KEY POINTS:
Making sure companies accurately report what their assets and liabilities are is no longer just about crunching the numbers, says a valuation expert.
PriceWaterhouseCoopers global and regional valuation strategy leader Andreas Mackenstedt was in Auckland last week to share strategies learned in his home country, Germany, on the conversion to international financial reporting standards.
All of the European Union's listed companies had to convert to IFRS by January 2005. But in New Zealand companies had until January 2007 to switch over and many are still in their first reporting season of the changes.
Mackenstedt said the change to IFRS had been beneficial but hugely challenging.
"It was difficult to change, particularly in Germany because the old system was very different to IFRS."
But New Zealand's decision to wait meant it could learn from what other countries had done.
The key difference between the systems is that IFRS aims to give assets a fair value based on the present economic conditions rather than just taking the value that was paid for an asset and adjusting it over time according to depreciation rules.
Also, for the first time the value of intangible assets such as brands, customer relationships and financial instruments have to be included on balance sheets.
The new system is designed to paint a much clearer picture of what a company owns and how much that is potentially worth.
Before the conversion it was estimated that US$7 trillion of company assets were not recorded on company balance sheets around the world.
Mackenstedt said the changes, although beneficial, had come at a huge cost to businesses which have had to retrain staff who previously worked only on an accountancy basis.
Those who audit company accounts have had to learn how to place a fair value on intangible assets as well as putting a figure on the basic cash, property and possessions owned by a business.
Mackenstedt said 60 to 70 methods were used for valuing intangible assets but it had downsized them to six or seven to simplify the process.
Those included taking a market approach to see whether there was a market price for the asset, looking at similar transactions, looking at the asset's ability to generate future cashflows, and income approaches including analysing how much a brand was worth.
Mackenstedt said there would always be a subjective element to it but having valuation methods should mean there was greater consistency.
PWC New Zealand partner Justin Liddell said in New Zealand the two biggest issues had come around valuing intangible assets of a new business when an acquisition took place and valuing financial instruments.
Financial instruments, including foreign exchange contacts and hedging instruments, can go up and down on a regular basis. Their value can be taken on a set date but any increase in value is not a realised gain because it has not actually been sold by the company.
