A markets and valuation concept defining how assets are priced and assessed using cash flows, risk measures, or relative benchmarks. It governs estimation of value, required return, and sensitivity to rate or spread changes across asset classes. It does not guarantee accuracy and depends on input quality, market liquidity, and the suitability of benchmarks and assumptions. It supports investment decisions and reporting by providing structured methods to quantify value and risk exposure. The concept is generally stable, though market structure and valuation conventions evolve over time.

Principle

Establish consistent, auditable, and governance-backed rules so that valuations are repeatable, transparent, and aligned with accounting standards and risk tolerances.

Demonstration

A bank's Valuation Policy specifies that marketable securities use quoted market prices (Level 1); thinly traded instruments use observable inputs with model calibration (Level 2); and complex derivatives use internally validated models with executive approval (Level 3).

Misapplication

Treating the policy as optional guidance and allowing ad hoc methods without documented approval, leading to inconsistent fair-value estimates and audit findings.

Consequence

When followed, the policy reduces valuation risk, improves comparability across periods and units, and supports reliable financial statements and regulatory submissions.

Reversal

A reversal would be an ad hoc valuation culture where methods, inputs, and approvals vary by individual analyst, producing non-reproducible and non-transparent values.

Boundary

Covers company-wide valuation governance and methods but excludes operational pricing for sales, which may follow commercial rather than accounting rules.

Semantic Tension

Tension exists between a prescriptive policy that ensures consistency and a principles-based policy that allows judgment for novel instruments; both aim for correct value but differ in rigidity.

Synthesis

A Valuation Policy formally codifies how to choose methods, inputs, and controls so that valuation outputs are governed, auditable, and consistent across instruments and reporting needs.