This is a high level summary of issues likely to be relevant to international groups with operations in Australia or that are considering transactions in Australia. The following overview was prepared by VRG member firm Leadenhall Corporate Advisory Pty Ltd.
Australian financial reporting is based on International Financial Reporting Standards (IFRS). The Australian Accounting Standards Board (AASB) has issued AASB standards mirroring IVS with a few very minor changes.
When are Valuations for Financial Reporting Required in Australia?
Market value is a commonly used term in Australian tax law. Valuation advice is often useful in the following circumstances:
Post-Acquisition. The cost base of various assets held by the acquired company can be re-set to market value. This includes tangible assets and certain intangibles, notably software, but excludes goodwill. Transactions will need to be structured correctly for this option to be available.
Group Restructures. Non-arm’s length transactions, for example as a result of a group restructure, typically trigger capital gains tax, which is based on market value.
Thin Capitalization. For certain international groups, the amount of interest payments that can be claimed as a tax deduction is limited to a proportion of the relevant company’s assets. Certain assets (particularly intangibles) can be included at market value, despite being held at cost for accounting, when making this assessment.
Form and Content
Australian Taxation Office (ATO) has developed a document referred to as Form for Instructing Your Valuation Consultant. While not a formal requirement, best practice would be for this form to be completed by the client at the outset of an engagement.
The ATO has also issued guidance referred to as Market Valuation for Tax Purposes. This document sets out minimum expected requirements for valuations prepared for taxation purposes. The bulk of the requirements are disclosure related.
Independent Expert’s Reports (IERs)
IERs are similar to fairness opinions, although they generally include a detailed analysis of a proposed transaction, including industry and company background and fully reasoned valuation analysis. The main circumstances when an IER is needed are:
- Related Party Takeover. An IER is required if the acquirer has a pre-existing stake of 30% or more, or if the target and acquirer have a common director.
- Related Party Purchase/Sale. An IER is required if a listed company proposed to buy an asset from or sell an asset to a related party and the value of the asset is greater than or equal to 5% of the book value of equity of that company.
- Major Shareholding. If a proposed transaction would result in a shareholder gaining greater than 20% of a listed company, or increasing a stake that is already over 20%, in the absence of a full takeover offer, then an IER is generally required.
- Voluntary. Target company boards of directors often seek an IER in response to a takeover offer, despite not having a regulated requirement to do so.
For more information about VRG’s full scope of international valuation and value-related services, contact Bill Hughes.
More Perspectives: International Valuation Issues
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Argentina has five main valuation practice characteristics that companies must remain mindful of during the decision-making process when pursuing business transactions in the country.
Valuation Issues in Brazil
When it comes to business combinations and asset acquisitions, Brazilian standards require the determination of the fair value assets and liabilities at their acquisition date.
Valuation Issues in Canada
In Canada, expert valuation analysis and reports contribute to the resolution of legal and financial disputes, matters before arbitration boards, securities commissions, and other regulatory bodies.
Valuation Issues in Japan
Financial reporting in Japan is mostly based on Japanese Generally Accepted Accounting Principles (JGAAP) and International Financial Reporting Standards (IFRS).
Valuation Issues in the UK and Europe
When acquiring a business with operations in multiple countries it may be necessary to value the entities by country in order to determine their tax basis as well as the appropriate level of deferred taxes.
Valuation Issues in the U.S.
Valuations in the U.S. are generally required around a transaction and can be grouped by needs for financial reporting, tax, or legal purposes, as well as for compliance or recurring regulatory purposes outside of a transaction.
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