Under the Vietnamese Valuation Standards issued with Circular No. 32/2024/TT-BTC of 16 May 2024, valuation follows three approaches: the market approach (comparison method), the cost approach (reproduction cost and replacement cost methods) and the income approach (direct capitalisation and discounted cash flow methods). For machinery and equipment the market and cost approaches are most common; the income approach is used only where the asset generates its own identifiable income.
A. VALUATION OF MACHINERY AND EQUIPMENT
1. Market approach: comparison method
1.1. Concept:
The comparison method estimates the market value of an asset by analysing the prices of similar assets that have been successfully transacted, or are actually being bought or sold, on the market at the valuation date, and comparing them with the asset being valued in order to estimate its market value.
Assets similar to the asset being valued have the following basic characteristics:
- The same physical characteristics.
- Similar basic economic and technical specifications.
- The same function and intended use.
- Equivalent quality.
- Interchangeability in use.
1.2. Scope of application:
This method is commonly used to value assets that are widely traded on the market.
1.3. Basis for valuing machinery and equipment
a. The comparison method is based on the premise that the market value of the asset being valued is closely related to the values of similar assets that have been or are being traded on the market.
b. Characteristics:
- This method relies solely on market transactions in similar assets to provide actual data for comparison with the asset being valued.
- The assessment of market transactions must satisfy the “willing seller and willing buyer” principle; the more comparable the transactions are with the subject asset, the more accurate the valuation result will be.
c. Requirements:
- This method can only be used when relevant information on similar assets traded on the market is available. Without market information on transactions in similar assets, there is no basis for comparison with the subject asset.
- The information actually collected must be comparable with the subject asset, i.e. there must be technical correlation in terms of size, capacity, design and other technical conditions, etc.
- The information must be of high quality, i.e. reasonably consistent in specification, timely, accurate, verifiable and complete, and collected from reliable sources such as journals, daily market price bulletins and specialised machinery and equipment dealers. Such sources are reliable because they can be cross-checked and verified when required.
- The market must be stable: if the market is highly volatile, this method is unlikely to be accurate, even if the comparables share similar characteristics in many respects.
- The valuer must have practical market experience and knowledge in order to apply the appropriate valuation method and arrive at a reasonable and acceptable proposed value.
d. Procedure:
When valuing by the comparison method, the following steps should be followed:
- Search for information on assets recently sold on the market that are comparable with the subject asset in terms of specification, namely size, capacity, design and other technical details, etc.
- Verify the information on the comparable assets to determine their market values as a basis for comparison with the subject asset. Normally, a number of assets that are most comparable in specification with the subject asset should be selected.
- Analyse the sale prices and identify the differences in technical characteristics such as size, type, service life and other conditions (better or worse) of each comparable relative to the subject asset; then adjust the sale price of each comparable (upwards or downwards) relative to the subject asset.
The adjustment process leading to the value of the subject asset is carried out as follows:
Taking the subject asset as the benchmark, if a comparable is superior, its transaction price is adjusted downwards, and vice versa.
- Estimate the value of the subject asset on the basis of the adjusted comparable sale prices.
1.4. Factors affecting asset value
- Time of sale: the transaction date has a significant impact on the market price of an asset.
- Sale under duress: if either the seller or the buyer is not acting willingly, the transaction price of the asset on the market will be affected.
1.5. Advantages and disadvantages:
Advantages:
- It is widely applied and is the most commonly used method in practice, as it involves no technical difficulties.
- It has a solid basis for acceptance because it relies on market value for comparison and assessment.
Disadvantages:
- Comparison is sometimes impossible because of the special technical nature of the subject asset, which makes it difficult to find an asset being traded on the market that is identical to it. This affects the accuracy of the method.
- The accuracy of this method decreases when market prices are highly volatile.
2. Cost approach: reproduction cost and replacement cost methods
2.1. Concept
A valuation method based on the cost of creating an asset equivalent to the asset being valued, less the actual depreciation of the asset being valued (if any), in order to estimate the value of the asset being valued.
Actual depreciation of an asset: the total reduction in the asset’s value due to physical wear and tear and obsolescence (physical deterioration and functional and external obsolescence) affecting its performance and usefulness.
2.2. Scope of application
- Valuation of specialised or one-off assets with few or no transactions (not commonly bought and sold on the market).
- Valuation for insurance purposes.
- A method used by bidders or in bid evaluation...
2.3. Requirements
The valuer must be technically proficient and sufficiently experienced to apply this method, specifically to:
- Determine the current cost of creating an asset similar to the asset being valued at the valuation date.
- Determine the accumulated depreciation of the machinery and equipment being valued.
2.4. Procedure
The valuation work under this method is generally carried out as follows:
- Estimate the current cost of replacing the machinery and equipment being valued, assuming that their current use is their highest and best use. To estimate this cost accurately, the valuer must understand the machinery so as to estimate the cost to a reasonable degree.
- Estimate the total accumulated depreciation (actual wear and tear) of the machinery from all causes, including physical deterioration and obsolescence.
B. VALUATION OF TRANSPORT VEHICLES
