International Valuation Standards Update

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1 International Valuation Standards Update Adam Smith Interim Technical Director of Business Valuation Standards OIV International Business Valuation Conference January 16, 2017 INTERNATIONAL VALUATION STANDARDS COUNCIL

2 IVS Goal and Vision The objective of the IVS is to increase the confidence and trust of users of valuation services by establishing transparent and consistent valuation practices. A standard will do one or more of the following: identify or develop globally accepted principles and definitions, identify and promulgate considerations for the undertaking of valuation assignments and the reporting of valuations, identify specific matters that require consideration and methods commonly used for valuing different types of asset or liability.

3 IVSC Organizational Review Summary In 2015, an independent group performed an organizational review of the International Valuation Standards Council. Some key findings included: IVSC lacks credibility Insufficient quality of Technical Standards (content, depth and process) IVS should clearly define mandatory and nonmandatory elements. Lack of clear purpose and mission Stakeholder engagement lacking

4 IVS 2017 Objectives Expand the depth of the IVSs to meet the expanding needs of IVSC stakeholders Increase stakeholder outreach Improve transparency of the standard-setting process

5 BV Stakeholder Outreach Summary 1. Not clear how IVS can be followed when performing business valuations IVS defines things differently from authorities/regulators (e.g. fair value, goodwill, etc.) Do commentary sections need to be followed? Do Technical Information Papers need to be followed? 2. Following IVS was not seen as a meaningful statement on the quality of a business valuation.

6 Making IVS 2017 Easier to Follow Clarify that all of IVS is mandatory (to state compliance with IVS) Clearly define when valuers may depart from IVS ( departures ) Remove commentary label Incorporate Technical Information Papers into standards (when relevant) Use consistent, defined language related to requirements ( may, must, and should )

7 Departures A departure is a circumstance where legislative, regulatory or other authoritative requirements must be followed that differ from some of the requirements within IVS. Departures are mandatory in that a valuer must comply with legislative, regulatory and other authoritative requirements appropriate to the purpose and jurisdiction of the valuation to be in compliance with IVS. A valuer may still state that the valuation was performed in accordance with IVS when there are departures.

8 IVS 200 (2013) Non-Commentary Portions REQUIREMENTS 1. The principles contained in the General Standards apply to valuations of businesses and business Interests. This standard only includes modifications, additional requirements or specific examples of how the General Standards apply for valuations to which this standard applies. Scope of Work (IVS 101) 2. To comply with the requirement to identify the asset or liability to be valued in IVS 101 para 2(d), the specific interest in the business to be valued shall be recorded. This will include items such as specifying the legal structure of the business, whether it is a whole or partial interest, whether it is confined to or excludes certain assets or liabilities and the class or classes of shares involved. 3. Typical assumptions or special assumptions that may need to be stated to comply with IVS 101 para 2(i) when valuing a business or business interest include: in the case of a partial interest, an assumption clarifying whether the owner or owners of the remaining interest(s) are either intending to sell or retain their holdings, whether certain assets or liabilities owned by the business are to be disregarded. Implementation (IVS 102) 4. If the valuation is of an interest that has the ability to liquidate the assets of the business, consideration shall be given as to whether the total value of the assets sold individually following liquidation would exceed their combined value as a going concern. Reporting (IVS 103) 5. There are no additional requirements for businesses and business interests other than inclusion of appropriate references to matters addressed in the scope of work in accordance with paras 2 and 3 above. Effective Date 6. The effective date of this standard is 1 January 2014, although earlier adoption is encouraged.

9 May, Must, and Should The new IVS Glossary includes definitions of these words to help valuers understand the requirements of IVS When possible, the definitions are consistent with how those terms are used in other standards (e.g. auditing standards)

10 May The word "may" describes actions and procedures that valuers have a responsibility to consider. Matters described in this fashion require the valuer's attention and understanding. How and whether the valuer implements these matters in the valuation engagement will depend on the exercise of professional judgment in the circumstances consistent with the objectives of the standards. Example: IVS 105, 30.3: If few recent transactions have occurred, the valuer may consider the prices of identical or similar assets that are listed or offered for sale provided the relevance of this information is clearly established, critically analysed, and documented

11 Must The word must indicates an unconditional responsibility. The valuer must fulfill responsibilities of this type in all cases in which the circumstances exist to which the requirement applies. Example: IVS 101, 20.3: A valuer must communicate the scope of work to its client prior to completion of the assignment

12 Should The word "should" indicates responsibilities that are presumptively mandatory. The valuer must comply with requirements of this type unless the valuer demonstrates that alternative actions which were followed under the circumstances were sufficient to achieve the objectives of the standards. In the rare circumstances in which the valuer believes the objectives of the standard can be met by alternative means, the valuer must document why the indicated action was not deemed to be necessary and/or appropriate. If a standard provides that the valuer "should consider" an action or procedure, consideration of the action or procedure is presumptively mandatory, while the action or procedure is not. Example: IVS 210, (regarding the With-and-Without Method): The differences in value between the two scenarios should be reflected solely in the cash flow projections rather than by using different discount rates in the two scenarios.

13 Making Compliance Meaningful (Example) IVS 102 (2013), paragraph 3: Sufficient evidence shall be assembled by means such as inspection, inquiry, computation and analysis to ensure that the valuation is properly supported. When determining the extent of evidence necessary, professional judgement is required to ensure the information to be obtained is adequate having regard to the purpose of the valuation. As a matter of practical expediency, it is normal for limits to be agreed on the extent of the valuer s investigations. Any such limits shall be recorded in the scope of work.

14 Making Compliance Meaningful (Example) IVS 102 (2017), paragraph 20.3: Limits may be agreed on the extent of the valuer s investigations. Any such limits must be noted in the scope of work. However, IVS 105 Valuation Approaches and Methods, para 10.7 requires valuers to perform sufficient analysis to evaluate all inputs and assumptions and their appropriateness for the valuation purpose. If limitations on investigations are so substantial that the valuer cannot sufficiently evaluate the inputs and assumptions, the valuation engagement must not state that it has been performed in compliance with IVS.

15 Structure of IVS 2017 IVS Glossary Introduction and Framework General Standards IVS 101 Scope of Work IVS 102 Investigation and Compliance IVS 103 Reporting IVS 104 Bases of Value (NEW) IVS 105 Valuation Approaches (NEW) Asset Standards IVS 200 Businesses and Business Interests IVS 210 Intangible Assets IVS 300 Plant and Equipment IVS 400 Real Property Interests IVS 410 Development Property IVS 500 Financial Instruments

16 IVS 101: Primary Changes IVS 2017 is more principles-based in nature The overarching principle behind the proposed IVS 101 Scope of Work is that it is a valuer s responsibility to communicate the scope of the assignment to all parties to the valuation engagement. A written scope of work is the most effective way to ensure compliance, the Board recognizes that it may not be feasible or necessary in all circumstances, particularly in the case of valuers performing valuations for their employer.

17 IVS 102: Primary Changes Under IVS 2013: virtually any valuation engagement could claim compliance with IVS as long as any limitations on investigations and procedures are disclosed in the scope of work and report. Under IVS 2017: valuers must perform sufficient procedures to assess the appropriateness of all significant inputs for use in the valuation. As such, significant limitations that impair a valuer s ability to assess the appropriateness of the inputs and assumptions may lead to a valuation not being in compliance with IVS.

18 IVS 103: Primary Changes Clear that there is no one format of report that is required to comply with IVS. Allows the report to take any form, but requires that it set out a clear and accurate description of: a) the scope of the work performed, including the elements noted in para 20.3 of IVS 101 Scope of Work to the extent each is applicable to the assignment, b) the approach or approaches adopted, c) the method or methods applied, d) the key inputs used, e) the assumptions made, f) the conclusion(s) of value and principal reasons for any conclusions reached, and g) the date of the report (which may differ from the valuation date). Requirements can be fulfilled by referring to other documents (engagement letter, internal policies etc.).

19 IVS 104: Bases of Value (New Chapter) Overarching Principle: Compliance with this mandatory standard requires a valuer to select the appropriate basis (or bases) of value and follow all applicable requirements associated with that basis of value whether those requirements are included as part of this standard (for IVS-defined bases of value) or not (for non IVS-defined bases of value).

20 IVS 104: Bases of Value - Contents 10. Introduction 20. Bases of Value 30. IVS Defined Bases of Value - Market Value 40. IVS Defined Bases of Value - Market Rent 50. IVS Defined Bases of Value Equitable Value 60. IVS Defined Bases of Value Investment Value/Worth 70. IVS Defined Bases of Value Synergistic Value 80. IVS Defined Bases of Value Liquidation Value 90. Other Basis of Value Fair Value (IFRS) 100. Other Basis of Value Fair Market Value (OECD) 110. Other Basis of Value Fair Market Value (US - IRS) 120. Other Basis of Value Fair Value (Legal/Statutory) 130. Premise of Value/Assumed Use 140. Premise of Value Highest and Best Use 150. Premise of Value Current Use/Existing Use 160. Premise of Value Orderly Liquidation 170. Premise of Value Forced Sale 180. Entity Specific Factors 190. Synergies 200. Assumptions and Special Assumptions 210. Transaction Costs

21 IVS 105: Valuation Approaches and Methods (New Chapter) - Establishes framework for selection and application of approaches and methods - Requires that inputs and assumptions be evaluated for reasonableness in the context of the valuation - Encourages, but does not require, the use of multiple approaches/methods - Requires valuers to maximize the use of observable market information in all three valuation approaches (when available).

22 IVS 105: Approach selection framework (example) 20.2 The market approach should be applied and afforded significant weight under the following circumstances: (a) the subject asset has recently been sold in a transaction appropriate for consideration under the basis of value, (b) the subject asset or substantially similar assets are actively publicly traded, and/or (c) there are frequent and/or recent observable transactions in substantially similar assets.

23 IVS 105: Approach selection framework (example) Although the above circumstances would indicate that the market approach should be applied and afforded significant weight, when the above criteria are not met, the following are additional circumstances where the market approach may be applied and afforded significant weight. When using the market approach under the following circumstances, a valuer should consider whether any other approaches can be applied and weighted to corroborate the value indication from the market approach: (a) Transactions involving the subject asset or substantially similar assets are not recent enough considering the levels of volatility and activity in the market.

24 IVS 105: Approach selection framework (example) (b) The asset or substantially similar assets are publicly traded, but not actively. (c) Information on market transactions is available, but the comparable assets have significant differences to the subject asset, potentially requiring subjective adjustments. (d) Information on recent transactions is not reliable (ie, hearsay, missing information, synergistic purchaser, not arm s-length, distressed sale, etc). (e) The critical element affecting the value of the asset is the price it would achieve in the market rather than the cost of reproduction or its income-producing ability.

25 Asset Standards IVS 200 Businesses and Business Interests IVS 210 Intangible Assets IVS 300 Plant and Equipment IVS 400 Real Property Interests IVS 410 Development Property IVS 500 Financial Instruments

26 Uniform Structure of Asset Standards Section 10: Overview Section 20: Introduction Section 30: Bases of Value Section 40: Valuation Approaches and Methods Section 50: Market Approach Section 60: Income Approach Section 70: Cost Approach Section 80 (and thereafter): Special Considerations

IVS 200 (2017) Overview 10. Requirements 20. Overview 30. Bases of Value 40. Valuation Approaches and Methods 50. Market Approach 60. Income Approach 70. Cost Approach 80.

27 IVS 200 (2017) Overview 10. Requirements 20. Overview 30. Bases of Value 40. Valuation Approaches and Methods 50. Market Approach 60. Income Approach 70. Cost Approach 80. Special Considerations for Businesses and Business Interests 90. Ownership Rights 100. Business Information 110. Economic and Industry Considerations 120. Operating and Non-Operating Assets 130. Capital Structure Considerations

28 IVS 210 (2017) - Overview 10. Requirements 20. Overview 30. Valuation Approaches and Methods 40. Income Approach 50. Income Approach Methods 60. Excess Earnings Method 70. Relief-from-Royalty Method 80. Premium Profit Method or With-and-Without Method 90. Greenfield Method 100. Distributor Method 110. Market Approach 120. Market Approach Methods 130. Cost Approach 140. Cost Approach Methods 150. Special Considerations for Intangible Assets 160. Discount Rates/Rates of Return for Intangible Assets 170. Intangible Asset Economic Lives 180. Tax Amortisation Benefit (TAB)

29 Potential Future Projects Analysis of Commercial Lease Transactions Art and Antiques Commercial Forests Contracts Credit/Debit Valuation Adjustments Deferred Revenue Depreciated Replacement Cost Method of Valuation for Financial Reporting Derivative Valuations Discount Rates Discounts and Premia Early Stage/Development Stage Valuations Expected Cash Flow Extractive Industries Funding Valuation Adjustments Inspections and Material Considerations International/Multinational Valuations Inventory Liabilities Preferred Stock Valuation of Residential Properties Valuations for Taxation purposes including taxes and tax flow-through Entities Recovery and Resolution Specialised Public Service Assets Stock Options Trade Related Property Valuation of Individual Trade- Related Properties Valuation in Markets Susceptible to Change: Certainty and Uncertainty Valuation of Personal Property including Art and Antiques. Valuation of Portfolios, Collections, and Groups of Properties/Assemblage Value

Thank you Input regarding any of the above topics for future consideration by the Standards Board is encouraged via communication with the following: Adam Smith, Interim Technical Director of

30 Thank you Input regarding any of the above topics for future consideration by the Standards Board is encouraged via communication with the following: Adam Smith, Interim Technical Director of Business Valuation Standards Contact: Alexander Aronsohn, Interim Technical Director of Real Estate Valuation Standards Contact: Peter Melvin, Interim Technical Director of Financial Instruments Standards Contact:

International Valuation Standards 2017 Queenstown 29 June Presenter Chris Stanley

International Valuation Standards 2017 Queenstown 29 June 2017 Presenter Chris Stanley Why Have Standards? To ensure concepts such as Market Value & Fair Value are consistently applied Provides financial