Whilst we focus on its decision-support implications, our valuation work is equally applicable to many financial reporting contexts. For example, the notion of “fair value” under general accounting guidelines (IFRS or IASB) is based on the value that willing and knowledgeable market participants would use in an orderly arm’s length transaction. Surely, such participants would consider the macro-level and strategic context, the capabilities of a business, the base case valuation, scenarios, as well as the risks and uncertainties. Further, a buyer may wish to separate the value potential that exists in strategic and operational actions, from that related to financing activities. Especially for illiquid assets (or where inputs to the relevant calculations are unobservable due to little or no market activity (Level 3 inputs)), valuation must use the best information available.
In fact, the established (financial reporting/compliance) valuation industry essentially follows regulatory guidelines only, and does not aim to go beyond this, for example to generate insight nor to support decisions. As such, it has been slow to innovate, generally requiring only basic analytic approaches, a reliance on clients’ own forecasts, and not compensating explicitly for biases, whilst also not reflecting the context, drivers, uncertainties within their analysis.
For example, despite the financial crisis, valuations of illiquid assets that are produced for financial reporting purposes are often “smoothed”, being based on appraisal processes that do not truly consider the full range of key value drivers and the underlying uncertainties. Such valuations will underestimate true volatility of asset values, and hence lead to an over-allocation of funds to illiquid assets (e.g. private equity), building up the elements that may play an important role in future financial crises. There has been only limited questioning within the industry as to whether alternative approaches should be used. Of course, it is hard for large firms and experienced practitioners to innovate, for fear of cannibalising or discrediting their legacy business.
As an independent boutique, we are able to innovate, providing insight whilst also meeting regulatory requirements where necessary.
Back to overview of Valuation Decisions Consulting.
Back to main Home page.