Introduction to Theory & Practice

of
Fixed Asset Valuation
Based on Market Approach
 CONTENTS

• Introduction
Chapter-1: Introduction to Valuation
Chapter-2: General Standards
Chapter-3: Asset Standards
Appendix-A: Sample Valuation Report
Appendix-B: Valuation Tables Examples
 INTRODUCTION TO VALUATION
• Nepalese Valuation Scenario
• In spite of valuation being practiced in Nepal for collateral mortgaging since long
time, the Valuation profession in Nepal is in primitive stage.
• Actually, any Government officer like CDO, LDO, Surveyor, Revenue officer, Mayor &
Ward Committee chairman of village and town are considered valuation experts.
• Similarly, financial institutions also have no clue about the qualification a valuer requires
to carry out an authenticate and reliable valuation.
• Nepalese Valures have no idea that valuation is a separate specialized profession which
requires extensive study and knowledge and training. There are several courses of study
and training in overseas. They are completely different approach on valuation more
scientific based.
• No valuation Act to monitor and guide valuers and no regulatory body for this profession
yet.
• Limitation of the used valuation approach is not realized by banks and valuers which
might lead to economic disaster.
• Secured lending is the primary objective with proper valuation.
• Thus in the current valuation practice, the valuer acts as a site surveyor for the banks and
financial institutions, multiplies the percentage prescribed by the banks and financial
institutions to calculate “Fair Market Value & Distress Value” which are not even
recognized in International Valuation Standards (IVS) and practices.
 What is Value
• The word "Value" is difficult to define
• "Cost" is expenditure to produce a commodity having a value
• "Price" is the cost of a commodity plus additional reward to the producer for
his labour & capital
“Price is the amount asked, offered or paid for an asset. Because of the
financial capabilities, motivations or special interests of a given buyer or
seller, the price paid may be different from the value which might be
ascribed to the asset by others. 
Cost is the amount required to acquire or create the asset. When that asset has
been acquired or created, its cost is a fact. Price is related to cost because
the price paid for an asset becomes its cost to the buyer.
Value is not a fact but an opinion of either:
• the most probable price to be paid for an asset in an exchange,
• or
• the economic benefits of owning an asset.” ----IVS
• It must possess utility,
• It must be scarce, and
• It must be transferable or marketable.
 Factors affecting the Value
Based upon users perception
• Utility
• Substitution
• Anticipation
Based upon Land and Improvement
• Movement in population
• Improved accessibility
Economic and legal factors
• Inflation
• Economic activity
• Change in taste and social circumstances
• Supply and demand / necessity and availability
• Cost of production
• Occupational value
• Interest on gilt edge securities
• Rent control act
• Urban land ceiling and regulate acts
• Town and country planning acts
• Abnormal conditions
• Transferability
• Location (Residential/Commercial/Agriculture/Industrial)
• Utility/ to suit to certain industry or institution
• Marketability
• Physical characteristics of land
• Development anticipation
When applying this method(s) of valuation, following details are considered:
• Appropriate and adequate comparable;
• Details of the comparable include, but not be limited to the following shall be recorded:
• Identification and description of the property;
• Date of sale;
• Tenure;
• Land and/or built-up/ net lettable areas;
• Purchase price;
• Breakdown of land and building values;
• Names of vendor and purchaser;
• Terms and conditions of sale (where available);
Other factors which may influence the applicability of the rate for subject property are as under:
• Situation and location
• Physical characteristics
• User of the property
• Extent of construction permissible like Floor Area Ratio and Ground Coverage
• Encumbrance
• Mode of payment
• Factor of additional liabilities of incidental costs
• Defects in title
• Impact of statutory restrictions like the urban land ceiling etc.
• Shape of plot
• Size and area of plot
• Ratio of frontage to depth
• Return frontage and double frontage
• Tenure of land including impact of ground rent
• Any other factors
Factors Affecting Valuation
• Present and future value of the property
• Type of property
(Residential/Commercial/Agriculture/Industrial)
• Location of property
(Residential/Commercial/Agriculture/Industrial)
• Accessibility to the property
• Climatic Condition
• Type of structure
• Topography
• Road width and motor able access
• Hold type (freehold/rented)
• Residual age of the property
 Application of Valuation
Mortgage
• Banking (Lending against Assets)
• Purchase for occupation
• Purchase for investment
• Disinvestment
• Partition
• Privatization
• Sale of asset
• Net worth
• Merger and acquisition
• Liquidation of company
• Auction bid
• Insurance
• Arbitration
• Financial Reporting
• Court & Litigation support
• Management information & Strategic Planning
• Initial Public offerings
• Impairment Studies
• Cost Investigations
 Knowledge required to carry out proper valuation
• Planning & designing
• Construction work
• Surveying and levelling
• Quantity surveying and estimating
• Estate development
• Building Bye-laws of local authority
• Land acquisition & Town planning act
• Local and Government Taxation
• Insurance
• Condition of money market and rate of interest available on investments in general
investment market
• Knowledge to carry out Feasibility study
• Report writing
Scopes of valuation
1. Valuation of land only
2. Valuation of land and building
3. Valuation of Building Only
4. Valuation of existing assets of building
5. Valuation of machines/equipments/plants in factories/industries.
6. Valuation of Vehicles
• VALUATION APPROACHES AND METHODS
• MARKET APPROACH
• INCOME APPROACH &
• COST APPROACH
• MARKET APPROACH - The market approach provides an indication of value by comparing the asset with identical or
comparable (that is similar) assets for which price information is available
The key steps in the comparable transaction method are:
• identify the units of comparison that are used by participants in the relevant market,
• identify the relevant comparable transactions and calculate the key valuation metrics for those transactions,
• perform a consistent comparative analysis of qualitative and quantitative similarities and differences between
the comparable assets and the subject asset,
• make necessary adjustments, if any, to the valuation metrics to reflect differences between the subject asset
and the comparable assets,
• apply the adjusted valuation metrics to the subject asset, and
• if multiple valuation metrics were used, reconcile the indications of value
Depreciation/Obsolescence
Non-interest procedures
• Straight line [Annual depreciation = (Original cost - Salvage)/Life in years]
• Declining Balance or Written Down Value (W.D.V.)
• Sum of the Year's Digits
Procedures based on interest theories
• Sinking Fund
• Present Worth

INCOME APPROACH ?
COST APPROACH ?
 Legal Documents required for valuation
For Valuation of land
• Copy of Land Ownership Document ( Lalpurja)
• Copy of Land Revenue payment reciept
• Original Copy of Boundary Declaration (Char Killa) Letter (within 3 months)
• Copy of Citizenship of Owner/Client
• Copy of Registration Certificates of Client/Owner
• Latest original survey map (blue print) of the area with clear print out of the respective plot(s), duly
stamped by the Government Land Survey Office mentioning - for Bank and Financial institution
purposes.
• Original Road Connect to Boundary Certificate (Ghar bato Shifaris) (Conditional)
• Srestha Utar Letter (Conditional)
• Location Plan
• Site Plan
• Clear Photographs from important angles
For Valuation of Building
• Approved Building Drawing and Floor plans approved by municipality
• Copy of Building Construction Completion Certificate
• Copy of Building Construction Approval Certificate (अस्थाइ र स्थाई इजाजत पत्र)
In the case of company as bank’s client
• Firm Registration Certificate
• PAN Registration Documents
• Tax Clearance Reciept
• Article of association and memorandum (प्रबन्ध पत्र तथा नियमावली) (for PVT. LTD. client )
 Area measurements of land
• Area is calculated as per site measurements and plotted in
AutoCAD.
• Triangulation method is used in area measurements.
• As the shape of land varies within its topography,
rectangle or irregular shaped land are to be examined. For
such irregular type of lands, number of triangles are
formed from every corner and edge of the plot and
triangulation method is used to calculate the area of land.
• Scan and trace of the cadastral map on printer/scanner
and then plot it on CAD to get area as per cadastral map
measurement.
• Area as per lalpurja documents
• Verification of area by using Google map/earth and
measurement of area of relatively large plots an be done
to get secure if the land area actually exists on the field.
 Value of the property
• As per the importance of the property, location, type of structure,
accessibility to the property, ability of public facilities, government
and commercial rates, value of property is determined.
• Considering the government rates and commercial rates, fair
market value rate is calculated.
• Fair Market Rate is the rate usually taken by considering 70% of
commercial rate and 30% of government rate.
Fair market rate= 60% of commercial rate + 40% of government
rate.
Ratio of fair market rate varies according to bank laws. It is usually
taken as 60:40, 70:30, 80:20, 90: 10 as per bank laws.
Value of property is calculated in consideration to the area of plot
multiplied by its fair market rate.
Value of Property= Considered Area of plot * Fair Market Rate of
plot
• For the valuation of building Cost Approach is used
 Valuation In Practice
Criteria for valuation of Properties as per bank
• Property must be Transferable- (Freehold, Free from any legal disputes,
Tenacy rights, guthi restriction-tainathi case, under litigation)
• Accessible by road and minimum 4’ wide on map and/or field
• Excluding ROW (Right of Way) for road and set back for historical area, River
setback, and high-tension line.
• For many land plots or plot area more than one ropani, area deduction for
land is taken within (15-20)% of total land as per land or road development.
• If the property is transferred as “Guthi to Raitani” after 2064/10/10?
• The property is without clear plot number, boundaries, etc.?
• The property is under compulsory acquisition by Government of Nepal or any
other such authority.?
• The construction of building or any other construction is prohibited in the
proposed land. ?
• The building is constructed in the land owned by some other person, without
the manjurinama of such land owner and his/ her legal heirs. ?
• There is any complication as per knowledge and professional ethics of the
valuator. ?
• Asset within 10 meter of the of 33kV or more
electric High Tension line crossing from one side,
• Asset within 3 meter of the centre of less than
33kV or more than 11kV electric
• High Tension Line crossing from one side,
• Asset within 2 meter of consumer distribution
and less than 11kV
 Report type
1. Preliminary Valuation Report
2. Complete Valuation Report
3. Re-valuation Report
4. Progress Report of Building Under-construction
 Introduction to new valuation aproach
• Weighted Average Deposit Rate (Commercial Banks) %/annum
• Weighted Average Lending Rate (Commercial Banks) %/annum
• Lending rate for fixed assets
• Discount Rate for valuation (R)
• Corporate TAX rate (T)
• Cost of Debt Kd=R(1-T)
• Weighted Average Cost of Capital (W.A.A.C.)
• National Consumer Price Index %/annum
• Average Inflation Rate of fixed assets (i) i = P^(1/n)-1
There are more about valuation. Many more!!!
Thank You.