Financial Reporting as per

Valuation Standards
By

R. K. Patel
M.E. (Mech.), FCMA, M.Sc. (Real Estate Valuation), Dip. In Business Valuation, MIE, FIV, FIIISLA, Chartered Engineer (I),
Insolvency Professional (IBBI)

Presentation at

National Conference on the Valuation Standards

(A Global Perspective in the Emerging Scenario)
Organized by
Institution of Valuers (India)
Bangalore Branch

at
Bengaluru
November 23-24, 2018
 Objectives
• Explain the principles that apply to valuations of
tangible assets prepared for use in financial
statements and related accounts of business
entities;
• Discuss accounting concepts and principles
underlying the relevant International Valuation
Standards (IVSs) viz-a-viz Indian Accounting
Standards (IndASs) for Valuation
• Study fair value measurement concepts and
valuation methods for financial reporting under
relevant IndASs.
December 29, 2017 R. K. Patel 2
 Financial Reporting under Companies Act, 2013
• International Valuation Standards (IVSs) facilitate cross-
border transactions and the viability of global markets
through harmonisation and transparency in financial
reporting.
• Indian Accounting Standards (IndASs) notified under
the Companies Act 2013 are converged to the
International Financial Reporting Standards (IFRSs)
• Valuer’s adherence to market-based definitions,
objectivity, and full disclosure of relevant matters are
fundamental to the requirements of valuation for
financial reporting
December 29, 2017 R. K. Patel 3
 Financial Reporting under Companies Act, 2013
• Valuers have been recognised as Experts in the
Companies Act, 2013
• Valuations under the Companies Act are required
to be carried out by only Registered Values
under the Companies Act 2013
• Act provides that the valuations are required to
be carried out as per the International Valuation
Standards or the Standards in force in India, till
Indian Valuation Standards are notified

December 29, 2017 R. K. Patel 4

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

December 29, 2017 R. K. Patel 5

 Regulations for Financial Reporting ?
• Accounting standards
– The IASB publishes IFRS (which replace IAS)
– The Indian Accounting Standards (IndASs)

• Valuation standards
– IVSC publishes IVSs
– RICS Red Book

December 29, 2017 R. K. Patel 6

 Statutory Valuations

• Companies Act, 2013

• Income Tax Act, 1961
• Reserve Bank of India
• SEBI Regulations
• Financial Reporting

May 19-20, 2018 CMA R. K. Patel 7

Provisions under the Companies Act, 2013
which require Valuation
Sl. Section Particulars
no.
1 62(1)C Valuation report for Further Issue of Shares
2 192(2) Valuation of Assets Involved in Arrangement of Non cash
transactions involving Directors
3 230(2)(c)(v) Valuation of shares, property and assets of the Company under a
scheme of Corporate Debt Restructuring
4 230(3) Valuation report along with Notice of creditors/shareholders
meeting –Under scheme of compromise/Arrangement.
5 232(2(d) The report of the expert with regard to valuation, if any, would be
circulated for meeting of creditors/Members
6 232(3)(h) The Valuation report to be made by the tribunal for exit opportunity
to the shareholders of transferor Company –Under the scheme of
Compromise/Arrangement in case the Transferor company is Listed
Company and the Transferee-company is an unlisted Company.
7 236(2) Valuation of equity shares held by the Minority Share Holders.
May 19-20, 2018 CMA R. K. Patel 8
Provisions under the Income Tax Act, 1961
which require Valuation
Sl. Section Particulars
no.
1 56(2) Valuation Methodology for Issue of Unquoted Equity
Shares -Rule 11UA(2)
2 56(2) Issue of Unquoted Shares (Other Than Equity Shares)
- Rule 11UA(1)(c)(c)
3 56(2) (x) Transfer of Shares and Other Securities
4 50CA Valuation for Capital Gains
5 92C Transfer Pricing – International Transactions between
Associated Entities
6 9 Indirect Transfer Pricing – Capital Gain arising to Non-
Resident on transfer of shares of foreign company
7 236(2) Valuation of Equity Shares held by the Minority Share
Holders.
May 19-20, 2018 CMA R. K. Patel 9
Reserve Bank of India - which require Valuation
Sl. Section Particulars
no.

1 FDI Foreign Exchange Management (Transfer or Issue

of Security by a Person Resident Outside India)
Regulations, 2017 – Notification dated 7/11/2017

2 ODI Direct Investments by Residents in Joint Venture

(JV) and Wholly Owned Subsidiary (WOS) Abroad –
Notification dated 7/7/2004

May 19-20, 2018 CMA R. K. Patel 10

SEBI - which require Valuation
Sl. Regulation Particulars
no.
1 76 – SEBI (Issue of Capital and Issue of Frequently Traded Shares
Disclosure Requirement)
Regulations, 2009

2 76A – SEBI (Issue of Capital and Issue of Infrequently Traded

Disclosure Requirement) Shares
Regulations, 2009

3 8(2) – SEBI(Substantial Acquisition of Frequently Traded Shares as well

Shares and Takeover) Regulations, as Infrequently Traded Shares
2011

4 SEBI (Issue of Sweet Equity) Valuation of IPR/ Knowhow

Regulations, 2002 (Listed and Unlisted Companies)
and Sweet Equity

May 19-20, 2018 CMA R. K. Patel 11

 Why Valuation of Tangible Asset in Financial Statements?
 Share-based payment transaction (IndAS 102)
 Establish value of assets acquired in takeover/ business combination (IndAS
103)
 Treatment of surplus assets (IndAS 105)
 Report the carrying amount on balance sheet (IndAS 16 and IndAS 40)
 Measurement of lease assets and liabilities (IndAS 17)
 Calculate of depreciation charges and Impairment Reviews (IndAS 36)
 In many cases use of value in financial report is an alternative option to
historic cost, e.g.
• IndAS 16 – Property, plant and equipment
• IndAS 40 – Investment property – although if cost adopted value must
be shown in notes to accounts
 Only a minority of businesses use value option under IndAS 16, although
importance increasing as IndAS 103 requires values to be shown after a
business combination (merger)

December 29, 2017 R. K. Patel 12

 Applicable Indian Accounting Standards
 IndAS 16 – Property, Plant and Equipment
 IndAS 40 - Investment Property
 IndAS 17 - Leases
 IndAS 29 - Financial Reporting in Hyperinflationary
Economies
 IndAS 36 - Impairment of Assets
 IndAS 38 – Intangible Assets
 IndAS 2 - Inventories
 IndAS 102 – Share Based Payments
 IndAS 103 - Business Combinations
 IndAS 105 - Non-current Assets Held for Sale and
Discontinued Operations

December 29, 2017 R. K. Patel 13

 Important Definitions
 Depreciated Replacement Cost (DRC)
 Improvements
 Market Value
 Specialised Property
 Carrying Amount (IndAS 36)
 Cash Generating Unit (IndAS 36)
 Depreciation and Depreciable Amount (IndAS 16, IndAS 36)
 Economic Life (IndAS 17)
 Fair Value (IndAS 16)
 Fair Value less Cost to Sale (IndAS 36)
 Impairment Loss (IndAS 36)

December 29, 2017 R. K. Patel 14

 Important Definitions
 Investment Property (IndAS 40)
 Net Realisable Value (IndAS 2)
 Owner Occupied Property (IndAS 40)
 Property, Plant and Equipment (IndAS 16)
 Recoverable Amount (IndAS 36)
 Residual Value (IndAS 16)
 Revalued amount (IndAS 16)
 Useful Life (IndAS 16; IndAS 36; IndAS 38, IndAS 17)
 Value in Use (IndAS 36)

December 29, 2017 R. K. Patel 15

 Valuation under IndAS-16
(Property, Plant and Equipment)
• The Cost Model as ““After recognition as an asset, an item
of property, plant and equipment shall be carried at its cost
less any accumulated depreciation and any accumulated
impairment losses.”
• The Fair Value Model, which requires regular revaluations,
is explained as “After recognition as an asset, an item of
property, plant and equipment whose fair value can be
measured reliably shall be carried at a revalued amount,
being its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations shall be
made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would
be determined using fair value at the balance sheet date.”

December 29, 2017 R. K. Patel 16

 Valuation under IndAS-16
(Property, Plant and Equipment)
Valuation of Land, Building and P & M
• The Fair Value of land and buildings is usually
determined from market-based evidence that is
normally undertaken by professionally qualified
valuers. The fair value of items of plant and equipment
is usually at their Market Value determined
• If there is no market-based evidence of fair value
because of the specialised nature of the item of
property, plant and equipment and the item is rarely
sold, except as a part of a continuing business, an
entity may need to estimate fair value using an income
or a Depreciated Replacement Cost Approach
December 29, 2017 R. K. Patel 17
 Valuation under IndAS-17
(Leased Assets)
• Leased assets are classified under IndAS 17 as either
finance leases or operating leases.
• If a lease is classified as a finance lease, the fair value
of the asset is required to establish the amount of the
asset and liability recorded by the entity on its balance
sheet.
• IndAS 40 allows Investment Property held by a lessee
to be accounted for as a finance lease under IndAS 17.
• The fair value is recognized as the value subject to the
lessee’s future liabilities under the lease.
• IVS considers that in each case the requirement to
establish the fair value of the leased asset is met by the
Valuer reporting the Market Value
December 29, 2017 R. K. Patel 18
 Valuation under IndAS-17
(Leased Assets)
• IVS considers that in each case the requirement
to establish the fair value of the leased asset is
met by the Valuer reporting the Market Value
• For leases of real estate, this is the Market Value
of the lease interest held by the lessee.
• A finance lease is recorded in a lessee’s balance
sheet as both an asset and a liability at amounts
equal to the fair value of the asset or, if lower,
the present value of the minimum lease
payments, each determined as at the inception
of the lease.
December 29, 2017 R. K. Patel 19
 Valuation under IndAS-40
(Investment Property)
IndAS 40 defines an investment property as a
property (land or a building--or part of a building-
-or both) held by the owner, or by a lessee under
a finance lease, to earn rentals, or for capital
appreciation or both.
It excludes owner-occupied property used for the
production or supply of goods or services, or for
administrative purposes, and also property held
for sale in the ordinary course of business.
Property leased to a subsidiary or parent under
an inter-company leasing arrangement does not
qualify as investment property

December 29, 2017 R. K. Patel 20

 Valuation under IndAS-40
(Investment Property)
 Investment property is measured initially at cost. After initial
recognition an entity may choose to adopt either:
 The Fair Value Model: Investment property should be
measured at fair value and changes recognised in the profit
and loss statement; or
 The Cost Model: The “historic” cost model is in accordance
with the model described in IndAS 16. An entity that chooses
the (historic) cost model should nonetheless disclose the fair
value of its investment property.
 At initial recognition an investment property held under a lease
shall be accounted for as though it were a finance lease under
IndAS 17, para 20, i.e., at the fair value of the property, or if
lower, at the present value of the minimum lease payments.
December 29, 2017 R. K. Patel 21
 Valuation under IndAS-36
(Valuation of Impaired Assets )

Impairment arises where there is a permanent

decrease in the value of an asset below its
carrying amount.

The entity is required to write down the

carrying amount of an impaired assert to the
higher of its value in use or fair value less
costs to sell.
December 29, 2017 R. K. Patel 22
 Valuation under IndAS-103
(Valuation after Business Combination)
• Where a business acquires or is merged with
another, the acquirer has to account for the
assets and liabilities of the acquiree at their
fair value as of the acquisition date.
• For identifiable assets and liabilities, IVS
considers that the Valuer should report the
Market Value as they existed at the date of
acquisition.
• Purchase Price Allocation
• Slump Sale
December 29, 2017 R. K. Patel 23
 Valuation under IndAS 105
(Surplus Assets or Assets Held for Disposal or Discontinued Operations)
• Under IndAS 105, Non-Current Assets Held for Sale and
Discontinued Operations, surplus assets are to be separately
identified.
• Such assets may be accounted for individually or as a “disposal
group”, i.e., a group of assets to be disposed of together, by sale
or otherwise, and the liabilities directly associated with those
assets that will also be transferred in the transaction.
• Surplus assets are to be initially accounted for at the lower of
the carrying amount and the fair value less costs to sell, and
subsequently at fair value less cost to sell.
• Valuers should therefore ascertain whether surplus assets are to
be valued as individual items, or as a group or portfolio of
assets that will be disposed of in a single transaction, and report
the29,Market
December 2017 Value with the appropriate
R. K. Patel assumptions. 24
 Valuation under IndAS 2
(Properties Held for Sale in the Ordinary Course of Business )
• These properties are measured at the lower of cost
and net realisable value.
• Net realisable value is the Market Value less the
costs of sale.
• When instructed to value impaired or surplus
assets, or assets that are held for sale in the course
of business, the Valuer must report their Market
Value without deducting selling costs.
• If the client requests the Valuer to advise on the
costs to sell the assets, such costs are to be
reported separately.
December 29, 2017 R. K. Patel 25
 Other Valuation Requirements
Under IndAS 16
 Componentization
 Remaining Useful Life
 Depreciation
 Valuing Cost of Restoring at the end of life of Asset/
Plant/ Property
 Specialized Property – Depreciated Replacement Cost

Under IndAS 29
 Disrupted Markets: When markets are disrupted or
suspended, Valuers must be vigilant in their analyses as
explained in IVS.
 Under IndAS 29, Financial Reporting in Hyperinflationary
Economies, Valuers may be required to assess balance sheet
value.
December 29, 2017 R. K. Patel 26
 Other Valuation Requirements
Under IndAS 38
 Intangible Assets
 Identification of Intangible Asset – Separable
and Contractual
 Internally Generated Goodwill and Internally
Generated Intangibles
 Cost Model and Revaluation Model
 Useful Life and Residual Value of Intangible Asset
 Depreciable Amount and Amortisation of
Intangible Assets
 Impairment Loss

December 29, 2017 R. K. Patel 27

 Valuation for Financial Reporting
Practical Case Study
Report - HGML - Main Report.PDF

SUNSHINE GLOBAL HOSPITAL LAND BLDG VALUATION -

September 2018.pdf

Part 1- Main Report - SICOP Valuation.pdf

REPORT on Valuation of Shares of LUXMI TOWNSHIP AND

HOLDINGS LTD.pdf

REPORT - DEVELOPMENT RIGHTS - Intangible Asset for

Financial Reporting.pdf

December 29, 2017 R. K. Patel 28

 Keep Abreast
Advanced Practices in Valuation

Valuation for Financial Statements/ Reporting

Valuation for Liquidation
Valuation for Security against Loan
Valuation for Merger and Acquisition
Valuation for Slum Sales
• Purchase Price Allocation
• Attracting Income Tax
• Transfer Pricing
• Stamp Duty ………
Valuation for Disinvestment of Public Undertakings

December 29, 2017 R. K. Patel 29

 Valuation for Financial Reporting
Challanges

 Subject to Audit
 Subject to Penal Clauses under the
Companies Act
 Calls for Multidisciplinary Approach

December 29, 2017 R. K. Patel 30

 Valuation for Financial Reporting
Art, Science and Practice
• Calls for Ethical Practice
• Calls for Sound Methodology for given Purpose
• Calls for Accurate Basis for Adjusting the Values
• Industry Specialization
• Specialized Properties are more governed by Value-
in- Use (in-situ or ex-situ) and has great influence on
adjustment in Value of Assets
• A Multidisciplinary Approach: for Valuers, adequate
working knowledge of Finance, Accounting, Business
Laws and Practices, Taxations, Product Demand/
Supply unavoidable
• Sound knowledge of Company Laws, Accounting
Standards, Valuation Standards, etc.

December 29, 2017 R. K. Patel 31

 Financial Reporting as per
Valuation Standards

Disclaimer

This theory and practical cases presented here are intended for general
information purposes only and is not intended to provide, and should not
be used in lieu of, professional advice. The author/ presenter assumes no
liability for readers’ use of the information herein and readers are
encouraged to seek professional assistance with regard to specific matters.
Any conclusions drawn or opinions given are based on the individual facts
and circumstances of a particular matter and therefore may not apply in
other matters. All opinions expressed in this article/ presentation are those
of the authors/ presenters and do not necessarily reflect the views of the
author/ presenter.

December 29, 2017 R. K. Patel 32

 Financial Reporting as per
Valuation Standards

THANKS
It’s a presentation by
R. K. PATEL
M.E. (Mech.), FCMA, M.Sc. (Real Estate Valuation), Dip. In Business Valuation, MIE, FIV, FIIISLA,
Chartered Engineer (I), Insolvency Professional (IBBI)

M/s R. K. Patel & Co.

Insurance Surveyors, Valuers, Chartered Engineers, Cost Accountants
314, Phoenix Complex, Near Suraj Plaza, Sayajigunj
VADODARA 390005
Phone: 0265-3922932, Mobile: 9825038407 email : rajupatel18@hotmail.com

December 29, 2017 R. K. Patel 33