22 JUN 2018
Managing Director at Duff & Phelps Srividya Gopalakrishnan recently spoke about “business & intangible valuation’s critical role in today’s Indonesian economy” at the RICS Valuation & Investment Conference. We caught up with Srividya after her presentation to hear her thoughts on how Indonesia’s investment landscape and business and intangible valuation have evolved over the past few years.
Southeast Asia is one of the world’s fastest-growing regions. According to Duff & Phelps the Transaction Trail, the technology sector’s contribution to mergers & acquisition (M&A)transaction value in Indonesia increased from 3% in 2016 to 19% in 2017. The sector’s private equity/venture capital (PE/VC) investment value in Indonesia increased even more notably from 3% in 2015 to 48% in 2016 to a dramatic 75% in 2017.
Currently, the country has four unicorns: Go-Jek, Traveloka, Tokopedia and Bukalapak. Based on a study by McKinsey, the number of internet users in Indonesia is expected to increase from 88 million in 2015 to 145 million by 2020, which clearly shows the shift from a resource-based economy to a technology and intellectual capital-led economy.
This shift will pose significant challenges in the form of tapping into capabilities, harnessing intellectual capital and managing risk. With companies such as Google, Expedia, Alibaba and Temasek investing into the economy, it is imperative to seek the right professional advice on transaction, due diligence and valuations as the focus shifts.
As Indonesia expands, the prevalence of business, intangible and complex financial-instrument valuation will increase. These could be for transactions, intangible financing, licensing arrangements, litigation, tax reporting and financial reporting (including purchase-price allocations), impairment assessments, fair-value reporting etc.
Appropriate experience and expertise in valuing these asset classes are fundamental to ensure reasonable and consistent output.
We have seen numerous changes made to global valuation standards and regulations, which reflects the economic and regulatory outlook. In the last two to three decades, several institutions, such as the Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), Private Equity Industry Guidelines Group (PEIGG), International Private Equity & Venture Capital (IPEV), International Valuation Standards Council (IVSC), and Royal Institution of Chartered Surveyors (RICS), have come up with their own standards for valuation.
However, it is positive to see the alignment of ideology in recent years between these institutions, which has strived towards principle-based valuation standards, away from rule-based standards.
The definition of “fair value” is now aligned and it is imperative to report fair value under most accounting rules. While the IVSC has defined several standards and bases of value, the process to be followed is aligned, even though methodologies could be different. These standards are followed by several Valuation Professional Organisations (VPOs) across the world, who overlay strong ethics and professional standards on top of the technical standards.
In addition, we are seeing an increased trend towards credentialization of valuers. Some of the key initiatives in this space are the Certified in Entity & Intangible Valuations (CEIV) credential and the Business Valuation Quality Mark initiative by IVSC.
With respect to valuation standards within Southeast Asia, we are observing a progressive shift towards global valuation standards that will encompass the requirements of regulators and stakeholders, while complying with best practices and corporate governance principles. Some key institutions, such as RICS, the Institute of Valuers & Appraisers of Singapore (IVAS) and the Indonesian Appraisal Society (MAPPI), have adopted the International Valuation Standards (IVS) for valuation of different asset classes. For financial reporting, most Southeast-Asian countries use International Financial Reporting Standards (IFRS), which places significant emphasis on fair value.
There is significant ambiguity and risk involved in business or intangible valuation.
It is imperative for valuers to possess both the right skills and adequate experience to arrive at appropriate results, considering these are not just desktop or formula-based mathematical exercises. Key success factors include professional accreditation, level of knowledge, and expertise/experience in specific valuation areas or asset classes.
Conversely, risk factors include the likelihood that professional expertise in a specific type of valuation might be irrelevant for other needs. For example, several business valuations require deep knowledge of cross-border factors, and financial instruments valuations need an in-depth understanding of investment terms. These are not typically required in a real estate or machinery valuation. Other risk factors include not having continuous professional education, over-simplified analysis, myopic perception of market conditions and ethical issues that can lead to manipulation.
Global standards fortify consistency, transparency and confidence in valuations, which is crucial for investment decisions and financial reporting. With global standards in place, professional bodies ensure that the relevant accredited professionals and best practices are employed so that businesses can attract international investors and safeguard stakeholders’ interests.
In the foreseeable future, we might observe a progressive shift from localised or adapted valuation standards towards uniform global standards.
The Red Book contains mandatory rules, best practice guidance and related commentary for all RICS professionals undertaking asset valuations.
The Red Book is issued as part of RICS’ commitment to promote and support high standards in valuation delivery worldwide. The publication details mandatory practices for RICS professionals undertaking valuation services. It also offers a useful reference resource for valuation users and other stakeholders.