation assignment shall be documented in writing in an engagement letter.

19. The engagement letter shall at the minimum include:

(a) details of the client;

(b) details of any other user/s of the valuation report apart from the client, if any;

(c) details of the valuer;

(d) purpose of the valuation;

(e) identification of the subject matter of valuation;

(f) valuation date;

(g) basis of valuation;

(h) responsibilities of the client and the valuer;

(i) confidentiality obligations of the client and the valuer;

(j) scope/ limitations

(k) details of third party expert, if any, and their scope of work, scope limitations, and

20. Any changes to the agreed upon terms of the engagement shall be documented in writing.

21. The client shall be responsible for providing timely and accurate data, information, records, clarifications, personnel etc.

22. The terms of engagement shall clearly specify that the ownership of the working papers rests with the It should also be made clear that the valuer may provide copies of non-proprietary working papers, upon a written request of the client.

23. The terms of engagement shall specify clearly the limitations on scope, coverage and reporting requirement, if any.

24. In case the valuer is unable to agree to any change in the terms of engagement and/or is not permitted to continue as per the original terms, he should withdraw from the engagement and should consider whether there is an obligation, contractual or otherwise, to report the circumstances necessitating the withdrawal.

Confidentiality of the Report

25. The engagement letter shall contain a condition that the valuation report should not be used, reproduced, distributed or circulated whether in whole or part, other than for the purpose agreed in the scope of work/terms of engagement, without the prior written consent of the client orvaluerasthe case may be unless there is a statutory or a regulatory requirement to do so.

Analyses and Evaluation

26. The extent of analyses to be carried out by the valuer in relation to the engagement shall be based on the purpose of the valuation assignment and the terms of engagement.

27. The judgments made by the valuer during the course of assignment, including the sufficiency of the data made available to meet the purpose of the valuation, must be adequately supported.

28. The valuer shall carry out relevant analyses and evaluations through discussions, inspections, survey, calculations and such other means as may be applicable and available to that effect.

Analysis of Asset to be Valued

29. If the valuer relies on the information available in public domain, the valuer should assess the credibility/reliability of such information taking into account, inter-alia, the purpose of valuation, materiality vis-а-vis the valuation conclusion, the expertise of the source in relation to the subject matter, whether the source is independent of either the asset to be valued and/or the recipient of the

30. The type, availability, and significance of such information may vary with the asset to be valued. Such information shall include:

(a) non-financial information;

(b) ownership details;

(c) financial information; and

(d) general information.

Non-Financial Information

31. A valuer shall obtain sufficient non-financial information to enable him to understand the underlying business, such as:

(a) nature, background, and history of the business;

(b) facilities;

(c) organizational structure;

(d) management team (which may include officers, directors, and key employees);

(e) classes of equity ownership interests and rights attached thereto;

(f) products or services, or both;

(g) capital markets providing relevant information; e.g., available rates of return on alternative investments, relevant public stock market information and relevant merger and acquisition information;

(h) prior transactions involving the subject business, or involving interests in, the securities of, or intangible assets in the subject business;

(i) economic environment;

(j) geographical markets;

(k) industry markets;

(l) key customers and suppliers;

(m) competition;

(n) business risks;

(o) future outlook for the business;

(p) strategy and future plans;

(q) governmental or regulatory environment

Ownership Information

32. A valuer shall obtain ownership information regarding the asset to be valued to enable him to:

(a) determine the type of ownership interest being valued and ascertain whether that interest exhibits control characteristics;

(b) analyse the different ownership interests of other owners and assess the potential effect on the value of the asset;

(c) understand the classes of equity ownership interests and rights attached thereto;

(d) understand other matters that may affect the value of the subject interest, such as:

(i) for a business, business ownership interest: shareholder agreements, partnership agreements, operating agreements, voting trust agreements, buy-sell agreements, loan covenants, restrictions, and other contractual obligations or restrictions affecting the owners and the asset to be valued;

(ii) for an intangible asset: legal rights, licensing agreements, sublicense agreements, nondisclosure agreements, development rights, commercialization or exploitation rights, and other contractual obligations.

Financial Information

33. A valuer shall obtain, where applicable and available, financial information on the underlying business such as:

(a) historical financial information (including annual and interim financial statements and key financial statement ratios and statistics) for an appropriate number of years;

(b) prospective financial information (for example, budgets, forecasts, and projections)- in the absence of which the valuer could consider information on future developments or course of the business;

(c) comparative summaries of financial statements or information covering a relevant time period;

(d) comparative common size financial statements for the subject entity for an appropriate number of years;

(e) comparative common size industry financial information for a relevant time period;

(f) income tax returns for an appropriate number of years;

(g) information on compensation for owners including benefits and personal expenses;

(h) information on key personnel or officers’ life insurance;

(i) management’s response to the inquiry regarding:

(i) advantageous or disadvantageous contracts;

(ii) contingent or off-balance-sheet assets or liabilities;

(iii) information on prior sales of company stock.

34.  A valuer shall read and evaluate the information to determine that it is reasonable for the purposes
of the engagement.

General Information

35.  A valuer shall gather and analyse the relevant general information which may affect the business
directly or indirectly and/or which are deemed relevant by the valuer.

Subsequent Events

36. The valuation date is the specific date at which a valuer estimates the value of the asset and concludes on the value.

37. Generally, a valuer shall consider only circumstances existing at the valuation date and events occurring up to the valuation date.

38. An event that occurs subsequent to the valuation date could affect the value; such an occurrence is referred to as a subsequent event.

39. Subsequent events are indicative of the conditions that were not known or knowable at the valuation date, including conditions that arose subsequent to the valuation date.

40. The valuation should not be updated to reflect those events or conditions.

41. The valuation report shall not include a discussion of those events or conditions because a valuation is performed as of a point in time – the valuation date – and the events described in this sub paragraph, occurring subsequent to that date, are not relevant to the value determined as of that date.

42. In the cases where a valuation is meaningful to the intended user beyond the valuation date, the events may be of such nature and significance as to warrant disclosure (at the option of the valuer) in a separate section of the report in order to keep users informed. Such disclosure shall clearly indicate that information regarding the events is provided for informational purposes only and does not affect the determination of value as of the valuation date.

43. To conclude, events subsequent to the valuation date shall not be taken into consideration when valuing business, except when at least one of the following conditions is true:

(a) the subsequent events were reasonably foreseeable as of the valuation date;

(b) the subsequent events are relevant to the valuation, and appropriate adjustments are made to take into account the differences between the facts and circumstances on valuation date and the date of such subsequent events;

(c) the subsequent events are not used to arrive at the valuation, but only as a means to confirm the value already arrived at;

(d)subsequent events may be evidence of value rather than as something that affects the value.

Reliance on the work of other Experts

44. A valuer shall evaluate the skills, qualification, and experience of the other expert in relation to the subject matter of his valuation.

45. A valuer must determine that the expert has sufficient resources to perform the work in a specified time frame and also explore the relationship which shall not give rise to the conflict of interest.

46. If the work of any third party expert is to be relied upon in the valuation assignment, the description of such services to be provided by the third party expert and the extent of reliance placed by the valuer on the expert’s work shall be documented in the engagement letter. The engagement letter should document that the third party expert is solely responsible for their scope of work, assumptions and conclusions.

47. A valuer shall specifically disclose the nature of work done and give sufficient disclosure about reliance placed by him on the work of the third party expert in the valuation report.

Effective Date

50. Indian Valuation Standard 201 Scope of Work, Analyses and Evaluation, shall be applied for the valuation reports issued on or after , 20181.

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