Financial Instruments

Financial Instrument Valuation

IFRS 9, IAS 39, IAS 32, SFAS 133

Companies must classify, measure, recognise and de-recognise financial instruments in reporting. A financial instrument is a contract that creates a financial asset of one entity and a financial liability or equity instrument of another.  Selected examples included in the scope of IAS 39 and its replacement, IFRS 9, are debt and equity investments, loans, trade receivables and payables, qualifying provisions, net cash-settled commodity contracts, financial guarantee contracts, derivatives and convertible debt and other contracts that include embedded derivatives.

Measurement of these assets arise in the context of business combinations (IFRS 3, SFAS 141), hedge accounting, or in the normal course of financial reporting.  

Options may be found in a growing variety of contracts.  Companies outside of the financial services market are sometimes surprised to find that they hold derivatives. We are finding more of our clients now hold sophisticated financial instruments such as convertible, leases with options and other contracts with embedded derivatives. Classification of these contracts requires detailed economic analysis because the economic effects of the conditions on the reporting firm must be considered. Measurement often requires the use of valuation models. 

Auditors cannot provide valuation services for the purposes of financial reporting. American Appraisal has experience providing independent valuation opinions of financial instruments at all levels of complexity in accordance with the requirements of IFRS 9 or IAS 39.  

American Appraisal offers its clients independence, deep technical insight and a level of commitment to client satisfaction not commonly found in valuation consulting.  For more information please contact us.

Our Work

American Appraisal consultants, both in the UK and across our network of global offices, have the complex modelling skills required to value most types of financial instrument. Models that tend to be applied include:

• Discounted Cash Flow
• Real option pricing techniques
• Black Scholes
• Binomial
• Lattice
• Monte Carlo
• Asset or nothing models
• Gap models

Recent instruments that we have valued include:

• Options with a performance condition linked to the share price performance compared to the FTSE
• Options with a hurdle linked to the value of the underlying shares
• Convertible preference shares with a redemption premium
• Options with a strike price that altered a year after grant based on the share price movement
• Shares whose payout was dependent on the value of the company being over a certain level at exit
• First to default credit linked notes
• Loan notes with interest paid in shares based on the future share price performance

American Appraisal consultants are active in:

• the ICAEWs Valuation Special Interest Group
• HMRC’s Shares & Asset Valuation Fiscal Forum
• the International Valuation Standards Council
• the Appraisal Issues Task Force
• the FASB’s Valuation Resources Group
• the Appraisal Foundation
• the American Society of Appraisers
• the American Institute of CPAs

This involvement ensures our knowledge of current valuation standards, practices and procedures.

Valuations of financial instruments performed by American Appraisal result in:

• Independent, objective and supportable market value opinions
• Clear, comprehensive valuation reports

Please feel free to contact one of our experts to discuss your financial instruments and how they might be valued.