How the valuation date influences whether the impacts of COVID-19 are accounted for or not?
A valuation is the estimated amount for which an asset should exchange on the valuation date.
When forming a valuation opinion, a valuer sources a range of information including financial statements, management accounts, customer data and prospective financial information.
A valuation is influenced by the information known or knowable at the valuation date. The effects and aftermath of COVID-19 in 2020 have caused reduced levels of economic activity, potentially leading to lower estimates of profitability, cash flows and asset values.
More recently, the valuation date influences whether a valuer has regard to (and the extent of) the impact of COVID-19 on estimates of prospective revenues, costs and profits. It is important that an engaging party is aware of how a valuer would account for information at different valuation dates.
Consider the following relevant example:
- A lawyer engaged a valuer to value an asset for a joint venture dispute.
- The lawyer is considering two valuation dates, 30 June 2019 and 30 June 2020.
- If the valuation date was 30 June 2019, the manager of a joint venture is unlikely to account for the impact of COVID-19 in the development of prospective financial information, as the impact of COVID-19 became known after this date.
- If the valuation date was 30 June 2020, the manager of a joint venture would likely account for the impact of COVID-19 in setting the prospective financial information, as the impact was known on or before that date.
What is a valuer’s responsibility when provided with prospective financial information?
A valuer may have regard to prospective financial information when valuing an asset. International Valuation Standards provide that:<sup>1</sup>
… a valuer must perform analysis to evaluate the [prospective financial information], the reassumptions underlying the [prospective financial information] and their appropriateness for the valuation purpose.
In 2020, a valuer should understand how management has accounted for the effects of the pandemic on levels of demand, cost structure and profitability. On analysis of the inputs and the prospective financial information, a valuer may have a view that management has not relevantly accounted for expected changes in revenues, costs and profits.
A valuer would test the effect of different assumptions on the outcomes indicated by the prospective financial information. If there are material changes, a valuer would proceed on a balanced set of assumptions which are aligned with expected revenues, costs and profits. This would cause an adjustment of the prospective financial information so that any valuation opinions are derived from a reasonable set of inputs and outputs.
What do you need to consider?
It is important that the instructing lawyer has clarity on the valuation date because a valuer has regard to information known or knowable at the valuation date.
If a valuer considers that management have not reasonably considered the impact of the pandemic in the prospective information, a valuer would make adjustments in his or her valuation analysis. An engaging party should expect a valuer to more critically challenge the inputs, process and outputs in this environment.
1International Valuation Standards Council (2019), International Valuation Standards, IVS105 Valuation Approaches and Methods, para. 50.13