Valuation Insight - India Edition, May 2017

Valuation Insights is a quarterly e-newsletter that provides you with the latest news from Duff & Phelps and the trends and changes in valuation and accounting that could affect your business transactions in Asia.

In this edition, our top stories cover the Financial Accounting Standards Board issuing an Accounting Standards Update, robust fair value measurement, the International Valuation Standards Council releasing the 2017 edition of its International Valuation Standards, and a recent Duff & Phelps study about fairness opinions.
We will also look at important Duff & Phelps reports and articles, including a recorded forum presentation by Professor Damodaran and the Duff & Phelps Global Regulatory Outlook 2017.

Top Stories:

• New FASB Accounting Standards Update Revises the Definition of a "Business"
• Valuing Fund Interests of Increasing Concern?
• IVSC Releases 2017 Edition of its International Valuation Standards
• New Study by Duff & Phelps Puts Fairness Opinions in New Light

Latest Duff & Phelps Report and Articles:

• Professor Damodaran Recorded Forum Presentation
• Global Regulatory Outlook 2017
• Transaction Trail 2016 Annual Study - Latest Southeast Asia M&A Trends
• Embracing the Change: A Concise Report on India's Most Valuable Celebrity Brands

Top Stories

New FASB Accounting Standards Update Revises the Definition of a "Business"
In January this year, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-01, clarifying the definition of a business and introducing a framework for determining when a set of assets and activities constitutes a business.

The definition of a business influences how an entity treats acquisitions and disposals of an asset (or group of assets), and how it accounts for goodwill and consolidation.

"Stakeholders expressed concerns that the definition of a business is applied too broadly and that many transactions recorded as business acquisitions are, in fact, more akin to asset acquisitions," FASB Chairman Russell G. Golden explained in a press release. "The new standard addresses this by clarifying the definition of a business while reducing the cost and complexity of analyzing these transactions."

The new ASU prescribes an initial screen that specifies when substantially all the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset (or a group of similar identifiable assets), the asset(s) does(do) not constitute a business, removing the need for further assessment.

As per the new ASU, to qualify as a business, an acquisition must include an input and a substantive process that altogether significantly contribute to the ability to create outputs. The ASU provides a framework to evaluate when an input and a substantive process are present. To still qualify as a business without outputs present, an organized workforce must be present.

Finally, the new guidance narrows the definition of the term "outputs" to be consistent with how it is described in Topic 606, Revenue from Contracts with Customers.

"The update will redound to less assets and activities meeting the definition of a business, increasing the number of asset acquisitions accounted for," predicts Santosh N, Duff & Phelps Managing Director in India. "This will have repercussions in many areas of accounting – among them acquisitions, goodwill impairment and consolidation."

Santosh believes the ASU's impact will affect a wide range of interests. "Most affected by the new ASU will be businesses concerned with real estate, pharma, and oil & gas," he explains.

Read the full ASU, with examples for various industries

Valuing Fund Interests of Increasing Concern?
For Chris Franzek and David Larsen, Duff & Phelps managing directors based in the New York and San Francisco offices respectively, robust fair value measurement remains an enduring topic of interest, despite no major revisions in five years to the accounting rules that define fair value.

In a new editorial published in the March issue of Pensions & Investments, Franzek and Larsen note the following developments:

Limited partners demand greater accountability from general partners or lead investors, as far as fair value reporting is concerned. The use of fair value as the only objective measure to compare dissimilar investments allows LPs to make better-informed decisions around performance and asset allocation.

With more tools available to allow LPs to evaluate their portfolio performance, LPs now feel more motivated to reach out to GPs whenever a fund's net asset value or fair value underperforms. If GPs are found to lack robust valuation processes, or otherwise fail to prove their ability to create value in their investments, they may find less future allocations coming their way.

"Fair value is an important piece of the analysis that is an input to the capital allocation decision," writes Franzek and Larsen. "Gone are the days when a GP got meaningful credit for increases in value because the market went up."

Regulators' influence on fair value determination will continue. The regulatory regime will continue to place high importance on fair value, as evidenced by developments in the EU and Brazil. In the US, the SEC and European regulators have penalized funds for poor valuation practices.

By 2018, the American Institute of Certified Public Accountants will release a new guide for the valuation of private equity investments. CPAs will benefit from the guide's examples, and audit firms are predicted to implement the guide on a global basis.

The valuation profession will also undergo a form of self-regulation, through the implementation in the U.S. of the Certified in Entity and Intangibles Valuations ("CEIV") designation for fully-certified valuation professionals.

"Once the CEIV certification rolls out, auditors will place more credibility in valuations performed by CEIV-holding professionals," explains Abhishek Pandey, Duff & Phelps Managing Director in India. "In time, only CEIV-compliant professionals will be perceived to have sufficient competence to perform fair value measurements."

Read the full article in Pensions & Investments

IVSC Releases 2017 Edition of its International Valuation Standards
The International Valuation Standards Council ("IVSC") has released the 2017 edition of its International Valuation Standards ("IVS 2017").

The new edition allows greater harmonisation for valuation practices on a global scale. Valuation professionals may use IVS 2017 as a key guiding text to reinforce consistency, transparency and confidence in valuations.

IVS 2017 is composed of a Framework, five General Standards, and six Asset Standards:

• General Standards: Requirements for the conduct of valuation assignments performed under IVS, including establishing the terms of a valuation engagement, bases of value, valuation approaches and methods, and reporting;
• Asset Standards: Requirements related to specific types of assets, including background information on the characteristics of each asset type that influence value and additional asset-specific requirements regarding common valuation approaches and methods. Guidance is available for intangibles, real property, personal property, and financial instruments, as well as for businesses and business interests.

"IVS 2017 represents the latest in IVSC’s continuing commitment to developing high-quality valuation standards," noted Sir David Tweedie, Chairman of IVSC. "The valuation of assets, both tangible and intangible, plays an essential role in financial and real estate markets – and therefore the global economy."

"IVS 2017 will be instrumental in improving valuation practice and will bring greater efficiency to capital markets."

The IVSC has announced that IVS 2017 adoption will become effective by July 1, 2017. Early adoption is encouraged.

The IVSC is an independent, not-for-profit organization whose objective is to build public trust in valuation by producing valuation standards and securing their adoption and implementation globally.

Read more on the IVS 2017

New Study by Duff & Phelps Puts Fairness Opinions in New Light
Most fairness opinions use a robust set of methodologies to produce a useful range of valuations, according to Duff & Phelps recent study on the subject. This conclusion addresses periodic criticisms that fairness opinions generally provide little utility for boards analyzing potential transactions as they produce valuation ranges too wide to provide meaningful information.

In an effort to assess the validity of these criticisms and determine the overall usefulness of fairness opinions, Duff & Phelps conducted a thorough analysis of more than 3,000 fairness opinions during the ten-year period ending in 2016.

The study found that in the vast majority of cases, fairness opinions offered valuation indications falling within 15 percentage points on either side of a midpoint: a range sufficiently narrow to justify its use as a valuable tool in evaluating purchase offers.

That average range narrows even further as the deal size grows larger. For deals carrying a value of $10 billion or more, DCF analyses produced average price ranges between 78 percent and 106 percent of the offer price.

"The analysis proves that fairness opinion advisors use robust, sophisticated methods to reach those valuations," reports Varun Gupta, Duff & Phelps Managing Director and leader of the firm's operations in Southeast Asia and Japan. "We can only conclude that, broadly speaking, fairness opinions represent a reliable way for corporate boards and executives to evaluate purchase offers."

Read the summary of the study

Latest Duff & Phelps Reports and Articles

Professor Damodaran Recorded Forum Presentation
On January 18, 2017, Duff & Phelps hosted a Valuation Forum at Trident Bandra-Kurla Complex, Mumbai with over 200 attendees. NYU Stern School of Business Professor Aswath Damodaran, was the esteemed guest speaker.
Global Regulatory Outlook 2017

The Duff & Phelps fifth annual Global Regulatory Outlook (GRO) report aims to assist the global financial services industry with navigating the key regulatory and financial services developments in 2017.

Transaction Trail 2016 Annual Study - Latest Southeast Asia M&A Trends
In December, Duff & Phelps released the Transaction Trail report for 2016. Now in its sixth year, the report covers 2016's salient developments in M&A, private equity/venture capital investments and initial public offerings in Singapore, Malaysia and Indonesia for the year 2016.

Embracing the Change: A Concise Report on India's Most Valuable Celebrity Brands
The second edition of our annual study of celebrity brand values in India was released in November 2016. The report, “Embracing the Change: A concise report on India’s most valuable celebrity brands" ranks the top 15 celebrities in India based purely on their earnings potential from brand endorsements.