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Ambiguity of basic valuation terms in Czech law

We wish to share with you our opinion on the definition of fundamental terms used in the preparation of expert opinions under the new Civil Code (Act No. 89/2012 Sb.) and the Companies Act (No. 90/2012 Sb.). This article focuses mainly on valuations for the purpose of transfers between related parties or in-kind contributions.

Where valuation begins

Fundamental valuation terms are the standards of value. The objective of the standards of value is to determine what type of investor replaces the valuer’s perspective. The range of possibilities is relatively wide, including the objective value, the traditional market and fair values defined by International Financial Reporting or Valuation Standards, and individual values. Depending on the standard of value applied, the valuation result could reflect properties such as the safe, highly conservative value of an asset or the value of an asset reflecting all synergies that can be brought to the asset by a new buyer.

Guidance for ‘the standard of value’ in current legislation

Disregarding restructuring, previous legislation (i.e. the Commercial Code) did not impose on valuers any requirements regarding the standard of value applied. Typically, the market value standard was applied, under which the value should reflect the perspective of a typical buyer and seller.

The new law governing transfer pricing and in-kind contributions (Sections 251 and 255 of the Companies Act) does not directly contain any specification of the standard of value that should be applied by a valuer in preparing an expert opinion. What is interesting is that a certain specification of a standard of value is contained in Section 469 of the Companies Act. However, this section governs exemptions from the obligation to have an in-kind contribution valued by a valuer, and imposes an obligation on an independent expert to value a non-tradable asset at fair value, without providing any detailed specification of the value. We consider the missing definition of the fair value standard directly in the Companies Act to be a factor making the choice of the standard of value and the following valuation uncertain.

How to find ‘real value’

It would be very untypical for a valuer to use, without a good reason, a standard of value other than an independent expert. However, how can the intuitive idea of ‘fair value’ be specified? In Czech law, this term is only defined in the Accounting Act (No. 563/1991 Sb.) as the ‘market value’ under the price ascertained from transactions in securities markets and secondarily as the valuation applied to a qualified estimate or a valuer’s expert opinion that is to ensure an adequate approximation of the market value.

This definition of standard of value is often insufficient for the valuation of very specific assets. It is therefore advisable to consult recognised international standards that use the term ‘fair value’ (in official translations of IFRS into Czech the term is ‘reálná hodnota’).

The fair value is specified in two recognised international standards.

One is International Financial Reporting Standards (IFRS), which ascertain the fair value from the perspective of the sale of a specific asset to investors active in a market that is the principal or the most appropriate market for the sale of the asset from the company’s perspective.

The other traditional standards are International Valuation Standards, which define the ‘fair value’ from the perspective of a transaction between two identified parties. (Unfortunately, these standards are not available in an official Czech translation.)

It is clear that there are differences between the definitions of ‘fair value’ in two key valuation-related standards. In some cases, the differences could lead to different conclusions regarding the value of the assets or liabilities being valued.

What to do with fair value

Historically, we saw situations where an independent regulator achieved significant standardisation of valuation procedures using recommended methods for expert opinion preparation. In this case, the regulation concerned expert opinions for the purpose of takeover bids, public bids and related squeeze-outs. The regulator was the Czech Securities Commission and then the Czech National Bank.

Consequently, it is advisable for the term of fair value as currently provided in the Companies Act to be defined more clearly, at least by means of an unofficial interpretation by a public institution so that it is clear from what investor perspective the valuer should look at the value.

We would be pleased to provide you with support in your practical needs related to valuation.

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