Drawing a Conclusion on Valuation Reasonableness – Investment Entity Review Reports

February 7, 2019

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In today’s growing investment industry, managers of investment entities are subject to increasingly stringent financial reporting obligations. They often must provide documentation to their auditors to support assertions made in respect to the value of investments recorded on their balance sheet.

Drawing a Conclusion on Valuation Reasonableness - Investment Entity Review Reports

In many cases (i.e. private equity and venture capital funds), there is no active market for the investments, and it may be impractical to retain an external valuator to value each of them at the reporting date.

In this situation, the investment manager must have an internal valuation system in place to value their investments. These valuations may be performed at regular intervals and their results could have a material impact on the financial position and operating results of the investment entity. As a result, external auditors of the investment entity are especially concerned with the reasonableness of the valuation conclusions determined by the investment manager. 

Auditors may require an independent review be performed to assess whether or not the value of the underlying investments, as determined by the manager of the investment entity (or another party), are reasonable. Chartered Business Valuators (CBV), recognized for their education and experience in business valuations, may be retained to provide an independent review and assessment. In response to this growing demand, the CBV Institute[1] established Professional Standard No. 610: Investment Entity Review Reports.

An Investment Entity Review Report (IERR) is defined as “any written communication prepared by a Valuator (the “Reviewer”) containing a conclusion as to the reasonableness of the value of the specified underlying investments or the net asset value of the Investment Entity as determined by a manager of the Investment Entity or another party (the “Preparer”).

When engaged to provide an IERR, it is important to clearly define the nature of the engagement at the outset, including:

  • The number and type of investments to be reviewed;
  • The purpose of the report and who will be relying on it; and,
  • The relevant financial reporting standards, internal policies, income tax rules or legislation for which the IERR is being prepared – this will dictate the appropriate terms of value to be used (i.e. fair market value, fair value, etc.).

We think it is also useful to develop a work plan for the engagement, so that the intended users of the IERR (often the auditors of the Investment Entity) can sign-off on the scope of review before the work commences. This reduces the potential for disagreement over what work is necessary to establish “reasonableness”.

At a minimum, the Reviewer should consider the following factors in establishing reasonableness:

  1. The appropriateness of the valuation approach and techniques used by the Preparer[2];
  2. The characteristics of the underlying securities and their impact on value;
  3. The historical and prospective financial information used by the Preparer; and,
  4. The key assumptions used by the Preparer.

Ideally, the IERR should include both qualitative and quantitative analysis to support a conclusion of reasonableness.

An example for Private Equity Investments:

Investment entities often determine the fair value of their unlisted private equity investments using the market comparison technique. The valuation model is based on market multiples derived from quoted prices of companies comparable to the investee, and the revenue and EBITDA of the investee. The estimate is adjusted for the effect of the non-marketability of the equity securities.

In this situation, the qualitative analysis would include a review of the investee’s business, (including their development stage, products, industries and target markets, size and geographic location) to assess whether it is reasonably comparable to the quoted companies. 

The quantitative analysis might include a computation of the trading multiples of the quoted companies as at the valuation date. It might also include a review of the trading volumes (liquidity) of the quoted companies to assess the reasonableness of the non-marketability discount applied to the portfolio company.

If you have any questions or would like to discuss Investment Entity Review Reports in more detail, please get in touch with one of our Chartered Business Valuators.


[1] The CBV Institute (formerly, the Canadian Institute of Chartered Business Valuators) is a professional organization that establishes the practice standards, educational requirements, and ethical guidelines for its members. A copy of standard 610 can be found here.

[2] For non-controlling interests in early stage technology companies, the Market Approach may be the only methodology available to the Preparer.  See our blog article “Monitoring the Value of Tech Company Investments” for some practical advice in this situation.






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