Verification of Valuation Data
In addition to substantiating the assumptions made and data utilised by external literature and market research, supplementary checks must be considered.
Cross-checking Using Alternative MethodologiesThere may be several alternative ways of identifying the intangible cash flow stream which are equally acceptable from a conceptual viewpoint but financial rigour and reliability may depend on the type and quality of information available. Secondary valuation methods may need to be explored, making allowance for their theoretical and practical limitations.. This process may enable a cross check to be performed on the intangible asset's value, its cash flow stream and the capitalisation factor used. Any differences will need to be investigated and reconciled.
Independent ReferencingComputations, source data, consistency of assumptions and data and the application of valuation methodologies need to be checked independently as part of normal professional practice.
Check Using Net Asset ApproachThe asset approach can provide a useful check in situations where the intangible asset represents a significant part of the enterprise. Assigning fair values to the assets and liabilities of the business provides a cross check to indicate whether the intangible asset reconciles to a fair value for the business as a whole.
Explanations for major unreconciled differences may include
- improper values assigned to the net tangible asset;
- omission of other significant intangible assets from the calculation;
- inconsistent valuation of the business as a whole; and
- inaccurate intangible asset valuation.
Valuation DateIf the date at which the valuation is to be made precedes the time during which the valuation is carried out, care needs to be exercised to consider the influence on stated assumptions.
Management RepresentationTo ensure that a complete and consistent assessment of the key valuation issues has been carried out, there is a need for close interaction between the valuer and client during the valuation process.. Ideally, management's assumptions should be summarised in writing and included in a representation letter from the company to the valuer.
ConsultationsOther steps may also be necessary in the verification process to address the subjectivity of the valuation and to ensure the consistency of the valuation over time. For example, if valuation of intangibles is to form a continuing process for accounting purposes, the following ongoing consultative process is envisaged:
- preparation of the valuation with management, documenting methodology, key assumptions and valuation parameters;
- consultation with, and approval by, the board of directors;
- consultation with, and approval by, the auditors;
- periodic review and reporting by independent professional valuers.
This will facilitate the regular review of the value of the intangible asset on a consistent basis over time. This process will also enable attention to be drawn to substantial changes in value and thus assist in highlighting possible permanent changes.
Extent of Verification WorkValuers can report in two alternative capacities:
- Advisory where the valuer places a high degree of reliance upon information supplied by management with minimal independent verification; and
- Opinion where the valuer performs sufficient independent verification to support a professional opinion and reference the valuers name in public documents.