Recent reports prepared by or for the European Union once again highlight the lack of a readily identifiable body of business and intangible asset valuation professionals in many European countries. This represents both an opportunity and threat for valuers operating in Europe. If they can organise themselves into a recognised profession the need is there, but if they fail, the threat of other bodies creating rules and standards without their input is rapidly increasing.
A recent study by Deloitte for the European Commission* explored options to tackle valuation issues associated with transfer pricing in the European Union (EU). This 200+ page study provides a wealth of detail on the strengths and weaknesses of the various valuation methods when used for transfer pricing purposes. It also provides some insights into the business valuation profession in Europe. Perhaps not surprisingly one of the key findings of the study if that the practice of intangibles valuation for the purposes of transfer pricing is relatively underdeveloped in many of the EU Member States (only 13 confirming relatively significant experience).
The study also examined valuation standards set by nine different bodies including IVSs, IFRSs, USPAP, OECD, ISO, and German national standards. It concluded that, while there is broad agreement between valuers on many key principles and methods of valuation, and while some valuation standards have been around for decades, that agreement has translated only partially into the standardisation of these approaches and methods across the world. These different interpretations of concepts and valuation approaches represent major challenges and the study concludes that a convergence of standards would be in the interest of the profession as well as public interest, in order to enhance the applicability, relevance and comparability of valuations across several jurisdictions and types of assets. The Study fell short of endorsing or rejecting any of the standards. However, the European Commission is considering whether or not a particular standard should be recommended or legislative measures introduced.
The Deloitte report drew on an earlier report on the Valuation of Intellectual Property** also prepared for the European Commission. This report reviewed the various valuation standards and concluded that although the standards have no contradictory content, the problem arose from the limited dissemination of the fact that they exist and little confidence in their results. The report recommended the creation of an organisation to oversee IP valuation practice as a way to increase confidence in the quality of valuations being performed and to ensure that valuations are in line with generally accepted principles and standards.
The latest quarterly report on the Euro Area*** has a chapter dedicated to the need to unlock investment in intangible assets, but sees the solution in improved accounting standards for the valuation of intangibles. Politicians and regulators have a record of seeing valuation as a branch of accounting, but in doing so miss the point. Accounting standards aim to ensure commonality in how assets owned by a business are recorded, in other words how the score is kept. While this consistency is part of the solution to building investor confidence, if investors are to invest in intangibles and create a more active market, confidence in how values and prices are determined in the first place is more important. Accounting follows the event, it does not create it.
There are very capable business and intangible asset valuers in Europe but in contrast to other professions there is little formal organisation and no readily identifiable body at a pan European level that can develop and promote standards and best practice to drive and support greater investment in intangible assets. However, the need for the expertise that exists to be focussed in a way that enables engagement with the EU and its member governments is becoming more and more acute given the gaps identified in the reports mentioned above. Can the valuation profession rise to the challenge?
* Study on the application of economic valuation techniques for determining transfer prices of cross border transactions between members of multinational enterprise groups in the EU
** Final report from the Expert Group on Intellectual Property Valuation
*** Quarterly Report on the Euro Area Vol 16, No 1 (2017)