The equity risk premium is a favorite topic of Aswath Damodaran (New York University Stern School of Business), who employs a forward-looking “implied” method in keeping with business valuation requirements, rather than the more common historical measures. He estimates the implied ERP to be 4.9% as of 1 January 2022 and reports the year-end estimates going back to 1960.

BVR includes Damodaran’s data as one broadly accepted result in the Cost of Capital Professional.

Each year, Damodaran posts a great amount of data on his website including risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. Business valuers around the world frequently cite his research, which has been accepted in expert testimony and financial reporting.

Damodaran also publishes regular commentary on his blog related to forward-looking cost of capital. Last week, he offered experts a new perspective on how current inflationary trends impact business valuation conclusions. (A post two weeks ago explains some of these risk premia data and gives the background of his annual analysis.)

To derive implied ERPs, Damodaran “backs this number out” from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond.

More complex insolvency cases are now passing through the High Court using the tools included in the UK’s new restructuring regulation. There are creditors’ meetings 10 February for one of the most watched of these insolvency cases, Smile Telecoms Holdings Limited.

A common theme: In the initial cases, the court has considered the adequacy of disclosures made to creditors. The written judgement from the Amicus Finance scheme the court authorised last August says, “[I]t is not enough for office-holders simply to state their conclusions as to the estimated outcome and implicitly to invite creditors to assume that because they are professionals that they will have got it right.”

These court administrators will be increasingly reliant on the opinions of their financial experts to support disclosure expectations, the Amicus decision showed. This plan intended to rescue the company from £32 million of claims primarily by reducing the rights of the senior secured creditor class. Since it was the first case proposed under the new regulations, many features like the cram down of dissenting classes and the creditor disclosure requirements were immediately tested. At the convening hearing, the court, for the first time, exercised its power under s. 901C(4) of the Companies Act 2006 to exclude the company’s members and all but a single class of creditors from voting on the plan.

New IVSC business valuation standards are now in effect—and online

The latest edition of the IVSC’s International Valuation Standards became effective yesterday 31 January--and members will soon have easier online access to the newest (and previous) versions. This is thanks to IVSC’s new IVSonline service.

The business valuation sections of the new IVS are relatively unchanged from the previous update, but IVSonline also provides further supporting materials and summaries of the key changes between versions, translations, and “bases for conclusions.”

The plan is that existing IVSC sponsors and subscribers will have free access to the new platform, though new passwords and a “unique sponsoring code” are currently required.

A checklist of conflicts that can be avoided in successful shareholder agreements

Buy-sell agreements frequently fail to meet all the needs of all shareholders over time. In some cases, the valuation methods (or an actual valuation conclusion) are at fault, but, more commonly, the problem is that scenarios were overlooked or the agreement is unclear on essential issues.

A new short checklist published by Siobhan Williams of the firm Darwin Gray, available at Lexology.com,should remind business valuers and their shareholder clients of many of the factors where buy-sell agreements frequently end up in disputes. Gray highlights the following essential topics in “Do I Need a Shareholders Agreement?”:

• Obligations or restrictions on what each shareholder can and cannot do, both whilst they are a shareholder and afterwards;

• Treatment of dividends and relative shares of any payouts;

• Individual shareholder rights to any new shares that may be issued;

• Processes should a shareholder wish to sell or transfer shares;

• Terms that defines which shareholders may be appointed as a director; and

• Dispute resolution methods, whether compulsory or voluntary, in the event of a disagreement.

BVWire—UK would add a number of valuation-related topics to Williams’ checklist, since those issues frequently are at the center of disputes that end up in the UK commercial courts. Many experts have noted that mandating a regular review of shareholders’ agreements by all signatories can often forestall future animosity or legal action.

The Carillion/Regenersis inquiry continues to haunt the audit and business valuation professions

The latest fines and sanctions revolve around an internal audit manager’s “forgery” of a key formula in a spreadsheet submitted to the Financial Reporting Council (FRC), which increased a materiality threshold. This eliminated audit scrutiny of contracts between £300,000 and £1.5m. A KPMG partner settled with inspectors and has been fined for “misleading” them about this change, which, according to FRC, was “contrary to his ICAEW professional accounting body’s code of ethics.”

The FRC continues to say sanctions on KPMG will be determined at the conclusion of their ongoing tribunal hearing on audits of Regenersis and Carillion. KPMG, which long ago self-reported to the FRC after its own investigation, has already admitted to misconduct in how the FRC was dealt with during spot checks of audits of Regenersis and Carillion.

IASB and FASB appear headed in different goodwill impairment directions, Barckow notes

At the recent AICPA and CIMA Conference in the U.S., Andreas Barckow, chair of the International Accounting Standards Board (IASB), discussed the status of the IASB’s current work plan, which is a goodwill impairment project. Barckow noted that, in the U.S., the Financial Accounting Standards Board (FASB) has tentatively decided to reintroduce an amortisation model for goodwill with a 10-year default amortisation period. The IASB is leaning toward a different conclusion, that is, retaining the impairment approach with some modifications. “Given that our pronouncements on business combinations are largely converged, an important consideration is to investigate how we can stay aligned,” said Barckow. This isn’t the final word on the subject, but the emphasis on harmonisation is welcome. Barckow’s full speech on goodwill impairment is available here.

17-18 February: ICAEW Advanced Valuation Techniques, virtual classroom

29-30 March: IPBC Europe IP Value Creation Conference, London

12-20 April: ICAEW Practical Business Valuation, virtual classroom Repeated 21-29 June.

14-16 September: IVSC Annual General Meeting, Fort Lauderdale, Fla.

3-5 October: 12th Annual International Valuation Conference, Riyadh, Saudi Arabia

Want to share a news item? Have feedback or comments? Please contact David Foster at ukeditor@bvresources.com.

Want to share a news item? Have feedback or comments? Please contact
David Foster at ukeditor@bvresources.com.