The International Valuation Standards Council (IVSC) has launched a consultation on a proposed new standard, IVS 220 Non-Financial Liabilities, which provides guidance on valuing for goods and services rather than financial assets
IVS 220 has been developed after the IVSC found that its definition of assets was incomplete, as ‘there is no definition of what constitutes a liability’ and ‘little consideration of any characteristics or attributes that are specific to liabilities as opposed to assets’.
Drawing on a consensus of findings from an examination of IFRS 17 Insurance Contracts, US GAAP and IASB guidance, the IVSC describes non-financial liabilities as typically including ‘an obligation to provide goods or services, rather than settled in cash like is typical for financial liabilities’.
The term includes (but is not restricted to) deferred revenue, warranties, power purchase agreements, certain litigation reserves and contingencies, and certain indemnifications and guarantees. Some non-financial liabilities ‘do not have a corresponding asset recognised by the counterparty’, such as environmental liability.
However, it also notes that some non-financial liabilities do require cash fulfilment, such as lease obligations. Because the corresponding asset of a non-financial liability can be held by numerous parties, the IVSC stresses that valuers need to take into account asset-liability asymmetry.
While non-financial liabilities have limited accounting and valuation guidance, financial liabilities are often subject to specific accounting, valuation, and regulatory requirements. The IVSC also warns that valuers must use judgement and rely on the applicable accounting and regulatory guidance when defining the subject liability as non-financial or financial.
Valuing non-financial liabilities can be done in several ways, such as using the top-down method, which is based on the premise that reliable market-based indications of pricing are available; the income approach, which determines value by reference to the present value of the costs to fulfil the obligation; or the bottom-up method, which applies the income approach plus a reasonable markup.
The project, which has been led by the Business Valuation Board with support from the Standards Review Board, Tangible Asset Board and Financial Instruments Board, arose as a result of feedback received by the IVSC during the agenda consultation in 2017-18.
The consultation on the proposed new standard, IVS 220, is open until 1 April 2019
Report by James Bunney