About the Valuation Date

Financial valuation is a process of estimating what something is worth at a particular point in time.  This point in time is referred to as the valuation date.  Values of assets and liabilities change continuously.  Thus valuation date has to be selected carefully to align with relevant strategic or regulatory goals.

The valuation date can be associated with a specific transaction or the end of a reporting period.  For example, valuation of common stock for accounting or strategic purposes should be done as close to the transaction or the date of the stock option grant as possible.  Alternatively, portfolio valuations for financial reporting purposes are completed as of the balance sheet date.

For companies that continuously issue stock options, management will commission periodic valuation updates.  The frequency of updates depends on factors outlined in the working draft of AICPA practice aid titled Valuation of Privately Held Company Equity Securities Issued as Compensation.  The document recommends:

High frequency updates are expected when IPO is imminent.  Sorbus observed that quarterly valuations are common when companies prepare to go public.

Frequency of new option grants should be considered.  Technically, every stock option grant has to have supportable strike price.  In practice, management will select a new valuation date so that a maximum number of option grants can be supported.

Significant events are expected to have material influence on value.  Both company’s operating performance as well as volatility of financial markets may lead to material changes in value.

The frequency of valuation updates requires judgment.  Many technology-based companies update valuations at least annually with additional updates for new rounds of financing or large stock option grants.  Large transactions of strategic significance are likely to affect common stock value as well.

While valuation work can be executed only after the valuation date, it should be completed as promptly as possible. The main issue with retrospective valuations is hindsight.  Hindsight contaminates the process of developing financial forecast and the assessment of risk associated with the uncertain forecast.  After a while it becomes impossible to accurately determine expectations and concerns that existed in the past.

Consider valuing real estate assets as of June 30, 2008.  It would be near impossible to complete an accurate and unbiased valuation if the analysis was performed in October of that year, or after Lehman Brothers collapsed.  Financial crisis brought dramatic changes to the outlook on risk and financial performance associated with the inflated asset class.


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About Financial Forecast

A financial forecast is a centerpiece of many valuations.  It answers the principal question: “Why the business is valuable in the first place?”  In strategic analysis, financial forecast links business strategy and value.  In financial reporting, a financial forecast is a more refined, post-strategic-planning representation of a company’s expected financial performance. 

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