IVSC consults on improvements to valuation standards and the valuation of financial liabilities

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04 Feb 2013

The International Valuations Standards Council (IVSC) has released two due process documents: an exposure draft of numerous proposed amendments to International Valuation Standards (IVS), and a discussion paper on the valuation of financial liabilities.

Proposed amendments to valuation standards

The IVSC issued a number of revised International Valuation Standards in July 2011.  The IVSC's exposure draft Amendments to the International Valuation Standards, proposes numerous amendments to these standards to make minor changes to reflect subsequent IVS publications and to make minor alterations to remove ambiguity or better illustrate a principle.  As such, in some respects, the IVSC exposure draft mirrors the annual improvements process of the IASB.  However, the exposure draft is broader and also incorporates the proposals from the IVSC's projects on valuation reviews and the valuer's reliance on information.

The proposed amendments include:

  • A number of changes across the IVS to clarify the applicability of the IVSs to 'valuation reviews' which would be defined as "the act or process of developing and reporting an opinion about a valuation undertaken by another party"
  • Changes to incorporate reference to the Code of Ethical Principles for Professional Valuers issued in December 2011
  • The introduction of a "unit of valuation" concept, which would be defined as "the asset or group of associated assets that is the subject of the valuation" and be distinct  from the "unit of account" concept under IFRS
  • Clarifications designed to address concern that some valuers put too much weight on a single valuation method ("in other words if the maths used in the model is right then it follows that the valuation must be") by amending the Framework to indicate multiple models provide a cross check and state this is "especially recommended where the inputs to the primary method are limited or inconclusive"
  • Proposals to impose a duty on the valuer to consider the credibility or reliability of information in the context of the valuation task
  • Clarifications on the valuation of property under construction
  • Removal of specific annexes from the IVS on historical property and property, plant and equipment in the public sector
  • Various other editorial, clarifying and consequential amendments.

Comments on the exposure draft close on 30 April 2013.  The IVSC intends to publish that the revised Standards in July 2013, with an effective date of 1 January 2014.

Click for access to the exposure draft (link to IVSC website).

Valuation of financial liabilities

The IVSC's discussion paper Valuation of Liabilities is the first stage in the IVSC's project to determine appropriate valuation practice for liabilities (other than those arising from financial instruments) and to develop as necessary a dedicated standard and supporting technical guidance.

The background to the discussion paper notes the following regarding the interaction with IFRS:

Within the field of financial reporting, the IASB’s IFRS 13 Fair Value Measurement specifically includes liabilities within its scope, but stipulates that specific assumptions be made that are directed at achieving a consistent accounting measurement of liabilities. Some of these assumptions, e.g. that a transfer has to be assumed even where fulfilment or cancellation are more likely or that in the absence of quoted prices a liability is to be valued from the perspective of the counterparty holding the corresponding asset, may or may not be appropriate when establishing the value of a liability for purposes other than financial reporting. The Board therefore considers that there is a need for standards or guidance on the valuation of liabilities in a wider context.

The background also mentions the IASB's previous project on amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets (which is now a research project on non-financial liabilities), and some of the topics discussed in the discussion paper correlate with topics considered by the IASB in that project.  The discussion paper notes "Although at first sight the scope of IAS 37 and the proposed IVSC project are similar, the IVSC project is addressing the valuation of liabilities for any purpose and is not addressing only the requirements in the IFRSs".

The discussion paper is structured as follows:

  • Key definitions and concepts - proposes a definition of 'liability' for valuation purposes, which would be different to that used under IFRS
  • Project scope - proposes to exclude the valuation of obligations to pay defined sums, financial instruments,pension liabilities, deferred taxes and insurance liabilities, and instead focus on the valuation of liabilities where the cost of the obligation is not defined, e.g. asset restoration obligations, warranties.  The paper also requests feedback on whether the project should also consider litigation liabilities
  • Basis of value - a statement of the fundamental measurement assumptions of a valuation, across three principal categories (hypothetical exchange price, value or benefit from ownership and reasonable exchange price between two parties) and four bases (market value, investment value, special value and fair value)
  • General valuation methods - the need to use more than one method, a presumption that the market approach may not often be relevant to the measurement of financial liabilities, an information request on using the discounted cash flow and other 'income approaches', and methods used under the 'cost approach'
  • Valuations for financial reporting - the paper notes the IVSC "does not consider that its project should address the valuation of liabilities specifically for financial reporting... [but] that this is the most common purpose for which liabilities are required to be valued and therefore it is proposed that future guidance should summarise the requirements under the IFRS and relate them to the general valuation guidance proposed by the IVSC".

Comments on the discussion paper close on 30 April 2013.  Click for access to the discussion paper (link to IVSC website).

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