It is the responsibility of the management of a company to present financial information accurately and fairly to their shareholders, creditors, and other stakeholders. When preparing financial statements for such stakeholders, the management typically presents financial information in accordance with the applicable financial reporting and accounting standards. These standards require certain assets and liabilities to be measured at fair value, to be accounted in the financial statements of a company.
Fair value measurements can be complex and are reviewed by a company’s statutory auditor as well as corporate regulators. The common fair value measurements required by IFRS are as follows:
- Purchase Price Allocation – Under IFRS 3: Business Combinations, an acquirer measures the cost of the acquisition at the fair value of the consideration paid; allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values and allocates the rest of the cost to goodwill, and if applicable, recognises any excess of acquired assets and liabilities over the consideration paid (as a ‘bargain purchase’) in profit or loss. The identifiable finite-life assets (tangible and intangible assets) are then depreciated/ amortized over their remaining useful lives.
- Goodwill Impairment Review – The guidance related to the impairment of assets is included in IAS 36. The standard requires acquired assets to be carried at no more than their respective fair values and any difference to be recorded as an impairment. Accordingly, goodwill must be tested for impairment at least annually.
- Valuation of Unquoted Investments and Portfolio Companies – The standard requires the fair value measurement of financial instruments such as equity investments that are not actively traded in an organized market. The guidance pertaining to the fair value measurement financial instruments is included in IFRS 9/ IFRS 13. Such valuations could pertain to either majority or minority shareholdings as the case might be, and depending on the extent of information available, the most appropriate methodology would be chosen.
- Other fair value measurements such as valuation of stock options, and valuations for tax purposes, dispute resolutions, restructuring, amongst others.
Often fair value measurements can be particularly challenging and time-consuming. Especially the valuation of intangible assets under PPA which requires significant professional judgment in its identification and valuation. The valuation of privately held companies can be also challenging in certain cases in absence of limited market data. Similarly, in such cases, professional judgment become imperative in selecting the most appropriate valuation input variables.
Considering the complexity involved in undertaking fair value measurements and the risk of scrutiny from a company’s statutory auditor and corporate regulators, the management of a company often engages independent valuation firms to perform these measurements. This is especially needed when an independent opinion is obligatory, or when a company does not have the internal resources or expertise to manage the process.
How can PKF UAE help you?
PKF UAE has a team of experienced professionals with many years of expertise, offering a wide range of valuations services for financial reporting purposes across sectors. PKF has assisted clients by undertaking valuation engagements for start-up and mature companies across a wide range of sectors for their fair value measurements requirements along with other purposes such as M&A, sale of minority shares, purchase price allocations, impairment testing of goodwill, among others. We will be pleased to discuss any of your requirements. Do contact us on email@example.com or at www.pkfuae.com.