When you ask many people about the importance of valuation in their lives, let alone in relation to the global financial system you will often receive a blank look. Yet valuation is a component of the financial system which directly or indirectly affects almost every one of us.

Are you buying a property? Do you want a mortgage? Do you want to take out a secured loan? Are you getting a divorce and need to split assets? Are you interested in listing your company on a stock exchange? Is the government going to place a compulsory purchase order on your property or business? What is the right amount of money to acquire or sell a company or business? Does this amount include goodwill or intangible assets? Is taxation at the correct level? Are you part of a pension fund which invests in listed companies or other assets? Do you invest in shares? Do you rely on financial reports to make decisions? Do you audit accounts? Do regulators require your bank to maintain a certain level of capital?

Valuation touches almost all parts of our national and global financial system and therefore each and every one of us, yet we do not have a fully global approach because each country historically created their own approach with varying levels of success before countries across the world became interlinked. The same was also true of accountancy.

The world of business has become increasingly global in nature and with continuously changing flows of investment and cash, is full of uncertainty compounded by the different standards and levels of professionalism in relation to valuation existing within different countries. As markets have expanded to become global, local practices have become barriers to market efficiency and stakeholders don’t always get reliable information which they need for decision making and use for comparative purposes. This is because there can be a wide variation in valuation methodologies and approaches across markets making it difficult to compare valuations, potential investments and secured lending decisions on a like-for-like basis.

Moreover international investors, lenders and other stakeholders do not have the levels of transparency, comparability and ultimately confidence in the valuations which are performed sometimes nationally as well as internationally and this can lead to a higher level of inherent risk when making secured lending decisions. This is especially important when one considers that according to the World Bank 50–70 per cent of the world’s wealth is in land or real estate (before even getting to Business Valuation and Financial Instruments) and therefore it is in the global public interest to have international valuation standards in place.

The last financial crisis demonstrated the impact of ineffective controls (including quality valuations) in relation to everything from real property through to financial instruments. Poor valuation practice was identified by the Financial Stability Forum and the G20 as a significant contributor to the 2008 financial crisis with a particular focus on financial instruments, where there was much inconsistency in valuation between financial institutions as well as across national borders.

Since then the SEC through a speech by its Chief Accountant also highlighted further issues in relation to differing levels of professionalism and the impact this can have on different stakeholder groups, these concerns have been echoed in many countries. Challenging times continue with difficulties in some markets and will recur at some point on a wider basis.

Valuations form a key part of audited accounts which should provide transparency and comparability in relation to the value of companies and therefore impact share prices. This is of interest to anyone with a pension or investment, and more broadly society who wish to see financial market stability because of the link to a stable economy. This is not, however, achievable without a consistent approach to performing quality valuations.

Valuations also have a significant impact on the transfer of intellectual property rights between related parties in different tax jurisdictions, as well as in connection with determination of global transfer pricing arrangements.

Problem of profit shifting

According to the EU Commission, 72 per cent of profit shifting that takes place in the EU is done via the channels of transfer pricing and location of intellectual property; spurious valuations of assets transferred between one jurisdiction and another are contributing to the erosion of countries’ national tax bases. Research by the IMF covering 51 countries concluded that profit shifting between tax jurisdictions resulted in an average revenue loss of about 5 per cent of current corporate income tax revenue — almost 13 per cent in non-OECD countries.

Again, profit shifting is largely based on valuation of those assets that are transferred between one tax jurisdiction and another. There is a clear public interest need for globally applicable valuation standards and high quality professionalism.

The world’s economy has benefited from the growth of international standards on a number of fronts including financial regulation, accounting and auditing standards. Many of these areas depend on the work of the various valuation professions. The International Valuation Standards Council (IVSC) has taken steps to also build a global approach to valuation through the adoption and implementation of International Valuation Standards, and to encourage a consistently high quality of valuation professionalism around the world. IVSC also works closely with key stakeholders such as IASB due to the importance of valuations which underpin financial statements. Significant progress has been made but there is still much more to do.

India’s steps

India is one of the fastest growing economies in the world and has the third largest spending power and therefore has a strong interest in a high quality approach to valuation both nationally and internationally. With increasing competition between countries to attract domestic and international investment it is right that the Indian government has taken steps to improve the professionalism of valuations being performed in India through increased regulation and has set up a Valuation Standards Advisory Committee to the government in relation to valuation.

IVSC welcomes the creation of this committee with the hope of a robust transparent and professional approach which will meet both the needs of India and those of international investors.

The writer is is the CEO of the International Valuation Standards Council

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