Valuation for Financial Reporting

Elements of fair value accounting have been widely used in different jurisdictions in recent years. Although the growth of fair value accounting** has been incremental, its use has accelerated in recent years as a means of enhancing a financial statement’s quality, transparency and relevance. This trend aligns with global accounting convergence and this can be reflected in current International Financial Reporting Standards (IFRS) and Statements of Financial Accounting Standards (SFAS of US).

Fair value accounting is commonly applied in purchase price allocation, impairment test, financial assets, biological assets etc.prior to listing.

**Fair Value is defined as ‘the amount at which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.’ (IAS)

Purchase Price Allocation
A business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree.

Common Assets to be valued:

• Land
• Property, plant and equipment
• Identifiable intangible assets (e.g. trademarks, distribution network, customer relationship, patents etc)
• Current assets/liabilities

Impairment Testing
Impairment occurs when the carrying amount of an asset exceeds its recoverable amount.

At each balance sheet date, all assets are required to be reviewed to determine any indication of impairment. If there is an indication that an asset may be impaired, the asset’s recoverable amount must be calculated.

Common Assets to be valued for impairment testing:

• Goodwill
• Investments in subsidiaries, associates and joint ventures
• Intangible assets
• Properties, plant and equipment
• Land

Other Fair Value Accounting

Financial Instruments Valuation
Valuation of financial instruments, which is required for financial reporting purposes, often involves complex valuation procedures. Commonly encountered financial instruments include options, warrants, convertible bonds, futures and swaps. Jones Lang LaSalle Sallmanns, with its team of industry-experienced professionals and market-specific expertise, is well positioned to assist clients in valuing their financial instruments. Our team has helped numerous clients listed in Hong Kong and US in valuing such financial instruments.

Biological Assets Valuation
The cultivation of biological assets, like many other assets, results in the production of a measurable income stream. The job of the financial valuer is to properly transform that income stream into an appropriate capital value within the recognised international regulatory framework.

Investment Property*
Many properties are held for investment purposes and have to be separately classified as such. Their net income stream, capital value and resulting yield must be annually measured to determine fair value, and ascertain whether there has been any gain or loss.

*Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both (IAS 40)

What role can Jones Lang LaSalle Sallmanns play in financial reporting?

• Advice on the appropriate valuation methodology, in compliance with relevant accounting standards
• Guidance in interpreting accounting standards
• Proactive involvement in communications with external auditors
• Determination of appropriate valuation methods and key assumption
• Identification of relevant intangible assets
• Determination of valuation parameters (discount rate etc)
• Fair value conclusions
• Guidance on how to calculate discount rates in current market conditions
• Assistance with building financial models
• Review of financial models prepared in-house by management/ other valuation firms