Quarterly Valuation and Continuous Monitoring in Egypt

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Market movements occur irrespective of the calendar used for the financial reporting cycle. Interest rates may shift in between reporting dates, exchange rates can shift within a short while, market multiples can shift rapidly, and news about the entity itself might influence the expectations of the market participants until the next reporting date. On the other hand, the financial reporting framework requires that there are distinct dates of measurement to arrive at the carrying amount and fair value of the relevant asset or liability. It thus poses an important question to firms, investors, regulators, accountants, and valuers: Is quarterly valuation enough considering that the market keeps moving?

Quarterly valuation remains relevant, with formal valuation on the reporting date still integral to the process. It is more reasonable to raise the question about the possibility for an enterprise to use the previous valuations in absence of the system of monitoring assumptions on which they are based and evidence from the market. Therefore, the new concept cannot be regarded as the replacement of the periodic valuation by daily valuation, but rather as its combination.

Fair Value Is a Measurement at a Specific Date

Fair value is not supposed to be an absolute value that will forever stay the same until its next formal valuation. As per IFRS 13, fair value is a measure of the amount that would have been received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Therefore, fair value must be measured based on the factors prevailing on the measurement date.

The above difference is very important in terms of frequency of valuations carried out. For example, it would not necessarily be wrong for a valuation to have been done up until 30 June since market conditions may change in July. This would mean that the valuation carried out is in respect to the asset or liability at the time of 30 June. In case a significant event happens in July, it may be useful in future measurement dates or even in the event period.

Therefore, it is the role of the appraiser to assess whether information on any event is indicative of situations prevailing at the time of measurement or the occurrence of an event post-measurement date. A shift in the market after the measurement date is not indicative of wrong calculation of fair value at the earlier measurement date but could merely be a reflection of post-measurement market conditions.

Quarterly Valuation and Continuous Monitoring Are Not the Same Thing

However, it appears in the context of quarterly valuation that there is an impression that there are two alternatives only. Either there is valuation of the asset on quarterly basis or it needs to be valued continuously. In reality, there is a third choice as well, which involves keeping the formal valuation dates intact, and yet continuing evaluation of all those events that may have an effect on valuation continuously between those dates.

In other words, what this means is that although valuation as of 30 June remains the formal valuation on that date, it does not necessarily mean that the factors affecting valuation are not being evaluated in the months of July, August, and September. It is possible that if no event of material significance occurs, the previous decision still stands good.

The aim is therefore not to conduct many valuations merely to conduct them. Rather, the aim is to ensure that the valuations process continues to take into account the considerations which may impact on the significance of the previous valuations.

Why the Egyptian Market Makes Continuous Monitoring More Important

However, monitoring becomes even more critical in valuation in the case of Egypt, as there are a number of valuation inputs which change significantly even in the short run. This includes interest rates which affect the discount rates and the cost of financing; the rate of foreign exchange which affects companies that earn revenues in foreign currencies or import their inputs; the rate of inflation which will affect the operating margin as well as the replacement cost; and the yield on government bonds as well as the risks associated with them which will affect the cost of capital.

Examples of such inputs could be found in the 2026 monetary policies of the Central Bank of Egypt. While reducing interest rates by 100 basis points in February 2026, the CBE kept the rates at 19.00%, 20.00%, and 19.50% respectively for overnight deposits, overnight lending, and main operations until August.

Exchange rates may be just as important. A firm which is importing machinery and raw materials will definitely not feel the effect of a certain currency movement in the same way as another firm that earns money in foreign currency. Likewise, a real estate developer can be influenced by exchange rates in terms of construction expenses, while another firm may be influenced by its financial position.

The Egyptian Market Also Creates Data and Liquidity Challenges

However, it is not the only problem. The quality and availability of the data required for the valuations are just as important. In some Egyptian industries, there may be only a few comparable companies available on the stock exchange, or there may be no recent transaction in the market at all. Even though the fact that the entity being valued has a price available on the Egyptian Exchange does not necessarily imply that the price is orderly market price.

The valuation expert needs to analyze the trading frequency, trading volume, free float size, market liquidity, trading suspension, ownership concentration, abnormal transactions, and whether the price observed is from transactions between the market participants. Thinly traded assets may offer less persuasive evidence than the actively traded assets in the deep and liquid markets.

This is the case even where private transaction data are used in valuations. It is not always possible to get transaction multiples in public domain, and it is also possible that the transactions were done in a situation different from the subject company. As such, the presence of transaction multiple does not guarantee its use. In cases where there are no Egyptian comparables, it may be necessary to use companies in regional or international contexts. However, these comparables need to be adjusted.

Different Valuation Purposes Require Different Frameworks

Indeed, there are many aspects that make it impossible to simply reduce valuation monitoring to a single formula, but the first among those is the purpose of the valuation. Valuation for fair value accounting and reporting purposes differs from impairment testing, capital increase, statutory offer, related party transaction, contribution in kind, M&A, tax and litigation valuations.

For example, different standards of value, valuation premises, dates of measurement, units of account, the users of the valuation, applicable regulations, and procedures might vary depending on the purpose of the particular engagement. Thus, a valuation in connection with a transaction regulated by the FRA may imply certain requirements which may be absent in the case of a financial reporting valuation.

The significance of acknowledging the need to establish separate frameworks for valuing is especially critical in the Egyptian context, where there may exist more than one framework for the valuation professional to choose from.

The Income Approach

The Income Approach is highly sensitive to differences in reporting periods since the value of an organization is determined by its expected future economic benefits. Revenue growth, operating margin, capital expenditure, working capital, taxes, terminal growth rate, and discounting rate may all influence the outcome in case the discounted cash flow approach is applied.

Consider the case of an Egyptian real estate developer where the valuation using the DCF method has been completed at the end of June. In case the costs of construction increase more than assumed in the initial business plan, financing costs increase, selling prices change, or foreign exchange changes influence the price of imported construction material, then the initial assumptions of the valuation may not be consistent with the expectations of the market anymore.

The same applies to the situation where an industrial firm has exposure to foreign currency. For example, devaluation of the Egyptian pound might make imports more expensive while at the same time increasing the value of foreign currencies in EGP. It all will depend on whether or not the firm will be able to pass costs to the consumers.

The Market Approach

Market Approach seems to be more objective because it uses market data which is observable. But the accuracy of the valuation will depend on the accuracy and relevance of the data used.

If we are going to do a valuation of an Egyptian listed company using the market approach, the valuation expert can use any of the ratio’s EV/EBITDA, P/E etc. using comparable companies. In case there are any changes in the market valuations of those companies, the valuation of the subject company may also change even though the performance of the subject company does not change at all.

However, the valuation expert should identify whether the market data used is relevant or not. This is because when a company has less free float, low trading volume and frequent trading interruptions, then the valuation of the subject company using the quotation may not give accurate results.

Thus, apart from examining the observed multiple, the valuation expert should examine the economic comparability and reliability of the market data used. If the expert finds it necessary to use international or regional comparables, he or she will have to factor in differences in risk, inflation, currency, leverage, growth, and liquidity, among other considerations.

The Cost Approach

Whereas the Cost Approach may seem to be less prone to fluctuations of the market, it relies on the replacement or reproduction cost of an asset, which can differ greatly depending on the inflation rate, exchange rates, costs of construction materials, prices of imported equipment, technology, and economic obsolescence.

It is particularly important for industrial, hospital, hotel, infrastructural, and specialized assets in Egypt due to the fact that some part of such assets consists of imported equipment. Fluctuations of the exchange rates can result in a significant rise in the EGP replacement cost of the asset even without any change in the asset itself.

Rapid increases in construction materials and labor costs may influence the replacement cost of the building. The expert needs to check if the assumptions of the Cost Approach are still valid and no functional or economic obsolescence has occurred since the last valuation.

Fair Value and the Financial Statements

Valuation is especially critical when fair value measurement affects accounting. Based on the applicable accounting standards as well as the categorization of the asset or liability, changes in the fair value will impact the carrying amounts of the assets and liabilities and can be reflected in profit or loss, other comprehensive income, or equity.

With regard to the statutory financial statements in Egypt, the applicable framework here is the Egyptian Accounting Standards and not the IFRS Accounting Standards. Hence, IFRS 13 and IAS 34 apply only when preparing the financial statements under IFRS and not in cases where EAS is applied by the entity.

The significance of the above is that the accounting framework sets the guidelines as to how to record valuation changes. Consequently, the valuator should understand the accounting objective of the assignment without taking any responsibility for the accounting judgment of the management.

Interim Reporting Is Not Merely a Reuse of the Previous Valuation

One thing that is critical in interim accounting is the choice between doing a complete valuation revision and a mere repetition of the past valuation without reviewing. In circumstances where there is a need for an environmental assessment from an accounting viewpoint, the firm will have to undertake an assessment of whether it makes sense to do this based on the interim period information.

This can be done by adopting a proportional approach. The company can review the assumptions and market inputs, undertake sensitivity analysis and test the forecast against the actual performance. In cases where a significant change can be shown to have occurred, either a partial revaluation or total revaluation can be done.

Therefore, it is a matter of materiality and risk. For instance, where a financial instrument is liquid and quoted, the market reviews will need to be done frequently. On the other hand, where a business is specialized, a more proportional approach will be more suitable.

A Practical Valuation-Trigger Framework

The shift from periodic valuation towards continuous monitoring necessitates a comprehensive set of triggers. Currencies and inflation need to be taken into account when the movement of either of these has any effect on the company. Interest rate movements, spreads, and refinancing need to be taken into account when they have any effect on the cost of capital or the servicing of the company’s debts. Market multiple and liquidity should be taken into consideration when performing valuation using the Market Approach method.

There are also triggers that occur internally. These include better or worse performance than expected, changes to major contracts or customers, loss of a major supplier, any changes in the way that the business operates, capital expenditures, litigation, regulation changes, and changes in the competitive environment.

The reaction to a trigger must take into account its importance and type. Sometimes, what would be appropriate is to not perform any changes to the valuation, but instead just explain why that was done. In other cases, it may be enough to conduct a new sensitivity analysis. In some instances, a reassessment of certain assumptions, a roll forward, or even a full reassessment of the valuation may be necessary.

Technology Can Enable Continuous Monitoring, but It Does Not Replace Judgment

It is becoming increasingly possible to utilize technology in continuous monitoring of valuation. Information about financial markets, government bonds, currencies, multiples of the valuation of comparable companies, commodity prices and other valuation inputs could be monitored by using automated processes.

However, a good monitoring process needs more than just technology. It requires a company to have relevant data sources, mechanisms for evaluating completeness and accuracy of data, criteria for materiality, access control, model version history, overriding information and back-testing on regular basis.

AI may be used in doing research, collecting data, detecting anomalies and doing scenarios analysis. It also has some pitfalls of its own, such as sources of information may not be reliable, the data itself could be made up, there are issues of confidentiality, unexplained and unjustified assumptions and models.

That is why human element is necessary here. The goal is to leverage technology to make the analysis better without breaking any professional judgment or confidentiality.

The Role of the Valuation Professional

The expert’s scope of work has increased due to the rapidly changing markets and increasing complexity of the valuation issues. The expert is advised to start with the definition of valuation objective, standard of value, valuation premise, valuation date, unit of account, and users of the valuation. These considerations set the analytical context and provide the necessary guard against any misuse of the valuation outside the defined objective.

The expert should be critical of management’s estimates, rather than include them in a financial model. Past experience, market, industry, and company-specific circumstances should determine whether the revenue growth estimates, margins, capital expenditures, working capital requirements, and terminal value estimates are commercially reasonable. The expert should also take care of consistency in inflation rate, foreign exchange rate, cash flows, and discount rate and avoid double-counting of risks such as execution risk.

Where there is more than one valuation method available, the expert should choose and calibrate methods relevant for the valuation and reconciled value indications obtained using those methods. The scenarios and sensitivities analysis should be conducted in order to understand the impact of important assumptions on the valuation.

Ongoing monitoring of the valuation process does not delegate the responsibility of management to the valuation expert. Management is still responsible for its forecasts, accounting estimates, and the value recognition made in its financial statements. The valuation expert adds his/her expertise in the valuation of assets according to the scope of the engagement but does not take away management’s responsibility for the financial statements.

It is also important to mention the responsibility of the auditor who, in turn, has certain obligations when a valuation expert is involved in the process. These responsibilities include assessing the relevant accounting estimate and considering, as appropriate, the qualifications and objectivity of the specialist, as well as the information and process of valuation.

This differentiation of roles is especially important in case of regulatory and transactional valuations. Independence and possible conflicts of interests should be taken into account during the whole process.

The Skills Required from the Modern Valuation Professional

The modern valuation professional requires skills going beyond simple financial modeling. The valuation professional must have knowledge of Egyptian accounting standards, Financial Regulatory Authority, valuation standards, and any other regulatory requirements within that specific industry. Knowledge of the macroeconomic environment, sovereign risks, interest rates, foreign exchange rates, market liquidity, and economics of the particular industry is equally important.

Use of advanced analytics and automated valuation tools is highly valued, especially when a lot of market information must be analyzed on a continual basis outside of the reporting period. Scenarios, probabilistic models, model risk management, data governance, and cybersecurity are increasingly becoming integral parts of the valuation process.

Professional skepticism is just as important. Even the most advanced models cannot substitute poor-quality data or inappropriate assumptions. The valuation expert must be able to question projections and communicate uncertainty to the board, auditors, regulatory bodies, and other stakeholders. In the case of Egypt, communication of valuation results in Arabic and English could become an asset in some situations.

Beyond the Reporting Calendar

The future of valuation is unlikely, therefore, to be one where all assets are revalued formally on a daily basis. This will prove to be too costly and difficult as well as, in many instances, unnecessary. What is needed rather is that formal valuation continues to be done appropriately at measurement and reporting dates, while the key drivers of valuation continue to be monitored on a continuous basis.

It is especially important in Egypt, where different assets and industries can behave differently to the same macroeconomic event. A change in the exchange rate can affect foreign currency earnings positively but reduce the margins of an importer. A change in the interest rates can affect a highly leveraged real estate business negatively and have another effect on a bank. A change in market multiples can help the valuation of a company but not necessarily one which is thinly traded.

The process of valuation, on the other hand, must always remain dynamic but never mechanical. Changes in the economic environment surrounding the preparation of the valuation must be observed but changes in the valuation itself must depend on professional judgment.

Conclusion

The need for quarterly valuations is still valid; however, the need for systematic monitoring along with quarterly valuations is becoming increasingly hard to ignore. The purpose of systematic monitoring is not to substitute formal valuation dates and conduct a full valuation procedure every time something changes in the marketplace. Instead, the aim of such a monitoring procedure should be to make sure that the company will have the opportunity to react to any changes in assumptions and evidence used in the valuation.

The problem of continuous monitoring is especially valid for Egypt due to the influence of several factors; changes in interest rate, foreign exchange, inflation, yields of the government, sovereign risk, financing terms, market liquidity, and the availability of comparable companies and transactions on the process of valuations depending on the chosen approach (Income, Market, or Cost).

The first consideration when approaching financial reporting from an accounting point of view is the ability to differentiate the right accounting framework from the professional valuation guidelines, FRA, as well as from other industry-specific rules and regulations. When preparing for statutory reporting in Egypt, entities applying the Egyptian Accounting Standards should take into account the appropriate EAS provisions, whereas those following IFRS in the preparation of their financial statements must rely on the corresponding IFRS provisions.

The ultimate issue here is not whether the practice of quarterly valuation needs to disappear, but whether quarterly valuation by itself is enough. The ideal combination would be formal valuation done at the proper measurement date supplemented by monitoring of all the assumptions and business environment changes that might have a material effect on the value of the asset.

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