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