Impact of COVID on Business Valuation and Financial Reporting

1. Chander Sawhney
FCA, FCS, Registered Valuer (IBBI)
“Impact of COVID on Business
Valuation and Financial
Reporting”
Webinar
12th May, 2020

2. I. Valuation Process
II. Valuation Approaches &
Methodologies
III. Financial Reporting Valuations
IV. Impact of COVID on Business
Valuations
V. Q&A
Agenda

3. I. Valuation Process

4. Understanding Purpose
of Valuation
Information requisition
from the Company
Financial Analysis and
Normalisation
Adjustments
Understanding Industry
Characteristics and
Trends
Forecasting and
reviewing Company
Performance
Considering and
Applying appropriate
Valuation
Methodologies
Performing Value
adjustments, Value
Conclusion,
Documentation and
Reporting
Valuation Process

5. Understanding
Regulatory
Valuations
in India under
different laws

6. II. Valuation Approaches &
Methodologies

7. Valuation
Approaches &
Methodologies

8. Valuation Methodologies vary across Business Cycle
Growing
Cos.
 Turnover/Profits: Increasing still Low
 Proven Track Record: Limited
 Valuation Methodology: Substantially on Business Model
 Cost of Capital: Quite High
High Growth
Cos.
 Turnover/Profits : Good
 Proven Track Record: Available
 Valuation Methodology: Business Model with Asset Base
 Cost of Capital: Reasonable
Mature
Cos.
 Turnover/Profits: Saturated
 Proven Track Record: Widely Available
 Method of Valuation: More from Existing Assets
 Cost of Capital: May be High
Declining
Cos.
`
 Turnover/Profits: Drops
 Proven Track Record: Substantial Operating History
 Method of Valuation: Entirely from Existing Assets
 Cost of Capital: N.A.
 Turnover/Profits: Negligible
 Proven Track Record: None
 Valuation Methodology: Entirely on Business Model +
Qualitative aspects
 Cost of Capital: Very High
Start Up
Cos.
Turnover
/
Profits
Time

9. Judicial guidance on
Choice of Valuation
approaches
In General, for Business Valuation on going concern basis, Income Approach is
preferred;
The dominance of profits for valuation of share was emphasised in “McCathies
case” (Taxation, 69 CLR 1) where it was said that “the real value of shares in a
company will depend more on the profits which the company has been making and
should be capable of making, having regard to the nature of its business, than upon
the amount which the shares would realise on liquidation”.
This was also re-iterated by the Indian Courts in Commissioner of Wealth Tax v.
Mahadeo Jalan’s case (S.C.) (86 ITR 621) and Additional Commissioner of Gift Tax v.
Kusumben D. Mahadevia (S.C.) (122 ITR 38).
 However, Asset Approach is preferred in case of Asset heavy companies and on
liquidation; The liquidated value of the Net Assets is also considered the minimum
value of the whole company and will prevail even if Earning capacity is low or
negative subject to any discounting in appropriate circumstances (like Reluctance
to wind up, Ability to control, Tax adjustments etc.)
 Market Approach is preferred in case of listed entity and also to evaluate the value
of unlisted company by comparing it with its peers;
In selecting a model, data availability and
quality/accuracy of data can be limiting
factors and require suitable adjustments
considering industry trends and valuer’s
experience.

10. IVSC guidance on
Choice of Valuation
approaches
As per IVS 105, Valuation Approaches and Methods
Para 10.3, the goal in selecting valuation approaches and methods for an asset is to find the most
appropriate method under the particular circumstances. No one method is suitable in every possible
situation.
Para 10.4, Valuers are not required to use more than one method for the valuation of an asset,
particularly when the valuer has a high degree of confidence in the accuracy and reliability of a single
method, given the facts and circumstances of the valuation engagement.
However, valuers should consider the use of multiple approaches and methods and more than one
valuation approach or method should be considered and may be used to arrive at an indication of value,
particularly when there are insufficient factual or observable inputs for a single method to produce a
reliable conclusion. Where more than one approach and method is used, or even multiple methods within
a single approach, the conclusion of value based on those multiple approaches and/or methods should be
reasonable and the process of analysing and reconciling the differing values into a single conclusion,
without averaging, should be described by the valuer in the report.
Para 10.5, It is the valuer’s responsibility to choose the appropriate method(s) for each valuation
engagement.
Para 10.7, Valuers should maximise the use of relevant observable market information in all three
approaches.

11. Valuation
methodologies &
Value impact
Major Valuation Methodologies Ideal for Result
Net Asset Value
Net Asset Value (Book Value) Minority Value
Equity Value
Net Asset Value (Fair Value) Control Value
Comparable Companies Multiples (CCM) Method
Price to Earning , Book Value
Multiple Minority Value
Equity Value
EBIT , EBITDA Multiple Enterprise Value
Comparable Transaction Multiples (CTM) Method
Price to Earning , Book Value
Multiple Control Value
Equity Value
EBIT , EBITDA Multiple Enterprise Value
Discounted Cash Flow (DCF)
Equity Control Value Equity Value
Firm Enterprise Value

12. III. Financial Reporting
Valuations

13. Regulations on Financial Reporting
• Ind AS 113 - Dedicated Standard on “Fair Value” Measurement – in line with global equivalents – IFRS 13 and
ASC 820 (US GAAP) covers Financial Reporting.
• Fair Value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current market conditions
• Fair Value is based on Willing Buyer; Willing Seller concept
• Known or Knowable at the measurement date
• Orderly means with Adequate Marketing
• Fair Value is a market-based measurement, NOT an entity-specific measurement
• Gives more preference to valuation methods relying on “Observable Inputs” than unobservable inputs as per
Fair Value Hierarchy
IND AS

14. Regulations on Financial Reporting
• Specific Standards for specific issues
• Ind AS - 109, 107 and 32 : Financial Instruments
• Ind AS - 102 : Share based payment
• Ind AS - 103 : Business Combination
• Ind AS - 38 : Intangible Assets
• Ind AS - 16 : Property Plant & Equipment
• Ind AS - 36 : Impairment of Assets
IND AS

15.  Factors considered in Valuation using Comparable Companies Multiples Methodology:
o Basis of selection of comparable companies (Market size / ROCE / Earning margins)
o Multiple used for valuation (Considering the type of business / Industry)
o Equity /Enterprise Multiples
o Adjustment of fair value of surplus assets
o Application of Market / Company specific Discounts / Premium (if any)
 Factors considered in Comparable Transaction Multiples Methodology:
o Source / Age / Parties among which transaction has taken place
o Multiple used for valuation (Considering the type of business / Industry)
 Factors considered in Discounted Cash Flow Methodology:
o Source of financial projections
o Specific adjustments w.rt. FCFF vs FCFE
o Factors considered for calculation of WACC in case of FCFF / Ke in case of FCFE
o Reasons for consideration of Company Specific additional Risk Premium (if any)
Key Factors considered in application of Valuation methodologies

16. IV. Impact of COVID on
Business Valuations

17.  Impairment of Assets ?
o Triggering Event
o Temporary / Permanent event
o Offset Impact of Government Stimulus
o Management + Auditor + Valuer
 Industry
o Positive / Negative Sectors
 Company
o Thorough review of Business Model
o Competitive advantages/disadvantanges
o Geographical Location of Business
o Time to Recovery
o Deeper penetration into Revenue, Cost, Working Capital, Leverage
o Type of Assets – Tangible , Intangible, Goodwill
Factors to consider during Business Valuation in COVID

18.  Factors to consider in Market based Valuation Methodology
o Valuation Date
o Past Average
o Subsequent Event
 Factors to consider in Discounted Cash Flow Methodology
o Detailing of Future Cash Flows and deeper understanding of Value drivers and underlying
assumptions of business
o Prospective Financial Information to cover “Known or Knowable” on Valuation Date
o Review of Cost of Capital (Historical v. Estimated)
o Incremental Risk Premium /CSRP / Alpha
 Impact of Uncertainty
 Sensitivity / Scenario Analysis
 Documentation
Factors to consider during Business Valuation in COVID

19. VI. Q&A

20. Chander Sawhney
Chartered Accountant & Registered Valuer (IBBI)
FCA, FCS, B.Com (H)
M: +91 9810557353
E: chandersawhney@gmail.com