This document provides guidance on methods for valuing shares and intangible assets. There are two main methods for valuing shares: net assets basis and earnings capacity basis. The net assets basis method includes break up value, book value, and appraisal value approaches. Earnings capacity basis uses dividend method or earnings method. Valuing intangible assets considers cost, future earnings potential, and value of exchanged securities. Guidance is also given on accounting standards for recording intangible assets. Links to additional resources on various topics are provided.

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3. Why do we need to undertake valuation of shares ? 1. when we are paying tax (wealth tax / gift tax / income tax / other taxes) 2. mergers and amalgamation of companies 3. issue of shares to employees 4. when there is need for reconstruction of the capital of the company 5. to show the value in books of accounts 6. other reasons as required by law

4. What are the methods of valuation of shares ? There are 2 mthods : 1. net assets basis and 2. earning capacity or yield basis.

5. What are the methods in Net Assets Based valuation methods? We have 3 methods of valuation in Net Assets based valuation methods. 1. break up value method 2. Book value method 3. Appraisal value method

6. When is break up value method more useful? When we are undertaking valuation of a sick company / closed company / a company which is not likely to remain operational

7. When is book value method more useful? For the purpose of taxation, and other similar formalities

8. When is appraisal value method more useful ? When we are undertaking valuation for the purpose of purchase / sale of shares etc.

9. How to undertake valuation in net assets based methods ? Find the value of assets, deduct the value of liabilities, find net assets. Divide net assets by number of shares to get the value of each share. Example : Assets = 100, liabilities = 40, number of shares are 5, (100-40)/5 = 12 per share so here the value of share is 12.

10. What is the difference between the three methods in Net Assets Based methods ? Break up value method – here we find the break up value of each asset – (what value we will get if we sell this asset) Book value method looks at book value (from the accounts of the company), appraisal value method looks at value based on appraisal by experts / independent valuers The value of share will be different in each of these three methods.

11. What is earning capacity / yield method ? Here the value of share is calculated by either of the following : 1. dividend 2. earning capacity

12. How to value share using dividend method ? Find the value of share using the following formula : (Dividend rate / normal dividend rate) * Paid up value of a share

13. How to value share using earnings method ? We will use the following formula for determination of value of share : - (earnings rate / normal earnings rate) * Paid up value of a share

14. How to find normal rate of return ? It is a crucial issue. The value of the share is based on normal rate of return. If we are prudent, we will be able to fix appropriate normal rate, thus the valuation will be proper. Normal rate depends on many factors and on the overall expectations of the investors.

15. Factors affecting normal rate of return? 1. whether it is secured or unsecured 2. investors expectations of risks 3. investors' perception of industry trend, future direction, likely risk 4. returns available in other sectors

16. Example .... Normal rate of return for government bonds will be less than corporate bonds, the normal rate for corporate bonds will be less than preference shares, which will also be less in comparison to equity shares. It all depends on investor's expectations of risks attached to the instruments

17. How to value share using fair value method ? Fair value method is arithematic mean of Net assets based value and yield based value. Thus its formula : = (Net assets based value + yield value) / 2

18. How to value intangible assets ? There are three important methods : 1. cost of the asset 2. future earning potential 3. if acquired in exchange of securities – then the value of the securities which have been exchanged

19. What is intangible asset? Non-Monetary asset – which doesn't have physical bases, but it can generate income for the enterprise in future.

20. What are the characteristics of intangible assets? 1. identifiability 2. control over a resource 3. expectation of future economic benefits flowing to the enterprise.

21. Is goodwill an intangible asset? Yes, but we DONT value goodwill and show in accounts, unless we have actually paid price for acquisition of goodwill

22. Example of intangible assets? Designs / drawings Patents Trademark Copyright know-how Software

23. How to record cost of intangible assets? Intangible assets should be values only if : 1. it is going to generate future economic benefits 2. its costs can be reliably measured. As soon as these critiria are fulfilled, we have to undertake costing of the intangible assets.

24. What are the accounting standards on valuation of intangible assets? AS 26 : It is the main document in India for valuation of intangible assets. If Intangible assets have been acquired / purchased through amalgamation etc. Read AS 14 for accounting standards.

25. What are the different phases in intangible assets? There are two phases in intanble assets : 1. research phase 2. development phase No Intangible assets should be recognised during research phase. They should be recognised only during development phase.

26. When does the development phase start ? When the intangible assets has been approved through feasibility study and it has been found fit to : 1. to generate economic benefit for the enterprise 2. it can be sold out in the market 3. it can be used commercially in production / technology

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