New International Value Standards (IVS) Include Several First-Time Requirements for Discount Rates and Complex Capital Structures

In The News |Olga Danilytcheva-Averin | Apr 17, 2020

The International Valuation Standards Council (IVSC) consists of over 120 member organizations in 47 countries, including the U.S. The IVSC develops, maintains and updates International Valuation Standards (IVS) which cover the actions required during a valuation assignment.

Here we will highlight the most important provisions of the IVSC’s latest extensive updates in IVS 2020, which replaces IVS 2017 and takes effect January 1, 2020. Provisions include guidance on discount rates and new sections on complex capital structures.

Discount rates:

Within sections 50.34-40, in section 50.34, for the first time, IVS will require documentation of the method used and inputs selected to derive discount rates. Section 50.36 is combined with Section 50.37, which lists methods valuers might employ. 50.36 will require valuers to consider the risk of achieving the forecast cash flow of the asset when developing the discount rate.

Complex Capital Structures:

In sections 130.5-8 of the IVS 200 Asset Standards, effective January 15, 2020, for the first time IVS includes guidance for allocating the entire enterprise value across various classes of economic or control rights.

In section 130.5, IVS allows valuers to use any reasonable method to determine the value of equity or a class of equity, including: (a) current value method (CVM), (b) option pricing method (OPM), and (c) probability-weighted expected return method (PWERM).

According to 130.7, valuers should consider any potential differences between a “pre-money” and “post-money” valuation, particularly for early stage companies with complex capital structures. For example, an infusion of cash may impact the enterprise’s overall risk profile and its relative value allocation between share classes.

And finally, 130.8. instructs valuers to consider recent transactions in equity, or a particular class of equity, and ensure assumptions used in the subject valuation reflect changes in investment structure and changed market conditions.