Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
Most quoted EU companies must report under IFRS after January 1st, 2005. And
the two boards that set these two standards are themselves working towards
harmonisation on a single internationally accepted system of Generally Accepted
Accounting Practices (GAAP).
Sadly, this does not at all mean that interpretation of accounts will become
unimportant, or that there will not be room for legitimate differences of opinion
over company performance. However prescriptive the accounting convention,
there will always be room for manoeuvre when companies report. The authors
believe that in practice there are a relatively small number of key issues that
investors need to understand and consider when interpreting company reports
and accounts, and that these will remain even after further convergence of
accounting standards. But that does not mean that an appropriate response is to
declare accounting profits irrelevant, and to revert to simple reliance on cash
flows as a tool for valuation.
How the book is structured
This book is set out in eight chapters.
Chapter One
The first chapter states the main thesis, which is that it is in effect impossible to
value a company without reference to profit and capital employed. Attempts to
avoid this simply result in implicit assumptions (usually foolish ones) replacing
explicit assumptions (however wrong the latter may be). In addition, it argues
that far from being unimportant, accruals represent key information about value,
whether or not it is represented in the framework of a discounted cash flow
(DCF) model.
Chapter Two
Chapter two attempts to explode another myth, that the cost of capital for a
company is an unambiguous figure, and that it is stable. Neither is the case. We
show how the traditional Weighted Average Cost of Capital (WACC) can be
reconciled with a more transparent approach based on Adjusted Present Value
(APV), and argue that the traditional framework within which practitioners
operate has at its core an assumption about the value of tax shelters that has led
to systematic overvaluation of the benefits from leverage, another cause of the
catastrophic fall in equity markets after the turn of the Millennium. In addition,
there is an ambiguity at the heart of the treatment of debt in the standard Capital
Asset Pricing Model (CAPM). Different interpretation of the risk premium on
corporate debt results in very different estimates for WACC, and for the value of
the enterprise.
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