Internal Consistency explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A defensible valuation is not one in which each assumption can be individually explained. It is one in which the assumptions collectively support a consistent and credible valuation narrative.
The validation step that gets skipped
Validation procedures commonly include benchmarking against market and industry evidence, comparison with historical performance, analytical review of operational and financial relationships, and corroboration using alternative sources.
The step described as frequently overlooked is the assessment of internal consistency — reviewing assumptions collectively to determine whether they present a coherent view of the business and the valuation scenario being adopted.
The six recurring pairs
| Assumption pair | Risk of inconsistency | Consistency check required |
|---|---|---|
| Revenue growth rate vs. discount rate | A high growth outlook combined with a high risk premium may reflect contradictory views of business prospects | Ensure the risk assessment embedded in the discount rate is consistent with the outlook reflected in projected cash flows |
| Capital structure in WACC vs. going-concern assumptions | A distressed capital structure may overstate risk where the valuation assumes successful resolution and business continuity | Consider whether the capital structure reflects the valuation scenario adopted; explain normalisation adjustments |
| Terminal growth rate vs. long-term economic growth | Excessive terminal growth may imply an economically unsustainable outcome | Anchor terminal growth to long-term economic or sector growth unless a specific, documented justification exists |
| Margin improvement vs. historical performance | Projected profitability improvements may lack operational support | Link margin improvements to identifiable operational, cost or business drivers |
| Going-concern valuation vs. asset-level liquidation assumptions | Entity-level assumptions may conflict with the basis applied to individual assets | Ensure consistency between the overall valuation premise and asset-level assumptions |
| Multiple valuation method conclusions | Arbitrary averaging or weighting may ignore significant analytical differences between methods | Explain the reasons for valuation differences and the rationale for any weighting applied |
Both the growth-versus-discount-rate pair and the capital-structure pair arise from the same failure: the cash flows and the discount rate were built by different reasoning about the same company.
A CIRP valuation is especially exposed. The projections come from the Information Memorandum and assume a successful resolution; the WACC is often built from the corporate debtor's actual, distressed debt-equity position and a large company-specific risk premium. Each half is defensible on its own. Together they price a recovery scenario at a no-recovery discount rate — and the internal consistency check is the only step that catches it.
The answer is not to soften either input, but to state which scenario the valuation is adopting and to explain any normalisation applied to reach it.
The entity-versus-asset conflict
The fifth pair is peculiar to insolvency work, where the same valuer produces both fair value on a going-concern premise and liquidation value on a piecemeal-realisation premise. Inconsistency creeps in when an asset schedule prepared for one exercise is reused in the other without changing the premise applied at asset level.
Where assumptions come from, and how they are tested
Sources include management information, historical performance, market evidence, industry data, contractual arrangements and professional judgement. Reliability is assessed before adoption:
- Management projections may require corroboration through historical performance and industry outlook.
- Historical trends may require normalisation for distress-related events.
- Market benchmarks should be evaluated for comparability to the subject entity.
Each material assumption should be traceable from its source, through the validation procedures performed, to its incorporation into the valuation — the same traceability standard the work file applies to conclusions.
Running the internal consistency review
- List every material assumption with the scenario it implies.
- Test each of the six pairs above against the model as built.
- Where a conflict appears, decide which scenario the valuation is adopting and align the other input to it.
- Record the normalisation and its reason — an unexplained adjustment invites the opposite challenge.
Common mistakes
- Validating each assumption alone and never reading them together.
- Using the distressed debt-equity ratio in a WACC that discounts recovery cash flows.
- Setting terminal growth above long-term economic growth without a documented justification.
- Averaging method outputs without explaining why they differ.