SVS No. 12 Financial Instruments Valuation

Status

Issued by Valuation Standards Committee in Taiwan on 8 December, 2016.

Summary

This Statement establishes the basic principle and application guidance for valuation of financial instruments. A financial instrument is a contract that creates rights or obligations between specified parties to receive or pay cash or other financial consideration, or an equity instrument. The contract may require the receipt or payment to be made on or before a specific date or be triggered by a specified event.

A thorough understanding of the instrument being valued is required to identify and evaluate the relevant market information available for identical or similar instruments. Valuation techniques are most likely to be required for instruments that are not traded on public exchange or that are normally traded on a public exchange but where that market has become inactive. It is these situations that are the main focus of this standard.

Understanding the credit risk is an important aspect of valuing any debt instrument. Some of the common factors that need to be considered in establishing and measuring credit risk include counterparty risk, subordination, leverage, collateral asset quality, netting agreements, and default protection. For parties for which limited information is available, it might be necessary to look to information available for entities with similar risk characteristics.

When valuing the interest of the issuer of a liability, the credit risk of the issuer is relevant to its value in any transfer of that liability. It is necessary to assume a transfer of the liability regardless of any actual constraints on the ability of the counterparties to do so. There are various potential sources for reflecting own credit risk in the valuation of liabilities. These include the yield curve for the entity’s own bonds or other debt issued and credit default swap spreads or byreference to the value of the corresponding asset.

The various valuation methods used in financial markets are mostly based on variations of either the market approach, the income approach or the cost approach described in the SVS NO.4. Valuation Process. It is important when using a particular valuation method or model to ensure that it is calibrated with observable market information on a regular basis.

Valuers should consider, where relevant, making valuation adjustments for the following: close-out costs, early termination, investing and funding costs, future administrative costs, and model risk. A further factor that can create a difference between an exchange traded price and the instruments to be valued can arise where transfer of the holding results in either the creation of a controlling interest or prospect of a change of control.

The control environment consists of the internal governance and control procedures that are in place with the objective of increasing the confidence of those who may rely on the valuation in the valuation process and conclusion. The appropriate protocols and controls should be determined by careful consideration of the threats to objectivity that would be perceived by a third party relying on the valuation.

Effective date

This Statement is effective from 1 January, 2017.