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THE MINISTRY OF
FINANCE OF VIETNAM
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THE SOCIALIST
REPUBLIC OF VIET NAM
Independence-Freedom-Happiness
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No. 36/2024/TT-BTC
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Hanoi, May 16, 2024
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CIRCULAR
PROMULGATING
VIETNAM’S VALUATION STANDARD ON BUSINESS VALUATION
Pursuant to the
Prices Law dated June 19, 2023;
Pursuant to the
Government’s Decree No. 14/2023/ND-CP dated April 20, 2023 defining functions,
tasks, powers and organizational structure of the Ministry of Finance of
Vietnam;
At the request of the
Director of the Department of Price Management;
The Minister of
Finance of Vietnam promulgates a Circular promulgating Vietnam’s Valuation
Standard on business valuation.
Article
1.
Vietnam’s Valuation Standard on business valuation is
promulgated together with this Circular.
Article
2. Effect
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2. The Circular No.
28/2021/TT-BTC dated April 27, 2021 of the Minister of Finance of Vietnam
promulgating Vietnam’s Valuation Standard No. 12 ceases to have effect from the
effective date of this Circular.
Article
3. Implementation
1. Relevant
organizations and individuals are responsible for implementation of Vietnam’s
Valuation Standard enclosed with this Circular.
2. Difficulties that
arise during the implementation of this Circular should be promptly reported to
the Ministry of Finance of Vietnam for consideration./.
PP. MINISTER
DEPUTY MINISTER
Le Tan Can
VIETNAM’S
VALUATION STANDARD
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Chapter I
GENERAL
PROVISIONS
Article
1. Scope
This Vietnam’s
Valuation Standard prescribes and provides instructions about valuation of
businesses which is conducted in accordance with regulations of the Prices Law.
Article
2. Regulated entities
1. Valuers, valuation
firms rendering valuation services in accordance with regulations of the Prices
Law.
2. Organizations and
individuals that perform State valuation tasks in accordance with regulations
of the Prices Law.
3. Organizations or
individuals ordering valuation services, third parties using valuation reports
under valuation service contracts (if any).
Article
3. Definitions
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1. Operating assets are assets used in
production and business activities of an enterprise and contributing to its
generation of revenue from selling goods and providing services or helping
reduce costs of its main production and business activities.
2. Non-operating
assets are
assets that do not participate in production and business activities of an
enterprise, including: investments in other companies (except cases where the enterprise
needing to be valued (hereinafter referred to as “subject enterprise”) is a
financial investment company); short-term financial investments; cash and cash
equivalents; assets under the ownership and at the disposal of the enterprise
that do not contribute to generation of their earnings, but still have value
(unexploited assets, unused patents, land-use rights (LURs), tenancy not yet
exploited according to the enterprise’s business plan, or expected to be
transferred/sold where they are not needed); assets under the ownership and at
the disposal of the enterprise that can generate their earnings, but do not
contribute to generating the revenue from selling goods and providing services,
or do not help reduce the costs of main production and business activities of
the subject enterprise (e.g. LURs or tenancy for use in business sectors or
industries not classified as their permitted ones) and other non-operating
assets.
3. Going-concern
value is
the value of an operating enterprise that is assumed to continue to operate
after the valuation date.
4. Value of a
fixed-term operating enterprise is the value of an operating enterprise that
is assumed to have the finite life since the enterprise is forced to cease to
operate after a specified date in the future.
5. Liquidation
value is
the value of an enterprise with the assumption that its assets will be sold piecemeal
and it will soon cease to operate after the valuation date.
Article
4. Bases of value
Bases of value used
in business evaluation are determined based on valuation purposes, legal
characteristics, economic-technical characteristics and market characteristics
of the subject enterprise, and requirements set out by the valuation customer in
the valuation service contract (if these requirements are aligned with the
valuation purposes) and other relevant laws. Other contents shall be subject to
Vietnam's Valuation Standard on bases of value.
Article
5. Operational status, transactional status of subject enterprise after
valuation date
The operational
status and transactional status (existing or hypothetical) of the subject enterprise
after the valuation date are determined based on the collected information on its
operational prospects, business markets, valuation purposes and provisions of
laws.
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Article
6. Use of financial statements in business valuation
1. The use of
financial statements in business valuation shall be subject to the selected valuation
approach and method, time of performance of the valuation and characteristics
of the subject enterprise. Additionally, the use of financial statements
audited or reviewed by independent audit firms is prioritized.
2. The reasonableness
of the financial statements must be compared and checked to ensure their
reliability. Where necessary, the subject enterprise may be requested to adjust
financial data presented on its financial statements before using them in
information analysis and applying valuation approaches and methods to the
business valuation. If the subject enterprise refuses to make adjustments, the
difference shall be determined and the contents and grounds for adjustment
should be clearly analyzed and specified in the valuation report.
3. When using data
obtained from unaudited or reviewed financial statements, or audited or
reviewed financial statements given opinions other than unqualified opinions,
this limitation must be clearly disclosed in the limitation section of the
valuation report and valuation certificate or the notice of valuation results to
valuation customer and users of valuation results.
4. With respect to
valuation methods in the market approach: When using data obtained from
financial statements of the subject enterprise, comparisons must be made to
calculate the following indicators: earnings per share (EPS), earnings before
interest, taxes, depreciation and amortization (EBITDA) used in calculating
market ratios for valuation purposes, and adjustments should be made to exclude
earnings and expenses of non-operating assets, unusual or nonrecurring expenses
or earnings.
5. With respect to
valuation methods in the income approach: When using data on profits obtained
from financial statements in the most recent years of the subject enterprise
for the purpose of anticipating the future annual income stream of the subject
enterprise, unusual or nonrecurring expenses and incomes, as well as incomes
and expenses arising from non-operating assets should be excluded.
6. Nonrecurring
expenses and incomes include: expenses related to the business restructuring;
increases and decreases recorded from the sale of assets; changes in accounting
estimates; inventory write-downs; declines in goodwill; debt write-off; losses
or gains from court decisions and other nonrecurring incomes and expenses. When
adjusting these entries or items, the impact of corporate income tax (CIT) (if
any) must be considered.
Article
7. Valuation approaches and methods
The selection of
valuation approaches and methods depends on the bases of value of the subject
enterprise and judgments on operational conditions of the subject enterprise on
and after the valuation date.
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The enterprise value
can be determined through the values of the comparable enterprises that are
similar to the subject enterprise in terms of size; main business lines;
business and financial risks; financial indicators or values of successful
transactions of the subject enterprise. The methods used in the market approach
include the mean ratio method and the transaction value method.
2. Cost approach
The enterprise value is
determined through the value of the subject enterprise’s assets. The method
used in the cost approach is the asset-based method.
3. Income approach
The enterprise value
is determined through converting predictable future net cash flows to a single
current value at the valuation date. The methods used in the income approach
include the discounted free cash flow method, the dividend discount method, and
the discounted free cash flow to equity method.
When determining the enterprise
value using the income approach, the value of the non-operating assets at the
valuation date should be added to the anticipated discounted cash-flow value of
operating assets at the valuation date. Where the cash flow of certain operating
assets cannot be reliably anticipated, the anticipation of the cash flow of
these operating assets may not be required but their value shall be separated
determined and added to the enterprise value. Particularly, the addition of
the value of non-operating assets which are cash and cash equivalent is not
required when the dividend discount method is adopted.
Article
8. Determining value of enterprise’s equity
The value of an
enterprise’s equity is determined by calculating the weighted average of the
results obtained from the application of valuation methods in case at least 02
valuation methods are adopted. Determination of the weighing factor depends on
the reliability of each method, input data, valuation purpose and relevant elements.
Chapter
II
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Section
1. MEAN RATIO METHOD
Article
9. Mean ratio method
1. The mean ratio
method is used for estimating the equity of the subject enterprise through the average
market ratio of comparable enterprises.
2. Market ratios
commonly used in the mean ratio method include price-to-earnings 
, price-to-sales 
, price-to-book value of equity 
, enterprise value to
earnings before interest, taxes, depreciation or amortization 
, enterprise value-to-sales 
, and enterprise value to
earnings before interest and taxes 
.
3. Comparable
enterprise is an enterprise that meets all of the following conditions:
a) It is similar to
the subject enterprise in terms of:
- Main business
lines;
- Business and
financial risks;
- Financial
indicators, including: Indicators showing the business size such as book value
of equity, net sales, and gross profits from sale of goods and provision of
services; Indicators showing the growth of the enterprise (the average growth
rate of profits after CIT in the last 03 years); Indicators showing business
performance such as return on equity (ROE) and return on assets (ROA));
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4. Conditions for
application of the mean ratio method
There must be at
least 03 comparable enterprises. Priority should be given to comparable enterprises
that are listed on stock exchanges or registered for trading on UPCoM.
5. Principles for
applying mean ratio method
a) The formulas used
for calculating financial indicators and market ratios must be consistently
applied to all comparable enterprises and the subject enterprise.
b) Financial
indicators and market ratios of comparable enterprises collected from different
sources must be reviewed and adjusted to ensure consistency in the applied
formulas before they are put into use in the valuation process.
6. Steps of the mean
ratio method
a) Evaluating and
selecting comparable enterprises as prescribed in clause 3 of this Article;
b) Determining market
ratios used for estimating the value of equity of the subject enterprise;
c) Estimating the value
of equity of the subject enterprise on the basis of appropriate market ratios and
making adjustment for differences.
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Determining market
ratios used for estimating the value of equity of the subject enterprise is
subject to the following provisions:
1. Calculating the
market ratios of comparable enterprises, and then using at least 03 out of the
following market ratios: price-to-earnings 
, price-to-sales 
, price-to-book value of equity 
, enterprise value to
earnings before interest, taxes, depreciation or amortization 
, enterprise value-to-sales 
, and enterprise value to
earnings before interest and taxes 
.
2. Selecting market
ratios used for estimating the equity value and the value of the subject
enterprise on the basis of considering the appropriateness of selected market
ratios on the basis of business size, characteristics, business lines, markets
and similarities. Market ratios of comparable enterprises should be evaluated
and considered for adjustment before they are used in the calculation of
equity. Market ratio adjustments, if applicable, are based on data (if any),
experience and market surveys or market researches.
3. Notes on
calculation of market ratios
a) Earnings per share
(EPS) is determined on the basis of the income earned in the most recent 01
year before the valuation date and adjustments for non-operating assets of
comparable enterprises should be taken into consideration;
b) The share price of
a comparable enterprise is the reference price on the latest trading day of these
shares on the stock market at the time of valuation and these shares must be
involved in transactions occurring during the 30-day period preceding the
valuation date. Where the shares of the comparable enterprise are not yet
listed on the stock exchange or registered for trading on UPCoM, the share
price of this comparable enterprise shall be the price of their shares that are
successfully traded on the market at the time closet to the valuation date but
not more than 01 year before the valuation date;
c) Regarding the book
value of shares in the indicator 
, it should be noted that the book value of
intangible fixed assets (excluding LURs, and rights to exploit assets on land)
must be excluded to limit the impact of regulations on accounting for intangible
fixed assets that may falsify the valuation results in the case the comparable
enterprises and the subject enterprise have intangible fixed assets in their
balance sheets. Where the exclusion of the book value of intangible fixed
assets is not made, reasons for this must be clearly stated.
d) The enterprise
value (EV) of comparable enterprises in the market ratios 
, 
and 
is calculated adopting the following formula:
Enterprise value
(EV)
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Market
capitalization of common shares
+
Total debts with
cost of capital
+
Preferred shares
(if any)
+
Non-controlling
interests (if any)
-
Value of
non-operating assets
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- Total debts with
cost of capital, preferred shares, non-controlling interests, cash and cash
equivalents are calculated based on their book values. Where information used
for calculating total debts with cost of capital is not sufficient, the book
values of loans and finance leases are used;
- Where an enterprise
has issued convertible securities or options securities, the conversion of
these securities into common shares must be evaluated and considered, if
appropriate, when calculating the enterprise’s market capitalization;
dd) EBITDA or EBIT of
the comparable enterprise includes neither incomes from cash and cash
equivalents nor incomes or expenses from non-operating assets.
Article
11. Estimating subject enterprise’s value of equity
1. Determining the
average market ratio for each market ratio
The average market
ratio is the arithmetic mean or the weighted average of the market ratios of
the comparable enterprises.
Determination of the
market ratio weighting factor for each comparable enterprise depends on the
similarity between that comparable enterprise and the subject enterprise.
2. Determining value
of the subject enterprise and its value of equity according to each annual
average market ratio
a) Determining the
value of the subject enterprise and its market value of equity according to the
average EV/EBITDA ratio, the average EV/EBIT ratio and the average EV/S ratio
of comparable enterprises:
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=
EBITDA of the
subject enterprise
x
Average 
of comparable
enterprises
Value of the
subject enterprise
=
EBIT of the subject
enterprise
x
Average 
of comparable
enterprises
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=
Net sales of the
subject enterprise
x
Average 
of comparable
enterprises
Where the EBITDA of
the subject enterprise includes neither incomes from cash and cash equivalents
nor incomes or expenses from its non-operating assets.
Value of the subject
enterprise’s equity
=
Value of the
subject enterprise
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-
Total debts with
cost of capital
-
Non-controlling
interests (if any)
-
Preferred shares
(if any)
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Value of
non-operating assets
b) Determining the
subject enterprise’s value of equity according to
:
- Determining the
subject enterprise’s value of equity according to the average P/E ratio of
comparable enterprises:
Value of the
subject enterprise’s equity
=
Profits after CIT
in 01 most recent year of the subject enterprise
x
Average 
of comparable
enterprises
- Determining the
subject enterprise’s value of equity according to the average P/B ratio of
comparable enterprises:
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=
The book value of
equity of the subject enterprise at the time closest to the valuation date
x
Average 
of comparable
enterprises
- Determining the
subject enterprise’s value of equity according to the average P/S ratio of
comparable enterprises:
Value of the
subject enterprise’s equity
=
Net sales in 01
most recent year of the subject enterprise
x
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3. Estimating the
subject enterprise’s value of equity adopting the mean ratio method:
The subject
enterprise’s value of equity according to the mean ratio method is the
arithmetic mean of the results of calculation of the subject enterprise’s value
of equity according to each of selected average market ratios or weighted
average of such results. Determination of the weighting factor for each value
result depends on the evaluated similarity between the comparable enterprises
regarding each market ratio used to calculate that value result on the
principle that the greater similarity between comparable enterprises a market
ratio shows, the greater weighting factor the value result using that market
ratio has.
Section
2. TRANSACTION VALUE METHOD
Article
12. Transaction value method
1. The transaction
value method helps estimate the subject enterprise's value of equity through
the prices of its successful transactions involving transfer of contributed
capital or shares on the market.
2. Conditions for
application of the transaction value method
The subject
enterprise has at least 03 successful transactions involving transfer of
contributed capital or shares on the market; at the same time, such transactions
have been conducted within 01 year prior to the valuation date.
3. Application
principles: Adjustment for prices of successful transactions should be
evaluated and considered to suit the valuation time, if necessary.
Article
13. Estimating equity value using transaction value method
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If shares of the
subject enterprise have been listed on the stock exchange or registered for
trading on UPCoM, the share price used for calculating the market value of
equity is either the transaction price or reference price of the subject
enterprise's shares quoted on or within 30 days prior to the valuation date.
Chapter III
COST
APPROACH
Article
14. Asset-based method
1. The asset-based
method is the method employed to estimate the subject enterprise’s value by
calculating the total value of the assets under the ownership and at the
disposal of the subject enterprise.
2. Application
principles:
a) Assets considered
in the valuation process are all assets of the subject enterprise determined on
the basis of its inventory data; these assets are valued according to
provisions of this Standard and other Vietnam’s valuation standards; where
information and documents serving the valuation of these assets are not
available, analyses and arguments thereon must be specified in the valuation
report, and then values of these assets shall be determined on the basis of
actual costs incurred and recorded in accounting books;
b) When valuing an
enterprise under the base of value which is the market value, the values of the
subject enterprise’s assets are their market values determined on the valuation
date and according to provisions of Article 15 of this Standard;
c) Values of
intangible assets that do not satisfy the conditions to be recorded in the
accounting books (e.g. trade names, trademarks, inventions, industrial
designs,...) and other assets that are not recorded in the accounting books
should be determined adopting appropriate valuation methods;
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3. Steps of the
asset-based method:
a) Estimating total
value of tangible assets and financial assets of the subject enterprise;
b) Estimating total
value of intangible assets of the subject enterprise;
c) Estimating the subject
enterprise’s value of equity.
Article
15. Estimating total value of tangible assets and financial assets of the
subject enterprise
Market values of
tangible assets and financial assets of the subject enterprise are estimated
adopting one of the valuation methods prescribed in Vietnam’s valuation
standards on market approach, cost approach and income approach, and other
relevant Vietnam’s valuation standards.
In addition,
estimation of market values of tangible assets and financial assets shall
comply with the following instructions:
1. Valuing liquid
assets
a) Cash is calculated
according to the inventory record of treasury of the subject enterprise;
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c) Cash deposits in
foreign currency are determined according to the principles stated in point d
clause 2 Article 14 of this Standard.
2. Valuing
investments
Values of investments
of the subject enterprise at the valuation date should be determined as
follows:
a) In case the
enterprise (to which the subject enterprise make capital contribution or whose
shares are purchased by the subject enterprise) has successful transactions
involving transfer of contributed capital or shares on the market, the values
of contributed capital or purchased shares shall be determined according to the
market value of equity of the enterprise in which the subject enterprise
invests. In this case, the market value of equity of the enterprise in which
the subject enterprise invests shall be determined adopting the methods
mentioned in this Standard or according to the following provisions:
- Where the shares of
enterprises have not been listed on the stock exchange or registered for
trading on UPCoM, and the successful transactions involving transfer of
contributed capital or shares on the market satisfy all of these 2 conditions:
(i) more than 50% of the enterprise’s equity is transferred out of total
transactions; (ii) transactions are conducted within 01 year prior to the
valuation date; then the value of investments shall be the average
transfer price determined according to the volumes of the transactions
conducted at the time closest to the valuation date.
- Where investments are
shares of enterprises which have been listed on the stock exchange or
registered for trading on UPCoM, the value of these investments shall be
determined at the share price which is the reference price of the subject
enterprise's shares quoted on the valuation date, and transactions involving
these shares must be conducted within 30 days prior to the valuation date.
b) In case the
enterprise (to which the subject enterprise makes capital contribution or whose
shares are purchased by the subject enterprise) does not have successful
transactions involving transfer of contributed capital or shares on the market,
the values of contributed capital or purchased shares shall be determined as
follows:
- Where the subject
enterprise holds 100% of the capital of the enterprise receiving investment or
capital contribution, the value of the investment shall be the value of the
enterprise receiving investment or capital contribution which is determined
adopting the methods prescribed in this Standard.
- Where the subject
enterprise holds at least 50% to under 100% of the capital of the enterprise
receiving investment or capital contribution, the value of the investment shall
be determined according to the value of equity of the enterprise receiving
investment. In this case, the value of equity of the enterprise in which the
subject enterprise invests shall be determined adopting the methods mentioned
in this Standard, or where such methods cannot be employed, it shall be
determined according to the following provisions:
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(ii) For the mean
ratio method: values of ratios 
shall be calculated, and then, the average 
ratios may be estimated
on the basis of 
ratios
of at least 03 enterprises having the same business lines.
(iii) The value of
an investment is determined on the basis of the ratio of investment capital of
the subject enterprise to total capital actually contributed to other enterprises
and the value of equity at other enterprises according to audited or reviewed
financial statements. If audited or reviewed financial statements of an
enterprise are not available, the value of equity determined according to the
most recent financial statements of that enterprise shall be used as the basis,
and this must be clearly stated in the limitation section of the valuation
certificate and the valuation report.
- Where the subject
enterprise holds less than 50% of the capital of the enterprise receiving
investment or capital contribution, the value of investment shall be determined
adopting the methods specified in Chapter II of this Standard or the guidance
in Points (i), (ii), (iii); if the guidance in Point (iii) is employed, it must
be clearly stated in the limitation section of the valuation certificate and
the valuation report.
3. Valuing
receivables and payables
a) The receivables
and payables recorded in the accounting books shall be compared with those
available on relevant documents provided and collected during the valuation
period. Where necessary, the subject enterprise may be requested to verify and
reaffirm data;
b) The value of
receivables and payables are determined according to actual balances on the
basis of relevant evidences provided. In case there is not enough evidence,
analyses, arguments and assumptions on the ability to collect receivables
should be provided on the basis of data available in the accounting books;
c) If relevant documents
or materials such as the records of reconciliation and confirmation of
receivables and payables or documents on receivables and payables arising after
the closing time of accounting books for preparation of financial statements
are not provided, this must be clearly stated in the limitation section of the
valuation certificate and the valuation report to serve the evaluation and
consideration by the intended users of valuation results.
4. Valuing
inventories
a) Work-in-progress
costs are determined according to the actual costs incurred and recorded in the
accounting books. In case the subject enterprise is a project owner incurring
work-in-progress costs from fundamental construction activities associated with
creation of off-the-plan real estate, it is necessary to determine the value of
LURs (if any, including off-the-plan property) of the subject enterprise
according to Vietnam’s valuation standards on market approach, income approach
and real property valuation; the value of construction items shall be
determined according to actually incurred costs which are recorded in
accounting books;
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c) In case inventories
are raw materials, tools and instruments which are in stock for a long time due
to manufacturing defects, unfinished products which cannot continue to be
further finished because of the problem of consumption, or any changes in
products, etc. leading to poor quality, the subject enterprise is required to
make the inventory or classification list and request the valuation to be
conducted based on the recoverable value of those that are best used in a most
effective manner;
d) In case
inventories are raw materials, tools and instruments which are in stock to
serve normal business and production activities or are being transferred, their
values shall be determined according to the actually incurred costs which are
recorded in accounting books.
5. Valuing tangible
fixed assets
a) The values of
tangible fixed assets which are houses, architectural objects,
investment-purpose real property classified as individual works (i.e. the size
or construction unit price, unit investment rate cannot be identified) may be
determined according to their historical costs recorded in the accounting
books, taking into account price escalation, less depreciation at the time of
valuation;
b) For tangible fixed
assets which are machinery, means of transport, transmission equipment,
equipment and tools for management purposes:
In the absence of similar
assets traded on the market or due to shortage of investment and technical
dossiers, information will be collected, argued and analyzed, and evidence that
no similar assets are traded in the market will be kept, and then the values of
these assets shall be determined according to their historical costs recorded
in accounting books (taking into account the exchange rate differences in case
of imported assets) less depreciation at the time of valuation.
The valuation of
these assets according to their historical costs recorded in accounting books
as mentioned above must be clearly stated in the limitation section of the
valuation certificate and the valuation report.
6. Valuing used tools
and instruments:
The value of tools
and instruments is determined according to the market prices of comparable
assets. Where the market prices of comparable assets cannot be collected, the
value of tools and instruments shall be determined according to the trading
prices of new tools or instruments which are of the same type or have similar
properties, or their purchase prices recorded in accounting books, less
depreciation at the time of valuation.
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7. Calculating
short-term and long-term deposits and pledges according to the accounting
books.
8. When valuing financial
assets existing in the form of a contract, the discounted cash flow method will
be given precedence over others.
9. Values of
in-progress fundamental construction works shall be determined in the same
manner as work-in-progress costs.
Article
16. Estimating total value of intangible assets of subject enterprise
The value of
intangible assets of the subject enterprise is the sum of the value of
identifiable intangible assets and the value of unidentifiable intangible assets.
Intangible assets of the subject enterprise include intangible fixed assets
recorded in its accounting books, other intangible assets which satisfy the
conditions set out in Vietnam’s valuation standard on intangible assets, and
unidentifiable intangible assets.
Total value of
intangible assets of the subject enterprise shall be determined adopting
one of the following methods:
1. Method 1:
Estimating total value of intangible assets of the subject enterprise by
estimating the value of each identifiable intangible asset and the value of
unidentifiable intangible assets (residual intangible assets).
The value of each
identifiable intangible asset shall be determined according to Vietnam’s
valuation standard on intangible assets. Particularly, the value of LURs or tenancy
shall be determined according to Vietnam’s valuation standards on market
approach, income approach and real property valuation.
The value of
unidentifiable intangible assets (including brands and other unidentifiable
intangible assets) shall be determined as follows:
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b) Estimating the
income that the subject enterprise can earn each year. This income is commonly
determined according to the FCFF value prescribed in clause 2 Article 19 of
this Standard. This income is the income which can be earned in normal
operating conditions of the subject enterprise, and estimated on the basis of
the business results achieved by the subject enterprise in the latest years,
taking into account the growth prospect of the subject enterprise after
eliminating abnormal factors affecting income such as income increases and
decreases due to liquidation of fixed assets, revaluation of financial assets,
and exchange rate risks;
c) Estimating appropriate
rates of return for the subject enterprise’s assets (excluding unidentifiable
intangible assets) which are involved in generation of incomes for the subject
enterprise. The rate of return of tangible assets shall not exceed the weighted
average cost of capital of the subject enterprise. The rate of return of
identifiable intangible assets shall not be less than the weighted average cost
of capital of the subject enterprise. The weighted average cost of capital of
the subject enterprise shall be determined according to Article 20 of this
Standard;
d) Estimate the
annual income earned from assets (excluding unidentifiable intangible assets)
which are involved in generation of incomes for the subject enterprise by
multiplying (x) the value of these assets, as determined in point a of this
clause, by the respective rate of return determined in point c of this clause;
dd) Estimating the
income earned by the subject enterprise from its unidentifiable intangible
assets by subtracting (-) the income earned from assets (excluding
unidentifiable intangible assets) which are involved in generation of incomes
for the subject enterprise, as determined in point d of this clause, from the
income that the subject enterprise can earn as determined in point b of this
clause;
e) Estimating appropriate
capitalization rate for the income that the subject enterprise earns from its unidentifiable
intangible assets. This capitalization rate must be at least equal to the cost
of equity of the subject enterprise. The cost of equity of the subject
enterprise shall be determined according to clauses 6 through 9 Article 20 of
this Standard;
g) Estimating the
value of unidentifiable intangible assets of the subject enterprise by
capitalizing the income that the subject enterprise earns from these assets.
2. Method 2: Estimating
total value of intangible assets of the subject enterprise by capitalizing the
flow of profits that the subject enterprise earns from these intangible assets.
a) Estimating the
market value of the subject enterprise’s assets (excluding intangible assets)
which are involved in generation of incomes for the subject enterprise. The
market values of financial assets and tangible assets shall be determined
according to Article 15 of this Standard;
b) Estimating the
income that the subject enterprise can earn each year. This income is commonly
determined according to the FCFF value prescribed in clause 2 Article 19 of
this Standard. This income is the income which can be earned in normal
operating conditions of the subject enterprise, and estimated on the basis of
the business results achieved by the subject enterprise in the latest years,
taking into account the growth prospect of the subject enterprise after
eliminating abnormal factors affecting income such as income increases and
decreases due to liquidation of fixed assets, revaluation of financial assets,
and exchange rate risks;
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d) Estimate the
annual income earned from assets (excluding intangible assets) which are
involved in generation of incomes for the subject enterprise by multiplying (x)
the value of these assets, as determined in point a of this clause, by the
respective rate of return determined in point c of this clause;
dd) Estimating the
income earned by the subject enterprise from all of its intangible assets by
subtracting (-) the income earned from assets of the subject enterprise, as
determined in point d of this clause, from the income that the subject
enterprise can earn as determined in point b of this clause;
e) Estimating the
appropriate capitalization rate for the income that the subject enterprise
earns from all intangible assets. This capitalization rate must be at least
equal to the cost of equity of the subject enterprise. The cost of equity of
the subject enterprise shall be determined according to clauses 6 through 9
Article 20 of this Standard;
g) Estimating total
value of intangible assets of the subject enterprise by capitalizing the income
that the subject enterprise earns from these intangible assets.
Article
17. Estimating subject enterprise’s value of equity
Total value of assets
of the subject enterprise
=
Total value of tangible
assets and financial assets of the subject enterprise
+
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The subject
enterprise’s value of equity shall be determined adopting the following
formula:
Value of the
subject enterprise’s equity
=
Total value of
assets of the subject enterprise
-
Liabilities
Where: Liabilities
shall be determined at the market price if market evidence is available. If
not, the book value shall be used for calculation of these liabilities.
Chapter IV
INCOME
APPROACH
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Article
18. Discounted free cash flow (DFCF) method
1. The DFCF method
helps determine the value of the subject enterprise by estimating the sum of
the discounted value of free cash flows (FCFs) of the subject enterprise and
the present value of its non-operating assets at the time of valuation.
2. Application
principles
If the subject
enterprise is a joint-stock company, the DFCF method shall be used with
assumption that the preferred shares of the subject enterprise are treated as
common shares. This assumption should be clearly stated in the limitation
section of the valuation certificate and the valuation report.
3. Steps of the DFCF method:
a) Forecasting the
Free Cash Flow to the Firm (FCFF) of the subject enterprise;
b) Estimating the
weighted average cost of capital (WACC) of the subject enterprise;
c) Estimating the
terminal value which is the business value at the end of the forecast period (Vn);
d) Estimating the
subject enterprise’s value of equity (V0).
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1. The period during
which cash flows are forecasted (forecast period) shall be estimated selecting
appropriate growth models on the basis of characteristics of the subject
enterprise, its business lines and economic contexts. A minimum forecast period
is 03 years. The forecast period of a new enterprise or a fast-growing
enterprise may be extended until the enterprise enters a phase of steady
growth. When determining the forecast period for a fixed-term operating
enterprise, the lifespan of the enterprise should be evaluated and taken into
account.
2. The annual FCFF of
the subject enterprise shall be calculated adopting the following formula and
other formulas which are equivalent variations from this formula:
FCFF = Earnings
before interest after taxes (EBIAT) + Depreciation/amortization - Capital
investment expenditures - Change in net working capital other than cash and
short-term non-operating assets (net working capital difference)
a) EBIAT is the
profits before interest after taxes from which earnings from non-operating
assets are taken away.
EBIAT is calculated from
earnings before interest and taxes (EBIT) using the following formula:
EBIAT = EBIT x (1 -
t)
Where:
t: CIT rate
For the period during
which the financial statements are available, the effective tax rate may be
used for calculating EBIAT: teffective = (Earnings before tax –
Earnings after tax) ÷ Earnings before tax.
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b) Capital investment
expenditures include expenditures on investment in fixed assets and other
long-term assets, expenditures on investment in operating assets included in
the group of expenditures on purchase of debt instruments of other entities,
and expenditures on investment in operating assets used as capital contribution
to other entities (if any);
c) The working
capital other than cash and short-term non-operating assets is calculated adopting
the following formula:
Working capital other
than cash and short-term non-operating assets = (Short-term receivables +
Inventories + Other current assets) – Short-term liabilities, excluding
short-term borrowings.
Article
20. Estimating weighted average cost of capital (WACC) of the subject
enterprise
1. WACC of the
subject enterprise is calculated for each interval or for the entire forecast
period of future cash flows to be used as the discount rate for the
corresponding interval when converting FCFs and terminal value (if any) to
present values at the time of valuation. The use of a discount rate for the
entire forecast period or the use of different discount rates for intervals in
the forecast period should be argued and clearly stated in the valuation report.
2. WACC is calculated
adopting the following formula:
WACC = Rd
x Fd x (1 - t) + Re x Fe
Where:
WACC: Weighted
average cost of capital
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Fd: Ratio
of debt to total capital
t: CIT rate
Re: Cost
of equity
Fe: Ratio
of equity to total capital
Total capital is
sources of financing for operations of the subject enterprise, comprising
equity and liabilities with cost of capital that are expected to finance the
operations of the subject enterprise during the forecast period. These liabilities
include both short-term and long-term liabilities, but must satisfy 02
conditions: repaying cost of capital and arising in the expectation of
financing the subject enterprise’s operations for the forecast period.
3. Estimating the ratio
of debt to total capital (Fd)
a) Fd is
the ratio of liabilities with cost of capital that is expected to finance the subject
enterprise’s operations during the forecast period to total capital;
b) It is necessary to
refer to the bases of value used and information on capital use plans provided
by the subject enterprise when carrying out analysis of the subject
enterprise’s borrowing demands and capabilities in the upcoming time and
evaluation of the capital structure of enterprises in the same industry for estimating
the ratio of liabilities with cost of capital that are expected to finance the
enterprise's operations during the forecast period. Simultaneously, it is also
necessary to evaluate and consider the estimation of the expected Rd
corresponding to the discount rate (WACC) of each interval in the forecast
period of the subject enterprise;
c) Fd is
determined on the basis of considering and assessing the ratio of liabilities
with cost of capital to total capital of enterprises that engage in the same
business lines as the subject enterprise, or determined according to the ratio
of liabilities with cost of capital to total capital of the subject enterprise in
the most recent years, taking into account the future capital structure.
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4. Estimating cost of
debt (Rd)
Rd is
determined according to cost of debt of the liabilities with cost of capital
that is expected to finance the subject enterprise’s operations during the
forecast period.
In case there are no
liabilities with cost of capital existing in the capital structure of the
subject enterprise, Rd may be determined according to the
expected interest rate. The expected interest rate is the interest rate which
is estimated on the basis of assessment of the subject enterprise’s ability to
negotiate with credit providers or long-term loan interests of the enterprises
engaging in the same business lines as the subject enterprise.
In case the subject
enterprise has liabilities with cost of capital, Rd shall be
determined according to this cost of capital or the aforesaid expected interest
rate; at the same time, evaluation or review should be carried out to estimate
Rd accordingly. Where the subject enterprise has different
types of liabilities with different costs of capital (different interest rates,
etc.), Rd can be determined by the weighted average interest rate on
the enterprise’s liabilities.
5. Estimating ratio
of equity
The ratio of equity
is determined adopting the following formula: Fe = (1 − Fd)
6. Estimating the
cost of equity (Re)
Re is
estimated adopting any of the three methods prescribed in clauses 7, 8 and 9 of
this Article.
7. Method 01 for
estimating the cost of equity (Re)
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b) If method 01 is
not applied, reasoning and grounds for not choosing this method must be stated
in the valuation report, and either method 02 or method 03 prescribed in clause
8 or 9 Article 20 of this Standard shall be employed to estimate Re.
c) General formula:
Re = Rf
+ βL x MRP
Where:
Rf : Risk-free
rate of return at or near the valuation date
MRP: Market risk premium
βL: Levered
beta which measures the systematic risks of the subject enterprise
- The risk-free rate
of return (Rf)
is estimated on the basis of the coupon rate of the Government bonds having a
maturity of 10 years or the longest maturity at or near the valuation date.
- The market risk
premium (MRP) is estimated by averaging the differences of the return on
investment for investments in the stock market (R'm) at the last
trading session of each month and the risk-free rate of return (R'f).
R’f is calculated on the basis of the coupon rate of the Government
bonds having a maturity of 10 years or the longest maturity at the
corresponding time or near the time of calculation of R’m. The
expected rate of return for investments in Vietnam's stock market is estimated adopting
the statistical method using VN-INDEX indicators in the last 05 years prior to
the valuation date. VN-INDEX indicators are listed on a monthly basis,
specifically the closing index of the last trading session of the month.
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d) Formula for
determining βL using the regression method of variance of a stock’s
reference price adjusted to the market price variance:
βL =
Covariance (stock
returns, market returns)
Variance of market
returns
Where: The price
variance is determined on a monthly basis and for a minimum period of 5 years
(for enterprises that do not have full data for 5 years, it is calculated from
the date on which the enterprise is listed or registers for trading), and the
market return is calculated based on VN-INDEX indicators.
Where there are
sufficient grounds and evidence that βL value has been disclosed on
the market, this βL value shall be used provided that it is
calculated in the same manner as mentioned above;
dd) βL is
estimated as follows:
- If the subject
enterprise has been listed on Vietnam’s stock market for a period of less than
03 years by the time of valuation, βL may be determined according to
transaction prices of shares of the subject enterprise in the years near the
valuation date or βL may be determined according to similar
enterprises that engage in the same business lines as the subject enterprise.
Reasoning for selection of this calculation method must be stated in the
valuation report.
- In other cases, at
least 03 enterprises that
engage in the same business lines as the subject enterprise on the stock market
shall be selected, and βL of the subject enterprise shall be
determined according to βL values of these enterprises;
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- Eliminating the
effects of capital structure in the risk coefficient using the following
formula:
Where:
βU:
Unlevered beta
: Ratio of debts with cost of
capital to equity of the enterprise engaging in the same business lines as the
subject enterprise.
D/E is averaged based
on the same number of years of collection of data for calculating βL
t: CIT rate
- Calculating the
average unlevered beta of the enterprises engaging in the same business lines
as the subject enterprise.
- Estimating the
levered beta (βL) of the subject enterprise adopting the following
formula:
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Where:
βL valuation:
levered beta which takes into account the effects of capital structure of the
subject enterprise
βU
average: Average unlevered beta
: Ratio of debts with cost of
capital to equity of the subject enterprise.
D/E ratio should
reflect future financial leverage and may be determined according to the D/E
value at the valuation date.
t: CIT rate
8. Method 2 for
estimating the cost of equity (Re)
a) General formula:
Re = RfHK
+ βL x MRPHK + Country risk premium + Exchange rate risk
premium (if any)
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- RfHK: Risk-free
rate of return that is estimated on the basis of the coupon rate of the U.S.A’s
Government bonds having a maturity of 10 years or the longest maturity near the
valuation date.
- MRPHK: Risk
premium of the U.S.A’s stock market.
- βL: Levered
beta of enterprises engaging in the same business lines as the subject
enterprise in the U.S.A’s market which has been adjusted according to the
capital structure of the subject enterprise.
b) Re shall
be determined on the basis of evaluation, argument and adjustment of Re
according to the size, liquidity and other relevant factors in order to reflect
the particular risk of the subject enterprise.
9. Method 3 for
estimating the cost of equity (Re)
General formula:
Re = Rf
+ Rp
- Risk-free rate of
return (Rf)
is estimated on the basis of the coupon rate of the Government bonds having a
maturity of 10 years or the longest maturity near the valuation date.
- Equity risk premium
(Rp) is determined according to the equity risk premium of
Vietnam that is published at reliable international financial databases.
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Article
21. Estimating terminal value (Vn)
1. Case 1: Cash flow
after the forecast period will not grow and last indefinitely.
Vn is
calculated adopting the following formula:
Where:
FCFFn+1:
FCF of the subject enterprise in the year n + 1
2. Case 2: Cash flow
after the forecast period will stably grow each year and last indefinitely.
Vn is
calculated adopting the following formula:
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g: Cash flow growth
rate
The cash flow growth
rate is determined according to the profit growth rate. The profit growth
rate is forecasted on the basis of assessment of the subject enterprise’s
growth prospect, past profit growth rate, business plans, reinvestment rate and
retention ratio.
3. Case 3: The
enterprise is shut down at the end of the forecast period. Vn is the
liquidation value of the subject enterprise.
Article
22. Estimating subject enterprise’s value of equity
1. Summing the
present values of FCFs and the terminal value after discount on the enterprise’s
FCFs and the terminal value of the enterprise at a discount rate that is WACC.
2. Estimating the
value of non-operating assets of the subject enterprise according to guidance
on valuation of tangible assets, intangible assets and financial assets in this
Standard, and relevant Vietnam’s valuation standards.
3. Estimating the
value of the subject enterprise’s equity at the valuation date by subtracting
the value of liabilities with cost of capital and those without cost of capital
as recorded on the financial statements, which arise from the creation of
non-operating assets at the time of valuation (if any, these assets are not
included in the enterprise's annual FCFs) from the sum of the present values of
FCFs of the subject enterprise and their terminal values, and the value of its
non-operating assets.
Section
2. DISCOUNTED FREE CASH FLOW TO EQUITY (FCFE) METHOD
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1. The discounted FCFE
method helps determine the value of the subject enterprise’s equity by
estimating total discounted value of FCFs to equity of the subject enterprise.
2. Application
principles
In case the subject
enterprise is a joint-stock company, the discounted FCFE method is applied with
assumption that the preferred shares of the subject enterprise are treated as
common shares. This assumption should be clearly stated in the limitation
section of the valuation certificate and the valuation report.
3. Steps of the discounted
FCFE method:
a) Forecasting free
cash flows to equity (FCFE) of the subject enterprise;
b) Estimating the
subject enterprise’s cost of equity (Re);
c) Estimating the
terminal value of equity which is the value at the end of the forecast period
(Vn);
d) Estimating the
subject enterprise’s value of equity (V0).
Article
24. Forecasting free cash flows to equity (FCFE) of the subject enterprise
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2. Formula for
calculating FCFE of the subject enterprise
FCFE = Earnings after
tax + Depreciation/amortization - Capital investment expenditures - Change in
net working capital other than cash and short-term non-operating assets (net
working capital difference) - Repayments of principal debts + Newly issued
debts
a) Earnings after tax
are profits after all taxes from which earnings from non-operating assets are
taken away;
b) Capital investment
expenditures include expenditures on investment in fixed assets and other
similar long-term assets which are not eligible to be recognized as fixed
assets according to corporate accounting regulations; expenditures on
investment in other long-term operating assets included in the group of
expenditures on purchase of debt instruments of other entities and expenditures
on capital contribution to other entities (if any);
c) The working
capital other than cash and short-term non-operating assets is calculated
adopting the following formula:
Working capital other
than cash and short-term non-operating assets = (Short-term receivables +
Inventories + Other current assets) – Short-term liabilities, excluding
short-term borrowings.
Article
25. Estimating the subject enterprise’s cost of equity (Re)
The cost of equity of
the subject enterprise shall be estimated according to guidance in clauses 6
through 9 Article 20 of this Standard.
Article
26. Estimating terminal value of equity (Vn)
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Where:
FCFEn+1:
Cash flow to equity in year n + 1.
2. Case 2: Cash flow
after the forecast period will stably grow each year and last indefinitely. Vn
is calculated adopting the following formula:
Where:
g: Growth rate of
cash flow to equity.
The growth rate of
cash flow to equity is forecasted on the basis of the subject enterprise’s
growth rate of operating profits after tax, growth prospect, past cash flow
growth rate, business plans, and reinvestment rate.
3. Case 3: The
enterprise is shut down at the end of the forecast period. Vn is the
liquidation value of the subject enterprise.
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1. Summing the net present
values of FCFE and terminal value of equity after discount on the enterprise’s
FCFE and terminal value of equity at a discount rate that is the cost of equity.
2. Estimating the
value of non-operating assets of the subject enterprise according to guidance
on valuation of tangible assets, intangible assets and financial assets in this
Standard, and relevant Vietnam’s valuation standards.
3. Estimating the
value of the subject enterprise’s equity by subtracting the value of
liabilities without cost of capital as recorded on the financial statements,
which arise from the creation of non-operating assets at the time of valuation
(if any, these assets are not included in the enterprise's FCFE) from the sum
of the net present values of FCFE and the terminal value of equity, and the
value of non-operating assets of the subject enterprise.
Section
3. DIVIDEND DISCOUNT METHOD
Article
28. Dividend discount method
1. The dividend
discount method helps determine the value of the subject enterprise’s equity by
estimating total discounted value of the stream of dividends of the subject
enterprise. The dividend discount method is commonly applied to cases where the
subject enterprise's stream of dividends may be forecasted.
2. Application
principles
In case the subject
enterprise is a joint-stock company, the dividend discount method is applied
with assumption that the preferred shares of the subject enterprise are treated
as common shares. This assumption should be clearly stated in the limitation
section of the valuation certificate and the valuation report.
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a) Forecasting the
stream of dividends of the subject enterprise (D);
b) Estimating the
subject enterprise’s cost of equity (Re);
c) Estimating the
terminal value of equity which is the value at the end of the forecast period
(Vn);
d) Estimating the
subject enterprise’s value of equity (V0).
Article
29. Forecasting stream of dividends of the subject enterprise
1. The dividend
payout rate and the dividend growth rate of the subject enterprise will be
forecasted when forecasting the stream of dividends of the subject enterprise.
2. The period during
which the stream of dividends is forecasted (forecast period) shall be
estimated selecting appropriate growth models on the basis of characteristics
of the subject enterprise, its business lines and economic contexts.
3. A minimum forecast
period is 03 years.
4. The forecast
period of a new enterprise or a fast-growing enterprise may be extended until
the enterprise enters a phase of steady growth. The forecast period of a
fixed-term operating enterprise is determined according to its lifespan.
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The cost of equity of
the subject enterprise shall be estimated according to guidance in clauses 6
through 9 Article 20 of this Standard.
Article
31. Estimating terminal value of equity (Vn)
1. Case 1: The stream
of dividends after the forecast period is the cash flow which will not grow and
last indefinitely. Vn is calculated adopting the following formula:
2. Case 2: The stream
of dividends after the forecast period is the cash flow which stably grow each
year and last indefinitely. Vn is calculated adopting the following
formula:
Where:
Dn+1:
Enterprise’s stream of dividends in year n + 1
g: Growth rate of the
stream of dividends
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3. Case 3: If the
subject enterprise is shut down at the end of the forecast period, the terminal
value is determined according to the liquidation value of the subject
enterprise.
Article
32. Estimating subject enterprise’s value of equity
1. Summing the net
present values of the stream of dividends and the terminal value of equity
after discount on the enterprise’s stream of dividends and terminal value of
equity at a discount rate that is the cost of equity.
2. Estimating the
value of non-operating assets of the subject enterprise according to guidance
on valuation of tangible assets, intangible assets and financial assets in this
Standard, and relevant Vietnam’s valuation standards.
3. Estimating the
value of the subject enterprise’s equity by subtracting the value of
liabilities without cost of capital as recorded on the financial statements,
which arise from the creation of non-operating assets at the time of valuation
(if any) from the sum of the net present values of the stream of dividends and
the terminal value of equity, and the value of non-operating assets of the
subject enterprise.
Article
33. Other situations
Provisions of
Vietnam’s valuation standard on income approach will apply to contents which
are not elaborated in this Standard./.
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