Since the proposed legislation of Extradition Bill in June 2019, large scale protests took place almost every month. The society has been largely divided into pro-government (“Blue”) and pro-protestors (“Yellow”) camps, politically and economically. Economic boycotts and physical damages are observed in certain so-called Blue stores, restaurants and shopping arcades whilst collaborated Yellow economic circles are developed among supporting merchants and consumers.
Economic damage assessment in business valuations
In the profession of business valuations, there is a specialty practice area in economic damage assessment. When alleged damage causing events, from natural disasters and accidents to physical destruction, fraud, bribery, or economic right infringement occurred, their economic impacts on the victims or related entities can be measured for various purpose. Generally, economic damage assessment reports may be used for transaction negotiations, arbitrations and litigations, liquidations as well as compensation claims.
Economic damage assessment in practice
The two common forms of economic damages are loss of profits (for certain time period) and asset value loss (including loss of business value). Depending on how long the damages is expected to last for, versus the time from the event to the assessment, among various factors, temporary impacts are usually measured by losses of profits whilst long-term or permanent effects are more often measured by losses of values.
Economic damages can be measured on contemporaneous or retrospective basis. A contemporaneous assessment is conducted based on information available at the time of the alleged damaging event only. A retrospective assessment would attempt to measure how much losses was caused by the event thereafter, such as reduction in actual subsequent income or decrease in asset prices.
Contemporaneous assessment
Common business valuation approaches, including income, market and cost approaches, are usually adopted for contemporaneous damage assessments, as business valuations are generally performed based on information available on the valuation date. Expected future cash flow with-or-without the alleged damages are discounted using income approach valuation and the value difference is considered as the expected damage. Price differentials of comparable prices of assets (including market multiples for equities) with-or-without the alleged damages are taken as losses under the market approach. The costs to replace or restore the assets into its unaffected form is applied in the cost approach valuation.
Retrospective assessment
Quantitative analysis can be applied in retrospective economic damage assessments. The financial performance (such as asset value or earnings) of a subject over a subsequent period is measured and compared against its peers. Subject to further analyses, any under-performance may be attributed to the alleged damaging event. Whilst this method tries to measure the residual income/value loss over time unexplained by market factors to the alleged damaging activities, regression analysis can also identify other relevant factors and estimates the income/value impacts from various identified factors to specify the economic effects from the alleged damages.
Causality considerations
Whilst valuations for financial reporting or transaction reference purposes are usually undertaken in accordance with governing financial reporting and valuation practice guidelines, economic damage assessment for dispute related cases should be in line with the legal point of view, especially on the causality relationship between the alleged damaging event identified and its economic consequences, as the overall economic impacts subsequent to the event may be resulted from one or more related or unrelated factors. Lawyer’s support on legal case references can also be very helpful. Due to the consequences from uses of such assessment reports, the analyses are often subject to severe scrutiny from the counter-party specialists.
Last but not least
Whilst economic damages to an asset or business can be ascertained professionally somehow, their impacts on the overall society are much more profound and persevering — if not fatal.
Note: This article describes how economic damages can be measured in valuation practices. It does not represent any opinion from IVL or the author on the current Hong Kong political or social status.
Jack Leung (Director), CFA, CVA, FRM, MPhil
T: (852) 2349 1698
E: jack@ivl.hk