CIRCULAR

ON THE ISSUANCE OF VIETNAM VALUATION STANDARDS FOR THE MARKET APPROACH, COST APPROACH, AND INCOME APPROACH

Pursuant to the Law on Prices dated June 19, 2023;

Pursuant to Decree No. 14/2023/ND-CP dated April 20, 2023 of the Government on the functions, tasks, powers, and organizational structure of the Ministry of Finance;

At the request of the Director of the Price Management Department;

The Minister of Finance issues this Circular on Vietnam Valuation Standards for the market approach, cost approach, and income approach.

Article 1. Issue together with this Circular the following Vietnam Valuation Standards:

- Vietnam Valuation Standard on the Market Approach;

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- Vietnam Valuation Standard on the Income Approach.

Article 2. Entry in force

1. This Circular comes into force as of July 1, 2024.

2. Circular No. 126/2015/TT-BTC dated August 20, 2015 of the Minister of Finance on issuance of Vietnam Valuation Standards No. 08, 09, and 10 shall cease to be effective from the effective date of this Circular.

Article 3. Implementation

1. Relevant organizations and individuals shall implement the Vietnam Valuation Standards issued under this Circular.

2. Difficulties that arise during the implementation of this Circular should be reported to the Ministry of Finance for consideration./.

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PP. THE MINISTER
DEPUTY MINISTER




Le Tan Can

VIETNAM VALUATION STANDARDS

ON THE MARKET APPROACH
(Enclosed with Circular No. 32/2024/TT-BTC dated May 16, 2024 of the Minister of Finance)

Chapter I

GENERAL PROVISIONS

Article 1. Scope

This Vietnam Valuation Standard stipulates and guides the market approach for valuation in accordance with price regulations.

Article 2. Regulated entities

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2. Organizations and individuals conducting State valuations (hereinafter referred to as state-authorized valuation entities) in accordance with pricing laws.

3. Organizations and individuals requesting valuations (hereinafter referred to as valuation clients), and third parties using valuation reports based on valuation contracts (if applicable).

Article 3. Interpretation of terms

For the purposes of this Vietnam Valuation Standard, the following terms are defined as follows:

1. “Comparable asset” refers to an identical or similar asset to the asset being valued (hereinafter referred to as valued asset.

2. “Similar asset” refers to an asset of the same type and comparable to the valued asset in terms of intended use, functionality, legal characteristics, economic-technical features, key characteristics of the valued asset, and other factors (if applicable).

3. “Indicated price” refers to the price of the comparable asset after adjustments have been made for differences in comparison factors with the valued asset.

4. “Net total adjustment value” is the total adjustment based on comparison factors, accounting for both negative (downward adjustments) and positive (upward adjustments), without considering the absolute value of each adjustment.

5. “Gross total adjustment value” is the total adjustment based on comparison factors in absolute value.

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1. The market approach determines the value of a valued asset by comparing it to comparable assets that have known market prices. In the case of business valuations, additional information about the valued asset itself may also be used.

2. Depending on the type of asset, the market approach can be applied through various methods, including the comparison method, average ratio method, and sales comparison method.

The average ratio method and sales comparison method are only applicable to business valuations and are regulated under the Vietnam Valuation Standards for business valuation.

Chapter II

COMPARISON METHOD

Article 5. Applying the comparison method

1. The comparison method determines the value of the valued asset by examining, analyzing, and evaluating the comparable factors of similar assets and then adjusting the price of the comparable assets to serve as the basis for estimating the value of the valued asset.

2. The comparison method is applied to value assets that have been transferred, offered for purchase, or publicly listed for sale in the market.  An asset is considered to have been transferred, offered for purchase, or publicly listed for sale if at least three comparable assets can be obtained from different organizations or individuals who have transferred, offered for purchase, or publicly listed them on the market near the time and location of the valuation.

3. Steps to implement:

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b) Analyze the information;

c) Adjust for differences between the valued asset and the comparable assets;

d) Determine the indicated price of the comparable assets;

dd) Determine the value of the valued asset.

Article 6. Surveying and collecting information on comparable assets

1. Information on comparable assets includes legal, economic, and technical characteristics; the price of the comparable assets; the time, location, and parties involved in the transfer, purchase, or sale; conditions attached to the price, and other relevant information (if any).

2. The survey and collection of information on comparable assets must meet the following requirements:

a) Information collected on comparable assets must be objective and reflect actual conditions. It must be reviewed and assessed to ensure it can be used for analysis and calculation. Priority is given to information that is closest in time and location to the valuation of the valued asset;

b) A minimum of three comparable assets must be collected, with transfer, purchase, or sale dates occurring at or near the time of valuation, but no more than 24 months prior to the valuation date.

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If information is collected from offered purchase or sale prices, market price trends, information sources, and other price data must be evaluated and analyzed to make appropriate adjustments (if necessary) before using them as comparison prices;

c) Preference is given to selecting comparable assets that are closest in proximity to the valued asset. Selection is not limited by administrative boundaries of communes or districts within a province. If the information collection extends beyond the province, the valuer must state the reasons and limitations (if any) for this in the valuation report;

d) Information on comparable assets may be collected from one or more of the following sources: contracts, invoices, sales receipts; successful transaction results on exchanges; means of mass media; market survey forms; prices recorded in documents from regulatory agencies or businesses; auction or bidding results as per regulations; direct interviews; phone calls; emails or the internet; government price databases, organizations, businesses; and other sources as per regulations (if any).

3. The results of the survey and information collection on comparable assets must be recorded and stored in the form of data collection sheets with the signature of the information collector.

If additional survey forms, questionnaires, data collection sheets, or evaluation forms are used during the information collection process, the information collector must sign these forms.

If information is collected from the internet, the data collection sheet must clearly cite specific links to the information, and images must be stored as evidence.  Information collected from the internet must come from official websites of organizations operating under legal regulations.

If the information is collected from purchase or sale quotes, it must include the name, address, tax identification number (if any) and the official stamp of the quoting entity, the time the information was provided, and the validity of the quote.

Article 7. Information analysis

1. Information analysis is conducted to identify similarities and differences, advantages and disadvantages, based on comparison factors between the valued asset and the comparable assets.

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3. The analysis of comparison factors between the valued asset and comparable assets is carried out using the following methods:

a) Quantitative analysis: This includes pairwise comparison, statistical analysis, regression analysis, cost analysis, and other similar methods to determine the adjustment value in terms of money or percentage (%);

b) Qualitative analysis: This includes comparative correlation analysis, ranking analysis, and interviews with relevant parties.

Article 8. Adjusting differences between the valued asset and comparable assets

1. When adjusting for differences between the valued asset and comparable assets, quantitative comparison factors (those that can be converted into monetary values) should be adjusted first, followed by qualitative comparison factors (those that cannot be converted into monetary values).

2. The adjustments for differences between the valued asset and comparable assets include:

a) Object of adjustment:  This refers to the prices of comparable assets that have been transferred, offered for purchase, or offered for sale in the market, with reasonable adjustments made to reflect the prevailing transaction prices in the market for comparable assets;

b) Basis for adjustment: Adjustments are made based on the differences in comparison factors between the comparable asset and the valued asset;

c) Principles of adjustment:

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When adjusting the price for differences in one comparison factor, all other comparison factors are held constant (assumed to be the same). If the valued asset has inferior qualities compared to the comparable asset, the price of the comparable asset is adjusted downward (-). If the valued asset has superior qualities compared to the comparable asset, the price of the comparable asset is adjusted upward (+).  If the valued asset and the comparable asset are identical in a given comparison factor, no adjustment is made.

Each adjustment for comparison factors must be supported by evidence gathered from the market, such as data collection forms, information analysis reports, market research reports, or other relevant documents;

d) Methods of adjustment:

Absolute monetary adjustment: This method is used when the difference in comparison factors can be expressed as an exact monetary value, calculated through specific computations.

Percentage adjustment: This method is used when the difference in comparison factors can only be estimated as a relative adjustment in percentage terms;

dd) Adjustment value:

The adjustment value for differences in comparison factors must be estimated based on market transaction data, with a thorough analysis and assessment of how each comparison factor affects the value of the asset;

e) Order of adjustments:

Adjustments are first made for the group of comparison factors related to legal characteristics and transaction conditions, followed by adjustments for the group of economic and technical characteristics.  The price after adjustments for legal and transaction factors is then used to adjust for the economic and technical characteristics of the asset.

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g) Control principle:

Ensure that the difference between the price of the comparable asset and its indicated price, as regulated in Article 9 of this Standard, aligns with market evidence.

Ensure that the difference between each indicated price and the average of the indicated prices does not exceed 15%.

Article 9. Determining the indicative value of comparable assets

1. The indicative value of comparable assets serves as the basis for estimating the value of the valued asset.

2. The adjustment for comparison factors and the determination of the indicative value of comparable assets are shown in the following adjustment table:

No.

Comparison factor

Unit

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Comparable asset 1

Comparable asset 2

Comparable asset 3

Comparable asset …

A

Market price (before adjustment)

Known

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Known

Known

B

Price after adjustment

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C

Adjustment for comparison factors

C1

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Adjustment rate

%

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Adjustment amount

VND

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Price after adjustment 1

VND

C2

Comparison factor 2

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Adjustment rate

%

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Adjustment amount

VND

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VND

C3

Comparison factor 3

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Adjustment rate

%

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Adjustment amount

VND

Price after adjustment 3

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C4

Comparison factor 4

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Adjustment rate

%

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Adjustment amount

VND

Price after adjustment 4

VND

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D

Indicative value

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D1

Average indicative value

VND

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D2

Deviation from the average indicative value

%

E

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E1

Total gross adjustment value

VND

E2

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times

E3

Adjustment margin

%

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E4

Total net adjustment value

VND

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Article 10. Determining the value of the valued asset

1. The value of the valued asset is determined based on the indicated prices of comparable assets, along with an analysis of the quality of the information from the comparable assets (regarding the source, reliability, and relevance of the information) and the following criteria:

a) The smallest total gross adjustment value (i.e., the smallest absolute sum of all adjustments);

b) The fewest number of adjustments;

c) The smallest adjustment range (i.e., the smallest adjustment amount or percentage for a comparison factor);

d) The smallest total net adjustment value (i.e., the smallest sum of all net adjustments).

2. If necessary, the trends and fluctuations of market supply and demand should be assessed before finalizing the valued asset's value using the comparison method./.

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VIETNAM VALUATION STANDARDS

ON THE COST APPROACH
(Enclosed with Circular No. 32/2024/TT-BTC dated May 16, 2024 of the Minister of Finance)

Chapter I

GENERAL PROVISIONS

Article 1. Scope

This Vietnam Valuation Standard stipulates the cost approach for valuation in accordance with price regulations.

Article 2. Regulated entities

1. Valuers and valuation firms providing valuation services as per legal regulations on pricing.

2. Organizations and individuals conducting State valuations (hereinafter referred to as state-authorized valuation entities) in accordance with pricing laws.

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Article 3. Interpretation of terms

For the purposes of this Vietnam Valuation Standard, the following terms are defined as follows:

1. “Cost approach” refers to the method of determining the value of an asset being valued (hereinafter referred to as valued asset) by estimating the cost of producing an identical or similar asset and accounting for depreciation of the valued asset.

2. “Physical depreciation” refers to the loss in an asset's utility, leading to a decrease in its value due to physical damage to the asset or its components, caused by the effects of time and normal use.

3. “Functional depreciation” refers to the loss in utility when an asset is less efficient than a substitute asset, leading to a decrease in value.

4. “External depreciation” refers to the loss in value caused by external factors such as economic conditions or location.  External depreciation due to location applies only to real estate and/or intangible assets related to real estate and occurs when changes in infrastructure, surroundings, or natural environments reduce the asset's value.

5. “Substitute asset” refers to an asset with similar functionality and utility to the valued asset, designed or built using newer technology, materials, or techniques.

6. “Total depreciation value” refers to the sum of the asset's physical, functional, and external depreciation at the time of valuation.

7. “Curable depreciation” can be addressed if:

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b) The cost of repair is greater than the added value, but the repair is necessary to maintain the value of other parts of the valued asset.

8. “Economic life” refers to the time period during which an asset generates economic benefits, starting from when it was newly produced or constructed and put into use.

9. “Actual life” refers to the number of years since the asset was completed and put into use, up to the valuation date.

10. “Effective life” refers to the number of years that reflects the actual condition of the valued asset at the time of valuation. The effective life depends on the maintenance and upkeep of the asset.

11. “Physical life” refers to the number of years the asset can be used before it becomes physically unusable for its originally intended purpose due to physical damage or wear and tear, without accounting for functional obsolescence or the impact of external factors. This can be determined through the manufacturer's technical specifications and the asset's construction features.

12. “Replacement cost” refers to the cost to create or acquire a 100% new substitute asset at the time of valuation.  

13. “Reproduction cost” refers to the cost to produce or acquire an identical asset to the valued asset, as it was when newly created at the time of valuation.

Chapter II

SPECIFIC PROVISIONS

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The cost approach is typically applied in the following cases:

1. There is insufficient market information to apply the market approach or income approach.

2. When estimating the cost of constructing a new asset or appraising newly built or manufactured assets.

3. To compare and verify with other valuation approaches.

Article 5. Replacement cost method

1. The replacement cost method determines the value of the valued asset based on the difference between the replacement cost and the asset's depreciation value.

2. The formula for the replacement cost method is:

Estimated value of the valued asset

=

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-

Total depreciation value of the valued asset (excluding any functional depreciation already reflected in the replacement cost)

Article 6. Reproduction cost method

1. The reproduction cost method determines the value of the valued asset based on the difference between the reproduction cost and the asset's depreciation value.

2. The formula for the reproduction cost method is:

Estimated value of the valued asset

=

Reproduction cost (including the manufacturer's/investor's profit)

-

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Article 7. Summation method

1. The summation method (also known as the asset method) determines the value of the valued asset by adding up the individual values of its components.

2. This method is typically used to appraise assets such as enterprises or assets whose value primarily depends on the value of their individual components.

3. The formula for the summation method is

Estimated value of the valued asset

=

Where:

V_i: is the value of component i of the valued asset, determined by the valuation approaches and methods outlined in the Vietnam Valuation Standards;

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i: i-th component.

Article 8. Components of reproduction and replacement costs and important considerations

1. Some components of reproduction cost and replacement cost that need to be considered and analyzed during the valuation process include: material costs, equipment costs, research and testing expenses, labor costs, transportation, design, consulting, management, financial expenses during production, non-refundable taxes, installation, trial operation, contractor profit, manufacturer/investor profit, taxes and charges payable, and other costs as required by law.

2. The determination of reproduction and replacement costs must align with the valuation base and assumptions made during the valuation engagement.

3. When determining reproduction costs, if identical materials or equipment cannot be sourced, similar materials or equipment may be considered.

4. When determining replacement costs, the substitute asset must be identified based on its functions and uses, and the cost to create or acquire the substitute asset must be estimated accordingly.

5. Reproduction and replacement costs should be based on market information collected at the time of valuation unless otherwise specified by law, such as when regulatory agencies provide cost norms, unit prices, investment rate per unit.

Article 9. Manufacturer/Investor profit

1. The manufacturer/investor's profit in reproduction or replacement costs is determined as follows:

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b) The profit of the manufacturer/investor in the reproduction cost or replacement cost is calculated by multiplying (x) the average ratio determined in point a of this clause by the reproduction cost or replacement cost, excluding the profit of the manufacturer/investor.

2. In cases where the method specified in clause 1 of this Article cannot be applied, use the standard set by the competent state authority (if available).

Article 10. Depreciation value determined using the comparison technique

1. The comparison technique determines the depreciation value of an asset by comparing it with the depreciation values of similar assets that have been transacted in the market.

2. The depreciation value is determined as follows:

a) Collect information and select at least two similar assets that have been successfully transacted or offered for purchase or sale in the market within the past year from the valuation date;

b) Based on the assessment of key comparison factors (e.g., sales conditions, financial terms), adjust the transaction price of the similar assets to derive the indicated prices that reflect the characteristics of the valued asset.  In the case of real estate, the value of land use right or land lease right (if applicable) of similar assets must be excluded to reflect the market value of the asset on the land;

c) Determine the cost to create a new, similar asset at the transaction time of the comparable assets (or the asset on the land in the case of real estate), without depreciation or obsolescence, but including the manufacturer's/investor's profit;

d) Subtract the result from b) from the result from c) to determine the depreciation value of the comparable assets. Then, calculate the depreciation rate by dividing the depreciation value by the cost to create the new comparable asset. Based on this, determine the depreciation rate of the valued asset;

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Article 11. Depreciation value determined using the effective life technique

The depreciation rate of an asset using the effective life technique is determined as follows:

1. Calculate the depreciation rate of the valued asset:

Depreciation rate

=

Effective life

x 100%

Economic life

2. Determine the replacement or reproduction cost, then multiply by the depreciation rate calculated in section 1 to determine the total depreciation value of the valued asset using the replacement or reproduction cost method.

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1. The total depreciation value of an asset is determined by analyzing its physical, functional, and external depreciation and adding these depreciation values together.

2. The physical depreciation value is determined using one of the following methods:

a) For curable physical depreciation, the physical depreciation value is estimated by the cost to repair or rectify wear and obsolescence (this cost includes the total expenses such as purchasing new parts and removing old ones) after deducting any income from the sale of old, removed parts (if applicable);

b) Determine the physical depreciation rate based on an analysis of the asset's utility at the time of valuation to estimate the physical depreciation value.  In specific:

Physical depreciation rate

=

Utilization level

x 100%

Designed utilization level

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c) Determine the physical depreciation rate based on the ratio of the asset’s effective life to its physical life.

Formula:

Physical depreciation rate

=

Effective life

x 100%

Physical life

Determine the replacement or reproduction cost, then multiply by the calculated physical depreciation rate to determine the physical depreciation value using the replacement or reproduction cost method;

d) Determine the physical depreciation rate based on an evaluation of the wear of the asset’s key components.

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Where:

H: Physical depreciation rate of the valued asset as a percentage;

H_i: Physical depreciation rate of the i-th key component as a percentage;

T_i: Proportion of the i-th key component in the total asset value;

n: Total number of key components of the valued asset;

i: The i-th key component.

Determine the replacement or reproduction cost, then multiply by the calculated physical depreciation rate to determine the physical depreciation value using the replacement or reproduction cost method.

2. Determining functional depreciation value:

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b) For curable functional depreciation, the functional depreciation value is calculated as the total cost of rectification after deducting any income (if applicable) from the sale of removed or replaced parts (if applicable);

c) Functional depreciation due to high capital costs arises when changes in design, production materials, or new technology result in a substitute asset with similar functionality but lower investment costs than the valued asset. This type of depreciation, which cannot be rectified, is determined by the difference between the reproduction cost and the replacement cost if the reproduction cost is higher than the replacement cost for the same asset;

d) Functional depreciation due to high operating costs occurs when changes in design, technology, or superior productivity result in substitute assets with lower operating and production costs than the valued asset. The value of this depreciation, which cannot be rectified, is determined as follows:

Analyze the operational reports of the valued asset to determine the operating cost per unit of product produced by the valued asset;

Determine the operating cost per unit of product produced by the substitute asset. Then, calculate the difference in operating costs per unit of product between the valued asset and the substitute asset;

Estimate the remaining economic life of the asset from the valuation date;

Determine the total annual operating cost difference based on the annual product output of the valued asset and the operating cost difference throughout the asset’s remaining economic life;

Deduct the total annual operating cost difference based on the corporate income tax effect on the additional income (due to using the substitute asset with lower operating costs than the valued asset);

Discount the total annual operating cost difference (throughout the remaining economic life) to the valuation date using a discount rate that reflects the risk associated with using the valued asset;

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3. Determining external depreciation value

External depreciation includes both economic depreciation and value reduction due to location.  This type of depreciation is usually irreparable.

External depreciation value is determined through market analysis, direct capitalization of lost income due to external depreciation, or by subtracting physical and functional depreciation values from the total depreciation value of the asset.

External depreciation value is typically determined after the physical and functional depreciation values have been established, as external depreciation is caused by outside factors, independent of the valued asset itself.

a) Estimating external depreciation through market analysis:

Use market information analysis to assess the value of the valued asset by examining the transaction information of similar assets that have been successfully sold in the market;

b) Estimating external depreciation by directly capitalizing lost income:

When the asset generates income, the lost income due to external economic or location factors can be capitalized to determine the total lost income in the asset’s overall value. This lost income corresponds to the external depreciation value.

The estimation of total lost income is carried out as follows: Analyze market data (related to economic and location factors) to estimate the annual lost income; discount the annual lost income to determine the total lost value's effect on the asset's value. If the lost income is stable and regular, the lost income stream is capitalized using an appropriate capitalization rate. If the lost income fluctuates annually, the lost income stream is discounted using the discounted cash flow (DCF) method.  The capitalization rate and DCF analysis are conducted in accordance with the Vietnam Valuation Standards on the Income Approach./.

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VIETNAM VALUATION STANDARDS

ON THE INCOME APPROACH
(Enclosed with Circular No. 32/2024/TT-BTC dated May 16, 2024 of the Minister of Finance)

Chapter I

GENERAL PROVISIONS

Article 1. Scope

This Vietnam Valuation Standard stipulates and guides the income approach for valuation in accordance with price regulations.

Article 2. Regulated entities

1. Valuers and valuation firms providing valuation services as per legal regulations on pricing.

2. Organizations and individuals conducting State valuations (hereinafter referred to as state-authorized valuation entities) in accordance with pricing laws.

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Article 3. Interpretation of terms

For the purposes of this Vietnam Valuation Standard, the following terms are defined as follows:

1. “Income approach” refers to the method of determining the value of an asset by converting future cash flows generated by the asset into present value.

2. “Direct capitalization method” refers to a valuation method that determines the value of an asset by converting projected stable annual net income into present value using an appropriate capitalization rate.

3. “Discounted cash flow (DCF) method” refers to a valuation method that determines the value of an asset by converting projected future cash flows into present value using an appropriate discount rate.

4. “Capitalization rate” refers to the rate used to convert projected stable annual net income into present value.

5. “Discount rate” refers to the rate used to convert future cash flows into present value.

6. “Terminal value” refers to the projected value of an asset at the end of the DCF forecast period (at the end of the cash flow analysis period).

Article 4. Income approach and valuation methods used in the income approach

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2. The valuation methods used in the income approach include the direct capitalization method and the DCF method, applied to assets that meet the criteria outlined in section 1 of this article, except in the following cases:

a) For businesses, the valuation methods used in the income approach include the free cash flow to firm (FCFF) method, the dividend discount method, and the free cash flow to equity (FCFE) method, as regulated in the Vietnam Valuation Standards on Business Valuation;

b) For intangible assets, the valuation methods used in the income approach include the royalty relief method, the excess earnings method, and the incremental income method, as regulated in the Vietnam Valuation Standards on Intangible Asset Valuation.

Chapter II

DIRECT CAPITALIZATION METHOD

Article 5. Applying the direct capitalization method

1. The formula for the direct capitalization method is:

Where:

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I: Net income generated by the asset

R: Capitalization rate

2. Steps to implement:

a) Determine the net income generated by the asset;

b) Determine the capitalization rate;

c) Calculate the asset value using the direct capitalization formula.

Article 6. Determining the net income generated by the asset (I)

1. The formula for determining net income:

Net income

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Potential gross income

-

Loss of revenue due to underutilization of capacity and payment risk

-

Operating expenses

2. The potential gross income, vacancy loss, and operating expenses are determined based on market survey data from at least three comparable assets, referencing past income and operating expenses of the valued asset, as well as supply-demand conditions, industry growth prospects, and other factors influencing the forecast of potential gross income, vacancy loss, and projected operating expenses of the valued asset.

3. Potential gross income is the total stable annual income generated by fully utilizing the asset.

4. Loss of revenue due to underutilization of capacity and payment risk are calculated by multiplying the loss rate by the potential gross income, where the loss rate is estimated by collecting and analyzing market information of comparable assets.

5. Operating expenses refer to the annual costs necessary to maintain the income stream from the asset.

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Article 7. Determining the capitalization rate (R)

1. Based on the purpose of the valuation, the characteristics of the valued asset, the valuation basis, and the collected information, the capitalization rate is determined using one of two methods: the comparison method and the loan-to-equity analysis method.

2. Comparison method

a) The comparison method determines the capitalization rate for the valued asset by comparing it with the capitalization rates of similar assets in the market;

b) To determine the capitalization rate, at least three comparable assets in the market must be surveyed, collecting information such as transaction prices, intended use, financial terms, market conditions at the time of sale, buyer-seller characteristics, operating income, operating expenses, vacancy and collection loss rates, and related factors.  If the comparable assets have differences from the valued asset, these differences must be adjusted;

c) The calculation of net income and operating expenses for the comparable assets must be consistent with the calculations used for the valued asset. The transaction prices of the comparable assets must reflect current market conditions as well as expected future market conditions similar to the valued asset.

3. Loan-to-equity analysis method

a) The loan-to-equity analysis method determines the capitalization rate based on the weighted average of the loan capitalization rate and the equity capitalization rate, where the weights are the proportions of capital raised from different sources invested in the asset. This method is applied to assets funded by a combination of equity and loans;

b) To determine the capitalization rate, information related to equity and loan sources must be collected, including: the equity-to-loan ratio, loan terms, number of payments, interest rates, investor expectations, return on investment, and other relevant factors;

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d) The equity capitalization rate is the rate used to capitalize income from equity. It is calculated by dividing annual equity income by the total equity amount.  The equity capitalization rate is typically determined by market surveys and analysis of comparable assets.

Chapter III

DISCOUNTED CASH FLOW METHOD

Article 8. Applying the Discounted cash flow method

1. The general formula for the discounted cash flow method:

a) General formula:

b) Specific formulas for certain cases:

- For single-stage cash flow where annual cash flows are equal and constant A, t → n

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- For two-stage cash flows:

*When cash flows vary until year n, and from year n+1 onwards are stable, with t → ∞:

* When cash flows vary until year n, and from year n+1 onwards grow at a constant rate of g% per year (where g < r) and t → ∞:

Where:

V: Value of the valued asset

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V_n: Terminal value at the end of the forecast period

n: Forecast period for future cash flows

r: Discount rate

t: Forecast year

g: Cash flow growth rate

2. Steps to implement:

a) Identify the forecast period for future cash flows;

b) Estimate forecasted cash flows based on the projected income from the asset and estimated operating costs;

c) Determine the terminal value of the asset at the end of the forecast period;

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dd) Calculate the asset’s value using the discounted cash flow formula.

Article 9. Identifying the forecast period for future cash flows (n)

1. The forecast period for future cash flows must be based on the purpose of the valuation, the characteristics of the valued asset, the collected information, and the valuation basis. The cash flow may consist of one or more stages.

2. The forecast period is determined based on the following factors:

a) The economic life of the valued asset;

b) The intended holding period for the valued asset;

c) The reliability of the information collected during the forecast period;

d) The forecast period must be long enough for the valued asset to reach relatively stable income levels and to allow for the calculation of terminal value.

Article 10. Identifying cash flows (CF)

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a) Income from the asset consists of the money the investor receives from investing in the asset;

b) Income estimation is based on: the economic and technical characteristics of the valued asset; past income from the valued asset and/or income from similar assets; industry market conditions; and other factors influencing the forecast of total income;

c) Income from the asset may be net operating income or potential gross income, depending on the available data and information.

2. Estimating operating costs related to the asset’s operation:

a) Operating costs include the necessary expenses to maintain income from the operation of the asset (including interest expenses);

b) Cost estimates are based on the economic and technical characteristics of the valued asset; past costs of the valued asset and/or similar assets; industry market conditions; and other factors influencing the forecast of costs.

3. Cash flow (CF) is determined as the difference between income from the asset and operating costs. Cash flow (CF) may be calculated either before or after income tax, depending on the valuation purpose, the characteristics of the valued asset, the collected information, the valuation basis, and the specific asset valuation method, and must align with the method used to determine the discount rate.

Article 11. Determining the terminal value of the asset (Vn)

1. The terminal value of the asset at the end of the forecast period can be the liquidation or salvage value, or the market value of similar assets at the end of the forecast period.

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Article 12. Determining the discount rate ®

1. The discount rate must reflect the time value of money, the risks associated with the cash flows generated by the valued asset, and the future use of the valued asset.

2. The discount rate may vary from year to year during the forecast period. The determination of the discount rate must be justified, based on the valuation basis, the valuation purpose, the type of valued asset, the asset’s economic life or holding period, geographic differences, exchange rates (if applicable), and the type of cash flow being considered.

3. The discount rate is determined based on market data and using one of the following methods:  the average return rate of similar assets in the market; the weighted average cost of capital (WACC); or the capital asset pricing model (CAPM)./.