Circular No. 32/2024/TT-BTC Issuing the Vietnamese Valuation Standards on the Market Approach, Cost Approach, and Income Approach

CIRCULAR

ISSUING THE VIETNAM VALUATION STANDARDS ON MARKET APPROACH, COST APPROACH, AND INCOME APPROACH

Pursuant to the Price Law on June 19, 2023;

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

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

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

Article 1. Attached to this Circular are the following Vietnam Valuation Standards:

- Vietnam Valuation Standard on Market Approach;

- Vietnam Valuation Standard on Cost Approach;

- Vietnam Valuation Standard on Income Approach.

Article 2. Effective Date

1. This Circular takes effect from July 1, 2024.

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

Article 3. Implementation Organization

1. Relevant organizations and individuals are responsible for implementing the Vietnam Valuation Standards issued with this Circular.

2. In the course of implementation, if there are any difficulties, organizations and individuals are requested to promptly report them to the Ministry of Finance for study and resolution.

VIETNAM VALUATION STANDARD
ON MARKET APPROACH

(Attached to Circular No. 32/2024/TT-BTC dated May 16, 2024, issued by the Minister of Finance)

PART I

GENERAL PROVISIONS

Article 1. Scope of Regulation

This Vietnam Valuation Standard stipulates and guides the market approach when valuing assets according to the law on prices.

Article 2. Applicability

1. Developable real estate is land intended for construction or land with structures that can be renovated or demolished to construct buildings for optimal and most effective use.

2. The residual method is a valuation method that determines the value of developable real estate based on subtracting estimated reasonable development costs (including investor profit) from the estimated development value (total development revenue) to create such development (total development cost).

Article 4. Approaches and Methods of Real Estate Valuation

Article 3. Explanation of Terms

In this Vietnam Valuation Standard, the following terms are understood as follows:

1. Comparable asset is an identical or similar asset to the asset being appraised.

2. Similar asset is an asset of the same type and comparable to the asset being appraised in terms of purpose of use, utility, legal characteristics, economic-technical characteristics, basic features of the asset being appraised, and other factors (if any).

3. Indicative price level is the price level of the comparable asset after adjustment for differences in comparison factors with the asset being appraised.

4. Net total adjustment value is the total adjustment amount according to comparison factors taking into account negative signs (reductions) and positive signs (increases), that is, without regard to the absolute value of each adjustment.

5. Gross total adjustment value is the total adjustment amount according to comparison factors based on absolute values.

Article 4. Market Approach

1. The market approach determines the value of the asset being appraised through comparing the asset being appraised with comparable assets that have price information available on the market; in the case of enterprise valuation, additional price information of the asset being appraised may also be used.

2. Depending on the type of asset, the market approach can be concretized into methods including the comparative method, the average ratio method, and the transaction price method.

The average ratio method and the transaction price method apply only to enterprise valuation and are specified in the Vietnam Valuation Standard on Enterprise Valuation.

Chapter II

COMPARISON METHOD

Article 5. Application of Comparative Method

1. The comparative method determines the value of the asset being appraised based on the comparison, analysis, and evaluation of comparison factors of comparable assets with the asset being appraised, thereby adjusting the price levels of comparable assets to estimate the value of the asset being appraised.

2. The comparative method is applied to appraise assets that have transfer activities or public purchase offers or sales announcements on the market. An asset is considered to have transfer activities or public purchase offers or sales announcements on the market when at least three comparable assets from different organizations or individuals are obtained, which were transferred or offered for purchase or sale on the market near the time of appraisal and the location of the asset being appraised.

3. Implementation Content

a) Surveying and collecting information about comparable assets;

b) Analyzing information;

c) Adjusting differences between the asset being appraised and comparable assets;

d) Determining the indicative price level of comparable assets;

d) Determining the price of the asset being appraised.

Article 6. Survey and collection of information on comparable assets

1. Information on comparable assets includes the legal and economic-technical characteristics of the comparable assets; the price level of the comparable assets; the time, location, and parties involved in the transfer, offer to purchase, or offer to sell; conditions accompanying 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 ensure objectivity according to reality and must be reviewed and evaluated to ensure that such information can be used before being incorporated into analysis and calculation; priority should be given to selecting information generated closest to the valuation date and location of the asset being valued.

b) The quantity of information collected must ensure at least three comparable assets with transfer times or offer times occurring at or nearest to the valuation date but not exceeding 24 months prior to the valuation date.

In cases where the price of the asset fluctuates during the period from the transfer time or offer time of the comparable asset to the valuation date, before adjusting the price level of the comparable asset according to comparison factors, it is necessary to adjust (increase or decrease) the price level of the comparable asset to the valuation date, and the person conducting the valuation must analyze and calculate accordingly with the market price fluctuations during this period.

When collecting information on assets offered for sale or purchase, it is necessary to evaluate and analyze market price trends, sources of collected information, and other pricing information on the market to make adjustments and find a suitable price level (if needed) before using it as a comparison price.

c) Priority should be given to selecting comparable assets with the shortest distance to the asset being valued and not limited by the administrative boundaries of communes, districts within the province. In cases where the scope of information collection is expanded beyond the provincial area, the person conducting the valuation must clearly state the reasons and limitations (if any) of expanding the scope of information collection in the valuation report.

d) Information on comparable assets is collected from one or more of the following sources: contracts; invoices; purchase-sale documents; successful transaction results on trading platforms; mass media; market investigation questionnaires; prices recorded in official documents of state agencies, production and business enterprises; auction and bidding results as prescribed; direct interviews; telephone; email or the Internet; price databases of state agencies, organizations, enterprises, and other sources as prescribed (if any).

3. The results of the survey and collection of information on comparable assets must be presented and stored in the form of a comparable asset information collection form accompanied by the signature of the information collector.

In cases where additional survey forms, investigation forms, collection forms, or evaluation forms are directly created by the information collector during the information collection process, there must be a signature of the information collector on these forms.

In cases where information is collected via the Internet, specific links to the collected information must be referenced on the information collection form and images must be stored as evidence. Information collected via the Internet must be from official websites of agencies and organizations operating in accordance with the law.

In cases where information is collected from purchase or sale quotations, complete information such as the name, address, tax code (if any), and stamp of the quoting entity, the time of providing the information, and the validity of the quotation must be included.

Article 7. Information Analysis

1. Information analysis aims to compare and draw out similarities and differences, advantages and disadvantages based on comparison factors between the appraised asset and the comparable asset.

2. Comparison factors include qualitative comparison factors and quantitative comparison factors that reflect the basic characteristics of the type of asset regarding its legal features, transaction status, economic and technical features of the asset, and other factors affecting the value of the asset.

3. The information analysis between the appraised asset and the comparable asset according to comparison factors is carried out through the following forms:

a) Quantitative analysis (analysis by quantity): including pair-wise analysis, statistical analysis, regression analysis, cost analysis, and similar analytical methods to find adjustment amounts as specific sums of money or percentages (%).

b) Qualitative analysis (analysis by quality): including comparative correlation analysis, ranking analysis, and interviewing relevant parties.

Article 8. Adjusting Differences Between the Appraised Asset and the Comparable Asset

1. When adjusting differences between the appraised asset and the comparable asset, adjustments should first be made to quantitative comparison factors (which can be quantified into monetary terms), followed by qualitative comparison factors (which cannot be quantified into monetary terms).

2. Contents for adjusting differences between the appraised asset and the comparable asset:

a) Subject of adjustment: is the transferred price or the offered purchase price or sale price on the market after reasonable adjustments have been made to the common successful transaction prices of the comparable asset on the market.

b) Basis for adjustment: based on the discrepancies of comparison factors between the comparable asset and the appraised asset.

c) Principles for adjustment:

Using the comparison factors of the appraised asset as the standard to adjust the price of the comparable asset according to the comparison factors of the appraised asset.

When adjusting the price based on the difference of one comparison factor, the remaining comparison factors are fixed (considered identical). Factors in the appraised asset that are inferior to those in the comparable asset will reduce (-) the price of the comparable asset. Factors in the appraised asset that are superior to those in the comparable asset will increase (+) the price of the comparable asset. Factors in the appraised asset that are identical to those in the comparable asset will maintain the price of the comparable asset unchanged (no adjustment).

Each adjustment of comparison factors must be substantiated by evidence collected from market investigations, such as information collection forms; information analysis reports; market research reports or related documents.

d) Methods of adjustment:

Absolute amount adjustment: applied to discrepancies of comparison factors where the absolute adjustment amount can be determined as a specific sum of money through calculation.

Percentage adjustment: applied to discrepancies of comparison factors where only relative adjustments can be determined as a percentage, with high estimation.

(1) Adjustment level:

The price adjustment due to differences in comparison factors needs to be estimated based on transaction information on the market, while analyzing and assessing the impact of comparison factors on the value of the asset.

e) Order of adjustment:

Adjust the group of comparison factors regarding the legal characteristics and transaction status of the asset before, adjust the group of comparison factors regarding the economic and technical characteristics of the asset after. The price after adjusting for the group of legal and transaction status factors is used to adjust for the group of economic and technical characteristic factors of the asset.

When adjusting the price of the comparable asset according to each group of factors above, adjust the comparison factors based on absolute amounts first, then adjust based on percentages. The price after absolute adjustment is used for percentage adjustment;

g) Control principle:

Ensure that the difference between the level of the comparable asset's price and the guidance price of that asset as stipulated in Article 9 of this Standard is consistent with market evidence.

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

Article 9. Determining the guidance price of comparable assets

1. The guidance price of comparable assets serves as the basis for estimating the value of the asset being appraised.

2. The adjustments according to the comparison factors and the determination of the guidance price of the comparable asset are reflected in the following adjustment table:

Article 10. Determining the value of the asset being appraised

1. The determination of the value of the asset being appraised is carried out based on the guidance price of comparable assets combined with the analysis of the quality of information of the comparable assets (regarding the source of information, the reliability and suitability of the information) and the following criteria:

a) The total adjusted value aggregated is the smallest (i.e., the total absolute value of the adjustments is the smallest);

6) The total number of adjustments should be as few as possible;

c) The adjustment range (meaning the level or percentage of adjustment) of a comparison factor should be as small as possible;

d) The total of the pure adjusted values is the smallest, i.e., the total of the adjustments is the smallest.

2. In necessary cases, it is required to evaluate the trends and movements of supply and demand in the market before determining the final value of the asset being appraised using the comparative method./.

MINISTRY OF FINANCE

VIETNAMESE VALUATION STANDARDS
ON THE APPROACH FROM COSTS

(Attached to Circular No. 32/2024/TT-BTC dated May 16, 2024, issued by the Minister of Finance)

PART I

GENERAL PROVISIONS

Article 1. Scope of Regulation

These Vietnamese Valuation Standards specify the approach from costs when conducting valuation in accordance with the law on pricing.

Article 2. Applicability

1. Developable real estate is land intended for construction or land with structures that can be renovated or demolished to construct buildings for optimal and most effective use.

2. The residual method is a valuation method that determines the value of developable real estate based on subtracting estimated reasonable development costs (including investor profit) from the estimated development value (total development revenue) to create such development (total development cost).

Article 4. Approaches and Methods of Real Estate Valuation

Article 3. Explanation of Terms

In this Vietnam Valuation Standard, the following terms are understood as follows:

1. The cost approach is a method of determining the value of the asset being appraised through the costs of creating an asset with identical or similar functions and utilities to the asset being appraised and the depreciation of the asset being appraised.

2. Physical depreciation is the loss of usefulness of the asset leading to a decrease in its value due to damage to the material parts of the asset or its components caused by the effects of time and normal usage.

3. Functional depreciation is the loss of usefulness of the asset leading to a decrease in its value due to the use of the asset not yielding the same efficiency as a replacement asset.

4. Peripheral depreciation is the loss of the asset due to external economic and location factors. Peripheral depreciation due to location only applies to real estate and/or intangible assets related to real estate and occurs when there is a change in infrastructure, landscape, and natural environment around the asset, leading to a decrease in the asset's value.

5. Replacement asset is an asset with similar function and equivalent utility to the asset being appraised, designed, manufactured, or constructed with newer technology, raw materials, and techniques.

6. Total depreciation value of the asset is the total reduction in the asset's value due to physical, functional, and peripheral depreciation at the time of appraisal.

7. Depreciation that can be remedied if:

a) The cost to remedy minor defects or obsolescence is less than or equal to the additional value gained from repairs and remediation;

b) The cost to remedy major defects or obsolescence exceeds the additional value gained from repairs and remediation but such remediation is necessary to maintain the value of other parts of the asset being appraised.

8. Economic life is the period during which the asset generates economic benefits (from the completion date of production, manufacture, or construction until it is put into full use).

9. Actual age is the number of years from the completion of production, manufacture, or construction of the new asset until the appraisal date.

10. Effective age reflects the actual condition of the asset being appraised at the appraisal date. The effective age depends on the maintenance and upkeep of the asset.

11. Physical life is the number of years the asset can be used before it becomes unusable for its original purpose due to damage or wear and tear from physical causes, without considering functional obsolescence or external factors. The physical life may be determined through technical specifications provided by the manufacturer and the structural characteristics of the asset.

12. Replacement cost is the cost to create or obtain a brand new replacement asset at the appraisal date.

13. Reproduction cost is the cost at the appraisal date to create or obtain an asset identical to the asset being appraised when it was brand new.

Chapter II

SPECIFIC PROVISIONS

Article 4. Cases for applying the cost approach

The cost approach is typically applied in any of the following cases:

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

2. There is a plan to create a new asset or when appraising newly constructed projects or newly manufactured assets.

3. Comparing and contrasting with other appraisal approaches.

Article 5. Replacement Cost Method

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

2. Formula for the replacement cost method:

Total depreciation value of the appraised asset (excluding the functional depreciation value of the appraised asset reflected in the replacement cost)

Replacement cost (including the profit of the manufacturer/investor)

Article 6. Reproduction Cost Method

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

2. Formula for the reproduction cost method:

Estimated value of the asset = (including the profit of the manufacturer/investor) - Reproduction cost Total depreciation value of the appraised asset

Article 7. Aggregation Method

1. The aggregation method (also known as the component method) determines the value of the appraised asset by summing up the individual values of the components of the appraised asset.

2. The aggregation method is often applied to appraise assets that are businesses or types of assets whose value primarily depends on the value of their constituent parts.

3. Formula for the aggregation method:

Estimated value of the asset

Where:

V_{i}: the value of the i-th component of the appraised asset determined according to the valuation approaches and methods prescribed in the Vietnamese Valuation Standards;

n: total number of components constituting the appraised asset;

i component of the i-th part.

Article 8. Components of Reproduction Costs, Replacement Costs, and Some Notes on Determination

1. Some components of reproduction costs and replacement costs that need to be considered and analyzed during the appraisal process include material costs, machinery and equipment costs, research and testing costs, labor costs, transportation costs, design costs, consulting fees, management costs, financial costs during production and construction, non-refundable taxes, installation and trial operation costs, contractor profits, investor profits, and other taxes and fees as prescribed by law.

2. The determination of reproduction costs and replacement costs must be tied to the basis of the appraisal value and the accompanying prices of the appraisal.

3. When determining reproduction costs but cannot find materials and machinery identical to those used to produce the appraised asset, similar materials and machinery may be considered.

4. When determining replacement costs, it is necessary to determine the replacement asset based on knowledge of the functions and uses of the appraised asset, thereby determining the cost to create or obtain the replacement asset.

5. Replacement costs and reproduction costs are determined based on collecting and analyzing market information at the time of appraisal, except where laws stipulate that costs should be determined according to cost norms, unit prices, and investment rates issued by competent state agencies.

Article 9. Profit of the manufacturer/investor

1. The profit of the manufacturer/investor in reproduction costs and replacement costs shall be determined as follows:

a) Determine the average ratio of pre-tax profit on total cost of goods sold, selling expenses, administrative expenses, and financial expenses for at least the three most recent years up to the valuation date from at least three enterprises that produce and operate assets identical to the asset being valued or the replacement asset on the market. The data must be taken from audited financial reports of the enterprises.

b) The profit of the manufacturer/investor in reproduction costs and replacement costs shall be calculated by multiplying the average ratio determined in point a of this clause with the reproduction costs and replacement costs not including the profit of the manufacturer/investor.

2. In cases where it cannot be determined according to the method prescribed in Clause 1 of this Article, the standard rate issued by the competent state agency (if any) shall be used.

Article 10. Depreciation value determined by comparison technique

1. The comparison technique determines the depreciation value of the asset through the depreciation value of similar assets traded on the market.

2. The determination of the depreciation value is as follows:

a) Collect information and select at least two similar assets that have been successfully traded or offered for sale or purchase on the market within a period not exceeding one year from the valuation date;

b) Based on evaluating some basic comparative factors (such as sales conditions, financial terms), adjust the transaction price of similar assets to reflect the characteristics of the asset being valued. For real estate, the land use right value or leasehold land value (if any) of similar assets must be excluded to reflect the market value of the asset on the land;

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

d) Subtract the result at point c from the result at point b to determine the depreciation value of similar assets. Then, determine the depreciation rate of comparable assets by dividing the depreciation value by the cost of creating new comparable assets. On this basis, determine the depreciation rate of the asset being valued;

e) Determine the replacement cost or reproduction cost, then multiply by the depreciation rate determined at point d to determine the total depreciation value of the asset being valued corresponding to the replacement cost method or the reproduction cost method.

Article 11. Depreciation value determined by age technique

Determine the depreciation rate of the asset by age technique as follows:

1. Determine the depreciation rate of the asset being valued:

Effective life

% = ------------------- x 100%

Economic life

2. Determine the replacement cost or reproduction cost, then multiply by the depreciation rate determined in Clause 1 of this Article to determine the total depreciation value of the asset being valued corresponding to the replacement cost method or the reproduction cost method.

Article 12. Determination of Depreciation Value According to Total Technical Method

1. The total depreciation value of the asset is determined through analyzing each type of physical, functional, and peripheral depreciation of the asset and summing up the values of these types of depreciation.

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

a) For recoverable physical depreciation, the physical depreciation value is estimated based on the costs required to repair or replace worn-out or outdated parts of the asset (these costs include the total expenses such as purchasing new parts, dismantling old parts), after deducting the income obtained from selling the dismantled old parts (if applicable).

b) Determine the rate of physical depreciation based on the analysis of the asset's usage value at the time of valuation to estimate the physical depreciation value. Specifically:

Degree of Usage

Design Usage Capacity

Determine the replacement cost or reproduction cost, then multiply (x) the determined rate of physical depreciation to determine the corresponding physical depreciation value using the replacement cost method or reproduction cost method;

c) Determine the rate of physical depreciation through the ratio of effective age and physical age of the asset being valued.

Formula:

Effective life

Rate of Physical Depreciation = ---------------- x 100%

Physical Age

Determine the replacement cost or reproduction cost, then multiply (x) the determined rate of physical depreciation to determine the corresponding physical depreciation value using the replacement cost method or reproduction cost method;

d) Determine the rate of physical depreciation based on the assessment of the degree of wear and tear of the main structures of the asset.

Based on the information and survey of the asset being valued, use the opinions of experienced experts related to the asset being valued to assess the weight of each main structure in the total value of the asset, the extent of damage, remaining quality of each main structure; thereby, determine the percentage of physical depreciation value of the asset being valued according to the following formula:

Where:

H: Rate of physical depreciation of the asset being valued expressed as a percentage;

H: Physical depreciation of the i-th main structure expressed as a percentage;

Ti: Weight of the i-th main structure in the total value of the asset being valued; n: Total number of main structures of the asset being valued;

i: i-th main structure

Determine the replacement cost or reproduction cost, then multiply (x) the determined rate of physical depreciation to determine the corresponding physical depreciation value using the replacement cost method or reproduction cost method.

2. Determine the functional depreciation value:

a) Functional depreciation includes: functional depreciation due to high capital costs and functional depreciation due to high operating costs;

b) For recoverable functional depreciation, the functional depreciation value is calculated as the total cost of repairs after deducting the income (if any) from selling dismantled or replaced parts;

c) High capital cost functional depreciation occurs when changes in design, production materials, or the use of new technology result in the creation of replacement assets with similar functionality but at lower investment costs compared to the asset being valued. Irrecoverable high capital cost functional depreciation is determined through the difference between the reproduction cost and the replacement cost of the asset in cases where the reproduction cost is higher than the replacement cost of the same asset;

d) High operating cost functional depreciation occurs when changes in design, technology, or superior productivity lead to the creation of replacement assets with lower operating and production costs compared to the asset being valued. Determining the value of irrecoverable high operating cost functional depreciation is done as follows:

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

Determine the operating cost per unit product produced by the replacement asset. Then, determine the difference in operating cost per unit product produced by the asset being valued and the replacement asset;

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

Determine the total annual operating cost difference through the annual quantity of products produced by the asset being valued and the operating cost difference throughout the remaining economic useful life of the asset being valued;

Deduct the total annual operating cost difference corresponding to the impact of corporate income tax applied to additional income (from using replacement assets with lower operating costs than the asset being valued);

Discount the total annual operating cost difference (throughout the remaining economic useful life of the asset) back to the valuation date with a discount rate reflecting the risk associated with the use of the asset being valued;

d) When determining and estimating various types of functional depreciation values, thorough analysis and argumentation must be conducted to avoid double counting, which could distort the results.

3. Determine the Peripheral Depreciation Value

Peripheral depreciation includes economic depreciation and location depreciation. This type of depreciation is usually unrecoverable.

Determine the peripheral depreciation value through market information analysis, direct capitalization of lost income due to peripheral depreciation, or applying the method of subtracting physical depreciation and functional depreciation values from the total depreciation value of the asset.

The peripheral depreciation value is typically determined after the physical depreciation and functional depreciation values have been determined, as peripheral depreciation is created by external factors unrelated to the asset being valued.

a) Estimate peripheral depreciation through market information analysis.

Use market information analysis to consider the value of the asset being valued by analyzing the information of similar assets that have successfully traded on the market;

b) Estimate peripheral depreciation through direct capitalization of lost income.

When the asset generates income, the lost income due to external economic and location factors can be capitalized to determine the total lost income in the total value of the asset. The total lost income corresponds to the peripheral depreciation value.

The estimation of total lost income is carried out as follows: Market analysis (related to economic factors, location) to determine the value of annual lost income; present value the annual lost income to determine the total value lost impacting the asset's value. If the annual lost income is stable and regular, the present value conversion of the income stream is performed by capitalizing the annual lost income with an appropriate capitalization rate. If the annual lost income fluctuates, the present value conversion of the income stream is performed through discounted cash flow analysis. Determining the capitalization rate and conducting discounted cash flow analysis is carried out according to the Vietnamese Valuation Standard on the Income Approach./.

MINISTRY OF FINANCE

These Vietnamese Valuation Standards prescribe and guide real estate valuation when conducting valuation according to the laws on prices. These Vietnamese Valuation Standards do not apply to cases of land valuation according to the laws on land.
ON THE INCOME APPROACH

of the Minister of Finance)

PART I

GENERAL PROVISIONS

Article 1. Scope of Regulation

This Vietnamese Valuation Standard specifies and guides the implementation of the income approach when valuing assets in accordance with the law on price.

Article 2. Applicability

1. Developable real estate is land intended for construction or land with structures that can be renovated or demolished to construct buildings for optimal and most effective use.

2. The residual method is a valuation method that determines the value of developable real estate based on subtracting estimated reasonable development costs (including investor profit) from the estimated development value (total development revenue) to create such development (total development cost).

Article 4. Approaches and Methods of Real Estate Valuation

Article 3. Explanation of Terms

In this Vietnam Valuation Standard, the following terms are understood as follows:

1. The income approach is a method of determining the value of an asset through converting future cash flows from the asset into present value.

2. The direct capitalization method is a valuation method that determines the value of an asset based on converting the expected stable annual net income from the asset into present value using an appropriate capitalization rate.

3. The discounted cash flow method is a valuation method that determines the value of an asset based on converting expected future cash flows from the asset into present value using an appropriate discount rate.

4. The capitalization rate is the rate used to convert expected stable annual net income from the asset into present value.

5. The discount rate is the rate used to convert future income streams into present value.

6. The terminal value of the asset is the anticipated value of the asset at the end of the forecast period for discounted cash flow analysis (at the end of the cash flow analysis period).

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

1. The income approach is applied to assets that generate income for the owner/user, can predict future income from the asset, and have calculable appropriate capitalization rates or discount rates.

2. The valuation methods used in the income approach are the direct capitalization method and the discounted cash flow method, applicable to assets meeting the conditions specified in Clause 1 of this Article, except for the following cases:

a) For business assets, the valuation method used in the income approach is the discounted free cash flow method, the discounted dividend method, and the discounted free cash flow equity method, implemented according to the Vietnamese Valuation Standard on Business Valuation.

b) For intangible assets, the valuation method used in the income approach is the intangible asset usage fee method, the excess earnings method, and the incremental income method, implemented according to the Vietnamese Valuation Standard on Intangible Asset Valuation.

Chapter II

THE DIRECT CAPITALIZATION METHOD

Article 5. Application of the direct capitalization method

1. Formula in the direct capitalization method

Where:

V: Value of the asset being appraised

I : Net income from the asset

R: Capitalization rate

2. Implementation content:

a) Determine the net income generated by the asset;

b) Determine the capitalization rate;

c) Determine the value of the asset according to the direct capitalization formula.

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

1. Formula for determining net income:

Operating costs

2. The determination of potential total income, loss, and operating costs is based on market survey information of at least three similar assets, taking into account past income and operating costs of the asset being appraised, supply-demand conditions, market industry development prospects, and other factors affecting the forecast of potential total income, loss, and expected operating costs of the asset being appraised.

3. Potential total income is determined as the total amount of stable annual income obtained from fully utilizing the asset's capacity.

4. Loss due to not using 100% capacity and payment risk is determined by multiplying the loss ratio (x) with the total potential income, where the loss ratio is estimated from collecting and analyzing information of similar assets on the market.

5. Operating costs are determined as the annual costs necessary to maintain the income stream from the asset.

6. Potential total income and operating costs may be calculated before or after income tax based on the purpose of the appraisal, characteristics of the asset being appraised, collected information, valuation basis, specific appraisal method, and must be consistent with the method of determining the capitalization rate.

Article 7. Determination of the capitalization rate (R)

1. Based on the purpose of the appraisal, characteristics of the asset being appraised, valuation basis, and collected information, the capitalization rate is determined through one of two methods: the comparison method and the debt-equity analysis method.

2. Comparison method

a) The comparison method determines the capitalization rate for the asset to be appraised by comparing and deriving from the capitalization rates of similar assets on the market;

b) To determine the capitalization rate, it is necessary to investigate, survey, and collect information on at least three comparable assets on the market, including transaction prices,

usage purposes, financial terms, market conditions at the time of purchase and sale, characteristics of buyers and sellers, operating income, operating costs, loss ratios due to not using 100% capacity and payment risk, and other related factors. In cases where the comparable assets have different factors compared to the asset being appraised, adjustments need to be made to these differences;

c) The calculation of net income and operating costs applied to comparable assets must be consistent with the calculation applied to the asset being appraised. The transaction price of comparable assets must reflect current market conditions as well as future market conditions similar to those of the asset being appraised.

3. Debt-equity analysis method

a) The debt-equity analysis method determines the capitalization rate based on the weighted average of the debt capitalization factor and the equity capitalization rate, where the weight is the proportion of funds raised from different sources invested in the asset. This method applies to assets funded by both equity and debt;

b) To determine the capitalization rate, it is necessary to investigate, survey, and collect information related to equity and debt sources, including: equity ratio, debt ratio, repayment term, number of repayment periods, interest rate, investor expectations from the investment, ability to recover investment capital, and other related factors;

c) The debt capitalization factor is the ratio of annual debt payments (including principal and interest) to the original debt amount. The debt capitalization factor is calculated by multiplying each period's payment (including principal and interest) by the number of periods to be repaid in a year and dividing by the total amount of original debt;

d) The equity capitalization rate is the rate used to capitalize income from equity. The equity capitalization rate is calculated by dividing annual equity profit by the total equity. The determination of the equity capitalization rate is usually determined through market surveys and analysis of information from comparable assets.

Chapter III

DISCOUNTED CASH FLOW METHOD

Article 8. Application of the Discounted Cash Flow Method

1. Formula in the Discounted Cash Flow Method

a) General formula:

b) Formulas in certain specific cases:

For a single-stage cash flow, annual cash flows are equal and constant at A, t -> n

For a two-stage cash flow:

Case where annual cash flows differ up to year n, stabilize from year n+1 onwards, t -> ∞.

Case where annual cash flows differ up to year n, increase steadily from year n+1 onwards at a rate of g%/year (with g < r), and t -> ∞:

Where:

V: Value of the asset being appraised

CF: Cash flow in period t

Example: Terminal value forecast

n: Forecast period for future cash flows

: Discount rate

: Forecast horizon

g: Rate of cash flow growth

2. Implementation content:

a) Determine the forecast period for future cash flows;

b) Determine the forecast cash flow based on estimated income from the asset and related operating costs;

c) Determine the terminal value forecast;

d) Determine the discount rate;

d) Determine the value of the asset according to the discounted cash flow formula.

Article 9. Determining the Forecast Period for Future Cash Flows (n)

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

2. The forecast period for future cash flows is determined based on the following factors:

a) Economic life of the asset being valued;

b) Intended holding period for the asset being valued;

c) Reliability of the information collected during the forecast period;

d) The forecast period for future cash flows should be long enough for the asset being valued to reach a relatively stable income level and enable the calculation of the terminal value forecast.

Article 10. Determining Cash Flow (CF)

1. Estimating income from the asset

a) Income from the asset includes amounts of money received by investors from investing in the asset;

b) The estimation of income is based on: The economic and technical characteristics of the asset being valued; past income of the asset being valued and/or similar assets; industry market, sector, and other factors affecting total income forecasting;

c) Income from the asset can be net operating income, potential total income, depending on the available information and data.

2. Estimating costs related to the operation and maintenance of the asset

a) Costs related to the operation and maintenance of the asset include necessary expenses for maintaining income from the operation and maintenance of the asset (including interest expense);

b) The estimation of costs is based on the economic and technical characteristics of the asset being valued; past costs of the asset being valued and/or similar assets; industry market, sector, and other factors affecting cost forecasting.

3. Cash flow (CF) is determined as the difference between income from the asset and costs related to the operation and maintenance of the asset. Cash flow (CF) can be pre-tax or post-tax income, based on the purpose of valuation, characteristics of the asset being valued, collected information, valuation basis, valuation method for the specific type of asset, and must be consistent with the method of determining the discount rate.

Article 11. Determining the End-of-Prediction-Period Asset Value (Vn)

1. The end-of-prediction-period asset value may be the liquidation value, disposal value of the asset, or the market value of similar assets at the end of the prediction period.

2. In cases where the asset continues to be used in subsequent years following the final year of the prediction period, the end-of-prediction-period asset value shall be determined using the two-stage cash flow formula for determining Vn as specified in Point b, Clause 1, Article 8 of this Standard.

Article 12. Determining the Discount Rate (r)

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

2. The discount rate may be the same or different across forecasted years. The determination of the discount rate must be based on reasoning and depend on the valuation basis, purpose of the valuation, type of appraised asset, economic life of the asset or holding period, geographical differences, exchange rates (if applicable), and the type of cash flow being considered.

3. The discount rate is determined through market information and by one of the following methods: the average return method of similar assets in the market; weighted average cost of capital (WACC); capital asset pricing model (CAPM).

MINISTRY OF FINANCE