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IVSC Consultation on Liability Valuation

At the beginning of 2019 the IVSC issued a consultation draft of a proposed new standard for the valuation of “non-financial liabilities”.   Comments on this are invited before 4th April.  The Exposure Draft can be viewed by clicking or tapping the adjoining image.

We would encourage all who may be called on to value a liability of ANY kind, whether that be a lease liability, a liability to reinstate land, liabilities in a business or arising from litigation to study the IVSC draft and respond.  This is the first attempt to establish generally accepted principles for the valuation of a wide range of liabilities and therefore it is important that it reflects as broad a range of sectors and experience as possible.   You may or may not agree with our comments, but they may form a useful starting point for your own discussions.

The IVSs have been intended to be applicable to liabilities as well as assets since the first comprehensive set of standards was published in 2000.  Liabilities are specifically mentioned in the definition of Market Value and since 2010 it has been stated that references to “asset” are deemed to include “liability” except were expressly stated otherwise.  However, the characteristics of a liability and approaches required for its valuation have some important distinctions from those of an asset.  It has therefore been something of an anomaly that the IVSs have not included any specific requirements or guidance on how many of the principles in the standards should be applied to liabilities.

In 2012 the Standards Board commenced a project to develop such guidance.  It formed a cross discipline advisory group and in 2013 issued a Discussion Paper for public comment.  The results of this consultation were discussed by the Board.  One important result was engagement with the International Actuarial Association (IAA).  While the IVSC had no desire to extend the IVSs into the actuaries’ areas of specialisation, both organisations agreed that material inconsistencies should be avoided, and that some of the experience of the IAA in creating its own standards on pension and insurance liabilities would be helpful to the IVSC.

By 2015 the Board had agreed on a brief for the detailed drafting of a new IVS, but this was put in abeyance pending a reorganisation of the IVSC before being resurrected by the current Board last year.

Current Exposure Draft
The document entitled “Non-Financial Liabilities IVS 220 Exposure Draft” extends to 39 pages, but only 11 of these are of the proposed standard proper.  The remainder is an exposition of the background to the draft and of some of the issues debated by the Board in developing the draft.

Our Comments
A copy of our response letter with detailed comments can be viewed here.  We have a number of concerns.  In summary these are:

  • The proposed limitation of the new standard to “non-financial liabilities”.  These are not clearly defined, which leaves room for argument as to exactly what liabilities fall within the scope of the standard.  Is it still intended that the IVSs generally should apply to all liabilities unless expressly excluded?  Ambiguity would be created by this title.

  • The draft has been prepared by a sub Board concerned only with the valuation of business interests and intangible assets.  This overlooks the fact that many liabilities arise in respect of interests in tangible assets, most notably land.  The lack of input from specialists in this area is evident from the draft.

  • Limited explanation of the different types of valuation basis that may be applicable when valuing liabilities for different purposes.

  • Limited explanation of the different types of valuation approach that may be appropriate for valuing liabilities for different purposes, with undue emphasis on methods under the market approach which may not be applicable where the required valuation premise does not involve a hypothetical transfer of the liability.

  • There is inadequate explanation of the fundamental difference between adjusting a discount rate for risk when valuing a liability as opposed to an asset.

  • Limited regard has been had to the comments received in response to the earlier Discussion Paper.