Global valuation standards: achievable?

26 Feb 2014

PwC Global valuations leader John Glynn and director Caroline Woodward explain how global valuation standards are worth pursuing, regardless of the obstacles likely to be encountered en route. And with a new chairman in place at the IVSC, the time could be right.

What does it take to create an international standard for something? Once you have the will, there’s a way. After the will, or the need, time is the most important thing. Lots of time. Then you need a simple framework, one that’s easy to transition to.

At the same time, you need someone – not the standard setter – to police the new framework. And along the way, you need to gather a critical mass of users, usually convinced by some catalyst – an event, a gesture – that joining in is desirable, if not essential.

In other words, there are a lot of moving parts, but it’s achievable in the right circumstances and with the appropriate efforts.

In fact, it was achieved not all that long ago, in financial reporting – but there were a number of important events that helped. Accounting under communism was very different. When the Berlin Wall fell, former communist countries in the CEE found the basic IAS framework that the IASC (the IASB’s predecessor) had adopted, very helpful.

A swathe of companies were faced with accounting for a whole range of situations they hadn’t yet encountered and for which they had no appropriate national framework. There were a lot of countries transitioning to IAS, and then of course the EU made its grand gesture, mandating IFRS for all listed companies by 2005. Enough things had fallen, or been maneuvered, into place for IFRS to credibly call itself the most widely spoken global accounting language.

So is it fair to say that we need a similar catalyst for the majority to support an international valuations standard setter? Those stars might already be aligning.

Building blocks already exist

First, the circumstances seem right. The financial crisis precipitated a focus on fair value. Valuations suddenly had its ‘Berlin Wall moment’. Regulators looking into the catastrophic failure of major companies were scrutinising the application of the fair value principle and, in many cases, not liking what they saw.

Also, the business environment looks like it might well require more comparable valuations, and soon. Intangible assets like brands, technology and know how are increasingly large components of a company’s value, and they’re hard to put a number on. Companies approach valuing their assets in a variety of ways, and the quality of those valuations can also be variable. Auditing those valuations for financial reporting can be a challenge – one that could be made simpler with global valuation standards.

We need a structure in place – a way of ensuring that asset valuations are of a globally consistent high quality.

The mixture of the crisis and the current business environment may not be enough. But there are positive signs that major players are coalescing around a global valuations standard setter – International Valuation Standards Council (IVSC), a body fast gaining worldwide recognition. The IVSC is one of a number of valuation bodies – most of which operate at a national level – but it stands out as the only organisation in the field truly trying to go global.

A leading technical voice

Among the positive signs too is the arrival at the IVSC of Sir David Tweedie – the driving force behind a very successful decade at the IASB.

With the right approach, an agile standard setter with a clear mission, a transparent system of governance and an open and thorough due process could mirror the headline successes at the IASB.

The profession needs to place trust in the IVSC and support its vision. It’s the only valuation body with global reach and has taken a number of steps to realise the goal of developing high-quality global valuation standards. It has diverse representation on its boards and a history of providing technical guidance across much of the spectrum of valuations.

But what’s the key to developing the IVSC’s position to a well-respected global standard setter?

First there’s the snowball of endorsements – and that’s already happening, including PwC adding our voice in early February.

But, importantly, the IVSC has to tread the line between being too prescriptive or too generic. Standards that are too generic don’t make good guidance, and when things are too prescriptive, professional judgement is hampered.Having a substantive global technical valuation framework that is principles-based will improve the consistency and comparability across the financial markets and increase confidence in valuations performed.

The profession at a crossroads

It’s time for the valuation profession to help chart a course that leads to a unified global framework. Valuation professionals need to decide whether they’re going to enhance their professional standing or continue with the status quo.

What would a break with the status quo look like? Collectively demanding a principles-based technical framework would improve the global standing of valuations specialists and lead to a greater level of consistency in both the methodology and documentation of valuations.

And what happens if the profession and the regulators don’t get behind the IVSC? Clearly the status quo is workable – but it’s certainly not desirable any longer. The increasing complexity of the financial markets, the expanded use of fair value and the evolving business environment has put the valuations profession to the test – and it’s been found wanting in some cases. We have the opportunity now to raise the standard of valuations and increase the confidence in the work that we do.