The Three Approaches to Valuation: Market, Income and Cost
By Harihar S, Chartered Engineer & IBBI Registered Valuer
How to Select the Right Valuation Method
The key aspect of valuation is the approach or method taken. Depending on the type of asset and the purpose of valuation, the right method or approach should be adopted in arriving at the value of assets. Each approach includes different, detailed methods of application.
Can You Use More Than One Approach?
Yes. IBBI registered valuers in India are required to consider all three approaches and document why each was selected or rejected for the specific assignment, rather than defaulting to a single method.
When to Use Each Approach
| Approach | When it's used |
|---|---|
| Market approach | When comparable transactions are available for the same or similar assets |
| Income approach | When the asset generates an identifiable income stream |
| Cost approach | When no active market exists, common for specialised industrial equipment |
Reconciling Multiple Approaches
Where more than one approach produces a usable result, the valuer reconciles the figures, giving more weight to the approach best supported by available data and most appropriate to the asset and purpose, rather than simply averaging them.
Which Approach Do Indian Regulations Prefer?
For real estate, the Market Approach is preferred for real estate valuation when comparable transactions are available. Where comparables are limited, the Income or Cost Approach may be used instead. For plant and machinery, the Depreciated Replacement Cost method under the Cost Approach is most commonly applied to plant and machinery valuation, since specialised industrial assets rarely have direct market comparables. The requirement to consider and document all three approaches comes from the ICAI Valuation Standards and the Companies (Registered Valuers and Valuation) Rules, 2017, not from professional convention alone, which is why a defensible report always records the reasoning, not just the concluded value.
Frequently asked questions
What are the three approaches to valuation?
The three approaches are the Market Approach (comparing the asset to similar assets with known prices), the Income Approach (converting future income or cash flow to a present value), and the Cost Approach (calculating replacement or reproduction cost, less depreciation and obsolescence). IBBI registered valuers in India are required to consider all three and document why each was selected or rejected.
Which valuation approach applies to plant and machinery?
The Cost Approach, specifically the Depreciated Replacement Cost method, is most commonly applied to plant and machinery, since specialised industrial assets rarely have direct market comparables.
Which valuation approach applies to real estate?
The Market Approach is preferred for real estate when comparable transactions are available. Where comparables are limited, the Income or Cost Approach may be used instead.
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