A Case on Wine Valuation
Reasons for investing in fine wine:
* As an investment in future drinking – buying young wines which will improve over time. * As a financial investment – buying wines with the sole intention of reselling them later for a profit. The global demand for fine wine has increased enormously over the last few decades. Wine as a financial asset outperformed benchmarks such as Dow Jones, FTSE 100 etc, and offered spectacular returns. It also offered stability against volatility of the Stock Market. Stake holders
The prices of wine are a key topic for market participants interested in valuation of wine funds. Dealers, restaurants and consumers interested in optimizing their wine purchases also show interest in accurate pricing mechanisms. Measuring performance of wine investment funds is also linked to remuneration and bonuses of managers, assessment of fair value of a share in the fund, and, more generally, accurate reporting to all stakeholders involved. As a closely related issue, regular re-valuation becomes an essential element of accurate valuation of a stock. Managers of wine funds are generally entrusted with these valuations. In this case, fair-value measurement is compulsory by law. In the next section we will discuss the available methods of valuation and also a newly emerging quantitative method aimed at meeting IFRS 13 compliance for fair valuation.
Transition from traditional valuation to IFRS 13 and wine funds versus other funds
Traditional valuation of physical assets by independent appraisers is slowly rendered obsolete by increasing access to data and automation capabilities. Furthermore, the growing level of stocks held by wine funds makes a regular very difficult to achieve. As the ‘manual’ evaluation gradually became difficult, new methods emerged, and as a consequence, the adoption of IFRS 13 (effective since January 2013) by regulated wine funds requires significant changes to traditional procedures for fair value determination. Unlike stocks and bonds, a wine bottle does not provide any coupon or dividend, and unlike other unconventional assets such as art that perpetually yield aesthetic dividends, wine cannot be consumed without destroying its value. For the same reason, cash-flows cannot be obtained from renting, or leasing bottles of wine, so that any type of net-present-value valuation cannot be applied. This research addresses the question of valuation of wine in the context of wine funds valued in going-concern and that are subject to IAS-IFRS regulation.
1. How should wine investment funds account for their holdings?
Current environment and methods presently used by some wine funds and their short comings:
Before arriving at the suggested valuation methodology for wine investment funds, it is imperative to have a look at some of the common valuation methodology keeping in mind that since 2005, compliance with IAS-IFRS is compulsory for all investment vehicles quoted on European stock exchanges, including wine funds.
I. Valuation system based on list prices – List prices are also referred as offer prices stated by merchants. This may over value the stock since the merchants may offer to sell at a much higher level than the market can realize or tolerate. At the same time, when these merchants were to buy the stock, they would bid at a much lower level for profit gains.
II. Pricing as per auction houses – these prices include a high rate of commission (ranging from 10 to 20%) thereby overvaluing the actual cost of the portfolio. Moreover auctions are not a daily or regular phenomenon, applicable largely to less frequently traded wines, and may not represent the regular fine wine portfolio in true sense.
III. Average of dealers & auction prices – Valuation is based on some average of the prices from wine merchants and from leading auction houses. This...
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