IVSC finalizes IVS 2017 exposure drafts
The standards board of the International Valuation Standards Councilhas issued exposure drafts of the chapters that will comprise IVS 2017. Comments are due on two different dates for two groups of exposure drafts.
Comments are due 7 July for:
- IVS 104 Bases of Value;
- IVS 105, Valuation Approaches;
- IVS 210 Intangible Assets; and
- Introduction and Framework for IVS 2017.
Comments are due 31 August for:
- IVS 101 Scope of Work, IVS 102 Investigation and Compliance, and IVS 103 Reporting;
- IVS 200 Businesses and Business Interests;
- IVS 300 Plant and Equipment;
- IVS 400 Real Property Interests;
- IVS 410 Development Property; and
- IVS 500 Financial Instruments
The IVSC wants comments from those who agree with the proposed standards as well as from those who have suggestions for improvement. Those who disagree should be as detailed as possible and suggest alternatives supported by specific reasoning.
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Ni hao! Valuation issues in China
In a YouTube video, Ray Moran (MG Valuations) talks about valuation and cultural issues often encountered in working with China-related transactions. Moran, who lived in China and has worked with Chinese firms for 15 years, says there is “so much activity” these days. Outbound Chinese M&A will hit record levels this year, he says, with large investments in agribusiness, dining/lodging, and technology. In terms of valuation methodology, cost approaches tend to be more prevalent in China than income-based approaches. China is very different culturally from anywhere else in the world, so it’s important to “form a proper business relationship” with Chinese clients.
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When to consult a compensation expert during a valuation
When insufficient data or research are available to help determine whether the compensation is reasonable—and the answer to that question is the central issue in an engagement—then it’s probably time to think about an outside compensation expert.
The decision to bring in a compensation expert will depend on the level of review and analysis that will be required. Mark Higgins, ASA, president of Higgins, Marcus & Lovett, a business valuation and litigation consulting firm based in Los Angeles, USA, views this as four levels:
- Internal review by valuer;
- Internal analysis and adjustment by valuer;
- High-level report from outside data source; and
- Focused analysis by retained outside expert.
The first level is an internal review conducted by the valuer that results in no explicit analysis or adjustment contained in the report. The valuator has concluded that compensation is clearly reasonable and no adjustment is warranted.
The second level is also an internal analysis conducted by the valuer, but there is an adjustment being made to compensation. This would involve the use of data already routinely in the possession of the valuer, such as industry ratio publications or published compensation surveys. In the report, there should be a narrative description of the analysis conducted, the data relied upon, and the calculation of the adjustment.
The third level is where the outside expert may first come into the picture, perhaps informally to point you in the direction of appropriate subscription or fee-based compensation databases.
The fourth level is the compensation expert, because the first three steps have not produced satisfactory answers on reasonable compensation. That’s when you need to bring in a compensation expert to do a focused analysis of the individuals involved. “Of course, in virtually every case, that requires some separate client approval and typically a separate engagement letter,” he says.
Learn more about when to call in a compensation expert for your valuation in the Q2 Business Valuation Australia (subscription required).
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Do companies track the value of their corporate brand?
“Yes,” says Rene Hlousek (Beacon Valuation Group LLC). “The proper stewardship of a corporate brand includes the measurement of financial metrics that may result from certain brand strategies.” For example, brand managers would want to know whether certain strategies (e.g., increased brand awareness, improved product recall, etc.) will result in greater revenue growth and, hopefully, profitability. But current brand valuation methods and rankings only give companies an idea of where they may stand.
An alternative method, the residual contribution method, results in a valuation metric that allows you to track the brand from a valuation perspective. It’s one thing to know that, if you raise brand awareness by 20%, it will result in a corresponding increase in revenue. But how does that translate into value?
“That’s not answered by the existing school of thought and valuation models,” Hlousek says. “The residual contribution method gives brand managers another tool to leverage—especially if they’re proactive—in managing brand performance.”
For more information: Hlousek is the developer of the residual contribution method, and he recently conducted a webinar that explains it in detail. To acquire a recording, visit www.bvresources.com/dlc.
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Three pitfalls of valuing OTC derivatives in the oil and gas industry
Oil and gas firms are in an industry that is highly sensitive and subject to volatility in returns, so these firms use derivatives regularly to manage their risks.
The types of derivatives most common to the oil and gas industry are: futures/forwards, options, swaps, costless collars, three-way collars, swaptions (options on contracts), and differentials (or basis) swaps, according to Ernest De Lachica, a director at BDO. De Lachica describes the most common pitfalls he sees in valuing over-the-counter (OTC) derivatives:
- Derivative instruments not identified as such. With oil and gas firms, you will usually find a good number of these. You won’t typically see four or five different swaps—you could see 300 of them, so the sheer volume can create additional complexity. Each instrument is unique—and time-consuming.
- Lots of moving pieces. Often, the instruments will be restructured, which results in a maze of moving pieces that can be difficult to navigate. “If you are not really on top of it, you could potentially miss some of the pieces, which would translate into a significant value that is not being captured accurately,” De Lachica says.
- Adjustments that are subjectively based. Numerous types of credit adjustments can be applied to these instruments. The adjustments can be based on a bond rating or a credit default swap curve if one is available. There are a number of different types of accepted approaches in applying these adjustments, so understanding what is acceptable is critical.
For more information: Business Valuation Australia offers more advice on valuing OTC derivatives in the oil and gas industry in its Q2 issue (subscription required).
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