Decision of the Board of Directors of the Authority No. (1) of 2017 Regarding the Issuance of the Egyptian Financial Valuation Standards for Enterprises

Decision of the Board of Directors of the Authority No. (1) of 2017 Date: 18/01/2017 Last Amendment Date: 26/07/2023 Regarding the Issuance of the Egyptian Financial Valuation Standards for Enterprises

The Board of Directors of the Capital Market Authority, Having reviewed Law No. (159) of 1981 on Joint Stock Companies, Companies with Limited Shares, and Limited Liability Companies; And Law No. (95) of 1992 on the Capital Market; And Law No. (10) of 2009 on Regulating Supervision over Non-Banking Financial Markets and Instruments; And Minister of Investment Decision No. (101) of 2007 adding financial securities consulting activities to the activities of companies operating in the securities field; And Board of Directors Decision No. (121) of 2010 regarding the basic professional performance standards for companies operating in the field of providing financial consulting services in securities; And Board of Directors Decision No. (11) of 2014 regarding the rules for listing and delisting securities on the Egyptian Exchange and its amendments; And upon the approval of the Board of Directors in its meeting No. (1) held on 18/01/2017 to approve the issuance of the Egyptian Financial Valuation Standards.

Decided:

(Article One)
Pursuant to the issuance of the Egyptian Financial Valuation Standards for Enterprises attached to this Decision.

(Article Two)
Financial consulting companies for securities licensed by the Authority shall comply with the attached standards when conducting all financial valuation work, including fair value determination studies, and shall be obligated to indicate this at the beginning of their reports.
The Authority shall not accept the financial valuation reports referred to in the preceding paragraph unless they include an indication at the beginning of these reports that they were prepared in accordance with the financial valuation standards for enterprises attached to this Decision.

(Article Three)
Decision of the Board of Directors of the Authority No. (121) of 2010 is hereby repealed.

(Article Four)
The provisions of this Decision shall not affect financial valuation reports, including fair value determination studies, submitted to the Authority prior to the effective date of this Decision, provided they complied with the standards in force at that time.

(Article Five)
This Decision shall be published in the Egyptian Gazette and on the websites of the Authority and the Egyptian Exchange, and shall take effect from the day following its publication in the Egyptian Gazette.

1 The Decision was amended by Board of Directors Decision No. 110 dated 23/06/2020 and Board of Directors Decision No. 150 dated 26/07/2023.

Egyptian Financial Valuation Standards for Enterprises Issued by Decision of the Board of Directors of the Authority No. (1) of 2017 18 January 2017, according to the last amendment dated 26/07/2023

Egyptian Financial Valuation Standards for Enterprises Subject | Page 1 Introduction and Scope of Application First: Professional Conduct Standards | 6 Second: Professional Competence Requirements | 11 Third: Scope of Work Standard | 12 Fourth: Execution of Valuation Process Standard | 14 Fifth: Reasonableness of Assumptions Standard | 19 Sixth: Valuation Approaches and Methods Standard | 21 Seventh: Preparation of Valuation Report and Its Contents | 24
Appendix A: Valuation Approaches and Methods | 30

1. Introduction and Scope of Application
   -1 Introduction:
   Financial valuation aims to determine the value of an enterprise or project on a specific date in accordance with multiple legal requirements, primarily implementing the Capital Market Law No. 95 of 1992, its executive regulations, and the listing and delisting rules of the Egyptian Exchange.
   In this context, the Capital Market Authority has been keen to issue approved Egyptian financial valuation standards for enterprises, keeping pace with international methodologies and best practices in related fields, completing the disclosure and objectivity system, which includes Egyptian Accounting Standards, Egyptian Auditing Standards, and Egyptian Real Estate Valuation Standards. These standards crown that system, which essentially aims to protect investors when valuing securities for purposes of offering, acquisition, capital increase, and other investment decisions. Law No. 10 of 2009 on Regulating Supervision over Non-Banking Financial Markets and Instruments forms the general legal framework for the aforementioned standards. The financial valuation standards were prepared taking into account the Capital Market Authority's issuance of the Egyptian Real Estate Valuation Standards. In this context, the financial valuation standards do not include a detailed explanation of real estate asset valuation, and users of the financial valuation standards may refer to the Egyptian Real Estate Valuation Standards regarding real estate assets. Therefore, the existence of national standards for financial valuers and their assistants to value various types of enterprises and projects aims to gain the trust of various parties and stakeholders in valuation work, protect market participants, and encourage investment. Accordingly, these standards were issued. The Capital Market Authority is the sole regulatory body in Egypt responsible for licensing the practice of independent financial advisory activities and approving the regulatory and supervisory requirements specific to this activity.

-2 Scope of Application According to Egyptian Capital Market Legislation:
The financial valuation standards apply to all cases where the Capital Market Law, its executive regulations, or the Egyptian Exchange listing and delisting rules require a valuation process for companies, securities, or other assets taking the form of an enterprise or project, particularly in the following cases:

• Capital increases by issuing new shares, in accordance with Article 17 of the Executive Regulations of the Capital Market Law No. 95 of 1992.
• Takeover bids in accordance with the provisions of Chapter Twelve of the Executive Regulations of the Capital Market Law.
• Share swaps held by a subscriber in the capital of another company for the purpose of acquisition or merger, in accordance with Article 22, paragraph (w) of the Executive Regulations of the aforementioned Law.
• Fair value studies required by the Egyptian Exchange listing and delisting rules when buying or selling shares of a listed company in the securities or enterprise representing 10% or more of the equity of the listed company.
• Growth and profitability studies for companies not meeting the profitability condition, in accordance with the Egyptian Exchange listing rules.
• Valuation of investment funds' investments in non-exchange-traded securities (particularly private equity funds and real estate investment funds).
• Mergers between companies and corporate divisions in accordance with the provisions of the Capital Market Law No. 95 of 1992.
• Valuation cases for the purpose of offering securities.
• Cases of executing share or stake transfers, capital increases, or issuing convertible financing instruments in startups, in accordance with shareholders' agreements of startups, in the event that companies and entities operating in venture capital invest in startups through convertible financing instruments.
  The standards use the term "Valuer" to refer to anyone performing financial valuation work and preparing fair value studies. In cases where Egyptian capital market legislation requires the preparation of a fair value study report, it must be issued by a party licensed by the Authority to practice financial consulting activities in the field of securities.

-3 Concepts and Definitions
Concept of the Valuation Process:
It is the process of estimating the value of the equity rights of the enterprise under valuation on a specific date, taking into account all rights, benefits, requirements, and restrictions related to the equity stake, regardless of its legal form.
This is done by using financial valuation standards, which rely on variables related to:
(1) The enterprise's generation of future returns.
(2) Comparing the value of the enterprise under valuation with the value of similar or comparable enterprises.
(3) Estimating the returns resulting from the liquidation of the enterprise under valuation (in relevant cases).

Concept of Value:
Value is the estimated financial equivalent as a fair price for the enterprise under valuation. This estimate is based on a set of future assumptions applied according to appropriate valuation methods and in light of the purpose of the valuation. The most important of these future assumptions is the assumption of the enterprise's continuity as an existing and ongoing entity in its operations, and that this entity has the ability to generate future benefits through the optimal use of its assets—except in liquidation cases. Value differs from market price in that market price is the financial amount requested, offered, or paid, or the best price a seller can actually obtain in the market for a specific asset, i.e., the most probable price and the most suitable price for the buyer on the valuation date. Within the framework of the valuation purpose, value concepts are defined, including fair market value, fair accounting value, investment value, and liquidation value, as follows:
-1 Fair Market Value:
It is the estimated financial equivalent as a fair price in a transaction between two parties, each possessing the ability and free will to make decisions in a free, open market for participants after adequate marketing periods. The definition assumes that the exchange parties (buyer and seller) represent the majority of market participants, have obtained sufficient information about the nature and characteristics of the enterprise under valuation, and have the ability to act independently and prudently based on available information, each in their own interest and within market conditions on the valuation date. For the current or potential buyer, value represents an estimate of the expected current and future economic benefits arising from owning equity rights in the enterprise under valuation. For the current or potential seller, it expresses the most probable price they would be willing to accept in exchange for relinquishing those benefits and rights. -2 Fair Accounting Value:
According to Egyptian Accounting Standard No. (45), fair value represents the financial equivalent that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, for the purpose of preparing and presenting financial statements. -3 Investment Value:
It is the financial equivalent of the enterprise under valuation from the perspective of a specific investor—or group of investors—for investment purposes that may differ from other market participants. It is a transaction value based on mutual agreement between two parties acting independently, with no relationship that would make this equivalent inconsistent with the market or excessive. Investment value represents the synergistic value resulting from combining two or more stakes. -4 Liquidation Value:
It is the sum of expected values from liquidating the enterprise, resulting from selling each of the enterprise's assets individually, after settling all liabilities. This concept is used in valuation cases of financial distress or when initiating liquidation procedures.
-5 Startups:
They are companies with a short operational history, often newly established, in the growth phase, and seeking markets. Some rely on technology and innovation. They often start with low capital and high costs during the establishment phase, and face numerous challenges at the beginning to obtain the necessary funding to grow their operations and expand their market presence. The need to value startups arises to increase capital according to the growth stage the company is passing through, as key investors, whether current or prospective, need to evaluate their investments in light of differing returns and risks according to each stage of the startup's growth.

First: Professional Conduct Standards
)1( Introduction
This standard aims to ensure the valuer performs their duties with integrity, seriousness, and respect by adhering to the code of conduct and professional ethics set forth in this standard, complying with financial valuation standards or any technical or professional standards issued by the Authority, as well as complying with laws and regulations related to the enterprises under valuation, and exercising the care of a prudent person when conducting any analysis within the scope of financial valuation duties. )2( Professional Conduct Rules -1/2 Integrity and Honesty:
a. The valuer must not engage in any professional behavior characterized by dishonesty, fraud, deception, or that involves any action that could negatively affect their reputation, integrity, or professional competence. b. The valuer must not participate in any financial valuation process aimed at reaching a predetermined value. -2/2 Duties Towards Market Participants and the Market:
a. The valuer must place the interests of market participants and potential investors before any personal interests, and deal fairly and objectively with all clients when expressing any opinions, recommendations, or consultations, or any professional work for these clients. In all cases, the valuer must not forget that they work for the public interest and potential investors of the enterprise under valuation. b. The valuer must not engage in or assist others in any practices that could manipulate prices. The valuer is considered a related party to the enterprise under valuation from the moment they are commissioned to prepare the valuation, and is considered informed about the processes under valuation and connected to all parties involved in those processes.
c. The valuer is obligated to disclose to the client the nature of any actual or potential conflict of interest between themselves and any party operating in the securities market before commencing the valuation and preparing the valuation report.
-3/2 Independence and Commitment to Avoid Conflicts of Interest:
a. A financial valuer must not perform valuation work for two or more entities simultaneously if their interests conflict, unless with written consent from each party, and must disclose this in the valuation report or fair value study, except in fair value studies for securities for public or private offering purposes. b. The valuer is responsible for ensuring no conflict exists between their personal interest, their employees, their employer, or relatives up to the second degree, or partners, and the client's interest or the interests of parties benefiting from the valuation or fair value study. In case of a potential conflict, the valuer is obligated to notify the client in writing before accepting the commission. If the valuer discovers a conflict after commissioning, they are obligated to notify the client in writing in a timely manner before the work concludes.
c. The valuer is prohibited from issuing a valuation report or fair value study for the purpose of determining the value of assets or financial instruments owned by them or any related parties, according to the definition at the end of this main section.
d. The valuer is prohibited from trading securities or assets of the enterprise under valuation using undisclosed or non-public market information or data, even if incomplete, during the valuation period, whether related to an imminent transaction or any other matter having a material effect on the trading prices of these securities or the financial positions of the issuers. e. The valuer is prohibited from trading securities they have valued during the three years following the valuation date. They are also prohibited from issuing a valuation report for use in any purposes related to the scope of these standards according to capital market legislation if they are connected to any party to a transaction concluded based on this report. f. In the event of contracting with the valuer as an independent financial advisor according to capital market legislation, full independence must be maintained for six months prior to the contracting date as an independent financial advisor. In takeover bids, this obligation includes not providing financial consultations to the bidder and the target enterprise for six months from the expiration of the bid period in case of unexecuted bids, and three months from the expiration of the bid period in case of executed bids. g. The valuer's fees must not be based on the value reached for the enterprise under valuation or on any gains or losses arising for related parties as a result of the issued reports. h. The valuer's and their staff's salaries, bonuses, and fees must not be linked to the results of the reports and studies they issue.
i. The valuer must not accept any gifts or grants from any person with whom they have professional relations for the purpose of influencing their professional performance or the valuation process and results, or for influencing their behavioral neutrality.
Related Parties:
The following are considered related parties to the financial valuer:

• Members of the board of directors of the company from which the valuation is issued, the natural person preparing the valuation, the assisting work team (and analysts in the specialized valuation department), and their relatives up to the second degree.
• Subsidiary companies of the company mentioned in the previous item.
• The shareholder owning the majority of the capital of the company from which the valuation is issued, as well as their subsidiary companies if the shareholder is a legal entity, or companies in which they or their relatives up to the second degree own the majority of shares if the shareholder is a natural person.
• Subsidiary companies of the legal entity members of the board of directors of the company from which the valuation is issued, as well as companies in which the majority of shares are owned by the valuation preparer or their assisting work team (and analysts in the specialized valuation department), or members of the board of directors of the company from which the valuation is issued, or any of their relatives up to the second degree.
  4/2 Objectivity and Avoidance of Misleading Information:
  a. The valuer must ensure that when making choices or addressing matters left to personal judgment, they rely on logical and objective foundations for their choice or personal estimate, and then clarify them to the report user to enable understanding of the results. In all cases, the valuer must strive and rely on logical foundations during analysis, comparison, and selection, and must seek to support those foundations with appropriate research and investigations as much as possible. In all cases, the valuer must not intentionally use valuation bases for the purpose of inflating or deflating valuation results. b. The valuer must not use any information obtained for valuation purposes or benefit from it unless exercising the care of a prudent person to verify its accuracy, credibility, and reasonableness. If the valuer relies on data that is difficult to verify or questionable, the valuer is obligated to clearly disclose this in a prominent place in the report and explain the extent of its impact on the valuation results.
  c. The valuer is prohibited from intentionally using, writing, or publishing any misleading reports, data, or information, or misrepresenting financial analyses or opinions, and must not intentionally express biased opinions and recommendations. The presentation must be fair, accurate, and complete.
  -5/2 Utilization of Other Valuers:
  The valuer may utilize the assistance of external parties in valuations related to specialized types of activities or assets associated with the enterprise under valuation, after exercising due care in selecting these parties as specialists with appropriate competence and experience in the tasks assigned to them, provided they make appropriate disclosure within the scope of work before commencing the valuation process and preparing the valuation report. This does not exempt the valuer from responsibility for the final results of the report. 6/2 – Valuation Report or Fair Value Study:
  The valuer's report or fair value study must be fair, accurate, complete, and clear. This includes not including any data or information when known to contain errors or unclear matters or biased opinions, or intentionally misrepresenting financial analyses or opinions and recommendations.
  -7/2 Confidentiality:
  a. The valuer is obligated to maintain the confidentiality of reports and use them only for their specified purpose, and protect any information related to the enterprise under valuation that may come to their knowledge during the performance of the work, which could affect the value of the enterprise under valuation, influence the investment decisions of market participants, or affect trading trends in the market. The valuer is also obligated to instruct analysts working under them to maintain confidentiality and not disclose their study results to any related parties operating in the investment field. b. The valuer is obligated not to disclose the results of a valuation performed for a client unless disclosure is to the specific parties stipulated in the contract and stated in the scope of work with this client, or to regulatory or judicial authorities upon request. -8/2 Retention of Information:
  The valuer must retain all data, information, and paper or electronic documents related to the valuation or fair value study—whether provided by the client or others and relied upon during the valuation process, as well as the methodologies used in analysis and valuation, and the results report—for a period of no less than five years from the date of submitting the report to the requesting entity, without prejudice to the provisions of the Capital Market Law and its executive regulations in this regard, or to related laws according to the nature of the task.

Second: Professional Competence Requirements
)1( Introduction
Performing financial valuation tasks requires the availability of several basic components related to the valuer's professional competence and the assisting work team in preparing the valuation report, and possessing the scientific and professional qualification, practical experience, and ability to obtain necessary information sufficient to meet the needs of preparing the valuation report. )2( Scientific and Professional Requirements:
The valuer must possess an appropriate amount of knowledge, experience, and scientific or professional specialization in the fields of financial valuation, and the ability to absorb developments related to the work that enable them to complete their task properly. In all cases, the valuer is prohibited from claiming qualifications they have not obtained or experiences they do not possess. )3( Continuing Education and Skill Development:
The valuer must have sufficient knowledge and awareness of the laws, regulations, and rules related to financial valuation work, all provisions of these standards, and internationally recognized valuation methodologies to utilize them in serving valuation purposes and understanding the nature of the enterprise. They must maintain and continuously improve their knowledge level through professional development programs and continuous awareness of developments in the valuation profession. )4( Acceptance of Valuation Assignment:
In all cases, the valuer must not accept to perform valuation tasks unless they expect to complete their task with a high degree of professional competence, enabling them to identify, gather, and analyze actual data specific to the enterprise under valuation, exercise appropriate professional judgment to set future assumptions and select the most appropriate valuation method/methods, and comply with these standards.

Third: Scope of Work Standard
)1( Introduction
This standard aims to define the elements of the valuer's framework in light of different valuation purposes, containing conditions for accepting the valuation assignment as well as the contents required when preparing the engagement letter with the client, as follows:
)2( Acceptance of Valuation Assignment
It refers to the valuer's acceptance of the valuation process in light of the absence of restrictions limiting their independence, objectivity, and compliance with the requirements set forth in these standards and the requirements of the authorities to whom the valuation report is submitted.
)3( Engagement Letter with the Client
The engagement letter represents a written contract between the valuer and the requesting entity(ies) to define the scope of work, its timing, and the valuer's fees. The valuer's scope of work is defined in the drafted contract in light of the valuation purpose.
The engagement letter must include at least the following:
a. The contract must include confirmation that the valuer:
.1 Is among those registered in the register of independent financial advisors with the Authority (in valuation cases required by capital market legislation).
.2 Has no conflict of interest as stipulated in the "Professional Conduct and Ethics Standard". b. Identification of the client and any other users of the valuation results.
The requesting entity(ies) and any other users of the valuation results must be identified. Any restrictions on the use of the results stated in the report must also be disclosed.
c. Purpose of the Valuation
The purpose of the valuation must be clearly defined and disclosed upon accepting the client, in light of the scope of application of these standards. d. Start Date of the Valuation Assignment e. Nature and Sources of Information The nature and sources of data and information that the requesting entity will provide, as well as the main sources of information the valuer will rely on, must be disclosed as much as possible. In case of restrictions or limitations on this information that affect the valuer's work, they must be disclosed in the engagement letter. f. Confirmation that the valuation will be completed in accordance with the Egyptian Financial Valuation Standards g. Description of the Report The engagement letter must include a general description of what the report will cover, without contradicting the provisions in the "Preparation of Valuation Report and Its Contents Standard". Any excluded elements and the reasons for their exclusion must be disclosed. h. Estimated Timelines for Completing the Valuation Assignment
i. The Financial Consideration Due to the Valuer for Performing Their Work.
)4( Modifications to the Scope of Work
In some cases, necessary modifications to the scope of work may be required during the valuation process, or restrictions may appear regarding the availability of information. In this case, the engagement letter is modified or an addendum is signed.

Fourth: Execution of Valuation Process Standard )1( Introduction Performing a valuation process requires the valuer to take a set of fundamental steps as follows:
First Phase: Understanding the nature of the activity of the enterprise under valuation.
Second Phase: Estimating the future performance of the enterprise.
Third Phase: Selecting one or more valuation methods.
Fourth Phase: Processing the results of applying valuation approaches and methods and reaching the final opinion.
Fifth Phase: Finalizing the preparation of the valuation report.
)2( Phase of Understanding the Nature of the Activity of the Enterprise Under Valuation The first phase in the valuation process is understanding the nature and activity of the enterprise under valuation, which includes – and as each case requires – collecting and analyzing the necessary data and information as follows:

• Analyzing the circumstances surrounding the enterprise (macroeconomic, sector, and industry analysis).
• Analyzing the competitive advantages and future strategy of the enterprise.
• Analyzing historical information and data pertaining to the enterprise's performance.
  a. Analyzing the circumstances surrounding the enterprise (macroeconomic, sector, and industry analysis) Analyzing the circumstances surrounding the enterprise refers to analyzing all commercial, technical, economic, and legislative considerations that affect or are expected to affect the performance of the enterprise and the sector to which it belongs, and the associated risks. The valuer may begin their study of the circumstances surrounding the enterprise from the general to the specific, by starting with studying the surrounding circumstances and their impact on the sector, then the enterprise under valuation, known as the "top-down approach", or the valuer may start with the specific then the general, i.e., studying the enterprise under valuation and its extent of impact by the sector it operates in and the surrounding circumstances, known as the "bottom-up approach". In order for the valuer to assess the risks surrounding the enterprise, they must collect, analyze, and study relevant data and information pertaining to the macroeconomy, sector, and industry to which the enterprise belongs. The valuer must also review what is pr...