The importance of valuation to the global financial system and to Hong Kong

Nick Talbot
Nick Talbot, Chief Executive Officer of the International Valuation Standards Council, on the importance of valuation to Hong Kong 

Nick Talbot, Chief Executive Officer of the International Valuation Standards Council, on why good valuation practice can affect both individuals and entire economies

When you ask most people about the importance of valuation in their own lives, let alone in realtion to the global financial system, you may recieve a blank look. Yet, valuation is an important component of the financial system which directly or indurectly affects almost and every single one of us.

Are you buying property? Do you want a morgage or to take out a secured loan? Are you getting divorced and need to split the assets? Are you interested in listing your company on a stock exchange? What is the right amount of money to acquire or sell a business for? Does this amount include goodwill or other intangible assets? Do you invest in shares? What protection do you have as a minority shareholder? Do you rely on financial reports to make decisions? Do you audit accounts? Do regulators require your bank to maintain a certain level of capital?

Valuations also form a key part of a company’s audited accounts which should provide transparency and comparability in relation to the value of companies and may impact share prices. They are therefore of interest to anyone with a pension or investment, and more broadly, any society that wishes to see financial market stability because of the link to a stable economy.

Indeed, valuation touches almost all parts of both local and global financial systems – yet we do not have a fully global approach because each territory historically had their own approach. With the world of business increasingly global in nature, flows of capital face different standards and regimes. International valuation standards would help investors by minimizing uncertainty caused by different valuation approaches – just like how global financial reporting and auditing standards have contributed to this increasingly global environment.

As markets expanded to become global, local practices in financial reporting and auditing became barriers to market efficiency, and stakeholders weren’t always able to get the reliable information they needed for decision making. Global standards help to improve the comparability between financial reports, and therefore enable more international investment. For business valuations, global standards would promote comparability through standardizing valuation methodologies and approaches, and unlock potential investments and secure lending decisions on a like-for- like basis.

Preparing for future challenges

The last financial crisis demonstrated the impact of ineffective controls (including quality valuations) in relation to everything from real estate through to financial instruments. Poor valuation practice was identified by the Financial Stability Forum and the G20 as a significant contributor to the 2008 global financial crisis with a particular focus on financial instruments, where there was much inconsistency in valuation between financial institutions as well as across national borders. 

Valuations also have a significant impact on another important global discussion topic – the transfer of intellectual property rights between related parties in different tax jurisdictions, as well as in connection with determination of global transfer pricing arrangements. According to the European Commission, 72 percent of profit shifting that takes place in the European Union is done via the channels of transfer pricing and location of intellectual property; spurious valuations of assets transferred between one jurisdiction and another are contributing to the erosion of countries’ national tax bases. Research by the International Monetary Fund covering 51 countries concluded that profit shifting between tax jurisdictions resulted in an average revenue loss of about 5 percent of current corporate income tax revenue – and almost 13 percent in non-Organization for Economic Cooperation and Development countries.

Securing Hong Kong’s status

Hong Kong is a major financial hub attracting major flows of capital. To maintain and protect this special status, it’s important to continually evolve, as this also gives confidence to investors, both domestic and international. While Hong Kong has an approach to property valuation based on International Valuation Standards, and additional guidance and qualifications from the Hong Kong Institute of Surveyors and the Royal Institution of Chartered Surveyors, other jurisdictions, including Singapore, have gone further in developing professionalism and ethical standards for all business valuations.

To protect the high-quality business valuations being performed in Hong Kong, the International Valuation Standards Council has been working closely with local professional bodies, including the Hong Kong Institute of CPAs, and businesses and regulators to produce a framework for business valuation professionalism and standards. We believe that the right solution for Hong Kong is one which brings together the best of international and local practice. These proposals can be found on the Institute’s website and we welcome your input and comments on them by 15 November.

The International Valuation Standards Council (IVSC) is a not for profit, public interest organization which brings experts together to build a global approach to valuation through the adoption and implementation of International Valuation Standards, and to encourage a consistently high quality of valuation professionalism around the world. IVSC also works closely with key stakeholders such as the International Accounting Standards Board and the International Auditing and Assurance Standards Board due to the importance of valuations which underpin financial statements. 

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