ED/Ind VS- 301/2018-2019/14
Exposure Draft
of
Indian Valuation Standard 301
Business Valuation
(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 301 Business Valuation
Following is the Exposure Draft of the Indian Valuation Standard 301 Business Valuation 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 suggestions 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/8axYjzIOIITFwglc2to submit comments online. (Preferred method)
2. Email: Comments can be sent to [email protected]
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 [email protected].
Exposure Draft
Indian Valuation Standard- 301
Business Valuation
| CONTENTS | PARAGRAPH |
| OBJECTIVE | 1-5 |
| SCOPE | 6-8 |
| SIGNIFICANT ELEMENTS | 9-11 |
| VALUATION METHIDOLOGY | 12-53 |
| Valuation Premise | 13-16 |
| Analysis of Asset to be valued | 17-24 |
| Adjustment to information from financial statements | 25-28 |
| Valuation Approaches And Methods | 29-38 |
| Market approach | 30-31 |
| Income approach | 32-33 |
| Cost approach | 34-38 |
| Value under liquidation | 39-42 |
| Rule of Thumb or Benchmark Method | 43-47 |
| Treatment of non-operating assets and inter-company investments | 48-49 |
| Consideration of the Capital Structure of company | 50 |
| Value | 51-53 |
| EFFECTIVE DATE | 54 |
Exposure Draft
Indian Valuation Standard- 301
Business Valuation
(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 provides guidance for business valuers who are performing business valuation or business ownership interests valuation engagements.
2. The objective of this Standard is to establish uniform concepts, principles, practices and procedures for valuers performing valuation services.
3. Valuations of businesses, business ownership interests may be performed for a wide variety of purposes including the following:
(a) valuation of financial transactions such as acquisitions, mergers, leveraged buyouts, initial public offerings, employee stock ownership plans and other share-based plans, partner and shareholder buy-ins or buyouts, and stock redemptions;
(b) valuation for dispute resolution and/ or litigation/pending litigation relating to matters such as marital dissolution, bankruptcy, contractual disputes, owner disputes, dissenting shareholder and minority ownership oppression cases, employment disputes, etc;
(c) valuation for compliance-oriented engagements, for example:
(i) financial reporting; and
(ii) tax matters such as corporate reorganizations; income tax, property tax etc. compliance; purchase price allocations.
(d) valuation for other purposes like the valuation for planning, internal use by the owners etc.
(e) Valuation under Insolvency and Bankruptcy Code.
4. This Standard provides a broad framework of generally accepted principles, theories and procedures.
5. 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
6. A valuer shall follow all requirements of this Standard in the valuation of a business.
7. This Standard describes the basic principles which govern the valuer’s professional responsibilities and which shall be complied with whenever an engagement to estimate value is carried out.
8. A valuer shall not apply this Standard, where any requirement of this Standard is inconsistent with
(a) the requirements prescribed under: or
(b) valuation procedures specified by
any law, regulations, rules or directions of any government or regulatory authority, or Court order.
In such cases, the valuer shall follow the requirements prescribed by any law, regulations, rules or directions of any government or regulatory authority, or Court order.
Significant Elements
9. Business Valuation is the act or process of determining the value of a business enterprise or ownership interest therein.
10. A valuer shall apply valuation approaches and valuation methods, as described in Indian Valuation Standard 103 Valuation Approaches and Methods, and also use his professional judgment which is an essential component of estimating value.
11. When valuing a business or business ownership interest, a valuer may express either an exact number or a range of values.
Valuation Methodology
12. In performing a valuation assignment, a valuer shall:
(a) define the premise of the value;
(b) analyse the asset to be valued and collect the necessary information;
(c) identify the adjustments to the financial and non-financial information for the valuation;
(d) consider and apply appropriate valuation approaches and methods;
(e) arrive at a value or a range of values; and
(f) identify the subsequent events, if any
Premise of the value
13. Premise of the value refers to the conditions how an asset is deployed.
14. The premise shall always reflect the facts and circumstances underlying each valuation engagement.
15. Determining the business value depends upon the situation in which the business is valued, i.e, subsequent events after the valuation date.
16. Premises of value are explained in detail in Indian Valuation Standard102 Valuation Bases.
Analysis of asset to be valued
17. The analysis of the asset to be valued shall assist the valuer in considering, evaluating, and applying the various valuation approaches and methods to the valuation engagement.
18. The nature and extent of the information needed to perform the analysis shall depend on the following:
(a) nature of the asset to be valued;
(b) scope of the valuation engagement;
(c) the valuation date;
(d) the intended use of the valuation;
(e) the applicable Indian Valuation Standard;
(f) the applicable premise of value;
(g) assumptions and limiting conditions; and
(h) applicable governmental regulations or regulations prescribed by other regulators or other professional standards;
19. In analysing the asset to be valued, the valuer shall gather, analyse and adjust the relevant information necessary to perform a valuation, appropriate to the nature or type of the engagement. Such information shall include:
(a) non-financial information;
(b) ownership details;
(c) financial information; and
(d) general information.
The detailed guidance in this respect is laid down in Indian Valuation Standard 201Scope of Work, Analyses and Evaluation.
20. A valuer shall read and evaluate the information to determine the reasonableness of information.
21. Even though the above mentioned procedure is presented in a manner that suggests a sequential valuation process, valuations involve an ongoing process of gathering, updating, and analysing information. Accordingly, the sequence of the requirements and guidance in this Standard may be implemented differently at the option of the valuer.
22. If the historical financial statements of the asset to be valued are not considered to be reflective of its future business performance, the valuer should understand the rationale for the same.
23. The conditions, rights and obligations of ownership right are usually mentioned in the legal document such as articles of association, bye-laws, shareholders agreement, partnership agreements, etc of the asset to be valued. These documents may consider certain restrictions or give certain benefits for ownership rights for certain groups of stakeholders. A valuer shall consider and incorporate the same in the valuation of the ownership interest of the business.
24. The type, availability, and significance of such information may vary with the asset to be valued.
Adjustment to information from financial statements
25. Adjustment shall be made to the historical financial statements, if appropriate, to reflect the appropriate asset value, income, cash flows and/or benefit stream, as applicable, to be consistent with the valuation method(s) selected by the valuer.
26. Financial information adjusted to be analysed include those of the underlying company and any entities used as comparable entities to the extent available in public domain.
27. Adjustments to financial information are modifications to reported financial information which is relevant and significant to the valuation process. Adjustments may be appropriate for the following reasons, amongst others:
(a) to present financial data of the underlying and comparable companies on a consistent basis;
(b) to adjust revenues and expenses to levels that are reasonably representative of continuing operations;
(c) to adjust for non-operating/non-recurring assets and liabilities, and any revenues and expenses related to the non-operating items.
28. Adjustments to the financial information are made for the sole purpose of assisting the valuer in reaching a value.
Valuation Approaches and Methods
29. Generally, the following three main valuation approaches are adopted to perform the business valuation in correlation with the valuation approaches and methodologies prescribed under Indian Valuation Standard 103 Valuation Approaches and Methods :
(a) market approach;
(b) income approach; and
(c) cost approach
Market approach
30. Market approach is a valuation technique 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.
31. The following are the common methodologies for the market approach:
(a) Market Price Method;
(b) Comparable Companies Multiple Method; and
(c) Comparable Transaction Multiple Method
Income approach
32. Income approach is the valuation technique that converts future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.
33. The following are the common methodologies for the market approach
(a) Discounted Cash Flow (DCF) Method;
(b) Relief from Royalty (RFR) Method; and
(c) Multi-Period Excess Earnings Method (MEEM); and
(d) With and Without Method (WWM);
Cost approach
34. Cost approach is a valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).
35. The following are the commonly used valuation methods under the income approach:
(a) Replacement Cost Method; and
(b) Reproduction Cost Method
36. A valuer shall select and apply appropriate valuation approaches, methods and procedures to the extent relevant for the engagement.
37. The requirements of this Standard shall be followed consistently in addition to the requirements as contained in Indian Valuation Standard 103 while selecting and applying the valuation approach.
38. In the event of valuation under the premise of liquidation, valuation should be based on the values of assets and liabilities at their realizable or their settlement values. Further, in doing so, the valuer should consider the costs attached to realization and liquidation
Value under liquidation
39. Liquidation value is the amount that will be realised on sale of an asset or a group of assets when the business is terminated.
40. The value under liquidation would be relevant in case the basis of valuation is liquidation value.
41. In the event of valuation of ownership interest under the premise of liquidation, it may be relevant to consider the realizable values of assets of the entity after considering costs including tax outgo that would be incurred in case of sale of the assets as also on the distribution of proceeds among the shareholders.
42. Liabilities could be considered at their settlement values.
Rule of Thumb or Benchmark Method
43. Rule of thumb or benchmark indicator is used as a reasonable check against the values determined by the use of other valuation approaches in a valuation engagement.
44. Rule of thumb may provide insight into the value of a business or business ownership interest. Some of the examples of rule of thumb or benchmark valuation would be value based on transaction multiples for capacity or turnover.
45. It shall not be used as the only method to determine the value of the asset to be valued.
46. Value indications derived from the use of rules of thumb method shall not be given substantial weight unless they are supported by other valuation methods and it can be established that knowledgeable buyers and sellers place substantial reliance on them.
47. A valuer shall set forth in the report the rationale and support for the valuation methods used.
Treatment of non-operating assets and inter-company investments
48. Apart from operating assets, entities hold non-operating assets. Such assets should be valued based on their realizable values net of costs and outgoes and added to the value arrived under the various approaches to derive the value for ownership interest.
49. Inter-company adjustments or cross holdings in the business valuations should be considered at fair value.
Consideration of Capital Structure of the business
50. A business is usually financed by a combination of equity and debt. In case the valuer has to segregate the Enterprise Value of the business between equity/types of equity and debt, the value of debt may or may not be equal to its book value/carrying value.
Value
51. Value is an estimate of the value of a business or business ownership interest, arrived at by applying the valuation procedures appropriate for a valuation engagement and using professional judgment as to the value or range of values based on those procedures.
52. The value shall be based upon the applicable standard of value, the purpose and intended use of the valuation, and all relevant information available as of the valuation date in carrying out the value for the valuation engagement and on value indications resulting from one or more valuation methods performed under the valuation process.
53. In arriving at the value, the valuer shall:
(a) correlate and reconcile the results obtained under the different approaches and methods used;
(b) assess the reliability of the results under the different approaches and assign weights to value indications reached on the basis of various methods;
(c) the selection of and reliance on appropriate methods and procedures depends on the judgment of the valuer and not on any prescribed formula. One or more approaches may not be relevant to a particular situation, and more than one method under an approach may be relevant;
(d) the valuer must use informed judgment when determining the relative weight to be accorded to indications of value reached on the basis of various methods, or whether an indication of value from a single method shall be conclusive. In any case, the valuer shall provide the rationale for the selection or weighting of the method or methods relied on in reaching the conclusion;
(e) in assessing the relative importance of indications of the value determined under each method, or whether an indication of value from a single method shall be the value, the valuer shall consider factors such as:
(i) the applicable premise of value;
(ii) the purpose and intended use of the valuation;
(iii) whether the underlying business is an operating company, a real estate or investment holding company, or a company with substantial non-operating or excess assets;
(iv) the quality and reliability of data underlying the value;
(v) such other factors that, in the opinion of the valuer, are appropriate for consideration.
Effective Date
54. Indian Valuation Standard 301BusinessValuation, shall be applied for the valuation reports issued on or after…… , 20181.
