The International Organization of Securities Commissions (IOSCO) recently issued a Statement on the Importance of High-Quality Valuation Information in Financial Reporting.

The document “emphasizes the need for international consistency of high quality valuation information included in financial reporting to provide investors with relevant and reliable financial information.” It describes the following “notable areas where practices could be improved and lead to higher quality valuation information being produced:”

1. Need for valuation expertise – IOSCO members often identify situations where management has prepared the valuation information but had limited expertise or understanding of the valuation methods or techniques used to value the asset or liability. To address this limitation, it is important for issuers to utilize knowledgeable resources in the application of financial reporting standards, and that may require the use of a valuation expert to assist with preparing the valuation information. Regardless of whether a valuation expert is used, management is ultimately responsible for any information presented in the issuer’s financial statements that are derived from valuation information.
2. High-quality inputs and assumptions – The determination of the inputs and assumptions used to calculate fair value information often requires significant management judgement. IOSCO members have identified situations where management has not prioritized the use of observable inputs or used assumptions that are not objective, not supported by sufficient internal documentation and/or are inconsistent with other information the issuer has provided either in its disclosure documents or in other publications such as investor presentations. IOSCO members also note that some issuers do not continually evaluate or assess whether past assumptions remain appropriate for current period financial reports, and do not constantly consider whether their process for developing inputs and assumptions needs to be revised.
3. Determining if an ‘active market’ exists – Many accounting frameworks, such as the IFRS Accounting Standards, establish a fair value hierarchy that categorizes the type of inputs used to measure fair value, with the highest priority being given to those inputs that are quoted prices in active markets for identical assets or liabilities. Whether transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis to constitute an active market is sometimes a matter of judgement. At times, IOSCO members have encountered situations in which the issuer concludes that an active market exists without sufficient support or where evidence exists to the contrary and accordingly makes no adjustments to the quoted price nor considers the use of other valuation techniques…
4. Identification of an ‘identical or similar’ asset or liability – In circumstances where the fair value of an asset or liability is not observable in an active market, an issuer may be permitted to determine fair value-based on a comparison to an identical or similar asset or liability with an observable fair value. IOSCO members have observed this method used in certain valuations of real estate property, early-stage businesses or other similar assets, and in these circumstances the determination of what is ‘identical or similar’ involves considerable judgment. When this method is used, IOSCO members have encountered situations where limited evidence exists to support or corroborate an issuer’s conclusion that another asset is identical or similar…
5. Disclosures associated with fair value determinations – Many accounting frameworks, such as the IFRS Accounting Standards, require disclosures to help readers understand the valuation techniques, the inputs used to develop fair value measurements, and the sensitivity of the fair value measurements if they are based on unobservable inputs. IOSCO members have observed various instances where these disclosures have not been presented in a manner that provides a sufficient level of detail and disaggregation of information, particularly for assets or liabilities that are measured on a recurring basis that rely on significant unobservable inputs to determine fair value.

One notes numerous references there to lack of evidence, support, documentation, or adequate consideration, perhaps reflecting a continuing tendency to think that because a fair value is necessarily judgmental, and disclosed as such, it demands less rigour than a measure driven by historical cost, particularly when relying to some degree on valuation professionals or other experts. The document reports the following:

• …the 2024 Survey of Inspection Findings from the International Forum of Independent Audit Regulators (IFIAR), identifies “Accounting estimates, including fair value measurement” as a key theme where audit regulators have consistently had a high level of inspection findings over the last five years. These IFIAR findings suggest that auditors are not always applying a robust and consistent approach to auditing fair value information and may not be applying sufficient professional skepticism when assessing the inputs, assumptions or significant judgments prepared by management. IOSCO members plan to discuss this topic further with IFIAR to understand whether there are recurring issues that could be addressed through additional standard setting, guidance, or other means to ensure that auditors are sufficiently performing their role in auditing fair value information.

The document also notes a need “for further coordination and application of International Valuation Standards in a manner that can better satisfy the context of producing financial statement information.” More work to be done, then, on a number of fronts. In the meantime, in its recent Corporate Finance branch report, the Ontario Securities Commission encouraged issuers “to consider (the IOSCO) statement and its contents when preparing financial statements to be filed with the OSC.” Presumably other regulators would endorse that advice – there certainly seems to be little upside in not considering it…

The opinions expressed are solely those of the author.