Desktop Valuations - Solution to travel restrictions due to the Coronavirus?

Kenneth Ma

Since late January 2020, the outbreak of the novel coronavirus has grasped the headlines of various media outlets across the globe. Big businesses in the PRC are either temporarily shutting down stores or advising staff to work from home. As a range of PRC companies listed in Hong Kong have been severely affected by the virus, on 30 January 2020, the Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong Limited (HKEX) released a joint statement to remind all Hong Kong listed companies to inform the Exchange about how their businesses have been affected by the outbreak of coronavirus1. Most PRC based listed companies have financial year ends on 31 December, and January through March is their busy period for the preparation of annual reports. However, current travel restrictions to and from PRC and Hong Kong have posed huge challenges for external auditors and also valuers, who often need to conduct on-site inspections and management interview for their work.

Perceptibly, inspections play a more significant role in valuing tangible assets, such as property, plant and equipment, than in valuing intangible assets like trademarks and customer relationships. Nevertheless, in business valuations and valuations of intangible assets (including customer relationship and trademarks), touring a company’s facilities and conducting management interviews are essential in helping valuers form views of the overall business nature, before performing all the mathematical calculations and reaching final valuation opinions.

International Valuation Standards (“IVS”), RICS Valuation - Professional Standards (“the 'Red Book'”)2 is a leading set of practice guidelines recognised by the international valuation community. As defined in the Red Book2, inspection is “a visit to a property or inspection of an asset, to examine it and obtain relevant information, in order to express a professional opinion of its value”. In a typical valuation engagement, physical inspection of the valuation subjects by valuers is required in the standard due diligence procedures.

For property valuations, Valuation Technical and Performance Standards (“VPS”) 2 of the Red Book2 contains general requirements related to inspections. VPS 2 has highlighted the importance and roles of inspections that “inspections and investigations must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose”. In most cases, valuers would evaluate the important matters of a property, such as the interior and exterior conditions, the functional and economic obsolescence through inspections.

However, in reality, valuers often encounter unforeseeable limitations during the valuation process – budget, time, and for now, travel restrictions due to coronavirus outbreak. These limitations confine the valuers’ ability to conduct on-site inspections, making it difficult to establish facts that are normally verified by inspections.

Under these similar circumstances, the Red Book2 allows a certain degree of flexibility in relation to the inspection requirements. According to paragraph 1 under VPS 2 of the Red Book2, if the valuer is unable to inspect the property due to certain limitations, he/she first needs to use their professional judgments to determine if the information obtained is adequate for the purpose of the valuation and consistent with the basis of value adopted. Assuming the above principle is satisfied, the valuer must disclose the limitations and the adopted assumptions in both the terms of engagement and the valuation report. If the valuer believes it is impossible to perform a valuation, even on a restricted basis due to the limitations, the client’s instruction should be declined.

In addition, paragraph 2 under VPS 2 of the Red Book2 does not allow a revaluation of a property to be performed without a re-inspection, unless the valuer has confirmed that there have been no material changes to the physical attributes and the location nature of the property since their last assessment.

For valuations of businesses, intangible assets and financial instruments, the Red Book2 has not stipulated any hard requirements on inspections nor management interview, as long as the information to be obtained is adequate for the purpose of the valuation, which is subject to the professional judgements of the valuers.

In the appraisal profession, a common term referring valuations that are performed without inspections is “desktop valuations” or “desktop-based valuations”, meaning the valuers arrive at a reasonable opinion of value from their desks, in which a vast amount of information is obtained remotely and assumptions have to be made by the valuers. Valuations of financial instruments such as share options and convertible bonds are typical examples of valuations that take place on a desktop basis.

In performing desktop valuations, paragraph 2.7.2 of RICS Valuation – Professional Standards Hong Kong3 states a general principal of “valuers should use their best efforts to carry out investigations into the assumptions used in reports to confirm their reasonableness”, which is further elaborated in paragraph 4.3 under Valuation Practice Guidance - Applications (“VPGA”) 7 of the Red Book2, stating that “if there are such limitations the valuer may need to make assumptions/special assumptions…any assumptions must be discussed and agreed with the client prior to the conclusion of the valuation and clearly documented in both the terms of engagement and the report”. In other words, valuers must disclose any limitations or assumptions regarding inspection, research or analysis and explain any effect on their conclusions clearly in the engagement terms and valuation report, in order for such desktop valuations to obtain legitimacy. In the cases when preparing a valuation for financial reporting purpose, the valuer should be prepared to discuss the appropriateness of any assumptions with management, external auditor, professional advisor, regulator and/or other related parties, to ensure the reasonableness and validity of the assumptions adopted in the valuation for the specified purpose of valuation.

On the other hand, based on our understanding, the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”)4, which is rules governing the listed companies and IPO applicants in Hong Kong, has not specifically mentioned about any inspection requirements in valuing businesses, intangible assets and/or financial instruments.

However, Rule 5.05 of the Listing Rules4 requires all property valuation reports to follow the Hong Kong Institute of Surveyors (“HKIS”) Valuation Standards or the IVS. Also, for the valuation of properties situated in Hong Kong, the valuer must be a fellow or associate member of the RICS (Hong Kong Branch) or HKIS. Moreover, Rule 5.06 of the Listing Rules4 states that all property valuation reports should contain inspection-related information, such as when the property was last inspected and a summary of the investigation carried out that includes the details of the inspection, such as building conditions, and availability of building services.

In view of the current situation of the outbreak of novel coronavirus, we believe desktop-based valuations would be the way out during this annual reporting season. Despite the challenges under present circumstances, with the use of appropriate technology such as teleconference apps, secure virtual data room, photos and videos supporting information, we are confident to overcome these extraordinary difficulties with you, and we strike to deliver the same exceptional service and quality work. With our best effort in obtaining sufficient and reliable information for the purpose of valuations, we ensure that we are complying with the relevant requirements, including but not limited to the Red Book2, RICS Valuation – Professional Standards Hong Kong3 and the Listing Rules4.

At Moore Transaction Services Limited, we have a team of financial analysts and accountants who are experienced in performing valuations for purposes such as M&A, financial reporting, listing and litigation purposes. For more details about how we could assist you in the relevant assessments, please contact our director Kenneth Ma at

1. Securities and Futures Commission and the Stock Exchange of Hong Kong Limited, “Joint statement in relation to results announcements in light of travel restrictions related to the severe respiratory disease associated with a novel infectious agent”
2. The Royal Institution of Chartered Surveyors (RICS), “RICS professional standards and guidance, global RICS Valuation – Global Standards”
3. The Royal Institution of Chartered Surveyors (RICS), “RICS Valuation – Professional Standards Hong Kong”
4. The Stock Exchange of Hong Kong Limited, “Main Board Listing Rules - Rules and Guidance”