3.2 Procedures involved in the preparation of a valuation report
i. The procedures adopted in carrying out a valuation may vary with circumstances, nature and purpose of valuation as well as information and time available. The principal procedures adopted by the RV in carrying out the valuation should be set out briefly in the report. Such procedures may typically include:
Review of past financials;
Review and analysis of financial projections;
Industry analysis;
SWOT analysis;
Comparison with similar transactions;
Comparison with other similar listed companies;
Discussions with the management;
Review of principal agreements/documents etc;
Site visit (external, internal or both) or desktop valuation;
Any assumption made for internal condition must be stated like in case of desktop valuation, a RV must state that the basis of the report is photographs provided, documents provided and secondary research only; and
Process of site identification, i.e., self-identified or with the help of clients representative or client itself.
ii. The RV should also include in his report:
an affirmative statement that information provided and assumptions used by management/others in developing projections have been appropriately reviewed, enquiries made regarding basis of key assumptions in context of business being valued and the industry/economy; and
an affirmative statement on adequacy of information and time for carrying out the valuations;
iii. The RV should mention any key factors which have a material impact on the valuation, including inter alia the size or number of the assets or shares of the company, its/their materiality or significance, minority or majority holding and changes on account of the transaction, any impacts on controlling interest, diminution or augmentation therein and marketability or lack thereof; prevailing market conditions and government policy in the specified industry as a disclaimer depending upon the factor.
iv. In case of valuation of tangible assets, there may be impact on the value due to faulty structural design or contamination. Based on the individual circumstances, the RV may decide on how to use such information in the valuation report.
Understanding the Guidelines on Use of Limitations, Caveats and Disclaimers by the Registered Valuers in Valuation Reports
Insolvency and Bankruptcy Board of India having office at 7th Floor, Mayur Bhawan, New Delhi – 110001 issued Guidelines on Use of Limitations, Caveats and Disclaimers by the Registered Valuers in Valuation Reports on 1st September, 2020, Some key features are mentioned below for knowledge gain purposes of the whole fertanity & the ecosystem attached to it.
3.3 Caveats, Limitations and Disclaimers
i. Caveats are warnings or cautions to the client/user of services.
ii. Limitation is a restriction on the scope of the RV’s work including inspection or investigation of the data available for analysis that may be present and known to the RV at the outset of the valuation engagement or that may arise during the course of a valuation assignment.
iii. A disclaimer is a statement intended to specify or delimit the scope of rights and obligations that may be exercised and enforced by parties in a legally recognized relationship. It is a statement denying responsibility intended to prevent civil liability arising for particular acts or omissions.
iv. While caveat, limitations and disclaimers have different connotations, in the context of a valuation the clauses may get used in an interchangeable manner as limitation or a disclaimer by a RV could be caveat for the user of the report. Hence it is imperative that the users of the report are familiarized about the same to enable them to assess the impact of the disclaimer/caveat/limitation on the credibility and reliability of the report.
v. Any caveats, limiting condition or other disclaimers to the report must be clearly stated with appropriate specificity.
vi. In the preparation of a valuation report, the RV shall not disclaim liability for his expertise or deny his duty of “due care”. However, it is recognized that a RV, shall prepare the valuation report of the company based on information and records concerned as provided by the management. The management remains liable for the correctness and veracity thereof.
However, significant inputs provided to the RV by the management/owners should be considered, investigated and /or corroborated. In cases where credibility of information supplied cannot be supported, consideration should be given as to whether or how such information is used.
vii. The RV does not make or calibrate the projections but factors his response and the valuation assessment on the reliability and credibility of the information. The various projections of business growth, profitability, and cash flows etc, which are used in the valuation report are the company’s estimates. The RV should consider reliability and credibility of projections after testing the assumptions made by the management/owners/company in given market conditions and after sufficient inspection, enquiry, computation and analysis. The extent of evidence requires professional judgements and RV has to ensure that it is adequate for the purpose of valuation. The RV may disagree with the projections if they are conjectural or bordering on the unreal and accordingly make necessary modifications.
viii. A RV has the right to demand relevant information and basis of the projections before commenting thereon. It is the duty of the entity being valued to be fair and to provide accurate information about the subject asset.
ix. In a valuation report the RV can state that the assumptions are statements of fact provided by the company and not generated by the RV. This warning statement is necessary as data provided by the company is often construed be a part of the valuation report. Notwithstanding this, the RV has to carry out sufficient inspection, enquiry, computations and analysis to ensure that valuation is properly supported.
x. All valuations are to be carried out in sufficient detail to comply with the requirements of “due care”. However, it can be reasonably expected that circumstances may place certain limitations regarding access to information or the time available. Hence, one has to recognize limitations of time and context in valuations, as it cannot constrain business need and flexibility.
xi. Keeping in view business needs and circumstances and, in the interest of transparency, any significant concerns regarding the justification, the information or the time available to complete the valuation be stated in the valuation report, together with appropriate explanation and implications.
xii. The effort, diligence and level of expertise applied by the relevant Registered Valuer, need to be stated in the valuation report.
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