IVSC consults on valuation of financial instruments
The International Valuation Standards Council (IVSC) is consulting on how to modify and enhance its standard for the valuation of financial instruments, given current concerns around inconsistencies and poor quality in international standards
12 Aug 2019
The IVSC says the valuation of financial instruments has been an important and often controversial topic among valuation professionals, investors, prudential and securities regulators and the wider financial services industry over recent years.
The IVSC stated: ‘It is clear, however, that there is no effective set of international valuation practice standards for financial instruments that has been generally adopted.
‘This has resulted in both inconsistent and sometimes low-quality valuation practices and, in recent years, concerns have been expressed by financial regulators and others about the quality and consistency of financial instrument valuation practice.’
The consultation document seeks feedback regarding the approach the IVSC’s newly established financial instruments standards board should take, and the prioritisation of that work.
The financial instruments board was formed in December 2018, and met for the first time in April 2019. At that meeting the board agreed to significantly modify and enhance the existing financial instrument standard IVS 500, and the consultation is the first step in this process. IVS 500 was originally created as a holding chapter on financial instruments, which was initially released as part of IVS 2017.
The financial instruments board has agreed on three principles to guide the revision of the IVS 500. Firstly, standards should be relevant for all types and sizes of entities with financial instruments. Secondly, they should focus on a process for valuation of financial instruments – what is being measured, how is it being measured, and what is being done with the results. Finally, standards should apply regardless of the measurement objective (GAAP, tax, stress testing, prudential valuations, or other requirements) and should be fit for use for the measurement objective.
The IVSC says the aim is to agree a set of overarching principles used to guide the valuation of financial instruments regardless of measurement objective. This includes guidance on roles and responsibilities of management and others, the segregation of duties and independence, as well as the assessment of valuation risk and escalations through the chain of command.
There will be guidance regarding the data validation, updating of data, determining the quality of data as well as guidance for exercising judgement in the use of data, and instances where limited or no data is available.
The consultation also aims to develop guidance regarding how methods and models are selected, validated, monitored and controlled, including consistency and granularity. In addition, guidance will be published for addressing evolving market practices, such as valuation adjustments, as well as guidance on the valuation control infrastructure, end-to-end valuation process and independent price verification.
The consultation closes for comment on 19 September 2019.
Pat Sweet | 12-08-19