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Overview of Technical Valuation

Presented By Amish Patel

at Study Course on Valuation offered by

The Chamber of Tax Consultants, Mumbai on 12th June, 2015

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Valuation ??!!!

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VALUATION OF TANGIBLE FIXED ASSETS

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COST

PRICE

VALUE

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Security against Bank Loan

Sale

Purchase

Insurance

Restructuring

Disinvestment

Arbitration

Loss Assessment, Damages & Loss of Profit

Analysis

Independent Expert testimony

Buy-sell disputes & post-Acquisition Disputes

Lease Rental Determination

Financial Reporting -IFRS / USGAAP / IGAAP

Partition

Impairment Review

Taxation

Management Review

Purchase Price Allocation

Merger & Acquisitions

Reserve Price Determination

Fund Raising

Joint Venture

Purpose of Valuation

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INTERNATIONAL VALUATION STANDARDS COMMITTEE (IVSC) has published

International Valuation Standards(IVS)

INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) has published

International Financial Reporting Standards(IFRS)

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As per the International Valuation Standards published by IVSC, Real Estate is defined as the physical land and those human-made items, which is attached to the land. It is the physical, tangible ‘thing’ which can be seen and touched, together with all additions on, above or below the ground.

Real Estate:

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As per the International Valuation Standards published by IVSC, Real Property includes all the rights, interests and benefits related to the ownership of real estate. An interest(s) in real property is normally demonstrated by some evidence of ownership (e.g. a title deed) separate from the physical real estate. Real property is a non-physical concept.

Real Property:

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As per the International Valuation Standards published by IVSC, The earth’s surface, the space beneath which extends to the centre of the earth, and the space above which extends to the sky. The ownership of land and the rights attached to the ownership are subject to the laws of a particular State.

Land:

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Means a structure or enclosure constructed with any materials whatsoever for any purpose, whether used for habitation or otherwise.

Building:

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Assets that are inextricably combined with others and that may include specialized buildings, machinery and equipment.

Plant:

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Individual machines or a collection of machines. A machine is an apparatus used for a specific process in connection with the operation of the entity.

Machinery:

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Other assets that are used to assist the operation of the enterprise or entity. The above mentioned definitions of Plant, Machinery and Equipment are as per the IVS

Equipment:

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As per the International Valuation Standards published by

IVSC, Market Value is the estimated amount for which an

asset or a liability should exchange on the date of

valuation between a willing buyer and a willing seller in an

arm’s length transaction, after proper marketing and

where the parties had each acted knowledgeably,

prudently and without compulsion.

Definition

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As per IVS, Fair Value is the estimated price for the transfer

of an asset or liability between the identified

knowledgeable and willing parties that reflects the

respective interests of those parties.*

• This definition does not apply to valuations for Financial

Reporting…

• As per IFRS 13 Fair Value Measurement, 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 measurement date.

Definition

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To draw near; to advance near to a point aimed at; to approximate; a way of coming forward or reaching a person or place, access.

A way of doing anything; mode; procedure; process; a regular orderly definite procedure.

Approach:

Method:

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A basis of value is a statement of the fundamental

measurement assumptions of a valuation

Basis of Valuation fall into Three principal categories:

I. Market Value

II. Investment Value and Special Value

III. Fair Value (these three basis are well described in IVS)

IV. Valuation may require the use of different Bases of

Value that are defined by statute, regulation, private

contract or other document like various valuation

measurement bases found in IFRS.

Basis of Valuation

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As per the IVS, Investment Value is the value of an asset to

the owner or a prospective owner for individual or

operational objectives.

Special Value is an amount that reflects particular

attributes of an asset that are only of value to a special

purchaser.

Definition

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Physical Legal Social Economic Utility Marketability Transferability Scarcity Value means present worth of future benefit In valuation of tangible assets- what is valued is intangible right of the owners or possessor in owning or possessing tangible assets.

Commandments of Valuation:

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(i) MARKET APPROACH - Direct Sales comparison Method - Hypothetical Plotting Scheme Method - Hypothetical Plotting Scheme Method - Belting Method (ii) COST APPROACH - Depreciated Replacement Cost Method (iii) INCOME APPROACH - Income (Rent) Capitalization Method

Approach to Valuation:

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Valuation of Real Estate

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For Valuation of Real Estate

Case Study – I

Commercial Building – New Delhi

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Value Indicators Market Value (USD)

Date of Value

Sales Comparison Approach (As Improved Office)

$ 69 000 000 1st October, 2008

Depreciated Replacement Cost Method under Cost Approach (Check Method)

$ 72 000 000 1st October, 2008

Rent Capitalization Method under Income Approach (Check Method)

$ 65 000 000 1st October, 2008

Final Conclusion of Value $67 000 000 1st October, 2008

Summarization of Valuation

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Few Court judgements, which have laid out and strengthened some important principles of valuation (1) In case of V.C. Ramchandra vs. C.W.T. (126 ITR 157) 1980, Hon’ble High

Court of Karnataka held that “If there are more than one valuation of same property, one which is nearer to correct market value alone should be adopted”. This judgement clearly establishes that average value of property estimated by two different methods are not permissible in law.

(2) In case of C.W.T. V/s. Smt. Shakuntala Mehta (2000) Hon’ble High

Court of Delhi has held that, Average of Two Valuation Method is not permissible.

(3) In case of famous Bank Natinalisation case of R.C. Cooper vs. Union of

India (AIR 1970 SC 564) also Hon’ble Supreme Court held that “Several methods of valuation may be available. Valuer should choose method which gives close to Actual Valuation”.

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Few Court judgments …. Contd…. (4) In case of Hays will Trust case 1971 (1 WLR 758). British Court

held that “There is a range of prices of property. Only competent valuer could find the fair market value of the property. In other words best possible price of the property may not be highest prevalent rate in the locality.

(5) In case of Nippon Electronics Ltd V/s C.I.T., (1978), Hon’ble

High Court of Karnataka has held that, Method to arrive at good judgment on Value of a property, you must have knowledge of books of Reference, knowledge of provisions of Laws and should have modern mind.

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For Valuation of Real Estate

Case Study – II

Port Facility at Sharjah, UAE

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For Valuation of Real Estate

Case Study – III

Industrial Land

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For Valuation of Real Estate

Case Study – IV

Commercial Mall

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Valuation of Plant & Machinery

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General Purpose

Machinery

Special Purpose

Machinery

Custom Built

Machinery

Replacement Cost Reproduction Cost

Age Effective Age

Physical Life Economic Life

Depreciation Obsolescence

Gross Current Replacement

Cost

Depreciated Replacement

Cost

Scrap Value Salvage Value

Basic Definitions

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1 • Instruction from client

2 • Scope of Work

3 • Location of Plant & Machinery

4 • Purpose for which Valuation is required

5 • Date of Valuation

6 • Site Visit

7 • Micro & Macro Identification of PME

8 • Market Survey, Data Analysis & Report Writing

Procedure for the Valuation of Plant & Machinery

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ABC Analysis Process Flow

Diagram

Machinery

Layout

Plant Visit

Preparation of

Inventory

• Macro & Micro

Identification

Assess the

Condition of

Plant &

Machinery

Review of all licenses,

permits and consents of

regulatory authority

Verification with Fixed

Asset Register (F.A.R.)

Checklist for the Valuation of Plant & Machinery

Data Collection

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A. Value in existing use

in-situ

B. Value in existing use

ex-situ

C.Value in alternative

use ex-situ

D.Value in alternative

use in-situ

Valuation of P & M can be done under following

Scenarios

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Data Analysis

Cost

Market

Income

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Assumptions are matters that are reasonable to accept as fact in

the context of valuation assignment without specific investigation

or verification. They are matters that, once stated, are to be

accepted in understanding the valuation.

Special Assumption is an assumption that either assumes fact that

differ from the actual facts existing at the valuation date or that

would not be made by a typical market participant in a

transaction on the valuation date.

Assumptions and Special Assumptions must be reasonable and

relevant having regard to the purpose for which valuation is

required.

Assumption & Special Assumption

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• From Market Inquiry / By Quotation

• From Personal Data Bank

• By Indexation

Calculate G.C.R.C.

• Method of Depreciation

• Technological, Functional & Economic Obsolescence

• Business Enterprise Equation

Depreciation & Obsolescence

• GCRC – Depreciation ≈ Market Value Subject to potential profitability

Depreciated Replacement Cost

(D.R.C.)

Cost Approach

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Depreciated Replacement Cost

=

GCRC - Depreciation

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DRC is subject to adequate profitability or justified service potential

Is Depreciated Replacement Cost (DRC) Equal to Market Value???

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Case Studies on Valuation of Plant & Machinery

1 Pellet Plant & Slurry Pipe Line

2 Mining

3 RASLANUF

4 Construction Company

5 Air Craft

6 Steel Unit

7 Oil Depot

8 On Shore Rigs

9 Companies Act, 2013

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Report Writing means the information and opinion, which

the client is seeking to be put in to words in the best

possible manner. Important decisions depend on the

information & advice given in a report. Advice should not

be obscurely expressed, it should be skillfully worded to

convey the meaning as intended.

Report Writing

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A Methodical Series of complete paragraphs for giving

facts to be framed. Each paragraph must

be independent and logically follows the

earlier paragraphs.

B Well Set

Out

One can refer any particular part

without difficulty. Appropriate title,

heading and sub headings should be

given to each paragraph

Essentials of Reports

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C Continuity It should be read as complete narrative from

start to finish. No obvious break between

various parts. Report is an essay on technical

point written in a simple language/words for

the client. Schedules and Appendices should

not be the part of the main report

D Concise &

Definite

Keep the report to the length required to

impart the facts and opinions needed. It

should contain definite facts, opinion and

advice in clear and unambiguous manner

and words.

Essentials of Reports

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A Certain dignity of tone to be preserved, so that facts

and opinions can be expressed convincingly;

B Choice of words: Use simple words having precise

meaning rather than ornamental words. There

should be no exaggeration. Avoid meaningless words

like ‘Pretty good, Quite fair, Needless to say, In my

opinion’ etc;

C Avoid Personal pronoun.

Other important points for Report Writing

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D Avoid Technical phrases;

E Use punctuation at correct places

F Supporting documents:

Schedules, Tables, Graphs, Maps, Plans, Layout,

Photographs, Expert’s report etc. are decisive in

achieving effective communication and must attach

as annexures

Other important points for Report Writing

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• Preamble PART – I

• Statement of Valuation of Buildings and Plant & Machinery

PART – II

• Annexures PART – III

General Structure of the Report

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Submit along with the Covering Letter.

Submission of Report

Preservation of Data

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Conclusion:

• Understand the ‘CASE’ and ‘ASSET’ without any predetermined mindset • Understand the Scope of Work • Keep your THINKING ‘ VERY SIMPLE’ about the CASE and ‘ASSET’ • Apply Basic Principles of Valuation • Apply COMMON SENSE

Valuation is nothing but, It is an Art of application of COMMON SENSE after understanding the purpose, scope of work, assets, facts & circumstances associated with it

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