Association for Foreign Investment

2003/08/22, American Apraisal s.r.o, Valuation Consulting Company settled in Prague, Member of the American Apraisal Associates network, AFI member

Most foreign investors in the Czech Republic have already come across the terms "Expert Opinion Report" and "Appraisal" or "Valuation". They might have also seen these terms mainly in business combinations such as mergers and divestitures of companies, share buy-out offers after acquiring a substantial equity interest in a company, security de-listings, allocation of a company's purchase price to individual assets (accounting records), and when transferring real estate. What kind of experience do foreign investors have with expert opinion reports and valuations in the Czech Republic? Varied.

Foreign investor's experience with expert opinion reports and administrative valuation (according to the Finance Ministry Reg. 540/2002) prepared for real estate transfer tax purposes has been generally negative. The reason is because the "administrative value" of appraised real estate based on this regulation very often exceeds the fair market value of the property. The government's own distrust towards taxpayers by taxing them on virtual values of property instead of fair market values is something incomprehensible to foreign investors.

Unfortunately, the authorized expert as an institution does not evoke trust either. The process of granting time unlimited authorization accompanied by a round stamp but without quality and repeated verification does not guarantee the quality of the valuation. The feeling still persists in the Czech legal environment that an authorized expert opinion is a document that should not be reviewed and that the expert's conclusions are binding for the court. At the same time, nothing prevents the court from familiarizing itself with the expert opinion report, having the authorized expert defend it and then either accept or reject it. Foreign investors prefer "testing" an expert by requesting his references and other quality certifications before engaging him.

In recent years, the Czech Securities Commission (CSC), the capital markets' regulatory body in the Czech Republic, began to play a specific role in reviewing expert opinion reports and methodology applied to business enterprise valuation. Amendment No. 513/1991 to the Commercial Code was adopted in 2001 in order to increase transparency on the Czech capital markets and to protect minor shareholders by establishing the obligation to justify share buy-out offers by an expert opinion report (which includes a business enterprise and share valuation). CSC thereby obtained the right to comment on expert opinion reports, to request additional information and also to refuse it if necessary. CSC makes use of this right and helps to decrease the number of non-transparent valuations significantly. The standards of expert opinion reports and applied methodology are improving.

Frequent discussions between CSC and experts about CSC requirements and conceptions lead to the attempt to create content requirements and methodological directions for expert opinion reports and valuations of business enterprises and shares. At present CSC is preparing the respective methodology which will be the first regulatory achievement in business enterprise and share valuation in the Czech Republic. This methodology is being built on the principles of international business valuation standards set by institutions such as IVSC (International Valuation Standards Committee), ASA (American Society of Appraisers), TEGoVA (The European Group of Valuers' Association) and The Appraisal Foundation with the support of the academic and business appraisers' community.

Expert certification by these international institutions and professional associations is widely used as another form of ensuring compliance with certain valuation standards, particularly if the valuation is not reviewed by the CSC. ASA provides its members with several levels of certification; the highest degree is "Accredited Senior Appraiser". The certification requirements reflect the highest degree of accreditation. These requirements include the association's respective courses which total 120 hours with tests lasting 8 hours, the USPAP (Uniform Standards of Professional Appraisal Practice) course with 15 hours and finishing with another test and an ethics course also ending with a test, respective references, a college degree and five years' experience in this line of business.

Certification is also available in the Czech Republic. The Property Valuation Institute (Institut oceňování majetku - IOM) at the University of Economics in Prague (Vysoká škola ekonomická - VSE) is one example. Certification is not as popular in the Czech Republic as abroad, probably because of slow implementation of international valuation experience and methodology coming from long-term valuation history, particularly from Great Britain and the U.S. The application of international valuation standards to all kinds of property (business enterprise, intangible assets, real estate, machinery and equipment) and the introduction of the respective internationally recognized certification in the Czech Republic is what the Czech professional community and particularly their clients can hope for.

Jiří Kadrman
Senior Valuation Consultant
aacz@american-appraisal.com