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The impact of COVID-19 on valuation dates and the use of hindsight

18 May 2020

Published by: Susan Blower

Never” or “Mostly no”. “It’s a grey area”. “Sometimes if it reflects what they should have known then”.

It’s about that ship isn’t it?

All of these are possible answers to one of the most exciting pub quiz questions written by people who have devoted their working life to damages calculations and valuations. 

The people who do this work (me included) can genuinely work their way into extreme states of excitement over valuation topics where there isn’t a definitive answer (which happens to be pretty much all elements of a valuation). 

Other pub quiz questions, “should a higher Country Risk Premium reflecting current COVID-19 stress be applied to cash flows in perpetuity” and “how shall we adjust our discount rate for the inflation differential between India and the UK”. All such questions can enthral members of our team for hours, days or weeks. COVID-19 has only exacerbated this I am afraid.

So what is the first question? 

Yes, it’s that grand old dame, Hindsight and when it should be reflected in valuation or damages calculations.  I have heard all of those answers over the years and there definitely was a ship.

Hindsight has seen its fair share of uncomfortable bed fellows over the years.  World events that have made a valuer’s job a bit more difficult; Iraq and Kuwait, Crimea, the Falklands war, and now COVID-19 – issues raising questions, of who knew what when, and more importantly, who should have known what when (meeting the test of “reasonably foreseeable”).

This can become very messy for valuation experts to the extent that experts have been known to prepare valuations on two sets of different documents; one including and one excluding hindsight.

A very simple example we are seeing in our practice - clients who have completed a sale or re-organisation pre-COVID-19 and need a valuation for tax purposes.  If at the date of sale, there was a relatively new virus affecting a region of China, should the valuation reflect an adjustment for the impact of COVID-19 or not?

The question of what was foreseeable at that time may be a question of who and where you are; it is unlikely to be black or white.   There are global indicators which can help you answer this question; the first sharp fall in stock prices on February 2020, the date of announcements by the World Health organisation, but there is little that is definitive.

All of this is a headache for valuers in the commercial world, but for expert work, hindsight is more likely than ever to be a contentious issue, particularly when it comes to determining the date of valuation or calculation of damages.

Case law tells us that hindsight is sometimes permitted where it reflects what should have been knowable and therefore reflected in forecasts (Buckingham v Francis, 1986) at the valuation date or where post valuation date transactions can provide some light over conditions (and value) existing at the valuation date. (Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Company [1903] ).

However, when it comes to answering the question of whether something was “reasonably foreseeable” there is a blurring of boundaries between the legal, accounting and scientific worlds,  with the answer likely to lie somewhere between case law, valuation/accounting practice, market economics, and (with the impact of COVID-19) science.

Given the almost binary impact of COVID-19 on some businesses, we are expecting to see even more focus on the date at which valuations or damages calculations are performed, with a more material divergence of values at different dates, and some complex valuation issues arising as a result.