Valuation Review for Financial Reporting

Valuation Review for Financial Reporting

Kenneth Ma

Ever since globalisation gained acceleration over the past decades, demand for valuation services has been growing significantly as the global business operating environment becomes more complicated so as the increasingly stringent financial reporting regulation nowadays.

Financial report users have also become more cognizant of valuation or assessment requirements changes and adoption, especially those give rise to pervasive impact to company asset and corporate structure reporting, including but not limited to those set out by the Hong Kong Institute of Certified Public Accountants (HKICPA):
  • HKFRS 2 – Share-based Payment;
  • HKFRS 3 – Business Combination;
  • HKFRS 9 – Financial Instruments;
  • HKFRS 13 – Fair Value Measurement;
  • HKFRS 16 – Lease;
  • HKAS 2 – Inventories;
  • HKAS 32 – Financial Instruments: Presentation; and
  • HKAS 36 – Impairment of Assets.
HKSA 620 - Using the Work of An Auditor's Expert ​
According to Hong Kong Standard on Auditing 620 - Using the Work of An Auditor's Expert (HKSA 620), an expert is defined as a person or firm that has special skill, knowledge, and experience in a particular field other than accounting or auditing. An auditor’s expert may either be an auditor’s internal expert (such as the auditor’s firm or a network firm), or an external expert.

Although the HKICPA does not mandatorily require the use of an expert in a valuation or assessment, many listed companies engage independent experts to conduct assignments when management does not possess such expertise. Similarly, it is not uncommon for auditors to appoint their own experts to give assurance on the reliability of valuation works and assignments under scrutiny taken by dedicated financial reporting practitioners.

Valuation uncertainty and valuation risk
Valuation involves substantial amount of subjective judgements. The value depends on what purpose the valuation is done for and the valuer who does it. As discussed in “Dealing with Valuation Uncertainty at Times of Market Unrest” published by the International Valuation Standards Council (IVSC) in response to COVID-19, a valuation can be interpreted as an estimate of the most probable of a range of possible outcomes based on a valuer’s assumptions.

As different market participants may have different views, objectives, or motivations in a subject asset, price fluctuations in different transactions of the identical subject are often observed. Such ramification can be regarded as valuation uncertainty. A valuation may also be subject to valuation risk, a risk that the subject asset may be mispriced because of some uncontrollable factors, such as volatile market movements, poor liquidity environments, or even valuers’ difficulties in accessing various information and data.

Hence, a prevalent situation is having two valuers deriving different values on the same valuation subject, even the same model is used. Having said that, there are generally accepted practices within the valuation industry which could help determine if a valuation is properly performed to minimise the uncertainties and risks of adopting an unreasonable result. This is becoming more vital in particular during the times of extreme situation, such as the pandemic that is ongoing now.

As mentioned, auditors often engage independent experts to review and give assurance on the valuation assignments since they are playing an increasingly important outreaching role in statutory financial reporting process. A reviewer’s responsibility is to assist the auditor in obtaining sufficient appropriate audit evidence, which the correctness, consistency, reasonableness, and completeness of the valuation are considered and examined.

This is when an auditor’s work would come across with HKSA 620, a guideline for using the work of an expert as audit evidence. The auditor is obligated to determine whether the use of expertise’s work in a field other than accounting or auditing is necessary in order to obtain sufficient appropriate audit evidence, the auditor can therefore use the expert’s work after evaluating expert’s suitability in accordance with the objectivity and professional competence requirements stipulated in relevent standards.

Although HKSA 620 specifies when and how to use a valuer or a valuation reviewer’s work in their audit procedures, it does not specifically mention how valuation reviews should be performed. Generally, some elements of a proper valuation review are:
  • the apparent adequacy and relevance of the data used;
  • the appropriateness of the methods and techniques employed; and
  • whether the analysis, opinions and conclusions are appropriate and reasonable.
IVS – Valuation Review
Over the past decade, the IVSC and the IFRS Foundation have been working closely for a consistent measurement of fair value for financial reporting. Therefore, the International Valuation Standards (IVS) published by the IVSC is often regarded as the most widely adopted standard in the accounting field, which also outlines some general requirements of valuation reviews.

First, the IVS states that a valuation reviewer must also be a valuer. It defines valuer as “an individual, group of individuals or a firm who possesses the necessary qualifications, ability and experience to execute a valuation in an objective, unbiased and competent manner”.

A common misconception is that reviewers have to provide their opinions of values for valuation reviews. However, according to the IVS, providing own opinions of values is not a mandatory requirement in valuation reviews. At such, reviewers only need to comment on the valuation’s methodology, inputs or value conclusion. The reviews thus serve as a check on the valuation as well as a check on the valuer regarding his or her expertise, experience and independence. As a result of valuation uncertainties, there may be times that a reviewer deemed a valuation was reasonably performed, but the adopted valuation assumptions have discrepancies with the reviewer’s practices if they are performing the same valuation.

Although no opinion of value is required, valuation reviews should be conducted in accordance with all principles set out in IVS that are appropriate for the purpose. For instance, IVS provides explanations of generally accepted valuation methods and principles as well as guidelines and procedures that the valuers should follow during an assignment. These requirements should all be followed by the reviewers during their reviews.

IVS also sets out some general areas that a valuation review report should include:
  • the scope of the review performed;
  • the inputs and assumptions upon which that valuation was based;
  • the reviewer’s conclusions about the valuation, including the associated rationale and supporting reasons; and
  • the date of the valuation report.
As an independent valuation review has been taking  a more influential role  in audit processes and fair value estimation of company asset and liabilities reporting, the corresponding industry standards is gaining more detailed attention from all valuers and other industry practitioners. A professional practitioner should always consider to obtain additional necessary assurance from experts in relevant professional field.

Moore’s Valuation Review
Moore Transaction Services Limited is experienced in performing business valuations and valuations reviews, and intangible asset valuations and valuations reviews (e.g. trademark, patent, customer relationship) across a broad range of industry sectors, including but not limited to natural resources; information technology, biological assets, financial services, manufacturing, retail, and real estate properties. Different business enterprises have their own needs, and we draw on our extensive sector knowledge to identify the correct approach to fit your needs.

Besides, our jobs also cover real estate and property valuations, and financial instruments related assessments and assessment reviews, such as share options, convertible bonds, interest rate derivatives, swaps, call/put options, expected credit losses (ECL), and credit rating analysis. We always keep abreast of the latest valuation industry practices and studies to develop our valuation models and valuation tools accordingly.
For more information on how we can assist you, please contact our Director Kenneth Ma.

1. International Valuation Standards Council, “International Valuation Standards”
2. The Hong Kong Institute of Certified Public Accountants, “Hong Kong Standard on Auditing 620 - Using the Work of an Expert”
3. International Valuation Standards Council, “Valuation Uncertainty – Exposure draft”
4. International Valuation Standards Council, “Dealing with valuation uncertainty at times of market unrest”