Measuring the convergence degree between accounting and valuation standards: case study on intangible assets.

• Author: Deaconu, Adela

1. INTRODUCTION

   In a global world, rigorous, understandable and universal financial information significantly influences the proper functioning of markets and the economic growth conditions. In recent years support was brought to this proven correlation also from the International Accounting Standards Board (IASB), which in the accounting field has shown a notable development of its standards. However, the financial crisis has demonstrated that there are still aspects where reforms should be undertaken. In particular, there is the area of valuation.

   Since 2004 the consensus between the international forums in the valuation field has focused on developing valuation standards that would clarify the measuring of market (fair) value for tangible and intangible assets. The Toronto Agreement (Sayce and Connellan, 2005) asks for valuation professional bodies to work together with the legislative and regulatory bodies in order to clinch the simplification and convergence of financial reporting standards. These valuation professional bodies have shown their support for the action undertaken by the International Valuation Standards Council (IVSC) and the IASB in this respect. Recent global events have given new significance to information disclosed in the financial statements and to the value at which they are measured. We submit to the idea, which many others support, that market value is essential to the best practice engaged for financial statements (Stan, 2008). However, solutions have to be offered for the best materialization of this objective. Considering the fact that accounting and valuation standards are two different sets that interconnect in various aspects, globally applied IFRS will be of little use if there is not a clear and universally applied set of valuation rules on which to rely (Lorente, 2009).

   In this study we focus on the IVSC and the way in which it meets financial reporting requirements. The analysis of the IVSC's actions and its standards, International Valuation Standards (IVS), underlines the idea that there is room for further improvements. Thus, it is believed that the effects of the financial crisis would have been less extreme if there had been robust valuation standards and if they had been applied globally (Lorente, 2009). The Financial Reporting Council (UK) concluded in a recent study (FRC, 2010) that there is a need for improved compliance with the disclosure requirements of IFRS, with particular criticism of the treatment of goodwill and intangibles. Another opinion states that IVS are a set of very basic valuation principles that can be applied in any economic system, but the world economic system urgently demands a more precise definition of many aspects of the standards, for example, the valuation of financial instruments in markets where there is little or no liquidity (Lorente, 2009).

   Where does the IVSC stand in what regards all the above? For the past years there has been a growing concern of the valuation body to enhance the credibility of its actions. Thus, in 2005 an administrative reform was initiated in order to increase the relevance and sustainability over time of both the standards and the organization itself (Lorente, 2009). Through the reorganization of the International Valuation Standards Committee (IVSC) a new structure was formed, entitled as the International Valuation Standards Council (IVSC) within which the International Valuation Standards Board (IVSB) and the International Valuation Professional Board (IVPB) were created. The former develops standards on carrying out and reporting valuation while the latter promotes the profession in general and oversees the educational and professional valuation standards.

   The current financial crisis propelled IVSC as an organization with significant impact on the regulation of financial markets. One of our arguments is IASB's new approach which offered a another type of acknowledgement of the activities conducted by its homologue in the valuation field. The statements from 2009 of the two regulatory organizations' assignees are eloquent in this respect. Sir David Tweedie, secretary of IASB, underlines the essential role held by the valuation of tangible and intangible assets in solving the financial crisis: "We are determined to accept IVSC's methodology in the issues related to valuation. In the past we have considered valuation as an ad hoc basis, but now we believe that there is room for development in this area, and a close collaboration with the IVSC is impetuously necessary." Michel Prada, secretary of IVSC's Board of Trustees states that: "The market participants and the supervisors need to base their decisions on a complete set of international standards for valuation of all assets and liabilities, which will lead to valuations conducted with objectivity and integrity, in order to assure a rigorous implementation of the business ethics principles. This is a challenge that the IVSC is willing to face while having a complementary role together with other regulatory organizations like IASB and IFAC".

   The two mentioned events i.e. the administrative reform and the answer given by the IVSC to the IASB to improve its standards are the premises for assuring the legitimacy of IVSC as an organization that globally regulates the professional and ethical standards for the position of assets and business valuer. Thus, according to the legitimacy theory (see for example, Mitchell et al., 1997; Frooman, 1999; Jacobs and Jones, 2009), institutions need legitimacy in order to function and to be perceived as rational. On the other hand, recent actions and projects undertaken by the valuation body are justified by the institutional theory according to which organizations monitor the needs and influences of their constituencies to adjust their actions (see for example Oliver, 1990; Previts et al., 1990; Kenny and Larson, 1993). Finally, IVSC's same position is reflected in the quality with which the requirements of the accounting standards are implemented and in the better understanding of the value measuring method for the benefit of the economic entity's different stakeholders. In other words, a convergence between the accounting and valuation standards, starting from improved bases of recognition, valuation and disclosure, would reduce information asymmetry and increase the quality of the agent-principal relationship.

   Considering the premises discussed here, in our empirical study we observe the degree in which IVSC is willing to know the public attitudes and adapt to environment pressures. Our case study starts from the second event mentioned above i.e. the coherence between accounting and valuation standards, brought forward by different observers and taken on by the IASB and the IVSC. In particular, our study tries to identify the way in which IVSC could provide support in implementing accounting measurement practices and policies. We try to present the manner in which IVSC deals with the challenges of the current economic conditions and of IASB, by measuring the convergence degree between the International Valuation Standards, IVS, on the one hand and the International Accounting Standards, IAS, and the International Financial Reporting Standards, IFRS(1), on the other hand. The structure of this paper is the following: section 2 describes the characteristics of intangible assets valuation for financial reporting, the valuation standards developed by the IVSC with this purpose, and the essential parts of a high quality financial reporting; section 3 presents intangible assets values' correspondence between accounting and valuation standards, the logic and development of the database designed for empirical processing; section 4 discusses the results of the comparative analysis in order to support the study's conclusions.

2. CHALLENGES OF INTANGIBLE ASSETS VALUATION AND JUSTIFICATION OF THE STUDY'S APPROACH

   Intangible assets valuation (here after, IA), which we present in this section, refers to the situations that call for recognition in the financial statements of values other than historical cost. We sum up these values within the concept of fair value for which we...