SFC toughens up on (monkey) business valuations

Written By: on BUSINESS VALUATIONS, FORENSIC ACCOUNTING NEWS

Following the issuance of SFC guidance note on directors’ duties in the context of valuations in corporate transactions on 15 May 2017, we have received increasing enquiries for business valuations particularly for M&A targets.

The SFC has become increasingly concerned that some listed companies are acquiring assets at unreasonably high prices or selling assets which are substantially undervalued. As a result of possibly ill-advised transactions, shareholders’ interests were harmed.

Our Directors are often engaged as accounting experts to prepare expert witness reports for valuing a company or a group of companies in various in dispute matters. Bearing in mind an Expert’s overriding duty owed to the Court, integrity and impartiality are our number one priority. However, business valuation is never a straight forward calculation and there is no magic formula which can be used to “plug in some numbers”. In this regard, the SFC also stated,

The SFC says valuers may be liable if they make reckless or unreasonable assumptions

Valuers are expected to exercise the degree of skill and care ordinarily exercised by reasonably competent members of the profession. They should not knowingly or recklessly accept any assumptions that are not reasonable and fair. Valuers may be liable if the valuation report contained any materially false or misleading information.

There are variety of accounting issues and practical questions we always have to deal with for example:-

  • relevance and usefulness of the valuation date
  • application of a premium or a discount if the acquiring target is a minority non-controlling interest or a majority controlling interest of a company
  • recoverability of a long outstanding account receivable or a debt owed by a company

Our extensive experience in preparing reports for Court’s purposes teach us how to strike a balance between being skeptical and reasonable in gathering information for business valuations. More often than not, we were informed of the non-existence of certain supporting documentation. The minimum steps we should undertake to establish a reasonable reliance on information are:-

  1. Firstly, request underlying third party documentary evidence to:-
  2. (a) explain fluctuations of profit and loss and balance sheet items as well as financing soundness;
    (b) support business or profitability forecasts;
    (c) identify intangible assets; and
    (d) identify real properties, intangible assets (e.g. patents, trademarks, brand names) or other assets which not within our expertise (as forensic accountants).

  3. Secondly, research public data or data service providers in the absence of the above documentary evidence.
  4. Lastly, considering and assess the reasonableness of the management’s representation based on the above.

Check out more about our Business Valuation services and experience here.


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