ASIC are not too keen on assumptions
The material assumptions disclosed should be specific and definite
or forecasts and projections
An expert should not include prospective financial information (including forecasts and projections) in its report unless there is a reasonable basis for that information. Otherwise the opinion may be misleading.
and made their thoughts known via their RG 111
Content of Expert Reports. When it comes to estimates they think that two years is about it, according to their guide on
Prospective Financial Information
Short-term estimates (not exceeding two years) relating to an existing business and based on events that management reasonably expects to take place or actions management reasonably expects to occur may establish reasonable grounds for disclosing prospective financial information in a disclosure document or PDS
The problem is that a DCF requires more than two years of estimates
However, we recognise that using discounted cash flow (DCF) methodology will involve the use of prospective financial assumptions over a longer period than the two year period..So long as the focus of the disclosure in the expert report is on the valuation rather than the prospective financial information that supports it, the expert does not need to commission an independent accountant report for the DCF methodology
On this ASIC are between a rock and a hard place, to use DCF you must project forward. And why is DCF used? because
Deloittes think it is the best method
Our view is that the market approach (i.e. applying multiples etc), often favoured by market participants is no longer suitable as a primary valuation method as it, more than ever, may not provide a realistic indication of intrinsic value. The income method (i.e. Discounted Cash Flow) is preferred since this looks through economic cycles and ignores market exuberance.
