International Accounting Standards Consultancy

Fair Value Estimations

Under IFRS, the historic cost notion does not exist as in most previous accounting principles. Instead, there is the concept of fair value. Why? Business changes frequently and this should be reflected in your Balance sheet and Income Statement, so that investors can understand what is happening to your company and can see any small changes immediately. For example, previously companies could smooth their expenses or even profit, in order to hide an unfavourable situation until after the books and records have closed for the year. With IFRS this would not be possible, as many of the former accounting techniques used (such as historical cost) have been replaced with more realistic techniques (such as Fair Value). This makes a company?s accounts more transparent and realistic but it also will bring in a large amount of volatility. However, once all companies adhere to the same standard, investors will be able to make comparisons between companies and make more informed choices.

Example: Historic Cost vs Fair Value

A company bought a building for ?1 million, 10 years ago. If we use the current UK/US GAAP accounting rules, this building may have a value of only ?500,000 in their accounts now due to the concept of annual depreciation, in reality, if the company decided to sell this building now they could have maybe ?5 million for this building due to high property prices. Caravan Insurance

What figure should be shown in the accounts?

Under IFRS it would be ?5 million, but under any other accounting system it would be ?500,000. Of course other types of items may decrease rather than increase in value - our analysis will reveal this.

Who can do this valuation?

The auditors of a company cannot do this because there would be conflict of interest. They just audit the values that company has and confirm if it is correct or not.

It should be done by an independent 3rd party

We propose to do this for you, using our partnerships with Chartered surveyors and the International valuation community. We also have our own methodology and technique to value different types of items.

For example, if a company needs to value it?s buildings, we will do this valuation in partnership with our building specialist. However for derivatives, we would use current market data, i.e. a valuation from the stock exchange or companies providing this information.

For more complex valuations of derivatives contracts we can use estimations based on market fair value as well as estimated fair value.