Valuation Overview: Indian Meaning of Value and Premises of Valuation

Valuation in India has undergone a significant transformation, evolving from a highly unregulated residual profession dominated by individual discretion to a scientific, regulated discipline under the oversight of the Insolvency and Bankruptcy Board of India (IBBI). The government identified that unregulated valuations could distort economic growth and misdirect banking funds; thus, the profession was structured into distinct asset classes: Land & Building, Plant & Machinery, and Securities & Financial Assets. This chapter provides the fundamental conceptual framework for understanding how value is defined and the premises upon which these valuations are built.

1. Indian Meaning of Value

In the Indian professional context, the term "value" is not absolute; it is highly contextual and changes based on purpose, use, situation, and the participants involved. As the source aptly notes, "A value has a value, only if its value is valued".

Contextual Classifications of Value

The workbook identifies four primary contexts in which value is derived:

• Value in Use: This refers to the specific value a person derives from the actual usage of an asset. It is subjective and dependent on the utility the asset provides to its current owner.
• Value in Exchange: This is the most common form of value, often referred to as Price in common parlance. It represents what a person seeks when exchanging an asset for money or an equivalent asset.
• Value in Store: This concept applies to assets whose value evolves with the passage of time while being held. An example provided is agricultural produce like rice and wheat stored in warehouses, which may become more valuable a year from their initial storage date.
• Value in Specific Situations: Value can fluctuate drastically based on external circumstances. For instance, the perceived value of vegetables might spike post-curfew, or the value of life-saving drugs can escalate during an epidemic.

Standardized Valuation Terms

To ensure consistency across the profession, several specific types of value are defined:

The Value Equation and Influencing Factors

Value is not merely a number but a reflection of utility and scarcity. The source illustrates this with the "SIM pin" example: a small pin has a very high value when needed to open a mobile phone's SIM slot but is otherwise considered trivial. Similarly, the value of water is exponentially higher in a desert than in a resource-rich area.

Factors affecting value include:

• Purpose and Use: Why and how the asset is being valued.
• Quality and People: The inherent characteristics of the asset and the motivations of the parties involved.
• Location and Affordability: For example, similar quality vegetables command higher prices in upscale areas compared to remote suburbs due to the varying affordability of the local population.

2. Premise of Valuation

The Premise of Valuation refers to the basic presumptions under which a valuer operates. These premises enable the valuer to derive a figure that parties can reliably use for transactions. These concepts are closely linked to the conventions of accounting found in the International Financial Reporting Standards (IFRS).

Core Premises

The two fundamental premises used in valuation are:

I. Going Concern

This is a fundamental presumption in both bookkeeping and valuation.

• Definition: It assumes that a company or legal entity will continue its operations for the foreseeable future.
• Impact on Valuation: This premise allows the valuer to factor in the usability and future earning capacity of the asset.
• Practical Application: It facilitates the calculation of depreciation and amortization over the asset’s useful life, ensuring that the value remains accurate year-on-year.

II. Liquidation

This premise is applied when the "Going Concern" assumption is no longer valid.

• Triggers: Liquidation is invoked due to unviable future operations, accumulated losses, owner disinterest, or changes in government regulations.
• Impact on Valuation: All assets are valued at their disposal or resale value, rather than their value-in-use. Similarly, all liabilities are valued at their settlement value.
• Importance: It serves as a benchmark or "floor" value, ensuring that creditors receive fair treatment and any residue is identified for owners.

Key Takeaways for Registered Valuers

• Professionalization: The shift toward "Registered Valuers" under IBBI aims to align Indian practices with international standards, providing greater transparency and stakeholder confidence.
• Context is King: A valuer must always identify the purpose of the valuation (e.g., sale, taxation, or liquidation) before selecting a meaning of value or a premise.
• Standardization: While valuation remains an "inexact science" prone to subjectivity, the use of defined terms like Fair Value and Intrinsic Value helps mitigate bias.
• Documentation as Insurance: For any valuation to be defensible in legal or regulatory audits, it must be supported by robust internal and external documentation.

Important Terms

• IBBI: Insolvency and Bankruptcy Board of India, the regulatory authority for valuers.
• Asset Classes: The three categories for registration: Land & Building, Plant & Machinery, and Securities & Financial Assets.
• Marriage Value: Another term for Synergistic Value.
• Book Value: The cost of an asset minus depreciation/amortization.
• Going Concern: The assumption that a business will continue to operate indefinitely.