Farm valuations will incorporate natural capital
The National Australia Bank (NAB) is the first, and so far only, Australian bank to sign the Natural Capital Declaration (NCD)—a global statement that recognises that natural capital poses significant risks and opportunities to the finance sector.
As a result, value will be assigned to water, trees, and grasses—depending on how well they are managed—which will affect farmers’ abilities to get a bigger bank loan and will be a factor in how farmers’ risk is assessed.
“Part of managing natural capital involves putting an economic value on ecosystem services and the natural environment. In other words, recognising the impacts and dependencies of biodiversity and ecosystem services and accounting for them within traditional business frameworks,” NAB said in a statement.
NAB’s increased focus on incorporating natural capital into accounting policies comes on the back of adding “natural value,” i.e., considering the value of natural capital, into its environmental agenda in 2011 and a growing global consciousness that companies’ profits will not grow unless consideration is given to the environment.
NAB said that, as business decisions become more informed by natural value considerations, it will be easier to place an actual value on natural capital, bringing it explicitly into the balance sheet.
“For example, over 65% of agricultural production of Australia is dependent on pollinators such as honey bees. Pollination services are estimated to contribute directly to $1.7 billion in agricultural production.
“And, in Melbourne, the water supply is dependent on protected forests for purification. Without these forests, Melbourne would need to build a new water treatment plant at a cost of $US500 million to $US1 billion, with additional operating costs running into hundreds of millions of dollars each year.”
John McKenzie, senior manager of agribusiness at McGrathNicol, has been involved with the concept of natural capital in previous roles and has been in discussions on how to calculate it.
“The issue has always been how to assign a value to it, unless there is a clear management long-term strategy in place. With a lot in nature, you are placing the environmental outcome in the hands of managers as they can enhance or deteriorate their natural assets,” McKenzie said.
Following on from this concept, the business valuation industry has flagged a downside for farmers, as investors who are not familiar with agricultural production could be prone to placing unrealistic environmental demands on them.
However, CSIRO researcher Steve Hatfield-Dodds told ABC that this risk could be overcome by proactivity.
“There are always risks and opportunities. I think overwhelmingly, on balance, this is an opportunity. But the opportunity is greatest and the risks are smallest when farmers work together to shape the environment they are working in.”
Hatfield-Dodds said farmers should work on collaborating with banks and other service providers to come up with a standard that defines natural capital, rather than leaving it to “bureaucrats.”
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Employee share proposal provides an opportunity for BV industry
In the last BVWire—Australia, we reported on the government’s draft legislation that will change how employee share option plans (ESOPs) are taxed in a bid to make them more accessible and attractive to businesses and employees.
The draft legislation confirms the proposed concessions, allowing startups to issue shares at a discount of up to 15% of market value, or grant of “out of the money” options in circumstances where employees will potentially pay no tax until the shares are ultimately sold.
In an opportunity for business valuation practitioners, the proposed legislation will continue to require shares to be valued when they’re issued.
Sydney-based solicitor Raena Lea-Shannon said the valuation approach could potentially result in a whole new industry for accountants and valuers.
“They’re still treating the shares as a form of income and therefore a taxable income or a taxable capital gain. Even with their simplified valuation system and what’s called the safe harbour valuation tables, it still requires an accountant.”
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What should be the ‘useful life’ of trademarks?
As members of the business valuation industry are aware, trademarks are often deemed indefinite because they don't have a legal end date as they can be continually renewed.
But this assumption has ramifications for the business valuation industry, according to Stefan Rüssli, managing director of Assessa GmbH, a Swiss brand value optimisation company, and Christof Binder, managing director of Capstone Branding GmbH, a German advisory firm.
“Almost no asset is imperishable, and the indefinite life assumption has serious consequences for the values ascribed to trademarks. Expected remaining life is a major determinant of any asset’s value,” Rüssli and Binder say.
They go on to draw contrasts between trademarks and other intellectual property-like patents—copyrighted works such as music, films, text, or pictures and software and databases—to arrive at the central question: Why should the lives of trademarks be limited?
To start their analysis, Rüssli and Binder delve into the expected lives of brands at the date of acquisition and explore how business valuation practitioners cope with the challenge of determining future lifetimes of a brand.
The two analyse the trademark lifetime assumptions from 4,500 acquisitions of branded businesses between 2003 and 2013, which they retrieved from the MARKABLES brand valuation database that both of them co-founded.
“Overall, in precisely 50% of all trademark valuations, it was concluded that no limit was foreseeable. Accordingly, an indefinite lifetime was assumed and revenues from that trademark were expected and projected into perpetuity,” they conclude.
Read about the four propositions that come out of Rüssli and Binder’s analysis in the January Business Valuation Australia (subscription required). Rüssli and Binder’s analysis first appeared in World Trademark Review, a global trademark professionals’ news service.
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Last chance to shape our 2015 direction!
This week is your last chance to tell us what you would like to see covered in upcoming editions of BVWire—Australia and BVA. If you haven’t taken the survey yet, click here to participate. BVWire—Australia will report on the outcome of the survey in the next issue.
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Former head of AVO discusses what makes a good business valuation report
In the upcoming April edition of Business Valuation Australia (subscription required), Elena Saarbrucken, Leadenhall corporate advisory director, investigates the characteristics of a good business valuation report that “guarantees unquestionable acceptance by the ATO.
I, like many valuation professionals, believe this is not just high mathematics where each input and variable can be easily defended by the logic of readily available theorems.
It requires extensive knowledge of businesses and industries, an understanding of economic, financial and political environments, technical proficiency in applying both quantitative and qualitative judgement, and wisdom in writing a meaningful report.
Drawing on her previous six years’ experience heading up the corporate valuation unit of the ATO’s Australian Valuation Office (AVO), Saarbrucken points out the ways to better calculate discount rates and project cash flows and shares her experience of key findings and observations in the valuation assessment process undertaken by the AVO.
Saarbrucken says the Market Valuation Guide for Tax Purposes published by the ATO provides good coverage of the processes required to estimate a market value for taxation purposes. However, she points out how general it is and that it is instinctively unable to cover all the circumstances of taxpayers.
“Thus a question becomes a problem: how to produce a report that can undoubtedly convince the ATO’s compliance team of the accuracy of the valuation exercise?”
Subscribe to Business Valuation Australia to read about the risk matrix of the valuation process and the key valuation principles that go into a good business valuation report.
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