ICAI Valuation Standards 2018

ICAI VALUATION STANDARDS 2018

ICAI VALUATION STANDARDS 2018
ISBN : 978-81-8441-935-1

Valuation Standards Board ICAI
And
ICAI Registered Valuers Organisation
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
www.icai.org New Delhi
August/2018/P2325 (New)
 ICAI Valuation Standards 2018

Valuation Standards Board ICAI
And
ICAI Registered Valuers Organisation
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
© The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form, or by any means, electronic
mechanical, photocopying, recording, or otherwise, without prior permission,
in writing, from the publisher.
Note: These ICAI Valuation Standards will be effective till Valuation
Standards are notified by the Central Government under Rule 18 of the
Companies (Registered Valuers and Valuation) Rules, 2017.

Published in : June, 2018

Committee/Department : Valuation Standards Board

E-mail : valuationstandards@icai.in

Website : www.icai.org

Price : Rs 100 /-

ISBN : 978-81-8441-935-1

Published by : The Publication Department on behalf of
the Institute of Chartered Accountants of
India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi - 110 002.

Printed by : Sahitya Bhawan Publications, Hospital
Road, Agra - 282 003.
August/2018/P2325
 Index
S. No ICAI Valuation Standard Page No
1. Preface to the ICAI Valuation Standards 1-5
2. Framework for the Preparation of Valuation Report in 6-14
accordance with the ICAI Valuation Standards
3. ICAI Valuation Standard 101- Definitions 15-22
4. ICAI Valuation Standard 102- Valuation Bases 23-34
5. ICAI Valuation Standard 103 - Valuation Approaches 35-58
and Methods
6. ICAI Valuation Standard 201 - Scope of Work, 59-67
Analyses and Evaluation
7. ICAI Valuation Standard 202 - Reporting and 68-75
Documentation
8. ICAI Valuation Standard 301 - Business Valuation 76-85
9. ICAI Valuation Standard 302 - Intangible Assets 86-104
10. ICAI Valuation Standard 303 - Financial Instruments 105-114
Preface to the ICAI Valuation Standards
CONTENT PARAGRAPHS
FORMATION OF THE VALUATION STANDARDS 1-2
BOARD
OBJECTIVES AND FUNCTIONS OF THE VALUATION 3-5
STANDARDS BOARD
VALUATION REPORTS 6-7
SCOPE OF VALUATION STANDARDS 8-14
PROCEDURE FOR ISSUING A VALUATION STANDARD 15-21
COMPLIANCE WITH VALUATION STANDARDS 22-23
EFFECTIVE DATE 24

(The Preface should be read in the context of Framework of the ICAI
Valuation Standards)
The following is the text of the Preface to the ICAI Valuation Standards,
issued by the Institute of Chartered Accountants of India (ICAI)
I. Formation of the Valuation Standards Board
1. The Institute of Chartered Accountants of India (ICAI), recognising the
need to have the consistent, uniform and transparent valuation
policies and harmonise the diverse practices in use in India,
constituted the Valuation Standards Board (VSB) on 28 th February,
2017.
2. The composition of the VSB is fairly broad-based and ensures
participation of all interest-groups in the standard-setting process.
Apart from the elected members of the Council of the ICAI nominated
on the VSB, the following are represented on the VSB:
(i) Nominee of the Central Government representing the Ministry
of Corporate Affairs on the Council of the ICAI
(ii) Representatives of Industry Associations
(iii) Representative of Central Board of Direct Taxes
ICAI Valuation Standards 2018

(iv) Representative of Reserve Bank of India
(v) Representative from Comptroller and Auditor General of India
(vi) Representative of Insurance Regulatory and Development
Authority of India
(vii) Representative of Securities and Exchange Board of India
(viii) Representatives of Academic Institutions
(ix) Representative of Indian Banks Association
(x) Eminent Professionals co-opted by the ICAI
(xi) Representative(s) of any other body, as considered appropriate
by the ICAI
II. Objectives and Functions of the Valuation
Standards Board
3. The following are the objectives of the Valuation Standards Board:
(i) To identify and suggest areas in which Valuation Standards
need to be developed.
(ii) To formulate Valuation Standards with a view to assisting the
Council of the ICAI in evolving and establishing Valuation
Standards in India.
(iii) To engage with ICAI Registered Valuers Organisation for
adoption of Valuation Standards formulated by ICAI.
(iv) To examine the extent upto which, ICAI Valuation Standards
are to be aligned with globally accepted valuation practices and
policies.
(v) To review, at regular intervals, the Valuation Standards, to keep
abreast of statutory, technological or other developments and ,
if necessary, revise the same.
(vi) To provide, from time to time, interpretations and guidance on
Valuation Standards.
(vii) To proactively interact with other national and international
bodies engaged in the standard-setting process, inter alia by
sending comments on various consultative papers like
Exposure Drafts, Discussion Papers etc., issued by them.

2
 ICAI Valuation Standards 2018

(viii) To carry out such other functions relating to valuation and
Valuation Standards.
4. The main function of the VSB is to formulate Valuation Standards to
be recommended by ICAI to Registered Valuers Organisations in
India, the Government and other regulatory bodies in India and abroad
for adoption and implementation. While formulating the Valuation
Standards, the VSB will take into consideration the applicable laws,
customs, usages and business environment prevailing in India.
5. The VSB has also been entrusted with the responsibility of
propagating the Valuation Standards and of persuading the concerned
parties to adopt them in the preparation of valuation reports. The VSB
will provide interpretations and guidance on issues arising from
Valuation Standards. The VSB will also review the Valuation
Standards at periodical intervals and, if necessary, revise the same.
III. Valuation Reports
6. While performing its function, the VSB will keep in view the purposes
and limitations of valuation reports and the responsibilities of valuer.
At the time of formulation of the Valuation Standards, the VSB will
make possible efforts to explain the basic concept to which valuation
principles should be oriented and state the valuation principles to
which the practices and procedures should conform. The VSB will
clarify the terms commonly used in valuation reports and suggest
improvements in the terminology wherever necessary.
7. The responsibility for the preparation of valuation report in compliance
with the Valuation Standards and for adequate disclosure of
information that supports the conclusion is that of the valuer.
IV. Scope of Valuation Standards
8. The objective of issuing the Valuation Standards is to standardise the
various principles, practices and procedures followed by registered
valuers and other valuation professionals in valuation of assets,
liabilities or a business. The Valuation Standards set out concepts,
principles and procedures which are generally accepted internationally
having regard to legal framework and practices prevalent in India.
9. The Standards will provide a benchmark to the professionals to ensure
uniformity in approach and quality of valuation output.

3
ICAI Valuation Standards 2018

10. Efforts will be made to ensure that the Valuation Standards are in
conformity with the provisions of the applicable laws, customs and
usages in India. In case of deviations, the provisions of the law will
prevail and the valuation report should be prepared in conformity with
such law.
11. The Valuation Standards by their very nature cannot and do not
override the local regulations which govern the preparation of
valuation report in the country. However, the government may
determine the extent of disclosure to be made in the valuation report.
12. The Valuation Standards are intended to apply only to items which are
material.
13. Any limitations with regard to the applicability of a Valuation Standard
and the date from which a particular Standard will come into effect will
be specified in the respective Standard.
14. The Standards issued by ICAI include paragraphs in bold type and
plain type, which have equal authority. Paragraphs in bold type
indicate the main principles. An individual Standard should be read in
the context of the objective stated in that Standard, this Preface &
Framework for the preparation of valuation report.
V. Procedure for Issuing a Valuation Standard
Broadly, the following procedure is adopted for formulating Valuation
Standards:
15. The VSB determines the broad areas in which Valuation Standards
need to be formulated and the priority in regard to the selection
thereof.
16. In the preparation of Valuation Standards, the VSB will be assisted by
Study Groups constituted to consider specific subjects. In the
formation of Study Groups, provision will be made for wider
participation by the members of the Institute and others. Based on the
findings of the Study Group(s), Draft of the proposed Standard will be
prepared.
17. The Draft of the proposed Standard will normally include the following:
(a) Objective of the Standard;

4
 ICAI Valuation Standards 2018

(b) Scope of the Standard including limitations with regard to its
applicability;
(c) Significant Elements;
(d) Principles and important considerations;
(e) The date from which the Valuation Standards will become
effective;
(f) Any other necessary aspects.
18. The VSB will consider the draft and based on findings, an Exposure
Draft of the proposed Standard will be issued for comments by the
members of the Institute and the public.
19. After taking into consideration the comments received, the draft of the
proposed Standard will be finalised by the VSB and submitted to the
Council of the ICAI.
20. The Council of the ICAI will consider the final draft of the proposed
Standard, and approve the same with or without modifications as
appropriate.
21. The procedure followed for formulation of a new Valuation Standard,
as detailed above, will also be followed for any revision thereof.
VI. Compliance with the Valuation Standards
22. The Valuation Standards will be mandatory from the respective date(s)
mentioned in the Valuation Standard(s). The mandatory status of
Valuation Standard implies that while preparing the valuation report, it
will be the responsibility of the valuer to comply with the Valuation
Standard.
23. Valuation Report cannot be described as complying with the
Valuation Standards unless they comply with all the requirements of
each relevant Valuation Standard, to the extent applicable.
VII. Effective Date
24. Valuers will be required to follow Valuation Standards in the
preparation of valuation report issued on or after the date(s) specified
in the Standard.

5
ICAI Valuation Standards 2018

Framework for the Preparation of Valuation
Report in accordance with the ICAI Valuation
Standards
CONTENTS PARAGRAPH
INTRODUCTION 1-10
Purpose and Status 1-6
Users of Valuation Report 7-8
Scope 9
OBJECTIVE OF VALUATION REPORT 10
QUALITATIVE CHARACTERISTICS OF VALUATION 11-22
REPORT
Understandability 12
Relevance 13-15
Materiality 14-15
Reliability 16-22
Faithful representation 17-18
Substance over form 19
Neutrality 20
Prudence 21
Completeness 22
Constraints on relevant and reliable information in 23-24
valuation report
Balance between benefit and cost 23
Balance among qualitative characteristics 24
ASSETS AND LIABILITIES 25-27
FUNDAMENTAL ETHICAL PRINCIPLES 28
VALUER 29-30
INTENDED USERS/ CLIENTS 31
EVIDENCE AND PROFESSIONAL JUDGEMENT 32
PROFESSIONAL SKEPTICISM 33
VALUATION REPORT 34

6
 ICAI Valuation Standards 2018

This Framework is prepared in the context of ICAI Valuation Standards as
they contain references to the Framework.
(The following is the text of the ‘Framework for the Preparation of Valuation
Report’ under ICAI Valuation Standards.)

Introduction
Purpose and Status
1. This framework sets out the concepts that underlie the preparation of
valuation reports in accordance with the ICAI Valuation Standards.
The purpose of the Framework is to:
(a) assist in the development of future ICAI Valuation Standards and
in review of ICAI Valuation Standards that are issued from time
to time;
(b) assist in promoting harmonisation of practices, valuation
standards and procedures relating to the preparation of valuation
reports by providing a basis for identifying approaches and
methodologies of valuation;
(c) assist valuers in applying ICAI Valuation Standards in
preparation of valuation report and in dealing with topics that are
yet to form the subject of an ICAI Valuation Standard;
(d) assist users of valuation report in understanding and
comprehending the information contained in valuation reports
prepared in conformity with the ICAI Valuation Standards; and
(e) provide those who are interested in ICAI Valuation Standards
with information about approach to their formulation.
2. This Framework is not a Valuation Standard and hence does not
prescribe or establish standards on valuation of any particular item for
preparation of valuation report. Nothing in this Framework overrides
any specific ICAI Valuation Standard.
3. This Framework does not provide procedural requirements for the
preparation of valuation report. Basic principles, methods and
approaches to valuation and related guidance, consistent with
concepts in this Framework, for the preparation of valuation report are
contained in the Valuation Standards.

7
ICAI Valuation Standards 2018

4. In a limited number of cases there may be a conflict between the
Framework and an ICAI Valuation Standard. The requirements of the
ICAI Valuation Standard will prevail over the Framework in case of a
conflict.
5. In the absence of any definition, or lack of guidance, for a specific
term or expression in the Valuation Standards, the valuer shall use its
judgement while performing the valuation assignment in such a
manner so that the information is:
(a) relevant to the economic decision-making needs of intended
users; and
(b) reliable, in the valuation reports
(i) represent faithfully the information contained therein;
(ii) reflect the economic substance and not merely the legal
form of an item;
(iii) are neutral, i.e., free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
6. In making the judgement described in paragraph 5, the valuer shall
refer to, and consider the applicability of, the following sources in
descending order:
(a) the prescriptions laid down in Companies (Registered Valuers
and Valuation) Rules, 2017, as amended from time to time;
(b) the requirements in this Framework;
(c) the requirements in the applicable accounting standards as may
be notified by the Ministry of Corporate Affairs and where
applicable the accounting standards issued by the Institute of
Chartered Accountants of India; and
(d) in the absence thereof, those of the other standard-setting bodies
that use a similar framework to develop valuation standards,
other authoritative literature relating to valuation and accepted
industry practices, to the extent that these do not conflict with
any of the requirements of ICAI Valuation Standards.

8
 ICAI Valuation Standards 2018

Users of Valuation Report
7. The Framework is concerned with the valuation report prepared for the
intended users.
8. The intended users of valuation may be present and potential
investors, employees, lenders, suppliers and other trade creditors,
customers, governments and their agencies and the public. They
require valuation report for their specific purpose and the
requirements may vary depending on the intended user.
Scope
9. The Framework deals with:
(a) the objective of the valuation report;
(b) the qualitative characteristics that determine the usefulness of
information in valuation report; and
(c) the fundamental ethical principles to be observed by the valuers.

Objective of Valuation Report
10. The objective of a valuation report is to present the result of findings
of a comprehensive appraisal of and revealing a user-specific value
for, one or more items.

Qualitative characteristics of valuation report
11. Qualitative characteristics are the attributes that make the information
provided in valuation report useful to the intended users. The principal
qualitative characteristics are understandability, relevance and
reliability.
Understandability
12. An essential quality of the underlying information provided in valuation
report is that it must be readily understandable by the intended users.
For this purpose, it is assumed that users have a reasonable
knowledge of business and economic activities and valuation
approaches and methods followed in the preparation of the valuation
report and ability to study the information with reasonable diligence.
However, information about complex matters that should be included
in the valuation report because of its relevance to the economic

9
ICAI Valuation Standards 2018

decision-making needs of users should not be excluded merely on the
grounds that it may be too difficult for certain users to understand.
Relevance
13. To be useful, the underlying information in a valuation report must be
relevant to the decision-making needs of the intended users.
Information provided in the valuation report has the quality of
relevance when it influences the economic and other decisions of
users.
Materiality
14. The relevance of the underlying information in valuation report is
affected by its nature and materiality.
15. The underlying information in valuation report is material if its
omission or misstatement could influence the economic decisions
taken by intended-users on the basis of the valuation report.
Materiality depends on the size of the item or error judged in the
particular circumstances of its omission or misstatement. Thus,
materiality provides a threshold or cut-off point rather than being a
primary qualitative characteristic, which information must have if it is
to be useful.
Reliability
16. To be useful, the underlying information in a valuation report must be
reliable. Information has the quality of reliability when it is free from
material error and bias and can be relied upon by users to represent
faithfully that which, it either purports to represent or could reasonably
be expected to represent.
Faithful representation
17. To be reliable, the information presented in a valuation report must
represent faithfully what it purports to represent. Faithful
representation has three characteristics, namely, error-free, neutrality
and completeness.
18. Sometimes the information in the valuation report is subject to some
risk of being less than a faithful representation of that which it purports
to portray. This is not due to bias, but may arise due to inherent
difficulties either in identifying the appropriate method, approaches or
techniques to be applied in valuation.

10
 ICAI Valuation Standards 2018

Substance over form
19. If the underlying information of valuation report represent faithfully the
value, that it purports to represent, it is necessary that they are
evaluated in valuation assignment in accordance with their substance
and economic reality and not merely by their legal form. The
substance of transactions such as acquisition or disposal of assets is
not necessarily consistent with that which is apparent from their legal
or contrived form. For example, an entity may dispose of an asset to
another party in such a way that the documentation purports to pass
legal ownership to that party; nevertheless, the entity continues to
enjoy the future economic benefits embodied in the asset. In such
circumstances, the reporting of a sale would not be free from error,
and such a transaction may affect the result of valuation.
Neutrality
20. To be reliable, the information contained in valuation report must be
neutral, that is, free from bias. The valuation reports are not
considered neutral if, by the selection or presentation of information,
the reports influence the making of a decision or judgement in order to
achieve a predetermined result or outcome.
Prudence
21. Prudence is the inclusion of a degree of caution in the exercise of the
judgements needed in making the estimates required under conditions
of uncertainty.
The preparers of the valuation report do, however, have to contend
with the uncertainties that inevitably surround many events and
circumstances, such as the collectability of doubtful receivables, the
probable useful life of plant and equipment and the number of
warranty claims that may occur. Such uncertainties are to be dealt
with prudence in the preparation of the valuation report. However, the
exercise of prudence does not allow the understatement of assets or
income, or the overstatement of liabilities or expenses, because the
valuation report would not be neutral and, therefore, not have the
quality of reliability.
Completeness
22. To be reliable, the underlying information in valuation report must be

11
ICAI Valuation Standards 2018

complete within the bounds of materiality and cost. An omission can
cause information to be false or misleading and thus unreliable and
deficient in terms of its relevance.

Constraints on relevant and reliable information in
valuation report
Balance between benefit and cost
23. The balance between benefit and cost is a pervasive constraint rather
than a qualitative characteristic. The benefits derived from information
in valuation report should exceed the cost of providing it. The
evaluation of benefits and costs is, however, substantially a
judgemental process.
Balance among qualitative characteristics
24. In practice a balancing, or trade-off, between qualitative
characteristics is often necessary. Generally the aim is to achieve an
appropriate balance among the characteristics in order to meet the
objective of valuation report. The relative importance of the
characteristics in different cases is a matter of professional
judgement.

Assets and liabilities
25. The ICAI Valuation Standards are to be applied for the valuation of
assets and liabilities. Any reference to the term asset also includes
liability.
26. An asset is a resource controlled by the entity as a result of past
events and from which future economic benefits are expected to flow
to the entity and will also include a group of assets business or
business ownership interests.
27. A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits and will also include
a group of liabilities.

Fundamental Ethical Principles
28. The fundamental ethical principles that all valuers are required to
observe are:

12
 ICAI Valuation Standards 2018

(a) Integrity and Fairness
The valuer should be straightforward and honest in all professional
and business relationships and maintain the highest standards and
integrity and fairness.
(b) Objectivity
The valuer should not allow bias, conflict of interest or undue influence
of others to override professional or business judgments.
(c) Professional Competence and Due Care
The valuer should maintain professional knowledge and skill at the
level required to ensure that an intended user receives competent
professional service based on current developments in practice,
legislation and techniques and act diligently and in accordance with
applicable technical standards and code of conduct.
(d) Confidentiality
The valuer should respect the confidentiality of information acquired
as a result of professional and business relationships and, therefore,
not disclose any such information to third parties without proper and
specific authority, unless there is a legal or professional right or duty
to disclose, nor use the information for his personal advantage or third
parties.
(e) Professional Behavior
The valuer should comply with relevant laws and regulations and
avoid any conduct that disrepute to the profession.

Valuer
29. The term valuer as used in this Framework means the registered
valuer registered with the Registering Authority under Section 247 of
the Companies Act 2013 and Rules made thereunder for carrying out
valuation of assets belonging to a class or classes of assets.
30. The term valuer also includes a valuer undertaking valuation
engagement under other Statutes like Income Tax, SEBI, FEMA, RBI
etc.

13
ICAI Valuation Standards 2018

Intended Users/Clients
31. The intended users/clients are the person, persons or class of persons
for whom the valuer prepares the valuation report.

Professional Judgement
32. The valuer plans and performs a valuation assignment in order to
obtain sufficient appropriate information. The valuer considers
materiality, risk, and the quantity and quality of available information
when planning and performing the valuation assignment, in particular
when determining the nature, timing and extent of evidence-gathering
procedures.

Professional Skepticism
33. The valuer plans and performs a valuation assignment with an attitude
of professional skepticism recognising that circumstances may exist
that cause the information used or contained in the valuation report to
be materially misstated. An attitude of professional skepticism means
the valuer makes a critical assessment, with a questioning mind, of
the validity of information obtained and is alert to information that
contradicts or brings into question the reliability of documents or
representations by the responsible party. For example, an attitude of
professional skepticism is necessary throughout the assignment
process for the valuer to reduce the risk of overlooking suspicious
circumstances, of over generalising when drawing conclusions from
observations, and of using faulty assumptions in determining the
nature, timing and extent of evidence-gathering procedures and
evaluating the results thereof.

Valuation Report
34. The valuer provides a written valuation report containing the minimum
requirements as per the ICAI Valuation Standards. In addition, the
valuer considers other reporting responsibilities, including
communicating with those charged with governance when it is
appropriate to do so.

14
 ICAI Valuation Standards 2018

ICAI Valuation Standard-101
CONTENTS PARAGRAPH
OBJECTIVE 1-2
SCOPE 3-5
DEFINITIONS 6
EFFECTIVE DATE 7

Definitions
(The ICAI Valuation Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the
main principles. (This ICAI Valuation Standard should be read in the
context of Framework for the Preparation of Valuation Report in
accordance with ICAI Valuation Standards)

Objective
1. The objective of this valuation standard is to prescribe specific
definitions and principles which are applicable to the ICAI
Valuation Standards, dealt specifically in other standards. The
definitions enunciated in this Standard shall guide and form the
basis for certain terms used in other valuation standards
prescribed herein.
2. The definitions contained in this standard define the terms used in the
ICAI Valuation Standards. This Standard may not contain certain
definitions which are considered to be basic from finance and
accounting perspective as the professionals are expected to have
basic knowledge and understanding of such terms.

Scope
3. The terms defined in this Standard do not apply in valuation
where a valuer is required to use a definition prescribed by any
law, regulations, rules or directions of any government or
regulatory authority.
4. In case the valuer is required to use a definition that significantly

15
ICAI Valuation Standards 2018

depart from those contained herein, the valuer shall explain the
reason for departure and disclose in the valuation report.
5. While undertaking a valuation engagement, a valuer shall refer
the terms defined in this Standard.

Definitions
6. The following definitions provide an inclusive but not exhaustive list of
terms which will be generally used during the course of a valuation
engagement:
6.1 Active Market: Active Market is a market in which transactions for the
asset or liability take place with sufficient frequency and volume to
provide pricing information on an ongoing basis. For listed securities,
active market would refer to one where activity/transaction is ongoing
and as defined in the guidelines issued by SEBI.
6.2 Asset: The word asset would refer to the assets that need to be
valued during an engagement and will also include a group of assets,
a liability or a group of liabilities, business or business ownership
interests. Any reference to the term asset also includes liability.
6.3 As-is-where-is Basis: The term as-is-where-is basis will consider the
existing use of the asset which may or may not be its highest and best
use.
6.4 Business Valuation: It is the act or process of determining the value
of a business enterprise or ownership interest therein.
6.5 Client: Client would mean an entity or a person for whom valuation is
conducted, which/who commissions the valuation engagement and is
identified as client in the valuation engagement letter entered into
between such entity/person and the valuer.
6.6 Comparable Companies Multiple Method: This method is also
known as Guideline Public Company Method. It involves valuing an
asset based on market multiples derived from prices of market
comparables traded on active market.
6.7 Comparable Transaction Multiple Method: This method is also
known as Guideline Transaction Method. It involves valuing an asset
based on transaction multiples derived from prices paid in

16
 ICAI Valuation Standards 2018

transactions of assets to be valued /market comparable (comparable
transactions).
6.8 Control Premium: Control Premium is an amount that a buyer is
willing to pay over the current market price of a publicly-traded
company to acquire a controlling interest in an asset. It is opposite of
discount for lack of control to be applied in case of valuation of a non-
controlling/minority interest.
6.9 Cost approach: It is a valuation approach that reflects the amount
that would be required currently to replace the service capacity of an
asset (often referred to as current replacement cost).
6.10 Discount Rate: Discount Rate is the return expected by a market
participant from a particular investment and shall reflect not only the
time value of money but also the risk inherent in the asset being
valued as well as the risk inherent in achieving the future cash flows.
6.11 Discounted Cash Flow (‘DCF’) Method: The DCF method values the
asset by discounting the cash flows expected to be generated by the
asset for the explicit forecast period and also the perpetuity value (or
terminal value) in case of assets with indefinite life.
6.12 Documentation: The term documentation includes the record of
valuation procedures performed, relevant evidence obtained, and
conclusions that the valuer has reached.
6.13 Fair value: Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the valuation date.
6.14 Forced transaction: Forced transaction is a transaction where a
seller is under constraints to sell an asset without appropriate
marketing period or efforts to market such asset.
6.15 Going concern value: It refers to the value of a business enterprise
that is expected to continue to operate in the future.
6.16 Goodwill: The term goodwill is defined as an asset representing the
future economic benefits arising from a business, business interest or
a group of assets, which has not been separately recognised in other
assets.
6.17 Highest and best use: The highest and best use is the use of a non-

17
ICAI Valuation Standards 2018

financial asset by market participants that would maximise the value of
the asset or the group of assets (e.g., a business) within which the
asset would be used.
6.18 Income approach: It is a valuation approach that converts
maintainable or future amounts (e.g., cash flows or income and
expenses) to a single current (i.e., discounted or capitalised) amount.
The fair value measurement is determined on the basis of the value
indicated by current market expectations about those future amounts.
6.19 Intangible Asset: An intangible asset is an identifiable non-monetary
asset without physical substance.
6.20 Integration costs: It refers to additional one time/ recurring expenses
which may need to be incurred by an acquirer, e.g., alignment of
employment terms/ remuneration for employees of the target entity
with the acquiring entity.
6.21 Jurisdiction: The term jurisdiction will include the regulatory and legal
environment in the boundaries of which the valuation asset is located.
6.22 Liquidation value: It is the amount that will be realised on sale of an
asset or a group of assets when an actual/hypothetical termination of
the business is contemplated/assumed.
6.23 Market approach: Market approach is a valuation approach that uses
prices and other relevant information generated by market
transactions involving identical or comparable (i.e., similar) assets,
liabilities or a group of assets and liabilities, such as a business.
6.24 Market participants: Market participants are willing buyers and willing
sellers in the principal (or most advantageous) market for the asset or
liability that have all of the following characteristics:
(a) they are independent of each other, that is, they are not related
parties as defined under applicable accounting framework and
set of reporting/ accounting standards therein, although the
price in a related party transaction may be used as an input to a
fair value measurement if the entity has evidence that the
transaction was entered into at market terms;
(b) they are knowledgeable, having a reasonable understanding
about the asset or liability and the transaction using all available

18
 ICAI Valuation Standards 2018

information, including information that might be obtained
through due care that is usual and customary;
(c) they are able to enter into a transaction for the asset or liability;
and
(d) they are willing to enter into a transaction for the asset or
liability, i.e., they are motivated but not forced or otherwise
compelled to do so.
6.25 Observable inputs: Inputs that are developed using market data,
such as publicly available information about actual events or
transactions, and that reflect the assumptions that market participants
would use when pricing the asset or liability.
6.26 Orderly liquidation: An orderly liquidation refers to the realisable
value of an asset in the event of a liquidation after allowing
appropriate marketing efforts and a reasonable period of time to
market the asset on an as-is, where-is basis.
6.27 Orderly transaction: Orderly transaction is a transaction that
assumes exposure to the market for a period before the valuation date
to allow for marketing activities that are usual and customary for
transactions involving such assets or liabilities and it is not a forced
transaction. The length of exposure time will vary according to the
type of asset and market conditions.
6.28 Participant specific value: Participant specific value is the estimated
value of an asset or liability considering specific advantages or
disadvantages of either of the owner or identified acquirer or identified
participants.
6.29 Premise of value: Premise of value refers to the conditions and
circumstances how an asset is deployed.
6.30 Present value: It is an integral tool used in the income approach to
link future amounts (e.g., cash flows or values) to a present amount
using a discount rate.
6.31 Purpose: The word purpose implies the reason for which valuation is
being conducted.
6.32 Relief from Royalty (RFR) Method: A method in which the value of
the asset is estimated based on the present value of royalty payments

19
ICAI Valuation Standards 2018

saved by owning the asset instead of taking it on lease It is generally
adopted for valuing intangible assets that are subject to licensing,
such as trademarks, patents, brands, etc.
6.33 Replacement Cost Method: It is also known as ‘Depreciated
Replacement Cost Method’ and involves valuing an asset based on
the cost that a market participant shall have to incur to recreate an
asset with substantially the same utility (‘comparable utility’) as that of
the asset to be valued, adjusted for obsolescence.
6.34 Reproduction Cost Method: This method involves valuing an asset
based on the cost that a market participant shall have to incur to
recreate a replica of the asset to be valued, adjusted for
obsolescence.
6.35 Rule of Thumb or Benchmark Value: Rule of thumb or benchmark
indicator is used as a reasonable check against the values determined
by the use of other valuation approaches in a valuation engagement.
6.36 Scope of work: It describes the work to be performed, responsibilities
and confidentiality obligations of the Client and the valuer respectively,
and limitation of the valuation engagement.
6.37 Significant/material: While considering any particular aspect to be
significant/material from a valuation standpoint is a valuer’s
professional judgement, any aspect of valuation will be significant /
material if its application or ignorance can significantly change or
impact the overall value.
6.38 Subsequent Event: An event that occurs subsequent to the valuation
date could affect the value; such an occurrence is referred to as a
subsequent event.
6.39 Synergies: Synergies is a concept which indicates that the combining
effect of two or more assets or group of assets and liabilities or two or
more entities in terms of their value and benefits will be or is likely to
be, greater than that of their individual values on a standalone basis.
6.40 Terminal value: Terminal value represents the present value at the
end of explicit forecast period of all subsequent cash flows to the end
of the life of the asset or into perpetuity if the asset has an indefinite
life.

20
 ICAI Valuation Standards 2018

6.41 Transaction costs: Transaction costs are the costs to sell an asset
or transfer a liability in the principle (or most advantageous) market for
the asset that are directly attributable to the disposal of the asset or
transfer of liability and which meet both the following criteria:
(a) they result directly from and are essential to that transaction;
(b) they would not have been incurred by the entity, had the decision
to sell the asset or transfer the liability not been made.
No adjustment will be made for any taxes payable by either party as a
direct result of the transaction.
6.42 Unobservable inputs: Inputs for which market data are not available
and that are developed using the best information available about the
assumptions that market participants would use when pricing the
asset or liability.
6.43 Value: A value is an estimate of the value of a business or business
ownership interests, arrived at by applying the valuation procedures
appropriate for a valuation engagement and using professional
judgment as to the value or range of values based on those
procedures.
6.44 Valuer: A valuer is a professional (which can be an individual or a
legally established entity) who is given the responsibility to conduct or
undertake valuation. .
6.45 Valuation base: Valuation base means the indication of the type of
value being used in an assignment.
6.46 Valuation date: Valuation date is the specific date at which the valuer
estimates the value of the underlying asset.
6.47 With and Without Method (WWM): Under WWM, the value of the
intangible asset to be valued is equal to the present value of the
difference between the projected cash flows over the remaining useful
life of the asset under the following two scenarios:
(a) business with all assets in place including the intangible asset to
be valued; and
(b) business with all assets in place except the intangible asset to be
valued.

21
ICAI Valuation Standards 2018

6.48 Weight/Weightage: Weight/weightage refers to the importance given
to a particular value determined using a particular valuation method/
approach.

Effective Date
7. ICAI Valuation Standard 101 Definitions, shall be applied for the
valuation reports issued on or after 1st July, 2018.

22
 ICAI Valuation Standards 2018

ICAI Valuation Standard 102
Valuation Bases
CONTENTS PARAGRAPH
OBJECTIVE 1-4
SCOPE 5-9
SIGNIFICANT ELEMENTS 10-13
VALUATION BASES 14-36
Fair Value 17-31
Price 20-22
Orderly transaction 23
Market participants 24
Valuation date 25-27
Highest and best use 28-31
Participant Specific Value 32-33
Liquidation Value 34-36
PREMISE OF VALUE 37- 51
Highest and Best Use 39-44
Going Concern Value 45-46
As-is-where-is basis 47
Orderly Liquidation 48-49
Forced Transaction 50-51
OTHER CONSIDERATION 52-62
Participant specific factors 52-53
Synergies 54-57
Integration Costs 58
Assumptions 59-60
Transaction Costs 61-62
EFFECTIVE DATE 63
The ICAI Valuation Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the
main principles. (This ICAI Valuation Standard should be read in the

23
ICAI Valuation Standards 2018

context of Framework for the Preparation of Valuation Report in
accordance with ICAI Valuation Standards)

Objective
1. This Standard:
(a) defines the important valuation bases;
(b) prescribes the measurement assumptions on which the
value will be based; and
(c) explains the premises of values.
2. The objective of this Standard is to define the important valuation
bases which represent the fundamental principle on which
professional valuations are based.
3. This Standard covers the measurement assumptions in a valuation
and/or the fundamental assumption on which the value will be based.
4. The principles enunciated in this Standard shall be applied in
conjunction with the principles prescribed and contained in the
Framework for the Preparation of Valuation Report in accordance
with ICAI Valuation Standards.

Scope
5. This Standard shall be applied in selecting the appropriate
valuation bases except as specified in paragraph 6.
6. This Standard does not apply in cases where a valuer is required
to adopt valuation bases that are prescribed:
(a) by a Statute, or Regulations; or
(b) in an agreement/ arrangement between the parties.
In such cases, the prescribed bases shall apply and adequate
information should be disclosed appropriately in the report, that
enables users of the valuation reports to understand the
valuation bases.
7. In some engagements, a valuer is required to adopt valuation bases
prescribed by regulations or as agreed upon between the parties. In
those cases, valuation bases will be applied considering the relevant

24
 ICAI Valuation Standards 2018

regulations, agreement or arrangement, e.g., valuation requirements
under:
(a) Income Tax Act;
(b) SEBI Regulations; or
(c) The Insolvency and Bankruptcy Code.
8. In transactions of the nature of –merger or amalgamation of
companies or merger or demerger of businesses, the consideration is
often discharged primarily by issue of securities in the nature equity of
the acquirer or transferee entity with reference to an exchange ratio or
entitlement ratio, considering the relative values.
Such relative values are generally arrived at by applying an
appropriate valuation approach or a combination of valuation
approaches. If a combination of valuation approaches or
methodologies is adopted, appropriate weightages are assigned to
arrive at a single value. Relative values are usually derived by using
similar valuation approaches, methodologies and weightages. Use of
differing methodologies or approaches may be justified in some
circumstances, e.g., merger of a listed company and an unlisted
company where market price method would be relevant only for the
listed company.
9. Valuation base selected by a valuer shall be appropriate considering
the purpose of engagement and the terms of the engagement. The
valuer shall use the relevant valuation approach and adhere to other
assumptions associated with the valuation bases.

Significant Elements
10. The key elements of a valuation exercise are:
(a) an actual/ possible transaction;
(b) valuation date; and
(c) the parties (actual or likely) to the transaction.
11. The valuation date will determine what information can be considered
in a valuation. Usually, information which is not available at the
valuation date is not considered for the purpose of valuation.

25
ICAI Valuation Standards 2018

12. The valuation exercise and selection of valuation bases depend on but
not limited to, the following:
(a) nature of the asset to be valued;
(b) scope and purpose of the valuation engagement;
(c) valuation date/ measurement date;
(d) intended purpose of the valuation;
(e) applicable standard of value;
(f) applicable premise of value;
(g) assumptions and limiting conditions; and
(h) applicable governmental regulations
13. A valuer shall gather, analyse and where appropriate adjust the
relevant information in a manner that the methodology and
approaches are in line with the nature or type of the engagement. For
example, for valuation of business, in accordance with ICAI Valuation
Standard 301 Business Valuation, the information shall include but not
limited to the following:
(a) non-financial information;
(b) ownership details;
(c) financial information; and
(d) general information.

Valuation Bases
14. Valuation base means the indication of the type of value being
used in an engagement. Different valuation bases may lead to
different conclusions of value. Therefore, it is important for the
valuer to identify the bases of value pertinent to the engagement.
This Standard defines the following valuation bases:
(a) Fair value;
(b) Participant specific value; and
(c) Liquidation value
15. A valuer shall select an appropriate valuation base considering
the terms and purpose of the valuation engagement.

26
 ICAI Valuation Standards 2018

16. A valuer shall not select a valuation base which is not appropriate for
the intended purpose of the valuation. A valuer is responsible for
understanding the relevant regulation(s) relating to the valuation
bases which are selected and used.
Fair Value
17. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the valuation date.
18. Fair value is the price in an orderly transaction in the principal (or
most advantageous) market at the valuation date under current market
conditions (i.e. an exit price) regardless of whether that price is
directly observable or estimated using another valuation technique.
19. Fair value is usually synonymous to market value except in certain
circumstances where characteristics of an asset translate into a
special asset value for the party(ies) involved.
Price
20. Fair value assumes that the price is negotiated in a free market (which
may be domestic or international).
21. Fair value reflects characteristics of an asset which are available to
market participants in general and do not consider advantages/
disadvantages which are available/applicable only to particular
participant(s).
22. The price in the principal (or most advantageous) market used to
measure the fair value of the asset shall not be adjusted for
transaction costs. To this end, a market in which the volume and level
of activities is high, or one in which the realisation from an asset is
maximum, is considered.
Orderly transaction
23. Orderly transaction is a transaction that assumes exposure to the
market for a period before the valuation date to allow for
marketing activities that are usual and customary for
transactions involving such assets or liabilities and it is not a
forced transaction. The length of exposure time will vary
according to the type of asset and market conditions.

27
ICAI Valuation Standards 2018

Market participants
24. Market participants are willing buyers and willing sellers in the
principal (or most advantageous) market for the asset or liability
that have all of the following characteristics:
(a) they are independent of each other, that is, they are not
related parties as defined under applicable accounting
framework and set of reporting/ accounting standards
therein, although the price in a related party transaction
may be used as an input to a fair value measurement if the
entity has evidence that the transaction was entered into at
market terms;
(b) they are knowledgeable, having a reasonable
understanding about the asset or liability and the
transaction using all available information, including
information that might be obtained through due care that is
usual and customary;
(c) they are able to enter into a transaction for the asset or
liability; and
(d) they are willing to enter into a transaction for the asset or
liability, i.e., they are motivated but not forced or otherwise
compelled to do so.
Valuation date
25. Valuation date is the specific date at which the valuer estimates
the value of the underlying asset.
26. Valuation is time specific and can change with the passage of time
due to changes in the condition of the asset to be valued and/ or
market. Accordingly, valuation of an asset as at a particular date can
be different from other date(s)
27. The valuation date is sometimes also referred to as measurement
date.
Highest and best use
28. The highest and best use is the use of a non- financial asset by
market participants that would maximise the value of the asset or

28
 ICAI Valuation Standards 2018

the group of assets (e.g., a business) within which the asset
would be used.
29. Highest and best use is usually for non- financial assets. The fair
value of a non-financial asset will reflect its highest and best use in
accordance with paragraphs 39-44.
30. The highest and best use of a non-financial asset takes into account
the use of the asset that is physically possible, legally permissible and
financially feasible.
31. Highest and best use is determined from the perspective of market
participants, even if the entity intends a different use. The highest and
best use of an asset may be its existing use or a different use.
Participant Specific Value
32. Participant specific value is the estimated value of an asset or
liability considering specific advantages or disadvantages of
either of the owner or identified acquirer or identified
participants.
33. Participant specific value may be measured for an existing owner or
for an identified acquirer or for a transaction between two identified
parties and consider factors which are specific to such party(ies) and
which may not be applicable to market participants in general. For
example:
(a) participant specific value for a potential acquirer in connection
with acquisition of a manufacturing facility will consider aspects
such as location specific advantage or synergies which may not
be available to market participants in general.
(b) participant specific value for transfer of 2% stake by a minority
shareholder to a shareholder holding 49% stake will consider
aspects such as minority discount and control premium
Liquidation Value
34. Liquidation value is the amount that will be realised on sale of an
asset or a group of assets when an actual/hypothetical
termination of the business is contemplated/assumed.
35. Liquidation value can be carried out under the premise of an

29
ICAI Valuation Standards 2018

orderly transaction with a typical marketing period or under the
premise of forced transaction with a shortened marketing period.
The valuer must disclose whether an orderly or forced
transaction is assumed.
36. The net amount is determined after considering estimated cost of
disposal.

Premise of Value
37. Premise of Value refers to the conditions and circumstances how
an asset is deployed.
38. In a given set of circumstances, a single premise of value may be
adopted while in some situations multiple premises of value may be
adopted. Some common premises of value are as follows:
(a) highest and best use;
(b) going concern value;
(c) as is where is value;
(d) orderly liquidation; or
(e) forced transaction.
Highest and Best Use
39. The highest and best use of a non-financial asset takes into account
the use of the asset that is physically possible, legally permissible and
financially feasible. as follows:
(a) a use that is physically possible takes into account the physical
characteristics of the asset that market participants would take
into account when pricing the asset (e.g., the location or size of a
property);
(b) a use that is legally permissible takes into account any legal
restrictions on the use of the asset that market participants would
take into account when pricing the asset (e.g., the zoning
regulations applicable to a property);
(c) a use that is financially feasible takes into account whether a use
of the asset that is physically possible and legally permissible
generates adequate income or cash flows (taking into account

30
 ICAI Valuation Standards 2018

the costs of converting the asset to that use) to produce an
investment return that market participants would require from an
investment in that asset put to that use.
40. Highest and best use is determined from the perspective of market
participants, even if the entity intends a different use. However, an
entity's current use of a non-financial asset is presumed to be its
highest and best use unless market or other factors suggest that a
different use by market participants would maximise the value of the
asset.
41. To protect its competitive position, or for other reasons, an entity may
intend not to use an acquired non-financial asset actively or it may
intend not to use the asset according to its highest and best use.
Nevertheless, the valuer shall measure the fair value of a non-
financial asset assuming its highest and best use by market
participants.
42. The highest and best use of a non-financial asset establishes the
valuation premise used to measure the fair value of the asset, as
follows:
(a) the highest and best use of a non-financial asset might provide
maximum value to market participants through its use in
combination with other assets as a group (as installed or
otherwise configured for use) or in combination with other assets
and liabilities (e.g., a business).
(i) if the highest and best use of the asset is to use the asset in
combination with other assets or with other assets and
liabilities, the fair value of the asset is the price that would
be received in a current transaction to sell the asset
assuming that the asset would be used with other assets or
with other assets and liabilities and that those assets and
liabilities (i.e. its complementary assets and the associated
liabilities) would be available to market participants;
(ii) liabilities associated with the asset and with the
complementary assets include liabilities that fund working
capital, but do not include liabilities used to fund assets
other than those within the group of assets;

31
ICAI Valuation Standards 2018

(iii) assumptions about the highest and best use of a non-
financial asset shall be consistent for all the assets (for
which highest and best use is relevant) of the group of
assets or the group of assets and liabilities within which the
asset would be used.
(b) the highest and best use of a non-financial asset might provide
maximum value to market participants on a stand-alone basis. If
the highest and best use of the asset is to use it on a stand-
alone basis, the fair value of the asset is the price that would be
received in a current transaction to sell the asset to market
participants that would use the asset on a stand-alone basis.
43. Where the highest and best use is different from the existing use,
costs, to be incurred, if any for conversion of an asset to its highest
and best use need to be considered for determination of value based
on highest and best use.
44. In certain cases, assessment of highest and best use may involve
considerable subjectivity/ technical aspects and the valuer may base
his assessment considering inter-alia relevant inputs from the client,
information available in public domain, etc.
Going Concern Value
45. Going concern value is the value of a business enterprise that is
expected to continue to operate in the future.
46. The intangible elements of Going Concern Value result from factors
such as having a trained work force, an operational plant, the
necessary licenses, marketing systems, and procedures in place etc.
As-is-where-is Basis
47. As-is-where-is basis will consider the existing use of the asset which
may or may not be its highest and best use.
Orderly Liquidation
48. An orderly liquidation refers to the realisable value of an asset in
the event of a liquidation after allowing appropriate marketing
efforts and a reasonable period of time to market the asset on an
as-is, where-is basis.
49. The reasonable period of time to market the asset would vary based
on the market conditions, nature of the asset, etc.

32
 ICAI Valuation Standards 2018

Forced transaction
50. Forced transaction is a transaction where a seller is under
constraints to sell an asset without appropriate marketing period
or effort to market such asset.
51. Sale in the market that is not active cannot be presumed to be forced
transaction without assessing the seller specific circumstances.

Other Considerations
Participant specific consideration
52. Certain examples of participant specific considerations which may be
considered depending on valuation bases adopted include:
(a) acquirer specific considerations on account of other assets
owned/ operated by such entity or ability to utlilise an asset in an
unique manner; and
(b) legal/ tax implications which are specific to a participant (e.g.,
implication of the Competition Act or an ability of an acquirer to
utilise the available tax losses in an accelerated manner);
53. Whether certain valuation considerations are applicable only to
particular participant(s) or market participants in general, it shall be
analysed on a case to case basis.
Synergies
54. Synergies is a concept which indicates that the combining effect
of two or more assets or group of assets and liabilities or two or
more entities in terms of their value and benefits will be or is
likely to be, greater than that of their individual values on a
standalone basis.
55. Synergy is a term that is most commonly used in the context of
mergers and acquisitions.
56. Synergy results from incremental benefits that accrue to the acquirer
on account of economies of scale or other post-acquisition factors,
such as realisation of increased discretionary cash flow (as a result of
the combinations of two or more business operations over and above
the aggregate discretionary cash flow of the two business viewed
separately), or reduced risk in attaining same when two businesses
combines.

33
ICAI Valuation Standards 2018

57. While, Fair value will consider synergies which are available to market
participants in general, Participant Specific Value will consider
synergies which may be specifically available only to the concerned
participant(s).
Integration Costs
58. Integration costs refer to additional one time/ recurring expenses
which may need to be incurred by an acquirer, e.g., alignment of
employment terms/ remuneration for employees of the target
entity with the acquiring entity.
Assumptions
59. Sometimes, a valuer may make assumptions to derive the value as
per the chosen valuation base.
60. A valuer may make assumptions which are appropriate having regard
to the circumstances and terms of engagement.
Transaction Costs
61. Transaction costs are the costs to sell an asset or transfer a
liability in the principle (or most advantageous) market for the
asset that are directly attributable to the disposal of the asset or
transfer of liability and which meet both the following criteria:
(a) they result directly from and are essential to that
transaction;
(b) they would not have been incurred by the entity, had the
decision to sell the asset or transfer the liability not been
made.
No adjustment will be made for any taxes payable by either party
as a direct result of the transaction.
62. Transaction costs are not a characteristic of an asset or a liability;
rather, they are specific to a transaction and will differ on the terms of
transaction.

Effective Date
63. ICAI Valuation Standard 102 Valuation Bases, shall be applied for the
valuation reports issued on or after 1st July, 2018.

34
 ICAI Valuation Standards 2018

ICAI Valuation Standard-103
Valuation Approaches and Methods
Contents Paragraphs
OBJECTIVE 1-3
SCOPE 4-7
VALUATION APPROACHES 8-107
Market Approach 14-48
Market Price Method 18-20
Comparable Companies Multiple (CCM) Method 21-28
Comparable Transaction Multiple (CTM) Method 29-48
Discounts and Control Premium 36-48
Discount for Lack of Marketability (DLOM) 38-41
Control Premium / Discount for Lack of Control (DLOC) 42-48
Income Approach 49- 94
Discounted Cash Flow (DCF) Method 54-73
Cash Flows 62-68
Discount Rate 69-73
Terminal Value 74-83
Gordon (Constant) Growth Model 77-78
Variable Growth Model 79
Exit Multiple 80-81
Salvage / Liquidation value 82
Terminal Growth 83
Relief from Royalty (RFR) Method 84-86
Multi-Period Excess Earnings Method (MEEM) 87-89
With and Without Method (WWM) 90-91
Option Pricing Models 92- 94
Cost Approach 95-107
Replacement Cost Method 100-102
Reproduction Cost Method 103-107

35
ICAI Valuation Standards 2018

Obsolescence 105-107
EFFECTIVE DATE 108

(The ICAI Valuation Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the
main principles. (This ICAI Valuation Standard should be read in the
context of Framework for the Preparation of Valuation Report in
accordance with ICAI Valuation Standards)

Objective
1. This Standard:
(a) defines the approaches and methods for valuing an asset;
and
(b) provides guidance on use of various valuation approaches
and methods.
2. The objective of this Standard is to provide guidance on different
valuation approaches and methods that can be adopted to determine
the value of an asset.
3. The principles enunciated in this Standard shall be applied in
conjunction with the principles prescribed and contained in the
Framework for the Preparation of Valuation Report in accordance
with ICAI Valuation Standards.

Scope
4. Subject to paragraph 7, this Standard shall be applied in
selecting the appropriate valuation approaches and
methodologies in determining the value of an asset, liability or a
business.
5. This Standard provides guidance on use of multiple approaches and
methods.
6. This Standard does not provide an exhaustive list of all the valuation
methods. For example, methods applicable for valuation of intangible
assets and financial instruments have been covered briefly in this
Standard and detailed guidance has been provided in the relevant
Standards.

36
 ICAI Valuation Standards 2018

7. This Standard does not apply in cases where a valuer is required to
adopt valuation bases that are prescribed by a statute or regulation. In
such cases, the prescribed base shall apply and the valuer shall adopt
specific methods or formulae as have been laid down under the
statute or regulation. Adequate information should be disclosed that
enables users of the valuation reports to understand the basis of the
valuation report and the nature and extent of impact on the findings
therein.

Valuation Approaches
8. This Standard provides guidance for following three main
valuation approaches:
(a) Market approach;
(b) Income approach; and
(c) Cost approach.
9. A valuer can make use of one or more of the processes or methods
available for each approach.
10. The appropriateness of a valuation approach for determining the value
of an asset would depend on valuation bases and premises. In
addition, some of the key factors that a valuer shall consider while
determining the appropriateness of a specific valuation approach and
method are:
(a) nature of asset to be valued;
(b) availability of adequate inputs or information and its reliability;
(c) strengths and weakness of each valuation approach and method;
and
(d) valuation approach/method considered by market participants.
11. A valuer shall be responsible to select the appropriate valuation
approach(es) and method(s) as there may not be a single
approach/method that is best suited for valuation in every situation.
12. A valuer may consider adopting one distinct valuation
approach/method or multiple valuation approaches/methods as may
be appropriate to derive a reliable value. When evaluating a value

37
ICAI Valuation Standards 2018

resulting from use of multiple valuation approaches/methods, a valuer
shall consider the reasonableness of the range of values. If the values
under different approaches and/or methods significantly differ from
each other, it would not be appropriate to derive the final value merely
by weightages accorded to differing values. The valuer shall consider
the factors given in paragraph 10 to determine whether the chosen
approaches and methodologies are appropriate or not.
13. The valuation approaches and methods shall be selected in a manner
which would maximise the use of relevant observable inputs and
minimise the use of unobservable inputs. The price information
gathered from an active market is generally considered to be a strong
indicator of value.
Market Approach
14. Market approach is a valuation approach that uses prices and
other relevant information generated by market transactions
involving identical or comparable (i.e., similar) assets, liabilities
or a group of assets and liabilities, such as a business.
15. The following are some of the instances where a valuer applies the
market approach:
(a) where the asset to be valued or a comparable or identical asset
is traded in the active market;
(b) there is a recent, orderly transaction in the asset to be valued; or
(c) there are recent comparable orderly transactions in identical or
comparable asset(s) and information for the same is available
and reliable.
16. In some instances, a valuer may consider using other valuation
approaches instead of Market approach or in combination with Market
approach, such as:
(a) where the asset has fewer identical or comparable assets
(market comparable);
(b) the asset to be valued or its market comparables are not traded
in the active market;
(c) sufficient information on the comparable transaction(s) is not
available;

38
 ICAI Valuation Standards 2018

(d) there is no recent transaction either in the asset or in the market
comparables; or
(e) there are material differences between the asset to be valued
and the market comparables, which require significant
adjustments.
17. The following valuation methods are commonly used under the market
approach:
(a) Market Price Method (see paragraphs 18 -20);
(b) Comparable Companies Multiple (CCM) Method (see paragraphs
21-28); and
(c) Comparable Transaction Multiple (CTM) Method (see paragraphs
29-48).
Market Price Method
18. A valuer shall consider the traded price observed over a reasonable
period while valuing assets which are traded in the active market.
19. A valuer shall also consider the market where the trading volume of
asset is the highest when such asset is traded in more than one active
market.
20. A valuer shall use average price of the asset over a reasonable
period. The valuer should consider using weighted average or volume
weighted average to reduce the impact of volatility or any one time
event in the asset.
Comparable Companies Multiple (CCM) Method
21. Comparable Companies Multiple Method, also known as
Guideline Public Company Method, involves valuing an asset
based on market multiples derived from prices of market
comparables traded on active market.
22. The following are the major steps in deriving a value using the CCM
method:
(a) identify the market comparables;
(b) select and calculate the market multiples of the identified market
comparables;

39
ICAI Valuation Standards 2018

(c) compare the asset to be valued with the market comparables to
understand material differences; and make necessary
adjustments to the market multiple to account for such
differences, if any;
(d) apply the adjusted market multiple to the relevant parameter of
the asset to be valued to arrive at the value of such asset; and
(e) if value of the asset is derived by using market multiples based
on different metrics/parameters, the valuer shall consider the
reasonableness of the range of values.
23. While identifying and selecting the market comparables, a valuer shall
consider the factors such as-
(a) industry to which the asset belongs;
(b) geographic area of operations;
(c) similar line of business, or similar economic forces that affect the
asset being valued; or
(d) other parameters such as size (for example - revenue, assets,
etc), stage of life-cycle of the asset, profitability, diversification,
etc.
This list is not an exhaustive list, there may be certain other factors
which a valuer shall consider while identifying and selecting the
market comparables.
24. The market multiples are generally computed on the basis of following
inputs:
(a) trading prices of market comparables in an active market; and
(b) financial metrics such as Earnings Before Interest, Tax,
Depreciation and Amortisation (EBITDA), Profit After Tax (PAT),
Sales, Book Value of assets, etc.
25. If market participants are using market multiple based on non-
financial metrics for valuing an asset, such multiples may also be
considered by the valuer in addition to market multiple based on the
financial metrics. For example, Enterprise Value (EV) / Tower in case
of tower telecom companies, EV/Tonne in case of cement industry,
etc.

40
 ICAI Valuation Standards 2018

26. A valuer shall preferably use several market comparables rather than
relying on a single comparable.
27. A valuer shall exercise judgement while selecting the multiple in case
where the market multiple computed for each comparable is
significantly different from the other.
28. The following are some of the differences between the asset to be
valued and market comparable that the valuer may consider while
making adjustments to the market multiple:
(a) size of the asset;
(b) geographic location;
(c) profitability;
(d) stage of life-cycle of the asset;
(e) diversification;
(f) historical and expected growth; or
(g) management profile.
Comparable Transaction Multiple (CTM) Method
29. Comparable Transaction Multiple Method, also known as
‘Guideline Transaction Method’ involves valuing an asset based
on transaction multiples derived from prices paid in transactions
of asset to be valued /market comparables (comparable
transactions).
30. The price paid in comparable transactions generally include control
premium, except where transaction involves acquisition of non-
controlling/minority stake.
31. The following are the major steps in deriving a value using the CTM
method:
(a) identify comparable transaction appropriate to the asset to be
valued;
(b) select and calculate the transaction multiples from the identified
comparable transaction;
(c) compare the asset to be valued with the market comparables

41
ICAI Valuation Standards 2018

and make necessary adjustments to the transaction multiple to
account where differences, if any existed;
(d) apply the adjusted transaction multiple to the relevant parameter
of the asset to be valued to arrive at the value of such asset; and
(e) if valuation of the asset is derived by using transaction multiples
based on different metrics or parameters, the valuer shall
consider the reasonableness of the range of values and exercise
judgement in determining a final value.
32. While identifying and selecting the comparable transaction, a valuer
may consider the factors such as-
(a) transactions that have been consummated closer to the valuation
date are generally more representative of the market conditions
prevailing during that time;
(b) the selected comparable is an orderly transaction;
(c) availability of sufficient information on the transactions to enable
the valuer to reasonably understand the market comparable and
derive the transaction multiple; or
(d) availability of information on transaction from reliable sources
such as regulatory filings, industry magazines, Merger &
Acquisition databases, etc.
33. The transaction multiples are generally computed based on the
following two inputs:
(a) price paid in the comparable transaction; and
(b) financial metrics such as EBITDA, PAT, Sales, Book Value, etc
of the market comparable.
Even multiples based on non-financial metrics such as EV per
room for hotels, EV/Bed for hospitals) can be considered.
34. A valuer shall preferably use multiple comparable transactions of
recent past rather than relying on a single transaction.
35. The following are some of the differences between the asset to be
valued and comparable transaction that the valuer may consider while
making adjustments to the transaction multiple:

42
 ICAI Valuation Standards 2018

(a) size of the asset;
(b) geographic location;
(c) profitability;
(d) stage of life-cycle of the asset;’
(e) diversification;
(f) historical and expected growth;
(g) management profile such as private ownership vs. public sector
undertaking; or
(h) conditions if any governing the comparable transaction such as
deferred payment of consideration contingent on achievement of
certain milestones).
Discounts and Control Premium
36. A valuer shall evaluate and make adjustments for differences between
the asset to be valued and market comparables/comparable
transactions. The most common adjustment under CCM method and
CTM method pertain to ‘Discounts’ and ‘Control Premium’.
37. ‘Discounts’ include Discount for Lack of Marketability (DLOM) and
Discount for Lack of Control (DLOC).
Discount for Lack of Marketability (DLOM)
38. DLOM is based on the premise that an asset which is readily
marketable (such as frequently traded securities) commands a
higher value than an asset which requires longer marketing
period to be sold (such as securities of an unlisted entity) or an
asset having restriction on its ability to sell (such as securities
under lock-in-period or regulatory restrictions).
39. Generally, restrictions on marketability that are only inherent in the
asset to be valued shall be considered while valuing the asset.
Marketability restrictions that are specific to a particular owner of the
asset are not generally considered for discount adjustment.
40. Determining an appropriate level of DLOM can be a complex and
subjective process. Accordingly, the specific nature and
characteristics of the asset and the facts and circumstances
surrounding the valuation should be considered.

43
ICAI Valuation Standards 2018

41. A valuer shall use his professional judgement while applying DLOM
and consider the relevant factors including but not limited to-
(a) size and nature;
(b) time and costs associated with marketing or for making a public
offer;
(c) restrictions on transferability;
(d) history of past transactions;
(e) exit rights; or
(f) lack of or limitation to access to information.
Control Premium and Discount for Lack of Control (DLOC)
42. Control Premium generally represents the amount paid by
acquirer for the benefits it would derive by controlling the
acquiree’s assets and cash flows.
43. Control Premium is an amount that a buyer is willing to pay over
the current market price of a publicly-traded company to acquire
a controlling interest in an asset. It is opposite of discount for
lack of control to be applied in case of valuation of a non-
controlling/minority interest.
44. Generally, on acquisition an acquirer can derive benefits from the
following:
(a) potential synergies as a result of merger/combination; and
(b) ability to influence acquiree’s operating, financial, or corporate
governance policies relating to appointment of board members,
declaration of dividends, etc.
45. Under the CCM method, the value of the asset is on a minority
interest/non-controlling interest as the market multiples of market
comparables are derived from their respective traded price in the
active market. The traded price of such comparables may not include
the benefit derived from controlling the market comparable’s assets
and cash flows. Therefore, while applying the CCM method to value
the asset having controlling interest, a control premium may be
considered.

44
 ICAI Valuation Standards 2018

46. Under the CTM method, the transaction price generally includes price
paid for control premium. Therefore, while valuing the asset for a non-
controlling/minority interest, DLOC may be considered.
47. Determining an appropriate level of Control Premium and DLOC can
be a complex and subjective process. Accordingly, the specific nature
and characteristics of the asset and the facts and circumstances
surrounding the valuation should be considered.
48. A valuer shall use his professional judgement while applying control
premiums and DLOC, considering the factors such as amount/ extent
of control in the asset to be valued, distribution of control of the
remaining interest in the subject entity, statutory provision relating to
protection of minority shareholders; the shareholder protection
restrictions contained in the articles of incorporation, the bye-laws
and/or the shareholders’ agreement, blockage discount, etc.
Income Approach
49. Income approach is a valuation approach that converts
maintainable or future amounts (e.g., cash flows or income and
expenses) to a single current (i.e., discounted or capitalised)
amount. The fair value measurement is determined on the basis
of the value indicated by current market expectations about
those future amounts.
50. This approach involves discounting future amounts (cash
flows/income/cost savings) to a single present value.
51. The following are some of the instances where a valuer may apply the
income approach:
(a) where the asset does not have any market comparable or
comparable transaction;
(b) where the asset has fewer relevant market comparables; or
(c) where the asset is an income producing asset for which the
future cash flows are available and can reasonably be projected.
52. In some instances, a valuer may consider using other valuation
approaches instead of income approach or in combination with
income approach, such as, where –
(a) the asset has not yet started generating income or cash flows,
e.g., projects under development;

45
ICAI Valuation Standards 2018

(b) there is significant uncertainty on the amount and timing of
income/future cash flows, e.g., start-up companies; or
(c) the client does not have access to the information relating to the
asset being valued, e.g., minority shareholder may not have
access to projections/budgets or growth expectations specific to
the business.
53. Some of the common valuation methods under income approach are
as follows:
(a) Discounted Cash Flow (DCF) Method (see paragraphs 54- 83);
(b) Relief from Royalty (RFR) Method (see paragraphs 84-86);
(c) Multi-Period Excess Earnings Method (MEEM) (see paragraphs
87-89);
(d) With and Without Method (WWM) (see paragraphs 90-91); and
(e) Option pricing models such as Black-Scholes-Merton formula or
binomial (lattice) model (see paragraphs 92-94).
Discounted Cash Flow (‘DCF’) Method
54. The DCF method values the asset by discounting the cash flows
expected to be generated by the asset for the explicit forecast
period and also the perpetuity value (or terminal value) in case of
assets with indefinite life.
55. The DCF method is one of the most common methods for valuing
various assets such as shares, businesses, real estate projects, debt
instruments, etc.
56. This method involves discounting of future cash flows expected to be
generated by an asset over its life using an appropriate discount rate
to arrive at the present value.
57. The following are the major steps in deriving a value using the DCF
method:
(a) Consider the projections to determine the future cash flows
expected to be generated by the asset;
(b) analyse the projections and its underlying assumptions to assess
the reasonableness of the cash flows;
(c) choose the most appropriate type of cash flows for the asset,

46
 ICAI Valuation Standards 2018

viz., pre-tax or post-tax cash flows, free cash flows to equity or
free cash flows to firm;
(d) determine the discount rate and growth rate beyond explicit
forecast period; and
(e) apply the discount rate to arrive at the present value of the
explicit period cash flows and for arriving at the terminal value.
58. While using the DCF method, it may also be necessary to make
adjustments to the valuation to reflect matters that are not captured in
either the cash flow forecasts or the discount rate adopted.
59. In case of the DCF method, projected cash flows reflect the benefits
of control and accordingly the value of asset arrived under this
method is not to be grossed up for control premium.
60. A valuer shall use his professional judgement while applying the
DLOM / DLOC. It may include adjustments for discount for the
marketability of the interest being valued or whether the interest being
valued is non-controlling interest in the business.
61. The following are important inputs for the DCF method:
(a) Cash flows;
(b) Discount rate; and
(c) Terminal value
Cash Flows
62. In most cases, the projections shall comprise the statement of profit &
loss, balance sheet, cash flow statement, along with the underlying
key assumptions. However, in certain cases, if balance sheet and
cash flow statement are not available, details of future capital
expenditure and working capital requirements may also suffice.
63. The projections reflect the accrual based accounting income and
expenses. For arriving at the cash flows, non-cash expenses, such as
depreciation and amortisation, shall be added back. Further, cash
outflows relating to capital expenditure and incremental working
capital requirements, if any shall be deducted.
64. Generally, historical financial statements are used as the base for
preparation of projections. If in future, changes in circumstances are

47
ICAI Valuation Standards 2018

anticipated the assumptions underlying the projections shall reflect
differences on account of such differences vis-à-vis the historical
financial statements.
65. A valuer shall by employing procedures such as ratio analysis, trend
analysis to determine historical trends, gather necessary information
to assess risks inherent in the achievability of the projections.
66. The fact that the valuer considers the projections in estimating the
value of the asset shall not be construed as the valuer being
associated with or being a party to such projections.
67. The length of the period of projections (explicit forecast period) shall
be determined based on the following factors:
(a) Nature of the asset- where the business is of cyclical nature,
explicit forecast period should ordinarily consider one entire
cycle (for example cement business).
(b) Life of the asset- In case of asset with definite life, explicit period
should be for the entire life of the asset (for example, debt
instruments, Build Operate Transfer (BOT) road projects).
(c) Sufficient period- The forecast period should have a length of
time that is sufficient for the asset to achieve stable levels of
operating performance.
(d) Reliable data- The data that are used for projecting the cash
flows, should be reliable.
68. The following are the cash flows which are used for the projections:
(a) Free Cash Flows to Firm (FCFF): FCFF refers to cash flows that
are available to all the providers of capital, i.e. equity
shareholders, preference shareholders and lenders. Therefore,
cash flows required to service lenders and preference
shareholders such as interest, dividend, repayment of principal
amount and even additional fund raising are not considered in
the calculation of FCFF.
(b) Free Cash Flows to Equity (FCFE): FCFE refers to cash flows
available to equity shareholders and therefore, cash flows after
interest, dividend to preference shareholders, principal
repayment and additional funds raised from lenders / preference
shareholders are considered.

48
 ICAI Valuation Standards 2018

Asset value is independent of the manner of finance, hence, FCFF is
most commonly used to arrive at an asset value. However, the value
of an asset is independent of the manner in which it is financed.
Discount Rate
69. Discount Rate is the return expected by a market participant from
a particular investment and shall reflect not only the time value
of money but also the risk inherent in the asset being valued as
well as the risk inherent in achieving the future cash flows.
70. The following discount rates are most commonly used depending
upon the type of the asset:
(a) cost of equity;
(b) weighted average cost of capital;
(c) Internal Rate of Return (‘IRR’);
(d) cost of debt; or
(e) yield.
71. Different methods are used for determining the discount rate. The
most commonly used methods are as follows:
(a) Capital Asset Pricing Model (CAPM) for determining the cost of
equity.
(b) Weighted Average Cost of Capital (WACC) is the combination of
cost of equity and cost of debt weighted for their relative funding
in the asset.
(c) Build-up method (generally used only in absence of market
inputs).
72. A valuer may consider the following factors while determining the
discount rate:
(a) type of asset being valued such as example debt, preference
shares, business, real estate, intangibles, etc.;
(b) life of the asset such as the risk-free rate used for determining
the cost of equity in the CAPM model differs for an asset with a
one-year life vs an indefinite life;

49
ICAI Valuation Standards 2018

(c) geographic location of the asset;
(d) currency in which the projections have been prepared;
(e) type of cash flows;
(f) risk in achieving the projected cash flows;
(g) cash flows used for the projections as FCFE needs to be
discounted by Cost of Equity whereas FCFF to be discounted
using WACC;
(h) discount the cash flows in the functional currency using a
discount rate appropriate for that functional currency; and
(i) pre-tax cash flows need to be discounted by pre-tax discount
rate and post-tax cash flows to be discounted by post-tax
discount rate;
73. A valuer shall include where appropriate risk adjustments that a
market participant shall expect as compensation for uncertainty
inherent in the cash flows.
Terminal Value
74. Terminal value represents the present value at the end of explicit
forecast period of all subsequent cash flows to the end of the life
of the asset or into perpetuity if the asset has an indefinite life.
75. In case of assets having indefinite or very long useful life, it is not
practical to project the cash flows for such indefinite or long periods.
Therefore, the valuer needs to determine the terminal value to capture
the value of the asset at the end of explicit forecast period.
76. There are different methods for estimating the terminal value. The
commonly used methods are :
(a) Gordon (Constant) Growth Model;
(b) Variable Growth Model;
(c) Exit Multiple; and
(d) Salvage / Liquidation value
Gordon (Constant) Growth Model
77. The terminal value under this method is computed by dividing the

50
 ICAI Valuation Standards 2018

perpetuity maintainable cash flows with the discount rate as reduced
by the stable growth rate.
78. The estimation of stable growth rate is of great significance because
even a minor change in stable growth rate can have an impact on the
terminal value and the value of the asset too.
Variable Growth Model
79. The Constant Growth Model assumes that the asset grows (or
declines) at a constant rate beyond the explicit forecast period
whereas the Variable Growth Model assumes that the asset grows (or
declines) at variable rate beyond the explicit forecast period.
Exit Multiple
80. The estimation of terminal value under this method involves
application of a market-evidence based capitalisation factor or a
market multiple (for example, Enterprise Value (EV) / Earnings before
Interest, Tax, Depreciation and Amortisation (EBITDA), EV / Sales) to
the perpetuity earnings / income.
81. The multiple needs to be estimated based on multiples of comparable
assets and hence, the principles laid down under the market approach
section of this standard should be complied with.
Salvage or Liquidation value
82. In some cases, such as mine or oil fields, the terminal value has
limited or no relationship with the cash flows projected for the explicit
forecast period. For such assets, the terminal value is calculated as
the salvage or realisable value less costs to be incurred for disposing
of such asset.
Terminal growth rate
83. Some of the factors that a valuer may consider while determining the
terminal growth rate:
(a) whether the level of operations beyond explicit forecast period
are expected to be significantly different from the level projected
in the last year of the explicit forecast period or only a normal
growth is expected;
(b) capacity utilisation at the end of explicit forecast period;

51
ICAI Valuation Standards 2018

(c) functional currency in which the projections have been prepared;
(d) market share;
(e) product life cycle;
(f) geographic location of the asset;
(g) type of cash flows;
(h) residual life of the asset at the end of the explicit forecast period;
(i) capital investment required to support the assumed growth rate;
(j) whether there is future growth potential for the asset beyond the
explicit forecast period, or whether the asset is deteriorating in
nature; and
(k) for cyclical assets, the terminal value should consider the cyclical
nature of the asset.
Relief from Royalty (RFR) Method
84. RFR Method is a method in which the value of the asset is
estimated based on the present value of royalty payments saved
by owning the asset instead of taking it on lease. It is generally
adopted for valuing intangible assets that are subject to
licensing, such as trademarks, patents, brands, etc.
85. The fundamental assumption underlying this method is that if the
intangible asset to be valued had to be licensed from a third-party
owner there shall be a royalty charge for use of such asset. By owning
the said intangible asset, royalty outgo is avoided. The value under
this method is equal to the present value of the licence fees / royalty
avoided by owning the asset over its remaining useful life.
86. The following are the major steps in deriving a value using the RFR
method:
(a) obtain the projected income statement associated with the
intangible asset to be valued over the remaining useful life of the
said asset from the client or the target;
(b) analyse the projected income statement and its underlying
assumptions to assess the reasonableness;
(c) select the appropriate royalty rate based on market-based

52
 ICAI Valuation Standards 2018

royalty rates for similar intangible assets or using the profit split
method;
(d) deduct costs associated with maintaining licencing arrangements
for the intangible asset from the resultant royalty savings;
(e) apply the selected royalty rate to the future income attributable to
the said asset;
(f) use the appropriate marginal tax rate or such other appropriate
tax rate to arrive at an after-tax royalty savings;
(g) discount the after-tax royalty savings to arrive at the present
value using an appropriate discount rate; and
(h) Tax amortisation benefit, if appropriate, should be added to the
overall value of the asset.
Multi-Period Excess Earnings Method (MEEM)
87. MEEM is generally used for valuing intangible asset that is
leading or the most significant intangible asset out of group of
intangible assets being valued.
88. The fundamental concept underlying this method is to segregate the
earnings attributable to the intangible asset being valued. Intangible
assets which have a finite life can only be used to value using MEEM.
The value under this method is equal to the present value of the
incremental after-tax cash flows (‘excess earnings’) attributable to the
intangible asset to be valued over its remaining useful life.
89. The following are the major steps in deriving a value using the MEEM
(a) obtain the projections for the entity or the combined asset group
over the remaining useful life of the said intangible asset to be
valued from the client or the target to determine the future after-
tax cash flows expected to be generated;
(b) analyse the projections and its underlying assumptions to assess
the reasonableness of the cash flows;
(c) Contributory Asset Charges (CAC) or economic rents to be
reduced from the total net after-tax cash flows projected for the
entity/combined asset group to obtain the incremental after-tax
cash flows attributable to the intangible asset to be valued;

53
ICAI Valuation Standards 2018

(d) the CAC represent the charges for the use of an asset or group
of assets (e.g., working capital, fixed assets, assembled
workforce, other intangibles) based on their respective fair
values and should be considered for all assets, excluding
goodwill, that contribute to the realisation of cash flows for the
intangible asset to be valued;
(e) discount the incremental after-tax cash flows attributable to the
intangible asset to be valued to arrive at the present value using
an appropriate discount rate; and
(f) Tax amortisation benefit, if appropriate.
With and Without Method (WWM)
90. Under WWM, the value of the intangible asset to be valued is
equal to the present value of the difference between the
projected cash flows over the remaining useful life of the asset
under the following two scenarios:
(a) business with all assets in place including the intangible
asset to be valued; and
(b) business with all assets in place except the intangible asset
to be valued.
91. The following are the major steps in deriving a value using the WWM :
(a) obtain cash flow projections for the business over the remaining
useful life of the said asset to be valued under the following two
scenarios:
(i) business with all assets in place including the intangible
asset to be valued; and
(ii) business with all assets in place except the intangible asset
to be valued.
(b) analyse the projections and its underlying assumptions to assess
the reasonableness of the cash flows;
(c) discount the difference between the projected cash flows under
two scenarios to arrive at the present value using an appropriate
discount rate; and
(d) Tax amortisation benefit, if appropriate.

54
 ICAI Valuation Standards 2018

Option Pricing Models
92. There are several methods to value options, of which the Black-
Scholes-Merton Model and Binomial Model are widely used. The
important inputs required in these models are as under:
(a) current price of asset to be valued;
(b) exercise price;
(c) life of the option;
(d) expected volatility in the price of the asset;
(e) expected dividend yield; and
(f) risk free interest rate.
93. These models value options by creating replicating portfolios
composed of asset to be valued and riskless lending or borrowing.
94. MEEM, Relief from Royalty method, With and Without method are
used only for valuation of intangible assets and Option Pricing Models
are used in case of valuation of options. Specific guidance on the
aforesaid valuation methods is provided in other relevant ICAI
Valuation Standards.
Cost Approach
95. Cost approach is a valuation approach that reflects the amount
that would be required currently to replace the service capacity
of an asset (often referred to as current replacement cost).
96. In certain situations, historical cost of the asset may be considered by
the valuer where it has been prescribed by the applicable
regulations/law/guidelines or is appropriate considering the nature of
the asset.
97. Examples of situations where a valuer applies the cost approach are:
(a) an asset can be quickly recreated with substantially the same
utility as the asset to be valued;
(b) in case where liquidation value is to be determined; or
(c) income approach and/or market approach cannot be used.
98. In some instances, the valuer may consider using other valuation
approaches in combination with cost approach, such as:

55
ICAI Valuation Standards 2018

(a) the asset has not yet started generating income / cash flows
(directly or indirectly);
(b) an asset of substantially the same utility as the asset to be
valued can be created but there are regulatory or legal
restrictions and involves significant time for recreation; or
(c) the asset was recently created.
99. The following are the two most commonly used valuation methods
under the Cost approach:
(a) Replacement Cost Method (see paragraph 100-102); and
(b) Reproduction Cost Method (see paragraph 103-107).
Replacement Cost Method
100. Replacement Cost Method, also known as ‘Depreciated
Replacement Cost Method’ involves valuing an asset based on
the cost that a market participant shall have to incur to recreate
an asset with substantially the same utility (comparable utility) as
that of the asset to be valued, adjusted for obsolescence.
101. The physical properties of the new asset may or may not be similar to
the one under valuation, but the former asset should bear comparable
utility. Obsolescence includes physical deterioration, functional
(technological) and economic obsolescence. The term obsolescence
connotes a wider meaning than the term depreciation adopted for
financial reporting or tax purposes.
102. The following are the major steps in deriving a value using the
Replacement Cost method:
(a) estimate the costs that will be incurred by a market participant
for creating an asset with comparable utility as that of the asset
to be valued;
(b) assess whether there is any loss on account of physical,
functional or economic obsolescence in the asset to be valued;
and
(c) adjust the obsolescence value, if any as determined under (b)
above from the total costs estimated under (a) above, to arrive at
the value of the asset to be valued.

56
 ICAI Valuation Standards 2018

Reproduction Cost Method
103. Reproduction Cost Method involves valuing an asset based on
the cost that a market participant shall have to incur to recreate a
replica of the asset to be valued, adjusted for obsolescence.
104. The following are the major steps in deriving a value using the
Reproduction Cost method:
(a) estimate the costs that will be incurred by a market participant for
creating a replica of the asset to be valued;
(b) assess whether there is any loss of value on account of physical,
functional or economic obsolescence in the asset to be valued;
and
(c) adjust the obsolescence value, if any as determined under (b)
above from the total costs estimated under (a) above, to arrive at
the value of the asset to be valued.
Obsolescence
105. Under the Replacement Cost Method or the Reproduction Cost
Method, the estimated cost of creating an asset is required to be
adjusted for depreciation on account of obsolescence in the
asset to be valued.
106. The following are common types of obsolescence
(a) Physical obsolescence represents the loss in value on account of
decreased usefulness of the asset as the useful life expires.
(b) Functional (technological) obsolescence represents the loss in
value on account of new technological developments; whereby
the asset to be valued becomes inefficient due to availability of
more efficient replacement assets.
(c) Economic (external) obsolescence represents the loss in value
on account of decreased usefulness of the asset caused by
external economic factors such as change in environmental or
other regulations, excess supply, high interest rates, etc.
107. Cost approach is generally used in case of valuation of property, plant
and equipment and certain intangible assets. ICAI Valuation
Standards dealing with valuation of these assets provides specific

57
ICAI Valuation Standards 2018

guidance on the aforesaid valuation methods under the Cost
approach.

Effective Date
108. ICAI Valuation Standard 103 Valuation Approaches and Methods,
shall be applied for the valuation reports issued on or after 1st July,
2018.

58
 ICAI Valuation Standards 2018

ICAI Valuation Standard 201
Scope of Work, Analyses and Evaluation
Contents Paragraph
OBJECTIVE 1-4
SCOPE 5-9
SIGNIFICANT ELEMENTS 10-15
SCOPE OF WORK/ TERMS OF ENGAGEMENT 16-24
CONFIDENTIALITY OF REPORT 25
ANALYSES AND EVALUATION 26-35
Analysis of asset to be valued 29-35
Non-financial Information 31
Ownership Details 32
Financial Information 33-34
General Information 35
SUBSEQUENT EVENTS 36-39
RELIANCE ON THE WORK OF OTHER EXPERTS 40-43
INFORMATION AND ANALYSES 44-45
EFFECTIVE DATE 46

This ICAI Valuation Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the
main principles. (This ICAI Valuation Standard should be read in the
context of Framework for the Preparation of Valuation Report in
accordance with ICAI Valuation Standards)

Objective
1. This Standard prescribes the basis for:
(a) determining and documenting the scope/terms of a valuation
engagement, responsibilities of the valuer and the client;

59
ICAI Valuation Standards 2018

(b) the extent of analyses and evaluations to be carried out by
the valuer; and
(c) responsibilities of the valuer while relying on the work of
other experts.
2. The objective of this Standard is to prescribe the minimum
requirements in respect of terms of the engagement of valuation.
3. This Standard provides guidance to the valuer in relation to his
responsibility for a valuation assignment.
4. The principles enunciated in this Standard shall be applied in
conjunction with the principles prescribed and contained in the
Framework for the Preparation of Valuation Report in accordance
with ICAI Valuation Standards.

Scope
5. A valuer shall follow the requirement of this Standard while
accepting an engagement of valuation. The valuer and the client
should agree on the terms of engagement before commencement
of the engagement.
6. The agreed terms shall be recorded in the engagement letter including
where necessary, an addendum, thereto.
7. This Standard is applicable to all valuation assignments performed
giving reference to any of the ICAI Valuation Standards.
8. The valuation engagement covers:
(a) arriving at an estimate of / providing an opinion of value;
(b) fairness opinion which involves opining on the fairness of the
price at which a transaction has taken place or on the fairness of
the value conclusion of another valuer;
(c) valuation review, where the work of another valuer is reviewed.
As part of a valuation review, the reviewer may perform certain
valuation procedures and/or providing an opinion of value.
9. A valuer shall carry out the assignment in accordance with the
principles laid in the ICAI Valuation Standards, as applicable to the
purpose and terms of engagement.

60
 ICAI Valuation Standards 2018

Significant Elements
10. Scope of work describes the work to be performed,
responsibilities and confidentiality obligations of the client and
the valuer respectively, and limitation of the valuation
engagement.
11. The terms of engagement shall be mutually agreed between the
valuer and the client. The valuer shall ensure that the terms of the
engagement provide a reasonable framework to perform the valuation
in accordance with the ICAI Valuation Standards.
12. The terms shall be reviewed by the valuer and the client and modified
suitably, if required, to meet the changed circumstances.
13. A valuer shall be responsible for the methods and assumptions used
by him.
14. The valuation shall not be constituted as an audit or review in
accordance with the auditing standards applicable in India,
accounting/financial/commercial/legal/tax/environmental due diligence
or forensic/investigation services, and shall not include verification or
validation work.
15. The client should keep the valuer informed of any material
development relating to the business or operations which may have a
bearing on the engagement.

Scope of Work/Terms of Engagement
16. The following are the key elements of the engagement:
(a) scope;
(b) responsibility;
(c) authority;
(d) confidentiality;
(e) limitations;
(f) reporting; and
(g) compliance with ICAI Valuation Standards.

61
ICAI Valuation Standards 2018

17. There should be clarity of terms of the valuation engagement between
the valuer and the client to avoid misunderstanding as to any aspect
of the engagement.
18. The terms of the valuation assignment shall be documented in writing
in an engagement letter.
19. The engagement letter shall at the minimum include:
(a) details of the client;
(b) details of any other user/s of the valuation report apart from the
client, if any;
(c) details of the valuer;
(d) purpose of the valuation;
(e) identification of the subject matter of valuation;
(f) valuation date;
(g) basis and premise of valuation;
(h) responsibilities of the client and the valuer;
(i) confidentiality obligations of the client and the valuer;
(j) scope/ limitations;
(k) fees ;
(l) details of third party expert, if any, and their scope of work, scope
limitations, and responsibilities.
20. Any changes to the agreed upon terms of the engagement shall be
documented in writing.
21. The client shall be responsible for providing timely and accurate data,
information, records, clarifications, personnel etc.
22. The terms of engagement shall clearly specify that the ownership of
the working papers rests with the valuer. It should also be made clear
that the valuer may provide copies of non-proprietary working papers,
upon a written request of the client.
23. The terms of engagement shall specify clearly the limitations on
scope, coverage and reporting requirement, if any.

62
 ICAI Valuation Standards 2018

24. In case the valuer is unable to agree to any change in the terms of
engagement and/or is not permitted to continue as per the original
terms, he should withdraw from the engagement and should consider
whether there is an obligation, contractual or otherwise, to report the
circumstances necessitating the withdrawal to the client.

Confidentiality of the Report
25. The engagement letter shall contain a condition that the valuation
report should not be used, reproduced, distributed or circulated
whether in whole or part, other than for the purpose agreed in the
scope of work/terms of engagement, without the prior written consent
of the client or valuer as the case may be unless there is a statutory or
a regulatory requirement to do so.

Analyses and Evaluation
26. The extent of analyses to be carried out by the valuer in relation
to the engagement shall be based on the purpose of the valuation
assignment and the terms of engagement.
27. The judgments made by the valuer during the course of assignment,
including the sufficiency of the data made available to meet the
purpose of the valuation, must be adequately supported.
28. The valuer shall carry out relevant analyses and evaluations through
discussions, inspections, survey, calculations and such other means
as may be applicable and available to that effect.
Analysis of Asset to be Valued
29. If the valuer relies on the information available in public domain, the
valuer should assess the credibility/reliability of such information
taking into account, inter-alia, the purpose of valuation, and materiality
vis-à-vis the valuation conclusion,.
30. The type, availability, and significance of such information may vary
with the asset to be valued. Such information shall include:
(a) non-financial information;
(b) ownership details;
(c) financial information; and
(d) general information.

63
ICAI Valuation Standards 2018

Non-Financial Information
31. A valuer shall obtain sufficient non-financial information to enable him
to understand the underlying business, such as:
(a) nature, background, and history of the business;
(b) facilities;
(c) organizational structure;
(d) management team (which may include officers, directors, and
key employees);
(e) classes of equity ownership interests and rights attached thereto;
(f) products or services, or both;
(g) capital markets providing relevant information; e.g., relevant
public stock market information and relevant merger and
acquisition information;
(h) prior transactions involving the subject business, or involving
interests in, the securities of, or intangible assets in the subject
business;
(i) economic environment;
(j) geographical markets;
(k) industry markets;
(l) key customers and suppliers;
(m) competition;
(n) business risks;
(o) future outlook for the business;
(p) strategy and future plans;
(q) governmental or regulatory environment;
(r) legal status of the asset being valued.
Ownership Information
32. A valuer shall obtain ownership information regarding the asset to be
valued to enable him to:

64
 ICAI Valuation Standards 2018

(a) determine the type of ownership interest being valued and
ascertain whether that interest exhibits control characteristics;
(b) analyse the different ownership interests of other owners and
assess the potential effect on the value of the asset;
(c) understand the classes of equity ownership interests and rights
attached thereto;
(d) understand other matters that may affect the value of the subject
interest, such as:
(i) for a business, business ownership interest: shareholder
agreements, partnership agreements, operating
agreements, voting trust agreements, buy-sell agreements,
loan covenants, restrictions, and other contractual
obligations or restrictions affecting the owners and the asset
to be valued;
(ii) for an intangible asset: legal rights, licensing agreements,
sublicense agreements, nondisclosure agreements,
development rights, commercialization or exploitation rights,
and other contractual obligations.
Financial Information
33. A valuer shall obtain, where applicable and available, financial
information on the underlying business such as:
(a) historical financial information (including annual and interim
financial statements and key financial statement ratios and
statistics) for an appropriate number of years;
(b) prospective financial information (for example, budgets,
forecasts, and projections)- in the absence of which the valuer
could consider information on future developments or course of
the business;
(c) comparative summaries of financial statements or information
covering a relevant time period;
(d) comparative common size financial statements for the subject
entity for an appropriate number of years;
(e) comparative common size industry financial information for a
relevant time period;

65
ICAI Valuation Standards 2018

(f) income tax returns for an appropriate number of years;
(g) information on compensation for owners including benefits and
personal expenses;
(h) details of and management’s response to the inquiry regarding:
(i) advantageous or disadvantageous contracts;
(ii) contingent or off-balance-sheet assets or liabilities;
(iii) surplus/ non-operating assets.
34. A valuer shall read and evaluate the information to determine that it is
reasonable for the purposes of the engagement.
General Information
35. A valuer shall gather and analyse the relevant general information
which may affect the business directly or indirectly and/or which are
deemed relevant by the valuer.

Subsequent Events
36. The valuation date is the specific date at which a valuer estimates the
value of the asset.
37. An event that occurs subsequent to the valuation date could
affect the value; such an occurrence is referred to as a
subsequent event.
38. Subsequent events are indicative of the conditions that were not
known or knowable at the valuation date, including conditions that
arose subsequent to the valuation date.
39. Generally, a valuer would consider only circumstances existing at the
valuation date and events occurring up to the valuation date.
However, events and circumstances occurring subsequent to the
valuation date, may be relevant to the valuation depending upon, inter
alia, the basis, premise and purpose of valuation. Hence the valuer
should apply its professional judgement, to consider any of such
circumstances / events which are relevant for the valuation. Such
circumstances / events could be relating to, but not limited to, the
asset being valued, comparables and valuation parameters used. In
the event such circumstances / events are considered by the valuer
the same should be explicitly disclosed in the valuation report.

66
 ICAI Valuation Standards 2018

Reliance on the work of other Experts
40. A valuer shall evaluate the skills, qualification, and experience of
the other expert in relation to the subject matter of his valuation.
41. A valuer must determine that the expert has sufficient resources to
perform the work in a specified time frame and also explore the
relationship which shall not give rise to the conflict of interest.
42. If the work of any third party expert is to be relied upon in the
valuation assignment, the description of such services to be provided
by the third party expert and the extent of reliance placed by the
valuer on the expert’s work shall be documented in the engagement
letter. The engagement letter should document that the third party
expert is solely responsible for their scope of work, assumptions and
conclusions.
43. A valuer shall specifically disclose the nature of work done and give
sufficient disclosure about reliance placed by him on the work of the
third party expert in the valuation report.

Information and Analyses
44. A valuer shall obtain sufficient appropriate data, information,
explanations and perform appropriate analyses based on his
professional judgment to enable him to draw reasonable
conclusions on which to base his opinions or findings.
45. The factors affecting the professional judgement include the possible
errors and their materiality and the risk of occurrence of such errors.

Effective Date
46. ICAI Valuation Standard 201 Scope of Work, Analyses and
Evaluation, shall be applied for the valuation reports issued on or
after 1st July, 2018

67
ICAI Valuation Standards 2018

ICAI Valuation Standard 202
Valuation Report and Documentation
CONTENTS PARAGRAPH
OBJECTIVE 1-3
SCOPE 4-6
SIGNIFICANT ELEMENTS 7-9
CONTENTS OF THE VALUATION REPORT 10-35
MANAGEMENT REPRESENTATIONS 36-38
DOCUMENTATION 39-48
EFFECTIVE DATE 49

The ICAI Valuation Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the
main principles. (This ICAI Valuation Standard should be read in the
context of Framework for the Preparation of Valuation Report in
accordance with the ICAI Valuation Standards)

Objective
1. This Standard provides the:
(a) minimum content of the valuation report;
(b) basis for preparation of the valuation report; and
(c) basis for maintaining sufficient and appropriate
documentation.
2. The objective of this Standard is to prescribe the minimum contents of
the valuation report depending upon the nature of the engagement
and specify the responsibility of a valuer in preparing the relevant
documentation for arriving at a value.
3. The principles enunciated in this Standard shall be applied in
conjunction with the principles prescribed and contained in the
Framework for the Preparation of Valuation Report in accordance
with the ICAI Valuation Standards.

68
 ICAI Valuation Standards 2018

Scope
4. A valuer shall follow all requirements of this Standard in
preparation of the valuation report.
5. This Standard provides guidance on the documentation to be
maintained for the preparation of a valuation report. Relevant valuation
documentation that meets the requirements of this Standard provides
evidence of the valuer’s basis for arriving at the value and that the
valuation was planned and performed in accordance with the relevant
ICAI Valuation Standards.
6. The contents of the valuation report specified in this Standard are not
applicable to the extent a valuer is required to follow the requirements
prescribed by any law, regulations, rules or directions of any
Government or regulatory authority, or Court order. Sometimes, a
valuer, as required by law or otherwise, may review a valuation
undertaken by another valuer. Such review may be called by any other
term such as opinion, valuation review engagement, etc. This
valuation standard shall apply to the reports of such reviews
undertaken.

Significant Elements
7. The form and content of the valuation report depends on the-
(a) nature of the engagement; and
(b) purpose of the valuation.
8. A valuer shall document matters which are important in providing
evidence that the valuation assignment was carried out in accordance
with the ICAI Valuation Standards and support his assessment or the
valuation report submitted by him.
9. A valuer shall prepare the valuation report with due professional care.

Contents of the Valuation Report
10. The contents of the valuation report are selected by the valuer,
based on the specifics of the engagement, in particular, the
nature of the engagement, and the purpose of valuation.
11. A valuer shall at a minimum include the following in the valuation
report:

69
ICAI Valuation Standards 2018

(a) background information of the asset being valued;
(b) purpose of the valuation and appointing authority;
(c) the identity of the valuer and any other experts involved in
the valuation;
(d) disclosure of the valuer’s interest or conflict, if any;
(e) date of appointment, valuation date and date of the valuation
report;
(f) inspections and/or investigations undertaken;
(g) nature and sources of the information used or relied upon;
(h) procedures adopted in carrying out valuation and valuation
standards followed;
(i) valuation methodology used;
(j) restrictions on use of the valuation report, if any;
(k) major factors that were taken into account during the
valuation;
(l) conclusion; and
(m) caveats, limitation and disclaimers to the extent they explain
or elucidate the limitations faced by valuer, which shall not
be for the purpose of limiting his responsibility for the
valuation report.
12. Where a valuer uses the work of an expert during the process of
valuation, he shall disclose the identity of such expert and the reliance
placed on the valuation report of such expert.
13. A valuer may decide to include the valuation report issued by such
expert as an annexure to his valuation report.
14. It is normally presumed by the users of the valuation report that the
valuer is independent of the asset to be valued and the client for whom
the valuation is being done. Where the valuation is being undertaken
for a client and is to be used for the purpose of any transaction or
otherwise by another identified specific party at the time of
engagement, the valuer shall evaluate independence with reference to
the other specific party also.

70
 ICAI Valuation Standards 2018

15. A valuer shall appropriately disclose his interest/conflict of interest, if
any, in the assets to be valued in the valuation report.
16. In case where the relevant law prohibits the acceptance of an
assignment by a valuer due to the existence of any interest in the
asset valued, or any conflict of interest, the valuer shall not accept the
valuation engagement.
17. A valuer shall determine the valuation bases for undertaking the
valuation of any asset category. These valuation bases describe the
fundamental premises on which the value will be based.
18. A valuer shall disclose the valuation bases which are considered in
accordance with ICAI Valuation Standard 102 Valuation Bases while
arriving at the value in the valuation report. The following are
examples of the valuation bases which are explained in detail in ICAI
Valuation Standard 102:
(a) Fair value;
(b) Participants specific value; and
(c) Liquidation value
19. A valuer shall use appropriate valuation approach/ approaches for
arriving at the value. Certain valuation approaches which are
explained in detail in ICAI Valuation Standard 103, Valuation
Approaches and Methods are as follows:
(a) Market approach;
(b) Income approach; and
(c) Cost approach.
20. The examples of various methods within these approaches are:
(a) market price method;
(b) comparable companies multiple method;
(c) comparable transaction multiple method;
(d) discounted cash flow method;
(e) relief from royalty method;
(f) multi-period excess earnings method;

71
ICAI Valuation Standards 2018

(g) with and without method;
(h) option pricing method;
(i) replacement cost method; and
(j) reproduction cost method.
21. A valuer may use a combination of methods and approaches to arrive
at the value.
22. A valuer shall disclose the approaches and methods which are
considered in accordance with ICAI Valuation Standard 103 used in
arriving at the value.
23. The valuation assignment concludes with the valuer providing an
estimate of value. Such an estimate of value may be an exact number
or a range of values.
24. A valuer shall clearly describe the conclusion of value, either as a
single amount or a range.
25. In certain cases, the law or regulatory orders may require the valuer to
report a specific amount, which may be a number or some other
specific unit. In such cases, the valuer shall clearly describe the
specific exchange or swap ratio based on the value arrived at.
26. The identity of the valuer shall be clearly mentioned in the valuation
report.
27. The valuation report shall include the signature of valuer along with
the name of entity (in case an entity is appointed) appointed for the
valuation assignment.
28. The signature shall (to the extent applicable) contain the name of the
valuer vested with signing authority, entity name, individual and
entity’s registration number along with the date and place where the
valuation report is signed.
29. A valuer considers various factors while undertaking the valuation.
These include assumptions in respect of information received,
information not available, as well as information which are not capable
of being independently verified.
30. A valuer shall disclose the major factors considered by him in the
valuation report to assist the readers to have a complete
understanding of the valuation.

72
 ICAI Valuation Standards 2018

31. Valuation analysis and results are specific to the purpose of valuation,
the client requirements and the valuation date. The caveats, limitations
or disclaimers which are considered while arriving at the value shall be
clearly disclosed in the valuation report.
32. A valuer shall exercise reasonable restraint in using caveats while
writing the valuation report.
33. ICAI Valuation Standards pertaining to certain classes of assets may
prescribe additional information to be reported. In such cases, the
valuation report shall include such additional information as specified
in the relevant ICAI Valuation Standard pertaining to such class of
assets.
34. A valuer shall indicate in the valuation report the restrictions on the
use of the report by or on the users of the report, as the case may be.
35. In addition to the minimum contents as given above, if the valuer
believes that certain additional information will be useful to the user for
a better understanding of the valuation, the valuer may include such
additional information in the valuation report.

Management Representations
36. A valuer may obtain written representations from the
management/client regarding information for performing the valuation
assignment. The decision to obtain a representation letter is a matter
of judgment by the valuer. A written representation obtained from the
management or those charged with governance becomes part of the
evidence obtained by the valuer which forms a basis for his valuation
report.
37. Wherever a valuer obtains written representations from the
management/client regarding information which is the base for the
valuation assignment, the valuer shall mention the fact of such
representation and the reliance placed on the same.
38. The existence of a management representation letter shall not
preclude the valuer from exercising reasonable skill and care with
respect to the information obtained regarding the valuation. The valuer
shall carry required procedures in the performance of his valuation
assignment in respect of the information included in the management
representation letter.

73
ICAI Valuation Standards 2018

Documentation
39. Documentation includes the record of valuation procedures
performed, relevant evidence obtained and conclusions that the
valuer has reached.
40. A valuer shall maintain documentation which provides:
(a) sufficient and appropriate record of the basis of the valuation
report; and
(b) evidence that the valuation assignment was planned and
performed in accordance with the ICAI Valuation Standards and
applicable legal and regulatory requirements, as the case may
be.
41. A valuer shall obtain sufficient and appropriate evidence in arriving at
conclusions which form the basis of his valuation report.
42. A valuer shall document the valuation evidence obtained on a timely
basis. Documentation shall be prepared at the time the valuation
assignment is performed. The extent of documentation is a matter of
professional judgement.
43. A valuer shall retain the information obtained, as well as his analyses,
assumptions, and workings to arrive at the valuation for a period of
time sufficient to meet the needs of applicable legal, regulatory or
other professional requirements for records retention. This retention
period for valuation documentation is ordinarily not shorter than eight
years from the date of the valuation report. The valuer may maintain
documentation in either physical or electronic format.
44. A valuer shall ensure that the documentation is maintained in a form
that is sufficient to enable another professional having no connection
with the engagement or a reviewer appointed by any relevant
professional body, to review the valuation process and conclusions.
45. The information received and relied upon, as well as analyses thereon
differ for every valuation engagement, However, the following
documents/information/analyses shall, at the minimum, be
documented:
(a) engagement or appointment letter which appoints the valuer to
undertake the valuation;

74
 ICAI Valuation Standards 2018

(b) tabulation of data obtained during the course of valuation;
(c) workings undertaken to arrive at the value;
(d) copies of relevant circulars, extracts of legal provisions;
(e) the base/s, approach/es, and method/s, or a combination thereof,
used to arrive at the value;
(f) assumptions, a change in which, may materially affect the value;
(g) a copy of the signed valuation report issued; and
(h) management/client representation letter or such communication
received, if any.
46. The valuation documentation is not limited to records prepared by the
valuer but may include appropriate records such as minutes of
meetings, reports issued by other experts, and other independent
industry/sector or other such data provided to the valuer by the client,
if any.
47. Unless otherwise specified by law or regulation, valuation
documentation is the property of the valuer.
48. A valuer or his organisation shall establish policies and procedures
designed to maintain the confidentiality, safe custody, integrity,
accessibility and retrievability of the documentation.

Effective Date
49. ICAI Valuation Standard 202 Valuation Report and Documentation,
shall be applied for the valuation reports issued on or after 1st July,
2018.

75
ICAI Valuation Standards 2018

ICAI Valuation Standard- 301
Business Valuation
CONTENTS PARAGRAPH
OBJECTIVE 1-5
SCOPE 6-8
SIGNIFICANT ELEMENTS 9-11
VALUATION METHIDOLOGY 12-52
Premise of the value 13-16
Analysis of Asset to be valued 17-24
Adjustment to information from financial statements 25-28
Valuation Approaches And Methods 29-37
Market approach 32-33
Income approach 34-35
Cost approach 36-37
Value under liquidation 38-41
Rule of Thumb or Benchmark Value 42-46
Treatment of non-operating assets and inter-company 47-48
investments
Consideration of the Capital Structure of company 49
Value 50-52
EFFECTIVE DATE 53
(The ICAI Valuation Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the
main principles. (This ICAI Valuation Standard should be read in the
context of Framework for the Preparation of Valuation Report in
accordance with ICAI Valuation Standards)

Objective
1. This Standard provides guidance for business valuers who are
performing business valuation or business ownership interests
valuation engagements.

76
 ICAI Valuation Standards 2018

2. The objective of this Standard is to establish uniform concepts,
principles, practices and procedures for valuers performing valuation
services.
3. Valuations of businesses, business ownership interests may be
performed for a wide variety of purposes including the following:
(a) valuation of financial transactions such as acquisitions, mergers,
leveraged buyouts, initial public offerings, employee stock
ownership plans and other share-based plans, partner and
shareholder buy-ins or buy-outs, and stock redemptions;
(b) valuation for dispute resolution and/ or litigation/pending litigation
relating to matters such as marital dissolution, bankruptcy,
contractual disputes, owner disputes, dissenting shareholder and
minority ownership oppression cases, employment disputes, etc;
(c) valuation for compliance oriented engagements, for example:
(i) financial reporting; and
(ii) tax matters such as corporate reorganisations, ; purchase
price allocations etc.
(d) valuation for other purposes like the valuation for planning,
internal use by the owners etc;
(e) valuation under Insolvency and Bankruptcy Code.
4. This Standard provides a broad framework of generally accepted
principles, theories and procedures.
5. The principles enunciated in this Standard shall be applied in
conjunction with the principles prescribed and contained in the
Framework for the Preparation of Valuation Report in accordance
with ICAI Valuation Standards.

Scope
6. A valuer shall follow all applicable requirements of this Standard in the
valuation of a business.
7. This Standard describes the basic principles which govern the valuer’s
professional responsibilities and which shall be complied with
whenever an engagement to estimate value is carried out.

77
ICAI Valuation Standards 2018

8. A valuer shall not apply this Standard, where any requirement of this
Standard is inconsistent with
(a) the requirements prescribed under; or
(b) valuation procedures specified by
any law, regulations, rules or directions of any government or
regulatory authority, or Court order.
In such cases, the valuer shall follow the requirements prescribed by
any law, regulations, rules or directions of any government or
regulatory authority, or Court order.

Significant Elements
9. Business Valuation is the act or process of determining the value
of a business enterprise or ownership interest therein.
10. A valuer shall apply valuation approaches and valuation methods, as
described in ICAI Valuation Standard 103 Valuation Approaches and
Methods, and also use his professional judgment which is an essential
component of estimating value.
11. When valuing a business or business ownership interest, a valuer may
express either an exact number or a range of values. There could be
different benchmarks at which the estimate of value of an entity could
be expressed by the Valuer. For example:
(a) Enterprise Value: Enterprise Value is the value attributable to the
equity shareholders plus the value of debt and debt like items,
minority interest, preference share less the amount of non-
operating cash and cash equivalents.
(b) Business Value: Business value is the value of the business
attributable to all its shareholders
(c) Equity Value: Equity Value is the value of the business
attributable to equity shareholders

Valuation Methodology
12. In performing a valuation assignment, a valuer shall:
(a) define the premise of the value;

78
 ICAI Valuation Standards 2018

(b) analyse the asset to be valued and collect the necessary
information;
(c) identify the adjustments to the financial and non-financial
information for the valuation;
(d) consider and apply appropriate valuation approaches and
methods;
(e) arrive at a value or a range of values; and
(f) identify the subsequent events, if any
Premise of the value
13. Premise of the value refers to the conditions and circumstances
how an asset is deployed.
14. The premise shall always reflect the facts and circumstances
underlying each valuation engagement.
15. Determining the business value depends upon the situation in which
the business is valued, i.e, the events likely to happen to the business
as contemplated at the valuation date.
16. Premises of value are explained in detail in ICAI Valuation Standard
102 Valuation Bases.
Analysis of asset to be valued
17. The analysis of the asset to be valued shall assist the valuer in
considering, evaluating, and applying the various valuation
approaches and methods to the valuation engagement.
18. The nature and extent of the information required to perform the
analysis shall depend on the following:
(a) nature of the asset to be valued;
(b) scope and purpose of the valuation engagement;
(c) the valuation date;
(d) the intended use of the valuation;
(e) the applicable ICAI Valuation Standard;
(f) the applicable premise of value;

79
ICAI Valuation Standards 2018

(g) assumptions and limiting conditions; and
(h) applicable governmental regulations or regulations prescribed by
other regulators or other professional standards;
19. In analysing the asset to be valued, the valuer shall gather, analyse
and adjust the relevant information necessary to perform a valuation,
appropriate to the nature or type of the engagement. Such information
shall include:
(a) non-financial information;
(b) ownership details;
(c) financial information; and
(d) general information.
The detailed guidance in this respect is laid down in ICAI Valuation
Standard 201 Scope of Work, Analyses and Evaluation.
20. A valuer shall read and evaluate the information to determine the
reasonableness of information.
21. Even though the above mentioned procedure is presented in a manner
that suggests a sequential valuation process, valuations involve an
ongoing process of gathering, updating, and analysing information.
Accordingly, the sequence of the requirements and guidance in this
Standard may be implemented differently at the option of the valuer.
22. If the historical financial statements of the business to be valued are
not considered to be reflective of its future business performance, the
valuer should understand the rationale for the same and document the
same.
23. The conditions, rights and obligations of ownership right are usually
mentioned in the legal document such as articles of association, bye-
laws, shareholders agreement, partnership agreements, etc of the
asset to be valued. These documents may consider certain restrictions
or give certain benefits for ownership rights for certain groups of
stakeholders. A valuer shall consider and incorporate the same in the
valuation of the ownership interest of the business.
24. The type, availability, and significance of such information may vary
with the asset to be valued.

80
 ICAI Valuation Standards 2018

Adjustment to information from financial statements
25. Adjustment shall be made to information available from the historical
financial statements, if appropriate, to reflect the appropriate asset
value, income, cash flows and/or benefit stream, as applicable, to be
consistent with the valuation method(s) selected by the valuer.\
26. Financial information adjusted to be analysed include those of the
underlying company and any entities used as comparable entities to
the extent available in public domain.
27. Adjustments to financial information are modifications to reported
financial information which is relevant and significant to the valuation
process. Adjustments may be appropriate for the following reasons,
amongst others:
(a) to present financial data of the underlying and comparable
companies on a consistent basis;
(b) to adjust revenues and expenses to levels that are reasonably
representative of continuing operations;
(c) to adjust for non-operating/non-recurring assets and liabilities,
and any revenues and expenses related to the non-operating
items.
28. Adjustments to the financial information are made for the sole purpose
of assisting the valuer in reaching a value.
Valuation Approaches and Methods
29. Generally, the following three main valuation approaches are adopted
to perform the business valuation in correlation with the valuation
approaches and methodologies prescribed under ICAI Valuation
Standard 103 Valuation Approaches and Methods :
(a) Market approach;
(b) Income approach; and
(c) Cost approach.
30. A valuer shall select and apply appropriate valuation approaches,
methods and procedures to the extent relevant for the engagement.
31. The requirements of this Standard shall be followed consistently in
addition to the requirements as contained in ICAI Valuation Standard
103 while selecting and applying the valuation approach.

81
ICAI Valuation Standards 2018

Market approach
32. Market approach is a valuation approach that uses prices and
other relevant information generated by market transactions
involving identical or comparable (i.e., similar) assets, liabilities
or a group of assets and liabilities, such as a business
33. The following are the common methodologies for the market
approach:
(a) Market Price Method;
(b) Comparable Companies Multiple Method; and
(c) Comparable Transaction Multiple Method.
Income approach
34. Income approach is the valuation approach that converts
maintainable or future amounts (e.g., cash flows or income and
expenses) to a single current (i.e. discounted or capitalised)
amount. The fair value measurement is determined on the basis
of the value indicated by current market expectations about those
future amounts.
35. The most commonly used income approach is Discounted Cash Flow
(DCF) Method.
Cost approach
36. Cost approach is a valuation approach that reflects the amount
that would be required currently to replace the service capacity of
an asset (often referred to as current replacement cost).
37. The following are the commonly used valuation methods under the
cost approach:
(a) Replacement Cost Method; and
(b) Reproduction Cost Method.
Value under liquidation
38. Liquidation value is the amount that will be realised on sale of an
asset or a group of assets when an actual/hypothetical
termination of the business is contemplated/assumed.

82
 ICAI Valuation Standards 2018

39. The value under liquidation would be relevant in case the basis of
valuation is liquidation value
40. In the event of valuation of ownership interest under the premise of
liquidation, it may be relevant to consider the realisable values of
assets of the entity after considering transaction costs.
41. Liabilities could be considered at their settlement values.
Rule of Thumb or Benchmark Value
42. Rule of thumb or benchmark indicator is used as a reasonable
check against the values determined by the use of other
valuation approaches in a valuation engagement.
43. Rule of thumb may provide insight into the value of a business or
business ownership interest. Some of the examples of rule of thumb or
benchmark valuation would be value based on transaction multiples
for capacity or turnover.
44. It shall not be used as the only method to determine the value of the
asset to be valued.
45. Value indications derived from the use of rules of thumb method shall
not be given substantial weight unless they are supported by other
valuation methods and it can be established that knowledgeable
buyers and sellers place substantial reliance on them.
46. A valuer shall set forth in the report the rationale and support for the
valuation methods used.
Treatment of non-operating assets and inter-company
investments
47. Apart from operating assets, entities hold non-operating assets. Such
assets should be valued based on their realisable values net of costs
and outgoes and added to the value arrived under the various
approaches to derive the value for ownership interest.
48. Inter-company adjustments or substantial cross holdings between
companies in the business valuations should be considered at fair
value.
Consideration of Capital Structure of the business
49. A business is usually financed by a combination of investments such

83
ICAI Valuation Standards 2018

as equity interests, debt (including redeemable preference shares)
and quasi equity instruments. Certain engagements may require the
valuer to allocate the enterprise value of the business into (a) value
allocable to equity and (b) value allocable to debt. In deriving the
above allocation, the valuer should give due consideration to the
capital structure of the business including the terms of instruments
used to finance the business. The value allocable to equity interests is
usually the residuary value after reducing the debt from enterprise
value.
Value
50. Value is an estimate of a business or business ownership
interest, arrived at by applying the valuation procedures
appropriate for a valuation engagement and using professional
judgment as to the value or range of values based on those
procedures.
51. The value shall be based upon the applicable bases of value, the
purpose and intended use of the valuation, and all relevant information
available as of the valuation date in carrying out the value for the
valuation engagement and on value indications resulting from one or
more valuation methods performed under the valuation process.
52. In arriving at the value, the valuer shall:
(a) assess the reliability of the results under the different approaches
and assign weights to value indications reached on the basis of
various methods;
(b) the selection of and reliance on appropriate methods and
procedures depends on the judgment of the valuer and not on
any prescribed formula. One or more approaches may not be
relevant to a particular situation, and more than one method
under an approach may be relevant;
(c) the valuer must use informed judgment when determining the
relative weight to be accorded to indications of value reached on
the basis of various methods, or whether an indication of value
from a single method shall be conclusive. In any case, the valuer
shall provide the rationale for the selection or weighting of the
method or methods relied on in reaching the conclusion;

84
 ICAI Valuation Standards 2018

(d) in assessing the relative importance of indications of the value
determined under each method, or whether an indication of value
from a single method shall be the value, the valuer shall consider
factors such as:
(i) the applicable premise of value;
(ii) the purpose and intended use of the valuation;
(iii) whether the underlying business is an operating company, a
real estate or investment holding company, or a company
with substantial non-operating or excess assets;
(iv) the quality and reliability of data underlying the value;
(v) such other factors that in the opinion of the valuer, are
appropriate for consideration.

Effective Date
53. ICAI Valuation Standard 301 Business Valuation, shall be applied for
the valuation reports issued on or after 1st July, 2018.

85
ICAI Valuation Standards 2018

ICAI Valuation Standard 302
Intangible Assets
CONTENTS PARAGRAPH
OBJECTIVE 1-3
SCOPE 4-5
VALUATION BASES 6
INTANGIBLE ASSET 7-15
Goodwill 11-15
CATEGORIES OF INTANGIBLE ASSETS 16-27
Customer-based intangible assets 18-19
Marketing-based intangible assets 20-21
Contract-based intangible assets 22-23
Technology-based intangible assets 24-25
Artistic-based intangible assets 26-27
SIGNIFICANT CONSIDERATIONS 28-41
Economic Useful Life 29-31
Discount Rates 32-37
Tax Amortisation Benefits 38-41
VALUATION APPROACHES AND METHODS 42-84
Market Approach 46-53
Price /Valuation multiples/Capitalisation rates 51
Guideline pricing method 52-53
Income Approach 54- 75
Relief from Royalty (RFR) Method 58-59
Multi-Period Excess Earnings Method (MEEM) 60-64
With and Without Method (WWM) 65-69
Greenfield Method 70- 72
Distributor Method 73-75
Cost Approach 76-84
Reproduction Cost Method 80-82
Replacement Cost Method 83-84
EFFECTIVE DATE 85

86
 ICAI Valuation Standards 2018

The ICAI Valuation Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the
main principles. (This ICAI Valuation Standard should be read in the
context of Framework for the preparation of Valuation Report in accordance
with ICAI Valuation Standards)

Objective
1. The objective of this Standard is to prescribe specific guidelines
and principles which are applicable to the valuation of intangible
assets that are not dealt specifically in another Standard.
2. The importance of valuing intangible assets arises from the fact that
the reported net worth of businesses may not be reflecting its true
value, which most likely is in the form of intangible assets. Certain
areas where intangible assets are required to be valued are as
follows:
(a) purchase price allocation for accounting and financial reporting
under Ind AS 103 Business Combination;
(b) impairment testing under Ind AS 36 Impairment of Assets;
(c) transfer pricing when an intangible asset is being
transferred/licensed in/out between geographies/companies;
(d) taxation by way of a purchase price allocation for claiming tax
deductions when a business is transferred by a slump sale;
(e) transaction (merger & acquisition) when the subject is the
intangible itself, such as a brand/telecom license or for carrying
out a pre-deal purchase price allocation to assess the impact of
the deal on financials;
(f) financing, when an intangible is used as a collateral;
(g) litigation, when there has been a breach of contract/right and the
compensation has to be determined;
(h) bankruptcy / restructuring, etc;
(i) insurance, such as determining the personal worth of a
celebrity/football franchise/cricket franchise; or

87
ICAI Valuation Standards 2018

(j) issuance of sweat equity shares which are generally issued
against technical knowhow/ technical expertise/intellectual
property.
3. The principles enunciated in this Standard shall be applied in
conjunction with the principles prescribed and contained in the
Framework for the Preparation of Valuation Report in accordance
with ICAI Valuation Standards.

Scope
4. This Standard shall be applied for valuation of identified
intangible assets for the given purpose of valuation.
5. Some intangible assets may be contained in or on a physical
substance such as a compact disc (in the case of computer software),
legal documentation (in the case of a licence or patent) or film.
In determining whether an asset that incorporates both intangible and
tangible elements should be treated as a tangible asset, or as an
intangible asset under this Standard, the valuer uses judgement to
assess which element is more significant. For example, computer
software for a computer-controlled machine tool that cannot operate
without that specific software is an integral part of the related
hardware and it is treated as tangible asset. The same applies to the
operating system of a computer. When the software is not an integral
part of the related hardware, computer software is treated as an
intangible asset.

Valuation Bases
6. A valuer must consider the relevant valuation bases for valuation of an
intangible asset in accordance with ICAI Valuation Standard 102
Valuation Bases. However, a valuer should follow the bases
prescribed by a prescribed law or regulation, if it is applicable.

Intangible assets
7. An intangible asset is an identifiable non-monetary asset without
physical substance.
8. An intangible asset is a non-monetary asset without physical
substance, whereas a monetary asset is one where assets to be

88
 ICAI Valuation Standards 2018

received are in fixed or determinable amounts of money. An intangible
asset grants economic rights or benefits to its owner and can be
identified and differentiated primarily on the basis of its ownership and
utility. Intangible assets lack physical properties and represent legal
rights developed or acquired by an owner.
9. Intangible assets shall be able to generate quantifiable economic
benefits for its owner and can be either directly owned through own
business (internally developed) or purchased by paying royalty or
licence fee. Common examples of items of intangible assets are
computer software, patents, copyrights, trademark, brands, motion
picture films, customer lists/contracts, mortgage servicing rights,
franchises, marketing rights, non-competition agreements, internet
domain names, distribution network, literary works/musical works,
telecom licenses, gaming platforms, trade design, licensing
arrangements, royalty agreements, employment contracts, trade
secrets, processes, designs, formulae, etc. Intangible assets may be
transferable, i.e. intangible assets can be bought, sold, rented, etc.
10. An intangible asset is identifiable if it either:
(a) is separable, i.e. is capable of being separated or divided from
the entity and sold, transferred, licensed, rented or exchanged,
either individually or together with a related contract, identifiable
asset or liability, regardless of whether the entity intends to do
so; or
(b) arises from contractual or other legal rights, regardless of
whether those rights are transferable or separable from the entity
or from other rights and obligations.
Goodwill
11. The definition of an intangible asset requires an intangible asset
to be identifiable to distinguish it from goodwill.
12. Goodwill is defined as an asset representing the future economic
benefits arising from a business, business interest or a group of
assets, which has not been separately recognised in another
asset.
13. Goodwill is the difference between the cost of the business
combination and the acquirer’s interest in the net fair value of the

89
ICAI Valuation Standards 2018

identifiable assets, liabilities and provisions for contingent liabilities. In
other words, goodwill is the residual amount after ascribing values to
identified intangible assets, other assets and liabilities. Goodwill can
be transferable or non-transferable.
14. The goodwill subsumes the value of an acquired intangible asset that
is not identifiable as of the acquisition date. Goodwill includes
elements of company and business-related synergies. Goodwill could
certain times include elements of assembled workforce, going concern
value, new customers, future technologies, etc.
15. Amount of goodwill could vary depending on the purpose of valuation
as the value of goodwill is dependent on the value of tangible and
other intangible assets.
Categories of Intangible Assets
16. Intangible assets can generally be classified under the following broad
categories (not intended to be exhaustive):
(a) Customer-based intangible assets;
(b) Marketing-based intangible assets;
(c) Contract-based intangible assets;
(d) Technology-based intangible assets; or
(e) Artistic-based intangible assets.
17. Intangible assets within the same category have certain similarities as
well as differences based on characteristics such as their ownership,
market position, function, and image. Additionally, certain intangible
assets, such as brands, may belong to more than one category.
Similarly, the value assigned to intangible assets belonging to the
same category could differ depending on the valuation subject and
purpose of valuation. For example, the intangible assets under
customer-based category like customer contracts could fetch a
different value than customer lists.
Customer-based intangible assets
18. Customer-based intangible assets are created with an entity
establishing relationships with its customers in the due course of
its business. Such intangibles may be contractual or non-
contractual.

90
 ICAI Valuation Standards 2018

19. The examples of customer-based intangible assets are:
(a) customer contracts;
(b) customer relationships;
(c) order backlog; or
(d) customer lists.
Marketing-based intangible assets
20. Marketing-based intangible assets are created with the
evolvement of a business and such intangibles are also used for
further growth of the business through marketing.
21. The examples of marketing-based intangible assets are:
(a) trademark;
(b) brand;
(c) trade name;
(d) internet domain name; or
(e) trade design.
Contract-based intangible assets
22. Contract-based intangible assets are created from rights arising
from contracts in a business.
23. The examples of contract-based intangible assets are:
(a) lease agreements;
(b) non-compete agreements;
(c) licensing agreements;
(d) royalty agreements; or
(e) employment contracts.
Technology-based intangible assets
24. Technology-based intangibles are those intangible assets that
create propriety knowledge.
25. The examples of contract-based intangible assets are:

91
ICAI Valuation Standards 2018

(a) patents;
(b) know-how;
(c) trade secrets;
(d) copyrights;
(e) processes;
(f) software;
(g) designs; or
(h) formulae.
Artistic-based intangible assets
26. Artistic-based intangible assets are created from the benefit
arising from artistic works.
27. The examples of contract-based intangible assets are:
(a) films and music;
(b) books;
(c) plays; or
(d) copyright (non-contractual).

Significant Considerations
28. The following other significant considerations shall be made for the
valuation of intangible assets:
(a) to determine the purpose and objective of the overall valuation
assignment;
(b) to consider the legal rights of the intangible asset to be valued,
for example, a registered trademark may have a higher value as
compared to an unregistered trademark. However, an unpatented
technology (as not in public domain) may have a higher value
than a patented technology;
(c) to evaluate the highest and best use considerations;
(d) to assess the history and development of the intangible asset; or
(e) to consider any specific laws or regulations guiding the intangible

92
 ICAI Valuation Standards 2018

asset valuation in the country, for example, royalty payments in
India are regulated.
Economic Useful Life
29. Intangible assets could have a finite or indefinite life where finite life
will usually be established by law or a contract, technology, function or
economic factors along with the pattern of replacement of the
intangible asset to be valued. Economic life of an intangible asset is
not the same as the remaining useful life for tax or accounting
purpose.
30. The economic and legal factors shall be considered together as well
as individually while determining the useful life of an intangible asset.
Economic factors determine the period over which future economic
benefits will be received by the entity. Legal factors may restrict the
period over which the entity controls access to these benefits. The
useful life is the shorter of the periods determined by these factors.
31. Economic life of customer-based intangible assets is to an extent
dependent on the attrition. Attrition refers to the possible expected
loss of customers which is based on the historical behavior of
customers. Historical attrition can be based on the following:
(a) Variable loss rate: dependent on the age of customer
relationship;
(b) Constant loss rate: calculated as a percentage of previous year’s
parameters.
Discount Rates
32. Discount Rate is the return expected by a market participant from
a particular investment and shall reflect not only the time value of
money but also the risk inherent in the asset being valued as well
as the risk inherent in achieving the future cash flows.
33. Discount rate shall be indicative of the risk associated with the cash
flows arising from the intangible asset to be valued. Some of the
factors which should be considered for determining the discount rate
are :
(a) generally intangible assets have relatively more risk associated
than tangible assets, a group of assets or business as a whole;

93
ICAI Valuation Standards 2018

(b) intangible assets having a higher economic life have more risk
associated than intangible assets having a lower economic life,
other things remaining the same; and
(c) intangible assets with definite and determinable cash flows have
relatively less risk associated as compared to intangible assets
not having determinable cash flows.
34. The following discount rates are most commonly used:
(a) weighted average cost of capital (WACC) of the company or
market participants;
(b) cost of equity for the company using the intangible assets or the
participants;
(c) cost of debt having maturity similar to the economic life of the
intangible asset to be valued;
(d) risk-free interest rates which have a maturity similar to the
economic life of the intangible asset to be valued; or
(e) internal rate of return of the transaction for the particular
intangible asset.
35. The discount rate is commonly considered with necessary premiums
or discounts to arrive at the appropriate discount rate for the intangible
asset to be valued.
36. In case of a business valuation or valuation of all assets, a valuer shall
determine the Weighted Average Return on Assets (WARA) to confirm
the reasonableness of the discount rate / WACC so considered for
valuation of the intangible asset. WARA is the expected rate of return
on a particular asset and can be determined based on the riskiness
involved for a particular asset.
37. The discount rates are discussed in detail in ICAI Valuation Standard
103 Valuation Approaches and Methods.
Tax Amortisation Benefits
38. Tax Amortisation Benefit (TAB) is a hypothetical benefit available
to a market participant by way of amortisation of the acquired
intangible assets, thereby reducing the tax burden.
39. Tax amortisation benefits (TAB) can be computed and added to the

94
 ICAI Valuation Standards 2018

overall value of the intangible asset based on nature of the asset and
purpose of valuation, if appropriate. Intangible assets can be
amortised based on tax jurisdictions and valuation methodology used.
40. Intangible assets can be amortised based on tax jurisdictions and
valuation methodology used.TAB generally needs to be computed and
added under the income approach as the value of TAB is understood
to be embedded in the value of the intangible asset under the market
or cost approach.
41. The discount rate to be used for determining the present value of tax
saving can be:
(a) weighted average cost of capital;
(b) discount rate used for valuation of the intangible asset to be
valued.

Valuation Approaches and Methods
42. Generally, the following three main valuation approaches are adopted
to measure value of intangible assets in correlation with the valuation
approaches and methodologies prescribed under ICAI Valuation
Standard 103 Valuation Approaches and Methods.
(a) Market approach;
(b) Income approach; and
(c) Cost approach.
43. The requirements of this Standard shall be followed consistently in
addition to the requirements as contained in ICAI Valuation Standard
103, while selecting and applying the valuation approach.
44. A particular intangible asset can be valued using more than one
approach or methodology as this provides the valuer multiple value
indications thus setting a range of value for the intangible asset to be
valued. A valuer shall consider some factors like availability of data,
quality of data available, consideration of actual transaction in the
industry, characteristics of the intangible, etc.
45. Intangible assets are generally entity specific and price information is
rarely available.

95
ICAI Valuation Standards 2018

Market Approach
46. Market approach is a valuation approach that uses prices and
other relevant information generated by market transactions
involving identical or comparable (i.e., similar) assets, liabilities
or a group of assets and liabilities, such as a business.
47. Valuation of an intangible asset using the market approach is based
on a certain market transaction or activity.
48. In accordance with the requirements contained in ICAI Valuation
Standard 103, the market approach shall be adopted only if adequate
information is available about the comparable intangible asset from a
recent transaction and there are instances of orderly transactions that
can be compared with the intangible asset to be valued. A comparable
intangible asset is an intangible asset which is of the same nature,
age, function and is at same stage of its life cycle.
49. Valuation will be based on a transaction of a comparable intangible
asset which can be considered to obtain pricing multiples. The rate
obtained can be applied to arrive at the value of the intangible asset.
50. The following are the common methodologies for the market
approach:
(a) Price/Valuation multiples/Capitalisation rates;
(b) Guideline pricing method.
Price/Valuation multiples/Capitalisation rates
51. This method considers certain multiples/ capitalisation rates to arrive
at the valuation of a comparable intangible asset. The multiples shall
be adjusted appropriately to factor in any differences between the
intangible asset to be valued and comparable intangible asset.
Guideline pricing method
52. This method determines the value of an intangible asset by
considering the price paid in an orderly transaction for a comparable
intangible asset (called as the guideline intangible asset which is
similar to the intangible asset to be valued).
53. However, in most instances, it may be difficult to obtain reliable data in
the form of a public transaction, valuation multiple or a guideline
intangible asset.

96
 ICAI Valuation Standards 2018

Income Approach
54. Income approach is the valuation approach that converts
maintainable or future amounts (e.g., cash flows or income and
expenses) to a single current (i.e. discounted or capitalised)
amount. The fair value measurement is determined on the basis
of the value indicated by current market expectations about those
future amounts.
55. Valuation of an intangible asset using the income approach is based
on the expectation of economic benefits from the intangible asset to
be valued. In other words, the value of an intangible asset is the
present value of the income expected or costs saved by the owner of
the intangible asset either through owned operations or licensing of
the intangible asset. The income so determined is adjusted with any
related expenses pertaining to the maintenance or enhancement of
the intangible asset. The projected net cash flows are then discounted
to present value using a risk-adjusted discount rate.
56. Income approach is commonly used for the valuation of intangible
assets like customer relationships and contracts, technology, non-
competition agreements, leasehold rights, trademark, brand, etc. The
income approach shall be applied in accordance with the requirements
contained in ICAI Valuation Standard 103 Valuation Approaches and
Methods.
57. Some of the common valuation methods under the income approach
are as follows:
(a) Relief-from-royalty-method;
(b) Multi-period Excess Earnings Method (MEEM);
(c) With-and-Without method or premium profit method;
(d) Greenfield method; and
(e) Distributor method
Relief-from-royalty-method
58. Under relief-from-royalty-method, the value of an intangible asset is
determined by estimating the value of total costs saved that would
have otherwise been paid by the user as royalty payments, if had

97
ICAI Valuation Standards 2018

been taken on lease from another party. Alternatively, it could also
indicate the value of an intangible asset that could have fetched cash
flows in the form of royalty payments, had it been leased to a third
party. Any associated costs expected to be incurred by the licensee
needs to be adjusted from the forecasted revenues.
59. The following are the major steps in the RFR method:
(a) obtain the projected income statement associated with the
intangible asset to be valued over the remaining useful life of the
said asset. The value of the intangible asset to be valued is
determined by first considering projections (of royalty income
adjusted with associated expenses like maintenance or
marketing) relevant to the intangible asset to be valued for its
estimated useful life. Forecasted revenue is royalty computed as
a percentage of revenue using an appropriate royalty rate.
(b) analyse the projected income statement and its underlying
assumptions to assess the reasonableness.
(c) select the appropriate royalty rate based on market-based royalty
rates for similar intangible assets: An appropriate royalty rate
(which can be based on royalty rates of similar transactions or
can be determined using the profit-split method).
(d) apply the selected royalty rate to the future income attributable to
the said asset: The selected royalty rate is then applied to the
cash flows so determined. Royalty rate should consider the
features of the intangible asset to be valued relevant to the profit
attributable to the intangible asset to be valued or the observed
transactions to determine the royalty rate. Other factors that
should be considered to determine the royalty rate are the
significance of the intangible asset to be valued to its owner and
the expected economic life of the intangible asset with any risks
relating to obsolescence.
(e) use the appropriate marginal tax rate or such other appropriate
tax rate to arrive at an after-tax royalty savings.
(f) discount the after-tax royalty savings to arrive at the present
value using an appropriate discount rate: The value of the
intangible asset to be valued is the present value of the after-tax

98
 ICAI Valuation Standards 2018

cash flows so computed by using an appropriate risk-adjusted
discount rate.
(g) Tax amortization benefit (TAB), if appropriate considering nature
of the asset and purpose of the engagement, should be added to
the overall value of the intangible asset.
Multi-period Excess Earnings Method (MEEM)
60. The MEEM is used to value an intangible asset which is the primary
intangible asset of the business. For example, for valuation of two
intangible assets, say customer contracts and intellectual property
rights, MEEM should be considered for valuation of one of the
intangible asset while the other intangible asset should be valued
using another method, unless both intangible assets are significant for
the business.
61. Under this method, the value of an intangible asset is equal to the
present value of the incremental after-tax cash flows (‘excess
earnings’) attributable to the intangible asset to be valued over its
remaining useful life. In other words, it is the present value of the
excess cash flows attributable to the intangible asset to be valued
(based on attrition rate of customers) as adjusted by the associated
expenses required for the generation of the cash flows and cash flows
pertaining to contributory assets (assets that contribute to the cash
flows relating to the intangible asset to be valued).
62. The following are the major steps in deriving a value using the MEEM:
(a) obtain the projections for the entity or the combined asset group
over the remaining useful life of the said intangible asset to be
valued from the client or the target to determine the future after-
tax cash flows expected to be generated;
(b) analyse the projections and its underlying assumptions to assess
the reasonableness of the cash flows;
(c) Contributory Asset Charges (CAC) or economic rents to be
reduced from the total net after-tax cash flows projected for the
entity/combined asset group to obtain the incremental after-tax
cash flows attributable to the intangible asset to be valued;
(d) the CAC represent the charges for the use of an asset or group

99
ICAI Valuation Standards 2018

of assets (e.g., working capital, fixed assets, assembled
workforce, other intangibles) based on their respective fair
values and should be considered for all assets, excluding
goodwill, that contribute to the realization of cash flows for the
intangible asset to be valued;
(e) discount the incremental after-tax cash flows attributable to the
intangible asset to be valued to arrive at the present value using
an appropriate discount rate; and
(f) Tax amortisation benefit (TAB) can be appropriately built and
added to the overall value of the intangible asset.
63. Contributory assets are assets that assist/support the intangible asset
to be valued to generate cash flows and are used in combination with
the intangible asset to be valued. Contributory asset charge (CAC) is
widely used by the valuers and refers to the return on assets
supporting the cash flow generation of the intangible asset to be
valued. Contributory assets could be in the form of working capital,
fixed assets, assembled workforce and any other intangible asset so
considered and valued. An appropriate rate of return on each asset
needs to be determined and shall be applied to the revenues to arrive
at the CAC. The rate of return will depend on the nature of asset and
is considered on post-tax basis.
64. For customer-based intangible assets, a valuer needs to consider
attrition, which refers to the possible expected loss of customers
which is based on the historical behavior of customers. Attrition can
either be calculated using the mid-point convention (average of
beginning and end of the year) or by considering the year-on-year
customer count or change in revenue.
With-and-Without method
65. The value of an intangible asset using the With and Without Method
(WWM) is computed by comparing the below-mentioned scenarios in
which the business:
(a) utilises the intangible asset to be valued (‘With’ scenario); and
(b) does not utilise the intangible asset to be valued (‘Without’
scenario).

100
 ICAI Valuation Standards 2018

It should be noted that all other factors relating to valuation should
remain constant.
66. Under this method, the value of the intangible asset to be valued
is equal to the present value of the difference between the
projected cash flows over the remaining useful life of the asset
under the following two scenarios :
(a) business with all assets in place including the intangible
asset to be valued; and
(b) business with all assets in place except the intangible
asset to be valued.
67. The following are the major steps in deriving a value using the WWM :
(a) obtain the projections comprising revenue, expenses, working
capital and capital expenditure under the following two
scenarios:
(i) with scenario; and
(ii) without scenario.
(b) discounted the projections obtained under two scenarios to
present value using an appropriate discount rate;
(c) difference between present value of cash flows under two
scenarios is considered to be the value of the intangible asset.
The difference so computed can also be probability-weighted
depending on the likelihood of competition expected to affect the
cash flows; and
(d) Tax amortisation benefit (TAB) can be appropriately built and
added to the overall value of the intangible asset.
68. The value of the intangible asset can also be computed by
determining the difference in the value of the business under ‘with’
and ‘without’ scenarios. The value of the intangible asset under both
approaches, i.e. using difference in cash flows or business values,
should be similar. Further, the discount rate used in both approaches
shall be same.
69. This method is commonly used for valuation of non-compete
agreements.

101
ICAI Valuation Standards 2018

Greenfield Method
70. The basic assumption for valuation using the greenfield method is that
the intangible asset to be valued is the only asset with all other
tangible or intangible assets being created, leased or acquired.
Instead of the contributory asset charge generally deducted from the
cash flows, a valuer is required to subtract replacement cost of the
asset that is required to be built or bought.
71. The greenfield method is usually used to value franchise agreements
and certain licenses.
72. The following are the major steps in deriving a value using the
greenfield method:
(a) prepare cash flow projections with the premise that the intangible
is the only asset in the business;
(b) project the related revenues, expenses, working capital and
capital;
(c) project the amount and timing of expenditure relating to
acquisition, creation or rentals of other assets required by the
intangible asset to be valued;
(d) compute the present value of the net cash flows using an
appropriate discount rate; and
(e) Tax amortisation benefit (TAB) can be appropriately built and
added to the overall value of the intangible asset.
Distributor Method
73. This is a variation of MEEM and is adopted for valuation of customer-
based intangible assets when MEEM is applied to value another
intangible asset (considered to be more significant). The fundamental
assumption used in this method is that cash flows of each segment of
a particular business are expected to generate profits.
74. The following are the major steps in deriving a value using the
distributor method:
(a) prepare revenue and expenses projections of existing customers
relationships along with relevant attrition;

102
 ICAI Valuation Standards 2018

(b) determine profit margins of distributors who are comparable to
the subject business and apply the same to the cash flows
projected;
(c) determine the support of distributor contributory assets like
working capital, fixed assets, workforce, etc;
(d) determine excess earnings after considering the contributory
asset charges;
(e) compute the present value of cash flows using an appropriate
discount rate; and
(f) calculate tax amortisation benefit, if appropriate and applicable,
and add it to the value of the intangible asset to be valued.
75. Other than the methods explained above, there can be other methods
that can be adopted to value intangibles, like Profit Premium method
and Differential Cash Flows method.
Cost Approach
76. Cost approach is a valuation approach that reflects the amount
that would be required currently to replace the service capacity of
an asset (often referred to as current replacement cost).
77. Valuation of an intangible asset using the cost approach is based on
the principle rule of substitution, i.e. the amount that will be required to
create a new similar intangible asset as adjusted for any depreciation
becomes the value of the intangible asset to be valued. This approach
may not hold good when the intangible asset to be valued is not
replaceable and is unique, e.g., patents, which is a unique intellectual
property and cannot be perfectly recreated.
78. Cost method is commonly used to value acquired or internally
generated intangible assets like software, technology, assembled
workforce, etc. Also, cost approach is generally adopted when market
and income approach cannot be applied. The cost approach should be
used with discretion and generally for intangible assets that are not
the primary business drivers and for which a market participant may
not be willing to pay a significant premium.
79. The following are the commonly used valuation methods under the
income approach:
(a) Reproduction Cost Method;

103
ICAI Valuation Standards 2018

(b) Replacement Cost Method.
Reproduction Cost Method
80. Reproduction Cost Method involves valuing an asset based on
the cost that a market participant shall have to incur to recreate a
replica of the asset to be valued, adjusted for obsolescence.
81. Under this method, the value of an intangible asset is the total cost
(based on current prices) to produce an exact replica of the intangible
asset to be valued. Nevertheless, since intangible assets are generally
not developed (other than certain assets like software), any intangible
asset that can be hypothetically developed using the same function
and utility, can provide a value base for the intangible asset to be
valued.
82. Costs to reproduce could include data-sets like direct costs, indirect
costs, developer’s profit for the intangible asset, etc. The cost
obtained under this method shall be adjusted for any physical,
functional or economical obsolescence.
Replacement Cost Method
83. Replacement Cost Method involves valuing an asset based on
the cost that a market participant shall have to incur to recreate
an asset with substantially the same utility (comparable utility) as
that of the asset to be valued, adjusted for obsolescence.
84. Under this method, the value of an intangible asset is the total cost
(based on current prices) to produce an asset similar to the intangible
asset to be valued. Nevertheless, since intangible assets are
generally not developed (other than certain assets like software), any
intangible asset that can be hypothetically developed using the same
function and utility, can provide a value base for the intangible asset
to be valued. Costs to replace could include datasets like direct costs,
indirect costs, developer’s profit for the intangible asset, etc. The cost
obtained under this method shall be adjusted for any physical,
functional or economical obsolescence.

Effective Date
85. ICAI Valuation Standard 302 Intangible Assets, shall be applied for
the valuation reports issued on or after 1st July, 2018.

104
 ICAI Valuation Standards 2018

ICAI Valuation Standard 303
Financial Instruments
CONTENTS PARAGRAPH
OBJECTIVE 1-3
SCOPE 4-10
VALUATION METHODS 11-29
Market Approach 16-20
Income Approach 21- 26
Cost Approach 27-29
VALUATION TECHNIQUES AND INPUTS 30-36
MAJOR CONSIDERATIONS 37-45
Determination of Present Value 37-39
Adjustments for Credit Risk 40-42
Control Environment 43-45
EFFECTIVE DATE 46
The of the ICAI Valuation Standard includes paragraphs set in bold type
and plain type, which have equal authority. Paragraphs in bold type
indicate the main principles. (This ICAI Valuation Standard should be read
in the context of Framework for the Preparation of Valuation Report in
accordance with ICAI Valuation Standards)

Objective
1. This Standard establishes principles, suggests methodology and
considerations to be followed by a valuer in performing valuation
of financial instruments.
2. This Standard supplements the other ICAI Valuation Standards by
providing specific principles and considerations in relation to financial
instruments.
3. The principles enunciated in this Standard shall be applied in
conjunction with the principles prescribed and contained in the
Framework for the Preparation of Valuation Report in accordance
with ICAI Valuation Standards.

105
ICAI Valuation Standards 2018

Scope
4. A valuer shall follow the requirement of this standard in valuation
of financial instruments.
5. For the purposes of this Standard, financial instrument is any contract
that gives rise to a financial asset of one entity and a financial liability
or equity instrument of another entity. Equity instruments, derivatives,
debt instruments, fixed income and structured products, compound
instruments, etc. are certain examples of financial instruments.
6. Valuation of financial instruments is commonly carried out amongst
other matters, for transactional pricing (i.e. buy or sell) and financial
reporting purposes. In addition, valuation of financial instruments is
also of particular importance in case of business combinations, share-
based payments, off-market transactions, risk management, tax
allocations, dispute resolution, purchase-price allocations, liquidation,
etc.
7. Considering the multiple categorisation and different usages of a
financial instrument valuation, detailed consideration of purpose
of valuation and the features of the instrument being valued is
essential to identify the relevant information available to be
perused for valuing the instrument.
8. The principles contained in the other ICAI Valuation Standards also
apply to valuation of financial instruments. This Standard provides
additional guidance for the valuation of financial instruments.
9. In accordance with the ICAI Valuation Standard 102 Valuation Bases,
a valuer shall select appropriate valuation bases that are relevant in
the context of the categorisation of the financial instrument. To arrive
at the right valuation base, a valuer amongst other matters should also
have an understanding of the relevant regulations governing the
functioning of the instrument.
10. The selection of the appropriate approach and method in accordance
with ICAI Valuation Standard 103 Valuation Approaches and Methods,
shall be properly reasoned and shortlisted on the basis of various
considerations. A valuer shall also give due consideration to the
complexity of the instrument being valued and the available
information while selecting a valuation approach and method.

106
 ICAI Valuation Standards 2018

Valuation Methods
11. Financial instruments being generally aligned to market linked factors,
the usage of market linked methods with observable inputs is usually
the preferred approach to arrive at a value. Valuation of certain
financial instruments, for example, equity instruments, may in
situations be based on the inherent business valuation from which the
financial instrument derives value. A valuer should give due
consideration to ICAI Valuation Standard 301 Business Valuation in
relation to valuation of such financial instruments.
12. In selection of the approach and method, a valuer shall also give
due consideration to the control environment under which the
entity and the instrument operates. The control environment
consist the entity’s internal governance and control objectives,
procedures and their operating effectiveness with the objective of
enhancing the reliance on the valuation process and outcome
thereof. A valuer, if relying on valuation inputs provided by the
entity, shall form independent opinion on the valuation control
environment and factor outcome on the valuation method,
approach, outcome and reporting thereof.
13. The methods used for the valuation of financial instruments are based
on the market, income and cost approaches as described in ICAI
Valuation Standard 103.
14. The following are some of the factors that a valuer shall consider while
determining the appropriateness of the method (or a combination of
methods) that should be used for the valuation:
(a) the valuation base and terms and conditions of the instrument
being valued;
(b) the purpose of valuation; and
(c) other considerations including the control framework of the entity
and input data sets.
15. Valuation of certain financial instruments involves significant
uncertainty with regard to the method used or market aberrations. In
such situations, a valuer shall document the nature of the uncertainty.
A valuer shall also document the inherent nature of the complexity in

107
ICAI Valuation Standards 2018

detail to enable the user to understand the assumptions that impact
the value of the instrument.
Market Approach
16. Market approach is a valuation approach that uses prices and
other relevant information generated by market transactions
involving identical or comparable (i.e., similar) assets, liabilities
or a group of assets and liabilities, such as a business.
17. In market approach, the value of the financial instrument is determined
by considering traded prices of such instrument in an active market; or
prices and other relevant information generated by market
transactions involving identical or comparable (similar) assets. A
valuer shall follow the detailed guidance provided in ICAI Valuation
Standard 103 for application of the market approach.
18. An example of the market approach is the price obtained from active
trading of financial instrument on an exchange as it is normally the
preferred indication of the market value of an identical instrument. In
absence of an active market benchmark price, comparable pricing or
private transaction pricing may also be considered.
19. Further, valuation techniques consistent with the market approach
often use market benchmarks derived from a set of comparable
financial instrument operating in a similar framework. Benchmarks
might be in a range with a different pricing benchmark for each
comparable. The selection of the appropriate comparable and its
pricing benchmark within the range requires close evaluation of
comparability, consideration of qualitative and quantitative factors
specific to the measurement of the financial instrument and
judgement.
20. In case, the financial instrument being valued is characterised by
certain different terms than the identical quoted instrument, the valuer
shall adjust the comparable price to reflect the different terms and
characteristics.
Income Approach
21. Income approach is the valuation approach that converts
maintainable or future amounts (e.g., cash flows or income and
expenses) to a single current (i.e., discounted or capitalised)

108
 ICAI Valuation Standards 2018

amount. The fair value measurement is determined on the basis
of the value indicated by current market expectations about those
future amounts.
22. In income approach, value of a financial instrument is determined
based on the expected economic benefits by way of income, cash
flows or cost savings generated by such financial instrument and level
of risk associated with such financial instrument. It generally involves
discounting future amounts to a single present value after adjusting
inherent risks.
23. The use of income approach especially the discounted cash flow
model requires usage of present-value techniques that are deployed
to ascertain the present value of future cash flows basis of certain
assumptions. Paragraphs 37-39 of this Standard further elaborates on
the considerations involving present value techniques.
24. Black-Scholes-Merton formula or a binomial model and similar other
pricing models are examples of income approach, that incorporate
present value techniques and reflect both the time value and the
intrinsic value of an option.
25. In situations where a financial instrument does not give rise to
committed contractual cash flows, an estimation of future cash flow
basis of various available estimates would aid the income approach. A
valuer shall follow detailed guidelines provided in ICAI Valuation
Standard 103 for use of discounted cash flow model.
26. Apart from the cash flows that the entity expects to realise the cash
flow, the terms of a financial instrument, amongst other matters, also
typically cover:
(a) the timing when the entity expects to realise the cash flows
related to the instrument;
(b) the basis of calculation of the cash flows, e.g., the interest rate,
coupon rate, underlying index or indices, etc; and
(c) the terms and timing for any special terms/restrictions in the
contract, e.g., put or call, lock-in, prepayment, extension,
conversion options, residuary right.

109
ICAI Valuation Standards 2018

Cost Approach
27. Cost approach is a valuation approach that reflects the amount
that would be required currently to replace the service capacity of
an asset (often referred to as current replacement cost).
28. From the perspective of a market participant seller, the price that
would be received for the asset is based on the cost to a market
participant buyer to acquire or construct a substitute asset of
comparable utility.
29. The usage of cost method is of more predominance in valuation of
non-financial assets. A valuer shall follow the detailed guidance
provided in ICAI Valuation Standard 103 for application of the cost
approach.

Valuation Techniques and Inputs
30. A valuer shall use valuation techniques that are appropriate in
the circumstances and for which sufficient data is available to
measure the value, maximising the use of relevant observable
inputs and accordingly minimising the use of unobservable
inputs.
31. A valuer shall use valuation techniques that enable him to form an
opinion to estimate the price at which an orderly transaction to sell the
financial instrument would take place between market participants at
the valuation date under the market conditions existing on that
valuation date. Valuation techniques differ in their application based
on the three approaches mentioned in paragraphs 16-29 or sometimes
even a combination thereof.
32. A valuer may choose basis of either a single valuation technique or a
combination of multiple valuation techniques to perform the valuation.
If multiple valuation techniques are used to measure the value, the
results shall be evaluated considering the reasonableness of the
range of values indicated by those results. Appropriate weightage can
be provided to the outcome derived from the deployment of multiple
valuation techniques. A valuation of financial instrument measurement
is the point within that range that is most representative of value in the
circumstances.

110
 ICAI Valuation Standards 2018

33. Once the valuation technique has been shortlisted and deployed, such
valuation technique used for valuation shall be applied consistently.
However, in certain circumstances a change in a valuation technique
or its application is appropriate if the change results in a measurement
that is equally or more representative of value in the circumstances.
Examples of instances when a change in valuation technique may be
necessitated are:
(a) change in terms or regulations governing the instrument;
(b) new markets development;
(c) new information becomes available;
(d) information previously used is no longer available;
(e) valuation techniques improvement; or
(f) market conditions change.
34. Usage of unobservable inputs carries a reasonable degree of
judgment and assumptions, and hence may be considered as a choice
of input in circumstances where observable inputs are unavailable.
Therefore, unobservable inputs shall also reflect the assumptions that
market participants would use when pricing the asset or liability,
including assumptions about risk. In addition to that a valuer shall
place a higher degree of emphasis on the entity control framework and
integrity of data used in deriving the unobservable input.
35. A valuation technique based on unobservable inputs values a
probability of outcome using certain assumptions (or range of
assumptions). A valuer would be expected to factor a risk element that
may be inherent to the probability or the assumptions. Accordingly,
assumptions about risk include the risk inherent in a particular
valuation technique used to measure value or the risk inherent in the
inputs to the valuation technique. It would be incorrect not to consider
appropriate levels of risks inherent in valuation of financial
instruments.
36. In using unobservable inputs, the valuer would evaluate whether the
unobservable inputs have been developed using the adequate
information available at the time of valuation. The unobservable input
shall also factor in the information about market participant
assumptions which is reasonably available.

111
ICAI Valuation Standards 2018

Major Considerations
Determination of Present Value
37. Present value is an integral tool used in the income approach to
link future amounts (e.g., cash flows or values) to a present
amount using a discount rate.
38. Paragraphs 21-26 of this Standard refers to income approach as a
valuation approach/method.
39. The valuation of a financial instrument using a present value
technique captures all the following elements from the perspective of
market participants at the valuation date:
(a) an estimate of future cash flows for the asset or liability being
measured;
(b) expectations about possible variations in the amount and timing
of the cash flows representing the uncertainty inherent in the
cash flows;
(c) the time value of money, represented by the rate on risk-free
security that have maturity dates or durations that coincide with
the period covered by the cash flows and pose neither
uncertainty in timing nor risk of default to the holder (i.e. a risk-
free interest rate);
(d) the price for bearing the uncertainty inherent in the cash flows
(i.e., a risk premium); and
(e) other factors that market participants would take into account in
the circumstances.
Adjustments for Credit Risk
40. One of an important characteristic of valuing a financial instrument is
to understand the risk associated with the following:
(a) instrument; and
(b) the issuer including the respective credit risk
41. The following are some of the factors that need to be considered in
measuring credit risk:
(a) Counterparty risk: The credit-risk measurement is influenced by

112
 ICAI Valuation Standards 2018

the financial strength of the issuer or any guarantors and will
involve the following major considerations:
(i) present and projected financial performance of the parties;
and
(ii) performance and prospects for the macro industry sector in
which the entity/business operates.
The due consideration shall also be given to the credit exposure
of any counterparties to the asset or liability being valued.
(b) Capital leveraging: The amount of borrowing deployed to
operationalise the assets from which an instrument’s return is
derived, or the overall capital leveraging profile of the issuer can
affect the volatility of returns to the issuer and also the credit risk
of the instrument.
(c) Security hierarchy: Establishing the security hierarchy of an
instrument is important in assessing the credit risk. Lower
hierarchy in security charge would usually result in a higher credit
risk profile.
(d) Collateral and default protection: For the purposes of measuring
credit risk, it is relevant that the estimate of expected cash
shortfalls reflect the cash flows expected from collateral and
other credit enhancements that are part of the contractual terms.
The estimate of expected cash shortfalls on a collateralised
financial instrument reflects the amount and timing of cash flows
that are expected from foreclosure on the collateral less the costs
of obtaining and selling the collateral, irrespective of whether
foreclosure is probable. A valuer needs to understand whether
there is recourse to all the assets or only to specified assets. The
greater the value and liquidity of the assets to which an entity
has recourse in the event of default, the lower the credit risk of
the instrument. Protection might take the form of a guarantee by
another party or a credit default swap. Credit risk is reduced if
subordinated instruments take the first losses on the underlying
assets and therefore reduce the risk to more senior instruments.
(e) History of default: Default occurred in the recent past in payment
obligations on borrowings, payables, etc. is relevant in evaluating
the financial stress and resulting credit risk therefrom.

113
ICAI Valuation Standards 2018

(f) Offsetting: If derivative instrument and underlying asset are held
by counterparty, credit risk will reduce by offsetting it with counter
party.
42. Typically, valuation is carried on a controlling and marketable basis.
The valuer shall make appropriate adjustments for minority and non-
marketable instruments, while performing the valuation of an
instrument. Higher the liquidity and control, lower would be the
discount on valuation of the instrument.
Control Environment
43. The consideration for control environment in valuation of financial
instruments gains enhanced importance in the event the valuation is
based on unobservable inputs. Unobservable inputs and calculation
models are usually prepared by the entity that owns or issues the
financial instrument.
44. The control environment of an entity consists of the governance and
control procedures that are set in place by an entity with the objective
of increasing the reliance on the valuation process and conclusion.
45. A valuer placing reliance upon an internally performed valuation, shall
consider the reliance on the control environment, its adequacy and
independence.

Effective Date
46. ICAI Valuation Standard 303 Financial Instruments, shall be applied
for the valuation reports issued on or after 1st July, 2018.

114