Actuarial Reserves, Provisions and Contingent Liabilities in DCF Valuation
Actuarial Reserves, Provisions and Contingent Liabilities in DCF Valuation

Summary/Abstract: The paper presents a practical guidance for the treatment of employee benefits, provisions, and contingent liabilities in the DCF valuation models. Market practitioners often encounter difficulties while incorporating the figures of actuarial reserves and provisions, which are themselves a result of a projection, into the cash flow calculation. Although the concepts of employee benefits, provisions and contingent liabilities are clearly defined in both Polish and international accounting standards, their accordance with the logic and assumptions of the DCF valuation model poses some technical problems, which are confronted in the paper. Among other things, we address the issues related to actuarial reserves, which are often neglected when outlining a company’s capital structure and calculating the WACC. We propose a step-by-step algorithm allowing to transfer the accounting inputs into the DCF model, which may be of considerable interest to practicing valuators.

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