The Relevance of Audited Financial Statements in a Valuation Analysis
This is an extract from GAR’s The Arbitration Review of the Americas 2020, first published in August 2019. The whole publication is available at https://globalarbitrationreview.com/edition/1001362/the-arbitration-review-of-the-americas-2020
The quantification of economic damages in international arbitration disputes often requires a valuation of the claimant’s investment at a specific valuation date. When preparing their respective valuation analyses, experts may utilise different methodologies, techniques and assumptions, resulting in materially different valuation conclusions. Unfortunately, this often leaves the tribunal with the difficult task of navigating through complex financial models to unravel the differences between each expert and reach what they consider to be an appropriate conclusion on quantum.
In the absence of an actual arm’s-length transaction as at the valuation date for a similar sized ownership block in the same investment being valued, there will almost always be a certain level of professional judgement involved in any valuation analysis. In this regard, stronger valuation analyses will typically include secondary approaches and cross-checks where possible, to support the reasonability of the conclusions derived under the valuator’s primary approach.
In this article, I will discuss how and when the carrying amount of an asset reported in the audited financial statements of its owners can be used as a sensibility check on the valuator’s conclusions. I will also explain how one may reconcile the carrying amount of the asset in the audited financial statements to an expert’s valuation conclusions, and the implications of failing to do so.