Standard demands

The International Valuation Standards Council is near the end of a three year project to improve its existing standards.  These standards had been developed piecemeal over many years and although they contain much that is sound, they also suffer from ‘middle-aged–spread’ and have been in need of a rigorous fitness regime to slim them down and improve their focus and relevance.  Following an extensive process, including  an independent critical review, public consultation on an exposure draft and roundtable discussions with stakeholders in New York, Hong Kong and London, a set of completely revised new standards are due to be published in late June.

Like other global standard setters, the IVSC has no power to enforce compliance with its standards; its role is to identify and then promulgate best practice.  Adoption and enforcement is by others, whether they be governments, regulators or membership bodies who recognise the authority of the International Valuation Standards (IVS) comes from the inclusive and collaborative nature of the process by which they are created and maintained.

So how do the IVS relate to other standards that are concerned with valuation, most notably the recently approved IFRS 13 on Fair Value measurement and its US equivalent?  Of course there are also the International Private Equity Valuation guidelines.

As far as the new accounting standards are concerned, the IVSC has been actively engaged with both the IASB and the FASB for many years, and hopefully our influence has helped in ensuring that the valuation concepts and processes described are reflective of mainstream valuation practice.

However, it is important to remember that these are accounting and not valuation standards. Valuation is being used as a tool to assist in the accounting construct and has meant that in a few cases the accounting standards require assumptions that depart from economic value.  Examples include the disregard of blockage factors for certain categories of asset, or the stipulation that certain liabilities should be valued by reference to the value of the opposing asset.

The IASB has stated in the introduction to its new standard that it is not intended to establish valuation standards and neither does it affect valuation outside of financial reporting.  The message is clear that accounting and valuation are related but distinct disciplines and that independently created valuation standards are necessary.

Turning to the IPEV guidelines, the IVSC has been in dialogue with the IPEV Board and recognises that the private equity market is an important part of the overall valuation landscape.  It is hoped that in the future there will be the opportunity to collaborate on projects relevant to the sector.  This will help ensure that IVS reflects the requirements of investors in private equity and that best practice guidance that is relevant to professionals in the sector can be developed.  My own perspective is that there are no fundamental differences of principle between the latest IPEV guidelines and IVS, except that the IVS are of necessity more broadly focussed.

Finally the IVSC is also building liaison with financial regulators such as IOSCO and ESMA.  Clearly there are concerns at what valuation regulations may emerge from under the European AlFM Directive.  IVSC is wasting no opportunity to impress on these bodies that the valuation profession is coming together to produce globally recognised standards and that to invent a parallel set of procedures under the directive at either EU or state level would not only be wasteful of resources but also liable to cause inconsistencies with market practice and opportunities for “standards arbitrage”.