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MINISTRY
OF FINANCE
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SOCIALIST
REPUBLIC OF VIETNAM
Independence - Freedom - Happiness
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No.
28/2021/TT-BTC
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Hanoi,
April 27, 2021
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CIRCULAR
ISSUING VIETNAMESE VALUATION STANDARD NO. 12
Pursuant to the Law on
Prices No. 11/2012/QH13 dated June 20, 2012;
Pursuant to the Government's
Decree No. 89/2013/ND-CP dated August 6, 2013, elaborating on implementation of
a number of articles of the Law on Pricing, regarding valuation;
Pursuant to the Government's
Decree No. 12/2021/ND-CP dated February 24, 2021 on amendments and supplements
to certain Articles of the Government's Decree No. 89/2013/ND-CP dated August
6, 2013, elaborating on the implementation of a number of articles of the Law
on Pricing, regarding valuation;
Pursuant to the Government’s
Decree No. 150/2020/ND-CP dated December 25, 2020, prescribing the
transformation of public service units into joint-stock companies;
Pursuant to the Government's
Decree No. 87/2017/ND-CP dated July 26, 2017, defining the functions, tasks,
powers and organizational structure of the Ministry of Finance;
Upon the request of the
Director of the Price Management Authority,
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Article
1. Vietnamese Valuation
Standard No. 12 – Business Valuation Standard is annexed hereto.
Article
2. Brand valuation of
public non-business units
When applying the
asset-based approach prescribed in Article 23 of the Government's Decree No.
150/2020/ND-CP dated December 25, 2020 on transformation of public non-business
units into joint stock companies, the brand value of a public non-business unit
is determined according to the unidentified intangible valuation approach
specified in a, 5.5, Part II of the Vietnamese Valuation Standard No. 12
annexed hereto.
Indicators of earnings of
public service units are determined according to laws on financial autonomy
mechanism of public service units.
Article
3. Implementation
1. This Circular is entering
into force as of July 01, 2021.
2. The Circular No.
122/2017/TT-BTC dated November 15, 2017 of the Ministry of Finance, issuing
Vietnamese Valuation Standard No. 12, shall be annulled as from the date of
entry into force of this Circular.
3. Department of Price
Management shall take charge of and cooperate with relevant entities in
directing, guiding and inspecting the implementation of regulations laid down
in the Valuation Standard annexed hereto and other relevant legislative
instruments.
4. In the course of
implementation, if there is any difficulty that arises, involved entities
should inform the Ministry of Finance for its review and decision on any
necessary action./.
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PP.
MINISTER
DEPUTY MINISTER
Ta Anh Tuan
VIETNAMESE
VALUATION STANDARDS
VIETNAMESE
VALUATION STANDARD NO. 12
BUSINESS
VALUATION
(Code:
TDGVN 12)
(Annexed
to the Circular No. 28/2021/TT-BTC dated April 27, 2021 of the Minister of
Finance)
I/
GENERAL PROVISIONS
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2. Subjects of application: Valuers,
valuation businesses, other organizations and individuals rendering valuation
services under the provisions of the Law on Pricing and other relevant laws. Organizations
and individuals mentioned above are collectively called valuers as defined in
this Standard.
3. Valuation customers and
third parties using valuation results (if any) under signed valuation contracts
need to study to understand the regulations of this Standard in order to
cooperate with valuation enterprises during the valuation process.
4. Definition
Operating assets are
assets used in the production and business activities of an enterprise and
contributing to generating revenue from selling goods and providing services or
helping reduce costs of production and business activities of the enterprise.
Non-operating assets are
assets that do not participate in production and business activities of an
enterprise, including: investments in other companies (except in cases where
the enterprises needing to be valued are financial investment companies);
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 earning, but still have value (unexploited assets, unused
patents, land tenure, tenancy not yet exploited according to the enterprise’s
business plan, or expected to be transferred/sold where they are not needed,
etc.); 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
sales and provision of services, or do not help reduce the costs of production
and business activities of the enterprise in the event that they need to be
valued (e.g. land tenure or tenancy for use in business sectors or industries
not classified as their permitted ones, ..) and other non-operating assets.
Going-concern value is
the value of an operating business that is assumed to continue to operate after
the valuation date.
Value of a fixed-term
operating enterprise is the value of an operating business that is assumed to have
the finite life since the business is forced to cease to operate after a particular
future time.
Liquidation value is
the value of a business with the assumption that their assets will be sold
individually and they will soon cease to operate after the valuation date.
II. CONTENTS
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1.1. Value bases for
business valuation
Business value basis is the
market value or non-market value. A basis of business value is determined based
on valuation purposes, legal characteristics, economic-technical
characteristics and market characteristics of the business to be valued, and
requirements of valuation customers under a valuation service contract (if
these requirements are aligned with the valuation purposes) and other relevant
laws. Other contents shall be subject to Vietnamese Valuation Standards No. 2
and No. 3.
Based on the actual
prospects, business markets of an enterprise, valuation purposes and provisions
of laws, the valuer should make a judgment on the operational status, the
transactional status (real or hypothetical) of the enterprise to be appraised
after the time of valuation. Normally, the value of a business is the
going-concern value of that business. In case the valuer determines that the
business will cease to operate after the time of valuation, the value of the
business will be the value of the business operating within a definite term or
the liquidation value.
The application of a
business valuation method should correspond to the business value basis and the
valuer's judgement of the operating status of the business at and after the
time of valuation.
1.2. Using financial
statements in the business valuation process
Based on the selected
business valuation approach and method, the time of valuation and the
characteristics of the business to be valued, the valuer may carry out analysis
and evaluation to use their financial statements appropriately and prioritize
the financial statements audited and reviewed by an independent audit unit.
Several notes on use of
financial statements in the business valuation process, including:
- The valuer compares and
checks the reasonableness of the financial statement to ensure reliability. In
case where necessary, the valuer requests the valued business to adjust their
financial statement and accounting book before entering into information
analysis, applying valuation approaches and methods. In case where the business
to be valued refuses to make any adjustment, the valuer can determine the
difference and clearly analyze the contents and grounds for possible adjustment
and specify them in the report on valuation results.
- When using data from an
unaudited or reviewed financial statement, or an audited or reviewed financial
statements obtaining an opinion other than an unqualified opinion, the valuer
must clearly inform these limitations in the limitation section of the Valuation
Deed and Report to valuation customers and users of valuation results.
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- With respect to the
valuation method in the income-based approach: When using data on profits from
financial statements in the most recent years of the business to be valued for
the purpose of forecasting the future annual income stream of the business to
be valued, the valuer needs to exclude extraordinary and non-recurring expenses
and incomes; exclude the income and expenses arising from non-operating assets.
- Non-recurring expenses and
profits include: expenses related to the business restructuring; increases and
decreases recorded from asset sales; changes in the accounting principles;
recording of inventory depreciation; declines in goodwill; debt write-off;
losses or gains from court decisions and other irregular profits and expenses. When
adjusting these entries or items, the impact of corporate income tax (if any)
must be considered.
2. Business
valuation approaches and methods
Business valuation
approaches and methods include: market approach, cost approach and income
approach. Valuation businesses need to choose valuation approaches and methods
on the basis of provided dossiers and documents and self-collected information
for business valuation purposes.
- Based on the market approach,
the business value is determined through the value of the business compared
with the business to be valued on the following factors: size; main business
sectors; business risk, financial risk; financial indicators or values of successful
transactions of the business to be valued. The method used in the market
approach for determination of the business value is the mean ratio method and
the transaction value method.
- In the cost approach,
business value is determined through the value of assets of the business. The
method used in the market approach for determination of the business value is
the mean ratio method and the transaction value method.
- In the income approach,
business value is determined through the conversion of future net cash flows
that are predictable at the time of valuation. The method used in the income
approach to determine business value is the discounted free cash flow method of
the business, the discounted dividend stream method, and the discounted free
cash flow to equity method.
When determining business
value using the income approach, the value of the non-operating assets at the
time of valuation with the predictable cash-flow discount of the operating
assets at the time of valuation should be added. Where the cash flow of certain
operating assets cannot be reliably forecast, the valuer may not forecast the
cash flow of these operating assets and determine the value of these operating
assets separately should be added to the business value. Particularly, the
dividend discount method does not need an addition of the part of non-operating
assets which are cash and cash equivalents.
3. Mean
ratio method
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The comparable business is
the business that satisfies the following conditions:
- They are similar to the
business to be valued in terms of the following factors: main business
activities; business risk, financial risk; financial indicators.
- There is information about
the price of share that has been successfully traded on the market at the time
of valuation or near the time of valuation but within 01 year till the time of
valuation. Market ratios
considered for use in the average ratio method include: price-to-earnings ratio
(
), price-to-sales ratio (
), price-to-book value of equity 
), ratio of equity value to earnings
before interest, tax, depreciation or amortization (
),
equity value-to-sales ratio (
).
3.2. Cases of application of
the mean ratio method
There must be at least 03
comparable businesses. Priority should be given to comparable companies that
are listed on stock exchanges or registered for trading on UPCoM.
3.3. Calculation principles
- The formulas used for
calculating financial ratios and market ratios should be consistently applied
to all comparable businesses and businesses to be valued.
- Financial indicators,
market ratios of comparable businesses collected from different sources must be
reviewed and adjusted to ensure consistency in the applied formulas before they
are put to use in the valuation process.
3.4. Steps in calculating
the business’s equity value
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- Step 2: Determining market
ratios used for estimating value of the business to be valued.
- Step 3: Estimating value
of equity of the business to be valued on the basis of market ratios
appropriate for use and correcting dissimilarities.
3.5. Evaluating and
selecting comparable businesses
Criteria for evaluating and
selecting comparable businesses, including:
(i) The comparable business
is similar to the business to be valued in terms of main business sector factors.
In many cases, businesses that are similar to the business to be valued in
terms of these factors can be selected from the competitors of the business to
be valued.
(ii) The comparable
business is similar to the business to be valued in terms of most of financial
indicators, including:
- Indicators showing the business
size, including book value of equity, net sales, gross profits from sale of
products and provision of services.
- Indicators showing the
growth ability of the business: the average growth rate of profit after
corporate income tax in the last 3 years.
- Indicators showing the
performance of the business: return on equity (ROE), return on assets (ROA).
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b) The valuer selects the
market ratio used to estimate the equity value, the value of the business to be
valued on the basis of considering the appropriacy of the market ratios on the
basis of business size, characteristics, business lines, markets and
similarities. The appraiser evaluates and considers the adjustment of market
ratios of comparable enterprises before applying them to the value calculation.
In the case of market ratio adjustments, these adjustments are based on data
(if any), experience and market surveys or market researches.
c) Notes on calculation of
market ratios:
- Earnings per share (EPS)
is determined on the basis of the income earned in the most recent 01 year till
the time of valuation and adjustments for non-operating assets of comparable
businesses should be taken into consideration.
- The share price of the
comparable business is taken as the closing 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 trades occurring during the 30-day period preceding the time of
valuation. In case the shares of the comparable business are not listed on the
stock exchange or have not been registered for trading on UPCoM, the price of
shares of the comparable business is the price of their shares that are
successfully traded on the market at the time closest to the time of valuation,
but not more than 01 year from the time of valuation.
- With respect to the book
value of shares in the indicator , it should be
noted that the book value of intangible fixed assets (these intangible fixed
assets do not include land tenure, rights to exploit assets on land) must be
taken away to limit the impact of regulations on Accounting for intangible
fixed assets that may falsify the valuation results in the case of the
comparable enterprises and the business to be valued have intangible fixed
assets in the balance sheet. In case where the book value of intangible fixed
assets is not taken away, the reasons for this must be clearly stated.
- Parameter of value of
comparable businesses (EV) in the market ratios and
can be calculated as follows:
Equity
value
=
Market
capitalization of common stock
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Liabilities
with costs of capital
+
Preferred
shares (if any)
+
Non-controlling
interests (if any)
-
Cash
and cash equivalents, and other non-operating assets
Where
+ Liabilities with costs of
capital, preferred shares, non-controlling interests, cash and cash equivalents
are calculated based on their book value. In the event that there is not enough
information to calculate liabilities with costs of capital, the values of loans
and finance leases are taken.
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- EBITDA of the comparable
business includes neither income from cash and cash equivalents nor income or
expenses arising from non-operating assets.
3.7. Estimating equity value
of the business to be valued
a) Determining the mean
market ratio for each market ratio:
The mean market ratio is
determined by the arithmetic mean of the market ratios of the comparable
businesses, or by the weighted mean of the market ratios of the comparable
businesses.
The determination of the
market ratio weighting factor for each comparable business is based on the
analysis of the similarity between the comparable business and the business to
be valued.
b) Determining the value of
the business to be valued, the equity value of the business to be valued
according to each mean market ratio:
- Determining the value of
the business to be valued, the equity market value of the business to be valued
by the mean EV/EBITDA ratio of comparable businesses and the EV/S ratio:
Value
of the business to be valued
=
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x
Mean
of
comparable businesses
Value
of the business to be valued
=
Net
sales of the business to be valued
x
Mean
of comparable
businesses
In particular, EBITDA of the
business to be valued does not include income from cash and cash equivalents.
Equity
value of the business to be valued
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Value
of the business to be valued
-
Liabilities
with costs of capital
-
Non-controlling
interests (if any)
-
Value
of preferred shares (if any)
+
Value
of cash and cash equivalents; other net non-operating assets
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+ Determining the equity
value of the business to be valued by the mean P/E ratio of comparable
businesses:
Equity
value of the business to be valued
=
Profits
after corporate income tax in 01 most recent year of the business to be
valued
x
Mean
of comparable
businesses
+ Determining the equity
value of the business to be valued by the mean P/B ratio of comparable businesses:
Equity
value of the business to be valued
=
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x
Mean
of comparable
businesses
+ Determining the equity
value of the business to be valued by the mean P/S ratio of comparable
businesses:
Equity
value of the business to be valued
=
Net
sales in the most recent year of the business to be valued
x
Mean
of comparable
businesses
c) Estimating the equity
value of the business to be valued by the mean ratio method:
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4. Transaction
value method
4.1. The transaction value
method helps estimate the equity value of the business to be valued through the
price of the successful transfer of contributed capital or shares on the market
of that business.
4.2. Cases of application of
the transaction value method
The business to be valued
have at least 03 successful transfers of contributed capital or shares in the
market; at the same time, the time of the transaction is not more than 01 year
preceding the time of valuation.
4.3. Principles of
application
The valuer should evaluate
and consider adjusting the prices of successful transactions to suit the
valuation time if necessary.
4.4. Estimating equity
value:
The equity value of the
business to be valued is calculated by the average price determined according
to the transaction volume of at least 03 successful transfers of contributed
capital or shares performed at the time closest to the time of valuation.
In case where the business
to be valued is an enterprise that has listed their shares on the stock
exchange or registered for trading on UPCoM, the share price used for
calculating the equity market price is the transaction price, or the closing
price of the shares of the business to be valued at or near the time of
valuation and trades in these shares must be performed within 30 days before
the time of valuation.
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5.1. The asset-based method
is a method of estimating the value of the business to be valued by calculating
the total value of the assets under the ownership and at the disposal of the
business to be valued.
The valuation of a
state-owned enterprise and single-member limited liability company in which
100% charter capital is held by the state-owned enterprise for transformation
into a joint-stock company by employing the asset-based method shall be applied
in accordance with the provisions of legislation on equitization.
5.2. Calculation principles:
- Assets considered in the
valuation process are all assets of the business, including both operating and
non-operating assets.
- The Director (General
Director) of the business to be valued should cooperate in carrying out the
inventorying and classification of assets under the ownership, custody or at
the disposal of that business (including property rights) together with
documents proving the rights to own and use assets for valuation purposes; at
the same time, assisting the valuer in conducting the survey of the current
state of the business's assets. In case where the valuer is not fully provided
with the aforesaid information and documents, or support for the survey of the
current state of the assets, the valuer can evaluate and consider making
assumptions (if necessary); also, include these limitations in the qualified
opinion and limitation section of the valuation certificate and valuation
report.
- When valuing a business on
the basis of market value, the value of the business's assets is the market
value of these assets at the time of valuation. Assets in the accounting books
need to be appraised at the right market value. In some special cases, the
instructions at Point 5.4 may be followed.
- 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 calculated by applying the
appropriate valuation method.
- For assets accounted for
in foreign currency: Foreign exchange rates apply according to the instructions
given in Vietnamese Accounting Standards during the process of preparation and
presentation of financial statements.
5.3. Calculation steps
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- Step 2: Estimating total
value of intangible assets of the business to be valued.
- Step 3: Estimating the
equity value of the business to be valued.
5.4: Estimating total value
of tangible assets and financial assets of the business to be valued
The market prices of
tangible assets and financial assets of the business is estimated according to
Vietnamese valuation standards in terms of the market approach, cost-based
approach, income-based approach and other relevant Vietnamese valuation
standards.
In addition, the valuer
should abide by the following instructions:
a) Valuing liquid assets:
- Cash is calculated
according to the inventory record of treasury of the business to be valued.
- Deposits are determined by
the balances verified or the ledger amounts checked with the banks that open
accounts of the business to be valued at the time of valuation.
- Cash and deposits in
foreign currency are determined according to the principles stated in 5.2 of
this Standard.
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Investments of the business
to be valued should be determined at the time of valuation are as follows:
- In case where the business
(to which the business to be valued contributes their capital to or of which
the business to be valued purchase shares) has successful capital or share
assignments on the market, the value of the contributed capital and purchased
shares is determined according to the market value of equity of the business in
which the business to be valued invests. In this case, the market value of
equity of the business in which the business to be valued invests is determined
according to the methods mentioned in Section 2, Part II of this Standard, or
determined as follows:
+ In case where the shares
of businesses have not been listed on the stock exchanges or have not been
registered for trading on UPCoM, and the successful capital or share
assignments on the market satisfy both conditions: (i) if more than 50% of the
equity of the business is transferred out of total transactions; (ii) the time
of transactions is not more than 01 year till the time of valuation; then the value
of the investments of the business to be valued should be determined according
to the average transfer price of volumes of the transactions closest to the
time of valuation.
+ In case where their investments
are shares of businesses that has been listed on stock exchanges or registered
for trading on UPCoM, the value of these investments are calculated at the share
price which is the closing price of the shares of the business to be valued at
the time of valuation and trades in these shares must be performed within 30
days before or at the time of valuation.
- In case where the business
(to which the business to be valued contributes their capital to or of which
the business to be valued purchase shares) does not have successful capital or
share assignments on the market, the value of the contributed capital and
purchased shares is determined as follows:
+ In case where the business
to be valued holds 100% of the contributed capital portion of the businesses
receiving investments or contributed capital, the value of the investments is
determined according to the value of the businesses receiving investments or
contributed capital, and is determined according to the methods mentioned in
section 2, Part II of this Standard.
+ In case where the business
to be valued holds at least 50% and below 100% of the contributed capital
portion of the businesses receiving investments or contributed capital, the
value of the investments is determined according to the value of equity of the
businesses receiving investments made or capital contributed by the business to
be valued. In this case, the equity of the businesses in which the business to
be valued invests is valued according to the method mentioned in Section 2,
Part II of this Standard, or else it is valued according to the following
method:
(i) For the discounted
equity flow method: the cost of equity is estimated on the basis of the mean
ROE for the last 5 years; the equity cash flow can be forecast on the basis of
data on profits distributed to the business’s owners, and the ROE growth rate
for the last 5 years.
(ii) For the mean ratio
method: The valuer only has to estimate the following ratios: 
, 
and
the mean 
and 
may be estimated on the
basis of 
, 
of at least 03 businesses
in the same manufacturing and business industry.
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+ In case the business to be
valued holds less than 50% of the capital of businesses receiving investments
or contributed capital, the value of the investments shall be determined
according to the methods mentioned in Section 2, Part II of this Standard or
according to the instructions at points (i), (ii), (iii); in case of complying
with the instructions given at point (iii), it must be clearly stated in the
limitation section of the Valuation Certificate and the Report on valuation
results.
c) Valuing receivables and
payables:
- The valuer examines and
compares the receivables and payables recorded in the accounting books with
those available on relevant documents and evidences provided and collected
during the valuation period; where necessary, the business to be valued should
verify and reaffirm data.
- The value of receivables
is determined according to the actual balance on the basis of relevant
evidences provided. In case where there is not enough evidence, the value can
be determined according to the data available on the accounting book. For
unrecoverable receivables, receivables that have been provisioned, and bad
debts, the valuer must consult the provided records and information to estimate
the value of receivables and clearly state them in the limitation section of
the Valuation Certificate and the Report on valuation results.
- In case of not being
provided with relevant documents or materials, such as the record of
reconciliation and confirmation of receivables and payables or record of
receivables and payables arising after the time of cutoff of data for
preparation of financial statement, they must be clearly stated in the
limitation section of the Valuation Certificate and the Report on valuation
results so that the users of the valuation results can conduct evaluation and review
when using the results of the valuation.
d) Valuing inventories:
- Work-in-progress costs are
determined according to the actual costs incurred and recorded in the
accounting books. In case where the business to be valued is the investor in a
project incurring work-in-progress costs from capital construction activities
associated with creation of future real estates, it is necessary to revalue the
value of the land use right of the business to be valued (if any, the land use
right to the future property must be included) according to Vietnamese
valuation standards in terms of the market approach and/or the cost-based
approach and/or income-based and/or real property valuation standards; for
construction items, these costs are determined according to the actually
incurred costs that are being recorded in the accounting books.
- In case where inventories
are real estate-related goods and finished products, the value of this real
estate shall be determined according to Vietnamese valuation standards by using
the market approach, the cost-based approach, the income-based approach or the
real estate appraisal approach.
- In case where inventories,
raw materials, tools and instruments are in stock for a long time due to
manufacturing defects, unfinished products that cannot continue to be further
finished because of the problem of consumption, or any change in products, etc.
leading to poor quality, the business 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.
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- For tangible fixed assets
that 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), the valuer may calculate them according to their
historical costs recorded in the accounting books, taking into account
slippage, less depreciation at the time of valuation.
- For fixed assets such as
machinery, means of transport, transmission equipment, equipment and tools for
management purposes: In the absence of equivalent assets traded on the market
or due to the shortage in investment and technical records, when the valuer has
to collect, argue and analyze information, and keep evidence that no equivalent
assets are traded in the market, the value of these assets is determined by
their historical book value (taking into account exchange rate differences in
case of imported ones) less depreciation determined at the time of valuation.
In case of valuing them by
using the historical book value according to the aforesaid instructions, the
valuer must clearly state these limitations in the limitation section of the
Valuation Certificate and the Report on valuation results.
e) Valuing used tools and
instruments:
The value of tools and
instruments is determined according to the market prices of comparable assets. In
case where the market prices of comparable assets cannot be collected, the
value of tools or instruments is determined according to the transaction price
of new tools or instruments that are of the same type or having similar
properties or at the initial purchase prices recorded in the accounting books, less
depreciation determined at the time of valuation.
In case of valuing them by
using the historical book value according to the aforesaid instructions, the
valuer must clearly state these limitations in the limitation section of the Valuation
Certificate and the Report on valuation results.
g) Calculating short-term
and long-term deposits and pledges according to the accounting books.
h) Financial assets existing
in the form of a contract is prioritized for calculation by using the discounted
cash flow method.
5.5. Estimating total value
of intangible assets of the business to be valued
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Total value of intangible
assets of the business to be valued shall be determined by one of the following
methods:
a) Method 1: Estimating
total value of intangible assets of the business to be valued through
estimation of value of each identifiable intangible asset and value of
unidentifiable intangible assets (residual intangible assets).
The valuer can value each
identifiable intangible asset in accordance with the provisions of Vietnamese
Valuation Standard No. 13. Particularly, the value of land tenure and tenancy
shall be determined according to regulations defined in the Vietnamese
Valuation Standards in terms of the market approach, the income-based approach
and the approach for real property valuation.
The valuer should determine
the value of unidentified intangible assets (including brands and other
unidentified intangible assets) through the following steps:
Step 1: Estimating the
market value of tangible, financial and identifiable intangible assets that are
involved in generation of income for the business to be valued. The market
value of these assets is determined according to paragraph 5.4 in this Standard
and the instructions given in the Vietnamese Valuation Standards.
Step 2: Estimating the
amount of income that the business to be valued can achieve each year. This
level of income is the level of income existing in the normal operating
conditions of the business to be valued, estimated on the basis of the results
achieved by the business to be valued in the latest years, taking into account
the growth prospect of the business to be valued after taking away abnormal
factors affecting income such as: income increases and decreases due to
liquidation of fixed assets, revaluation of financial assets, exchange rate
risks, etc.
Step 3: Estimating
appropriate rates of return for identifiable tangible, financial and intangible
assets of the business to be valued. The rate of return of tangible assets must
not exceed the weighted average cost of capital of the business to be valued. The
rate of return of these intangible assets must not be less than the weighted
average cost of capital of the business to be valued. Determination of the
weighted average cost of capital of the business to be valued must follow the
instructions given in 6.4 of this Standard.
Step 4: Estimating the
income that the business to be valued earns from tangible assets, financial
assets, and intangible assets each year by multiplying (x) the value of
tangible assets, financial assets and identifiable intangible assets (of the business
to be valued) calculated in step 1 by the respective rates of return determined
in step 3.
Step 5: Estimating the
income that the business to be valued earns from unidentified intangible assets
by the income that the business to be valued can earn as calculated in step 2
minus (-) the income that the business to be valued earns from tangible assets,
financial assets and identifiable intangible assets as calculated in step 4.
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Step 7: Estimating the value
of unidentifiable intangible assets of the business to be valued by
capitalizing the income that the business to be valued earns from these
intangible assets.
b) Method 2: Estimating
total value of intangible assets of the business to be valued by capitalizing
the flow of profits that the business to be valued earns from these intangible
assets.
Step 1: Estimating the
market value of tangible and financial tangible assets that are involved in the
process of generation of income for the business to be valued. The market value
of these assets is determined according to regulations laid down in 5.4 of this
Standard.
Step 2: Estimating the amount
of income that the business to be valued can achieve each year. This level of
income is the level of income existing in the normal operating conditions of
the business to be valued, estimated on the basis of the results achieved by
the business to be valued in the latest years, taking into account the growth
prospect of the business to be valued after taking away abnormal factors
affecting income such as: income increases and decreases due to liquidation of
fixed assets, revaluation of financial assets, exchange rate risks, etc.
Step 3: Estimating rates of
return appropriate for tangible assets and financial assets of the business to
be valued. These rates of return must not exceed the weighted average cost of
capital of the business to be valued. Determination of the weighted average
cost of capital of the business to be valued must follow the instructions given
in 6.4 of this Standard.
Step 4: Estimating the
income that the business to be valued earns from tangible assets and financial
assets each year by multiplying (x) the value of tangible assets, financial
assets of the business to be valued as calculated in step 1 by the respective
rates of return determined in step 3.
Step 5: Estimating the
income that the business to be valued earns from intangible assets by the
income that the business to be valued can earn as calculated in step 2 minus
(-) the income that the business to be valued earns from tangible assets and
financial assets as calculated in step 4.
Step 6: Estimating the
appropriate capitalization rate for the income that the business to be valued
earns from all intangible assets. This capitalization rate must be at least
equal to the cost of equity of the business to be valued. Determination of the
cost of capital of the business to be valued must conform to d, 6.4 of this
Standard.
Step 7: Estimating total
value of intangible assets of the business to be valued by capitalizing the
income that the business to be valued earns from the intangible assets.
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Total
asset of the business to be valued
=
Total
tangible assets and financial assets of the business to be valued
+
Total
intangible assets of the business to be valued
The equity value of the
business to be valued shall be calculated according to the following formula:
Equity
value of the business to be valued
=
Total
asset of the business to be valued
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Liabilities
Where Liabilities to be
valued are calculated at the market price if market evidence is available. If
not, the book value is used for calculation of liabilities.
6.
Discounted free cash flow method
6.1. The discounted free
cash flow method helps determine the value of the business to be valued by
estimating the sum of the discounted free cash flows of the business to be
valued and the present value of non-operating assets of the business at the
time of valuation. In case where the business to be valued is a joint stock
company, the discounted free cash flow method of the business is used with
assumption that the preferred shares of the business to be valued are treated
as common shares. This assumption should be clearly stated in the limitation
section of the Valuation Deed and the Report on valuation results.
6.2. Steps in calculating
the business’s equity value:
- Step 1: Forecasting free
cash flows of the business to be valued.
- Step 2: Estimating the
weighted average cost of capital of the business to be valued.
- Step 3: Estimating the
equity value at the end of the forecast period.
- Step 4: Estimating the
equity value of the business to be valued.
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In order to estimate the
cash flow forecast period, the valuer should refer to the characteristics of
the business, business lines and economic contexts to select appropriate growth
models. Minimum cash flow forecast period is 03 years. In case of newly
established or fast-growing businesses, the cash flow forecast period can be
extended until the business enters a phase of steady growth. In case of
enterprises operating within a term, when determining the cash flow forecast
period, the lifespan of the business needs to be evaluated and taken into
account.
The formula for calculating
the business's annual free cash flows is the one mentioned below and other
formulas that are equivalent variations from the former:
FCFF = Earnings before
interest after tax (EBIAT) + Depreciation/Amortization – capital investment
expenditures – Change in net working capital other than cash and short-term
non-operating assets (net working capital difference)
Earnings before interest
after tax (EBIAT) are profits before interest after tax from which earnings
from non-operating assets are taken away.
The formula for calculating
earnings before interest after tax (EBIAT) from earnings before interest and
tax (EBIT) is as follows:
EBIAT = EBIT x (1 - t)
Where
t: Corporate income tax rate
The valuer uses the
effective tax rate when calculating EBIAT for the period during which the
financial statements are available, and uses the current corporate income tax
rate to calculate EBIAT over the cash flow forecast period.
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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 another entity and
expenditures on investment in operating assets used as capital contribution to
another entity (if any).
- The formula for
calculating working capital other than cash and short-term non-operating
assets:
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
6.4. Estimating the weighted
average cost of capital of the business to be valued
The valuer estimates the
weighted average cost of capital of the business to be valued for each period
or for the entire forecast period of future cash flows to be used as the
discount rate for the corresponding period when converting free cash flows and
forecasted ending value (if any) to the time of valuation. The use of a
discount rate for the entire cash flow forecast period or the use of different
discount rates for each cash flow forecast period should be argued and stated by
the valuer in the report on valuation results.
The valuer estimates the
weighted average cost of capital of the business to be valued according to 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: Corporate income tax rate
Re: Cost of
equity
Fe: Ratio of
equity to total capital
Total capital is sources of
financing for operations of the business, comprising equity and liabilities
with costs of capital that are expected to finance the operations of the
business during the cash flow forecast period. These liabilities include both
short-term and long-term liabilities, but must satisfy 02 conditions: repaying
costs of capital and arising in the expectation of financing the business’s operations
for the cash flow forecast period.
a) Estimating the ratio of
debt to total capital Fd:
Ratio of debt to total
capital (Fd) is the ratio of liabilities with costs of capital that are
expected to finance the business's operations during the cash flow forecast
period to total capital.
Based on the type of
valuation basis used, information on the capital use plan provided by the
business to be valued, analysis of the business's borrowing demands and
capabilities in the upcoming time, evaluation of the capital structure of
businesses in the same industry, the valuer can estimate the proportion of
liabilities with costs of capital that are expected to finance the business’s operations
during the cash flow forecast period. Simultaneously, it is necessary to
evaluate and consider the estimation of the expected Rd corresponding to the
discount rate (WACC) of each time period in the cash flow forecast period of
the business to be valued.
The ratio of debt to total
capital (Fd) is determined on the basis of considering and assessing
the ratio of liabilities with costs of capital to total capital of businesses
having the same production and business lines as the business to be valued, or
determined according to the ratio of liabilities with costs of capital to total
capital of the business to be valued in the most recent years, taking into
account the future capital structure.
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b) Estimating costs of debt
(Rd)
Costs of debt (Rd)
is determined according to cost of debt of the liabilities with costs of
capital that are expected to finance the operations of the business to be
valued during the cash flow forecast period.
In case where there are no
liabilities with costs of capital existing in the capital structure of the
business to be valued, Rd may be determined according to the
expected interest rate. The expected interest rate is the estimated interest
rate based on the assessment of the ability of the business to be valued to
negotiate with credit providers or long-term loan interest of businesses in the
same production and business lines as the business to be valued.
In case where the business
to be valued has liabilities with costs of capital, Rd shall be determined
according to these costs of capital or the aforesaid expected interest rate; at
the same time, the valuer must conduct evaluation or review to estimate Rd
accordingly. Where the valued business has multiple liabilities with different
costs of capital (different interest rates, etc.), Rd can be determined by the
weighted average interest rate on the business's debts.
c) Estimating the equity proportion:
The equity proportion is
calculated according to the following formula: Fe = (1 - Fd)
d) Estimating costs of
equity (Re)
Based on valuation purposes,
bases of value to be appraised, characteristics of the business to be valued,
and information on financial data that can be collected and other relevant
elements, the valuer evaluate and select the appropriate method for determining
costs of equity of the valued business by applying one of 03 methods hereunder:
The method 01 is applied in
the following case: There are at least 03 enterprises in the same business
sector or industry as the valued business that have their shares listed or
registered for trading on Vietnam's stock exchanges; or, the business to be
valued is an enterprise that has been listed on Vietnamese stock exchanges for
not less than 03 years till the time of valuation. In case of not applying the
method 01, the valuer should state his/her reasoning and grounds for not
choosing this method in the report on valuation results.
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Cost of equity can be
calculated according to the following formula:
Re = Rf + βL x MRP
Where
Rf: Risk-free
rate of return at or near the time of valuation
MRP: Market risk premium
βL:
Systematic risk coefficient of the business to be valued
- The risk-free rate of
return (Rf) is estimated on the basis of the coupon rate of the
Government bond having a maturity of 10 years or the longest maturity at or
near the valuation date.
- 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 bond 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
investing in Vietnam's stock market is estimated by the valuer according to the
statistical method using VN-INDEX indicators in the last 5 years at the time of
valuation. INDEX indicators are listed on a monthly basis, specifically the
closing index of the last trading session of the month.
- In order to calculate the systematic
risk factor, taking into account the effect of capital structure, (βL),
the regression method of variance of a stock’s closing price adjusted to the
market price variance according to the formula:
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Covariance
(stock returns, market returns)
Variance
of market returns
Including: price variance is
determined on a monthly basis and for a minimum period of 5 years (for
businesses that do not have full data for 5 years, it is calculated from the
date on which the business is listed or registers for trading), the market's
rate of return calculated based on VN-INDEX indicators. The valuer can adopt
the published coefficient βL provided that the calculation is
carried out in the same way as above.
The risk coefficient taking
into account the effect of capital structure (βL) is estimated as
follows:
+ In case where the business
to be valued is a business listed on the Vietnamese stock exchange for not less
than 03 years till the time of valuation, the valuer can evaluate and consider the
determination of βL based on the transaction price of shares of the business
to be valued in the years near the time of valuation, or the determination of βL
according to similar businesses operating in the same business sectors or
industries, and use reasoning for selection of this calculation method in the
Report on valuation results.
+ In the remaining cases, βL
is estimated through the systematic risk coefficients of businesses operating
in the same business sectors as the business to be valued on the stock
exchange. The valuer needs to select at least 03 businesses having the same
business lines as the business to be valued and determine the coefficients βL
of these businesses.
Because there may be a
difference in capital structure between the business to be valued and
businesses having the same business lines, the valuer should adjust the risk
coefficients of businesses having the same business lines according to the
capital structure of the business to be valued according to the following
steps:
(1) Step 1: Eliminating the
effects of capital structure in the risk coefficients according to the formula:
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βU:
Non-leveraged risk coefficient
: Proportion of liabilities with costs of
capital to equity of businesses having the same business lines as the business
to be valued.
D/E is averaged based on the
same number of years of collection of data used for calculation of βL
t: Corporate income tax rate
(2) Step 2: Calculating the
average non-leverage risk coefficients of businesses having the same business
line as the business to be valued.
(3) Step 3: Eliminating the
risk coefficient taking into account the effects of capital structure (Pl) of
the business to be valued according to the following formula:
βL valuation
= βu average x (1 + D/E x (1 – t))
Where
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βu average:
Average non-leverage risk coefficient
: Proportion of liabilities with costs of
equity of the business to be valued.
D/E ratio should reflect
future financial leverage and can be determined according to D/E at the time of
valuation.
t: Corporate income tax rate
d2) Method 2:
Cost of equity of the
business to be valued is calculated according to the following formula:
Re = RfHK
+ βL x MRPHK + Country risk premium + Exchange rate
risk premium (if any)
- RfHK: Risk-free
rate of return (Rf) that is estimated on the basis of the coupon
rate of the U.S.A’s Government bond having a maturity of 10 years or the
longest maturity or the maturity near the valuation date.
- MRPHK: Risk premium
of the U.S.A’s stock market.
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The valuer needs to
evaluate, argue and adjust Re on the basis of the size, liquidity
and other relevant factors in order to reflect the particular risks of the business
to be valued.
d3) Method 3:
Cost of equity of the business
to be valued is calculated according to the following formula:
Re = Rf
+ Rp
- Risk-free rate of return is
estimated on the basis of the coupon rate of the Government bond having a
maturity of 10 years or the longest maturity or the maturity near the valuation
date.
- Equity risk premium (Rp)
is estimated by the equity risk premium of Vietnam that is published at
reliable international financial databases.
The valuer needs to
evaluate, argue and adjust Re on the basis of the size, liquidity and other relevant
factors in order to reflect the particular risks of the business to be valued.
6.5. Estimating the value at
the end of the forecast period
- Situation 1: Cash flow
existing after the forecast period is the cash flow that does not grow and last
indefinitely.
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Where
FCFFn+1: Free
cash flow of the business in year n + 1
- Situation 2: Cash flow
existing after the forecast period is the cash flow that steadily grows each
year and lasts indefinitely.
Formula for calculation of
the value at the end of the forecast period:
Where
g: cash flow growth rate
Cash flow growth rate is
determined according to the profit growth rate. The profit growth rate is
forecasted on the basis of assessing the growth prospect of the business, the
past profit growth rate of the business, the production and business plan, the
reinvestment rate and the rate of retained profits,...
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6.6. Estimating the equity
value of the business to be valued:
Step 1: Summing the present
values of free cash flows and the value at the end of the forecast period after
discount on the business's free cash flows and the value at end of the forecast
period of the business at a discount rate that is the weighted average cost of
capital.
Step 2: Estimating the value
of non-operating assets of the business according to the guidance on
determining the value of tangible assets, intangible assets and financial
assets in this Valuation Standard and other relevant valuation standards.
Step 3: Valuing the business
to be valued by adding the present values of the business's free cash flows and
the value at end of the forecast period to the value of non-operating assets of
the business to be valued and value of operating assets that have not yet been
reflected in the free cash flows of the business to be valued.
Step 4: Estimating the
equity value of the business to be valued at the time of valuation by
subtracting the value of liabilities arising from costs of capital at the time
of valuation from the calculation result achieved at step 3.
7. Discounted
dividend stream method
7.1. The discounted dividend
stream method determines the equity value of the business to be valued by
estimating total value of the discounted value of the dividend stream of the
business to be valued. In case where the business to be valued is a joint stock
company, the discounted dividend stream method of the business is used with
assumption that the preferred shares of the business to be valued are treated
as common shares. This assumption should be clearly stated in the limitation
section of the Valuation Deed and the Report on valuation results.
7.2. Steps in calculating
the equity value
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The valuer needs to forecast
the dividend payout rate and the dividend growth rate of the business to be
valued. In order to estimate the dividend stream forecast period, the valuer
should refer to the characteristics of the business, business lines and
economic contexts to select appropriate growth models. Minimum dividend stream
forecast period is 03 years. In case of newly established or fast-growing
businesses, the dividend stream forecast period can be extended until each
business enters a phase of steady growth. For businesses operating within a
definite term, the dividend stream forecast period is determined according to
the age of the business.
b) Step 2: Estimating the
cost of equity according to the instructions given in 6.4 of this Standard.
c) Step 3: Estimating the
equity value at end of the forecast period as follows:
- Situation 1: Dividend
stream existing after the forecast period is the cash flow that does not grow
and last indefinitely. Formula for calculation of the value at the end of the
forecast period:
- Situation 2: Dividend
stream existing after the forecast period is the cash flow that steadily grows
each year and lasts indefinitely. Formula for calculation of the value at the
end of the forecast period:
Where
Dn+1: Dividend
stream in year n + 1
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The growth rate of the
dividend stream is forecasted on the basis of the ratio of profit after tax
retained for addition of capital, the rate of return on equity.
- Situation 3: If the
business is terminated at the end of the forecast period, the value at the end
of the forecast period is determined according to the liquidation value of the
business to be valued.
d) Step 4: Estimating the
equity value of the business to be valued:
- Summing the net present
values of dividend streams and the equity value at the end of the forecast
period after discount on the business's dividend streams and the equity value
at end of the forecast period of the business at a discount rate that is the
cost of equity.
- Estimating the value of
non-operating assets of the business according to the guidance on determining
the value of tangible assets, intangible assets and financial assets in this
Valuation Standard and other relevant valuation standards.
- Estimating the equity
value of the business to be valued by adding the net present values of the
business's dividend streams and the present equity value at the end of the
forecast period to the value of non-operating assets and operating assets have
not been reflected in the dividend streams of the business to be valued.
8. Discounted
free cash flow to equity method
8.1. The discounted free
cash flow to equity method determines the equity value of the business to be
valued by estimating the sum of the discounted free cash flow to equity of the
business to be valued. In case where the business to be valued is a joint stock
company, the discounted free cash flow to equity method of the business is used
with assumption that the preferred shares of the business to be valued are
treated as common shares. This assumption should be clearly stated in the
limitation section of the Valuation Deed and the Report on valuation results.
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a) Step 1: Forecasting free
cash flows to equity of the business to be valued.
In order to estimate the
cash flow forecast period, the valuer should refer to the characteristics of
the business, business lines and economic contexts to select appropriate growth
models. Minimum cash flow forecast period is 03 years. In case of newly
established or fast-growing businesses, the cash flow forecast period can be
extended until the business enters a phase of steady growth. In case of
enterprises operating within a term, when determining the cash flow forecast
period, the lifespan of the business needs to be evaluated and taken into
account.
Formula for calculation of
free cash flows to equity of the business to be valued:
FCFE = Earnings after tax +
Depreciation/Amortization – capital investment expenditures – Changes in net
working capital other than cash and short-term non-operating assets (net
working capital difference) – repayments of principal debts + newly issued
debts
Earnings after tax are
profits after tax from which profits from non-operating assets are taken away.
Capital investment
expenditures include: expenses for investment in fixed assets and other similar
long-term that are not eligible to be recognized as fixed assets according to
the corporate accounting regulations; expenditures on investment in other
long-term operating assets included in the group of expenditures on purchases
of debt instruments of other entities and expenditures on capital contribution
to other entities (if any).
The formula for calculating
working capital other than cash and short-term non-operating assets:
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
b) Step 2: Estimating the
cost of equity of the business to be valued according to the instructions given
in d, 6.4 of this Standard.
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- Situation 1: Cash flow
existing after the forecast period is the cash flow that does not grow and last
indefinitely. Formula for calculation of the value at the end of the forecast
period:
Where
FCFEn+1: Cash
flow to equity in year n + 1
- Situation 2: Cash flow
existing after the forecast period is the cash flow that steadily grows each
year and lasts indefinitely. Formula for calculation of the value at the end of
the forecast period:
Where
g: growth rate of cash flow
to equity
The growth rate of cash flow
to equity is forecasted on the basis of the growth rate of operating profits
after tax, the growth prospect of the business, the past growth rate of cash
flow of the business, the production and business plan, the reinvestment
rate,...
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d) Step 4: Estimating the
equity value of the business to be valued:
- Summing net present values
of the business's forecasted free cash flows and the equity value at the end of
the forecast period after discount on the equity free cash flow and the ending
equity value forecast period of the business at the discount rate which is the
cost of equity.
- Estimating the value of
non-operating assets of the business according to the guidance on determining
the value of tangible assets, intangible assets and financial assets in this
Valuation Standard and other relevant valuation standards.
- Estimating the equity
value of the business by adding the net present value of free cash flows to
equity and the present value of equity at the end of the forecast period to the
value of non-operating assets and operating assets that have not yet been shown
in the free cash flow to equity of the business to be valued, then taking away
any liabilities that have not yet been shown in the free cash flows to equity
of the business to be valued.
8.3. For the issues that are
not specified in this Valuation Standard, the valuer needs to base more on the
instructions about application of the discounted cash flow method specified in
the Vietnamese Valuation Standard in terms of the income-based approach.
9. Conclusion
about the business’s equity value
The business’s equity value
can be determined through calculation of the weighted average of the results
obtained from application of the valuation methods. The weighting for each
option depends on the reliability of each method, input data, valuation
purposes, etc., and must ensure weighting factors are market-appropriate./.