07 Jul 2020 Ankit Chadha

Business Valuation Services: Valuation In The Face Of Crisis

Business Valuation Services | TRC Consulting

The COVID-19 crisis has put the global stock markets in an upheaval, and various industries are gaping at an unclear future. In India, most of the listed companies in the stock markets have witnessed a substantial collapse.  

In these unstable times, organizations, financial institutions, investors, and specialists are struggling with quite a few questions related to the business valuation services. Some of these questions are discussed below: 

  1. How will this coronavirus crisis impact investments of entities that have been accounted at fair value? 

The Fair Value measurements need to take into account the cash flow prospects and market terms as it is recorded on the measurement date. The auditing standards regulating such measurements put significant importance on the three-level fair value hierarchy that is based on the inputs of the standard valuation methodology.  

The Level 1 inputs correlate the directly detectable and observable inputs from the stock market. While quantifying investments in publicly registered entities or exchange-listed ventures, it may be suitable to review the trading quantities, including all trades made in a principal-to-principal market, and gauge the market’s ‘orderliness.’ 

As mentioned in the International Financial Reporting Standards (IFRS) 13, any adjustments that are being made to the observed market inputs, should consider the measurements as on the present date of valuation, except for specific circumstances as clarified in the ordinance. Contrarily, the use of level 2 or level 3 market inputs can demand more prudent considerations.  

  • If the business valuation services deploy transactions multiple approach: An investment that has been valued using the transactions multiple methods in the past, now, needs to apply suitable discounts available due to COVID-19 control measures if the comparable list has been declared before the COVID-19 crisis. 

  • If the business valuation services deploy market multiple approach: An investment that utilized the market multiples method of comparable listed companies, needs to understand and equate the businesses and primary drivers of the target company to realize an appropriate comparative standing. In case the businesses are suitably comparable (shares of comparable companies are frequently traded), it may not be wise to contemplate accepting an average price over an extended period – just because of the recent decline in prices for estimating the valuation multiples of comparable companies and entities. 

  • If the business valuation services deploy income-based approach: The management and professionals need to cautiously consider the cash flow forecasts and continually update them for the evaluation dates. Given the extreme volatility that is currently prevailing, it is an absolute necessity to build situation-wise projection sets with prospects and control measures formulated for each set. Consequently, near-term forecasts and estimates are also expected to get profoundly affected. The pandemic presents a ‘known-unknown’ risk, which is tricky to model when it comes to business valuations and thus, a certain level of conservatism is advised. 

Note: In the given situations, utilizing capitalization of earnings method may be less appropriate, even for entities that continued to generate steady cash flows as arriving at a single normalized cash flow projection would be extremely difficult, due to the market instability.  

  1. Will the Carrying Value of the company assets like Goodwill and Intangible Assets go through impairment? 

Goodwill impairment assessment and additional intangible assets are governed by International Accounting Standards (IAS) 36 and similar norms across all nations. It is imperative to note that the specifics given in the standards concentrate on the recoverability of the assets and therefore, they implicitly want us to ingrain a long-term outlook.  

Involving careful interpretation of the temporary and permanent adjustments such as macro-economic factors is one outlook, as suggested by IAS 36. Subsequently, any structural or fundamental changes in such factors triggered in the wake of the present market uncertainty demand appropriate valuation analysis. 

  1. If I invested funds in a company five months ago, do I need a write down at the time of registering the fair value as on 31 March, 2020? 

Any investments made in either private equity or venture capital funds factor a higher relative degree of volatility in the ‘month-over-month’ performance as compared to what is usually witnessed in the market. The business valuations at which these funds generally invest also considers near-term underperformance for different reasons such as lower rate of team build-up, and the difference in real versus projected market traction. It is essential to examine the health of the balance sheet and the ‘year-to-date’ performance as presented on the date of measurement. 

It is also necessary to evaluate and review any near- or long-term financial performance impacts with the management and the investee company of these funds. Remember, every investment is different, and such impairment decisions vary with cases. 

 

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