Methodology Selection 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.
The objective is not a theoretically perfect method. It is the approach most capable of producing a reliable indication of value given the evidence actually available and the premise being applied.
No prescribed answer
Neither IVS 105 nor the insolvency framework prescribes a preferred methodology for all situations. The valuer is required to exercise professional judgement, and a defensible process begins by evaluating the suitability of each potentially relevant approach and method before arriving at the methodology ultimately adopted.
That sequencing matters. Evaluating alternatives after choosing one is rationalisation; evaluating them before choosing is methodology selection.
The eight factors
| Factor | Primary consideration | Likely methodological implication |
|---|---|---|
| Nature of business | Earnings-driven or asset-driven value creation | Income Approach or Asset Approach may be more relevant |
| Basis of value | Fair Value or Liquidation Value | May influence both approach and method |
| Reliability of projections | Availability of credible forecasts | Supports or limits use of DCF |
| Availability of market evidence | Comparable companies or transactions available | Supports or limits use of the Market Approach |
| Asset intensity | Value primarily derived from underlying assets | Greater relevance of NAV or DRC methods |
| Business continuity | Going concern versus liquidation scenario | Influences Income versus Asset-based methods |
| Information quality | Completeness, accuracy and verifiability | Affects reliability of all approaches and methods |
| Distress severity | Extent of operational and financial uncertainty | May require greater emphasis on asset-based methodologies and corroborative analysis |
Seven of the eight factors point toward one approach or another. Information quality is different: it affects the reliability of all approaches and methods.
This is why the reliability of available information is described as often a decisive factor in methodology selection. A DCF cannot be rescued by an asset-heavy balance sheet if the projections are unusable; a Market Approach cannot be rescued by a strong peer set if the subject company's own financials cannot be normalised.
The instruction is to assess not only the availability of information but also its quality, verifiability and relevance to the valuation objective — the same three-dimension test that governs information integrity generally.
What each factor asks in a CIRP
- Nature of the business and asset base — the corporate debtor's character gives the first indication. Earnings-driven businesses lend themselves to an Income Approach; asset-intensive entities, investment holding companies or businesses with limited operating continuity warrant greater reliance on the Cost Approach.
- Basis of value and premise — a methodology fit for Fair Value on a going-concern basis may not be fit for Liquidation Value under a forced or time-constrained realisation.
- Business continuity and distress — where continuity is highly uncertain, assets are non-operational or liquidation is the more probable outcome, asset-realisation methodologies may give a more reliable indication.
- Market evidence — listed peers, recent transaction activity, sector benchmarks and observable pricing strengthen market-based methods; where evidence is thin or needs extensive adjustment, reliance shifts elsewhere.
- Cross-checks — methodology selection is not necessarily an either-or decision.
Getting the outcome into the report
The outcome of this assessment should be clearly reflected in the valuation report. A methodology is most defensible when the report demonstrates not only what was selected, but why that selection was appropriate having regard to the valuation objective, the available evidence and the circumstances of the assignment.
Practically, that means the methodology section records the assessment that actually took place — which approaches were evaluated, what each was tested against, and what disqualified or limited the ones not adopted.
Common mistakes
- Choosing the method first and assembling the justification afterwards.
- Treating asset intensity as decisive while ignoring information quality.
- Applying the Fair Value methodology to Liquidation Value unchanged.
- Performing the methodology selection analysis and leaving it out of the report.