8
Valuation basis
8.1
The valuation of assets and liabilities should reflect their economic substance. A realistic valuation basis should be used taking into account the actual amounts and timings of cash flows under any projections used in the assessment.
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8.2
In carrying out a capital assessment, wherever possible the value of assets should be marked to market. Where marking to market is not possible, the capital assessment should use a method suitable for assessing the underlying economic benefit of holding each asset.
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8.3
The methods and assumptions used in valuing the liabilities should contain no explicit margins for risk, nor should the approach be optimistic. The valuation of liabilities should be consistent with the valuation of assets. To the extent the market price includes an implicit allowance for risk, this should be included within the valuation.
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8.4
The methodology used to place a value on an asset or a liability following a risk event should be consistent with the methodology used prior to the risk event.
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8.5
Approximate valuation methods may be used by the firm for minor lines of business or to capture less material types of risk. However, the firm should avoid methods which underestimate the risk in aggregate.
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8.6
The firm should carry out a broad reconciliation of key parts of any balance sheet used in the capital assessment with the corresponding entry from audited results where possible.
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