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.