PRC Appraiser common mistakes
PRC Appraiser · Understand the traps and how to avoid them.
Applying the income approach to machinery and equipment by discounting the equipment's own projected cash flows as if it were a standalone business, instead of treating the equipment as one asset within an operating enterprise.
The income approach section of 资产评估基础 is taught with enterprise cash flows, and candidates mechanically reuse the same model in 实务一. Machinery rarely generates separable cash flow, so the result is a fictitious value with no allocation basis.
What to do instead
Before choosing a method, write one sentence identifying the asset's highest and best use and whether its cash flow is separable. For single machines default to cost approach (replacement cost less depreciation) or market approach; reserve the income approach for equipment whose earnings are contractually identifiable (e.g., leased rolling stock, dedicated pipelines) and state the allocation logic explicitly.
Computing machinery depreciation as a single straight-line percentage of replacement cost, ignoring the three separate components (physical, functional, economic) and their different bases.
Textbook examples often show one combined depreciation rate, so candidates skip the decomposition. Examiners test whether the candidate can split obsolescence, especially functional obsolescence from excess operating cost, which is capitalized rather than deducted as a percentage.
What to do instead
Build the depreciation table in three rows: physical (age/life or observation score), functional (excess capital cost plus capitalized excess operating cost using an appropriate discount rate and remaining life), economic (external, e.g., product demand or regulatory). Sum them, cap the total at replacement cost, and show each calculation line so partial credit is available.
Valuing real property with the market comparison approach without making the required adjustments in a defensible order and without documenting the adjustment direction for each comparable.
Candidates memorize the list of adjustment factors (transaction, date, location, area, condition, rights) but not that adjustments must be applied to the comparable to make it equivalent to the subject, and that the order and compounding affect the result. Sign errors are the most common arithmetic loss.
What to do instead
Adopt a fixed template: adjust the comparable toward the subject, one factor per line, with an explicit +/- sign and a stated basis (percentage or absolute). Compute the adjusted unit price per comparable, then reconcile to a single value with weights and justify the weights. Re-check signs by asking whether the subject is better or worse than the comparable on each factor.
Using the direct capitalization approach for real property while mismatching the capitalization rate to the income definition (e.g., applying a rate derived from net operating income before property taxes to a net income after taxes, or using a rate built for a different property class).
Candidates grab a rate from a table without checking the numerator definition. Direct capitalization only works when rate and income are consistently defined and the property is stabilized.
What to do instead
State the income definition (potential gross income, effective gross income, or NOI) before selecting the rate, and derive the rate by extraction from comparable sales, band of investment, or a published source matched to asset class, location, and date. If income is non-stabilized or uneven, switch to DCF and say why.
Treating an intangible asset valuation as a residual after deducting tangible assets, or applying the relief-from-royalty method without testing whether a comparable royalty rate actually reflects the subject's profit split.
The residual (excess earnings) method is easy to apply mechanically, so candidates use it for trademarks and customer relationships where it is inappropriate, and they accept any published royalty rate without adjustment for exclusivity, territory, and remaining life.
What to do instead
Select the method by asset characteristics: relief-from-royalty for brands and patented technology with licensable comparables, multi-period excess earnings for customer relationships and assembled workforce, incremental cash flow for non-compete or process intangibles. When using a royalty rate, adjust comparables for profit margin, exclusivity, geographic scope, and stage of development, and document the adjustment.
Building a discounted cash flow enterprise valuation where the discount rate and cash flow are inconsistent (e.g., WACC applied to cash flows that are not free cash flow to the firm, or a cost of equity applied to pre-debt cash flow), and omitting the terminal value growth constraint.
Candidates learn WACC and FCFF as formulas but not as a matched pair. Terminal growth above long-run nominal GDP growth or above the discount rate is a frequent silent error.
What to do instead
Write the pairing rule at the top of the answer: FCFF with WACC, FCFE with cost of equity. Derive WACC from after-tax cost of debt and CAPM cost of equity with a stated beta source and risk-free maturity matching the cash flow horizon. Set terminal growth at or below long-run inflation plus real growth of the economy, and show the sensitivity of value to the discount rate and terminal growth.
Confusing the legal and economic life of an intangible asset, or amortizing it over the statutory maximum rather than the remaining useful life supported by evidence.
Candidates conflate patent term, trademark renewal, and contractual term with economic life. Intangible assets are frequently tested on remaining useful life because it drives both the DCF horizon and the amortization tax shield.
What to do instead
For each intangible, record legal life, contractual life, and economic life separately, then justify the selected remaining life with evidence such as customer attrition, technology cycle, or renewal history. Use the shortest of the binding constraints unless evidence supports extension, and state the assumption explicitly.
Answering economics and financial management questions with formula recall only, without setting up the cash flow timeline, so NPV, IRR, and payback answers are off by one period or ignore working capital and salvage.
Exam questions compress multi-year projects into a paragraph; candidates plug numbers without laying out year 0 through year n, forgetting initial working capital, tax depreciation shields, and terminal recovery.
What to do instead
Always draw the timeline before computing: year 0 outflows including working capital, operating cash flow as (revenue minus cash costs) times (1 minus tax) plus depreciation times tax, and terminal year including salvage and working capital recovery. Compute NPV first, then IRR, and state the accept/reject rule against the cost of capital.
Mixing fair value measurement rules with historical cost rules in accounting questions, particularly for investment property, impairment reversals, and business combinations under the relevant Chinese accounting standards.
The accounting domain tests standard-specific treatment, and candidates apply a general 'revalue everything' habit. Rules on impairment reversal and the measurement of non-controlling interests differ by standard and are frequently examined.
What to do instead
Build a one-page matrix of the standards tested: initial measurement, subsequent measurement model, impairment and whether reversal is permitted, and disclosure. Before answering, name the standard and the measurement model, then apply it. For business combinations, state whether the entity uses the full or partial goodwill method and compute NCI accordingly.
Writing conclusions without stating the value premise, valuation date, and scope of work, and presenting a single number with no range, no key assumptions, and no limitation statement.
Candidates treat the report as an afterthought to the calculation, but examiners award marks for the professional structure of the conclusion, and missing premise or date invalidates an otherwise correct computation.
What to do instead
Use a fixed conclusion template: value type (market value or investment value), valuation date, valuation object and scope, method and key assumptions, result as a point value with a reasonableness range, and limitations. Re-read the question to confirm the requested premise and date, and echo them verbatim in the conclusion.