KPMG in Sri Lanka organises exclusive webinar on ‘valuation’

Every asset has a value, however the methods and techniques used in asset valuation will vary from case to case. As a result of this, there is much uncertainty associated with the term ‘valuation’. 

KPMG in Sri Lanka Principal – Deal Advisory Shiluka Goonewardene

KPMG in Sri Lanka Director – Deal Advisory (Valuations and Restructuring) Ajantha Weerasekara

KPMG Academy conducted a free webinar on ‘Introduction to Valuation’ featuring KPMG Director, Deal Advisory Ajantha Weerasekara, on 4 August. This webinar was conducted with the aim of shedding light on the fundamentals of valuation on different asset classes, used for different requirements and were presented with six key areas related to the topic followed by an interesting Q&A session.

The key takeaways of the webinar: 

What is valuation and why do we need it?

The webinar kicked off with Ajantha’s simple explanation, valuation is an estimation of the value or worth of a particular asset. He further went on to explain that valuation is important for transactions and tax and regulatory purposes of both business and personal nature. Further, valuations are an essential part of accounting and reporting requirements, and also considered in capital market transactions and by corporates in their internal decision-making process, such as decisions on how to improve value and identify value drivers. 

Key valuation concepts

The webinar brought light to four of the main concepts: 

• Fair value is the value arrived at based on what a hypothetical prudent buyer (who is willing but not anxious to buy) would be prepared to pay to a seller(who is willing but not anxious to sell), in circumstances where both buyer and seller are fully informed of all operational and financial arrangements in relation to the business/asset.
• Market value is the price at which a particular asset is traded between willing buyers and sellers in a competitive auction setting. Market value can be the same as fair value however, this is not practiced in Sri Lanka. Price discovery will depend on the level of depth and efficiency in the marketplace.
• Transaction value is the price at which a buyer and a seller agrees to exchange ownership of a business/asset, based on the prevailing circumstances affecting the transaction.
• Value on Use/Worth is the value of an asset to a particular owner or prospective owner for individual investment or operational objectives. This basis of value reflects the benefits received by an entity from holding the asset and therefore does not involve a presumed exchange.

What can be valued and how?

Any asset can be valued, specifically income generating assets or public assets. These can be classified into two broad categories:

• Tangible assets which includes land and buildings, plant and equipment, vehicles, vessels, art and biological assets and infrastructure assets such as powerplants, roads and airports.
• Intangible assets which includes businesses – from mature to start-up business valuations, intellectual property, licences, permits and software applications.

Valuation approaches

•  
• Market approach 
• Income approach
• Cost/Assets Base approach

Each of these approaches contain intrinsic value methods and relative value methods. Valuation is done based on intrinsic characteristics in the intrinsic value method. For example, a business would be valued by putting value on future income generating capabilities. However, in the relative value method, valuation is based on the value of a similar asset or based on rule of thumb.

Commonly used valuation methodologies

When using market approach to value intangible and tangible assets, market price is often used if it is listed in the stock market. Relative valuation methods such as direct comparisons of companies or assets can also be used however, it is not the most ideal approach for intangible asset valuations, as no assets will be identical. When it comes to tangible assets such as property valuations, the comparison method is a commonly used relative valuation method under the market approach. 

Income approach involves the use of methods such as discounted cash flow, earnings capitalisation, residual income and market multiples in valuing intangible assets however, of these methods discounted cash flow method and market multiples method are most commonly used. Financial services are one exception to this, as the residual method is often used for this purpose. Income approach is typically used when valuing tangible assets, more specifically, income method, profit capitalisation and discounted cash flow methods can be used.

In valuing intangible assets under the cost approach, the net asset value method is generally used. However, for valuing tangible assets such as land and buildings the contractor test method is used.

Key considerations in valuations

• Study what needs to be valued – in detail
• Understand the purpose of the valuation – in detail. For example, it could be for reporting or issuing shares to the public.
• Know who will use/relay upon the valuation
• Select the appropriate method of valuation based on the above – at least two methods. The method can be selected by answering the questions – What? Why? Who?
• Check if the necessary data and information are available and accessible to carry out the valuation effectively
• Make sure the assumptions and value drivers can be backed up by proper evidence and reasons

Companies may seek valuations for various reasons such as corporate governance or regulatory reasons, or because management wants to understand value better so it can make optimal decisions. In these instances, a company is often at a critical juncture and therefore, accuracy is often utmost importance. KPMG in Sri Lanka has a comprehensive team of professionals equipped with the right tools and experience, headed by Principal – Deal Advisory Shiluka Goonewardene, prepared to provide efficient and focused advisory assistance on crucial issues to enable clients make effective decisions based on accurate and relevant information.