Contents. Topics to discuss

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2 Contents Key Facets of Valuation Premises of Valuation Different Purposes of Valuation Sources of Information Approach for Valuation Types of Values Topics to discuss Fair Value Concept under IFRS Ind AS 36 ~ Impairment of Assets Valuation under Sec. 56 of the Income Tax Act Case Study ~ on Valuation for Dispute Resolution CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

3 Key Facets of Valuation CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

4 Premise of Value Premise of Value Going Concern Value as an ongoing operating business enterprise. Liquidation Value when business is terminated. It could be forced or orderly. Premise of value is of utmost important while undertaking any valuation assignment because there is a significant change in value if it s valued as a going concern or on liquidation. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

5 Different Purposes of Valuation Strategic Regulatory Accounting Dispute Resolution Value Creation IPO RBI / FEMA ESOP CLB/Court Equity Research Merger Income Tax IFRS Arbitration Credit Rating Acquisition SEBI/SE Impairment Mediation Fin. Planning PE Companies Act Transfer Pricing Family Dispute / Marital Dissolution Brand / Patent Goodwill Insurance Purchase Price Allocation Loss of Profit CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

6 Sources of Information for Valuation Sources of Information Historical financial results Income Statement and Balance Sheets Data available in Public Domain Stock Exchange / MCA/SEBI/Independent Report Data on comparable companies SALES/EV-EBITDA/ PAT/BV Stock market quotations BSE/ NSE Discussion and Representation with/by the management of the Company Data on projects planned/under implementations including future projection CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

7 Approaches to Valuation Valuation Approaches Asset Based Method Income Based Method Market Based Method Other Methods Book Value Method Capitalization of Earning Method Comparable Companies Market Multiples Method Gross Merchandise Valuation Liquidation Value Method Discounted Cash Flow Method Comparable Transaction Multiples Method Price of Recent Investment Method Replacement Value Method Market Value Method (For Quoted Securities) Rule of Thumb CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

8 Types of Values Book Value Replacement Value Fair Market Value (FMV) Realizable Value (RV) Distress Sale Value / Liquidation Value Insurable Value / Reinstatement Value Going Concern Value / Value-in Use Value-in Exchange CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

9 Topics for discussion Fair Value Concept under IFRS Ind AS 36 ~ Impairment of Assets Valuation under Sec. 56 of the Income Tax Act Case Study ~ on Valuation for Dispute Resolution CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

10 Fair Value Concept under IFRS CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

11 Fair Value Fair Value Concept under IFRS FASB/IAS (Fair Value Accounting Standard Board/Indian Accounting Standards) has issued numerous standards in recent years to require the use of or provide guidance for calculating fair-value measurements in financial accounting. This change from prior practice signifies to many a deliberate movement away from historical-cost financial statements and toward fair market value statements. Development is on path that will provide insight into a more efficient system for presenting financial information and economic transactions to boards of directors, analysts, and investors. First, fair-value accounting would produce balance sheets that are more representative of a company s / entity s current value / worth. Specifically, unless the values of fixed assets are assumed to remain the same over time, historical cost information is relevant only upon obtaining the asset. Furthermore, because historical-cost measures remain unchanged over time, users do not get valuable feedback about appreciation or depreciation following the purchase of the asset. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

12 Fair Value ~ Definition Fair Value Concept under IFRS Fair Value is defined in IAS 39, Finance instruments; Recognition and measurement, as the amount for which an asset could be exchanged, or liability settled, between knowledgeable, willing parties in an arm s length transaction Major Elements ~ 1. could be exchanged 2. knowledgeable parties 3. willing parties 4. arm s length transaction CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

13 Fair Value Hierarchy Fair Value Concept under IFRS Full Information available If not available, use quoted market prices for similar assets and liabilities If not available, use other valuation techniques (most subjective) CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

14 Fair Value Concept under IFRS Fair Value ~ Definition under Valuation Standards Fair Market Value is the estimated amount for which an asset ought to exchange on the date of valuation between a willing buyer & a willing seller in an arm s length transaction after proper marketing where in the parties had each acted knowledgeably, prudently & without compulsion. Major Elements ~ 1. estimated amount 2. asset ought to exchange 3. date of valuation 4. willing buyer 5. willing seller 6. proper marketing 7. arm s length transaction 8. parties each acted knowledgeably, prudently CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

15 Fair Value Concept under IFRS Fair Value ~ Comparison of Definition s Major Elements in Definition under Valuation Standards 1. Estimated amount 2. Ought to exchange 3. Date of valuation 4. Willing buyer 5. Willing seller 6. Arm s length transaction 7. Proper marketing 8. Each acted knowledgeably, prudently & without compulsion Major Elements in Definition under IFRS 1. Could be exchanged 2. Knowledgeable parties 3. Willing parties 4. Arm s length transaction CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

16 Ind AS 36 Impairment of Assets CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

17 Objective o o o Ind AS 36 ~ Impairment of Assets The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount a compared to its carrying amount, the asset is valuated at its recoverable amount and such an asset is described as impaired, and the Standard requires the entity to recognize an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures. This Standard applies to financial assets classified as: a) subsidiaries, as defined in Ind AS 110, CFS; b) associates, as defined in Ind AS 28, Investments in Associates and JVs; and c) joint ventures, as defined in Ind AS 111, Joint Arrangements. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

18 Ind AS 36 ~ Impairment of Assets Scope This Standard shall be applied in accounting for the impairment of all assets, other than : This Standard does not apply to : Inventories Ind AS 2 assets arising from construction contracts Ind AS 11 Deferred tax assets Ind AS 12 Assets arising from employee benefits Ind AS 19 Financial assets Ind AS 109 Biological assets related to agricultural activities that are measured at fair value less costs to sell Deferred acquisition costs, and intangible assets, arising from an insurer s contractual rights under insurance contracts Ind AS 41 Ind AS 104 Non-current assets classified as held for sale Ind AS 105 CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

19 Ind AS 36 ~ Impairment of Assets Definitions o An active market is a market in which all the following conditions exist: o the items traded within the market are homogeneous; o willing buyers and sellers can normally be found at any time; and o prices are available to the public. o A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. o Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense. o An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

20 Ind AS 36 ~ Impairment of Assets Identifying an asset that may be impaired o An asset is impaired when its carrying amount exceeds its recoverable amount. o An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. o Irrespective of whether there is any indication of impairment, an entity shall also: Test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. Different intangible assets may be tested for impairment at different times. Test goodwill acquired in a business combination for impairment annually. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

21 Ind AS 36 ~ Impairment of Assets Indications for an Asset to be Impaired External Sources there are observable indications that the asset s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use significant changes with an adverse effect on the entity have taken place during the period, in the technological, market, economic or legal environment in which the entity operates the carrying amount of the net assets of the entity is more than its market capitalisation market interest rates or other market rates of return on investments have increased during the period CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

22 Ind AS 36 ~ Impairment of Assets Indications for an Asset to be Impaired Internal Sources evidence is available of obsolescence or physical damage of an asset significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

23 Ind AS 36 ~ Impairment of Assets Measuring Recoverable Amount o This Standard defines recoverable amount as the higher of: o an asset s or cash generating unit s fair value less costs of disposal and o its value in use. o Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs, unless either: the asset s fair value less costs of disposal is higher than its carrying amount; or the asset s value in use can be estimated to be close to its fair value less costs of disposal and fair value less costs of disposal can be measured. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

24 Valuation under Sec 56 of the Income Tax Act CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

25 Valuation u/s 56 of the Income Tax Act Term ~ Relative? If tax payer is Mr. X 1. Spouse of the individual Mrs. X 2. Brother or sister of the individual Brothers/sisters of Mr. X 3. Brother or sister of the spouse of the Brothers/sisters of Mrs. X individual 4. Brother or sister of either of the parents of the individual Brothers/sisters of father/mother of Mr. X 5. Any lineal ascendant or descendant of the individual Lineal ascendant or descendant of Mr. X 6. Any lineal ascendant or descendant of the spouse of the individual Lineal ascendant or descendant of Mrs. X 7. Spouse of the person referred to in (2) to (6) Spouse of the aforesaid persons. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

26 Valuation u/s 56 of the Income Tax Act Valuation viz. Different Properties (Rule 11U & 11UA) Different Properties Valuation of Properties 1. Immovable Property Stamp duty value of the Property 2. Jewellery, archaeological * If purchased from a registered dealer- If collections, drawings, paintings jewellery archaeological collections, etc., are sculptures or any work of art. received by the way of purchase on the valuation date from a registered dealer (under sales tax), the invoice value of these properties shall be the fair market value * In any other case The price which such jewellery, archaeological collections, etc., would fetch if sold in the open market on the valuation date CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

27 Valuation u/s 56 of the Income Tax Act Valuation viz. Different Properties Different Properties 3. Quoted shares and securities (received by way of a transaction carried out through a recognized stock exchange in India) 4. Quoted shares and securities (not being received by way of a transaction carried out through a recognized stock exchange in India) Valuation of Properties The transaction value as recorded in such stock exchange. The lowest price of such shares and securities quoted on any recognized stock exchange in India on the valuation date. If, however, on the valuation date such shares and securities are not traded on any recognized stock exchange, the lowest price of such shares and securities on a date immediately preceding the valuation date (when such shares/securities are traded) shall be the fair market value. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

28 Valuation u/s 56 of the Income Tax Act Valuation viz. Different Properties Different Properties 5. Unquoted equity shares (Option I) Rule 11UA (1) 5. Unquoted equity shares (Option 2) [applicable only in the case of section 56(2) (viib)] Rule 11UA (2) Valuation of Properties Assets xxxx Less Liabilities xxxx Net Worth xxxx Value of one share = Net worth X Paid-up Value of one share/total amount of paid-up equity share capital as shown in balance sheet. The fair market value of the unquoted equity shares shall be determined (at the option of the assesse) by a merchant banker or an accountant as per the DCF Method. (option either Book Value or DCF) CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

29 Valuation u/s 56 of the Income Tax Act Valuation viz. Different Properties Different Properties Valuation of Properties 6. Other unquoted shares and The fair market value shall be estimated to be the securities (other than equity shares) price, it would fetch if sold in the open market on the valuation date and the assesse may obtain a report from a Category-I Merchant Banker (registered with SEBI) or a Chartered Accountant in respect of such valuation. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

30 Case Study on Valuation for Dispute Resolution CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

31 Case Study on Valuation for Dispute Resolution Assessment & Quantification of the Economic Damage to Business on account of Black Listing of the Name of the Client Company as the Civil Contractor by the Surat Mahanagar Seva Sadan CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

32 Case Study on Valuation for Dispute Resolution Brief about Client Company o XYZ Pvt. Ltd. is incorporated under the provisions of Indian Companies Act, o Erstwhile Partnership Firm naming M/s. XYZ Construction has been converted into XYZ Pvt. Ltd. on 1 st April o The Company (Erstwhile firm too was) is the AA class registered Civil Contractor, operating in the State of Gujarat and across. o The cardinal principles at the time of inception were "NEVER BARGAIN IN THE QUALITY". This has remained the guiding logo of the Company throughout and even now. o This was the vision of its young and energetic directors Mr. PQR and Mr. ABC. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

33 Case Study on Valuation for Dispute Resolution Preface of the Case In Oct. 2009, The Surat Mahanagar Seva Sadan (SMSS) awarded the Civil Work of Renovation of one of the premises of Corporation; to erstwhile Partnership Firm M/s. XYZ Construction. In April 2013, the partners of the Firm converted the Regd. Partnership Firm to Company under Part IX of the Companies Act And converted all the licences and registrations to the name of the Company since then including Regn. as AA Class Civil Contractor. The subject renovation work could not been completed and with respect therewith, the SMSS has black listed the name of the Firm as Civil Contractor, with effect from April CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

34 Case Study on Valuation for Dispute Resolution Impact of Black Listing o The Black Listing has impacted primarily & principally the reputation & recognition of the Company (erstwhile Firm) and consequently to the business of the Company. o The Office of SMSS issued a copy of the Resolution/Letter, and marked the copies of the same to various offices of SMSS as well other Government & Semi- Government Enterprises including different offices of the Road & Building Dept. of Government of Gujarat. o As a consequence of the same, the Company (erstwhile Firm) has been discontinued to get the civil contract works from such & said offices as well other Municipal Corporations and Government offices. Besides issue of the said letter by SMSS, in those days, news of such blacklisting published in the various local & state level newspapers and that has adversely impacted the reputation & recognition of the Company (erstwhile Firm) publicly. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

35 Case Study on Valuation for Dispute Resolution Impact of Black Listing o And as a result thereof, the large corporates & public sector undertakings have also stopped giving the civil contract work to the Company (erstwhile Firm). o in other words, the Company (erstwhile Firm) has suffered a damage / loss in terms of loss of Businesses/Turnover, Profits and in turn Goodwill as well. o We, being Govt. Registered and Approved Valuers for Tangible Assets as well Intangible Assets, the Company requested and appointed us to carry of Valuation of the Economic Damage to Business accordingly. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

36 Case Study on Valuation for Dispute Resolution How can we evaluate such Loss or Damage? CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

37 Case Study on Valuation for Dispute Resolution Valuation Approach The impact of black listing the name of the Company (erstwhile Firm) by SMSS, it is our professional opinion to evaluate & assess the Economic Damage to Business based on difference of (a) Business and Profits as actual achieved by the Company since black listing i.e. from FY to FY , and b) Business and Profits based on the anticipation/projections, as if, the Company (erstwhile Firm) would not have been blacklisted by SMSS. CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

38 Case Study on Valuation for Dispute Resolution Actual Business of subject Company till Black Listing Rs. in Lac Audited Audited Audited Audited Turnover Actual Annual Turnover Growth Rate (from FY to ) 35 % CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

39 Case Study on Valuation for Dispute Resolution Actual Business of subject Company since Black Listing Rs. in Lac Audited Audited Audited Audited Audited Turnover Actual Annual Turnover Growth Rate (from FY to ) 8-9 % CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

40 Case Study on Valuation for Dispute Resolution Assumptions & Factors Considered for ~ Projections of Anticipated Business of subject Company Presuming NO Black Listing Actual business & profits of 5 years preceding to blacklisting Actual average annual growth rate of 35% in turnover of 5 years preceding to blacklisting The market outlook vis-a-vis other market parameters of other similar Construction Companies in Gujarat Volume of such Tenders & Contracts awarded by such & similar other Municipal Corporations and Corporates in Gujarat Peer Company s Performance in turnover & profit - 5 years Preceding to Black Listing and 5 Years since Black Listing Peer Company s Performance - since Black Listing - actual average annual growth rate of about 35% in turnover CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

41 Case Study on Valuation for Dispute Resolution Actual Business of Peer Company Rs. in Lac Audited Audited Audited Audited Audited Turnover 5, , , , , Rs. in Lac Audited Audited Audited Audited Turnover 31, , , , Profit Before Tax (PBT) 2, , , , Tax , , , Profit After Tax (PAT) 1, , , , PBT/Turnover % 7.09 % % 9.64 % 8.05 % 8.9 % Average PAT/Turnover % 4.75 % 7.44 % 6.48 % 5.03 % 5.9 % Average Annual Turnover Growth Rate 34.9 % (Average of FY to ) CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

42 Case Study on Valuation for Dispute Resolution Business Graph of subject Company CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

43 Case Study on Valuation for Dispute Resolution Anticipated Business of subject Company presuming NO Black Listing Anticipated Annual Turnover Growth Rate (from FY to 35 % Rs. in Lac Projected Projected Projected Projected Projected Turnover CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

44 Case Study on Valuation for Dispute Resolution Loss of Business of subject Company Rs. in Lac Audited Audited Audited Audited Provisional Turnover (actual) Turnover (projected) Loss of Business (300.00) (878.00) 3, , , Aggregate of Loss of Business (since Black Listing FYs ) Rs Lac CA & Valuer Bharat P. Gajjar / gajjar@gajjarconsultants.com,

45 CA & Valuer Bharat P. Gajjar g a j j a g a j j a r c o n s u l t a n t s. c o m / Composite In-house Team of Techno-Legal-Financial Professionals Professionally Associated with National & International Leading Corporates T H By decade+, trust bestowed by Banks, FIs, Hon ble HC, Large Corporates A Carried out Carried out Valuation Assignments; of Tangible & Intangible Assets TEV Study, LIE, Project Assessment, Stock Audits etc. N K of Land, Building & Infrastructure of Plant & Machinery of Vehicle & Equipment of Business, Stock, Shares & Goodwill of Trademark, Brand & Other be it for Borrowing, Lending, be it for Merger, Demerger or be it for Accounting requirement or Impairment or any @ Techno-Economic Viability Study Technical Feasibility Study Study of Rehabilitation & Restructuring Proposal Special Investigative Audit (SIA) Stock & Receivable Audit Due Diligence Audit Pre & Post-CDR Review Concurrent Audit of BIFR/Nursed/CDR Unit Loss & Claim Assessment Y O as Lender s Independent Engineer (LIE) OR on behalf of Domestic or Foreign Investor ~ on behalf of Private Equity Partner, OR for Regulatory Compliance ~ for Project Implementation Schedule ~ for Budgetary Comparison of Project Cost ~ AND Periodic Reporting of Mentoring & Monitoring, Techno-Economic Aid to project Decision & Execution U

46 CA & Valuer Bharat P. Gajjar g a j j a g a j j a r c o n s u l t a n t s. c o m / Composite In-house Team of Techno-Legal-Financial Professionals Professionally Associated with National & International Leading Corporates By decade+, trust bestowed by Banks, FIs, Hon ble HC, Large Corporates Carried out Valuation Assignments; of Tangible & Intangible Assets Carried out TEV Study, LIE, Project Assessment, Stock Audits etc. of Land, Building & Infrastructure of Plant & Machinery of Vehicle & Equipment of Business, Stock, Shares & Goodwill of Trademark, Brand & Other be it for Borrowing, Lending, be it for Merger, Demerger or be it for Accounting requirement or Impairment or any @ Techno-Economic Viability Study Technical Feasibility Study Study of Rehabilitation & Restructuring Proposal Special Investigative Audit (SIA) Stock & Receivable Audit Due Diligence Audit Pre & Post-CDR Review Concurrent Audit of BIFR/Nursed/CDR Unit Loss & Claim Assessment as Lender s Independent Engineer (LIE) OR on behalf of Domestic or Foreign Investor ~ on behalf of Private Equity Partner, OR for Regulatory Compliance ~ for Project Implementation Schedule ~ for Budgetary Comparison of Project Cost ~ AND Periodic Reporting of Mentoring & Monitoring, Techno-Economic Aid to project Decision & Execution