Valuations Emerging Professional Avenues for CMAs By CMA

Valuations (Emerging Professional Avenues for CMAs) By CMA R. K. Patel M. E. (Mech. ), FCMA, M. Sc. (Real Estate Valuation), Dip. In Business Valuation, MIE, FIV, FIIISLA, Chartered Engineer (I), Insolvency Professional (IBBI) Presentation at National CMA Practitioners Convention 2018 (Emerging Professional Avenues : Capacity Building for CMAs ) Organized by The Institute of Cost Accountants of India at Vadodara May 19 -20, 2018

What is Valuation? 1. Is it Art, Science and Practice? 2. An American Judge answered “It is neither an art nor a science, I view it as a mystery!”. 3. Valuation is concerned with legal interests exchanged for money and therefore entails the phenomena of exchange, scarcity and choice that characterizes a “market‟ in the economic sense of the term. 4. Valuation is for Use and Investment; in both cases the purchaser measures the expected return or benefits to be received against cost outlay. 5. Valuer’s task is to express these benefits in money terms and to interpret the relationship between cost and benefit as a rate of return, thus allowing the investor to make a choice between alternatives. May 19 -20, 2018 CMA R. K. Patel 2

Is Valuation Multi-Disciplinary? Valuation is a multi-disciplinary subject involving following disciplines over and above valuation: – • • Economics Law Insurance Accountancy Business processes / engineering Industry Analysis, Sectoral Analysis, Asset Analysis Social Analysis Environmental issues –Internal as well as External • PESTLE Analysis May 19 -20, 2018 CMA R. K. Patel 3

Philosophy of Valuation 1. Features of monetary value of the property: The Valuer does not create the value. It is created by the choices and decisions people make in the marketplace 2. Marketable and non-marketable properties: Title free from reasonable doubt 3. Investment and Non-Investment Properties 4. Above two makes further classification - Marketable Investment Property - Marketable Non-Investment Property - Non-Marketable Non-Investment Property May 19 -20, 2018 CMA R. K. Patel 4

Philosophy of Valuation 5. Purpose of Valuation – Various Purpose (notoriously either for DEBT or DIVORSE or DEATH) 6. Premise of value : Ø Market Value (Liquidation) Ø Value-in-Use (Going Concern) 5. Approaches to Valuation : ØSales/ Market (Comparison Analysis) Method of Valuation ØIncome (Investment Analysis) Method of Valuation ØCost-Summation Method of Valuation May 19 -20, 2018 CMA R. K. Patel 5

Philosophy of Valuation 1. Features of monetary value of the property: The Valuer does not create the value. It is created by the choices and decisions people make in the marketplace 2. Marketable and non-marketable properties: Title free from reasonable doubt 3. Investment and Non-Investment Properties 4. Above two makes further classification - Marketable Investment Property - Marketable Non-Investment Property - Non-Marketable Non-Investment Property May 19 -20, 2018 CMA R. K. Patel 6

Methods of Valuation q Asset Based (Cost) Approach Ø Replacement Cost New Method (RCN) Ø Depreciated Replacement Cost (DRC) Ø Optimized Depreciated Replacement Cost (ODRC) Ø Book (Carrying) Value q Market Approach Ø Comparable (Guideline) Company Multiples Method Ø Comparable Transaction Multiples Method Ø Rules of Thumb Method q Income Approach Ø Income (Benefit) Capitalization Method Ø Discounted Cash (Benefit) Method May 19 -20, 2018 CMA R. K. Patel 7

Statutory Valuations • • • Companies Act, 2013 Income Tax Act, 1961 Reserve Bank of India SEBI Regulations Financial Reporting May 19 -20, 2018 CMA R. K. Patel 8

Provisions under the Companies Act, 2013 which require Valuation Sl. Section no. 1 62(1)C Particulars 2 192(2) 3 230(2)(c)(v) 4 230(3) 5 232(2(d) 6 232(3)(h) Valuation of Assets Involved in Arrangement of Non cash transactions involving Directors Valuation of shares, property and assets of the Company under a scheme of Corporate Debt Restructuring Valuation report along with Notice of creditors/shareholders meeting –Under scheme of compromise/Arrangement. The report of the expert with regard to valuation, if any, would be circulated for meeting of creditors/Members The Valuation report to be made by the tribunal for exit opportunity to the shareholders of transferor Company –Under the scheme of Compromise/Arrangement in case the Transferor company is Listed Company and the Transferee-company is an unlisted Company. 7 236(2) May 19 -20, 2018 Valuation report for Further Issue of Shares Valuation of equity shares held by the Minority Share Holders. CMA R. K. Patel 9

Provisions under the Income Tax Act, 1961 which require Valuation Sl. Section Particulars no. 1 56(2) Valuation Methodology for Issue of Unquoted Equity Shares -Rule 11 UA(2) 2 56(2) Issue of Unquoted Shares (Other Than Equity Shares) - Rule 11 UA(1)(c)(c) 3 56(2) (x) Transfer of Shares and Other Securities 4 50 CA Valuation for Capital Gains 5 92 C Transfer Pricing – International Transactions between Associated Entities 6 9 Indirect Transfer Pricing – Capital Gain arising to Non. Resident on transfer of shares of foreign company 7 236(2) Valuation of Equity Shares held by the Minority Share Holders. May 19 -20, 2018 CMA R. K. Patel 10

Reserve Bank of India - which require Valuation Sl. Section Particulars no. 1 FDI Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 – Notification dated 7/11/2017 2 ODI Direct Investments by Residents in Joint Venture (JV) and Wholly Owned Subsidiary (WOS) Abroad – Notification dated 7/7/2004 May 19 -20, 2018 CMA R. K. Patel 11

SEBI - which require Valuation Sl. no. 1 Regulation Particulars 2 76 A – SEBI (Issue of Capital and Issue of Infrequently Traded Disclosure Requirement) Shares Regulations, 2009 3 8(2) – SEBI(Substantial Acquisition of Frequently Traded Shares as well Shares and Takeover) Regulations, as Infrequently Traded Shares 2011 4 SEBI (Issue of Regulations, 2002 76 – SEBI (Issue of Capital and Issue of Frequently Traded Shares Disclosure Requirement) Regulations, 2009 May 19 -20, 2018 Sweet Equity) Valuation of IPR/ Knowhow (Listed and Unlisted Companies) and Sweet Equity CMA R. K. Patel 12

Financial Reporting under Companies Act, 2013 • International Valuation Standards (IVSs) facilitate cross-border transactions and the viability of global markets through harmonisation and transparency in financial reporting. • Indian Accounting Standards (Ind. ASs) notified under the Companies Act 2013 are converged to the International Financial Reporting Standards (IFRSs) • Valuer’s adherence to market-based definitions, objectivity, and full disclosure of relevant matters are fundamental to the requirements of valuation for financial reporting • Valuers have been recognised as Experts in the Companies Act, 2013 • Valuations under the Companies Act are required to be carried out by only Registered Values under the Companies Act 2013 • Act provides that the valuations are required to be carried out as per the International Valuation Standards or the Standards in force in India May 19 -20, 2018 CMA R. K. Patel 13

Why Valuations for Financial Reporting ? • Required for: – Company accounts (Balance Sheet, Profit and Loss and Cash Flow Statements) – Stock Exchange Documents – Pension Funds, Trusts, Investment Funds, Insurance Companies • Public domain, therefore tight regulation • Report financial status of an “entity” to provide information on performance • Useful to management, owners and other stakeholders in making economic decisions • Often required by statutes May 19 -20, 2018 CMA R. K. Patel 14

Regulations for Financial Reporting ? • Accounting standards – The IASB publishes IFRS (which replaces IAS) – The Indian Accounting Standards (Ind. ASs) • Valuation standards – IVSC publishes IVSs • International Valuation Standards, 2017 – RICS Red Book May 19 -20, 2018 CMA R. K. Patel 15

Why Valuation in Financial Statements? Ø Share-based payment transaction (Ind. AS 102) Ø Establish value of assets acquired in takeover/ business combination (Ind. AS 103) Ø Treatment of surplus assets (Ind. AS 105) Ø Report the carrying amount on balance sheet (Ind. AS 16 and Ind. AS 40) Ø Measurement of lease assets and liabilities (Ind. AS 17) Ø Calculate of depreciation charges and Impairment Reviews (Ind. AS 36) May 19 -20, 2018 CMA R. K. Patel 16

Why Valuation in Financial Statements? Ø In many cases use of value in financial report is an alternative option to historical cost, e. g. • Ind. AS 2 – Inventories • Ind. AS 16 – Property, plant and equipment • Ind. AS 40 – Investment property – although if cost adopted value must be shown in notes to accounts • Ind. AS 106 - Exploration for and Evaluation of Mineral Resources Ø First Time Adoption of Ind. AS (Ind. AS-101) Ø Fair Value Measurement (Ind. AS-113) Ø Financial Instruments (Ind. AS- 109) Ø Business Combinations (Ind. AS – 103) May 19 -20, 2018 CMA R. K. Patel 17

Other Areas of Valuation Ø Valuations under Goods and Service Tax (GST) Ø Valuations under Customs Act Ø Valuations for Insurance Ø Valuations under Insolvency and Bankruptcy Code 2016 (IBC-2016) Ø Valuations for Contract Price Adjustments/ Escalation Ø Claims of Liquidated Damages, etc. Ø Valuation for Liquidation Ø Valuation for Security against Loan May 19 -20, 2018 CMA R. K. Patel 18

Other Areas of Valuation Ø Valuations under SEBI Real Estate Investment Trusts Regulations (REITs) Ø Valuations under SEBI Infrastructure Investment Trusts Regulations (In. VTs) Ø Valuations under Real Estate Regulation Act (RERA) Ø Valuation for Slum Sales • Purchase Price Allocation • Attracting Income Tax • Transfer Pricing • Stamp Duty ……… Ø Valuation for Disinvestment of Public Undertakings May 19 -20, 2018 CMA R. K. Patel 19

Valuation –Challenges to Valuers q q q Subject to Audit Subject to Penal Clauses under the Companies Act, 2013 Calls for Multidisciplinary Approach Corporate World expects Value Addition from services of Valuers Professional Valuers are called for Specialization In Various Facets like technical, economics, finance, accounting, law and what not Abreast to specialize in Sector Specific Areas & specialties in valuations May 19 -20, 2018 CMA R. K. Patel 20

Valuation –Challenges to Professional Bodies q The professional bodies will have to play important roles in Framing Valuation Standards and Guidelines for professional members/ valuers to have uniform and ethical practice q Design Specialized Courses for Continuous education to abreast the members with latest developments q Tie up with Educational Institutions for conducting examinations/ training qualifying professional valuers May 19 -20, 2018 CMA R. K. Patel 21

Valuations (Art, Science and Practice? ? ? ? ? ) My personal view: “Valuation is more of an ART rather than SCIENCE and PRACTICE” May 19 -20, 2018 CMA R. K. Patel 22

Valuations (Emerging Professional Avenues for CMAs) Disclaimer This presentation is intended for general information purposes only and is not intended to provide, and should not be used in lieu of, professional advice. The author/ presenter assumes no liability for readers’ use of the information herein and readers are encouraged to seek professional assistance with regard to specific matters. Any conclusions drawn or opinions given are based on the individual facts and circumstances of a particular matter and therefore may not apply in other matters. All opinions expressed in this article/ presentation are those of the authors/ presenters and do not necessarily reflect the views of the author/ presenter. May 19 -20, 2018 CMA R. K. Patel 23

Valuations (Emerging Professional Avenues for CMAs) THANKS It’s a presentation by CMA R. K. PATEL M. E. (Mech. ), FCMA, M. Sc. (Real Estate Valuation), Dip. In Business Valuation, MIE, FIV, FIIISLA, Chartered Engineer (I), Insolvency Professional (IBBI) M/s R. K. Patel & Co. Insurance Surveyors, Valuers, Chartered Engineers, Cost Accountants 314, Phoenix Complex, Near Suraj Plaza, Sayajigunj VADODARA 390005 Phone: 2225578 Mobile: 9825038407 email : rajupatel 18@hotmail. com May 19 -20, 2018 CMA R. K. Patel 24