The global COVID-19 pandemic actually covers more and more areas of social and economic life. It is obvious that it also affects the process of valuing enterprises and companies. Let's analyze the main valuation hot areas during the uncertain coronavirus period.

1. Valuation date

The valuation date - i.e. what day the valuation is carried out - is crucial in the valuation process.
The valuation process should take into account all information, facts and events objectively existing at the valuation date plus future events that can reasonably be predicted at the valuation date. In English, two combined terms are used to refer to this information, facts and events - "known and knowable". The date of preparation of the valuation report - the date of completion of work on the valuation by a given specialist - is different from the valuation date. Theoretically, the date of preparation of the report should not affect the recommendation of the valuation value.

Moving on to more practical ground, in the case of valuation of packages of shares and shares of Polish entities as at the valuation date of December 31, 2019, it should be reasonably assumed that the valuation process should probably not take into account the impact of the coronavirus epidemic on the economic situation of the valued entity. It is (rather) unlikely to reasonably predict the epidemic in Poland from the point of view of December 31, 2019. At the same time, generalizations should be avoided and each valuation process should be considered separately. For example, when the Expert evaluates a block of shares in a Polish company as at the valuation date of December 31, 2019, in which one of the main suppliers is a Chinese entity from an area affected by the pandemic already at the end of 2019, it should be reasonably assumed that the valuation process should take into account aspects of the impact of the epidemic, but only in terms of the relationship with this supplier.

The fundamental question is - from what valuation date should the valuation process (generally) of Polish entities take into account the impact of the development of the coronavirus epidemic in Poland. This thing is a bit judgmental. From the point of view of the rather calming tone of official/governmental factors until the end of February 2020, I am inclined to claim that such a time difference was the day of detection of the first case of infection in Poland - March 4, 2020.

How did the capital market react to emerging data on the threat of an epidemic? The WIG index was in a slight downward trend from November 3, 2019 to December 10, 2019 - a drop from 59,326 to 55,531; then increased its value to 59,275 on January 12, 2020; then a slight decline to 56,681 on January 30, 2020 and after a slight increase it reached 57,424 on February 20, 2020 - in summary, from November 3, 2019 to February 20, 2020, the index was subject to minor fluctuations .

The following week beginning February 23, the index collapsed and the index fell 14% to 49,277 as of February 27. On March 2 and 3, there was a slight rebound to the levels of 50,150 and 52,231, and then there was a strong decline lasting until March 15, 2020 - the value of 37,738. To sum up, from February 20 to March 15, 2020, the WIG index lost 34% of its value.

Drawing conclusions from the information presented above, more technically, with a high degree of probability, from the point of view of the valuation of Polish companies (generally), the valuation process with the valuation date:

• January 31, 2020 should not take into account the impact of the epidemic;

• February 29, 2020 may not take into account the impact of the epidemic (assessment issue - official/government factors rather expressed calming voices, and the capital market has already reacted since February 23, 2020);

• March 31, 2020 should take into account the impact of the epidemic.

It should be emphasized once again that each valuation process should be analyzed separately - the specific market situation of the entity being valued, in particular its relations with customers and suppliers, may mean that the above general recommendations will not be appropriate.

2. Valuation report

Taking into account the potentially (very) significant and most often negative impact of the coronavirus epidemic on the economic situation of the valued business entity and its fair value (or fair market value), the expert should consider including an appropriate clause in the valuation report explaining whether the valuation takes into account the impact of the coronavirus epidemic, and if yes, to what extent and/or area of ​​activity of the entity. This type of additional clause should assist users of the valuation report in properly understanding the results of the Expert's work and should reduce the risk of incorrectly interpreting his value recommendation.

For the sake of clarity, if the valuation date is before the epidemic period, the expert is not obliged to include in this type of clause information on the impact of the coronavirus epidemic on the value of the subject of the valuation (in terms of value). The reason is simple - to provide this type of valuable impact (change), the expert should perform a new valuation for a more current date (i.e. the date when the "coronavirus" epidemic has already occurred) and compare it with the previously performed valuation.

An alternative solution to including appropriate information in the report itself is to present a clause explaining the reflection of the issue of the epidemic in the valuation in a separate letter addressed (usually) to the Expert's client. At the same time, it should be taken into account that the group of users of the valuation report is often wider than just the client, which creates a risk that other users of the report will not have the opportunity to become familiar with the additional explanatory clause.

An additional issue that should be properly recognized in the valuation report is the impact of the epidemic on the scope of work carried out by the Expert. A certain standard in the process of valuing enterprises and companies is to carry out a general inspection/inspection of the plant of the company being valued, or in general, the place of business. If the company's valuation entails the need to carry out separate valuations of real estate and/or machinery and equipment, the standard is for appraisers to inspect the valued assets. It is obvious that limitations in the scope of work performed and procedures applied resulting from the requirements to minimize personal epidemiological risk by Experts should be properly recognized in the valuation report.

It is worth noting the analogy to recognizing events after the balance sheet date when preparing financial statements. Events after the balance sheet date, in accordance with point 6.1 of the National Accounting Standard No. 7 "Changes in accounting principles (policy), estimated values, correction of errors, events following the balance sheet date - recognition and presentation", may:
a) provide new information about the circumstances existing in the balance sheet date,
b) indicate circumstances that arose after the balance sheet date.

The events referred to in point a) have "retroactive effect" - that is, they are taken into account when preparing financial statements - they respectively affect the items of the profit and loss account and the balance sheet. Events meeting criteria b) above, with the additional assumption of significant significance for the recipients of the financial statements, require an appropriate explanation to be included in the notes to the financial statements (they do not adjust the items of the profit and loss account and the balance sheet). It is common sense to assume that when preparing the financial statements for the financial year 2019, the issue of the coronavirus epidemic meets the criteria of point b) above and should be appropriately discussed in the additional information.

3. Usefulness and timeliness of the valuation

Assuming that the valuation was carried out on a valuation date preceding the onset of the coronavirus epidemic, and the valuation report was presented later, the question arises to what extent such a valuation is useful and/or current. Actually, these are two different questions. Very often, the purpose of the valuation influences the answer.

If the valuation is carried out for the purpose of preparing the financial statements and balance sheet as at December 31, 2019 (e.g. valuation of the fair value of a minority stake in another company), the valuation is useful (the value recommended by the Expert will be able to be appropriately taken into account in the prepared financial statements for the financial year ending December 31, 2019), but not necessarily current as of the date of presentation of the valuation report. The concept of usefulness is somewhat relative - from the point of view of the CFO responsible for preparing the annual financial report, the valuation is useful (the value recommendation in the valuation can be used in the financial report), and from the point of view of the shareholder receiving the 2019 annual financial report at the beginning of April 2020. information about the value of a given financial asset as at December 31, 2019 may be of questionable usefulness.

If the valuation was prepared for the purpose of advising on the contemplated acquisition of another entity, it should be reasonably assumed that the usefulness and validity of the prepared valuation are questionable. In such a situation, for transaction purposes, it is advisable to update the valuation to a more current valuation date - i.e. the date after the beginning of the spread of the coronavirus epidemic. It should be clearly emphasized that the fact that the new valuation may present a recommended value at a level significantly lower than the original valuation does not mean that the original valuation was carried out incorrectly. Simply put, between the date of the first valuation and the date of the second valuation, an event occurred that the Expert could not reasonably have predicted and, additionally, could have significantly influenced the economic situation of the entity and its value.

It should also be honestly said that the macroeconomic condition and the economic situation in individual economic sectors are changing dynamically in the era of coronavirus - this means that the valuation carried out on today's valuation date - April 8, 2020 (i.e. the "coronavirus" date) may differ significantly from valuation carried out in two months (e.g. with a valuation date of May 31 - also "epidemiological"). The uncertainty and variability of the economic situation resulting from the epidemic may result in the fact that the set of information, facts and events objectively existing as of the valuation date of April 8, 2020, plus future events that can be reasonably and reasonably predicted on that valuation date, does not have to coincide with the so defined collection as of the valuation date of May 31. In other words, valuation assumptions for the "coronavirus" valuation date are not set in stone, which means that value recommendations for different "epidemiological" dates may differ and these differences may be (very) significant.

4. Valuation approaches and methods

When conducting a valuation in the era of coronavirus, an expert should carefully consider how the existing specific situation may affect the scope of data and assumptions standardly used in valuation approaches and methods. Below are some notes and comments to consider when conducting a valuation for the "coronavirus" valuation date.

Income approach – it is advisable to consider:

• preparation of a scenario analysis (several financial forecast scenarios) based on various assumptions of the impact of the coronavirus epidemic on the future market situation of the valued entity;

• taking into account potential restructuring processes and government anti-crisis programs (anti-crisis shield in Poland) in financial forecasts, potentially as part of a scenario analysis;

• revaluation of non-operating assets; 

• update of the base cost of capital (at this point it is worth noting that Duff & Phelps in the information of March 25, 2020 increased the US ERP (Equity Risk Premium) recommendation from 5% to 6%, which in connection with the standardized risk-free rate 3 % means an increase in the basic US cost of equity capital from 8% to 9%).

Regarding the comparative approach, the expert should bear in mind that multipliers based on capitalization and data from the pre-epidemic financial statements may not be appropriate for the valuation at the "epidemiological" date. Consequently, the Expert should take appropriate actions to ensure that the multipliers are based on "coronavirus" data or, alternatively, the "pre-coronavirus" multipliers are appropriately adjusted. Additionally, in relation to multipliers based on private transactions (non-public markets), the expert should make sure that the transaction prices meet the assumptions of fair market value - in particular, whether the selling party was not forced to sell due to the risk of loss of liquidity.

Property/cost approach – it is advisable to consider:

• Conducting a review and creating appropriate provisions for trade receivables and individual categories of inventories;

• Conducting the valuation of intangible assets (in particular those typically valued using income methods and not usually disclosed in financial statements - e.g. trademarks and customer relations) based on "epidemiological" assumptions;

• Revaluation of non-operating assets.

Let us hope that the coronavirus epidemic will end as soon as possible. On the other hand, unfortunately, let's be prepared for the fact that we will be forced to live with it for some time...