Issuance of Circular 32 on the Vietnamese valuation standards on market approach, cost approach, and income approach in Vietnam

Issuance of Circular 32 on the Vietnamese valuation standards on market approach, cost approach, and income approach in Vietnam

On May 16, 2024, the Minister of Finance issued Circular 32/2024/TT-BTC, which establishes the Vietnamese valuation standards on market approach, cost approach, and income approach.

According to Article 4 of the Vietnamese valuation standards on cost approach issued with Circular 32/2024/TT-BTC, the cost approach is applied in the following cases:

- When there is insufficient information available in the market to apply the market approach and income approach.

- When there is an intention to create a new asset or when evaluating newly constructed works or newly manufactured assets.

- When comparing and contrasting with other valuation approaches.

Issuance of Circular 32 on the Vietnamese valuation standards on market approach, cost approach, and income approach in Vietnam - image from internet

What is the basis for the replacement cost method in Vietnam?

Based on Article 5 of the Vietnamese valuation standards on cost approach issued with Circular 32/2024/TT-BTC, the replacement cost method is defined as follows:

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.

The formula for the replacement cost method is as follows:

Estimated value of the appraised asset = Replacement cost (including the profit of the manufacturer/investor) - Total depreciation value of the appraised asset (excluding the functional depreciation value of the appraised asset already reflected in the replacement cost).

What is the basis for the reproduction cost method in Vietnam?

Based on Article 6 of the Vietnamese valuation standards on cost approach issued with Circular 32/2024/TT-BTC, the reproduction cost method is defined as follows:

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.

The formula for the reproduction cost method is as follows:

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

What shall be considered when determining the components of replacement cost and reproduction cost itself in Vietnam?

Based on Article 8 of the Vietnamese valuation standards on cost approach issued with Circular 32/2024/TT-BTC, the following considerations should be taken into account when determining the components of reproduction cost and replacement cost:

- Some components of reproduction cost and replacement cost that need to be considered and analyzed during the valuation process include material costs, equipment costs, research and testing costs, labor costs, transportation costs, design costs, consulting fees, management costs, financing costs during the production period, construction costs, non-refundable taxes, installation costs, commissioning costs, contractor's profit, manufacturer/investor's profit, and other taxes and fees required by law.

- The determination of reproduction cost and replacement cost must be based on the valuation value basis and accompanying assumptions of the appraisal.

- When determining the reproduction cost, if it is not possible to find identical materials or equipment used to create the appraised asset, similar materials or equipment can be considered.

- When determining the replacement cost, the replacement asset must be identified based on an understanding of the functions and uses of the appraised asset, from which the cost to create or obtain the replacement asset is determined.

- The replacement cost and reproduction cost are determined based on the collection and analysis of market information at the time of appraisal, except in cases where the law stipulates the determination of costs based on cost standards, unit prices, or investment capital rates set by authorized state agencies.

What are regulations on the profit of the manufacturer determined in the reproduction cost and replacement cost in Vietnam?

Based on Article 9 of the Vietnamese valuation standards on cost approach issued with Circular 32/2024/TT-BTC, the profit of the manufacturer is determined in the reproduction cost and replacement cost as follows:

- Determine the average ratio of pre-tax profit of the enterprise on the total of cost of goods sold, selling expenses, enterprise management expenses, and financial expenses for the last three years up to the appraisal date of at least three enterprises engaged in the production and business of assets identical or similar to the appraised asset on the market. The data must be taken from the audited financial statements of the enterprises.

- The profit of the manufacturer/investor in the reproduction cost and replacement cost is calculated by multiplying the average ratio determined at point a of this section by (x) the reproduction cost or replacement cost that does not include the profit of the manufacturer/investor.

In cases where the average ratio of pre-tax profit cannot be determined, the profit of the manufacturer/investor in the reproduction cost and replacement cost is determined based on standard rates set by the authorized state agency (if available).

Note: Circular 32/2024/TT-BTC issued by the Minister of Finance takes effect from July 1, 2024.