Extra guidance on discount rates and impairment testing
In its new Executive Report, released December 2014, business advisory firm Leadenhall Corporate Advisory observed that many businesses calculate their discount rates for impairment testing using imprecise, unsubstantiated, or inconsistent data, while some auditors overlook key assumptions.
“This year, with impairment testing and asset values being a key focus for ASIC in relation to the 31 December 2014 reporting period, you and your board will want to ensure the process is robust and the resulting discount rates are reasonable,” the report says.
“The good news is that discount rates have generally moved downwards slightly since December 2013, indicating reduced risk of impairment. The bad news is that impairment testing was done poorly last year and discount rates continue to be a hot topic for ASIC.”
A key issue for businesses and their boards is whether the discount rates they adopt for impairment testing will turn into a problem.
“Discount rates and impairment testing continue to be an area of focus for ASIC, which has forced a number of entities to book impairment write-downs. In our analysis we find that the reduction in risk-free rates has been met with an increase in equity risk premiums,” says Leadenhall.
“For most companies, the overall impact will be a slight reduction in discount rates, although this will not always be the case.”
Other business valuation fallacies that Leadenhall said may attract the attention of ASIC are:
- Overly complex Excel models with material errors;
- Optimistic forecasts with insufficient allowances for capital investment;
- Inconsistencies between the discount rate and cash flows;
- Inconsistencies between the carrying values of the CGU and the calculated value;
- Relying on a single valuation methodology without considering any cross-checks; and
- Failing to explain movements in the value or key assumptions across periods.
Leadenhall has also written an Audit Committee Guide to Impairment in association with Chartered Accountants Australia and New Zealand.
Click here to download the Executive Report as of December 2014.
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New global resource on BVR
Business Valuation Resources (BVR) has launched a new Global Resource Centre, which provides the latest and most up-to-date valuation news, training, and resources to those involved in the business valuation industry.
BVR provides best-in-class resources—including authoritative deal and market data, news and research, training, and expert opinion to help stakeholders involved in business valuation, performance benchmarking, and risk assessment.
Business valuation practitioners can access this resource by clicking on the “Valuation by Topic” category on the sidebar of the BVR website, which also includes an Australian section.
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IASB analyses impact of new lease standard on company financials
The International Accounting Standards Board is finalising a new standard that will require companies to bring leases onto the balance sheet.
The new International Financial Reporting Standard (IFRS) on leases will also result in some changes to company income statements. The IASB has published a document (registration required) outlining the likely practical effects of the new IFRS on leases.
The document also compares the IASB’s requirements to those of the Financial Accounting Standards Board (FASB).
“The main change that will be brought about by the new Leases Standard is an increase in assets and liabilities on the balance sheet for those companies that currently have a large amount of leases off balance sheet, thus improving the transparency of a company’s leverage and asset base,” says Hans Hoogervorst, IASB chairman.
Among the likely effects on the income statement is the reporting of higher operating profit compared to the current requirements and in comparison to the FASB model. In terms of cash flow, there will be no changes to total cash flows, but the amount of operating cash will increase in the cash flow statement while the amount of financing cash will decrease.
Deliberations by the IASB on the new accounting model for leases will be completed this month, and the final standard is scheduled to be issued later this year.
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Register for the 2015 International Valuation Forum
The inaugural 2015 International Valuation Forum in Atlanta, Georgia, USA, on 7 and 8 May 2015 is jointly sponsored by Business Valuation Resources, the International Association of Consultants, Valuators and Analysts (IACVA), CEIC, Wiley, and Duff & Phelps, all major participants in the international valuation arena.
Participants from around the world have begun to sign up, including Australia, Canada, China, Ghana, India, Korea, Lebanon, Russia, and the United States.
This forum will provide an ideal opportunity to meet practitioners, gather information, and research suppliers from around the globe, as well as to increase your professional network and make new friends. The forum will focus on valuation matters impacting the global valuation business. Read a summary of the event here.
Venue: Westin in Buckhead Hotel, Atlanta, Georgia, USA
Direct link for booking a room: www.starwoodmeeting.com/Book/iacvameetingmay2015
Features of the forum:
- Learn what new research and data are now available (BVR, CEIC, Duff & Phelps, and others);
- Learn how actual valuation experts are using new data throughout their analyses;
- Learn the current "best practices" in business and intangible valuation;
- Learn new "fair value" changes;
- Receive an introduction to current and anticipated changes to valuation standards such as the IVS;
- See the latest approaches in mining, oil and gas, brands, valuations for tax, and intellectual property; and
- See valuation developments in emerging economies.
Fees: Discounts for professors and students. Early bird discounts are still available. Read more here.
Register: Click here to register and contact the IACVA if you have any troubles on registration.
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RICS Guidance Note on Valuation of Intellectual Property
In our recently released April edition of Business Valuation Australia (subscription required), IP valuation director at Griffith Hack Tim Heberden dissects the Royal Institution of Chartered Surveyors (RICS) Guidance Note on the Valuation of Intellectual Property.
“We live in an age of intangible assets. Brands, technology, and artistic content are core assets of many companies. The ability to protect the competitive advantage created by these assets is dependent on the strength of the supporting intellectual property rights,” says Heberden.
“This has resulted in an increased need for robust intellectual property (IP) valuations.”
The legal, functional, and economic characteristics of IP are complex, and each of these can have a profound impact on the value of an asset.
“Yet IP is often valued by business valuers who might not be familiar with the nuances of the different categories of IP,” Heberden says.
Subscribe to the current edition of Business Valuation Australia to read Heberden’s most important points from the guidance note.
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