In the previous article, we discussed regarding various provisions of Companies Act, 2013, where valuation is required, profession of registered valuers in India and brief of Valuation Standards issued by ICAI.
In this article, we are going to discuss regarding procedure to be adopted or followed while performing a valuation assignment. Followings are the seps to be taken: -
I. Analyse the asset to be valued and collect the necessary information
II. Define the Valuation Base
III. Select the premise of Value
IV. Consider and apply appropriate valuation approaches and methods
V. Arrive at a value or a range of values
In this article, broadly, we will discuss point IV. Valuation approaches and methods and give a brief introduction of rest.
I. Analyse the asset to be valued and collect the necessary information: -
The first step of the valuation procedure is to analyse the asset being valued and collect the necessary information (financial and non-financial). This is the very much crucial steps amongst all other steps as information analysed and collected in this step shall assist the Registered Valuer in selecting the valuation base, premise of value and appropriate valuation methods.
The nature and extent of the information required to perform the analysis shall depend on the following:
· nature of the asset to be valued;
· scope and purpose of the valuation engagement;
· the valuation date;
· the intended use of the valuation;
· the applicable ICAI Valuation Standard;
· the applicable premise of value;
· assumptions and limiting conditions; and
· applicable governmental regulations or regulations prescribed by
· other regulators or other professional standards;
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.
II. Define the Valuation Base: -
As per Valuation Standard-102, Valuation base means the indication of the type of value being used in an engagement. Different valuation bases may lead to different conclusions of value. Therefore, it is important for the valuer to identify the bases of value pertinent to the engagement. This Standard defines the following valuation bases:
· Fair value;
· Participant specific value; and
· Liquidation value
III. Select the premise of Value: -
As per Valuation Standard-102, Premise of Value refers to the conditions and circumstances how an asset is deployed. In a given set of circumstances, a single premise of value may be adopted while in some situations multiple premises of value may be adopted. Some common premises of value are as follows:
· highest and best use;
· going concern value;
· as is where is value;
· orderly liquidation; or
· forced transaction.
The premise shall always reflect the facts and circumstances underlying each valuation engagement. Determining the business value depends upon the situation in which the business is valued, i.e., the events likely to happen to the business as contemplated at the valuation date.
IV. Consider and apply appropriate valuation approaches and methods: -
Internationally following are the three main valuation approaches: -
· Market Approach;
· Income Approach; and
· Assets Approach.
ICAI VS-103, also defines these three
approaches. These approaches further contain different valuation methods within
their criteria as follows: -