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MINISTRY OF FINANCE
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SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom – Happiness
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No. 32/2024/TT-BTC
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Hanoi, May 16, 2024
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CIRCULAR
ON THE ISSUANCE OF VIETNAM VALUATION
STANDARDS FOR THE MARKET APPROACH, COST APPROACH, AND INCOME APPROACH
Pursuant
to the Law on Prices dated June 19, 2023;
Pursuant
to Decree No. 14/2023/ND-CP dated April 20, 2023 of the Government on the
functions, tasks, powers, and organizational structure of the Ministry of
Finance;
At
the request of the Director of the Price Management Department;
The
Minister of Finance issues this Circular on Vietnam Valuation Standards for the
market approach, cost approach, and income approach.
Article
1. Issue together
with this Circular the following Vietnam Valuation Standards:
- Vietnam
Valuation Standard on the Market Approach;
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- Vietnam
Valuation Standard on the Income Approach.
Article
2. Entry in force
1. This
Circular comes into force as of July 1, 2024.
2. Circular
No. 126/2015/TT-BTC dated August 20, 2015 of the Minister of Finance on
issuance of Vietnam Valuation Standards No. 08, 09, and 10 shall cease to be
effective from the effective date of this Circular.
Article
3. Implementation
1. Relevant
organizations and individuals shall implement the Vietnam Valuation Standards
issued under this Circular.
2. Difficulties
that arise during the implementation of this Circular should be reported to the
Ministry of Finance for consideration./.
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PP. THE MINISTER
DEPUTY MINISTER
Le Tan Can
VIETNAM VALUATION STANDARDS
ON THE MARKET APPROACH
(Enclosed with Circular No. 32/2024/TT-BTC dated May 16, 2024 of the
Minister of Finance)
Chapter
I
GENERAL PROVISIONS
Article
1. Scope
This Vietnam Valuation Standard stipulates and guides the
market approach for valuation in accordance with price regulations.
Article
2. Regulated entities
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2. Organizations
and individuals conducting State valuations (hereinafter referred to as
state-authorized valuation entities) in accordance with pricing laws.
3. Organizations
and individuals requesting valuations (hereinafter referred to as valuation
clients), and third parties using valuation reports based on valuation
contracts (if applicable).
Article
3. Interpretation of terms
For the
purposes of this Vietnam Valuation Standard, the following terms are defined as
follows:
1. “Comparable
asset” refers to an identical or similar asset to the asset being valued
(hereinafter referred to as valued asset.
2. “Similar
asset” refers to an asset of the same type and comparable to the
valued asset in terms of intended use, functionality, legal characteristics,
economic-technical features, key characteristics of the valued asset, and other
factors (if applicable).
3. “Indicated
price” refers to the price of the comparable asset after adjustments have
been made for differences in comparison factors with the valued asset.
4. “Net
total adjustment value” is the total adjustment based on comparison
factors, accounting for both negative (downward adjustments) and positive
(upward adjustments), without considering the absolute value of each
adjustment.
5. “Gross
total adjustment value” is the total adjustment based on comparison factors
in absolute value.
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1. The
market approach determines the value of a valued asset by comparing it to
comparable assets that have known market prices. In the case of business
valuations, additional information about the valued asset itself may also be
used.
2. Depending
on the type of asset, the market approach can be applied through various
methods, including the comparison method, average ratio
method, and sales comparison method.
The
average ratio method and sales comparison method are only applicable to
business valuations and are regulated under the Vietnam Valuation Standards for
business valuation.
Chapter
II
COMPARISON METHOD
Article
5. Applying the comparison method
1. The
comparison method determines the value of the valued asset by examining,
analyzing, and evaluating the comparable factors of similar assets and then
adjusting the price of the comparable assets to serve as the basis for
estimating the value of the valued asset.
2. The
comparison method is applied to value assets that have been transferred,
offered for purchase, or publicly listed for sale in the market. An asset is
considered to have been transferred, offered for purchase, or publicly listed
for sale if at least three comparable assets can be obtained from different
organizations or individuals who have transferred, offered for purchase, or
publicly listed them on the market near the time and location of the valuation.
3. Steps
to implement:
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b)
Analyze the information;
c)
Adjust for differences between the valued asset and the comparable assets;
d)
Determine the indicated price of the comparable assets;
dd)
Determine the value of the valued asset.
Article
6. Surveying and collecting information on comparable assets
1. Information
on comparable assets includes legal, economic, and technical characteristics;
the price of the comparable assets; the time, location, and parties involved in
the transfer, purchase, or sale; conditions attached to the price, and other
relevant information (if any).
2. The
survey and collection of information on comparable assets must meet the
following requirements:
a)
Information collected on comparable assets must be objective and reflect actual
conditions. It must be reviewed and assessed to ensure it can be used for
analysis and calculation. Priority is given to information that is closest in
time and location to the valuation of the valued asset;
b) A
minimum of three comparable assets must be collected, with transfer, purchase,
or sale dates occurring at or near the time of valuation, but no more than 24
months prior to the valuation date.
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If
information is collected from offered purchase or sale prices, market price
trends, information sources, and other price data must be evaluated and
analyzed to make appropriate adjustments (if necessary) before using them as
comparison prices;
c)
Preference is given to selecting comparable assets that are closest in
proximity to the valued asset. Selection is not limited by administrative
boundaries of communes or districts within a province. If the information
collection extends beyond the province, the valuer must state the reasons and
limitations (if any) for this in the valuation report;
d)
Information on comparable assets may be collected from one or more of the
following sources: contracts, invoices, sales receipts; successful transaction
results on exchanges; means of mass media; market survey forms; prices recorded
in documents from regulatory agencies or businesses; auction or bidding results
as per regulations; direct interviews; phone calls; emails or the internet;
government price databases, organizations, businesses; and other sources as per
regulations (if any).
3. The
results of the survey and information collection on comparable assets must be
recorded and stored in the form of data collection sheets with the signature of
the information collector.
If
additional survey forms, questionnaires, data collection sheets, or evaluation
forms are used during the information collection process, the information
collector must sign these forms.
If
information is collected from the internet, the data collection sheet must
clearly cite specific links to the information, and images must be stored as
evidence. Information collected from the internet must come from official
websites of organizations operating under legal regulations.
If the
information is collected from purchase or sale quotes, it must include the name,
address, tax identification number (if any) and the official stamp of the
quoting entity, the time the information was provided, and the validity of the
quote.
Article
7. Information analysis
1. Information
analysis is conducted to identify similarities and differences, advantages and
disadvantages, based on comparison factors between the valued asset and the
comparable assets.
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3. The
analysis of comparison factors between the valued asset and comparable assets
is carried out using the following methods:
a)
Quantitative analysis: This includes pairwise comparison, statistical analysis,
regression analysis, cost analysis, and other similar methods to determine the
adjustment value in terms of money or percentage (%);
b)
Qualitative analysis: This includes comparative correlation analysis, ranking
analysis, and interviews with relevant parties.
Article
8. Adjusting differences between the valued asset and comparable assets
1. When
adjusting for differences between the valued asset and comparable assets,
quantitative comparison factors (those that can be converted into monetary
values) should be adjusted first, followed by qualitative comparison factors
(those that cannot be converted into monetary values).
2. The
adjustments for differences between the valued asset and comparable assets
include:
a)
Object of adjustment: This refers to the prices of comparable assets that have
been transferred, offered for purchase, or offered for sale in the market, with
reasonable adjustments made to reflect the prevailing transaction prices in the
market for comparable assets;
b)
Basis for adjustment: Adjustments are made based on the differences in
comparison factors between the comparable asset and the valued asset;
c)
Principles of adjustment:
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When
adjusting the price for differences in one comparison factor, all other
comparison factors are held constant (assumed to be the same). If the valued
asset has inferior qualities compared to the comparable asset, the price of the
comparable asset is adjusted downward (-). If the valued asset has superior
qualities compared to the comparable asset, the price of the comparable asset
is adjusted upward (+). If the valued asset and the comparable asset are
identical in a given comparison factor, no adjustment is made.
Each
adjustment for comparison factors must be supported by evidence gathered from
the market, such as data collection forms, information analysis reports, market
research reports, or other relevant documents;
d)
Methods of adjustment:
Absolute
monetary adjustment: This method is used when the difference in comparison
factors can be expressed as an exact monetary value, calculated through
specific computations.
Percentage
adjustment: This method is used when the difference in comparison factors can
only be estimated as a relative adjustment in percentage terms;
dd)
Adjustment value:
The
adjustment value for differences in comparison factors must be estimated based
on market transaction data, with a thorough analysis and assessment of how each
comparison factor affects the value of the asset;
e)
Order of adjustments:
Adjustments
are first made for the group of comparison factors related to legal
characteristics and transaction conditions, followed by adjustments for the
group of economic and technical characteristics. The price after adjustments
for legal and transaction factors is then used to adjust for the economic and
technical characteristics of the asset.
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g)
Control principle:
Ensure
that the difference between the price of the comparable asset and its indicated
price, as regulated in Article 9 of this Standard, aligns with market evidence.
Ensure
that the difference between each indicated price and the average of the
indicated prices does not exceed 15%.
Article
9. Determining the indicative value of comparable assets
1. The
indicative value of comparable assets serves as the basis for estimating the value
of the valued asset.
2. The adjustment for comparison factors and the determination of the
indicative value of comparable assets are shown in the following adjustment
table:
No.
Comparison factor
Unit
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Comparable asset 1
Comparable asset 2
Comparable asset 3
Comparable asset …
A
Market
price (before adjustment)
Known
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Known
Known
B
Price
after adjustment
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C
Adjustment
for comparison factors
C1
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Adjustment
rate
%
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Adjustment
amount
VND
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Price
after adjustment 1
VND
C2
Comparison
factor 2
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Adjustment
rate
%
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Adjustment
amount
VND
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VND
C3
Comparison
factor 3
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Adjustment
rate
%
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Adjustment
amount
VND
Price
after adjustment 3
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C4
Comparison
factor 4
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Adjustment
rate
%
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Adjustment
amount
VND
Price
after adjustment 4
VND
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D
Indicative
value
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D1
Average
indicative value
VND
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D2
Deviation
from the average indicative value
%
E
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E1
Total
gross adjustment value
VND
E2
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times
E3
Adjustment
margin
%
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E4
Total
net adjustment value
VND
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Article
10. Determining the value of the valued asset
1. The
value of the valued asset is determined based on the indicated prices of
comparable assets, along with an analysis of the quality of the information
from the comparable assets (regarding the source, reliability, and relevance of
the information) and the following criteria:
a) The
smallest total gross adjustment value (i.e., the smallest absolute sum of all
adjustments);
b) The
fewest number of adjustments;
c) The
smallest adjustment range (i.e., the smallest adjustment amount or percentage
for a comparison factor);
d) The
smallest total net adjustment value (i.e., the smallest sum of all net
adjustments).
2. If
necessary, the trends and fluctuations of market supply and demand should be
assessed before finalizing the valued asset's value using the comparison
method./.
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VIETNAM VALUATION STANDARDS
ON THE COST APPROACH
(Enclosed with Circular No. 32/2024/TT-BTC dated May 16, 2024 of the Minister
of Finance)
Chapter
I
GENERAL PROVISIONS
Article
1. Scope
This
Vietnam Valuation Standard stipulates the cost approach for valuation in
accordance with price regulations.
Article
2. Regulated entities
1. Valuers
and valuation firms providing valuation services as per legal regulations on
pricing.
2. Organizations
and individuals conducting State valuations (hereinafter referred to as
state-authorized valuation entities) in accordance with pricing laws.
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Article
3. Interpretation of terms
For the
purposes of this Vietnam Valuation Standard, the following terms are defined as
follows:
1. “Cost
approach” refers to the method of determining the value of an asset being
valued (hereinafter referred to as valued asset) by estimating the cost of
producing an identical or similar asset and accounting for depreciation of the
valued asset.
2. “Physical
depreciation” refers to the loss in an asset's utility, leading to a
decrease in its value due to physical damage to the asset or its components,
caused by the effects of time and normal use.
3. “Functional
depreciation” refers to the loss in utility when an asset is less efficient
than a substitute asset, leading to a decrease in value.
4. “External
depreciation” refers to the loss in value caused by external factors such
as economic conditions or location. External depreciation due to
location applies only to real estate and/or intangible assets related to real
estate and occurs when changes in infrastructure, surroundings, or natural
environments reduce the asset's value.
5. “Substitute
asset” refers to an asset with similar functionality and utility to the
valued asset, designed or built using newer technology, materials, or
techniques.
6. “Total
depreciation value” refers to the sum of the asset's physical, functional,
and external depreciation at the time of valuation.
7. “Curable
depreciation” can be addressed if:
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b) The
cost of repair is greater than the added value, but the repair is necessary to
maintain the value of other parts of the valued asset.
8. “Economic
life” refers to the time period during which an asset generates economic
benefits, starting from when it was newly produced or constructed and put into
use.
9. “Actual
life” refers to the number of years since the asset was completed and put
into use, up to the valuation date.
10. “Effective
life” refers to the number of years that reflects the actual condition of
the valued asset at the time of valuation. The effective life depends on the
maintenance and upkeep of the asset.
11. “Physical
life” refers to the number of years the asset can be used before it becomes
physically unusable for its originally intended purpose due to physical damage
or wear and tear, without accounting for functional obsolescence or the impact
of external factors. This can be determined through the manufacturer's
technical specifications and the asset's construction features.
12. “Replacement
cost” refers to the cost to create or acquire a 100% new substitute asset
at the time of valuation.
13. “Reproduction
cost” refers to the cost to produce or acquire an identical asset to the
valued asset, as it was when newly created at the time of valuation.
Chapter
II
SPECIFIC PROVISIONS
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The
cost approach is typically applied in the following cases:
1. There
is insufficient market information to apply the market approach or income
approach.
2. When
estimating the cost of constructing a new asset or appraising newly built or
manufactured assets.
3. To
compare and verify with other valuation approaches.
Article
5. Replacement cost method
1. The
replacement cost method determines the value of the valued asset based on the
difference between the replacement cost and the asset's depreciation value.
2. The
formula for the replacement cost method is:
Estimated value of the valued
asset
=
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-
Total depreciation value of the
valued asset (excluding any functional depreciation already reflected in the
replacement cost)
Article
6. Reproduction cost method
1. The
reproduction cost method determines the value of the valued asset based on the
difference between the reproduction cost and the asset's depreciation value.
2. The
formula for the reproduction cost method is:
Estimated value of the valued
asset
=
Reproduction cost (including the
manufacturer's/investor's profit)
-
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Article
7. Summation method
1. The
summation method (also known as the asset method) determines the value of the
valued asset by adding up the individual values of its components.
2. This
method is typically used to appraise assets such as enterprises or assets whose
value primarily depends on the value of their individual components.
3. The
formula for the summation method is
Estimated value of the valued
asset
=
Where:
Vi:
is the value of component i of the valued asset, determined by the valuation
approaches and methods outlined in the Vietnam Valuation Standards;
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i: i-th
component.
Article
8. Components of reproduction and replacement costs and important
considerations
1. Some
components of reproduction cost and replacement cost that need to be considered
and analyzed during the valuation process include: material costs, equipment
costs, research and testing expenses, labor costs, transportation, design,
consulting, management, financial expenses during production, non-refundable
taxes, installation, trial operation, contractor profit, manufacturer/investor
profit, taxes and charges payable, and other costs as required by law.
2. The
determination of reproduction and replacement costs must align with the
valuation base and assumptions made during the valuation engagement.
3. When
determining reproduction costs, if identical materials or equipment cannot be
sourced, similar materials or equipment may be considered.
4. When
determining replacement costs, the substitute asset must be identified based on
its functions and uses, and the cost to create or acquire the substitute asset
must be estimated accordingly.
5. Reproduction
and replacement costs should be based on market information collected at the
time of valuation unless otherwise specified by law, such as when regulatory
agencies provide cost norms, unit prices, investment rate per unit.
Article
9. Manufacturer/Investor profit
1. The
manufacturer/investor's profit in reproduction or replacement costs is
determined as follows:
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b) The
profit of the manufacturer/investor in the reproduction cost or replacement
cost is calculated by multiplying (x) the average ratio determined in point a
of this clause by the reproduction cost or replacement cost, excluding the
profit of the manufacturer/investor.
2. In
cases where the method specified in clause 1 of this Article cannot be applied,
use the standard set by the competent state authority (if available).
Article
10. Depreciation value determined using the comparison technique
1. The
comparison technique determines the depreciation value of an asset by comparing
it with the depreciation values of similar assets that have been transacted in
the market.
2. The
depreciation value is determined as follows:
a)
Collect information and select at least two similar assets that have been
successfully transacted or offered for purchase or sale in the market within
the past year from the valuation date;
b)
Based on the assessment of key comparison factors (e.g., sales conditions,
financial terms), adjust the transaction price of the similar assets to derive
the indicated prices that reflect the characteristics of the valued asset. In
the case of real estate, the value of land use right or land lease right (if
applicable) of similar assets must be excluded to reflect the market value of
the asset on the land;
c)
Determine the cost to create a new, similar asset at the transaction time of the
comparable assets (or the asset on the land in the case of real estate),
without depreciation or obsolescence, but including the
manufacturer's/investor's profit;
d)
Subtract the result from b) from the result from c) to determine the
depreciation value of the comparable assets. Then, calculate the depreciation
rate by dividing the depreciation value by the cost to create the new
comparable asset. Based on this, determine the depreciation rate of the valued
asset;
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Article
11. Depreciation value determined using the effective life technique
The
depreciation rate of an asset using the effective life technique is determined
as follows:
1. Calculate
the depreciation rate of the valued asset:
Depreciation rate
=
Effective life
x 100%
Economic life
2. Determine
the replacement or reproduction cost, then multiply by the depreciation rate
calculated in section 1 to determine the total depreciation value of the valued
asset using the replacement or reproduction cost method.
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1. The
total depreciation value of an asset is determined by analyzing its physical,
functional, and external depreciation and adding these depreciation values
together.
2. The
physical depreciation value is determined using one of the following methods:
a) For
curable physical depreciation, the physical depreciation value is estimated by
the cost to repair or rectify wear and obsolescence (this cost includes the
total expenses such as purchasing new parts and removing old ones) after
deducting any income from the sale of old, removed parts (if applicable);
b)
Determine the physical depreciation rate based on an analysis of the asset's
utility at the time of valuation to estimate the physical depreciation value. In
specific:
Physical depreciation rate
=
Utilization level
x 100%
Designed utilization level
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c)
Determine the physical depreciation rate based on the ratio of the asset’s
effective life to its physical life.
Formula:
Physical depreciation rate
=
Effective life
x 100%
Physical life
Determine
the replacement or reproduction cost, then multiply by the calculated physical
depreciation rate to determine the physical depreciation value using the
replacement or reproduction cost method;
d)
Determine the physical depreciation rate based on an evaluation of the wear of
the asset’s key components.
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Where:
H: Physical
depreciation rate of the valued asset as a percentage;
Hi:
Physical depreciation rate of the i-th key component as a percentage;
Ti:
Proportion of the i-th key component in the total asset value;
n: Total
number of key components of the valued asset;
i: The
i-th key component.
Determine
the replacement or reproduction cost, then multiply by the calculated physical
depreciation rate to determine the physical depreciation value using the
replacement or reproduction cost method.
2. Determining
functional depreciation value:
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b) For
curable functional depreciation, the functional depreciation value is
calculated as the total cost of rectification after deducting any income (if
applicable) from the sale of removed or replaced parts (if applicable);
c)
Functional depreciation due to high capital costs arises when changes in
design, production materials, or new technology result in a substitute asset
with similar functionality but lower investment costs than the valued asset. This
type of depreciation, which cannot be rectified, is determined by the
difference between the reproduction cost and the replacement cost if the
reproduction cost is higher than the replacement cost for the same asset;
d)
Functional depreciation due to high operating costs occurs when changes in design,
technology, or superior productivity result in substitute assets with lower
operating and production costs than the valued asset. The value of this
depreciation, which cannot be rectified, is determined as follows:
Analyze
the operational reports of the valued asset to determine the operating cost per
unit of product produced by the valued asset;
Determine
the operating cost per unit of product produced by the substitute asset. Then,
calculate the difference in operating costs per unit of product between the
valued asset and the substitute asset;
Estimate
the remaining economic life of the asset from the valuation date;
Determine
the total annual operating cost difference based on the annual product output
of the valued asset and the operating cost difference throughout the asset’s
remaining economic life;
Deduct
the total annual operating cost difference based on the corporate income tax
effect on the additional income (due to using the substitute asset with lower
operating costs than the valued asset);
Discount
the total annual operating cost difference (throughout the remaining economic
life) to the valuation date using a discount rate that reflects the risk
associated with using the valued asset;
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3. Determining
external depreciation value
External
depreciation includes both economic depreciation and value reduction due to
location. This type of depreciation is usually irreparable.
External
depreciation value is determined through market analysis, direct capitalization
of lost income due to external depreciation, or by subtracting physical and
functional depreciation values from the total depreciation value of the asset.
External
depreciation value is typically determined after the physical and functional
depreciation values have been established, as external depreciation is caused
by outside factors, independent of the valued asset itself.
a)
Estimating external depreciation through market analysis:
Use
market information analysis to assess the value of the valued asset by
examining the transaction information of similar assets that have been
successfully sold in the market;
b)
Estimating external depreciation by directly capitalizing lost income:
When
the asset generates income, the lost income due to external economic or
location factors can be capitalized to determine the total lost income in the
asset’s overall value. This lost income corresponds to the external
depreciation value.
The
estimation of total lost income is carried out as follows: Analyze market data
(related to economic and location factors) to estimate the annual lost income;
discount the annual lost income to determine the total lost value's effect on
the asset's value. If the lost income is stable and regular, the lost income
stream is capitalized using an appropriate capitalization rate. If the lost
income fluctuates annually, the lost income stream is discounted using the
discounted cash flow (DCF) method. The capitalization rate and DCF analysis
are conducted in accordance with the Vietnam Valuation Standards on the Income
Approach./.
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VIETNAM VALUATION STANDARDS
ON THE INCOME
APPROACH
(Enclosed with Circular No. 32/2024/TT-BTC dated May 16, 2024 of the
Minister of Finance)
Chapter
I
GENERAL PROVISIONS
Article
1. Scope
This
Vietnam Valuation Standard stipulates and guides the income approach for
valuation in accordance with price regulations.
Article
2. Regulated entities
1. Valuers
and valuation firms providing valuation services as per legal regulations on
pricing.
2. Organizations
and individuals conducting State valuations (hereinafter referred to as
state-authorized valuation entities) in accordance with pricing laws.
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Article
3. Interpretation of terms
For the
purposes of this Vietnam Valuation Standard, the following terms are defined as
follows:
1. “Income
approach” refers to the method of determining the value of an asset by
converting future cash flows generated by the asset into present value.
2. “Direct
capitalization method” refers to a valuation method that determines the
value of an asset by converting projected stable annual net income into present
value using an appropriate capitalization rate.
3. “Discounted
cash flow (DCF) method” refers to a valuation method that determines the
value of an asset by converting projected future cash flows into present value
using an appropriate discount rate.
4. “Capitalization
rate” refers to the rate used to convert projected stable annual net income
into present value.
5. “Discount
rate” refers to the rate used to convert future cash flows into present
value.
6. “Terminal
value” refers to the projected value of an asset at the end of the DCF
forecast period (at the end of the cash flow analysis period).
Article
4. Income approach and valuation methods used in the income approach
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2. The
valuation methods used in the income approach include the direct capitalization
method and the DCF method, applied to assets that meet the criteria outlined in
section 1 of this article, except in the following cases:
a) For
businesses, the valuation methods used in the income approach include the free
cash flow to firm (FCFF) method, the dividend discount method, and the free
cash flow to equity (FCFE) method, as regulated in the Vietnam Valuation
Standards on Business Valuation;
b) For
intangible assets, the valuation methods used in the income approach include
the royalty relief method, the excess earnings method, and the incremental
income method, as regulated in the Vietnam Valuation Standards on Intangible
Asset Valuation.
Chapter
II
DIRECT CAPITALIZATION METHOD
Article
5. Applying the direct capitalization method
1. The
formula for the direct capitalization method is:
Where:
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I: Net
income generated by the asset
R: Capitalization
rate
2. Steps
to implement:
a)
Determine the net income generated by the asset;
b)
Determine the capitalization rate;
c)
Calculate the asset value using the direct capitalization formula.
Article
6. Determining the net income generated by the asset (I)
1. The
formula for determining net income:
Net income
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Potential gross income
-
Loss of revenue due to
underutilization of capacity and payment risk
-
Operating expenses
2. The
potential gross income, vacancy loss, and operating expenses are determined
based on market survey data from at least three comparable assets, referencing
past income and operating expenses of the valued asset, as well as
supply-demand conditions, industry growth prospects, and other factors
influencing the forecast of potential gross income, vacancy loss, and projected
operating expenses of the valued asset.
3. Potential
gross income is the total stable annual income generated by fully utilizing the
asset.
4. Loss
of revenue due to underutilization of capacity and payment risk are calculated
by multiplying the loss rate by the potential gross income, where the loss rate
is estimated by collecting and analyzing market information of comparable
assets.
5. Operating
expenses refer to the annual costs necessary to maintain the income stream from
the asset.
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Article
7. Determining the capitalization rate (R)
1. Based
on the purpose of the valuation, the characteristics of the valued asset, the
valuation basis, and the collected information, the capitalization rate is
determined using one of two methods: the comparison method and the
loan-to-equity analysis method.
2. Comparison
method
a) The
comparison method determines the capitalization rate for the valued asset by
comparing it with the capitalization rates of similar assets in the market;
b) To
determine the capitalization rate, at least three comparable assets in the
market must be surveyed, collecting information such as transaction prices,
intended use, financial terms, market conditions at the time of sale,
buyer-seller characteristics, operating income, operating expenses, vacancy and
collection loss rates, and related factors. If the comparable assets have
differences from the valued asset, these differences must be adjusted;
c) The
calculation of net income and operating expenses for the comparable assets must
be consistent with the calculations used for the valued asset. The transaction
prices of the comparable assets must reflect current market conditions as well
as expected future market conditions similar to the valued asset.
3. Loan-to-equity
analysis method
a) The
loan-to-equity analysis method determines the capitalization rate based on the
weighted average of the loan capitalization rate and the equity capitalization
rate, where the weights are the proportions of capital raised from different
sources invested in the asset. This method is applied to assets funded by a
combination of equity and loans;
b) To
determine the capitalization rate, information related to equity and loan
sources must be collected, including: the equity-to-loan ratio, loan terms,
number of payments, interest rates, investor expectations, return on
investment, and other relevant factors;
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d) The
equity capitalization rate is the rate used to capitalize income from equity. It
is calculated by dividing annual equity income by the total equity amount. The
equity capitalization rate is typically determined by market surveys and
analysis of comparable assets.
Chapter
III
DISCOUNTED CASH FLOW METHOD
Article
8. Applying the Discounted cash flow method
1. The
general formula for the discounted cash flow method:
a)
General formula:
b)
Specific formulas for certain cases:
- For
single-stage cash flow where annual cash flows are equal and constant A, t → n
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- For
two-stage cash flows:
*When
cash flows vary until year n, and from year n+1 onwards are stable, with t → ∞:
* When cash flows vary until year n, and from year n+1
onwards grow at a constant rate of g% per year (where g < r) and t → ∞:
Where:
V: Value
of the valued asset
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Vn: Terminal value at the end of the
forecast period
n: Forecast
period for future cash flows
r: Discount
rate
t: Forecast
year
g: Cash
flow growth rate
2. Steps
to implement:
a)
Identify the forecast period for future cash flows;
b)
Estimate forecasted cash flows based on the projected income from the asset and
estimated operating costs;
c)
Determine the terminal value of the asset at the end of the forecast period;
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dd)
Calculate the asset’s value using the discounted cash flow formula.
Article
9. Identifying the forecast period for future cash flows (n)
1. The
forecast period for future cash flows must be based on the purpose of the
valuation, the characteristics of the valued asset, the collected information,
and the valuation basis. The cash flow may consist of one or more stages.
2. The
forecast period is determined based on the following factors:
a) The
economic life of the valued asset;
b) The
intended holding period for the valued asset;
c) The
reliability of the information collected during the forecast period;
d) The
forecast period must be long enough for the valued asset to reach relatively
stable income levels and to allow for the calculation of terminal value.
Article
10. Identifying cash flows (CF)
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a)
Income from the asset consists of the money the investor receives from
investing in the asset;
b)
Income estimation is based on: the economic and technical characteristics of
the valued asset; past income from the valued asset and/or income from similar
assets; industry market conditions; and other factors influencing the forecast
of total income;
c)
Income from the asset may be net operating income or potential gross income,
depending on the available data and information.
2. Estimating
operating costs related to the asset’s operation:
a)
Operating costs include the necessary expenses to maintain income from the
operation of the asset (including interest expenses);
b) Cost
estimates are based on the economic and technical characteristics of the valued
asset; past costs of the valued asset and/or similar assets; industry market
conditions; and other factors influencing the forecast of costs.
3. Cash
flow (CF) is determined as the difference between income from the asset and
operating costs. Cash flow (CF) may be calculated either before or after income
tax, depending on the valuation purpose, the characteristics of the valued
asset, the collected information, the valuation basis, and the specific asset
valuation method, and must align with the method used to determine the discount
rate.
Article
11. Determining the terminal value of the asset (Vn)
1. The
terminal value of the asset at the end of the forecast period can be the
liquidation or salvage value, or the market value of similar assets at the end
of the forecast period.
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Article
12. Determining the discount rate ®
1. The
discount rate must reflect the time value of money, the risks associated with
the cash flows generated by the valued asset, and the future use of the valued
asset.
2. The
discount rate may vary from year to year during the forecast period. The
determination of the discount rate must be justified, based on the valuation
basis, the valuation purpose, the type of valued asset, the asset’s economic
life or holding period, geographic differences, exchange rates (if applicable),
and the type of cash flow being considered.
3. The
discount rate is determined based on market data and using one of the following
methods: the average return rate of similar assets in the market; the weighted
average cost of capital (WACC); or the capital asset pricing model (CAPM)./.