Proportional Analysis 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 report is not the longest one. Justifying every assumption to the same depth buries the three that decide the value under forty that do not — which is a reporting failure of a different kind.
The principle
Defensible reporting is not achieved through lengthy narratives, extensive caveats or voluminous appendices. It is achieved through disciplined analytical communication.
Specifically: defensible reporting does not mean explaining every assumption at equal length. A report that attempts to justify every micro-assumption in equal depth becomes unreadable and dilutes the impact of the genuinely important justifications.
Proportional analysis therefore requires that the depth of justification be proportionate to the materiality and subjectivity of the assumption.
The five materiality triggers
An assumption is material to justification when any of the following applies:
| # | Trigger | Why it matters |
|---|---|---|
| 1 | A 10% change in the assumption produces a greater than 5% shift in the final value | Sensitivity — the assumption drives the answer |
| 2 | It involves significant professional judgement not directly observable from market data | Subjectivity — there is no external check |
| 3 | Key data was obtained from management and could not be independently verified | Source reliability |
| 4 | It deviates from common market practice | The departure needs explaining |
| 5 | It falls in a category courts and regulators have historically scrutinised | Known challenge exposure |
Assumptions meeting these criteria deserve thorough, evidenced justification. Assumptions that are standard, verifiable and low-sensitivity can be addressed with a brief statement of basis.
"A 10% change produces a greater than 5% shift" is a computable criterion. It can be run across every input in the model before the report is drafted, and it produces a ranked list of the assumptions that actually matter.
That list then does two jobs. It tells the valuer where to invest the justification effort — and it is, in substance, the sensitivity analysis that IVS 201 and 202 expect a compliant report to contain in any event.
Running the test is therefore not additional work. It is the same work, used twice.
Which assumptions typically clear the threshold
- Discount rate — small changes move a DCF conclusion substantially, and much of the build-up is judgement.
- Terminal growth rate — in most DCF models the terminal value is the largest component of the answer.
- Revenue growth in the projection period — particularly where management projections diverge from historical performance.
- Distress adjustments — the insolvency-specific judgement, with no market observation available.
- Selection of comparables — inherently a judgement, and one a counter-expert can readily contest.
Which typically do not
- Depreciation rates consistent with the debtor's accounting policy.
- Statutory tax rates.
- Working capital assumptions consistent with a stable historical pattern.
- Inputs directly observable from published market data on the valuation date.
These still require a statement of basis — proportional analysis reduces the depth, not the disclosure.
Why readability is a defensibility issue
The book lists clarity and readability for both specialist and non-specialist stakeholders among the characteristics of a speaking report. That is not a stylistic preference.
A committee of creditors includes bankers, and in a real estate case homebuyers and land authorities. A report in which the three decisive assumptions are indistinguishable from forty routine ones has communicated nothing to them — which is the same failure as omitting the justification altogether, arrived at by the opposite route.
Common mistakes
- Justifying every input at equal length and burying the material ones.
- Assessing materiality by the size of the input rather than its effect on the value.
- Omitting a basis statement for low-sensitivity assumptions entirely.
- Treating an unverifiable management input as routine because the figure is small.