Expert Witness Journal Issue 68 August 2026 - Flipbook - Page 86
There is also the issue of liquidity and marketability
of the comparable company. A listed company is
often assumed to represent a reliable benchmark.
However, a listing does not guarantee actual
trading activity. Some shares are technically traded,
but in the same way that an old dusty treadmill is
technically used.
Cost approach: balance sheets and the
illusion of simplicity
The
cost
approach
appears
reassuringly
straightforward: value the assets, deduct the
liabilities, and arrive at equity value. Internationally,
however, this simplicity can be deceptive. Di昀昀erences
in accounting standards, valuation practices, and
approaches to estimates and assumptions mean
that asset and liability 昀椀gures may not be prepared
on a basis that is aligned with a business valuer’s
expectations.
From a solicitor’s perspective, these issues
provide useful areas of enquiry when considering
expert evidence. Understanding why particular
comparables have been selected, and whether
accounting, regulatory and market di昀昀erences have
been appropriately addressed, can help assess the
robustness of the valuation methodology.
A prominent example is the di昀昀erences in lease
accounting rules between IFRS and US GAAP.
Depending on the situation, leased assets may or may
not be recognised on balance sheets. Approaches to
the recognition and valuation of intangible assets
can also be wildly di昀昀erent under di昀昀erent regimes.
Income approach: an assumption mine昀椀eld
The income approach, which typically involves
forecasting cash 昀氀ows for the business being valued
and discounting them to present value, is capable
of producing very precise numbers. Unfortunately,
precision and accuracy are not always the same thing,
with this approach requiring consistency between
cash 昀氀ows, currency and discount rates. A 昀氀awed
assumption, once embedded in a spreadsheet, can
have far-reaching and unintended consequences.
Particular assets and liabilities may rely on the
work of other specialist valuers, for example a RICS
valuation of a property by a chartered surveyor.
While RICS is aligned with International Valuation
Standards and is used in many jurisdictions, other
local property valuation methodologies may have
instead been employed, leading to misleading asset
values on a balance sheet.
For example, a discount rate incorporating the
political, economic and regulatory risks associated
with the eurozone as a whole will likely align more
with the larger eurozone economies. This is not a
“one size 昀椀ts all” discount rate that can be applied
to all eurozone companies though, given the
vastly di昀昀erent risk pro昀椀les within this large and
diverse economic area. Applying a discount rate
derived from one economic environment to cash
昀氀ows generated in another is rather like using a
Mediterranean weather forecast to plan what clothes
to take on your UK holiday…it is unlikely to end well.
A keen awareness of potential di昀昀erences is key
in order to address whether and how adjustments
to asset and liability values should be applied. In
short, while the cost approach may promise a neatly
balanced answer, in practice the balance sheet may
be decidedly wobbly and demand a very careful
second look.
Where a valuation relies substantially on balance
sheet values, solicitors may wish to understand
whether the expert has independently assessed the
underlying asset and liability values, or whether
they have relied upon 昀椀gures prepared under local
accounting or valuation conventions.
Local tax regimes, which are rarely straightforward
and sometimes surprising, can lead to undervaluing
or overvaluing a business if they are not fully
understood. For example, did you know that in
Hungary, companies can donate up to 80% of their
corporation tax liability to eligible sports clubs
instead of paying it to the state treasury? If this is
misunderstood, a valuer may overstate future tax
payments, not realising they are already forecast
under donations, arti昀椀cially depressing forecast
cash 昀氀ows and undervaluing the business.
Practical takeaways for solicitors
appointing expert witnesses
If you have a case involving an international or crossborder business valuation, and need to appoint an
expert witness or consider the robustness of a report
provided, the following practical takeaways are
worth bearing in mind:
Solicitors should pay particular attention to
assumptions for which small changes can have
a large impact on value. Discount rates, growth
assumptions and tax treatments are often among
the most contentious aspects of a valuation and can
substantially in昀氀uence the expert’s conclusion.
EXPERT WITNESS JOURNAL
84
•
International valuation experience: An expert
should be able to demonstrate experience of
dealing with cross-border valuations, di昀昀ering
accounting frameworks, and jurisdictional risk
factors.
•
Global footprint of the expert’s 昀椀rm: Will the
expert have good access to local expertise and
information in the required jurisdictions, if
required?
AUGUST 2026
