The accurate valuation of debt or equity instruments, whether share options, forward purchase contracts or embedded derivatives within convertible loan notes, plays a crucial role in the preparation of a company’s financial statements. Additionally, intangible assets acquired in a business combination need to be valued on acquisition and subsequently tested for impairment.
Granting share options comes with complex accounting valuation requirements when accounting under both IFRS and UK GAAP. Due to this complexity, there is now an increase in regulatory focus meaning auditors are much more likely to scrutinise the valuation models used as well as their appropriateness.
Increasingly in today’s market, companies tend to issue convertible loan notes (CLNs) to secure funding. Companies should be mindful of the terms and conditions of those CLNs as it is commonplace for these agreements to include an embedded derivative which under IFRS is required to be fair valued using an appropriate valuation model.
At One Advisory we pride ourselves on being financial reporting valuation specialists. Our expertise ensures our clients accurately value all their debt or equity instruments in accordance with the relevant accounting standard, be that IFRS 2 or IFRS 9, and valuing intangible assets under FRS 102 or IFRS 3.
We offer a suite of valuation services that benefits companies both prior to and after the issue of a debt or equity instrument and offer purchase price allocation (PPA) and impairment review services arising from business combinations.
Monte Carlo Valuations
Options that incorporate market-based conditions, or vesting conditions that are complex and include multiple variables, are typically required to be valued using a valuation model that computes option values numerically, such as the Monte Carlo valuation model.
We routinely build Monte Carlo valuation models for our clients, calculating the share-based payment charge for the current and future reporting periods, and draft the applicable accounting disclosures for the annual report or interim report.
As part of this, our team of experts provides a bespoke report detailing the inputs into the valuation model, documenting all assumptions made and addressing any further considerations such as the accounting requirements for entities within a group, if applicable.
To ease the burden on the client’s internal financial reporting team, we liaise directly with the client’s auditor, should the client wish, addressing any queries that might arise to ensure satisfaction and sign-off.
Black Scholes Valuations
Whether you need to fair value share options or other derivatives, we can help. With a deep understanding of financial instruments and extensive experience in applying the Black Scholes valuation model, we are able to provide accurate and reliable fair value valuations.
Our dedicated team works closely with you, reviewing any option agreements and analysing the vesting conditions and calculation of inputs prior to drafting a bespoke memo that can be provided directly to the auditor.
Whether you’re a start-up issuing your first share options or a Plc managing complex derivative portfolios, we’re here to streamline the valuation process to allow you to focus on other areas of the business.
Impact Assessments
The terms set out in an option agreement or CLN agreement can seem straightforward; however, minor details in those agreements can lead to an unexpected increase in complexity when it comes to financial reporting, resulting in an unforeseen charge to be recognised in the profit or loss.
At One Advisory, we routinely review option agreements and CLN agreements prior to execution. Following this review, we deliver a bespoke report detailing the immediate and future impact on the financial statements. The report further considers the ramifications to the accounts of any modifications the company may consider making in future.
We can also recommend any changes to the instrument agreements that may help simplify the relevant financial reporting requirements, making the instruments more cost-effective for the company. At times, altering just a few sentences to an agreement could make the difference between a large charge to be recognised in the profit or loss against one that is relatively small, whilst still retaining the key components and intended outcomes.
Purchase Price Allocations (PPA)
Business combination accounting under FRS 102 and IFRS 3 requires the identification and valuation of the acquired intangible assets. We have considerable experience in performing PPA valuations. Our reports clearly explain the fair value of the consideration for the acquisition, the criteria for the identification of the intangible assets, valuation methodologies, inputs and assumptions used in our analysis, fair value assessment of other assets and liabilities acquired, as well as other technical requirements expected from a PPA exercise, such as any deferred tax effect.
We also provide the necessary journal entries arising from the PPA and guide companies who have not made acquisitions previously in incorporating the acquisition into their consolidated financial statements, including drafting the business combinations note required in its entirety.
Our PPAs have been reviewed and signed off by London’s key reporting accountants, so by engaging with One Advisory, you can be sure that your PPA requirements will be delivered on time and on budget.
”The One Advisory finance team have assisted us for a number of years on complex financial reporting requirements including PPAs, IFRS impact assessments and advice on specific IFRS standards, accounting for debt instruments (with embedded derivatives) and drafting IFRS and FRS 101 statutory accounts templates for multiple entities. I would have no hesitation in recommending One Advisory to companies dealing with complex reporting requirements, particularly those that arise in private equity fund structures following changes in ownership.
Richard Rose, CFOHorizon Energy Infrastructure
Impairment Reviews
Under IAS 36, a cash generating unit (CGU) to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with its recoverable amount. The recoverable amount of an asset or a CGU is the higher of its “fair value less costs to sell” and its “value in use.” We have significant experience in performing annual goodwill and intangible asset impairment valuations for companies using income methods.
”We have worked closely with One Advisory’s Financial Reporting team over the years, who provide invaluable technical support to listed companies. We routinely review workstreams prepared by One Advisory, including full IFRS accounts, RTO accounting, PPAs, impairment reviews and convertible loan note valuations. The team’s grasp of IFRS and the financial reporting framework is excellent and they are always available to discuss their reports in detail. We highly recommend any company seeking support in their annual accounts preparation or any areas of technical accounting to consider One Advisory.
Adam Humphreys, PartnerPKF
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