This is a high-level summary of issues likely to be relevant to companies and international groups with operations in or that are considering transactions in the UK and Europe. The following overview was prepared by VRG member firm Valuation Consulting LLP Partner, Kelvin King.
Valuations in the UK and Europe are generally required because of either tax, a transaction, dispute, litigation or investment, and can be broadly grouped by needs; financial and reporting, tax, fiduciary, and legal purposes. There are instances where valuations are required for compliance or regulatory purposes (some on a recurring basis).
UK financial reporting is mostly based on EU adopted International Financial Reporting Standards (IFRS) and UK FRS for financial statements not applying IFRS. All listed companies in the EU must report in IFRS and with the new FRS 102 UK GAAP accounting standard private UK companies are required to adopt fair value financial reporting.
When are Independent Valuations for Financial Reporting Required in the UK or Europe?
Business Combinations/Asset Acquisitions
Valuation of Assets and Liabilities. In a business combination or the acquisition of a group of assets the value of the acquired tangible, intangible and intellectual property assets, and liabilities including deferred revenue and contingent consideration, are required to be re-set to fair value in a purchase price allocation (PPA) report. Contemplated transactions and ‘pre-completion’ valuation advice assists potential acquirers with understanding the potential accounting impact of the acquisition.
Shares and/or Options Issued as Compensation. As part of a business combination or acquisition when management is given shares or share options as part of a capital structure you must determine the fair value of the shares and or options issued.
Valuations for Tax or Statutory Purposes
Open market value and fair market value are the commonly used terms in tax law.
When are Independent Valuations for Tax Required in the UK and Europe?
Valuation of Share Options as Compensation and Reward. Management and staff are often given stock or options. In respect of Enterprise Management Incentive (EMI), Share Incentive Plan (SIP), Long-Term Incentive Plans, Growth Share Plans, Company Share Option Plans (CSOP), Unapproved Share Options, Employee Share Schemes (ESS), and Deferred Share Purchase Plans, HMRC’s Shares and Assets Valuation (SAV), where two Partners of VRG’s UK affiliate held senior positions, will negotiate on the valuation. SAV has withdrawn two of its longstanding non-statutory valuation agreement procedures.
The remuneration of private equity executives can be complex and valuations of future payments, including carrying interests may be required.
Business Combinations, Valuation of Legal Entities. When acquiring a business with operations in multiple countries it may be necessary to value the entities by country in order to determine their tax basis as well as the appropriate level of deferred taxes.
Transfer Pricing, Valuation of Intangibles, Value of Debt. IR authorities and the Organization for Economic Cooperation and Development (OECD) have recently revised their guidelines to address concerns, particularly with respect to intellectual property (IP) valuations in a transfer pricing context. We have extensive experience advising multi-national clients about the value of their intellectual property, brands, trademarks, patents, and copyright technology and many other intangible assets, in respect of transfer pricing particularly with regard to the recent Base Erosion and Profit Shifting (BEPS) rules of OECD. Common methods for valuing IP in this area include Income Methods, Comparable Uncontrolled Transaction Method, Comparable Profits Method, and the Profit Split Method.
When is an Independent and or Expert Witness Role Needed in the UK and Europe?
Directions in Agreements. Independent valuations including those of a final and binding nature are required and advised under unquoted company’s constitutional documents, shareholder agreements, and Articles of Association.
Court Work. Valuation and Royalty Rate appraisal is required when acting as Expert Witness in matters of alleged intellectual property infringement and in the determination of loss of profit, reasonable royalty, and damages. VRG’s UK affiliate partner, Valuation Consulting LLP, acted for Governments as Expert Witness and are also well known for presenting testimony worldwide in cases of shareholder dispute and matrimonial divorce when a business interest or such as copyright of an author or artist and or image right of a personality may be a valuable and important consideration.
Fiduciary and Commercial Opinions
Fairness Opinions. Arms-length, related party, and other types of transactions such as M&A, sale of substantial assets, forbearance agreements, new debt financings, affiliate transactions, and winding down operations routinely obtain an independent fairness opinion for material transactions to serve as a form of defense and legal protection for the board on both sides of a deal.
Portfolio Valuations for Funds and Europe’s Alternative Investment Fund Directive. Key changes introduced to AIFMD mean EU AIFM’s will be required to have independent risk management and valuation functions. Article 19 sets the stage for the independent expert role in providing and or supporting:
“Proper and independent valuation…at a frequency which is…appropriate…performed by an external valuer or the AIFM itself provided…valuation is functionally independent”.
Valuation Consulting LLP satisfies through ICAEW and RICS valuer registration and regulation acknowledged independent expert credentials to effectively perform the valuation function.
Commercially Driven Opinions. Valuations for restructurings; insolvency, distress and recovery; banking reviews; joint ventures and assisting M&A, Initial Public Offerings, Bond issuance, strategic options, and Information Memoranda for investment are commonplace.
Or, for more information about VRG’s full scope of international valuation and value-related services, contact Bill Hughes.
More Perspectives: International Valuation Issues
Valuation Issues in Australia
Australian financial reporting is based on IFRS. The Australian Accounting Standards Board (AASB) has issued AASB standards mirroring IVS with a few very minor changes.
Valuation Issues in Canada
In Canada, expert valuation analysis and reports contribute to the resolution of legal and financial disputes, matters before arbitration boards, securities commissions, and other regulatory bodies.
Valuation Issues in Japan
Multinational firms considering mergers, acquisitions, or divestitures in Japan will require sound valuation analysis and advice from a firm that is fully immersed in JGAAP and IFRS financial reporting standards.
Transaction-Related Valuation Issues
The deal teams at multi-national firms need valuations more than ever because every M&A transaction faces financial or tax reporting issues throughout the deal process.
The Value of Valuation Research Group
When clients have an international valuation need, VRG’s international reach allows us to provide our multinational clients with a single source for support.
International Business Combinations
The continued globalization of business drives an undeniable need for independent valuations delivered by a firm offering local experts and global reach.