Issuance of Decree 32/2024/TT-BTC on the Vietnam valuation standards for market approach, cost approach, and income approach

Issuance of Decree 32/2024/TT-BTC on the Vietnam valuation standards for market approach, cost approach, and income approach

On May 16, 2024, the Minister of Finance issued Decree 32/2024/TT-BTC on the Vietnam valuation standards for the Market Approach, Cost Approach, and Income Approach.

According to this decree, there are three Vietnam valuation standards as follows:

- Vietnam valuation standard for the Market Approach

- Vietnam valuation standard for the Cost Approach

- Vietnam valuation standard for the Income Approach

The scope of application of Decree 32/2024/TT-BTC includes:

- Price appraisers, valuation enterprise carrying out valuation services according to the provisions of the price-related laws.

- Organizations and individuals performing state valuation activities according to the provisions of the price-related laws.

- Organizations and individuals requesting valuation, third parties using valuation reports under the valuation contract (if any).

Issuance of Decree 32/2024/TT-BTC on the Vietnam valuation standards for market approach, cost approach, and income approach - image from internet

In which case is the Cost Approach applied in Vietnam?

According to Article 4 of the Vietnam valuation standards for the Cost Approach, which is issued alongside Decree 32/2024/TT-BTC, the cases where the Cost Approach is applied are as follows:

- Insufficient market information to apply the Market Approach and the Income Approach.

- Intention to create a new asset or when appraising newly constructed works or newly manufactured assets.

- Comparison and correlation with other valuation approaches.

On what basis are the replacement cost and reproduction cost in Vietnam determined?

In Article 8 of the Vietnam valuation standards for the Cost Approach, which is issued alongside Decree 32/2024/TT-BTC, the components of replacement cost and reproduction cost, as well as some considerations when determining them, are specified as follows:

Components of replacement cost, reproduction cost, and considerations when determining:

1. Several components of replacement cost and reproduction cost that need to be considered and analyzed during the valuation process include material costs, machinery and equipment costs, research and testing costs, labor costs, transportation costs, design costs, consulting costs, management costs, financial costs during production, construction costs, non-refundable taxes, installation costs, trial running costs, contractor's profit, producer/investor's profit, and taxes and fees as prescribed by law, as well as other costs as regulated by law.

2. The determination of replacement cost and reproduction cost should be close to the valuation basis and accompanying assumptions of the appraisal.

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

4. When determining the reproduction cost, the replacement asset should be determined based on an understanding of the functions and uses of the appraised asset, from which the cost to create or obtain the replacement asset can be determined.

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

Therefore, the replacement cost and reproduction cost are determined based on:

Collecting and analyzing market information at the time of the appraisal, except in cases where the law prescribes the determination of costs based on cost standards, unit prices, or investment capital rates set by authorized state agencies.

How to determine the profit of the producer/investor in the replacement cost and reproduction cost in Vietnam?

In Article 9 of the Vietnam valuation standards for the Cost Approach, which is issued alongside Decree 32/2024/TT-BTC, the profit of the producer/investor in the replacement cost and reproduction cost is determined as follows:

- Determine the average ratio of pre-tax corporate income profit to the sum of cost of goods sold, selling expenses, management expenses, and financial expenses over the past three years until the appraisal date, based on at least three companies that produce and trade assets identical or similar to the appraised asset or replacement asset on the market. The data must be taken from the audited financial reports of these companies.

- The profit of the producer/investor in the replacement cost and reproduction cost is calculated by multiplying the average ratio determined at point (a) by the replacement cost or reproduction cost, excluding the profit of the producer/investor.

Note: If the above method cannot be determined, then the standard set by the authorized state agency (if any) should be used.