With reference to a guidance document issued by the China Appraisal Society (“CAS”) in relation to discount rate calculation, the China Securities Regulatory Commission (“CSRC”) launched the Regulatory Guidance - Valuation (the “Guidance”) in January 2021 to standardize the parameters of discount rate calculation in the income approach.
The Guidance provides specific requirements for the parameters in Capital Asset Pricing Model (“CAPM”) and Weighted Average Cost of Capital (“WACC”), including risk-free rate, market risk premium, beta, capital structure, specific risk premium and expected return of debt.
With AVISTA’s experience in business valuation, the key points of the Guidance for the discount rate calculation are outlined below.
Background and Objective
The discrepancies for the current valuation practices in the income approach have been prevailing among valuation entities (“Entities”), ranging from sample selection, parameters’ determination and calculation methodology. Meanwhile, the valuation process may also be influenced by complicated and subjective judgment, which would impact the reliability of company’s financial data and valuation result.
Accordingly, the CSRC formulates the Guidance in order to standardize the discount rate calculation, thereby enhancing the regulations in the valuation industry.
The Guidance enumerates 3 fundamental requirements to the Entities highlighting the consistency and reasonableness in the discount rate calculation.
Instructions on Parameters
The Guidance provides instructions for 6 parameters typically used in the discount rate calculation. In general, the Guidance requires the Entities to disclose parameter-related methods, analytical processes and data sources in the valuation reports. The details of the instructions to each parameter are specified below.
To read the full Regulatory Guidance released by CSRC, please click here. (Available in Chinese version only)
AVISTA’s Professional Services for Business Valuation
As a professional valuation and financial advisory firm, AVISTA provides reliable business valuation services and accommodates the valuation needs in various transactions, including merger and restructuring. Our valuation experts are ready to advise you on asset valuation in compliance with the latest regulatory guidance.
For further information or enquiries regarding the potential valuation impact of the CSRC’s regulatory guidance on discount rate calculation, please feel free to contact us.
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