BVR Logo 16 September 2019 | Issue 6-1

Thank you for subscribing to BVWire—UK! This free service from BVR keeps you current on the growing business valuation profession in the United Kingdom by offering news and perspectives from valuation thought leaders, the High Courts, HMRC, the standard-setters, ICAEWRICS, and more.

Please be in touch with your perspectives, news, and ideas—and pass this issue along to colleagues (complimentary sign-up instructions are here).



IVS update includes guidance for complex
capital structures

For the first time, the International Valuation Standards (IVS) include guidance for valuers whose engagements require that the entire enterprise value be allocated across various classes of economic or control rights. The overview of possible methods is provided in sections 130.5-8 of the IVS 200 Asset Standards, which become effective 15 January 2020:

130.5. For complex capital structures, being those that include a form of equity other than just common stock, valuers may use any reasonable method to determine the value of equity or a particular class of equity. In such cases, typically the enterprise value of the business is determined and then that value is allocated between the various classes of debt and equity. Three methods that valuers could utilise in such instances are discussed in this section, including:

(a) current value method (CVM);
(b) option pricing method (OPM); and
(c) probability-weighted expected return method (PWERM).

130.6. While the CVM is not forward looking, both the OPM and PWERM estimate values assuming various future outcomes. The PWERM relies on discrete assumptions for future events and the OPM estimates the future distribution of outcomes using a lognormal distribution around the current value.

130.7. A valuer should consider any potential differences between a “pre-money” and “post-money” valuation, particularly for early stage companies with complex capital structures. For example, an infusion of cash (i.e., “post-money valuation”) for such companies may impact the overall risk profile of the enterprise as well as the relative value allocation between share classes.

130.8. A valuer should consider recent transactions in the subject equity or a particular class of equity, and ensure the assumptions used in the subject valuation are updated as necessary to reflect changes in the investment structure and changes in market conditions.

The new Section 130 goes on to offer further description of the CVM, OPM, and PWERM and their potential uses (and risks), making it the first part of the IVS that recommends specific valuation methods for specific facts and circumstances. Valuing assets with complex capital structures has largely been the domain of the international firms, but these additions confirm—and in fact require—that any ‘valuer must determine and consider the different rights and preferences associated with each class of debt and equity.’

 

iiBV intangible assets 212 course gets kudos

Several BVWire—UK readers have commented that they’ve used the new iiBV 212 Valuing Intangible Assets online course to help staff get up to speed on the key business valuation concepts. Taught by John Barton, this IVS-compliant course includes Excel-based case studies so that valuers can see the application of intangibles valuation methods (MPEEM, relief from royalty, and the profit split method, among others) to financial reporting and particularly purchase price allocations. Estimated time to complete the 13 modules is two hours. The iiBV course costs £120 (group discounts are available) and includes a certificate of knowledge in intangible asset valuation and iiBV 212 credit.

Let the (WACC) sunshine in ...

Led by cost reductions at Chinese manufacturers, and assuming a 7% weighted average cost of capital, solar energy is now the cheapest power source—in England! So concludes a new levelised cost of energy (LCOE) analysis by a group of European academics published last week. The study’s authors conducted a sensitivity analysis and found that WACC and, not surprisingly, location were the two most important parameters when comparing energy contract prices to traditional sources.

As with most valuation examinations, the authors comment that ‘market prices of photovoltaic modules and systems have developed so fast that it is difficult to find reliable up to date public data,’ but they reference other studies that report that solar module prices have fallen 90% in the past decade and generation system costs have dropped 80%. Meanwhile, private and public investment has poured in, keeping returns expectations reasonable (increasing nominal WACC to 10% dramatically increases energy costs for PV power).

Institutions have failed to keep up with the financial changes in the industry, argue the authors. They point out, for instance, that the European Commission’s current energy transition pathways do not even include solar energy and use decade-old financials to conclude that the capex for PV is too high to be even considered.

That being said, even in the UK, the current levelised cost of electricity from solar is now 42 euros per megawatt hour, compared to the average spot market price of traditional sources of 64 E/MWh. This comparison is biased because PV systems require storage. Including that factor, the authors conclude that solar energy will be cheaper to produce—even in London—by the end of 2020.

Impact of Weighted Average Cost of Capital, Capital Expenditure, and Other Parameters on Future Utility‐Scale PV Levelised Cost of Electricity’ is available at the Wiley Online Library. The authors include Ero Vartianen, Gaëtan Masson, Christian Breyer, David Moser, and Eduardo Román Medina.
Deloitte puts further reliance on IVS

The Big Four firm has contributed financial and staff support to IVSC since the organisation was founded, but now it’s aligning professionally with the need for harmonised standards in the form of the IVS. ‘Our proprietary global valuation standards provide guidance for our valuation practitioners and are consistent with local authoritative valuation guidance, as well the International Valuation Standards issued by the IVSC. It was important for us to establish guidelines that are in compliance with the IVS, as the IVSC is the most globally recognized source for valuations standards.’

So say Mark Pighini, global leader, and Stamos Nicholas, global regulatory and compliance leader, of Deloitte’s Valuation & Modeling division.

‘The very fact that valuation is largely unregulated around the world today makes it more and not less important to have strong professionalism and consistent, internationally recognised and applied guidance. Companies, investors, regulators, auditors and the global financial community as a whole rely on business valuation professionals now more than ever, so it’s imperative that we operate similar to CPAs, doctors, lawyers, and other qualified professionals for the benefit of clients and in the public interest.

‘Robust and consistent practice serves as a framework for, and an enabler of, professionalism,’ Pighini and Nicholas conclude.

New leadership at CFA Institute

CFA Institute announced that Margaret Franklin (previously president of BNY Mellon Wealth Management in Toronto) began last week as the organisation’s new president and CEO. Diane Nordin, CFA, becomes chair of the board of governors, and Daniel Gamba (BlackRock) now serves as vice chair.

The 15-member CFA Institute board of governors includes two representatives from the UK; Karina Litvack, nonexecutive director, Eni s.p.a., and Alex Birkin of EY both continue their tenure.

See you in London 23 October

The largest gathering of business valuation professionals in the UK is coming up next month at the ICAEW’s Moorgate Hall facility. Brexit aside, the 2019 Valuation Community Annual Conference ‘aims to keep you informed of some of the changes and some of the constants in business valuation,’ says programme chair Jonathan White (KPMG).

Sessions begin with an economic update delivered by Professor Trevor Williams, former chief economist at Lloyds Bank, and now at the University of Derby—probably a wise start for any business valuer, given the current uncertainty.

Further highlights include a leadership panel on valuation of intangible assets under FRS 102 led by Steve Shaw, director, Financial Seminars Ltd. The other panelists include Simon Jones (partner, BDO); Ashley Higgs (partner, Smith & Williamson); and Olivier Pecon (director, EY).

Sarah Middleton (director, PwC) will discuss current factors in valuing assets in divorce, and Andrew Strickland and Luke Morris of Scrutton Bland will address ‘current developments in the valuation of family businesses.’

Steve Shaw, director, Financial Seminars Ltd, completes the breakout programming with a session on advanced valuation techniques.

Dates for your business valuation diary

ICAEW Practical Business Valuation, 11 and 25 November, London

IVSC Annual General Meeting and IVAS/IVSC Business Valuation Conference, 7-9 October, Singapore

ACG UK Chapter Trends in Alternative Capital, 15 October, London

ICAEW Excel Modelling—Investment Appraisal, Valuation and Business Cases, 18 October or 15 November, London

ICAEW Valuation Community Annual Conference, 23 October, London

ICAS New April 2019 Corporate Insolvency Rules for Scotland course, 31 October, Glasgow; 1 November, Aberdeen; 7 November, Edinburgh; 15 November, Perth

ICAEW Forensic and Expert Witness Conference, 7 November, London

UK200 Group Annual Conference, 13-15 November, Liverpool


Interested in working with BVR in the UK as a partner or ambassador?
Want to share a news item? Have feedback or comments?

Please contact David Foster (Executive Editor) at:
ukeditor@bvresources.com or +011-917-741-3853


LinkedIn Icon
Twitter IconYouTube Icon

Business Valuation Resources, LLC
111 SW Columbia Street, Suite 750, Portland, OR 97201 U.S.A.
+011-503-479-8200 | info@bvresources.com
© 2019. All rights reserved.