I have already written about the requirements for valuation standards in India and have also indicated important sets of valuation standards presently prevalent in the world.

In this series of blog posts, I will be writing about the Comparison of ICAI Valuation Standards 2018, effective 1 July 2018 (“ICAI VS”) with International Valuation Standards, effective 31 January 2020 (“IVS”).

While Companies (Registered Valuers and Valuation) Rules, 2017 (Valuation Rules) require that any valuation carried out by a registered valuer shall be carried out in accordance with the valuation standards notified by the Central Government and until such valuation standards are notified, a valuer shall make valuation as per

1. internationally accepted valuation standards (emphasis supplied);
2. valuation standards adopted by any registered valuers organisation,

no particular set of valuation standards has been mandated by the Government.

ICAI VS have been developed and issued by the Valuation Standards Board (“VSB”) of The Institute of Chartered Accountants of India (“ICAI”) with the objectives of having consistent, uniform, and transparent valuation policies and to harmonise the diverse practices in use in India. ICAI VS have been adopted by ICAI Registered Valuers Organization (“ICAI RVO”).

ICAI requires chartered accountants to mandatorily follow ICAI VS while carrying out valuations required under the Companies Act, 2013 and that ICAI RVO also requires its members (registered valuers) to follow ICAI VS while conducting valuations.

IVS are developed and issued by International Valuation Standards Council (“IVSC”) with the objectives to

1. develop high quality International Valuation Standards (IVS) which ensure consistency, transparency and confidence in valuations throughout the world, and;
2. encourage the adoption of IVS, along with valuation professionalism provided by Valuation Professional Organisations throughout the world.

While IVS are followed by a number of valuers in India, there is no mandatory requirement in India to follow IVS. Valuers may follow IVS or any other set of internationally accepted valuation standards.

The objectives of both ICAI VS and IVS are as follows:

ICAI VS

IVS

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.  The Standards will provide a benchmark to the professionals to ensure uniformity in approach and quality of valuation output.

The objective of the IVS is to increase the confidence and trust of users of valuation services by establishing transparent and consistent valuation practices.  A standard will do one or more of the following: identify or develop globally accepted principles and definitions,identify and promulgate considerations for the undertaking of valuation assignments and the reporting of valuations,identify specific matters that require consideration and methods commonly used for valuing different types of assets or liabilities.

Various documents and standards included in both sets of valuation standards are as follows:

ICAI VS	IVS
Preface to the ICAI Valuation Standards	Introduction
Framework for the Preparation of Valuation Report in accordance with the ICAI Valuation Standards	IVS Framework
General Standards
ICAI Valuation Standard 101- Definitions	Glossary
ICAI Valuation Standard 102 – Valuation Bases	IVS 104 Bases of Value
ICAI Valuation Standard 103 – Valuation Approaches and Methods	IVS 105 Valuation Approaches and Methods
ICAI Valuation Standard 201 – Scope of Work, Analyses and Evaluation	IVS 101 Scope of Work IVS 102 Investigations and Compliance
ICAI Valuation Standard 202 – Reporting and Documentation	IVS 103 Reporting
Asset Standards
ICAI Valuation Standard 301 – Business Valuation	IVS 200 Businesses and Business Interests
ICAI Valuation Standard 302 – Intangible Assets	IVS 210 Intangible Assets
	IVS 220 Non-Financial Liabilities
	IVS 300 Plant and Equipment
	IVS 400 Real Property Interests
	IVS 410 Development Property
ICAI Valuation Standard 303 – Financial Instruments	IVS 500 Financial Instruments
Other Documents
	Basis for Conclusions
	Technical Information Paper 1 Discounted Cash Flow
	Technical Information Paper 2 The Cost Approach for Tangible Assets
	Technical Information Paper 3 The Valuation of  Intangible Assets
	Technical Information Paper 4 Valuation Uncertainty

IVS 220 Non-Financial Liabilities was issued in 2019 effective 31 January 2020. In addition, IVSC has issued an exposure draft of IVS 230 Inventory.

As we can see from the above table, while ICAI VS are focused more on valuers of securities and financial assets, IVS is more comprehensive as it covers valuation of non-financial assets and non-financial liabilities as well. Further, there are supporting documents available along with IVS to assist valuers in their valuations which are not available along with ICAI VS.

General Standards

General Standards set forth requirements for the conduct of all valuation assignments including establishing the terms of a valuation engagement, bases of value, valuation approaches and methods, and reporting. They are designed to be applicable to valuations of all types of assets and for any valuation purpose.

 

Asset Standards

Asset Standards include requirements related to specific types of assets. These requirements must be followed in conjunction with the General Standards when performing a valuation of a specific asset type. 

Preface to ICAI VS provides that 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.

It further provides that 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. 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.

On the other hand, Introduction to IVS provides that the IVS consist of mandatory requirements that must be followed in order to state that a valuation was performed in compliance with the IVS.  Certain aspects of the standards do not direct or mandate any particular course of action, but provide fundamental principles and concepts that must be considered in undertaking a valuation.

The IVS Framework also mentions that when a statement is made that a valuation will be, or has been, undertaken in accordance with the IVS, it is implicit that the valuation has been prepared in compliance with all relevant standards issued by the IVSC.

Key differences between Framework for the Preparation of Valuation Report in accordance with the ICAI Valuation Standards and IVS Framework are as follows:

Preparation of Valuation Report in accordance with the ICAI Valuation Standards	IVS Framework
The purpose of the Framework is to inter-alia: 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; 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.	The IVS framework serves as a preamble to the IVS.  The IVS Framework consists of general principles for valuers following the IVS regarding objectivity, judgement, competence, and acceptable departures from the IVS.
The ICAI Valuation Standards are to be applied for the valuation of assets and liabilities. Any reference to the term asset also includes liability.	The standards can be applied to the valuation of both assets and liabilities.  To assist the legibility of these standards, the words asset or assets have been defined to include liability or liabilities and groups of assets, liabilities, or assets and liabilities, except where it is expressly stated otherwise, or is clear from the context that liabilities are excluded.
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.	When a statement is made that a valuation will be, or has been, undertaken in accordance with the IVS, it is implicit that the valuation has been prepared in compliance with all relevant standards issued by the IVSC
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.   The term valuer also includes a valuer undertaking valuation engagement under other Statutes like Income Tax, SEBI, FEMA, RBI etc.	Valuer has been defined as “an individual, group of individuals, or a firm possessing the necessary qualifications, ability and experience to undertake a valuation in an objective, unbiased and competent manner.  In some jurisdictions, licensing is required before one can act as a valuer. Because a valuation reviewer must also be a valuer, to assist with the legibility of these standards, the term valuer includes valuation reviewers except where it is expressly stated otherwise, or is clear from the context that valuation reviewers are excluded.
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: relevant to the economic decision-making needs of intended users; and reliable, in the valuation reports represent faithfully the information contained therein;  reflect the economic substance and not merely the legal form of an item;  are neutral, i.e., free from bias; are prudent; and are complete in all material respects.   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.    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.	The process of valuation requires the valuer to make impartial judgements as to the reliability of inputs and assumptions.  For a valuation to be credible, it is important that those judgements are made in a way that promotes transparency and minimises the influence of any subjective factors on the process.  Judgement used in a valuation must be applied objectively to avoid biased analyses, opinions, and conclusions.   It is a fundamental expectation that, when applying these standards, appropriate controls and procedures are in place to ensure the necessary degree of objectivity in the valuation process so that the results are free from bias.  The IVSC Code of Ethical Principles for Professional Valuers provides an example of an appropriate framework for professional conduct.
In making the judgement described above, the valuer shall refer to, and consider the applicability of, the following sources in descending order: the prescriptions laid down in Companies (Registered Valuers and Valuation) Rules, 2017, as amended from time to time; the requirements in this Framework;  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 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.	A “departure” is a circumstance where specific legislative, regulatory, or other authoritative requirements must be followed that differ from some of the requirements within IVS.  Departures are mandatory in that a valuer must comply with legislative, regulatory, and other authoritative requirements appropriate to the purpose and jurisdiction of the valuation to be in compliance with IVS.  A valuer may still state that the valuation was performed in accordance with IVS when there are departures in these circumstances.    The requirement to depart from IVS pursuant to legislative, regulatory, or other authoritative requirements takes precedence over all other IVS requirements.   As required by IVS 101 Scope of Work, para 20.3 (n) and IVS 103 Reporting, para 10.2 the nature of any departures must be identified (for example, identifying that the valuation was performed in accordance with IVS and local tax regulations).  If there are any departures that significantly affect the nature of the procedures performed, inputs and assumptions used, and/or valuation conclusion(s), a valuer must also disclose the specific legislative, regulatory or other authoritative requirements and the significant ways in which they differ from the requirements of IVS (for example, identifying that the relevant jurisdiction requires the use of only a market approach in a circumstance where IVS would indicate that the income approach should be used).   Departure deviations from IVS that are not the result of legislative, regulatory, or other authoritative requirements are not permitted in valuations performed in accordance with IVS.
The fundamental ethical principles that all valuers are required to observe are:   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.   Objectivity The valuer should not allow bias, conflict of interest or undue influence of others to override professional or business judgments.   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.   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.   Professional Behaviour The valuer should comply with relevant laws and regulations and avoid any conduct that disrepute to the profession.   Professional Judgement 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 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.	Objectivity The process of valuation requires the valuer to make impartial judgements as to the reliability of inputs and assumptions.  For a valuation to be credible, it is important that those judgements are made in a way that promotes transparency and minimises the influence of any subjective factors on the process.  Judgement used in a valuation must be applied objectively to avoid biased analyses, opinions, and conclusions.   It is a fundamental expectation that, when applying these standards, appropriate controls and procedures are in place to ensure the necessary degree of objectivity in the valuation process so that the results are free from bias.  The IVSC Code of Ethical Principles for Professional Valuers provides an example of an appropriate framework for professional conduct.    Competence Valuations must be prepared by an individual or firm having the appropriate technical skills, experience, and knowledge of the subject of the valuation, the market(s) in which it trades and the purpose of the valuation.   If a valuer does not possess all of the necessary technical skills, experience and knowledge to perform all aspects of a valuation, it is acceptable for the valuer to seek assistance from specialists in certain aspects of the overall assignment, providing this is disclosed in the scope of work (see IVS 101 Scope of Work) and the report (see IVS 103 Reporting).    The valuer must have the technical skills, experience, and knowledge to understand, interpret and utilise the work of any specialists.
Objective of Valuation Report 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: UnderstandabilityRelevanceMaterialityFaithful representationSubstance over formPrudenceCompleteness
Constraints on relevant and reliable information in valuation report: ·       Balance between benefit and cost Balance among qualitative characteristics

To be continued……..