Business Valuation | STEAM Valuation Advisory (HK)

Intro

Business Valuation Under IVS and USPAP

Business valuation is increasingly relied upon in financial reporting, transactions, shareholder matters, tax, litigation, restructuring, investment analysis and corporate governance. In these situations, the valuation conclusion is only useful if the valuation process is properly scoped, supported by relevant data and inputs, and communicated in a clear and credible report.

STEAM Valuation Advisory provides business valuation services with reference to the International Valuation Standards (“IVS”) issued by the International Valuation Standards Council (“IVSC”) and, where applicable, the Uniform Standards of Professional Appraisal Practice (“USPAP”). IVS is structured around General Standards, including scope of work, bases of value, valuation approaches, data and inputs, valuation models, documentation and reporting, together with Asset Standards such as IVS 200 Businesses and Business Interests. USPAP is recognized as the generally accepted ethical and performance standards for appraisal practice in the United States and includes standards for business valuation and intangible asset appraisal

Discover how ASA explain the concepts and nuances of business valuation so that the client could pursue new deals and unlock growth.

What We Value

We perform business valuations for a broad range of corporate, financial reporting and transaction purposes, including:

business enterprise valuation;
equity interest valuation;
impairment testing and cash-generating unit valuation;
purchase price allocation and business combination valuation;
fair value measurement for financial reporting;
private equity and venture capital portfolio valuation;
employee share option and share-based payment valuation;
intangible asset and intellectual property valuation;
financial instrument and complex capital structure valuation;
shareholder, transaction and restructuring support;
expected credit loss and credit-related valuation analysis.

Our work is designed to help intended users understand the value conclusion, the basis of value, the valuation methodologies applied, the data and inputs used, and the key assumptions and limitations affecting the valuation.

The Valuation Standards

Business Valuation Under USPAP

USPAP is commonly relevant where the valuation is prepared for US-related purposes, litigation, tax, financing, internal governance or when required by law, regulation, professional practice or client instruction. The Appraisal Foundation describes USPAP as the generally recognised ethical and performance standards for the appraisal profession in the United States, and notes that USPAP includes standards for multiple disciplines, including business valuation.

The USPAP Requirement

For business valuation, USPAP Standards 9 and 10 are particularly relevant:

Standard 9 addresses the development of business or intangible asset appraisals.
Standard 10 addresses the reporting of business or intangible asset appraisals.

In addition, USPAP includes broader requirements relating to ethics, competency, scope of work, record keeping and reporting.

Business Valuation Under IVS

IVS is a global valuation framework designed to support consistency, transparency and confidence in valuation practice. IVSC describes IVS as comprising General Standards and Asset Standards. The General Standards cover valuation engagement terms, bases of value, methodologies, data and inputs, valuation models, documentation and reporting. The Asset Standards address specific asset classes, including IVS 200 Businesses and Business Interests, IVS 210 Intangible Assets and IVS 500 Financial Instruments.

The IVS Requirement

For business valuation, the most relevant IVS Asset Standard is generally:

IVS 200 — Businesses and Business Interests
IVS 210 may also be relevant where the assignment involves separately identifiable intangible assets, such as technology, customer relationships, trademarks, software, IPR&D or other intangible assets.
IVS 500 may be relevant where the assignment involves financial instruments, derivatives, convertible instruments or other complex instruments.

Independent

Professional Competence

IVSC recognizes the important role of Valuation Professional Organizations (“VPOs”). IVSC describes VPOs as valuation professional associations or institutes that are recognized by law or market consensus, set minimum education and ethical standards for individual valuers, and support the public interest.

STEAM’s business valuation work is led by professionals with recognized valuation credentials, including the Accredited Senior Appraiser (“ASA”) designation of the American Society of Appraisers. The ASA designation requires discipline-specific education, appraisal report requirements and at least five years of full-time appraisal experience.

Why STEAM Valuation

STEAM Valuation Advisory provides business valuation services with reference to International Valuation Standards and, where applicable, USPAP. Our work covers business enterprise value, equity interests, impairment testing, purchase price allocation, fair value measurement, share-based payment, intangible assets and financial instruments. Our standards-led approach focuses on scope of work, basis of value, valuation methodology, data and inputs, valuation models, documentation and reporting. Our work is led by ASA-credentialed valuation professionals with experience in financial reporting, audit support and complex valuation matters

Standards-Led Approach

Our business valuation process is designed around recognised valuation standards, including IVS and USPAP where applicable.

ASA-Credentialed Valuation Expertise

Our work is led by ASA-credentialed professionals with valuation education, experience and report-review discipline. ASA credentials are recognised internationally as evidence of professional valuation competence.

Financial Reporting and Audit Understanding

We understand the interaction between valuation, financial reporting and audit evidence, including impairment testing, fair value measurement, purchase price allocation and share-based payment.

Business and Intangible Asset Valuation Experience

We support assignments involving businesses, equity interests, CGUs, intangible assets, financial instruments and complex capital structures.

Clear and Defensible Reporting

Our reports are designed to help intended users understand the valuation problem, standards considered, work performed, assumptions adopted and conclusion reached.

DevlopmentProcess

Our Business Valuation Process

Step 1 — Understand the Valuation Purpose

We first identify the purpose of the valuation, intended use, intended users, valuation date, basis of value and reporting requirements.

Step 2 — Define the Subject of Valuation

We define the business, equity interest, CGU, intangible asset, financial instrument or ownership interest being valued.

Step 3 — Review Financial and Operational Information

We consider historical performance, management accounts, forecasts, industry data, capital structure, business model, risk profile and relevant non-financial factors.

Step 4 — Select Valuation Approaches

We select valuation approaches and methods appropriate for the purpose of valuation, basis of value, asset class, availability of data and market evidence.

Step 5 — Analyse Data and Inputs

We assess the relevance and supportability of significant valuation inputs, including cash flows, discount rates, growth assumptions, market multiples, working capital and capital expenditure, where applicable.

Step 6 — Develop the Valuation Model

We prepare or review valuation models that are transparent, internally consistent and suitable for the intended use.

Step 7 — Conclude and Report

We communicate the valuation conclusion in a clear report that describes the scope, basis of value, methodology, assumptions, limitations, data, inputs and conclusions.

Our Standards-Based Valuation Framework

1. Scope of Work

A credible business valuation begins with a properly defined scope of work. Under IVS, the scope of work is part of the General Standards framework and should establish the valuation engagement, intended use, intended users, valuation date, basis of value, subject asset or business interest, assumptions, limitations and reporting format. USPAP also includes a Scope of Work Rule requiring the appraiser to identify the problem to be solved and determine and perform the scope of work necessary to produce credible assignment results.

At STEAM, we define the valuation problem before selecting the valuation approach. This helps ensure that the valuation is relevant to the purpose for which it will be used, whether for financial reporting, transaction pricing, audit support, shareholder reporting or internal decision-making.

2. Basis of Value

The basis of value determines the measurement objective of the valuation. Depending on the purpose, the relevant basis of value may include fair value, market value, value in use, investment value or another defined basis. IVS includes specific requirements on bases of value as part of its General Standards.

For financial reporting assignments, the basis of value may be determined by the applicable accounting standard, such as IFRS 13 for fair value measurement or IAS 36 for impairment testing. For transaction or shareholder matters, the appropriate basis of value may differ depending on the intended use and legal or contractual context.

3. Valuation Approaches and Methods

Business valuation commonly involves one or more of the following approaches:

Income Approach
The value of a business is estimated by converting expected future economic benefits into a present value. Common methods include discounted cash flow analysis and capitalised earnings methods.
Market Approach
The value of a business is estimated by reference to market evidence, such as comparable listed companies or comparable transactions.
Cost or Asset-Based Approach
The value is estimated based on the underlying assets and liabilities of the business, where appropriate.

IVS includes valuation approaches and methods as part of the General Standards, and IVS 200 provides specific guidance for businesses and business interests. USPAP Standards 9 and 10 address the development and reporting of business or intangible asset appraisals

4. Data and Inputs

A valuation is only as reliable as the data and inputs used. IVS 104 specifically addresses data and inputs, while IVS 105 addresses valuation models. In business valuation, key inputs may include historical financial information, forecasts, market data, discount rates, capital structure, comparable company data, transaction multiples, working capital requirements and industry benchmarks.

STEAM evaluates the relevance, reliability and consistency of significant data and inputs. Where judgement is required, we document the rationale and explain how the input affects the valuation conclusion.

5. Valuation Models

Business valuation often requires financial modelling. Our valuation models are designed to be transparent, internally consistent and capable of being reviewed by intended users. IVS includes valuation models as a standalone General Standard, reflecting the importance of model design, model selection, model risk, testing and documentation.

Our model review process considers:

calculation logic;
formula consistency;
linkage of assumptions to source data;
sensitivity of value to key inputs;
consistency between cash flows, discount rates and terminal value;
consistency with the stated basis of value;
presentation of outputs and supporting schedules.