b'Strategic report Governance Financial statements2. Critical accounting judgements and key sources of estimation uncertaintyIn the application of the Groups accounting policies described in note 1 above, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.The Directors have made the following judgements and estimates, which have had the most significant effect on the carrying amounts of the assets and liabilities in these consolidated financial statements.Fair value measurements and valuation processesThe judgements required to determine the appropriate valuation methodology of unquoted equity investments means there is risk of a material adjustment to the carrying amounts of assets and liabilities. These judgements include a decision whether or not to impair or uplift investment valuations.The fair value of unlisted securities is established using the International Private Equity and Venture Capital Valuation Guidelines (IPEVCVG),as revised on 21 December 2018 and effective for accounting periods beginning after 1 January 2019.Investments are measured at fair value at each measurement date. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that a hypothetical transaction to sell an asset takes place in the principal market or, in its absence, the most advantageous market for the asset. For quoted investments, available market prices will be the exclusive basis for the measurement of fair value for identical instruments. For unquoted investments, the measurement of fair value requires the valuer to assume the underlying business or instrument is realised or sold at the measurement date, appropriately allocated to the various interests, regardless of whether the underlying business is prepared for sale or whether its shareholders intend to sell in the near future.In estimating fair value for an investment, the valuer should apply a methodology that is appropriate in light of the nature, facts and circumstances of the investment in the context of the total investment portfolio and should use reasonable current market data and inputs, combined with reasonable market participant assumptions.The price of recent investment can be used to estimate the enterprise value, before allocating to the various interests. The Group believes that this is still the most relevant technique to measure fair value for early-stage investments. However, it has also taken into consideration time elapsed, performance since and external market events to help inform its judgements. 0-6 months post last funding roundThe Group will apply the price of a recent investment for up to six months post the last funding round, subject to there being no material change to the investee companys prospects (which would include the prospects of drawing down the next tranche or raising the next round of funding). 7-18 months post last funding roundBeyond the six months point, the Group seeks assurance that the investee company is progressing against the development milestones which were set out in the initial assessment. Failing to hit milestones will not necessarily impact the valuationthis may simply be an indicator that incremental value will take longer to deliver, but the performance against milestones is assessed as an indicator of a potential change in value.The Group will be cautious about increasing the valuation of an early-stage investee company unless it is based on a new market price or maintainable revenues and/orearnings. 19+ months post last funding roundFrom this point onwards, the Group looks for additional support for the price of recent investment by calibrating back to that using a discounted cash flow (DCF) methodology. However, unless the investee company has become established with maintainable revenues and/or earnings and can be valued on an earnings basis, given the inherent risk in early-stage investing and the lack or reliability of using estimates of such metrics yet to be delivered a number of years into the future, the Group is unlikely to increase the fair value even if a DCF calculation suggests a higher value. Nevertheless, the DCF calculation helps support the proposed fair value at the valuation point.A key focus of the portfolio valuations as at 31 March 2020 was an assessment of the impact of the COVID-19 pandemic on each investee companys enterprise value, considering the performance before the outbreak of COVID-19, as well as the projected short-term impact on the ability to generate earnings and cash flows, and also the longer-term view of each investee companys ability to recover.The Group has applied a COVID-19 overlay (assessing some 13 criteria) to help ascertain the potential effects on each of the investee companies enterprise values. The overall reductions in prices of listed entities was used as a basis to determine a range of COVID-19 discounts between 25% and 100%. The methodology for determining the valuation of investments has been predominantly based on taking the enterprise value from the last funding round and then applying a COVID-19 discount where applicable. This assessment is based on Mercias knowledge of the investee companies and of the specific effects seen as relevant to each sector within which the investee companies operate. The Group then looked closer at each investee company to assess any mitigating factors (eg Mercias defensive investment structuring), comparable asset or sector performance to arrive at our valuation.Mercia Asset Management PLC 85Annual Report and Accounts 2020'