The introduction of fair value accounting has changed the way in which financial statements are assembled and companies are valued. It has been nearly four years since the launch of international financial reporting standards (IFRS) to reflect the reporting of fair value on assets. But it hasn't changed the clash between valuers and auditors over the ramifications of this different system of accounting, particularly with respect to the merits of applying fair values to fixed and intangible assets. Theoretically, there shouldn't be definitive right or wrong answers for valuation given the subjectivity of the assumptions and methodologies involved. But the numbers may be challenged when auditors feel uncomfortable about the independence of the valuation. Challenging the valuer's basis, methodology and underlying assumptions, particularly when there are material discrepancies between fair values and net book values resulting in substantial gain or loss in the company's accounts, can cause conflict. Roy Lo Wa-kei, deputy managing partner at accounting firm Shinewing, said that following the introduction of IFRS the increasing need to value intangible assets, such as financial instruments for the purposes of mergers and acquisitions (M&A), has brought discord to the previously smooth relationship between valuer and auditor. Auditors and valuers are professionals in their own areas of expertise but remain guided by different sets of professional standards - IFRS for the accountants and the Hong Kong Institute of Surveyors' Valuation Standards on Properties and Valuation Standards on Trade-Related Business Assets for the valuers. According to Tony Cheng, managing director of BMI Appraisals, 'the work of valuers is to share the risks of the auditor by providing specific industry expertise in valuing a company's assets'. 'In preparing their valuation reports, they normally give details of the assets under valuation together with background information about the valuation methodologies applied, data sources and any underlying assumptions. Sometimes, the standards are only broad guidelines; hence the valuers have to use their own judgment to arrive at an opinion of value. 'Auditors, on the other hand, must evaluate the appropriateness of the valuers' work as audit evidence regarding the assertion being considered and make inquiries regarding any procedures undertaken to establish whether the source data is relevant and reliable, and then review or test the data used,' Cheng said. There are two areas of valuation that have become increasingly common: the first is related to the valuation of financial instruments such as convertible bonds preference shares or employee share options; the second concerns the evaluation of companies in preparation for merger and acquisition. 'Co-operation between the valuer and auditor is more important than ever before because many listed companies are engaging in M&As with target acquisitions,' Lo said. 'We depend on the fair value of these assets or companies, so an agreed valuation is very important in order for the M&A to go ahead. 'For fixed assets like land and buildings, we would use a surveyor to perform the valuations. But for intangible assets, the use of a valuation model like cash-flow or income approach is a little more open to interpretation.' Financial instruments are popular investment vehicles for listed companies and they all need valuations. The valuers use complicated formulas, market data, and information about the listed company to reach a fair value for these kind of instruments, which is then reviewed with the auditor. 'Valuers may arrive at a high annual profit because of intangible assets, certificates of deposits and other financial instruments,' Lo said. 'These figures may be inflated and booked as profit to the financial statement. As auditors, we request not just a valuation report but also a concise cash-flow forecast or profit forecast, with very detailed reasoning for that forecast.' Ultimately, if a valuation cannot be agreed between valuer and auditor, the two parties will meet with representatives from the listed company to find an appropriate and reasonable valuation. In such situations, there had to be compromise, Cheng said. 'Most of the time it's the numbers or how we look at the assets that leads to a difference of opinion but it's always something we can reach agreement on. We don't adjust our valuation, rather we arrive at a consistent view.' While auditors in Hong Kong are regulated by the Hong Kong Institute of Certified Public Accountants, there is no organisation regulating valuers and appraisal firms. This is something that Shinewing's Lo would like to see change. 'I would like to see the Hong Kong and Shanghai stock exchanges work together to consider setting a benchmark upon which a valuation firm is qualified to perform valuations, especially for listed companies,' he said.