The China Asset Appraisal Association has formulated the “Assessment Practice Guidelines for Assets—Asset Appraisal Method” (Zhongxiexie [2019] No. 35), which will be implemented from March 1, 2020. The practice standard clearly confirms the three basic methods of asset valuation and their derivative methods, and clarifies the basic connotation, application conditions and method selection of asset valuation methods.
With regard to the selection of evaluation methods, Article 22 of the "Assessment Practice Guidelines-Asset Evaluation Methods" clearly states that "when the conditions for adopting different evaluation methods are met, asset evaluation professionals should choose two or more evaluation methods. The analysis forms the general conclusion of a reasonable evaluation conclusion; and Article 23 of the Practice Guidelines specifies the special circumstances in which an evaluation method can be used.
The relevant attachments are as follows:
Asset Appraisal Practice Guidelines-Asset Appraisal Method
Chapter 1 General Rules
Article 1 To standardize the behavior of asset appraisal institutions and their asset appraisal professionals in using asset appraisal methods when performing asset appraisal business, this Code is formulated in accordance with the Basic Asset Appraisal Guidelines.
Article 2 The "asset evaluation method" referred to in this standard refers to the methods and means for assessing the estimated asset value. The asset evaluation methods mainly include the three basic methods of market method, income method and cost method and their derivative methods.
Article 3 The asset evaluation business shall comply with these Guidelines.
Chapter 2 Market Law
Article 4 The market method is also called the comparative method and the market comparison method. It refers to the general name of the evaluation method for determining the value of the evaluation object based on the market price of the comparable reference object by comparing the evaluation object with the comparable reference object.
The market law includes a variety of specific methods. For example, the comparison method of transaction cases and the comparison method of listed companies in the valuation of enterprises, the direct comparison method and the indirect comparison method in the evaluation of individual assets, etc.
Article 5 Assessment professionals should consider the prerequisites for the application of market law when selecting and using market law:
(1) The comparable reference object of the evaluation object has an open market and active transactions;
(2) Necessary information about the transaction can be obtained.
Article 6 Assessment professionals shall select comparable reference objects based on the characteristics of the assessment object and based on the following principles:
(1) Choose a reference object that is the same as or comparable to the evaluation object in the transaction market;
(2) Select an appropriate number of reference objects that are the same as or comparable to the evaluation object;
(3) Selecting reference objects that are the same as or similar to the evaluation target in terms of value influence factors;
(4) Select a reference object whose transaction time is close to the evaluation base date;
(5) Select a reference object suitable for the transaction type and evaluation purpose;
(6) Choose a reference object that is normal or can be corrected to the normal transaction price.
The comparison benchmark of the market method is usually different due to the difference in the asset type and industry of the assessed object, which can be expressed in the form of value ratio, transaction unit price and so on.
Article 7 Asset appraisal professionals shall use the market method to make a comparative analysis of the appraisal object and comparable reference objects, and make reasonable amendments to the differences in value influencing factors and transaction conditions.
Article 8 When applying the market law, attention should be paid to the following factors that affect the reliability of the evaluation results:
(1) The degree of market activity;
(2) The similarity of the reference object;
(3) How close the transaction time of the reference object is to the evaluation base date;
(4) Comparability of the transaction purpose and conditions of the reference object;
(5) Adequacy of reference material information materials.
Chapter 3 Income Method
Article 9 The "income method" refers to the general term for various evaluation methods that determine the value of the evaluation object by capitalizing or discounting its expected income.
The income method includes a variety of specific methods. For example, the cash flow discount method and dividend discount method in enterprise value assessment; incremental income method, excess income method, license fee saving method, and revenue sharing method in intangible asset assessment
Article 10 Assessment professionals should consider the prerequisites for the application of the income method when selecting and using the income method:
(1) The future income of the assessed object can be reasonably expected and measured in currency;
(2) The risk corresponding to the expected return can be measured;
(3) The profit period can be determined or reasonably expected.
Article 11 Assessment professionals should focus on:
(1) Type and caliber of expected income. For example, income, profit, dividends or cash flow, as well as the return on total assets or partial equity, pre-tax or post-tax income, nominal or actual income, etc. Nominal income includes the expected level of inflation, and actual income excludes the effects of inflation.
(2) The income forecast should be made according to the nature of the asset, the information available and the type of value required.
Asset evaluation professionals should analyze and evaluate the financial information and other relevant information, assumptions and their appropriateness for the purpose of the evaluation.
Article 12 Assessment professionals should consider the life expectancy of the evaluation target, laws, regulations and relevant contracts when determining the income period. The selection of the detailed prediction period should consider the period and periodicity of the evaluation target to achieve stable income.
Article 13 The discount rate used in the income method assessment should not only reflect the time value of the funds, but also reflect the risks related to the type of income and the future operation of the evaluation object, and match the selected type of income and caliber.
Article 14 When applying the income method, attention should be paid to the following factors that affect the reliability of the evaluation results:
(1) The necessary information to support professional judgment cannot be obtained;
(2) The appraisal object has no historical revenue record or has not yet begun to generate revenue, and the prediction of revenue is based only on expectations;
(3) Significant changes in the future business model or profit model.
Chapter IV Cost Method
Article 15 Cost method refers to the general name of the evaluation method that uses the reconstruction or replacement cost as the basis for determining the value of the evaluation object and deducts the relevant depreciation in order to determine the value of the evaluation object.
The cost method includes a variety of specific methods. For example, restoration replacement cost method, update replacement cost method, cost addition method (also known as asset-based method), etc.
Article 16 Assessment professionals should consider the prerequisites for the application of the cost method when selecting and using the cost method:
(1) The evaluation object can be used normally or in use;
(2) Evaluation objects can be obtained through resetting channels;
(3) The replacement cost and related devaluation of the assessed objects can be reasonably estimated.
Article 17: The cost method is generally not applicable when:
(1) The premise of resetting the evaluation object does not exist due to restrictions of laws, administrative regulations or industrial policies;
(2) Evaluation objects that cannot be obtained through resetting.
Article 18 Replacement cost can be divided into restoration replacement cost and update replacement cost.
Update replacement cost is generally applicable to assets reset using current conditions. It can provide similar or the same function as the evaluation object, and the update replacement cost is lower than its restoration replacement cost.
The utility of restoration and replacement cost for the evaluation object can only be provided by re-copying the evaluation object according to the original article.
Article 19 Assessment professionals shall reasonably determine the components of replacement cost based on the purpose of assessment, assessment targets and assessment assumptions.
The components of replacement cost generally include the direct costs, indirect costs, capital costs, taxes and fees and reasonable profits of the construction or acquisition of the evaluation object.
The replacement cost should be an objective and necessary cost of the general productivity level of society, not an individual cost.
Article 20 Assessment professionals shall combine the actual situation of the appraisal object and the conditions affecting its value change, fully consider the factors that may affect the depreciation of assets, and reasonably determine the depreciation. The main forms of depreciation of evaluation objects in the form of entities are physical depreciation, functional depreciation and economic depreciation.
Physical depreciation, also called tangible loss, refers to the loss of asset value caused by the loss or decline of the physical performance of the asset due to the use and the effect of natural forces.
Functional depreciation refers to the loss of asset value caused by relatively backward asset functions due to technological progress.
Economic depreciation refers to the loss of asset value caused by the idleness of assets and the decline of earnings due to changes in external conditions.
Chapter Five: Selection of Evaluation Methods
Article 21 Assessment professionals shall be familiar with, understand and properly select the assessment method. Asset selection professionals should fully consider the factors that affect the selection of valuation methods when choosing valuation methods. Factors considered in the selection of assessment methods include:
(1) Evaluation purpose and value type;
(2) Evaluation objects;
(3) Applicable conditions of the evaluation method;
(4) The quality and quantity of the data on which the evaluation method is based;
(5) Other factors that affect the choice of assessment methods.
Article 22 When the conditions for adopting different evaluation methods are met, the asset evaluation professional shall choose two or more evaluation methods and form a reasonable evaluation conclusion through comprehensive analysis.
Article 23 When there are the following situations, asset evaluation professionals may adopt an evaluation method:
(1) An evaluation method may be adopted based on the provisions of relevant laws, administrative regulations and the regulations of the Ministry of Finance;
(2) An evaluation method is adopted because the evaluation object only meets the applicable conditions of one evaluation method;
(3) An evaluation method is adopted due to the limitation of operating conditions. Restrictions on operating conditions should not be ruled out by the usual practice methods of the asset appraisal industry, and the operational capabilities and conditions of individual asset appraisal agencies or individual asset appraisal professionals should not be used as judgment criteria.
Article 24 The asset evaluation report shall disclose the choice of evaluation method and its reasons.
If an appraisal method is selected due to limited applicability, the reason why other basic appraisal methods are not applicable shall be disclosed in the asset appraisal report; if an appraisal method is selected due to limited operating conditions, the operating conditions shall be Analyze, explain and disclose.
Chapter Six: Supplementary Rules
Article 25 The Guidelines shall come into force on March 1, 2020.