Indian Valuation Standards notified, effective from 01 July 2018
The Institute of Chartered Accountants of India has notified the Indian Valuation Standards (IVS). These Standards are effective for the valuation reports issued on or after 1st July, 2018. This has been necessitated amid increasing need of standardizing the practices, principles and procedures followed by valuation professionals supported by Valuation Standards, Guidance Notes, Interpretations and other technical matters. These Valuation Standards will be applicable for all valuations under the Companies Act, 2013 mandatorily. In respect of valuations under any other Act, these Standards are re commendatory.
Following are the Indian Valuation Standards:
1. Indian Valuation Standard 101- Definitions
2. Indian Valuation Standard 102- Valuation Bases
3. Indian Valuation Standard 103- Valuation Approaches and Methods
4. Indian Valuation Standard 201- Scope of Work, Analyses and Evaluation
5. Indian Valuation Standard 202- Valuation Report and Documentation
6. Indian Valuation Standard 301- Business Valuation
7. Indian Valuation Standard 302- Intangible Assets
8. Indian Valuation Standard 303- Financial Instruments
IVS 102- Valuation Bases
IVS 102 prescribes the major valuation bases, fundamental assumptions of valuations and provides the premises of values. Valuer such as fair value, participant specific value and liquidation value – these are the three valuation bases. Participant specific value means the estimated value of an asset or liability from the point of view of acquirer considering the advantages and disadvantages that may arises to him.
Premise of value refers to present and future use of an asset. Some common valuation bases are highest and best use, going concern value, as is where is basis, orderly liquidation and forced transaction. A valuer can choose any premise of value depending on the selection of valuation bases.
IVS 103- Valuation Approaches and Methods
This Standard provides guidance on three main approaches of valuation- market approach, income approach and cost approach. There are various valuation methods suitable for each approach. Selection of approach and methods by a valuer are based on valuation bases and premises of value. Some of the valuation methods given in this Standard are discounted cash flow method, market price method, comparable companies multiple method, relief from royalty method, replacement cost method and reproduction cost method, etc.
IVS 201- Scope of Work, Analyses and Evaluation
It provides guidance on how a valuer should determine its scope of work & responsibilities under an engagement of valuation, to what extent a valuer should make analyses and evaluations of facts and what are the responsibilities of the valuer while using work of other experts. According to IVS 201, the terms and conditions of an engagement must be clear to avoid any misunderstanding between a valuer and a client. A valuer should make analyses and evaluations through discussions, surveys, inspections and various calculations, etc. and the extent of such analyses and evaluation depends on the terms and purpose of the engagement.
IVS 202- Valuation Report and Documentation
According to IVS 202, nature of the engagement of valuation purpose decides the form and content of a valuation report. It prescribes significant elements and minimum contents of a valuation report, basis for preparation of a valuation report and provides guidance on sufficient and appropriate documentation of the engagement. A valuer should document the methods & procedures adopted for valuation, relevant evidences obtained, its observations based on those evidences and management representations.
IVS 301- Business Valuation
IVS 301 is applied for valuation of an entire business enterprise or valuation of ownership interests in a business enterprise. In such type of valuations, a valuer should adopt following six steps:
1. Defining the premise of the value in accordance with IVS 102;
2. Analysis of the business to be valued and collection of relevant information in accordance with IVS 201;
3. Identification of the adjustments required to be made, if any, to the information collected in the last step for the valuation;
4. Selection of valuation approach and method in accordance with IVS 103;
5. Calculation of value or range of values as per approach & method selected in the last step; and
6. Identification of subsequent events and their adjustments to the determined value, if any.
IVS 302- Intangible Asset
This standard shall be applied in the valuation of an intangible asset including goodwill alike any other IVS. A valuer should value an intangible asset at fair value from the perspective of market participants. It prescribes various methods for measuring the fair value which includes relief-from-royalty method, greenfield method, distributor method, reproduction cost method and replacement cost method, etc. The valuation method is based on whether the intangible asset is internally generated or externally acquired.
IVS 303- Financial Instruments
This Standard is applied for the valuation of financial instruments, i.e., financial assets, financial liabilities and equity instruments. It establishes the principles, methodology and other considerations for valuer. A valuer can choose market approach or income approach or cost approach in accordance with IVS 103 and valuation methods accordingly. For the valuation of financial instruments, observable inputs should be used more and should avoid use of unobservable inputs.