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To agree with this. As someone with more of a general economic and metrics background, I was quite amazed when I first learned of the breadth of possible valuat

by wjnc 7y ago

To agree with this. As someone with more of a general economic and metrics background, I was quite amazed when I first learned of the breadth of possible valuation methods IFRS (International Financial Reporting Standards) allows for. Some are pretty close to what you'd expect for the valuation of a financial instrument (after all, equity is one of those), while some are 'pretty far away'.

SeanAppleby 7y ago
Are you allowed to switch between them at will, or is there a legal inertia that pushes you to continue reporting using the same one?
- airstrike 7y ago
  I think he's talking about the levels of fair value measurement https://www.iasplus.com/en/standards/ifrs/ifrs13 https://www.iasplus.com/en/standards/ifrs/ifrs13 No anchor links on that page, so I'll just quote some snippets here: Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86] Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available.
- wjnc 7y ago
  We would need an accountant for a proper answer to that question. My perception is that they look at changes more carefully than at continuing practices and that material changes above a certain threshold need to be mentioned in the yearly report. So the effect clearly is inertia, which I would feel is a plus.
Havoc 7y ago
>I was quite amazed when I first learned of the breadth of possible valuation methods IFRS (International Financial Reporting Standards) allows for. Think that's a bit of a misunderstanding of what's going on. IFRS doesn't deal with valuation methods per se. It's a principles driven set of standards. In this case that's "fair value". The valuation method would be driven by something like IPEV http://www.privateequityvaluation.com/Portals/0/Documents/Guidelines/IPEV%20Valuation%20Guidelines%20-%20December%202018.pdf http://www.privateequityvaluation.com/Portals/0/Documents/Gu...
- wjnc 7y ago
  Great link, thanks. I do think I got the jist of it right? Fundamentally, a company proposes a method and the accountant, when applicable, under IFRS, allows for the method to be used when he signs the financial report. From my (risk management) perspective and in an environment where it's usually mark-to-market and mark-to-quite-sophisticated-model, I just had to blink a few times when I learned that things like the net assets-approach (why is that even an approach) exist. I do understand that in the cases I see there would be materially no difference for the investor (small investments, large firm) when using a more advanced approach like DCF (which still hinges on a few key assumptions).
  - Havoc 7y ago
    Yeah mostly. It's a complicated area frankly. Company, accountant, valuation committee, valuation team, investment advisor and possibly external administrator all sorta play for the same team. They collaborate to get to an approach and a number. Then the auditors roll in and check whether they think the approach is reasonable, assumptions are reasonable and calc was done right. If they don't like it they might force a change. What's acceptable driven more by industry specific norm than anything hardcoded. So I might be looking at two similar debt contracts but do something wildly different because the one is back by real estate deeper in the structure while the other is part of a private equity structure. Not really something an outsider can easily look into - cause it's often in the context of a interlocking web of controls - that again differ by entity/sector. DCF - yes, though more complex isn't necessarily more accurate. In fact I dislike it because it's so easy to manipulate & difficult to call bullshit on. >net assets-approach (why is that even an approach) It depends on what in it basically & how those in turn were valued. Plus nature of the entity - for income/cash generating entities you do something like DCF or EBITDA peer multiple instead.

by wjnc 7y ago

SeanAppleby 7y ago

Are you allowed to switch between them at will, or is there a legal inertia that pushes you to continue reporting using the same one?

airstrike 7y ago
I think he's talking about the levels of fair value measurement https://www.iasplus.com/en/standards/ifrs/ifrs13 https://www.iasplus.com/en/standards/ifrs/ifrs13 No anchor links on that page, so I'll just quote some snippets here: Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86] Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available.
wjnc 7y ago
We would need an accountant for a proper answer to that question. My perception is that they look at changes more carefully than at continuing practices and that material changes above a certain threshold need to be mentioned in the yearly report. So the effect clearly is inertia, which I would feel is a plus.

Havoc 7y ago

>I was quite amazed when I first learned of the breadth of possible valuation methods IFRS (International Financial Reporting Standards) allows for. Think that's a bit of a misunderstanding of what's going on. IFRS doesn't deal with valuation methods per se. It's a principles driven set of standards. In this case that's "fair value". The valuation method would be driven by something like IPEV http://www.privateequityvaluation.com/Portals/0/Documents/Guidelines/IPEV%20Valuation%20Guidelines%20-%20December%202018.pdf http://www.privateequityvaluation.com/Portals/0/Documents/Gu...

wjnc 7y ago
Great link, thanks. I do think I got the jist of it right? Fundamentally, a company proposes a method and the accountant, when applicable, under IFRS, allows for the method to be used when he signs the financial report. From my (risk management) perspective and in an environment where it's usually mark-to-market and mark-to-quite-sophisticated-model, I just had to blink a few times when I learned that things like the net assets-approach (why is that even an approach) exist. I do understand that in the cases I see there would be materially no difference for the investor (small investments, large firm) when using a more advanced approach like DCF (which still hinges on a few key assumptions).
- Havoc 7y ago
  Yeah mostly. It's a complicated area frankly. Company, accountant, valuation committee, valuation team, investment advisor and possibly external administrator all sorta play for the same team. They collaborate to get to an approach and a number. Then the auditors roll in and check whether they think the approach is reasonable, assumptions are reasonable and calc was done right. If they don't like it they might force a change. What's acceptable driven more by industry specific norm than anything hardcoded. So I might be looking at two similar debt contracts but do something wildly different because the one is back by real estate deeper in the structure while the other is part of a private equity structure. Not really something an outsider can easily look into - cause it's often in the context of a interlocking web of controls - that again differ by entity/sector. DCF - yes, though more complex isn't necessarily more accurate. In fact I dislike it because it's so easy to manipulate & difficult to call bullshit on. >net assets-approach (why is that even an approach) It depends on what in it basically & how those in turn were valued. Plus nature of the entity - for income/cash generating entities you do something like DCF or EBITDA peer multiple instead.