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  2. 2. Valuation is not just figure but it calibrates different knowledge wisdom of art, science, social economics, local laws regulation and many human and potential hidden dimensions. 2/49
  3. 3. KEYTERMS IN VALUATION Important terms used in valuation by various stakeholders (persons, entities, government etc.) who deals in incurring and/or acquiring “Cost” i.e.. incurred cost, decides and transact “Price” Base on cardinal or perceive principle of “Valuation” as opinion and/or judgment arrived in. 3/49
  4. 4. DOMAIN OFVALUATION • Business and Transaction Valuation for taxes and allied requirements • Share, Goodwill, Patent, Trademark Valuation (Intangible Assets). • Human Resource Valuation • Fixed Assets Valuation Inventory Valuation ( Current Stocks) • Merger , Acquisition, Reconstruction and Amalgamation.( Companies' Act 2013) • The Assets Valuation shall cover Fair Valuation as per Ind As. • Valuation under IBC Code 2016, ( For RDDBFCB Act and SARFESAI Act )for resolution, liquidation, for Corporate Debtors (Bank/FIs/Companies/LLP, • Individual, Partnership Firms with rules as frame there in from time to time. • Enterprise Valuation, Fair Valuation and Liquidation Valuation. • Assessment of Property Transition for Village Panchayat, Nagrapaliks, Municipal corporation, State Revenue Taxes, Vehicles, Road-Toll Taxes and allied requirements and allied., Registration and Court Fees and allied. • Valuation under Direct Taxes: Capital Gain Tax, Transfer pricing provisions : Comparable uncontrolled Price (CUP), Cost Plus Methods, Resale Price Method, Profit Split Method, Transaction Net Margin Method & Indirect Taxation. • Valuation Under Indirect Taxation: GST ACT Valuation with Rules frame there in. 4/49
  5. 5. OTHER MATTERS TO BE ATTAINED FOR – Employee Stock Ownership Plan (ESOP). – Solvency and Fairness Opinions – Damage Assessment – Dissenting Shareholder Actions – Dispute resolution mechanism. – For arriving for dissenting shareholders claims – In Arbitration and out of Court Settlement – Marital Dissolutions 5/49
  6. 6. WHAT DRIVESVALUE? Goods and services are assets when received & used Control = ability to direct use of & obtain substantially remaining benefits from asset & ability to prevent others from doing so Benefits of an asset are potential cash flows (inflows or savings in outflows) obtained directly or indirectly by using asset to– * Produce goods or provide services * Enhance the value of other assets * Using the asset to settle liabilities or reduce expenses * Selling or exchanging the asset * Pledging the asset to secure a loan * Holding the asset J. B. M 6/49
  8. 8. ENTERPRISE VALUE • Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors (secured and unsecured) and shareholders (preferred and common). . 8/49
  9. 9. LIQUIDATION VALUE Liquidation value is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation value is typically lower than fair market value. Liquidation value may be either the result of a forced liquidation or an orderly liquidation. . 9/49
  10. 10. WHYVALUATION IS DONE ?  Tax : (Direct, Indirect & State Taxes) For Estate/Gift, Buy/Sell Agreements  Bankruptcy and Litigation – Liquidation or Reorganization – Patent Infringement – Partner Disputes – Economic Damages  Financial Reporting – Purchase Price Allocation, Impairment Testing and Stock Options and Grants, etc.  Strategic Planning/Transaction – Value Enhancement – Business Plan/Capital Raising – Strategic Direction, Spin-Offs, Carve Outs, etc. – Acquisitions, Due Diligence . 10/4 9
  12. 12. Valuation Approaches Overview of Valuation Approaches Is the Business Enterprise a viable, operating entity? No Yes Liquidation Approach • Asset-Based Methodology • Income-Based Methodology • Capitalized cash flow / earnings • Capitalized EBIT / EBITDA • Market comparables • Other multiples based approaches (Rules of Thumb) Going Concern Approach • Asset-Based Methodology • Orderly vs. forced
  13. 13. NETASSET BASED METHOD Net Assets/Book Value approach indicates the Value of the Business by adjusting the assets and liabilities appearing in the Balance Sheet of the Company which is being valued as the Value Analysis date. . 13/4 9
  15. 15. LAND & BUILDING •Under Ind. AS16, Assets classification and Valuation measurement (Tangible Assets ) shall Cover For Property Like Real Estate Properties, Plant and Machinery, Utilities, Furniture and Fixtures, Vehicles etc and can be Grouped based on entity specific requirements. 15/4 9
  16. 16. LAND • Like Agriculture Land, Non Agriculture Land, Specific Intended Use Land known as N.A. land Industrial, Residential, Commercial, Public Utilities and services For Railways, Port, Civil Aviation, State Transport & Bus Depots, Ware Houses for Water ways, Public Road and like Garden Amusement, Archeological and related sites etc. • Land: From Ownership perspective of various entity i.e. owned and/or lease (Short term or Long term) with riders with intended uses, covenants etc. • Based on above with Valuation of Intended purpose valuation are required to be carried out for Various Stake holders and implication to entities 16/4 9
  17. 17. BUILDING • Residential Buildings • Industrial Buildings • Commercial Buildings • Hotel, Tourism, Leisure’s and amusement Parks • Buildings related to Roads, Marine and Air Services infrastructure, Logistic and Ware housing etc. • Buildings for of Government, Local Bodies owned Like, Metropolitan Cities, Municipal Corporations, Panchayat, Public Services, Health like water, sanitation, waste deposal and environment supporting systems. • Other if any. 17/4 9
  18. 18. PLANTAND MACHINERY • Plant and Machinery related Production of Goods and Services to Specific Industries: Engineering, Chemical & Process Plants, Marine Vessels, Air, Vehicles, Power Sectors Like Hydro, Thermal, Nuclear, Equipments for Agricultures, Deference Equipments Like Air, Marine and Army Equipments on Land, Air, Water and distance war equipments like Missile and Aero Space Engineering, Mining Mineral, Exploration, Dragging equipments etc. Ware housing and Logistic Managements and allied. 18/4 9
  19. 19. OTHER TANGIBLEASSETS • Inventory Inventory in terms of goods for sale, organizations manufactures , Service – providers and and not-for - profit - also have inventories (fixtures, furniture, supplies, etc.) that they do not intend to sell. Manufacturers', distributers and wholesalers' inventory tends to cluster in warehouses . Retailer's inventory may exist in a warehouse or in a Shops or store accessible to Customers Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. In manufacture, trade, warehousing and services are mainly classed as : • Raw materials and components scheduled for use in making a product. • Work in progress : WIP - materials and components that have begun their transformation to finished goods. • Finished goods : Goods ready for sale to customers. • Goods for resale - returned goods that are salable. • Stocks in transit. • Consignment stocks • Maintenance supply In servicing of Products during Installation, commissioning trial run etc. Inventory in Agriculture, Marine, Explorations, Minerals, Mines, Construction, Farming, Animal Husbandry etc. 19/4 9
  20. 20. VALUATION OFINTANGIBLEASSETS • An intangible asset is a non-monetary asset that manifests itself by its economic Properties. It does not have physical substance but grants rights and economic benefits to its owner. • An intangible asset is distinguishable from goodwill. Goodwill is any future economic benefit arising from a business or a group of assets which is not separable from the business or group of assets in its entirety. • Valuations of intangible assets are required for many different purposes including acquisitions, mergers and sales of businesses or parts of businesses, purchases and sales of intangible assets, reporting to tax authorities, litigation and insolvency proceedings, and financial reporting. 20/4 9
  21. 21. MODESOF ACQUISITIONOFIA J. B. Mistri & Co. 21/49 IA Acquired through Exchange of assets Governmet grant Business combination Internally generated
  22. 22. VALUATION IN FINANCIAL STATEMENTS • In many cases use of value in financial report is an alternative option to historical cost, e.g. • IndAS 2 – Inventories • IndAS 16 – Property, plant and equipment • IndAS 40 – Investment property – although if cost adopted value must be shown in notes to accounts • IndAS 106 - Exploration for and Evaluation of Mineral Resources  First Time Adoption of IndAS (IndAS-101)  Fair Value Measurement (IndAS-113)  Financial Instruments (IndAS- 109) Business Combinations (IndAS – 103) J. B. Mistri & Co. 22/4 9
  23. 23. J 23
  24. 24. PRINCIPLE OF HABU AND LALU HIGHEST AND BEST USE/USABLE(HABU) Highest and best use is that use that would produce the highest value for a property, regardless of its actual current use. LOWEST AND LEAST USE / USABLE (LALU) Lowest and least use is that may use would produce the least value for a property, regardless of its actual current use.(Leftover land area after exploration of Minerals or/ and polluted and unfriendly environmental asset/lands, encroachment ) J. B. Mistri & Co. 24/4 9
  25. 25. Page 25 Valuation Approaches Valuations – Asset Based Methodologies • Asset based methodologies are most commonly used to value holding companies, real estate and equipment • Most common asset based techniques: - Liquidation Value • Consider using if business is not a going concern • Orderly vs. Forced • Tax considerations - Adjusted Net Book Value • Commonly used to value holding companies • Tax considerations - Replacement Cost
  26. 26. Page 26 Valuation Approaches Valuations – Asset Based Methodologies Example Book Value vs. Going Concern Value vs. Liquidation Value Assets Book Value Going Concern Value Liquidation Value Cash 1,000 1,000 1,000 Accounts Receivable 1,500 1,500 700 Inventory 800 800 600 Prepaids 200 200 - Land 5,000 8,000 7,000 Equipment 2,500 2,500 1,000 11,000 14,000 10,300 Liabilities Accounts Payable 1,000 1,000 1,000 Long term debt 2,500 2,800 2,500 3,500 3,800 3,500 Net Assets 7,500 10,200 6,800 Holdco. Co. Balance Sheet As at December 31, 2003
  27. 27. Page 27 Valuation Approaches Income Based Methodologies – What are they and When are they Appropriate? • Underlying premise: - Profitable company earns a reasonable rate of return on the invested assets - Value is calculated in relation to the cash flow or earnings available to the stakeholders - Value determined by converting anticipated future benefits to a present single amount • Separate consideration of excess or redundant assets that may be extracted from operating business without impairing operations
  28. 28. Page 28 Valuation Approaches Income Based Methodologies • Some possible methodologies: - Capitalized Earnings / Cash Flow - Capitalized EBIT or EBITDA - Discounted Cash Flow - Other multiples – revenue, book value, etc. • Appropriate multiples or rates of return developed through: - Traditional financial market models • Capital Asset Pricing Model, Weighted Average Cost of Capital, Build-Up Approach - Public company comparables – trading and transactional information - Analysis, experience and judgment
  29. 29. Market Value Added Approch J. B. Mistri & Co. 29
  30. 30. J. B. Mistri & Co. 30
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  32. 32. Page 32 Valuation Approaches Income Based Methodologies – Earnings Based • Earnings based methodologies are most commonly used to value operating and going concern businesses • Most common earnings based techniques: - Capitalized Earnings or cash flow method • Bases include EBITDA / EBIT / After tax earnings / Cash flow • (Use multiple to convert constant stream of earnings or cash flow to a value - Discounted Cash Flow (“DCF”) • Present value forecast cash flows
  33. 33. Page 33 Valuation Approaches Income Based Methodologies – Potential Normalization Adjustments • Non-arm’s length transactions • Discretionary compensation • Earnings level – tax minimization incentive versus profit motive • Unusual/non-recurring expenses • Other non-business assets (redundancies) • Existence of related companies / planning vehicles / services businesses • Owner/Manager Remuneration
  34. 34. Earnings measure based on accounting – Capitalisation • Capitalisation rate expressed in percentage refers to investment sum that an investor is willing to make to earn a specified income • The capitalization rate is another term for the rate of returns expected on an investment in fields of commercial real estate; this term is just a ratio of the rate of return to the actual investment made on the commercial real estate project. 34
  35. 35. Capitalisation rate • Suppose an business gives a net operating income of Rs 10,00,000 is valued at Rs75,00,000 • we can calculate the capitalization rate of the building is: • = 10,00,000/75,00,000 = 13.33% • Thus, if the business is sold for 75 lakh, it can also be said that the business was sold at a 13.33% capitalization rate. or Acquiring firm on an investment of 75 lakh can earn an income of 13.33% 35
  36. 36. Valuation Approaches Income Based Methodologies – Factors Impacting Selection of Capitalization Rate. • External Factors - General economic conditions - Opportunities and threats facing company • Industry Factors - Outlook - Barriers to entry • Internal Factors - Strengths and weaknesses facing company - Management - Dependency on key customers or individuals
  37. 37. Page 37 Valuation Approaches Earnings Multiple (P/E RATIO) • Inverse of the Capitalization Rate • Applied to earnings – either historical or future • Cap Rate = Discount Rate – Growth Rate • High risk = High return = Low multiple • Selection of an appropriate earnings multiple requires professional judgement
  38. 38. Page 38 Valuation Approaches Determination of an Appropriate Multiple • Build Up Method – small closely held companies - Risk free rate + risk premium (subjective) • Capital Asset Pricing Method (CAPM) - Large businesses that are comparable to public companies - Based on target company’s risk profile against an average public company - Discount Rate = Rf + (Beta x Equity risk premium)
  39. 39. P/ E ratio The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple. P/E ratios are used by investors and analysts to determine the relative value of a company's shares. 39
  40. 40. Page 40 Valuation Approaches Income Based Methodologies – Example EBITDA EBIT Revenues 125,000 125,000 Expenses before interest and taxes & dep'n (30,000) (30,000) Normalization adjustments: One time professional fees (5,000) (5,000) Market compensation adj. (10,000) (10,000) Rent at market value adj. (10,000) (10,000) EBITDA 70,000 Depreciation (20,000) EBIT 50,000 EBITDA/EBIT multiple 6.0 8.5 Operating Enterprise Value 420,000 425,000 Less: Interest bearing debt (LT and ST) (100,000) (100,000) Add: Redundant assets (eg, excess WC) 15,000 15,000 Fair Market Value Equity 335,000 340,000
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  43. 43. MARKET APPROACH Market multiple approach indicates the Value of the business by comparing it to publicly traded companies and/or market transactions in similar lines of business. The approach based on the segment the business operates as per universal factors affecting market conditions such as demand for products, availabilities of inputs like Raw Materials, infrastructures, price elasticity of demand, tax and duty regime, impact of business cycles etc. An analysis of these comparable companies then gives an opportunity to access the Value of the Business under consideration. J. B. Mistri & Co. 43/4 9
  44. 44. Page 44 Valuation Approaches Valuations – Market Based Methodologies • Market based methodologies are most commonly used to value operating and going concern businesses • Review multiples of comparable companies and transactions in the marketplace • Difficult to find an exact comparable company • Application of public equity market multiples
  45. 45. Page 45 Valuation Approaches Other Multiple Based Approaches – Rules of Thumb Advantages: - Simple to apply - Relevant if widely publicized and used Disadvantages: - No empirical evidence that market actually follows - How to apply (i.e. before debt?) - Wide range of values - Too general for specific company - Sometimes not earnings based (i.e. multiple of sales) Conclusion - Used as a reasonability check most often
  46. 46. Market Transaction (M&A) Approach –In the Guideline Merged and Acquired Company Method, the value of the business is indicated based on multiples paid for entire companies or controlling interests. –Public Market Transaction Approach »Public Buyer or Seller Transactions »Control Value – Private Market Transaction Approach »Private to Private Transactions »Control Value 46/4 9
  47. 47. INCOME APPROACH xas per normal working cycle and its requirements. These cash flows are then discounted at a cost of Capital that reflects the risk of the business and capital structure. –The various forms: »Capitalization of Earnings/Cash Flow Analysis (Gordon Growth Model) » Discounted Cash Flow Analysis (DCF) 47/4 9
  48. 48. Risk Factors Fluctuation in sales/earnings Degree of FL Degree of OL Nature of competition Availability of Subsitute products Level of Government regulations. J. B. Mistri & Co. 48

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