Institute of Cost Accountants of India
WIRC Bulletin-August 2018


The concept of valuation has gained momentum now-a-days. Valuation is not an exact science. Mathematical certainty is not demanded nor is it possible. It involves a decision-making process by using different methods to determine the price one is willing to pay or receive to affect the sale of a business. It is based upon assumptions, method and the data considered by the Valuer. Moreover, Value is also dependent upon the other circumstances like demand, availability, uniqueness etc. A fair valuation is spirit of the valuation process.
The first great landmark in the long and tortuous intellectual struggle with the riddle of value was laid by the philosophers of the Athenian Academy in the 4th century BC. It was Aristotle (384-322) who held that the source of value was based on need, without which exchange would not take place. Originally, it was he who distinguished between value in use and value in exchange- ‘of everything which we possess, there are two uses; For example, a shoe is used to wear and it is used for exchange’.
Valuation which is an opinion, is the key factor of decision of every transaction. Take it business or individual, valuation has its form and necessity depending upon the transaction. Often, we have question like “is it worth”. It can be defined in a number of different ways, and without carefully defining the term, the results of the valuation can become meaningless.
The difference between the price, cost, and value of a product or service is very negligible, perceived and subtle. When we talk about price it refers to the money which we have to pay to acquire the same. Cost refers to the amount spent or incurred to manufacture the product or service in question.
Importance of Valuation and Valuation of Asset Class Financial Assets
Valuations are widely used and relied upon in financial and other markets, whether for inclusion in financial statements, for regulatory compliance or to support secured lending and transactional activity.
Valuation of assets, as a field of work is vast and diverse. There are a number of valuer’s associations around the world that are engaged in the process of standardising the methods and approaches to valuations of assets.
Valuations have become much more important in today’s times, than they ever were. The business world undergoes changes with the number of re-organisations of companies. Besides, various laws require a reliable estimate of values of business and its assets for calculating tax liabilities and other purposes.
The Central Government delegated its powers and functions under section 247 of the Companies Act, 2013 to the Insolvency and Bankruptcy Board of India (IBBI) and specified the IBBI as the Authority under the Companies (Registered Valuers and Valuation) Rules, 2017. Consequently, w. e. f. 1st October, 2018, for conducting valuations required under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016, a person is to be registered with the IBBI as a registered Valuer. For registering with IBBI, a person has to pass valuation examination as per prescribed syllabus.
There are many methods prescribed for valuation under different statues. Securities Exchange Board of India (SEBI) has prescribed ICDR 2009, LODR-2015, Mutual Fund Regulations-1996, Share based Employee Benefits Regulation 2014, SAST Regulation 2011, Delisting Regulations & ESOP Valuation methods as per the objectives their statue. Similarly, RBI & FEMA has also prescribed similar methods under FEMA (Transfer or Issue of Security by a Person Resident Outside India), Regulations, 2017, Foreign Direct Investment (Pricing Guidelines), Direct Investment by Residents in Joint Venture/ Wholly Owned Subsidiary abroad, Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks, guidelines on Sale of Stressed Assets by Bank and SARFESI Act, 2002.
However, under Insolvency & Bankruptcy Code 2016 read with Companies (Registered Valuers and Valuation) Rules, 2017, the Valuer not only be abreast of all these to reach at correct valuation of asset as per circumstances of the case but also be aware of relevant Economic, Financial aspects of the business to have the optimum value of underlying assets. Since many a times a Valuer has to use his discretion to reach at estimated value. The discretion should be used by him within the parameters of prescribed law only. Valuer should be aware of his ethics and standards.
Income Tax plays a very vital role in asset valuation. Whether cessation of liability shall be subject to Income Tax or not! How to calculate Capital Gain on transfer of non-current Assets! Whether MAT is applicable on book profit! How Double Taxation Avoidance Agreement (DTAA) be interpreted! Whether losses be allowed to be adjusted or carry forward etc!
Syllabus for the exam on Valuation of Asset Class Financial Assets
The syllabus may seem to be vast, but it can be tackled with correct approach and some smart reading and memorising techniques.
Let us cover the topics under the syllabus prescribed for the asset class Securities or Financial Assets.
The first chapter is based on Economics, covering National Income Accounting, Fiscal and Monetary Policy and Understanding the Business Cycle.
Importance of National Income accounting can be remembered as PDC or Post-Dated Cheque (Policy formulation, effective Decision making, international economic Comparison)
Stages of business cycle can be remembered as REP DRT (REPresentation at Dispute Resolution Tribunal) (Recession, Expansion, Peak, Depression, Recovery, Trough).
Finance and financial management is something what is done in every day lives, at home or at business. Financial management is procurement of funds and their effective utilisation in business.
There are various types of finances, based on their purpose, sources and term.
Professional Ethics and Standards covers what is the acceptable behaviour for a valuation professional. They are covered under the Companies (Registered Valuers and Valuation) Rules, 2017.
The model code of conduct is recommended for the registered valuers. It can be easily remembered as ICIGI PRO (Intergrity & Fairness, Confidentiality, Independence & Disclosure of Intrest, Gifts & Hospitality, Information Management, Professional Competence & Due care, Remuneration, Occupation Employability & Restrictions.)
Analysis of financial statements covers study of incomes, expenses, assets and liabilities, performance, capital structure, credit and cash flow analysis. To cover this part, various accounting standards need to be studied. There are various techniques and methods of financial statement analysis, a few of which are very simple, while the others are not so simple.
The topic on general laws covers all the laws that may in some way be related to the valuation of Financial Assets.
The Companies (Registered Valuers and Valuation) Rules, 2017 lists out the valuation standards and provisions related to registered valuers organisation and registration of valuers and procedures related thereto.
The Indian Contract Act, 1872 and the Sale of Goods Act, 1930 are the simplest acts possible. A read through the text will give a fair idea of the terms used and that is the only thing in the whole of these acts.
The Indian Contract Act is based on English Law and was passed by the British India. It came into effect from 1st September, 1872. The Act originally had 266 Sections, it had wide scope and included.
• General Principles of Law of Contract- Sections 01 to 75
• Contract relating to Sale of Goods- Sections 76 to 123
• Special Contracts- Indemnity, Guarantee, Bailment & Pledge- Sections 124 to 238
• Contracts relating to Partnership- Sections 239 to 266
But at later stages the Provisions relating to the Sale of Goods and Partnership were restructured and separate Acts were enacted, the Sale of Goods Act, 1930 and the Indian Partnership Act, 1932. This legislation governs the contracts enforced in India. So, at present only the below sections are in force.
• General Principles of Law of Contract- Sections 01 to 75
• Special Contracts- Indemnity, Guarantee, Bailment & Pledge- Sections 124 to 238
The Sale of Goods Act, 1930 was enacted to govern and the amend all the laws relating to the Sale of Goods in India. It is a kind of contract act which came into existence on 1st July, 1930. It is a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for price.
The Transfer of Property Act, 1882, came into force on July 1, 1882. The Act is divided into 8 Chapters, 137 Sections and 1 Schedule. This Act, covers the transfer of both movable and immovable properties transferred in India.
The Acts deals with the following types of transfers.
• Transfer of property by act of parties (movable / immovable)
• Mortgages of Immovable Property and Charges
• Leases of Immovable Property
• Exchanges
• Gifts
• Transfers of Actionable Claims
The Indian Stamp Act, 1899 is a fiscal statute laying down the law relating to tax levied in the form of stamps on instruments recording transactions. Stamp Duty is a form of tax that is levied on the documents. Historically, a physical stamp had to be attached to or impressed upon the document to denote that stamp duty has been paid before the document became legally effective. Modern versions of the tax no longer require physical stamp duty.
The general provisions related to the Income Tax Act, 1971, like the heads of income, applicability of tax to various assessees and clubbing and set off are covered under this section of the syllabus, while the specific sections related to valuation are covered under the section i of the syllabus.
Corporate Insolvency Resolution and Corporate Liquidation sections of the Insolvency and Bankruptcy Code, 2016 are to be studied. These are covered in Part II of the Act. Part II contains VII chapters covering sections from S. 4 to S. 77.
The section dealing with the laws and regulations can be mastered by reading and understanding the bare acts of the relevant laws.
The next section is on the overview of valuation. It covers the abcs of valuation. The basic concepts, like the meaning of value and purpose of valuation, the purpose and process of valuation and documentations. It is an important section, as it lays down the foundation for the ways to tackle work that will be taken up in future. If the basics are clear, the foundation becomes strong. And a strong foundation is necessary for a strong building.
Next is the valuation approaches and methodologies. There are no approaches and methods specified by any authorities in India. But as per the international practices and the standards laid down by the International Valuation Standards Board, there are three approaches to Valuation, namely, Cost, Income and Market approach. There are different methods prescribed under each approach, based on the asset to be valued and the information available regarding the same.
The most important part of the syllabus, which covers 33% weightage is the Application of valuation. This section is covers the practical aspects for the valuation of business, fixed income securities, option valuation, intangible assets and valuations specific to certain situations.
This section can be mastered through experience shared by peers and seniors, reading of various business articles and newsletters and applying all the knowledge and experience gained through the years by an individual. Reading of valuation standards issued by various authorities will also be useful.
The laws relevant to the valuation of financial assets include the financial reporting, relevant sections of the Companies Act, various regulations of SEBI, RBI and FEMA and certain provisions of the Income Tax Act.
The financial reporting and the Companies Act sections can be easily tackled. The regulations by various authorities might seem lengthy and confusing but reading them over and over and mastering them is very essential, not only for clearing the exams, but for taking up and successfully completing valuation assignments related to financial assets.
The last portion of the syllabus and the paper will be the case studies. The case studies are put up to evaluate the candidate of the level of his knowledge and to check his ability to apply the knowledge gained in practical situations.
Paper Pattern and types of Questions
The exam for the valuation of the Financial assets will be conducted online. The paper will have objective multiple choice questions and all the questions are compulsory. There is negative marking of 25% of marks assigned question, for every incorrect answer. Minimum passing percentage is 60.
The registrations for the exams are open. Exams are being conducted at a number of locations of the country and is available on every working day.
The number of questions on each topic will depend on the weightage assigned to it in the course module.
As mentioned earlier, the syllabus is vast, but not difficult to cover, if tackled correctly. Expertise can be gained only once you begin the journey as a beginner. To reach the level of an expert, reading as much as possible on the topic is very essential. Reading includes reading of all the available books, act, rules, regulations, reports, websites, judgements and any articles available on the topic. Attending programs and seminars and discussions with peers also help in increasing one’s insight into the topic.
All the best to all the aspirants who wish to be registered valuers!

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