International Valuation Standards
2
International Valuation Standards 2
International Valuation Standards
International Valuation Standards Council
United Kingdom
Email c @ivscorg Web wwwivscorg
IVSC Cover FPLayout 1 01072011 1314 Page 1
1 King Street London EC2V 8AU
ontact
017
017International Valuation
Standards
2017
International Valuation Standards CouncilCopyright © 2017 International Valuation Standards Council
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Council
Please address publication and copyright matters to
International Valuation Standards Council 1 King Street LONDON EC2V 8AU
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ISBN 9780993151309
The International Valuation Standards Council the authors and the publishers do not accept
responsibility for loss caused to any person who acts or refrains from acting in reliance on
the material in this publication whether such loss is caused by negligence or otherwise
Typeset and printed by Page Bros NorwichIntroduction
iii
Contents
Introduction
1
Glossary
3
IVS Framework 6 General Standards
IVS 101 Scope of Work
9
IVS 102 Investigations and Compliance
12
IVS 103 Reporting
14
IVS 104 Bases of Value
16
IVS 105 Valuation Approaches and Methods
29
Asset Standards
IVS 200 Business and Business Interests
49
IVS 210 Intangible Assets
57
IVS 300 Plant and Equipment
74
IVS 400 Real Property Interests
81
IVS 410 Development Property

88
IVS 500 Financial Instruments
99
Index
108Introduction
1
Introduction
The International Valuation Standards Council (IVSC) is an independent

notforprofit organisation committed to advancing quality in the valuation profession Our primary objective is to build confidence and public trust in
valuation by producing standards and securing their universal adoption and implementation for the valuation of
assets
across the world We believe that
International Valuation Standards (IVS) are a fundamental part of the financial system along with high levels of professionalism in applying them
Valuations are widely used and relied upon in financial and other markets whether for inclusion in financial statements for regulatory compliance or to support
secured lending and transactional activity The International Valuation Standards (IVS) are standards for undertaking valuation assignments using generally recognised concepts and principles that promote transparency and consistency in valuation practice The IVSC also promotes leading practice approaches for the
conduct and competency of professional valuers The IVSC Standards Board is the body responsible for setting the IVS The Board has autonomy in the development of its agenda and approval of its publications
In developing the IVS the Board •
follows established due process in the development of any new standard
including consultation with stakeholders (valuers users of valuation services regulators valuation professional organisations etc) and public exposure of all
new standards or material alterations to existing standards
•
liaises with other bodies that have a standardsetting function in the

financial markets
•
conducts outreach activities including roundtable discussions with invited
constituents and targeted discussions with specific users or user groups
The objective of the IVS is to increase the confidence and trust of users of valuation services by establishing transparent and consistent valuation practices
A standard will do one or more of the following •
identify or develop globally accepted principles and definitions
•
identify and promulgate considerations for the undertaking of valuation
assignments and the reporting of valuations
•
identify specific matters that require consideration and methods commonly used
for valuing different types of
assets
or liabilitiesInternational Valuation Standards
Introduction
2
The IVS consist of mandatory requirements that must be followed in order to
state that a valuation was performed in compliance with the IVS Certain aspects
of the standards do not direct or mandate any particular course of action
but provide fundamental principles and concepts that must be considered in
undertaking a valuation
The IVS are arranged as follows
The IVS Framework
This serves as a preamble to the IVS The IVS Framework consists of general
principles for valuers following the IVS regarding objectivity judgement
competence and acceptable departures from the IVS
IVS General Standards
These set forth requirements for the conduct of all valuation assignments including
establishing the terms of a valuation engagement bases of value valuation
approaches and methods and reporting They are designed to be applicable to
valuations of all types of assets and for any valuation purpose
IVS Asset Standards
The Asset Standards include requirements related to specific types of assets
These requirements must be followed in conjunction with the General Standards
when performing a valuation of a specific asset type The Asset Standards include
certain background information on the characteristics of each asset type that
influence value and additional assetspecific requirements on common valuation
approaches and methods used
What is in this Book
This book includes the IVS Framework the IVS General Standards and the IVS
Asset Standards approved by the IVSC Standards Board on 15 December 2016
with an effective date of 1 July 2017 Early adoption of these standards is allowed
Future Changes to these Standards
The IVSC Standards Board intends to continuously review the IVS and update or
clarify the standards as needed to meet stakeholder and market needs The Board
has continuing projects that may result in additional standards being introduced or
amendments being made to the standards in this publication at any time News on
current projects and any impending or approved changes can be found on the IVSC
website at wwwivscorg
 Glossary
Glossary
3
Glossary
10 Overview of Glossary
101 This glossary defines certain terms used in the International Valuation
Standards
102 This glossary does not attempt to define basic valuation accounting or
finance terms as valuers are assumed to have an understanding of such
terms (see definition of valuer)
20 Defined Terms
201 Asset or Assets
To assist in the readability of the standards and to avoid repetition the
words asset and assets refer generally to items that might be subject to
a valuation engagement Unless otherwise specified in the standard these
terms can be considered to mean asset group of assets liability group of
liabilities or group of assets and liabilities
202 Client
The word client refers to the person persons or entity for whom the
valuation is performed This may include external clients (ie when a valuer
is engaged by a thirdparty client) as well as internal clients (ie valuations
performed for an employer)
203 Jurisdiction
The word jurisdiction refers to the legal and regulatory environment in
which a valuation engagement is performed This generally includes laws
and regulations set by governments (eg country state and municipal) and
depending on the purpose rules set by certain regulators (eg banking
authorities and securities regulators)
204 May
The word may describes actions and procedures that valuers have
a responsibility to consider Matters described in this fashion require
the valuer’s attention and understanding How and whether the valuer
implements these matters in the valuation engagement will depend on the
exercise of professional judgement in the circumstances consistent with the
objectives of the standards
205 Must
The word must indicates an unconditional responsibility The valuer must
fulfill responsibilities of this type in all cases in which the circumstances exist
to which the requirement applies International Valuation Standards
Glossary
4
206 Participant
The word participant refers to the relevant participants pursuant to the
basis (or bases) of value used in a valuation engagement (see IVS 104
Bases of Value) Different bases of value require valuers to consider
different perspectives such as those of market participants (eg Market
Value IFRS Fair Value) or a particular owner or prospective buyer (eg
Investment Value)
207 Purpose
The word purpose refers to the reason(s) a valuation is performed
Common purposes include (but are not limited to) financial reporting tax
reporting litigation support transaction support and to support secured
lending decisions
208 Should
The word should indicates responsibilities that are presumptively
mandatory The valuer must comply with requirements of this type unless
the valuer demonstrates that alternative actions which were followed under
the circumstances were sufficient to achieve the objectives of the standards
In the rare circumstances in which the valuer believes the objectives of the
standard can be met by alternative means the valuer must document why
the indicated action was not deemed to be necessary andor appropriate
If a standard provides that the valuer should consider an action or
procedure consideration of the action or procedure is presumptively
mandatory while the action or procedure is not
209 Significant andor Material
Assessing significance and materiality require professional judgement
However that judgement should be made in the following context
• Aspects of a valuation (including inputs assumptions special
assumptions and methods and approaches applied) are considered
to be significantmaterial if their application andor impact on the
valuation could reasonably be expected to influence the economic or
other decisions of users of the valuation and judgments about materiality
are made in light of the overall valuation engagement and are affected by
the size or nature of the subject asset
• As used in these standards materialmateriality refers to materiality
to the valuation engagement which may be different from materiality
considerations for other purposes such as financial statements and
their audits
2010 Subject or Subject Asset
These terms refer to the asset(s) valued in a particular valuation
engagementGlossary
Glossary
5
2011 Valuation Purpose or Purpose of Valuation
See Purpose
2012 Valuation Reviewer
A valuation reviewer is a professional valuer engaged to review the work of
another valuer As part of a valuation review that professional may perform
certain valuation procedures andor provide an opinion of value
2013 Valuer
A valuer is an individual group of individuals or a firm who possesses the
necessary qualifications ability and experience to execute a valuation in an
objective unbiased and competent manner In some jurisdictions licensing
is required before one can act as a valuer
2014 Weight
The word weight refers to the amount of reliance placed on a particular
indication of value in reaching a conclusion of value (eg when a single
method is used it is afforded 100 weight)
2015 Weighting
The word weighting refers to the process of analysing and reconciling
differing indications of values typically from different methods andor
approaches This process does not include the averaging of valuations
which is not acceptable
 International Valuation Standards
IVS Framework
6
IVS Framework
Contents Paragraphs
Compliance with Standards 10
Assets and Liabilities 20
Valuer 30
Objectivity 40
Competence 50
Departures 60
10 Compliance with Standards
101 When a statement is made that a valuation will be or has been undertaken
in accordance with the IVS it is implicit that the valuation has been prepared
in compliance with all relevant standards issued by the IVSC
20 Assets and Liabilities
201 The standards can be applied to the valuation of both assets and liabilities
To assist the legibility of these standards the words asset or assets have
been defined to include liability or liabilities and groups of assets liabilities
or assets and liabilities except where it is expressly stated otherwise or is
clear from the context that liabilities are excluded
30 Valuer
301 Valuer has been defined as an individual group of individuals or a firm
possessing the necessary qualifications ability and experience to undertake
a valuation in an objective unbiased and competent manner In some
jurisdictions licensing is required before one can act as a valuer Because
a valuation reviewer must also be a valuer to assist with the legibility of
these standards the term valuer includes valuation reviewers except where
it is expressly stated otherwise or is clear from the context that valuation
reviewers are excluded
40 Objectivity
401 The process of valuation requires the valuer to make impartial judgements
as to the reliability of inputs and assumptions For a valuation to be credible
it is important that those judgements are made in a way that promotes
transparency and minimises the influence of any subjective factors on the
process Judgement used in a valuation must be applied objectively to avoid
biased analyses opinions and conclusions IVS Framework
IVS Framework
7
402 It is a fundamental expectation that when applying these standards
appropriate controls and procedures are in place to ensure the necessary
degree of objectivity in the valuation process so that the results are free from
bias The IVSC Code of Ethical Principles for Professional Valuers provides
an example of an appropriate framework for professional conduct
50 Competence
501 Valuations must be prepared by an individual or firm having the appropriate
technical skills experience and knowledge of the subject of the valuation
the market(s) in which it trades and the purpose of the valuation
502 If a valuer does not possess all of the necessary technical skills experience
and knowledge to perform all aspects of a valuation it is acceptable for the
valuer to seek assistance from specialists in certain aspects of the overall
assignment providing this is disclosed in the scope of work (see IVS 101
Scope of Work) and the report (see IVS 103 Reporting)
503 The valuer must have the technical skills experience and knowledge to
understand interpret and utilise the work of any specialists
60 Departures
601 A departure is a circumstance where specific legislative regulatory or
other authoritative requirements must be followed that differ from some
of the requirements within IVS Departures are mandatory in that a
valuer must comply with legislative regulatory and other authoritative
requirements appropriate to the purpose and jurisdiction of the valuation to
be in compliance with IVS A valuer may still state that the valuation was
performed in accordance with IVS when there are departures in
these circumstances
602 The requirement to depart from IVS pursuant to legislative regulatory
or other authoritative requirements takes precedence over all other IVS
requirements
603 As required by IVS 101 Scope of Work para 203 (n) and IVS 103 Reporting
para 102 the nature of any departures must be identified (for example
identifying that the valuation was performed in accordance with IVS and
local tax regulations) If there are any departures that significantly affect the
nature of the procedures performed inputs and assumptions used andor
valuation conclusion(s) a valuer must also disclose the specific legislative
regulatory or other authoritative requirements and the significant ways in
which they differ from the requirements of IVS (for example identifying
that the relevant jurisdiction requires the use of only a market approach
in a circumstance where IVS would indicate that the income approach
should be used)
604 Departure deviations from IVS that are not the result of legislative regulatory
or other authoritative requirements are not permitted in valuations performed
in accordance with IVS
 8General Standards
General Standards – IVS 101 Scope of Work
9
General Standards 
IVS 101 Scope of Work
Contents Paragraphs
Introduction 10
General Requirements 20
Changes to Scope of Work 30
10 Introduction
101 A scope of work (sometimes referred to as terms of engagement) describes
the fundamental terms of a valuation engagement such as the asset(s)
being valued the purpose of the valuation and the responsibilities of parties
involved in the valuation
102 This standard is intended to apply to a wide spectrum of valuation
assignments including
(a) valuations performed by valuers for their own employers (inhouse
valuations)
(b) valuations performed by valuers for clients other than their employers
(thirdparty valuations) and
(c) valuation reviews where the reviewer may not be required to provide their
own opinion of value
20 General Requirements
201 All valuation advice and the work undertaken in its preparation must be
appropriate for the intended purpose
202 A valuer must ensure that the intended recipient(s) of the valuation advice
understand(s) what is to be provided and any limitations on its use before it
is finalised and reported
203 A valuer must communicate the scope of work to its client prior to completion
of the assignment including the following
(a) Identity of the valuer The valuer may be an individual group of
individuals or a firm If the valuer has any material connection or International Valuation Standards
General Standards – IVS 101 Scope of Work
10
involvement with the subject asset or the other parties to the valuation
assignment or if there are any other factors that could limit the valuer’s
ability to provide an unbiased and objective valuation such factors
must be disclosed at the outset If such disclosure does not take place
the valuation assignment is not in compliance with IVS If the valuer
needs to seek material assistance from others in relation to any aspect
of the assignment the nature of such assistance and the extent of
reliance must be made clear
(b) Identity of the client(s) (if any) Confirmation of those for whom the
valuation assignment is being produced is important when determining
the form and content of the report to ensure that it contains information
relevant to their needs
(c) Identity of other intended users (if any) It is important to understand
whether there are any other intended users of the valuation report their
identity and their needs to ensure that the report content and format
meets those users’ needs
(d) Asset(s) being valued The subject asset in the valuation assignment
must be clearly identified
(e) The valuation currency The currency for the valuation and the final
valuation report or conclusion must be established For example a
valuation might be prepared in euros or US dollars This requirement
is particularly important for valuation assignments involving assets in
multiple countries andor cash flows in multiple currencies
(f) Purpose of the valuation The purpose for which the valuation
assignment is being prepared must be clearly identified as it is important
that valuation advice is not used out of context or for purposes for which
it is not intended The purpose of the valuation will also typically
influence or determine the basisbases of value to be used
(g) Basisbases of value used As required by IVS 104 Bases of Value the
valuation basis must be appropriate for the purpose of the valuation The
source of the definition of any basis of value used must be cited or the
basis explained This requirement is not applicable to a valuation review
where no opinion of value is to be provided and the reviewer is not
required to comment on the basis of value used
(h) Valuation date The valuation date must be stated If the valuation date
is different from the date on which the valuation report is issued or the
date on which investigations are to be undertaken or completed then
where appropriate these dates should be clearly distinguished
(i) The nature and extent of the valuer’s work and any limitations thereon
Any limitations or restrictions on the inspection enquiry andor analysis
in the valuation assignment must be identified (see IVS Framework
paras 601604) If relevant information is not available because the
conditions of the assignment restrict the investigation these restrictions
and any necessary assumptions or special assumptions (see IVS 104
Bases of Value paras 20012005) made as a result of the restriction
must be identifiedGeneral Standards
General Standards – IVS 102 Investigations and Compliance
11
(j) The nature and sources of information upon which the valuer relies The
nature and source of any relevant information that is to be relied upon
and the extent of any verification to be undertaken during the valuation
process must be identified
(k) Significant assumptions andor special assumptions All significant
assumptions and special assumptions that are to be made in the conduct
and reporting of the valuation assignment must be identified
(l) The type of report being prepared The format of the report that is how
the valuation will be communicated must be described
(m) Restrictions on use distribution and publication of the report Where it is
necessary or desirable to restrict the use of the valuation or those relying
on it the intended users and restrictions must be clearly communicated
(n) That the valuation will be prepared in compliance with IVS and that the
valuer will assess the appropriateness of all significant inputs The
nature of any departures must be explained for example identifying
that the valuation was performed in accordance with IVS and local tax
regulations See IVS Framework paras 601604 relating to departures
204 Wherever possible the scope of work should be established and agreed
between parties to a valuation assignment prior to the valuer beginning
work However in certain circumstances the scope of a valuation
engagement may not be clear at the start of that engagement In such
cases as the scope becomes clear valuers must communicate and agree
the scope of work to their client
205 A written scope of work may not be necessary However since valuers are
responsible for communicating the scope of work to their client a written
scope of work should be prepared
206 Some aspects of the scope of work may be addressed in documents such
as standing engagement instructions master services agreements or a
company’s internal policies and procedures
30 Changes to Scope of Work
301 Some of the items in para 203 may not be determinable until the valuation
assignment is in progress or changes to the scope may become necessary
during the course of the assignment due to additional information becoming
available or matters emerging that require further investigation As such
whilst the scope of work may be established at the outset it may also be
established over time throughout the course of the assignment
302 In valuation assignments where the scope of work changes over time
the items in para 203 and any changes made over time must be
communicated to the client before the assignment is completed and the
valuation report is issued
 International Valuation Standards
General Standards – IVS 102 Investigations and Compliance
12
IVS 102 Investigations and Compliance
Contents Paragraphs
General Principle 10
Investigations 20
Valuation Record 30
Compliance with Other Standards 40
10 General Principle
101 To be compliant with IVS valuation assignments including valuation
reviews must be conducted in accordance with all of the principles set out
in IVS that are appropriate for the purpose and the terms and conditions set
out in the scope of work
20 Investigations
201 Investigations made during the course of a valuation assignment must be
appropriate for the purpose of the valuation assignment and the basis(es) of
value References to a valuation or valuation assignment in this standard
include a valuation review
202 Sufficient evidence must be assembled by means such as inspection
inquiry computation and analysis to ensure that the valuation is properly
supported When determining the extent of evidence necessary
professional judgement is required to ensure the information to be obtained
is adequate for the purpose of the valuation
203 Limits may be agreed on the extent of the valuer’s investigations Any such
limits must be noted in the scope of work However IVS 105 Valuation
Approaches and Methods para 107 requires valuers to perform sufficient
analysis to evaluate all inputs and assumptions and their appropriateness
for the valuation purpose If limitations on investigations are so substantial
that the valuer cannot sufficiently evaluate the inputs and assumptions
the valuation engagement must not state that it has been performed in
compliance with IVS
204 When a valuation assignment involves reliance on information supplied by
a party other than the valuer consideration should be given as to whether
the information is credible or that the information may otherwise be relied
upon without adversely affecting the credibility of the valuation opinion
Significant inputs provided to the valuer (eg by managementowners) may
require consideration investigation andor corroboration In cases where
credibility or reliability of information supplied cannot be supported such
information should not be used
205 In considering the credibility and reliability of information provided valuers
should consider matters such as
(a) the purpose of the valuation
(b) the significance of the information to the valuation conclusionGeneral Standards
General Standards – IVS 102 Investigations and Compliance
13
(c) the expertise of the source in relation to the subject matter and
(d) whether the source is independent of either the subject asset andor the
recipient of the valuation (see IVS 101 Scope of Work paras 203 (a))
206 The purpose of the valuation the basis of value the extent and limits on the
investigations and any sources of information that may be relied upon are
part of the valuation assignment’s scope of work that must be communicated
to all parties to the valuation assignment (see IVS 101 Scope of Work)
207 If during the course of an assignment it becomes clear that the
investigations included in the scope of work will not result in a credible
valuation or information to be provided by third parties is either unavailable
or inadequate the valuation assignment will not comply with IVS
30 Valuation Record
301 A record must be kept of the work performed during the valuation process
and the basis for the work on which the conclusions were reached for a
reasonable period after completion of the assignment having regard to any
relevant statutory legal or regulatory requirements Subject to any such
requirements this record should include the key inputs all calculations
investigations and analyses relevant to the final conclusion and a copy of
any draft or final report(s) provided to the client
40 Compliance with Other Standards
401 As noted in the IVS Framework when statutory legal regulatory or other
authoritative requirements must be followed that differ from some of the
requirements within IVS a valuer must follow the statutory legal regulatory
or other authoritative requirements (called a departure) Such a valuation
has still been performed in overall compliance with IVS
402 Most other sets of requirements such as those written by Valuation
Professional Organisations other professional bodies or firms’ internal
policies and procedures will not contradict IVS and instead typically
impose additional requirements on valuers Such standards may be
followed in addition to IVS without being seen as departures as long as all
of the requirements in IVS are fulfilled
 International Valuation Standards
General Standards – IVS 103 Reporting
14
IVS 103 Reporting
Contents Paragraphs
Introduction 10
General Requirements 20
Valuation Records 30
Valuation Review Reports 40
10 Introduction
101 It is essential that the valuation report communicates the information
necessary for proper understanding of the valuation or valuation review
A report must provide the intended users with a clear understanding of
the valuation
102 To provide useful information the report must set out a clear and accurate
description of the scope of the assignment its purpose and intended use
(including any limitations on that use) and disclosure of any assumptions
special assumptions (IVS 104 Bases of Value para 2004) significant
uncertainty or limiting conditions that directly affect the valuation
103 This standard applies to all valuation reports or reports on the outcome of a
valuation review which may range from comprehensive narrative reports to
abbreviated summary reports
104 For certain asset classes there may be variations from these standards
or additional requirements to be reported upon These are found in the
relevant IVS Asset Standards
20 General Requirements
201 The purpose of the valuation the complexity of the asset being valued and
the users’ requirements will determine the level of detail appropriate to the
valuation report The format of the report should be agreed with all parties
as part of establishing a scope of work (see IVS 101 Scope of Work)
202 Compliance with this standard does not require a particular form or format
of report however the report must be sufficient to communicate to the
intended users the scope of the valuation assignment the work performed
and the conclusions reached
203 The report should also be sufficient for an appropriately experienced
valuation professional with no prior involvement with the valuation
engagement to review the report and understand the items in paras 301
and 401 as applicableGeneral Standards
General Standards – IVS 103 Reporting
15
30 Valuation Reports
301 Where the report is the result of an assignment involving the valuation of an
asset or assets the report must convey the following at a minimum
(a) the scope of the work performed including the elements noted in
para 203 of IVS 101 Scope of Work to the extent that each is applicable
to the assignment
(b) the approach or approaches adopted
(c) the method or methods applied
(d) the key inputs used
(e) the assumptions made
(f) the conclusion(s) of value and principal reasons for any conclusions
reached and
(g) the date of the report (which may differ from the valuation date)
302 Some of the above requirements may be explicitly included in a report
or incorporated into a report through reference to other documents
(engagement letters scope of work documents internal policies and
procedures etc)
40 Valuation Review Reports
401 Where the report is the result of a valuation review the report must convey
the following at a minimum
(a) the scope of the review performed including the elements noted in
para 203 of IVS 101 Scope of Work to the extent each is applicable to
the assignment
(b) the valuation report being reviewed and the inputs and assumptions
upon which that valuation was based
(c) the reviewer’s conclusions about the work under review including
supporting reasons and
(d) the date of the report (which may differ from the valuation date)
402 Some of the above requirements may be explicitly included in a report
or incorporated into a report through reference to other documents (eg
engagement letters scope of work documents internal policies and
procedures etc)
 International Valuation Standards
General Standards – IVS 104 Bases of Value
16
IVS 104 Bases of Value
Contents Paragraphs
Introduction 10
Bases of Value 20
IVSDefined Basis of Value – Market Value 30
IVSDefined Basis of Value – Market Rent 40
IVSDefined Basis of Value – Equitable Value 50
IVSDefined Basis of Value – Investment ValueWorth 60
IVSDefined Basis of Value – Synergistic Value 70
IVSDefined Basis of Value – Liquidation Value 80
Other Basis of Value – Fair Value
(International Financial Reporting Standards) 90
Other Basis of Value – Fair Market Value
(Organisation for Economic Cooperation and Development (OECD)) 100
Other Basis of Value – Fair Market Value
(United States Internal Revenue Service) 110
Other Basis of Value – Fair Value (LegalStatutory)
in different jurisdictions 120
Premise of ValueAssumed Use 130
Premise of Value – Highest and Best Use 140
Premise of Value – Current UseExisting Use 150
Premise of Value – Orderly Liquidation 160
Premise of Value – Forced Sale 170
EntitySpecific Factors 180
Synergies 190
Assumptions and Special Assumptions 200
Transaction Costs 210
Compliance with this mandatory standard requires a valuer to select
the appropriate basis (or bases) of value and follow all applicable
requirements associated with that basis of value whether those
requirements are included as part of this standard (for IVSdefined
bases of value) or not (for nonIVSdefined bases of value)
10 Introduction
101 Bases of value (sometimes called standards of value) describe the
fundamental premises on which the reported values will be based It is
critical that the basis (or bases) of value be appropriate to the terms and
purpose of the valuation assignment as a basis of value may influence or
dictate a valuer’s selection of methods inputs and assumptions and the
ultimate opinion of value
102 A valuer may be required to use bases of value that are defined by statute
regulation private contract or other document Such bases have to be
interpreted and applied accordinglyGeneral Standards
General Standards – IVS 104 Bases of Value
17
103 While there are many different bases of value used in valuations most have
certain common elements an assumed transaction an assumed date of the
transaction and the assumed parties to the transaction
104 Depending on the basis of value the assumed transaction could take a
number of forms
(a) a hypothetical transaction
(b) an actual transaction
(c) a purchase (or entry) transaction
(d) a sale (or exit) transaction andor
(e) a transaction in a particular or hypothetical market with
specified characteristics
105 The assumed date of a transaction will influence what information and
data a valuer consider in a valuation Most bases of value prohibit the
consideration of information or market sentiment that would not be known or
knowable with reasonable due diligence on the measurementvaluation date
by participants
106 Most bases of value reflect assumptions concerning the parties to a
transaction and provide a certain level of description of the parties In
respect to these parties they could include one or more actual or assumed
characteristics such as
(a) hypothetical
(b) known or specific parties
(c) members of an identifieddescribed group of potential parties
(d) whether the parties are subject to particular conditions or motivations at
the assumed date (eg duress) andor
(e) an assumed knowledge level
20 Bases of Value
201 In addition to the IVSdefined bases of value listed below the IVS have
also provided a nonexhaustive list of other nonIVSdefined bases of value
prescribed by individual jurisdictional law or those recognised and adopted
by international agreement
(a) IVSdefined bases of value
1 Market Value (section 30)
2 Market Rent (section 40)
3 Equitable Value (section 50)
4 Investment ValueWorth (section 60)
5 Synergistic Value (section 70) and
6 Liquidation Value (section 80)International Valuation Standards
General Standards – IVS 104 Bases of Value
18
(b) Other bases of value (nonexhaustive list)
1 Fair Value (International Financial Reporting Standards) (section 90)
2 Fair Market Value (Organisation for Economic Cooperation and
Development) (section 100)
3 Fair Market Value (United States Internal Revenue Service)
(section 110) and
4 Fair Value (LegalStatutory) (section 120)
a the Model Business Corporation Act and
b Canadian case law (Manning v Harris Steel Group Inc)
202 Valuers must choose the relevant basis (or bases) of value according to
the terms and purpose of the valuation assignment The valuer’s choice
of a basis (or bases) of value should consider instructions and input
received from the client andor its representatives However regardless
of instructions and input provided to the valuer the valuer should not use a
basis (or bases) of value that is inappropriate for the intended purpose of
the valuation (for example if instructed to use an IVSdefined basis of value
for financial reporting purposes under IFRS compliance with IVS may
require the valuer to use a basis of value that is not defined or mentioned
in the IVS)
203 In accordance with IVS 101 Scope of Work the basis of value must be
appropriate for the purpose and the source of the definition of any basis of
value used must be cited or the basis explained
204 Valuers are responsible for understanding the regulation case law and other
interpretive guidance related to all bases of value used
205 The bases of value illustrated in sections 90120 of this standard are defined
by organisations other than the IVSC and the onus is on the valuer to ensure
they are using the relevant definition
30 IVSDefined Basis of Value – Market Value
301 Market Value is the estimated amount for which an asset or liability should
exchange on the valuation date between a willing buyer and a willing seller
in an arm’s length transaction after proper marketing and where the parties
had each acted knowledgeably prudently and without compulsion
302 The definition of Market Value must be applied in accordance with the
following conceptual framework
(a) The estimated amount refers to a price expressed in terms of money
payable for the asset in an arm’s length market transaction Market
Value is the most probable price reasonably obtainable in the market on
the valuation date in keeping with the market value definition It
is the best price reasonably obtainable by the seller and the most
advantageous price reasonably obtainable by the buyer This estimate
specifically excludes an estimated price inflated or deflated by special
terms or circumstances such as atypical financing sale and leaseback
arrangements special considerations or concessions granted by anyone
General Standards – IVS 104
Bases of ValueGeneral Standards
General Standards – IVS 104 Bases of Value
19
associated with the sale or any element of value available only to a
specific owner or purchaser
(b) An asset or liability should exchange refers to the fact that the value
of an asset or liability is an estimated amount rather than a
predetermined amount or actual sale price It is the price in a transaction
that meets all the elements of the Market Value definition at the
valuation date
(c) On the valuation date requires that the value is timespecific as of
a given date Because markets and market conditions may change
the estimated value may be incorrect or inappropriate at another time
The valuation amount will reflect the market state and circumstances as
at the valuation date not those at any other date
(d) Between a willing buyer refers to one who is motivated but not
compelled to buy This buyer is neither over eager nor determined to
buy at any price This buyer is also one who purchases in accordance
with the realities of the current market and with current market
expectations rather than in relation to an imaginary or hypothetical
market that cannot be demonstrated or anticipated to exist The
assumed buyer would not pay a higher price than the market requires
The present owner is included among those who constitute the market
(e) And a willing seller is neither an over eager nor a forced seller prepared
to sell at any price nor one prepared to hold out for a price not
considered reasonable in the current market The willing seller is
motivated to sell the asset at market terms for the best price attainable
in the open market after proper marketing whatever that price may
be The factual circumstances of the actual owner are not a part of this
consideration because the willing seller is a hypothetical owner
(f) In an arm’s length transaction is one between parties who do not have
a particular or special relationship eg parent and subsidiary companies
or landlord and tenant that may make the price level uncharacteristic
of the market or inflated The Market Value transaction is presumed to
be between unrelated parties each acting independently
(g) After proper marketing means that the asset has been exposed to the
market in the most appropriate manner to effect its disposal at the best
price reasonably obtainable in accordance with the Market Value
definition The method of sale is deemed to be that most appropriate
to obtain the best price in the market to which the seller has access The
length of exposure time is not a fixed period but will vary according to the
type of asset and market conditions The only criterion is that there must
have been sufficient time to allow the asset to be brought to the attention
of an adequate number of market participants The exposure period
occurs prior to the valuation date
(h) Where the parties had each acted knowledgeably prudently presumes
that both the willing buyer and the willing seller are reasonably informed
about the nature and characteristics of the asset its actual and potential
uses and the state of the market as of the valuation date Each is
further presumed to use that knowledge prudently to seek the price that
is most favourable for their respective positions in the transaction
Prudence is assessed by referring to the state of the market at the
General Standards – IVS 104
Bases of ValueInternational Valuation Standards
General Standards – IVS 104 Bases of Value
20
valuation date not with the benefit of hindsight at some later date For
example it is not necessarily imprudent for a seller to sell assets in a
market with falling prices at a price that is lower than previous market
levels In such cases as is true for other exchanges in markets with
changing prices the prudent buyer or seller will act in accordance with
the best market information available at the time
(i) And without compulsion establishes that each party is motivated
to undertake the transaction but neither is forced or unduly coerced to
complete it
303 The concept of Market Value presumes a price negotiated in an open and
competitive market where the participants are acting freely The market for
an asset could be an international market or a local market The market
could consist of numerous buyers and sellers or could be one characterised
by a limited number of market participants The market in which the asset
is presumed exposed for sale is the one in which the asset notionally being
exchanged is normally exchanged
304 The Market Value of an asset will reflect its highest and best use (see
paras 14011405) The highest and best use is the use of an asset
that maximises its potential and that is possible legally permissible and
financially feasible The highest and best use may be for continuation of
an asset’s existing use or for some alternative use This is determined by
the use that a market participant would have in mind for the asset when
formulating the price that it would be willing to bid
305 The nature and source of the valuation inputs must be consistent with the
basis of value which in turn must have regard to the valuation purpose
For example various approaches and methods may be used to arrive at
an opinion of value providing they use marketderived data The market
approach will by definition use marketderived inputs To indicate
Market Value the income approach should be applied using inputs and
assumptions that would be adopted by participants To indicate Market
Value using the cost approach the cost of an asset of equal utility and the
appropriate depreciation should be determined by analysis of marketbased
costs and depreciation
306 The data available and the circumstances relating to the market for the
asset being valued must determine which valuation method or methods
are most relevant and appropriate If based on appropriately analysed
marketderived data each approach or method used should provide an
indication of Market Value
307 Market Value does not reflect attributes of an asset that are of value to a
specific owner or purchaser that are not available to other buyers in the
market Such advantages may relate to the physical geographic economic
or legal characteristics of an asset Market Value requires the disregard of
any such element of value because at any given date it is only assumed
that there is a willing buyer not a particular willing buyerGeneral Standards
General Standards – IVS 104 Bases of Value
21
40 IVSDefined Basis of Value – Market Rent
401 Market Rent is the estimated amount for which an interest in real property
should be leased on the valuation date between a willing lessor and a willing
lessee on appropriate lease terms in an arm’s length transaction after
proper marketing and where the parties had each acted knowledgeably
prudently and without compulsion
402 Market Rent may be used as a basis of value when valuing a lease or an
interest created by a lease In such cases it is necessary to consider the
contract rent and where it is different the market rent
403 The conceptual framework supporting the definition of Market Value
shown above can be applied to assist in the interpretation of Market Rent
In particular the estimated amount excludes a rent inflated or deflated
by special terms considerations or concessions The appropriate lease
terms are terms that would typically be agreed in the market for the type of
property on the valuation date between market participants An indication of
Market Rent should only be provided in conjunction with an indication of the
principal lease terms that have been assumed
404 Contract Rent is the rent payable under the terms of an actual lease It may
be fixed for the duration of the lease or variable The frequency and basis
of calculating variations in the rent will be set out in the lease and must be
identified and understood in order to establish the total benefits accruing to
the lessor and the liability of the lessee
405 In some circumstances the Market Rent may have to be assessed based
on terms of an existing lease (eg for rental determination purposes where
the lease terms are existing and therefore not to be assumed as part of a
notional lease)
406 In calculating Market Rent the valuer must consider the following
(a) in regard to a Market Rent subject to a lease the terms and conditions of
that lease are the appropriate lease terms unless those terms and
conditions are illegal or contrary to overarching legislation and
(b) in regard to a Market Rent that is not subject to a lease the assumed
terms and conditions are the terms of a notional lease that would
typically be agreed in a market for the type of property on the valuation
date between market participants
50 IVSDefined Basis of Value – Equitable Value
501 Equitable Value is the estimated price for the transfer of an asset or liability
between identified knowledgeable and willing parties that reflects the
respective interests of those parties
502 Equitable Value requires the assessment of the price that is fair between
two specific identified parties considering the respective advantages or
disadvantages that each will gain from the transaction In contrast Market
Value requires any advantages or disadvantages that would not be available
to or incurred by market participants generally to be disregardedInternational Valuation Standards
General Standards – IVS 104 Bases of Value
22
503 Equitable Value is a broader concept than Market Value Although in many
cases the price that is fair between two parties will equate to that obtainable
in the market there will be cases where the assessment of Equitable Value
will involve taking into account matters that have to be disregarded in the
assessment of Market Value such as certain elements of Synergistic Value
arising because of the combination of the interests
504 Examples of the use of Equitable Value include
(a) determination of a price that is equitable for a shareholding in a non
quoted business where the holdings of two specific parties may mean
that the price that is equitable between them is different from the price
that might be obtainable in the market and
(b) determination of a price that would be equitable between a lessor
and a lessee for either the permanent transfer of the leased asset or the
cancellation of the lease liability
60 IVSDefined Basis of Value – Investment ValueWorth
601 Investment Value is the value of an asset to a particular owner or
prospective owner for individual investment or operational objectives
602 Investment Value is an entityspecific basis of value Although the value
of an asset to the owner may be the same as the amount that could be
realised from its sale to another party this basis of value reflects the benefits
received by an entity from holding the asset and therefore does not involve
a presumed exchange Investment Value reflects the circumstances and
financial objectives of the entity for which the valuation is being produced It
is often used for measuring investment performance
70 IVSDefined Basis of Value – Synergistic Value
701 Synergistic Value is the result of a combination of two or more assets or
interests where the combined value is more than the sum of the separate
values If the synergies are only available to one specific buyer then
Synergistic Value will differ from Market Value as the Synergistic Value will
reflect particular attributes of an asset that are only of value to a specific
purchaser The added value above the aggregate of the respective interests
is often referred to as marriage value
80 IVSDefined Basis of Value – Liquidation Value
801 Liquidation Value is the amount that would be realised when an asset or
group of assets are sold on a piecemeal basis Liquidation Value should take
into account the costs of getting the assets into saleable condition as well
as those of the disposal activity Liquidation Value can be determined under
two different premises of value
(a) an orderly transaction with a typical marketing period (see section 160)
or
(b) a forced transaction with a shortened marketing period (see section 170)
802 A valuer must disclose which premise of value is assumed General Standards
General Standards – IVS 104 Bases of Value
23
90 Other Basis of Value – Fair Value
(International Financial Reporting Standards)
901 IFRS 13 defines Fair Value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date
902 For financial reporting purposes over 130 countries require or permit the
use of International Accounting Standards published by the International
Accounting Standards Board In addition the Financial Accounting
Standards Board in the United States uses the same definition of Fair Value
in Topic 820
100 Other Basis of Value – Fair Market Value (Organisation for Economic
Cooperation and Development (OECD))
1001 The OECD defines Fair Market Value as the price a willing buyer would pay
a willing seller in a transaction on the open market
1002 OECD guidance is used in many engagements for international tax
purposes
110 Other Basis of Value – Fair Market Value
(United States Internal Revenue Service)
1101 For United States tax purposes Regulation §2020311 states The fair
market value is the price at which the property would change hands between
a willing buyer and a willing seller neither being under any compulsion to
buy or to sell and both having reasonable knowledge of relevant facts
120 Other Basis of Value – Fair Value (LegalStatutory)
in different jurisdictions
1201 Many national state and local agencies use Fair Value as a basis of value in
a legal context The definitions can vary significantly and may be the result
of legislative action or those established by courts in prior cases
1202 Examples of US and Canadian definitions of Fair Value are as follows
(a) The Model Business Corporation Act (MBCA) is a model set of law
prepared by the Committee on Corporate Laws of the Section of
Business Law of the American Bar Association and is followed by 24
States in the United States The definition of Fair Value from the MBCA
is the value of the corporation’s shares determined
(1) immediately before the effectuation of the corporate action to which
the shareholder objects
(2) using customary and current valuation concepts and techniques
generally employed for similar businesses in the context of the
transaction requiring appraisal and
(3) without discounting for lack of marketability or minority status except
if appropriate for amendments to the articles pursuant to section
1302(a)(5)International Valuation Standards
General Standards – IVS 104 Bases of Value
24
(b) In 1986 the Supreme Court of British Columbia in Canada issued a
ruling in Manning v Harris Steel Group Inc that stated Thus a fair’
value is one which is just and equitable That terminology contains within
itself the concept of adequate compensation (indemnity) consistent with
the requirements of justice and equity
130 Premise of ValueAssumed Use
1301 A Premise of Value or Assumed Use describes the circumstances of how an
asset or liability is used Different bases of value may require a particular
Premise of Value or allow the consideration of multiple Premises of Value
Some common Premises of Value are
(a) highest and best use
(b) current useexisting use
(c) orderly liquidation and
(d) forced sale
140 Premise of Value – Highest and Best Use
1401 Highest and best use is the use from a participant perspective that would
produce the highest value for an asset Although the concept is most
frequently applied to nonfinancial assets as many financial assets do not
have alternative uses there may be circumstances where the highest and
best use of financial assets needs to be considered
1402 The highest and best use must be physically possible (where applicable)
financially feasible legally allowed and result in the highest value If
different from the current use the costs to convert an asset to its highest
and best use would impact the value
1403 The highest and best use for an asset may be its current or existing use
when it is being used optimally However highest and best use may differ
from current use or even be an orderly liquidation
1404 The highest and best use of an asset valued on a standalone basis may be
different from its highest and best use as part of a group of assets when its
contribution to the overall value of the group must be considered
1405 The determination of the highest and best use involves consideration of the
following
(a) To establish whether a use is physically possible regard will be had to
what would be considered reasonable by participants
(b) To reflect the requirement to be legally permissible any legal restrictions
on the use of the asset eg town planningzoning designations need
to be taken into account as well as the likelihood that these restrictions
will change
(c) The requirement that the use be financially feasible takes into account
whether an alternative use that is physically possible and legally
permissible will generate sufficient return to a typical participant after
taking into account the costs of conversion to that use over and above
the return on the existing useGeneral Standards
General Standards – IVS 104 Bases of Value
25
150 Premise of Value – Current UseExisting Use
1501 Current useexisting use is the current way an asset liability or group
of assets andor liabilities is used The current use may be but is not
necessarily also the highest and best use
160 Premise of Value – Orderly Liquidation
1601 An orderly liquidation describes the value of a group of assets that could
be realised in a liquidation sale given a reasonable period of time to find
a purchaser (or purchasers) with the seller being compelled to sell on an
asis whereis basis
1602 The reasonable period of time to find a purchaser (or purchasers) may vary
by asset type and market conditions
170 Premise of Value – Forced Sale
1701 The term forced sale is often used in circumstances where a seller is
under compulsion to sell and that as a consequence a proper marketing
period is not possible and buyers may not be able to undertake adequate
due diligence The price that could be obtained in these circumstances
will depend upon the nature of the pressure on the seller and the reasons
why proper marketing cannot be undertaken It may also reflect the
consequences for the seller of failing to sell within the period available
Unless the nature of and the reason for the constraints on the seller
are known the price obtainable in a forced sale cannot be realistically
estimated The price that a seller will accept in a forced sale will reflect its
particular circumstances rather than those of the hypothetical willing seller
in the Market Value definition A forced sale is a description of the situation
under which the exchange takes place not a distinct basis of value
1702 If an indication of the price obtainable under forced sale circumstances is
required it will be necessary to clearly identify the reasons for the constraint on
the seller including the consequences of failing to sell in the specified period
by setting out appropriate assumptions If these circumstances do not exist at
the valuation date these must be clearly identified as special assumptions
1703 A forced sale typically reflects the most probable price that a specified
property is likely to bring under all of the following conditions
(a) consummation of a sale within a short time period
(b) the asset is subjected to market conditions prevailing as of the date
of valuation or assumed timescale within which the transaction is to
be completed
(c) both the buyer and the seller are acting prudently and knowledgeably
(d) the seller is under compulsion to sell
(e) the buyer is typically motivated
(f) both parties are acting in what they consider their best interests
(g) a normal marketing effort is not possible due to the brief exposure time and
(h) payment will be made in cashInternational Valuation Standards
General Standards – IVS 104 Bases of Value
26
1704 Sales in an inactive or falling market are not automatically forced sales
simply because a seller might hope for a better price if conditions improved
Unless the seller is compelled to sell by a deadline that prevents proper
marketing the seller will be a willing seller within the definition of Market
Value (see paras 301307)
1705 While confirmed forced sale transactions would generally be excluded
from consideration in a valuation where the basis of value is Market Value it
can be difficult to verify that an arm’s length transaction in a market was
a forced sale
180 EntitySpecific Factors
1801 For most bases of value the factors that are specific to a particular buyer or
seller and not available to participants generally are excluded from the inputs
used in a marketbased valuation Examples of entityspecific factors that
may not be available to participants include
(a) additional value or reduction in value derived from the creation of a
portfolio of similar assets
(b) unique synergies between the asset and other assets owned by
the entity
(c) legal rights or restrictions applicable only to the entity
(d) tax benefits or tax burdens unique to the entity and
(e) an ability to exploit an asset that is unique to that entity
1802 Whether such factors are specific to the entity or would be available to
others in the market generally is determined on a casebycase basis For
example an asset may not normally be transacted as a standalone item
but as part of a group of assets Any synergies with related assets would
transfer to participants along with the transfer of the group and therefore are
not entity specific
1803 If the objective of the basis of value used in a valuation is to determine the
value to a specific owner (such as Investment ValueWorth discussed in
paras 601 and 602) entityspecific factors are reflected in the valuation of
the asset Situations in which the value to a specific owner may be required
include the following examples
(a) supporting investment decisions and
(b) reviewing the performance of an asset
190 Synergies
1901 Synergies refer to the benefits associated with combining assets
When synergies are present the value of a group of assets and liabilities
is greater than the sum of the values of the individual assets and liabilities
on a standalone basis Synergies typically relate to a reduction in costs
andor an increase in revenue andor a reduction in risk
1902 Whether synergies should be considered in a valuation depends on the
basis of value For most bases of value only those synergies available General Standards
General Standards – IVS 104 Bases of Value
27
to other participants generally will be considered (see discussion of
EntitySpecific Factors in paras 18011803)
1903 An assessment of whether synergies are available to other participants
may be based on the amount of the synergies rather than a specific way
to achieve that synergy
200 Assumptions and Special Assumptions
2001 In addition to stating the basis of value it is often necessary to make an
assumption or multiple assumptions to clarify either the state of the asset
in the hypothetical exchange or the circumstances under which the asset is
assumed to be exchanged Such assumptions can have a significant impact
on value
2002 These types of assumptions generally fall into one of two categories
(a) assumed facts that are consistent with or could be consistent with
those existing at the date of valuation and
(b) assumed facts that differ from those existing at the date of valuation
2003 Assumptions related to facts that are consistent with or could be consistent
with those existing at the date of valuation may be the result of a limitation
on the extent of the investigations or enquiries undertaken by the valuer
Examples of such assumptions include without limitation
(a) an assumption that a business is transferred as a complete
operational entity
(b) an assumption that assets employed in a business are transferred
without the business either individually or as a group
(c) an assumption that an individually valued asset is transferred
together with other complementary assets and
(d) an assumption that a holding of shares is transferred either as a block
or individually
2004 Where assumed facts differ from those existing at the date of valuation
it is referred to as a special assumption Special assumptions are
often used to illustrate the effect of possible changes on the value of an
asset They are designated as special so as to highlight to a valuation
user that the valuation conclusion is contingent upon a change in the
current circumstances or that it reflects a view that would not be taken by
participants generally on the valuation date Examples of such assumptions
include without limitation
(a) an assumption that a property is freehold with vacant possession
(b) an assumption that a proposed building had actually been completed on
the valuation date
(c) an assumption that a specific contract was in existence on the valuation
date which had not actually been completed and
(d) an assumption that a financial instrument is valued using a yield curve
that is different from that which would be used by a participantInternational Valuation Standards
General Standards – IVS 104 Bases of Value
28
2005 All assumptions and special assumptions must be reasonable under the
circumstances be supported by evidence and be relevant having regard to
the purpose for which the valuation is required
210 Transaction Costs
2101 Most bases of value represent the estimated exchange price of an asset
without regard to the seller’s costs of sale or the buyer’s costs of purchase
and without adjustment for any taxes payable by either party as a direct
result of the transaction
General Standards
General Standards – IVS 105 Valuation Approaches and Methods
29
IVS 105 Valuation Approaches and Methods
Contents Paragraphs
Introduction 10
Market Approach 20
Market Approach Methods 30
Income Approach 40
Income Approach Methods 50
Cost Approach 60
Cost Approach Methods 70
DepreciationObsolescence 80
10 Introduction
101 Consideration must be given to the relevant and appropriate valuation
approaches The three approaches described and defined below are the
main approaches used in valuation They are all based on the economic
principles of price equilibrium anticipation of benefits or substitution
The principal valuation approaches are
(a) market approach
(b) income approach and
(c) cost approach
102 Each of these valuation approaches includes different detailed methods
of application
103 The goal in selecting valuation approaches and methods for an asset is to
find the most appropriate method under the particular circumstances No
one method is suitable in every possible situation The selection process
should consider at a minimum
(a) the appropriate basis(es) of value and premise(s) of value
determined by the terms and purpose of the valuation assignment
(b) the respective strengths and weaknesses of the possible valuation
approaches and methods
(c) the appropriateness of each method in view of the nature of the asset
and the approaches or methods used by participants in the relevant
market and
(d) the availability of reliable information needed to apply the method(s)
104 Valuers are not required to use more than one method for the valuation
of an asset particularly when the valuer has a high degree of confidence
in the accuracy and reliability of a single method given the facts and
circumstances of the valuation engagement However valuers should
consider the use of multiple approaches and methods and more than one International Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
30
valuation approach or method should be considered and may be used to
arrive at an indication of value particularly when there are insufficient factual
or observable inputs for a single method to produce a reliable conclusion
Where more than one approach and method is used or even multiple
methods within a single approach the conclusion of value based on those
multiple approaches andor methods should be reasonable and the process
of analysing and reconciling the differing values into a single conclusion
without averaging should be described by the valuer in the report
105 While this standard includes discussion of certain methods within the Cost
Market and Income approaches it does not provide a comprehensive list of
all possible methods that may be appropriate Some of the many methods
not addressed in this standard include option pricing methods (OPMs)
simulationMonte Carlo methods and probabilityweighted expectedreturn
methods (PWERM) It is the valuer’s responsibility to choose the appropriate
method(s) for each valuation engagement Compliance with IVS may
require the valuer to use a method not defined or mentioned in the IVS
106 When different approaches andor methods result in widely divergent
indications of value a valuer should perform procedures to understand
why the value indications differ as it is generally not appropriate to simply
weight two or more divergent indications of value In such cases valuers
should reconsider the guidance in para 103 to determine whether one of the
approachesmethods provides a better or more reliable indication of value
107 Valuers should maximise the use of relevant observable market information
in all three approaches Regardless of the source of the inputs and
assumptions used in a valuation a valuer must perform appropriate analysis
to evaluate those inputs and assumptions and their appropriateness for the
valuation purpose
108 Although no one approach or method is applicable in all circumstances
price information from an active market is generally considered to be the
strongest evidence of value Some bases of value may prohibit a valuer
from making subjective adjustments to price information from an active
market Price information from an inactive market may still be good
evidence of value but subjective adjustments may be needed
20 Market Approach
201 The market approach provides an indication of value by comparing the
asset with identical or comparable (that is similar) assets for which price
information is available
202 The market approach should be applied and afforded significant weight
under the following circumstances
(a) the subject asset has recently been sold in a transaction appropriate for
consideration under the basis of value
(b) the subject asset or substantially similar assets are actively publicly
traded andor
(c) there are frequent andor recent observable transactions in substantially
similar assetsGeneral Standards
General Standards – IVS 105 Valuation Approaches and Methods
31
203 Although the above circumstances would indicate that the market approach
should be applied and afforded significant weight when the above criteria
are not met the following are additional circumstances where the market
approach may be applied and afforded significant weight When using
the market approach under the following circumstances a valuer should
consider whether any other approaches can be applied and weighted to
corroborate the value indication from the market approach
(a) Transactions involving the subject asset or substantially similar assets
are not recent enough considering the levels of volatility and activity in
the market
(b) The asset or substantially similar assets are publicly traded
but not actively
(c) Information on market transactions is available but the comparable
assets have significant differences to the subject asset potentially
requiring subjective adjustments
(d) Information on recent transactions is not reliable (ie hearsay missing
information synergistic purchaser not arm’slength distressed sale etc)
(e) The critical element affecting the value of the asset is the price it
would achieve in the market rather than the cost of reproduction or its
incomeproducing ability
204 The heterogeneous nature of many assets means that it is often not possible
to find market evidence of transactions involving identical or similar assets
Even in circumstances where the market approach is not used the use
of marketbased inputs should be maximised in the application of other
approaches (eg marketbased valuation metrics such as effective yields and
rates of return)
205 When comparable market information does not relate to the exact or
substantially the same asset the valuer must perform a comparative
analysis of qualitative and quantitative similarities and differences between
the comparable assets and the subject asset It will often be necessary to
make adjustments based on this comparative analysis Those adjustments
must be reasonable and valuers must document the reasons for the
adjustments and how they were quantified
206 The market approach often uses market multiples derived from a set of
comparables each with different multiples The selection of the appropriate
multiple within the range requires judgement considering qualitative and
quantitative factors
30 Market Approach Methods
Comparable Transactions Method
301 The comparable transactions method also known as the guideline
transactions method utilises information on transactions involving assets
that are the same or similar to the subject asset to arrive at an indication
of value
302 When the comparable transactions considered involve the subject asset
this method is sometimes referred to as the prior transactions method International Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
32
303 If few recent transactions have occurred the valuer may consider the prices
of identical or similar assets that are listed or offered for sale provided the
relevance of this information is clearly established critically analysed and
documented This is sometimes referred to as the comparable listings
method and should not be used as the sole indication of value but can
be appropriate for consideration together with other methods When
considering listings or offers to buy or sell the weight afforded to the listings
offer price should consider the level of commitment inherent in the price
and how long the listingoffer has been on the market For example an offer
that represents a binding commitment to purchase or sell an asset at a
given price may be given more weight than a quoted price without such a
binding commitment
304 The comparable transaction method can use a variety of different comparable
evidence also known as units of comparison which form the basis of the
comparison For example a few of the many common units of comparison
used for real property interests include price per square foot (or per square
metre) rent per square foot (or per square metre) and capitalisation
rates A few of the many common units of comparison used in business
valuation include EBITDA (Earnings Before Interest Tax Depreciation and
Amortisation) multiples earnings multiples revenue multiples and book value
multiples A few of the many common units of comparison used in financial
instrument valuation include metrics such as yields and interest rate spreads
The units of comparison used by participants can differ between asset classes
and across industries and geographies
305 A subset of the comparable transactions method is matrix pricing which
is principally used to value some types of financial instruments such
as debt securities without relying exclusively on quoted prices for the
specific securities but rather relying on the securities’ relationship to other
benchmark quoted securities and their attributes (ie yield)
306 The key steps in the comparable transactions method are
(a) identify the units of comparison that are used by participants in the
relevant market
(b) identify the relevant comparable transactions and calculate the key
valuation metrics for those transactions
(c) perform a consistent comparative analysis of qualitative and quantitative
similarities and differences between the comparable assets and the
subject asset
(d) make necessary adjustments if any to the valuation metrics to reflect
differences between the subject asset and the comparable assets (see
para 3012(d))
(e) apply the adjusted valuation metrics to the subject asset and
(f) if multiple valuation metrics were used reconcile the indications of value
307 A valuer should choose comparable transactions within the following context
(a) evidence of several transactions is generally preferable to a single
transaction or eventGeneral Standards
General Standards – IVS 105 Valuation Approaches and Methods
33
(b) evidence from transactions of very similar assets (ideally identical)
provides a better indication of value than assets where the transaction
prices require significant adjustments
(c) transactions that happen closer to the valuation date are more
representative of the market at that date than olderdated transactions
particularly in volatile markets
(d) for most bases of value the transactions should be arm’s length
between unrelated parties
(e) sufficient information on the transaction should be available to allow the
valuer to develop a reasonable understanding of the comparable asset
and assess the valuation metricscomparable evidence
(f) information on the comparable transactions should be from a reliable and
trusted source and
(g) actual transactions provide better valuation evidence than intended
transactions
308 A valuer should analyse and make adjustments for any material differences
between the comparable transactions and the subject asset Examples of
common differences that could warrant adjustments may include but are not
limited to
(a) material characteristics (age size specifications etc)
(b) relevant restrictions on either the subject asset or the
comparable assets
(c) geographical location (location of the asset andor location of where
the asset is likely to be transactedused) and the related economic and
regulatory environments
(d) profitability or profitmaking capability of the assets
(e) historical and expected growth
(f) yieldscoupon rates
(g) types of collateral
(h) unusual terms in the comparable transactions
(i) differences related to marketability and control characteristics of the
comparable and the subject asset and
(j) ownership characteristics (eg legal form of ownership amount
percentage held)
Guideline publiclytraded comparable method
309 The guideline publiclytraded method utilises information on publiclytraded
comparables that are the same or similar to the subject asset to arrive at an
indication of value International Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
34
3010 This method is similar to the comparable transactions method However
there are several differences due to the comparables being publicly traded
as follows
(a) the valuation metricscomparable evidence are available as of the
valuation date
(b) detailed information on the comparables are readily available in public
filings and
(c) the information contained in public filings is prepared under well
understood accounting standards
3011 The method should be used only when the subject asset is sufficiently
similar to the publiclytraded comparables to allow for meaningful
comparison
3012 The key steps in the guideline publiclytraded comparable method are to
(a) identify the valuation metricscomparable evidence that are used by
participants in the relevant market
(b) identify the relevant guideline publiclytraded comparables and calculate
the key valuation metrics for those transactions
(c) perform a consistent comparative analysis of qualitative and quantitative
similarities and differences between the publiclytraded comparables and
the subject asset
(d) make necessary adjustments if any to the valuation metrics to
reflect differences between the subject asset and the publiclytraded
comparables
(e) apply the adjusted valuation metrics to the subject asset and
(f) if multiple valuation metrics were used weight the indications of value
3013 A valuer should choose publiclytraded comparables within the following
context
(a) consideration of multiple publiclytraded comparables is preferred to the
use of a single comparable
(b) evidence from similar publiclytraded comparables (for example with
similar market segment geographic area size in revenue andor assets
growth rates profit margins leverage liquidity and diversification)
provides a better indication of value than comparables that require
significant adjustments and
(c) securities that are actively traded provide more meaningful evidence
than thinlytraded securities
3014 A valuer should analyse and make adjustments for any material differences
between the guideline publiclytraded comparables and the subject asset
Examples of common differences that could warrant adjustments may
include but are not limited to General Standards
General Standards – IVS 105 Valuation Approaches and Methods
35
(a) material characteristics (age size specifications etc)
(b) relevant discounts and premiums (see para 3017)
(c) relevant restrictions on either the subject asset or the
comparable assets
(d) geographical location of the underlying company and the related
economic and regulatory environments
(e) profitability or profitmaking capability of the assets
(f) historical and expected growth
(g) differences related to marketability and control characteristics of the
comparable and the subject asset and
(h) type of ownership
Other Market Approach Considerations
3015 The following paragraphs address a nonexhaustive list of certain special
considerations that may form part of a market approach valuation
3016 Anecdotal or ruleofthumb valuation benchmarks are sometimes
considered to be a market approach However value indications derived
from the use of such rules should not be given substantial weight unless it
can be shown that buyers and sellers place significant reliance on them
3017 In the market approach the fundamental basis for making adjustments
is to adjust for differences between the subject asset and the guideline
transactions or publiclytraded securities Some of the most common
adjustments made in the market approach are known as discounts and
premiums
(a) Discounts for Lack of Marketability (DLOM) should be applied when
the comparables are deemed to have superior marketability to the
subject asset A DLOM reflects the concept that when comparing
otherwise identical assets a readily marketable asset would have a
higher value than an asset with a long marketing period or restrictions on
the ability to sell the asset For example publiclytraded securities
can be bought and sold nearly instantaneously while shares in a private
company may require a significant amount of time to identify potential
buyers and complete a transaction Many bases of value allow the
consideration of restrictions on marketability that are inherent in the
subject asset but prohibit consideration of marketability restrictions that
are specific to a particular owner DLOMs may be quantified using any
reasonable method but are typically calculated using option pricing
models studies that compare the value of publiclytraded shares and
restricted shares in the same company or studies that compare the
value of shares in a company before and after an initial public offering
(b) Control Premiums (sometimes referred to as Market Participant
Acquisition Premiums or MPAPs) and Discounts for Lack of Control
(DLOC) are applied to reflect differences between the comparables
and the subject asset with regard to the ability to make decisions and
the changes that can be made as a result of exercising control All International Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
36
else being equal participants would generally prefer to have control over
a subject asset than not However participants’ willingness to pay a
Control Premium or DLOC will generally be a factor of whether the ability
to exercise control enhances the economic benefits available to the
owner of the subject asset Control Premiums and DLOCs may be
quantified using any reasonable method but are typically calculated
based on either an analysis of the specific cash flow enhancements or
reductions in risk associated with control or by comparing observed
prices paid for controlling interests in publiclytraded securities to the
publiclytraded price before such a transaction is announced Examples
of circumstances where Control Premiums and DLOC should be
considered include where
1 shares of public companies generally do not have the ability to make
decisions related to the operations of the company (they lack control)
As such when applying the guideline public comparable method to
value a subject asset that reflects a controlling interest a control
premium may be appropriate or
2 the guideline transactions in the guideline transaction method often
reflect transactions of controlling interests When using that method
to value a subject asset that reflects a minority interest a DLOC may
be appropriate
(c) Blockage discounts are sometimes applied when the subject asset
represents a large block of shares in a publiclytraded security such that
an owner would not be able to quickly sell the block in the public market
without negatively influencing the publiclytraded price Blockage
discounts may be quantified using any reasonable method but typically
a model is used that considers the length of time over which a participant
could sell the subject shares without negatively impacting the
publiclytraded price (ie selling a relatively small portion of the security’s
typical daily trading volume each day) Under certain bases of value
particularly fair value for financial reporting purposes blockage discounts
are prohibited
40 Income Approach
401 The income approach provides an indication of value by converting future
cash flow to a single current value Under the income approach the value of
an asset is determined by reference to the value of income cash flow or cost
savings generated by the asset
402 The income approach should be applied and afforded significant weight
under the following circumstances
(a) the incomeproducing ability of the asset is the critical element affecting
value from a participant perspective andor
(b) reasonable projections of the amount and timing of future income are
available for the subject asset but there are few if any relevant
market comparables General Standards
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37
403 Although the above circumstances would indicate that the income
approach should be applied and afforded significant weight the following
are additional circumstances where the income approach may be applied
and afforded significant weight When using the income approach under
the following circumstances a valuer should consider whether any other
approaches can be applied and weighted to corroborate the value indication
from the income approach
(a) the incomeproducing ability of the subject asset is only one of several
factors affecting value from a participant perspective
(b) there is significant uncertainty regarding the amount and timing of future
incomerelated to the subject asset
(c) there is a lack of access to information related to the subject asset
(for example a minority owner may have access to historical financial
statements but not forecastsbudgets) andor
(d) the subject asset has not yet begun generating income but is projected
to do so
404 A fundamental basis for the income approach is that investors expect to
receive a return on their investments and that such a return should reflect
the perceived level of risk in the investment
405 Generally investors can only expect to be compensated for systematic risk
(also known as market risk or undiversifiable risk)
50 Income Approach Methods
501 Although there are many ways to implement the income approach methods
under the income approach are effectively based on discounting future
amounts of cash flow to present value They are variations of the Discounted
Cash Flow (DCF) method and the concepts below apply in part or in full to
all income approach methods
Discounted Cash Flow (DCF) Method
502 Under the DCF method the forecasted cash flow is discounted back to the
valuation date resulting in a present value of the asset
503 In some circumstances for longlived or indefinitelived assets DCF may
include a terminal value which represents the value of the asset at the end of
the explicit projection period In other circumstances the value of an asset
may be calculated solely using a terminal value with no explicit projection
period This is sometimes referred to as an income capitalisation method
504 The key steps in the DCF method are
(a) choose the most appropriate type of cash flow for the nature of the
subject asset and the assignment (ie pretax or posttax total cash flows
or cash flows to equity real or nominal etc)
(b) determine the most appropriate explicit period if any over which the
cash flow will be forecast
(c) prepare cash flow forecasts for that periodInternational Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
38
(d) determine whether a terminal value is appropriate for the subject asset
at the end of the explicit forecast period (if any) and then determine the
appropriate terminal value for the nature of the asset
(e) determine the appropriate discount rate and
(f) apply the discount rate to the forecasted future cash flow including the
terminal value if any
Type of Cash Flow
505 When selecting the appropriate type of cash flow for the nature of asset
or assignment valuers must consider the factors below In addition the
discount rate and other inputs must be consistent with the type of cash
flow chosen
(a) Cash flow to whole asset or partial interest Typically cash flow to the
whole asset is used However occasionally other levels of income
may be used as well such as cash flow to equity (after payment of
interest and principle on debt) or dividends (only the cash flow distributed
to equity owners) Cash flow to the whole asset is most commonly
used because an asset should theoretically have a single value that is
independent of how it is financed or whether income is paid as dividends
or reinvested
(b) The cash flow can be pretax or posttax If a posttax basis is used
the tax rate applied should be consistent with the basis of value and
in many instances would be a participant tax rate rather than an
ownerspecific one
(c) Nominal versus real Real cash flow does not consider inflation whereas
nominal cash flows include expectations regarding inflation If expected
cash flow incorporates an expected inflation rate the discount rate has to
include the same inflation rate
(d) Currency The choice of currency used may have an impact on
assumptions related to inflation and risk This is particularly true in
emerging markets or in currencies with high inflation rates
506 The type of cash flow chosen should be in accordance with participant’s
viewpoints For example cash flows and discount rates for real property
are customarily developed on a pretax basis while cash flows and discount
rates for businesses are normally developed on a posttax basis Adjusting
between pretax and posttax rates can be complex and prone to error and
should be approached with caution
507 When a valuation is being developed in a currency (the valuation currency)
that differs from the currency used in the cash flow projections (the
functional currency) a valuer should use one of the following two currency
translation methods
(a) Discount the cash flows in the functional currency using a discount rate
appropriate for that functional currency Convert the present value of
the cash flows to the valuation currency at the spot rate on the
valuation dateGeneral Standards
General Standards – IVS 105 Valuation Approaches and Methods
39
(b) Use a currency exchange forward curve to translate the functional
currency projections into valuation currency projections and discount
the projections using a discount rate appropriate for the valuation
currency When a reliable currency exchange forward curve is not
available (for example due to lack of liquidity in the relevant currency
exchange markets) it may not be possible to use this method and only
the method described in para 507(a) can be applied
Explicit Forecast Period
508 The selection criteria will depend upon the purpose of the valuation the
nature of the asset the information available and the required bases of
value For an asset with a short life it is more likely to be both possible and
relevant to project cash flow over its entire life
509 Valuers should consider the following factors when selecting the explicit
forecast period
(a) the life of the asset
(b) a reasonable period for which reliable data is available on which to base
the projections
(c) the minimum explicit forecast period which should be sufficient for
an asset to achieve a stabilised level of growth and profits after which a
terminal value can be used
(d) in the valuation of cyclical assets the explicit forecast period should
generally include an entire cycle when possible and
(e) for finitelived assets such as most financial instruments the cash flows
will typically be forecast over the full life of the asset
5010 In some instances particularly when the asset is operating at a stabilised
level of growth and profits at the valuation date it may not be necessary to
consider an explicit forecast period and a terminal value may form the only
basis for value (sometimes referred to as an income capitalisation method)
5011 The intended holding period for one investor should not be the only
consideration in selecting an explicit forecast period and should not impact
the value of an asset However the period over which an asset is intended
to be held may be considered in determining the explicit forecast period if
the objective of the valuation is to determine its investment value
Cash Flow Forecasts
5012 Cash flow for the explicit forecast period is constructed using
prospective financial information (PFI) (projected incomeinflows and
expenditureoutflows)
5013 As required by para 5012 regardless of the source of the PFI (eg
management forecast) a valuer must perform analysis to evaluate the
PFI the assumptions underlying the PFI and their appropriateness for the
valuation purpose The suitability of the PFI and the underlying assumptions
will depend upon the purpose of the valuation and the required bases of
value For example cash flow used to determine market value should reflect International Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
40
PFI that would be anticipated by participants in contrast investment value
can be measured using cash flow that is based on the reasonable forecasts
from the perspective of a particular investor
5014 The cash flow is divided into suitable periodic intervals (eg weekly monthly
quarterly or annually) with the choice of interval depending upon the nature
of the asset the pattern of the cash flow the data available and the length
of the forecast period
5015 The projected cash flow should capture the amount and timing of all future
cash inflows and outflows associated with the subject asset from the
perspective appropriate to the basis of value
5016 Typically the projected cash flow will reflect one of the following
(a) contractual or promised cash flow
(b) the single most likely set of cash flow
(c) the probabilityweighted expected cash flow or
(d) multiple scenarios of possible future cash flow
5017 Different types of cash flow often reflect different levels of risk and may
require different discount rates For example probabilityweighted expected
cash flows incorporate expectations regarding all possible outcomes
and are not dependent on any particular conditions or events (note that
when a probabilityweighted expected cash flow is used it is not always
necessary for valuers to take into account distributions of all possible cash
flows using complex models and techniques Rather valuers may develop
a limited number of discrete scenarios and probabilities that capture the
array of possible cash flows) A single most likely set of cash flows may be
conditional on certain future events and therefore could reflect different risks
and warrant a different discount rate
5018 While valuers often receive PFI that reflects accounting income and
expenses it is generally preferable to use cash flow that would be
anticipated by participants as the basis for valuations For example
accounting noncash expenses such as depreciation and amortisation
should be added back and expected cash outflows relating to capital
expenditures or to changes in working capital should be deducted in
calculating cash flow
5019 Valuers must ensure that seasonality and cyclicality in the subject has been
appropriately considered in the cash flow forecasts
Terminal Value
5020 Where the asset is expected to continue beyond the explicit forecast period
valuers must estimate the value of the asset at the end of that period The
terminal value is then discounted back to the valuation date normally using
the same discount rate as applied to the forecast cash flow
5021 The terminal value should consider
(a) whether the asset is deterioratingfinitelived in nature or indefinitelived
as this will influence the method used to calculate a terminal valueGeneral Standards
General Standards – IVS 105 Valuation Approaches and Methods
41
(b) whether there is future growth potential for the asset beyond the explicit
forecast period
(c) whether there is a predetermined fixed capital amount expected to be
received at the end of the explicit forecast period
(d) the expected risk level of the asset at the time the terminal value
is calculated
(e) for cyclical assets the terminal value should consider the cyclical nature
of the asset and should not be performed in a way that assumes peak
or trough levels of cash flows in perpetuity and
(f) the tax attributes inherent in the asset at the end of the explicit forecast
period (if any) and whether those tax attributes would be expected to
continue into perpetuity
5022 Valuers may apply any reasonable method for calculating a terminal value
While there are many different approaches to calculating a terminal value
the three most commonly used methods for calculating a terminal value are
(a) Gordon growth modelconstant growth model (appropriate only for
indefinitelived assets)
(b) market approachexit value (appropriate for both deterioratingfinitelived
assets and indefinitelived assets) and
(c) salvage valuedisposal cost (appropriate only for deteriorating
finitelived assets)
Gordon Growth ModelConstant Growth Model
5023 The constant growth model assumes that the asset grows (or declines) at a
constant rate into perpetuity
Market ApproachExit Value
5024 The market approachexit value method can be performed in a number of
ways but the ultimate goal is to calculate the value of the asset at the end of
the explicit cash flow forecast
5025 Common ways to calculate the terminal value under this method
include application of a marketevidence based capitalisation factor
or a market multiple
5026 When a market approachexit value is used valuers should comply
with the requirements in the market approach and market approach methods
section of this standard (sections 20 and 30) However valuers should also
consider the expected market conditions at the end of the explicit forecast
period and make adjustments accordingly
Salvage ValueDisposal Cost
5027 The terminal value of some assets may have little or no relationship to the
preceding cash flow Examples of such assets include wasting assets such
as a mine or an oil wellInternational Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
42
5028 In such cases the terminal value is typically calculated as the salvage value
of the asset less costs to dispose of the asset In circumstances where the
costs exceed the salvage value the terminal value is negative and referred
to as a disposal cost or an asset retirement obligation
Discount Rate
5029 The rate at which the forecast cash flow is discounted should reflect not only
the time value of money but also the risks associated with the type of cash
flow and the future operations of the asset
5030 Valuers may use any reasonable method for developing a discount
rate While there are many methods for developing or determining the
reasonableness of a discount rate a nonexhaustive list of common
methods includes
(a) the capital asset pricing model (CAPM)
(b) the weighted average cost of capital (WACC)
(c) the observed or inferred ratesyields
(d) the internal rate of return (IRR)
(e) the weighted average return on assets (WARA) and
(f) the buildup method (generally used only in the absence of
market inputs)
5031 In developing a discount rate a valuer should consider
(a) the risk associated with the projections made in the cash flow used
(b) the type of asset being valued For example discount rates used in
valuing debt would be different to those used when valuing real property
or a business
(c) the rates implicit in transactions in the market
(d) the geographic location of the asset andor the location of the markets in
which it would trade
(e) the lifeterm of the asset and the consistency of inputs For example
the riskfree rate considered would differ for an asset with a threeyear
life versus a 30year life
(f) the type of cash flow being used (see para 505) and
(g) the bases of value being applied For most bases of value the discount
rate should be developed from the perspective of a participant
60 Cost Approach
601 The cost approach provides an indication of value using the economic
principle that a buyer will pay no more for an asset than the cost to obtain
an asset of equal utility whether by purchase or by construction unless
undue time inconvenience risk or other factors are involved The approach General Standards
General Standards – IVS 105 Valuation Approaches and Methods
43
provides an indication of value by calculating the current replacement
or reproduction cost of an asset and making deductions for physical
deterioration and all other relevant forms of obsolescence
602 The cost approach should be applied and afforded significant weight under
the following circumstances
(a) participants would be able to recreate an asset with substantially the
same utility as the subject asset without regulatory or legal
restrictions and the asset could be recreated quickly enough that a
participant would not be willing to pay a significant premium for the ability
to use the subject asset immediately
(b) the asset is not directly incomegenerating and the unique nature of the
asset makes using an income approach or market approach unfeasible
andor
(c) the basis of value being used is fundamentally based on replacement
cost such as replacement value
603 Although the circumstances in para 602 would indicate that the cost
approach should be applied and afforded significant weight the following
are additional circumstances where the cost approach may be applied
and afforded significant weight When using the cost approach under
the following circumstances a valuer should consider whether any other
approaches can be applied and weighted to corroborate the value indication
from the cost approach
(a) participants might consider recreating an asset of similar utility but
there are potential legal or regulatory hurdles or significant time involved
in recreating the asset
(b) when the cost approach is being used as a reasonableness check
to other approaches (for example using the cost approach to confirm
whether a business valued as a goingconcern might be more valuable
on a liquidation basis) andor
(c) the asset was recently created such that there is a high degree of
reliability in the assumptions used in the cost approach
604 The value of a partially completed asset will generally reflect the costs
incurred to date in the creation of the asset (and whether those costs
contributed to value) and the expectations of participants regarding the value
of the property when complete but consider the costs and time required to
complete the asset and appropriate adjustments for profit and risk
70 Cost Approach Methods
701 Broadly there are three cost approach methods
(a) replacement cost method a method that indicates value by calculating
the cost of a similar asset offering equivalent utility
(b) reproduction cost method a method under the cost that indicates value
by calculating the cost to recreating a replica of an asset and
(c) summation method a method that calculates the value of an asset by the
addition of the separate values of its component partsInternational Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
44
Replacement Cost Method
702 Generally replacement cost is the cost that is relevant to determining the
price that a participant would pay as it is based on replicating the utility of
the asset not the exact physical properties of the asset
703 Usually replacement cost is adjusted for physical deterioration and all
relevant forms of obsolescence After such adjustments this can be
referred to as depreciated replacement cost
704 The key steps in the replacement cost method are
(a) calculate all of the costs that would be incurred by a typical participant
seeking to create or obtain an asset providing equivalent utility
(b) determine whether there is any deprecation related to physical functional
and external obsolescence associated with the subject asset and
(c) deduct total deprecation from the total costs to arrive at a value for the
subject asset
705 The replacement cost is generally that of a modern equivalent asset which
is one that provides similar function and equivalent utility to the asset being
valued but which is of a current design and constructed or made using
current costeffective materials and techniques
Reproduction Cost Method
706 Reproduction cost is appropriate in circumstances such as the following
(a) the cost of a modern equivalent asset is greater than the cost of
recreating a replica of the subject asset or
(b) the utility offered by the subject asset could only be provided by a replica
rather than a modern equivalent
707 The key steps in the reproduction cost method are
(a) calculate all of the costs that would be incurred by a typical participant
seeking to create an exact replica of the subject asset
(b) determine whether there is any deprecation related to physical functional
and external obsolescence associated with the subject asset and
(c) deduct total deprecation from the total costs to arrive at a value for the
subject asset
Summation Method
708 The summation method also referred to as the underlying asset method is
typically used for investment companies or other types of assets or entities
for which value is primarily a factor of the values of their holdings
709 The key steps in the summation method are
(a) value each of the component assets that are part of the subject asset
using the appropriate valuation approaches and methods andGeneral Standards
General Standards – IVS 105 Valuation Approaches and Methods
45
(b) add the value of the component assets together to reach the value of the
subject asset
Cost Considerations
7010 The cost approach should capture all of the costs that would be incurred by
a typical participant
7011 The cost elements may differ depending on the type of the asset and should
include the direct and indirect costs that would be required to replace
recreate the asset as of the valuation date Some common items to
consider include
(a) direct costs
1 materials and
2 labour
(b) indirect costs
1 transport costs
2 installation costs
3 professional fees (design permit architectural legal etc)
4 other fees (commissions etc)
5 overheads
6 taxes
7 finance costs (eg interest on debt financing) and
8 profit marginentrepreneurial profit to the creator of the asset (eg
return to investors)
7012 An asset acquired from a third party would presumably reflect their costs
associated with creating the asset as well as some form of profit margin to
provide a return on their investment As such under bases of value that
assume a hypothetical transaction it may be appropriate to include an
assumed profit margin on certain costs which can be expressed as a target
profit either a lump sum or a percentage return on cost or value However
financing costs if included may already reflect participants’ required return
on capital deployed so valuers should be cautious when including both
financing costs and profit margins
7013 When costs are derived from actual quoted or estimated prices by third
party suppliers or contractors these costs will already include a third parties’
desired level of profit
7014 The actual costs incurred in creating the subject asset (or a comparable
reference asset) may be available and provide a relevant indicator of the
cost of the asset However adjustments may need to be made to reflect the
followingInternational Valuation Standards
General Standards – IVS 105 Valuation Approaches and Methods
46
(a) cost fluctuations between the date on which this cost was incurred and
the valuation date and
(b) any atypical or exceptional costs or savings that are reflected in the
cost data but that would not arise in creating an equivalent
80 DepreciationObsolescence
801 In the context of the cost approach depreciation refers to adjustments
made to the estimated cost of creating an asset of equal utility to reflect
the impact on value of any obsolescence affecting the subject asset This
meaning is different from the use of the word in financial reporting or tax law
where it generally refers to a method for systematically expensing capital
expenditure over time
802 Depreciation adjustments are normally considered for the following types
of obsolescence which may be further divided into subcategories when
making adjustments
(a) Physical obsolescence Any loss of utility due to the physical
deterioration of the asset or its components resulting from its age
and usage
(b) Functional obsolescence Any loss of utility resulting from inefficiencies
in the subject asset compared to its replacement such as its design
specification or technology being outdated
(c) External or economic obsolescence Any loss of utility caused
by economic or locational factors external to the asset This type of
obsolescence can be temporary or permanent
803 Depreciationobsolescence should consider the physical and economic lives
of the asset
(a) The physical life is how long the asset could be used before it would be
worn out or beyond economic repair assuming routine maintenance but
disregarding any potential for refurbishment or reconstruction
(b) The economic life is how long it is anticipated that the asset could
generate financial returns or provide a nonfinancial benefit in its
current use It will be influenced by the degree of functional or economic
obsolescence to which the asset is exposed
804 Except for some types of economic or external obsolescence most types of
obsolescence are measured by making comparisons between the subject
asset and the hypothetical asset on which the estimated replacement or
reproduction cost is based However when market evidence of the effect of
obsolescence on value is available that evidence should be considered
805 Physical obsolescence can be measured in two different ways
(a) curable physical obsolescence ie the cost to fixcure the
obsolescence orGeneral Standards
General Standards – IVS 105 Valuation Approaches and Methods
47
(b) incurable physical obsolescence which considers the asset’s age
expected total and remaining life where the adjustment for physical
obsolescence is equivalent to the proportion of the expected total life
consumed Total expected life may be expressed in any reasonable way
including expected life in years mileage units produced etc
806 There are two forms of functional obsolescence
(a) excess capital cost which can be caused by changes in design
materials of construction technology or manufacturing techniques
resulting in the availability of modern equivalent assets with lower capital
costs than the subject asset and
(b) excess operating cost which can be caused by improvements in design
or excess capacity resulting in the availability of modern equivalent
assets with lower operating costs than the subject asset
807 Economic obsolescence may arise when external factors affect an individual
asset or all the assets employed in a business and should be deducted
after physical deterioration and functional obsolescence For real estate
examples of economic obsolescence include
(a) adverse changes to demand for the products or services produced by
the asset
(b) oversupply in the market for the asset
(c) a disruption or loss of a supply of labour or raw material or
(d) the asset being used by a business that cannot afford to pay a market
rent for the assets and still generate a market rate of return
808 Cash or cash equivalents do not suffer obsolescence and are not adjusted
Marketable assets are not adjusted below their market value determined
using the market approach 48Asset Standards
Asset Standards – IVS 200 Businesses and Business Interests
49
Asset Standards 
IVS 200 Businesses and Business Interests
Contents Paragraphs
Overview 10
Introduction 20
Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for Businesses and Business Interests 80
Ownership Rights 90
Business Information 100
Economic and Industry Considerations 110
Operating and NonOperating Assets 120
Capital Structure Considerations 130
10 Overview
101 The principles contained in the General Standards apply to valuations
of businesses and business interests This standard contains additional
requirements that apply to valuations of businesses and business interests
20 Introduction
201 The definition of what constitutes a business may differ depending on
the purpose of a valuation However generally a business conducts a
commercial industrial service or investment activity Businesses can
take many forms such as corporations partnerships joint ventures and
sole proprietorships The value of a business may differ from the sum of
the values of the individual assets or liabilities that make up that business
When a business value is greater than the sum of the recorded and
unrecorded net tangible and identifiable intangible assets of the business
the excess value is often referred to as going concern value or goodwill International Valuation Standards
Asset Standards – IVS 200 Businesses and Business Interests
50
202 When valuing individual assets or liabilities owned by a business valuers
should follow the applicable standard for that type of asset or liability (IVS
210 Intangible Assets IVS 400 Real Property Interests etc)
203 Valuers must establish whether the valuation is of the entire entity shares or
a shareholding in the entity (whether a controlling or noncontrolling interest)
or a specific business activity of the entity The type of value being provided
must be appropriate to the purpose of the valuation and communicated as
part of the scope of the engagement (see IVS 101 Scope of Work) It is
especially critical to clearly define the business or business interest being
valued as even when a valuation is performed on an entire entity there may
be different levels at which that value could be expressed For example
(a) Enterprise value Often described as the total value of the equity in a
business plus the value of its debt or debtrelated liabilities minus any
cash or cash equivalents available to meet those liabilities
(b) Total invested capital value The total amount of money currently invested
in a business regardless of the source often reflected as the value of
total assets less current liabilities and cash
(c) Operating Value The total value of the operations of the business
excluding the value of any nonoperating assets and liabilities
(d) Equity value The value of a business to all of its equity shareholders
204 Valuations of businesses are required for different purposes including
acquisitions mergers and sales of businesses taxation litigation insolvency
proceedings and financial reporting Business valuations may also be
needed as an input or step in other valuations such as the valuation of stock
options particular class(es) of stock or debt
30 Bases of Value
301 In accordance with IVS 104 Bases of Value a valuer must select the
appropriate basis(es) of value when valuing a business or business interest
302 Often business valuations are performed using bases of value defined by
entitiesorganisations other than the IVSC (some examples of which are
mentioned in IVS 104 Bases of Value) and it is the valuer’s responsibility
to understand and follow the regulation case law andor other interpretive
guidance related to those bases of value as of the valuation date
40 Valuation Approaches and Methods
401 The three principal valuation approaches described in IVS 105 Valuation
Approaches and Methods may be applied to the valuation of businesses and
business interests
402 When selecting an approach and method in addition to the requirements
of this standard a valuer must follow the requirements of IVS 105 Valuation
Approaches and Methods including para 103
50 Market Approach
501 The market approach is frequently applied in the valuation of businesses
and business interests as these assets often meet the criteria in IVS 105
Valuation Approaches and Methods para 202 or 203 When valuing Asset Standards
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51
businesses and business interests under the Market Approach valuers
should follow the requirements of IVS 105 Valuation Approaches and
Methods sections 20 and 30
502 The three most common sources of data used to value businesses and
business interests using the market approach are
(a) public stock markets in which ownership interests of similar businesses
are traded
(b) the acquisition market in which entire businesses or controlling interests
in businesses are bought and sold and
(c) prior transactions in shares or offers for the ownership of the
subject business
503 There must be a reasonable basis for comparison with and reliance upon
similar businesses in the market approach These similar businesses
should be in the same industry as the subject business or in an industry
that responds to the same economic variables Factors that should be
considered in assessing whether a reasonable basis for comparison exists
include
(a) similarity to the subject business in terms of qualitative and quantitative
business characteristics
(b) amount and verifiability of data on the similar business and
(c) whether the price of the similar business represents an arm’s length and
orderly transaction
504 When applying a market multiple adjustments such as those in para
608 may be appropriate to both the subject company and the
comparable companies
505 Valuers should follow the requirements of IVS 105 Valuation
Approaches and Methods paras 307 308 when selecting and adjusting
comparable transactions
506 Valuers should follow the requirements of IVS 105 Valuation Approaches
and Methods paras 3013 3014 when selecting and adjusting comparable
public company information
60 Income Approach
601 The income approach is frequently applied in the valuation of businesses
and business interests as these assets often meet the criteria in IVS 105
Valuation Approaches and Methods paras 402 or 403
602 When the income approach is applied valuers should follow the
requirements of IVS 105 Valuation Approaches and Methods sections
40 and 50
603 Income and cash flow related to a business or business interest can be
measured in a variety of ways and may be on a pretax or posttax basis
The capitalisation or discount rate applied must be consistent with the type
of income or cash flow used International Valuation Standards
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604 The type of income or cash flow used should be consistent with the type of
interest being valued For example
(a) enterprise value is typically derived using cash flows before debt
servicing costs and an appropriate discount rate applicable to enterprise
level cash flows such as a weightedaverage cost of capital and
(b) equity value may be derived using cash flows to equity that is after debt
servicing costs and an appropriate discount rate applicable to equity
level cash flows such as a cost of equity
605 The income approach requires the estimation of a capitalisation rate when
capitalising income or cash flow and a discount rate when discounting cash
flow In estimating the appropriate rate factors such as the level of interest
rates rates of return expected by participants for similar investments and the
risk inherent in the anticipated benefit stream are considered (see IVS 105
Valuation Approaches and Methods paras 50295031)
606 In methods that employ discounting expected growth may be explicitly
considered in the forecasted income or cash flow In capitalisation
methods expected growth is normally reflected in the capitalisation rate If
a forecasted cash flow is expressed in nominal terms a discount rate that
takes into account the expectation of future price changes due to inflation
or deflation should be used If a forecasted cash flow is expressed in real
terms a discount rate that takes no account of expected price changes due
to inflation or deflation should be used
607 Under the income approach the historical financial statements of a business
entity are often used as guide to estimate the future income or cash flow
of the business Determining the historical trends over time through ratio
analysis may help provide the necessary information to assess the risks
inherent in the business operations in the context of the industry and the
prospects for future performance
608 Adjustments may be appropriate to reflect differences between the actual
historic cash flows and those that would be experienced by a buyer of the
business interest on the valuation date Examples include
(a) adjusting revenues and expenses to levels that are reasonably
representative of expected continuing operations
(b) presenting financial data of the subject business and comparison
businesses on a consistent basis
(c) adjusting nonarm’s length transactions (such as contracts with
customers or suppliers) to market rates
(d) adjusting the cost of labour or of items leased or otherwise contracted
from related parties to reflect market prices or rates
(e) reflecting the impact of nonrecurring events from historic revenue and
expense items Examples of nonrecurring events include losses caused
by strikes new plant startup and weather phenomena However the
forecast cash flows should reflect any nonrecurring revenues or
expenses that can be reasonably anticipated and past occurrences may
be indicative of similar events in the future andAsset Standards
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(f) adjusting the inventory accounting to compare with similar businesses
whose accounts may be kept on a different basis from the subject
business or to more accurately reflect economic reality
609 When using an income approach it may also be necessary to make
adjustments to the valuation to reflect matters that are not captured in
either the cash flow forecasts or the discount rate adopted Examples may
include adjustments for the marketability of the interest being valued or
whether the interest being valued is a controlling or noncontrolling interest
in the business However valuers should ensure that adjustments to the
valuation do not reflect factors that were already reflected in the cash
flows or discount rate For example whether the interest being valued
is a controlling or noncontrolling interest is often already reflected in the
forecasted cash flows
6010 While many businesses may be valued using a single cash flow scenario
valuers may also apply multiscenario or simulation models particularly
when there is significant uncertainty as to the amount andor timing of future
cash flows
70 Cost Approach
701 The cost approach cannot normally be applied in the valuation of
businesses and business interests as these assets seldom meet the
criteria in IVS 105 Valuation Approaches and Methods paras 702 or
703 However the cost approach is sometimes applied in the valuation of
businesses particularly when
(a) the business is an early stage or startup business where profits and
or cash flow cannot be reliably determined and comparisons with other
businesses under the market approach is impractical or unreliable
(b) the business is an investment or holding business in which case the
summation method is as described in IVS 105 Valuation Approaches and
Methods paras 708709 andor
(c) the business does not represent a going concern andor the value
of its assets in a liquidation may exceed the business’ value as a
going concern
702 In the circumstances where a business or business interest is valued using a
cost approach valuers should follow the requirements of IVS 105 Valuation
Approaches and Methods sections 70 and 80
80 Special Considerations for Businesses and Business Interests
801 The following sections address a nonexhaustive list of topics relevant to the
valuation of businesses and business interests
(a) Ownership Rights (section 90)
(b) Business Information (section 100)
(c) Economic and Industry Considerations (section 110)
(d) Operating and NonOperating Assets (section 120)
(e) Capital Structure Considerations (section 130)International Valuation Standards
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90 Ownership Rights
901 The rights privileges or conditions that attach to the ownership interest
whether held in proprietorship corporate or partnership form require
consideration in the valuation process Ownership rights are usually defined
within a jurisdiction by legal documents such as articles of association
clauses in the memorandum of the business articles of incorporation
bylaws partnership agreements and shareholder agreements (collectively
corporate documents) In some situations it may also be necessary to
distinguish between legal and beneficial ownership
902 Corporate documents may contain restrictions on the transfer of the interest
or other provisions relevant to value For example corporate documents
may stipulate that the interest should be valued as a pro rata fraction of
the entire issued share capital regardless of whether it is a controlling or
noncontrolling interest In each case the rights of the interest being valued
and the rights attaching to any other class of interest need to be considered
at the outset
903 Care should be taken to distinguish between rights and obligations inherent
to the interest and those that may be applicable only to a particular
shareholder (ie those contained in an agreement between current
shareholders which may not apply to a potential buyer of the ownership
interest) Depending on the basis(es) of value used the valuer may be
required to consider only the rights and obligations inherent to the subject
interest or both those rights and considerations inherent to the subject
interest and those that apply to a particular owner
904 All the rights and preferences associated with a subject business or
business interest should be considered in a valuation including
(a) if there are multiple classes of stock the valuation should consider the
rights of each different class including but not limited to
1 liquidation preferences
2 voting rights
3 redemption conversion and participation provisions and
4 put andor call rights
(b) When a controlling interest in a business may have a higher value than
a noncontrolling interest Control premiums or discounts for lack of
control may be appropriate depending on the valuation method(s) applied
(see IVS 105 Valuation Approaches and Methods para 3017(b)) In
respect of actual premiums paid in completed transactions the valuer
should consider whether the synergies and other factors that caused
the acquirer to pay those premiums are applicable to the subject asset to
a comparable degree
100 Business Information
1001 The valuation of a business entity or interest frequently requires reliance
upon information received from management representatives of the
management or other experts As required by IVS 105 Valuation
Approaches and Methods para 107 a valuer must assess the Asset Standards
Asset Standards – IVS 200 Businesses and Business Interests
55
reasonableness of information received from management representatives
of management or other experts and evaluate whether it is appropriate to
rely on that information for the valuation purpose For example prospective
financial information provided by management may reflect ownerspecific
synergies that may not be appropriate when using a basis of value that
requires a participant perspective
1002 Although the value on a given date reflects the anticipated benefits of future
ownership the history of a business is useful in that it may give guidance
as to the expectations for the future Valuers should therefore consider the
business’ historical financial statements as part of a valuation engagement
To the extent the future performance of the business is expected to deviate
significantly from historical experience a valuer must understand why
historical performance is not representative of the future expectations of
the business
110 Economic and Industry Considerations
1101 Awareness of relevant economic developments and specific industry trends
is essential for all valuations Matters such as political outlook government
policy exchange rates inflation interest rates and market activity may affect
assets in different locations andor sectors of the economy quite differently
These factors can be particularly important in the valuation of businesses
and business interests as businesses may have complex structures involving
multiple locations and types of operations For example a business may be
impacted by economic and industry factors specific related to
(a) the registered location of the business headquarters and legal form of
the business
(b) the nature of the business operations and where each aspect of the
business is conducted (ie manufacturing may be done in a different
location to where research and development is conducted)
(c) where the business sells its goods andor services
(d) the currency(ies) the business uses
(e) where the suppliers of the business are located and
(f) what tax and legal jurisdictions the business is subject to
120 Operating and NonOperating Assets
1201 The valuation of an ownership interest in a business is only relevant in
the context of the financial position of the business at a point in time It is
important to understand the nature of assets and liabilities of the business
and to determine which items are required for use in the incomeproducing
operations of the business and which ones are redundant or excess to the
business at the valuation date
1202 Most valuation methods do not capture the value of assets that are not
required for the operation of the business For example a business valued
using a multiple of EBITDA would only capture the value the assets utilised
in generating that level of EBITDA If the business had nonoperating
assets or liabilities such as an idle manufacturing plant the value of that International Valuation Standards
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nonoperating plant would not be captured in the value Depending on the
level of value appropriate for the valuation engagement (see para 203) the
value of nonoperating assets may need to be separately determined and
added to the operating value of the business
1203 Businesses may have unrecorded assets andor liabilities that are not
reflected on the balance sheet Such assets could include intangible
assets machinery and equipment that is fully depreciated and legal
liabilitieslawsuits
1204 When separately considering nonoperating assets and liabilities a valuer
should ensure that the income and expenses associated with nonoperating
assets are excluded from the cash flow measurements and projections
used in the valuation For example if a business has a significant liability
associated with an underfunded pension and that liability is valued
separately the cash flows used in the valuation of the business should
exclude any catchup payments related to that liability
1205 If the valuation considers information from publiclytraded businesses the
publiclytraded stock prices implicitly include the value of nonoperating
assets if any As such valuers must consider adjusting information from
publiclytraded businesses to exclude the value income and expenses
associated with nonoperating assets
130 Capital Structure Considerations
1301 Businesses are often financed through a combination of debt and equity
However in many cases valuers may be asked to value only equity or a
particular class of equity in a business While equity or a particular class of
equity can occasionally be valued directly more often the enterprise value
of the business is determined and then that value is allocated between debt
and any types of equity
1302 When the value of debt is equal to its carrying valuebook value allocations
of value may be straightforward For example in such cases it may be
appropriate to deduct the book value of debt from enterprise value to
calculate equity value (sometimes referred to as a waterfall method of
value allocation) However valuers should not necessarily assume that the
value of debt and its book value are equal
1303 In circumstances where the value of debt may differ from its book
value valuers should either value the debt directly or use a method that
appropriately allocates value to debt and any equity securities such as a
probabilityweighted expected return method or an optionpricing model
 Asset Standards
Asset Standards – IVS 210 Intangible Assets
57
IVS 210 Intangible Assets
Contents Paragraphs
Overview 10
Introduction 20
Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for Intangible Assets 80
Discount RatesRates of Return for Intangible Assets 90
Intangible Asset Economic Lives 100
Tax Amortisation Benefit (TAB) 110
10 Overview
101 The principles contained in the General Standards apply to valuations
of intangible assets and valuations with an intangible assets component
This standard contains additional requirements that apply to valuations of
intangible assets
20 Introduction
201 An intangible asset is a nonmonetary asset that manifests itself by its
economic properties It does not have physical substance but grants rights
andor economic benefits to its owner
202 Specific intangible assets are defined and described by characteristics
such as their ownership function market position and image These
characteristics differentiate intangible assets from one another
203 There are many types of intangible assets but they are often considered to
fall into one or more of the following categories (or goodwill)
(a) Marketingrelated Marketingrelated intangible assets are used
primarily in the marketing or promotion of products or services
Examples include trademarks trade names unique trade design and
internet domain names
(b) Customerrelated Customerrelated intangible assets include customer
lists backlog customer contracts and contractual and noncontractual
customer relationships
(c) Artisticrelated Artisticrelated intangible assets arise from the right to
benefits from artistic works such as plays books films and music and
from noncontractual copyright protectionInternational Valuation Standards
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(d) Contractrelated Contractrelated intangible assets represent the value
of rights that arise from contractual agreements Examples include
licensing and royalty agreements service or supply contracts lease
agreements permits broadcast rights servicing contracts employment
contracts and noncompetition agreements and natural resource rights
(e) Technologybased Technologyrelated intangible assets arise from
contractual or noncontractual rights to use patented technology
unpatented technology databases formulae designs software
processes or recipes
204 Although similar intangible assets within the same class will share
some characteristics with one another they will also have differentiating
characteristics that will vary according to the type of intangible asset In
addition certain intangible assets such as brands may represent a
combination of categories in para 203
205 Particularly in valuing an intangible asset valuers must understand
specifically what needs to be valued and the purpose of the valuation
For example customer data (names addresses etc) typically has a very
different value from customer contracts (those contracts in place on the
valuation date) and customer relationships (the value of the ongoing
customer relationship including existing and future contracts) What
intangible assets need to be valued and how those intangible assets are
defined may differ depending on the purpose of the valuation and the
differences in how intangible assets are defined can lead to significant
differences in value
206 Generally goodwill is any future economic benefit arising from a business
an interest in a business or from the use of a group of assets which has
not been separately recognised in another asset The value of goodwill is
typically measured as the residual amount remaining after the values of all
identifiable tangible intangible and monetary assets adjusted for actual or
potential liabilities have been deducted from the value of a business It is
often represented as the excess of the price paid in a real or hypothetical
acquisition of a company over the value of the company’s other identified
assets and liabilities For some purposes goodwill may need to be further
divided into transferable goodwill (that which can be transferred to third
parties) and nontransferable or personal goodwill
207 As the amount of goodwill is dependent on which other tangible and
intangible assets are recognised its value can be different when calculated
for different purposes For example in a business combination accounted for
under IFRS or US GAAP an intangible asset is only recognised to the extent
that it
(a) is separable ie capable of being separated or divided from the entity
and sold transferred licensed rented or exchanged either individually
or together with a related contract identifiable asset or liability
regardless of whether the entity intends to do so or
(b) arises from contractual or other legal rights regardless of whether those
rights are transferable or separable from the entity or from other rights
and obligationsAsset Standards
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208 While the aspects of goodwill can vary depending on the purpose of the
valuation goodwill frequently includes elements such as
(a) companyspecific synergies arising from a combination of two or more
businesses (eg reductions in operating costs economies of scale or
product mix dynamics)
(b) opportunities to expand the business into new and different markets
(c) the benefit of an assembled workforce (but generally not any intellectual
property developed by members of that workforce)
(d) the benefit to be derived from future assets such as new customers and
future technologies and
(e) assemblage and going concern value
209 Valuers may perform direct valuations of intangible assets where the
value of the intangible assets is the purpose of the analysis or one part of
the analysis However when valuing businesses business interests real
property and machinery and equipment valuers should consider whether
there are intangible assets associated with those assets and whether those
directly or indirectly impact the asset being valued For example when
valuing a hotel based on an income approach the contribution to value of the
hotel’s brand may already be reflected in the profit generated by the hotel
2010 Intangible asset valuations are performed for a variety of purposes It is the
valuer’s responsibility to understand the purpose of a valuation and whether
intangible assets should be valued whether separately or grouped with other
assets A nonexhaustive list of examples of circumstances that commonly
include an intangible asset valuation component is provided below
(a) For financial reporting purposes valuations of intangible assets are often
required in connection with accounting for business combinations asset
acquisitions and sales and impairment analysis
(b) For tax reporting purposes intangible asset valuations are frequently
needed for transfer pricing analyses estate and gift tax planning and
reporting and ad valorem taxation analyses
(c) Intangible assets may be the subject of litigation requiring valuation
analysis in circumstances such as shareholder disputes damage
calculations and marital dissolutions (divorce)
(d) Other statutory or legal events may require the valuation of intangible
assets such as compulsory purchaseseminent domain proceedings
(e) Valuers are often asked to value intangible assets as part of general
consulting collateral lending and transactional support engagements
30 Bases of Value
301 In accordance with IVS 104 Bases of Value a valuer must select the
appropriate basis(es) of value when valuing intangible assets International Valuation Standards
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302 Often intangible asset valuations are performed using bases of value
defined by entitiesorganisations other than the IVSC (some examples
of which are mentioned in IVS 104 Bases of Value) and the valuer must
understand and follow the regulation case law and other interpretive
guidance related to those bases of value as of the valuation date
40 Valuation Approaches and Methods
401 The three valuation approaches described in IVS 105 Valuation Approaches
can all be applied to the valuation of intangible assets
402 When selecting an approach and method in addition to the requirements
of this standard a valuer must follow the requirements of IVS 105 Valuation
Approaches including para 103
50 Market Approach
501 Under the market approach the value of an intangible asset is determined
by reference to market activity (for example transactions involving identical
or similar assets)
502 Transactions involving intangible assets frequently also include other assets
such as a business combination that includes intangible assets
503 Valuers must comply with paras 202 and 203 of IVS 105 when determining
whether to apply the market approach to the valuation of intangible assets
In addition valuers should only apply the market approach to value
intangible assets if both of the following criteria are met
(a) information is available on arm’s length transactions involving identical or
similar intangible assets on or near the valuation date and
(b) sufficient information is available to allow the valuer to adjust for all
significant differences between the subject intangible asset and those
involved in the transactions
504 The heterogeneous nature of intangible assets and the fact that intangible
assets seldom transact separately from other assets means that it is rarely
possible to find market evidence of transactions involving identical assets
If there is market evidence at all it is usually in respect of assets that are
similar but not identical
505 Where evidence of either prices or valuation multiples is available valuers
should make adjustments to these to reflect differences between the
subject asset and those involved in the transactions These adjustments
are necessary to reflect the differentiating characteristics of the subject
intangible asset and the assets involved in the transactions Such
adjustments may only be determinable at a qualitative rather than
quantitative level However the need for significant qualitative adjustments
may indicate that another approach would be more appropriate for the
valuation
506 Consistent with the above examples of intangible assets for which the
market approach is sometimes used include
(a) broadcast spectrumAsset Standards
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(b) internet domain names and
(c) taxi medallions
507 The guideline transactions method is generally the only market approach
method that can be applied to intangible assets
508 In rare circumstances a security sufficiently similar to a subject
intangible asset may be publicly traded allowing the use of the guideline
public company method One example of such securities is contingent
value rights (CVRs) that are tied to the performance of a particular product
or technology
60 Income Approach
601 Under the income approach the value of an intangible asset is determined
by reference to the present value of income cash flows or cost savings
attributable to the intangible asset over its economic life
602 Valuers must comply with paras 402 and 403 of IVS 105 Valuation
Approaches and Methods when determining whether to apply the income
approach to the valuation of intangible assets
603 Income related to intangible assets is frequently included in the price paid
for goods or a service It may be challenging to separate the income related
to the intangible asset from income related to other tangible and intangible
assets Many of the income approach methods are designed to separate the
economic benefits associated with a subject intangible asset
604 The income approach is the most common method applied to the valuation
of intangible assets and is frequently used to value intangible assets
including the following
(a) technology
(b) customerrelated intangibles (eg backlog contracts relationships)
(c) tradenamestrademarksbrands
(d) operating licenses (eg franchise agreements gaming licenses
broadcast spectrum) and
(e) noncompetition agreements
Income Approach Methods
605 There are many income approach methods The following methods are
discussed in this standard in more detail
(a) excess earnings method
(b) relieffromroyalty method
(c) premium profit method or withandwithout method
(d) greenfield method and
(e) distributor methodInternational Valuation Standards
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Excess Earnings Method
606 The excess earnings method estimates the value of an intangible asset as
the present value of the cash flows attributable to the subject intangible
asset after excluding the proportion of the cash flows that are attributable
to other assets required to generate the cash flows (contributory assets)
It is often used for valuations where there is a requirement for the acquirer
to allocate the overall price paid for a business between tangible assets
identifiable intangible assets and goodwill
607 Contributory assets are assets that are used in conjunction with the
subject intangible asset in the realisation of prospective cash flows
associated with the subject intangible asset Assets that do not contribute
to the prospective cash flows associated with the subject intangible asset
are not contributory assets
608 The excess earnings method can be applied using several periods of
forecasted cash flows (multiperiod excess earnings method or MPEEM)
a single period of forecasted cash flows (singleperiod excess earnings
method) or by capitalising a single period of forecasted cash flows
(capitalised excess earnings method or the formula method)
609 The capitalised excess earnings method or formula method is generally only
appropriate if the intangible asset is operating in a steady state with stable
growthdecay rates constant profit margins and consistent contributory
asset levelscharges
6010 As most intangible assets have economic lives exceeding one period
frequently follow nonlinear growthdecay patterns and may require different
levels of contributory assets over time the MPEEM is the most commonly
used excess earnings method as it offers the most flexibility and allows
valuers to explicitly forecast changes in such inputs
6011 Whether applied in a singleperiod multiperiod or capitalised manner the
key steps in applying an excess earnings method are to
(a) forecast the amount and timing of future revenues driven by the subject
intangible asset and related contributory assets
(b) forecast the amount and timing of expenses that are required to
generate the revenue from the subject intangible asset and related
contributory assets
(c) adjust the expenses to exclude those related to creation of new
intangible assets that are not required to generate the forecasted
revenue and expenses Profit margins in the excess earnings method
may be higher than profit margins for the overall business because the
excess earnings method excludes investment in certain new intangible
assets For example
1 research and development expenditures related to development
of new technology would not be required when valuing only existing
technology and
2 marketing expenses related to obtaining new customers would not be
required when valuing existing customerrelated intangible assetsAsset Standards
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(d) identify the contributory assets that are needed to achieve the forecasted
revenue and expenses Contributory assets often include working
capital fixed assets assembled workforce and identified intangible
assets other than the subject intangible asset
(e) determine the appropriate rate of return on each contributory asset
based on an assessment of the risk associated with that asset For
example lowrisk assets like working capital will typically have a
relatively lower required return Contributory intangible assets and highly
specialised machinery and equipment often require relatively higher
rates of return
(f) in each forecast period deduct the required returns on contributory
assets from the forecast profit to arrive at the excess earnings
attributable to only the subject intangible asset
(g) determine the appropriate discount rate for the subject intangible asset
and present value or capitalise the excess earnings and
(h) if appropriate for the purpose of the valuation (see paras 11011104)
calculate and add the tax amortisation benefit (TAB) for the subject
intangible asset
6012 Contributory asset charges (CACs) should be made for all the current
and future tangible intangible and financial assets that contribute to the
generation of the cash flow and if an asset for which a CAC is required is
involved in more than one line of business its CAC should be allocated to
the different lines of business involved
6013 The determination of whether a CAC for elements of goodwill is appropriate
should be based on an assessment of the relevant facts and circumstances
of the situation and the valuer should not mechanically apply CACs or
alternative adjustments for elements of goodwill if the circumstances do not
warrant such a charge Assembled workforce as it is quantifiable is typically
the only element of goodwill for which a CAC should be taken Accordingly
valuers must ensure they have a strong basis for applying CACs for any
elements of goodwill other than assembled workforce
6014 CACs are generally computed on an aftertax basis as a fair return on
the value of the contributory asset and in some cases a return of the
contributory asset is also deducted The appropriate return on a contributory
asset is the investment return a typical participant would require on
the asset The return of a contributory asset is a recovery of the initial
investment in the asset There should be no difference in value regardless of
whether CACs are computed on a pretax or aftertax basis
6015 If the contributory asset is not wasting in nature like working capital only a
fair return on the asset is required
6016 For contributory intangible assets that were valued under a relieffrom
royalty method the CAC should be equal to the royalty (generally adjusted
to an aftertax royalty rate)International Valuation Standards
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64
6017 The excess earnings method should be applied only to a single intangible
asset for any given stream of revenue and income (generally the primary
or most important intangible asset) For example in valuing the intangible
assets of a company utilising both technology and a tradename in delivering
a product or service (ie the revenue associated with the technology and the
tradename is the same) the excess earnings method should only be used to
value one of the intangible assets and an alternative method should be used
for the other asset However if the company had multiple product lines
each using a different technology and each generating distinct revenue and
profit the excess earnings method may be applied in the valuation of the
multiple different technologies
RelieffromRoyalty Method
6018 Under the relieffromroyalty method the value of an intangible asset is
determined by reference to the value of the hypothetical royalty payments
that would be saved through owning the asset as compared with licensing
the intangible asset from a third party Conceptually the method may
also be viewed as a discounted cash flow method applied to the cash flow
that the owner of the intangible asset could receive through licensing the
intangible asset to third parties
6019 The key steps in applying a relieffromroyalty method are to
(a) develop projections associated with the intangible asset being valued for
the life of the subject intangible asset The most common metric
projected is revenue as most royalties are paid as a percentage
of revenue However other metrics such as a perunit royalty may be
appropriate in certain valuations
(b) develop a royalty rate for the subject intangible asset Two methods can
be used to derive a hypothetical royalty rate The first is based on market
royalty rates for comparable or similar transactions A prerequisite
for this method is the existence of comparable intangible assets that are
licensed at arm’s length on a regular basis The second method is based
on a split of profits that would hypothetically be paid in an arm’s length
transaction by a willing licensee to a willing licensor for the rights to use
the subject intangible asset
(c) apply the selected royalty rate to the projections to calculate the royalty
payments avoided by owning the intangible asset
(d) estimate any additional expenses for which a licensee of the subject
asset would be responsible This can include upfront payments required
by some licensors A royalty rate should be analysed to determine
whether it assumes expenses (such as maintenance marketing and
advertising) are the responsibility of the licensor or the licensee A
royalty rate that is gross would consider all responsibilities and
expenses associated with ownership of a licensed asset to reside
with the licensor while a royalty that is net would consider some or all
responsibilities and expenses associated with the licensed asset to
reside with the licensee Depending on whether the royalty is gross or
net the valuation should exclude or include respectively a deduction
for expenses such as maintenance marketing or advertising expenses
related to the hypothetically licensed asset Asset Standards
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(e) if the hypothetical costs and royalty payments would be tax deductible
it may be appropriate to apply the appropriate tax rate to determine
the aftertax savings associated with ownership of the intangible asset
However for certain purposes (such as transfer pricing) the effects of
taxes are generally not considered in the valuation and this step should
be skipped
(f) determine the appropriate discount rate for the subject intangible asset
and present value or capitalise the savings associated with ownership of
the intangible asset and
(g) if appropriate for the purpose of the valuation (see paras 11011104)
calculate and add the TAB for the subject intangible asset
6020 Whether a royalty rate is based on market transactions or a profit split
method (or both) its selection should consider the characteristics of the
subject intangible asset and the environment in which it is utilised The
consideration of those characteristics form the basis for selection of a
royalty rate within a range of observed transactions andor the range of profit
available to the subject intangible asset in a profit split Factors that should
be considered include the following
(a) Competitive environment The size of the market for the intangible asset
the availability of realistic alternatives the number of competitors
barriers to entry and presence (or absence) of switching costs
(b) Importance of the subject intangible to the owner Whether the subject
asset is a key factor of differentiation from competitors the importance
it plays in the owner’s marketing strategy its relative importance
compared with other tangible and intangible assets and the amount the
owner spends on creation upkeep and improvement of the subject asset
(c) Life cycle of the subject intangible The expected economic life of the
subject asset and any risks of the subject intangible becoming obsolete
6021 When selecting a royalty rate a valuer should also consider the following
(a) When entering a licence arrangement the royalty rate participants would
be willing to pay depends on their profit levels and the relative
contribution of the licensed intangible asset to that profit For example
a manufacturer of consumer products would not license a tradename at
a royalty rate that leads to the manufacturer realising a lower profit selling
branded products compared with selling generic products
(b) When considering observed royalty transactions a valuer should
understand the specific rights transferred to the licensee and any
limitations For example royalty agreements may include significant
restrictions on the use of a licensed intangible asset such as a restriction
to a particular geographic area or for a product In addition the valuer
should understand how the payments under the licensing agreement
are structured including whether there are upfront payments milestone
payments putscalls to acquire the licensed property outright etcInternational Valuation Standards
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WithandWithout Method
6022 The withandwithout method indicates the value of an intangible asset
by comparing two scenarios one in which the business uses the subject
intangible asset and one in which the business does not use the subject
intangible asset (but all other factors are kept constant)
6023 The comparison of the two scenarios can be done in two ways
(a) calculating the value of the business under each scenario with the
difference in the business values being the value of the subject intangible
asset and
(b) calculating for each future period the difference between the profits in
the two scenarios The present value of those amounts is then used to
reach the value of the subject intangible asset
6024 In theory either method should reach a similar value for the intangible asset
provided the valuer considers not only the impact on the entity’s profit but
additional factors such as differences between the two scenarios in working
capital needs and capital expenditures
6025 The withandwithout method is frequently used in the valuation of
noncompetition agreements but may be appropriate in the valuation of
other intangible assets in certain circumstances
6026 The key steps in applying the withandwithout method are to
(a) prepare projections of revenue expenses capital expenditures and
working capital needs for the business assuming the use of all of the
assets of the business including the subject intangible asset These are
the cash flows in the with scenario
(b) use an appropriate discount rate to present value the future cash flows
in the with scenario andor calculate the value of the business in the
with scenario
(c) prepare projections of revenue expenses capital expenditures and
working capital needs for the business assuming the use of all of the
assets of the business except the subject intangible asset These are the
cash flows in the without scenario
(d) use an appropriate discount rate for the business present value the
future cash flows in the with scenario andor calculate the value of the
business in the with scenario
(e) deduct the present value of cash flows or the value of the business in
the without scenario from the present value of cash flows or value of
the business in the with scenario and
(f) if appropriate for the purpose of the valuation (see paras 11011104)
calculate and add the TAB for the subject intangible asset
6027 As an additional step the difference between the two scenarios may need
to be probabilityweighted For example when valuing a noncompetition
agreement the individual or business subject to the agreement may choose
not to compete even if the agreement were not in place Asset Standards
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6028 The differences in value between the two scenarios should be reflected
solely in the cash flow projections rather than by using different discount
rates in the two scenarios
Greenfield Method
6029 Under the greenfield method the value of the subject intangible is
determined using cash flow projections that assume the only asset of the
business at the valuation date is the subject intangible All other tangible and
intangible assets must be bought built or rented
6030 The greenfield method is conceptually similar to the excess earnings
method However instead of subtracting contributory asset charges from
the cash flow to reflect the contribution of contributory assets the greenfield
method assumes that the owner of the subject asset would have to build
buy or rent the contributory assets When building or buying the contributory
assets the cost of a replacement asset of equivalent utility is used rather
than a reproduction cost
6031 The greenfield method is often used to estimate the value of enabling
intangible assets such as franchise agreements and broadcast spectrum
6032 The key steps in applying the greenfield method are to
(a) prepare projections of revenue expenses capital expenditures and
working capital needs for the business assuming the subject intangible
asset is the only asset owned by the subject business at the valuation
date including the time period needed to ramp up to stabilised levels
(b) estimate the timing and amount of expenditures related to the
acquisition creation or rental of all other assets needed to operate the
subject business
(c) using an appropriate discount rate for the business present value the
future cash flows to determine the value of the subject business with only
the subject intangible in place and
(d) if appropriate for the purpose of the valuation (see paras 11011104)
calculate and add the TAB for the subject intangible asset
Distributor Method
6033 The distributor method sometimes referred to as the disaggregated method
is a variation of the multiperiod excess earnings method sometimes
used to value customerrelated intangible assets The underlying theory
of the distributor method is that businesses that are comprised of various
functions are expected to generate profits associated with each function
As distributors generally only perform functions related to distribution of
products to customers rather than development of intellectual property
or manufacturing information on profit margins earned by distributors
is used to estimate the excess earnings attributable to customerrelated
intangible assets
6034 The distributor method is appropriate to value customerrelated intangible
assets when another intangible asset (for example technology or a brand) is
deemed to be the primary or most significant intangible asset and is valued
under a multiperiod excess earnings methodInternational Valuation Standards
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6035 The key steps in applying the distributor method are to
(a) prepare projections of revenue associated with existing customer
relationships This should reflect expected growth in revenue from
existing customers as well as the effects of customer attrition
(b) identify comparable distributors that have customer relationships similar
to the subject business and calculate the profit margins achieved by
those distributors
(c) apply the distributor profit margin to the projected revenue
(d) identify the contributory assets related to performing a distribution
function that are needed to achieve the forecast revenue and expenses
Generally distributor contributory assets include working capital fixed
assets and workforce However distributors seldom require other assets
such as trademarks or technology The level of required contributory
assets should also be consistent with participants performing only a
distribution function
(e) determine the appropriate rate of return on each contributory asset
based on an assessment of the risk associated with that asset
(f) in each forecast period deduct the required returns on contributory
assets from the forecast distributor profit to arrive at the excess earnings
attributable to only the subject intangible asset
(g) determine the appropriate discount rate for the subject intangible asset
and present value the excess earnings and
(h) if appropriate for the purpose of the valuation (see paras 11011104)
calculate and add the TAB for the subject intangible asset
70 Cost Approach
701 Under the cost approach the value of an intangible asset is determined
based on the replacement cost of a similar asset or an asset providing
similar service potential or utility
702 Valuers must comply with paras 602 and 603 of IVS 105 Valuation
Approaches and Methods when determining whether to apply the cost
approach to the valuation of intangible assets
703 Consistent with these criteria the cost approach is commonly used for
intangible assets such as the following
(a) acquired thirdparty software
(b) internallydeveloped and internallyused nonmarketable software and
(c) assembled workforce
704 The cost approach may be used when no other approach is able to be
applied however a valuer should attempt to identify an alternative method
before applying the cost approach in situations where the subject asset
does not meet the criteria in paras 602 and 603 of IVS 105 Valuation
Approaches and Methods Asset Standards
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705 There are broadly two main methods that fall under the cost approach
replacement cost and reproduction cost However many intangible assets
do not have physical form that can be reproduced and assets such as
software which can be reproduced generally derive value from their
functionutility rather than their exact lines of code As such the replacement
cost is most commonly applied to the valuation of intangible assets
706 The replacement cost method assumes that a participant would pay no more
for the asset than the cost that would be incurred to replace the asset with a
substitute of comparable utility or functionality
707 Valuers should consider the following when applying the replacement cost
method
(a) the direct and indirect costs of replacing the utility of the asset including
labour materials and overhead
(b) whether the subject intangible asset is subject to obsolescence While
intangible assets do not become functionally or physically obsolete they
can be subject to economic obsolescence
(c) whether it is appropriate to include a profit markup on the included
costs An asset acquired from a third party would presumably reflect
their costs associated with creating the asset as well as some form of
profit to provide a return on investment As such under bases of value
(see IVS 104 Bases of Value) that assume a hypothetical transaction
it may be appropriate to include an assumed profit markup on costs
As noted in IVS 105 Valuation Approaches and Methods costs
developed based on estimates from third parties would be presumed to
already reflect a profit markup and
(d) opportunity costs may also be included which reflect costs associated
with not having the subject intangible asset in place for some period of
time during its creation
80 Special Considerations for Intangible Assets
801 The following sections address a nonexhaustive list of topics relevant to the
valuation of intangible assets
(a) Discount RatesRates of Return for Intangible Assets (section 90)
(b) Intangible Asset Economic Lives (section 100)
(c) Tax Amortisation Benefit (section 110)
90 Discount RatesRates of Return for Intangible Assets
901 Selecting discount rates for intangible assets can be challenging as
observable market evidence of discount rates for intangible assets is rare
The selection of a discount rate for an intangible asset generally requires
significant professional judgment
902 In selecting a discount rate for an intangible asset valuers should perform
an assessment of the risks associated with the subject intangible asset and
consider observable discount rate benchmarksInternational Valuation Standards
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903 When assessing the risks associated with an intangible asset a valuer
should consider factors including the following
(a) intangible assets often have higher risk than tangible assets
(b) if an intangible asset is highly specialised to its current use it may have
higher risk than assets with multiple potential uses
(c) single intangible assets may have more risk than groups of assets
(or businesses)
(d) intangible assets used in risky (sometimes referred to as nonroutine)
functions may have higher risk than intangible assets used in more low
risk or routine activities For example intangible assets used in research
and development activities may be higher risk than those used in
delivering existing products or services
(e) the life of the asset Similar to other investments intangible assets with
longer lives are often considered to have higher risk all else being equal
(f) intangible assets with more readily estimable cash flow streams such
as backlog may have lower risk than similar intangible assets with less
estimable cash flows such as customer relationships
904 Discount rate benchmarks are rates that are observable based on
market evidence or observed transactions The following are some of the
benchmark rates that a valuer should consider
(a) riskfree rates with similar maturities to the life of the subject
intangible asset
(b) cost of debt or borrowing rates with maturities similar to the life of the
subject intangible asset
(c) cost of equity or equity rates or return for participants for the subject
intangible asset
(d) weighted average cost of capital (WACC) of participants for the
subject intangible asset or of the company owningusing the subject
intangible asset
(e) in contexts involving a recent business acquisition including the subject
intangible asset the Internal Rate of Return (IRR) for the transaction
should be considered and
(f) in contexts involving a valuation of all assets of a business the valuer
should perform a weighted average return on assets (WARA) analysis to
confirm reasonableness of selected discount rates
100 Intangible Asset Economic Lives
1001 An important consideration in the valuation of an intangible asset
particularly under the income approach is the economic life of the asset
This may be a finite period limited by legal technological functional or
economic factors other assets may have an indefinite life The economic
life of an intangible asset is a different concept than the remaining useful life
for accounting or tax purposes Asset Standards
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1002 Legal technological functional and economic factors must be considered
individually and together in making an assessment of the economic life For
example a pharmaceutical technology protected by a patent may have a
remaining legal life of five years before expiry of the patent but a competitor
drug with improved efficacy may be expected to reach the market in three
years This might cause the economic life of the patent to be assessed as
only three years In contrast the expected economic life of the technology
could extend beyond the life of the patent if the knowhow associated with
the technology would have value in production of a generic drug beyond the
expiration of the patent
1003 In estimating the economic life of an intangible asset a valuer should also
consider the pattern of use or replacement Certain intangible assets may
be abruptly replaced when a new better or cheaper alternative becomes
available while others may be replaced slowly over time such as when a
software developer releases a new version of software every year but only
replaces a portion of the existing code with each new release
1004 For customerrelated intangibles attrition is a key factor in estimating
an economic life as well as the cash flows used to value the customer
related intangibles Attrition applied in the valuation of intangible assets
is a quantification of expectations regarding future losses of customers
While it is a forwardlooking estimate attrition is often based on historical
observations of attrition
1005 There are a number of ways to measure and apply historical attrition
(a) a constant rate of loss (as a percentage of prior year balance) over the
life of the customer relationships may be assumed if customer loss does
not appear to be dependent on age of the customer relationship
(b) a variable rate of loss may be used over the life of the customer
relationships if customer loss is dependent on age of the customer
relationship In such circumstances generally youngernew
customers are lost at a higher rate than older more established
customer relationships
(c) attrition may be measured based on either revenue or number of
customerscustomer count as appropriate based on the characteristics
of the customer group
(d) customers may need to be segregated into different groups For
example a company that sells products to distributors and retailers may
experience different attrition rates for each group Customers may also
be segregated based on other factors such as geography size of
customer and type of product or service purchased and
(e) the period used to measure attrition may vary depending on
circumstances For example for a business with monthly subscribers
one month without revenue from a particular customer would indicate a
loss of that customer In contrast for larger industrial products a
customer might not be considered lost unless there have been no sales
to that customer for a year or moreInternational Valuation Standards
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1006 The application of any attrition factor should be consistent with the way
attrition was measured Correct application of attrition factor in first
projection year (and therefore all subsequent years) must be consistent with
form of measurement
(a) If attrition is measured based on the number of customers at the
beginningofperiod versus endofperiod (typically a year) the attrition
factor should be applied using a midperiod convention for the first
projection year (as it is usually assumed that customers were lost
throughout the year) For example if attrition is measured by looking
at the number of customers at the beginning of the year (100) versus the
number remaining at the end of the year (90) on average the company
had 95 customers during that year assuming they were lost evenly
throughout the year Although the attrition rate could be described as
10 only half of that should be applied in the first year
(b) If attrition is measured by analysing yearoveryear revenue or customer
count the resulting attrition factor should generally be applied without
a midperiod adjustment For example if attrition is measured by looking
at the number of customers that generated revenue in Year 1 (100)
versus the number of those same customers that had revenue in Year 2
(90) application would be different even though the attrition rate could
again be described as 10
1007 Revenuebased attrition may include growth in revenue from existing
customers unless adjustments are made It is generally a best practice
to make adjustments to separate growth and attrition in measurement
and application
1008 It is a best practice for valuers to input historical revenue into the model
being used and check how closely it predicts actual revenue from existing
customers in subsequent years If attrition has been measured and applied
appropriately the model should be reasonably accurate For example if
estimates of future attrition were developed based on historical attrition
observed from 20X0 through 20X5 a valuer should input the 20X0 customer
revenue into the model and check whether it accurately predicts the revenue
achieved from existing customers in 20X1 20X2 etc
110 Tax Amortisation Benefit (TAB)
1101 In many tax jurisdictions intangible assets can be amortised for tax
purposes reducing a taxpayer’s tax burden and effectively increasing
cash flows Depending on the purpose of a valuation and the valuation
method used it may be appropriate to include the value of TAB in the
value of the intangible
1102 If the market or cost approach is used to value an intangible asset the
price paid to create or purchase the asset would already reflect the ability
to amortise the asset However in the income approach a TAB needs to be
explicitly calculated and included if appropriate
1103 For some valuation purposes such as financial reporting the appropriate
basis of value assumes a hypothetical sale of the subject intangible asset
Generally for those purposes a TAB should be included when the income
approach is used because a typical participant would be able to amortise Asset Standards
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73
an intangible asset acquired in such a hypothetical transaction For other
valuation purposes the assumed transaction might be of a business or
group of assets For those bases of value it may be appropriate to include
a TAB only if the transaction would result in a stepup in basis for the
intangible assets
1104 There is some diversity in practice related to the appropriate discount rate to
be used in calculating a TAB Valuers may use either of the following
(a) a discount rate appropriate for a business utilising the subject asset
such as a weighted average cost of capital Proponents of this view
believe that since amortisation can be used to offset the taxes on
any income produced by the business a discount rate appropriate for the
business as a whole should be used or
(b) a discount rate appropriate for the subject asset (ie the one used in the
valuation of the asset) Proponents of this view believe that the valuation
should not assume the owner of the subject asset has operations and
income separate from the subject asset and that the discount rate used
in the TAB calculation should be the same as that used in the valuation
of the subject assetInternational Valuation Standards
Asset Standards – IVS 300 Plant and Equipment
74
IVS 300 Plant and Equipment
Contents Paragraphs
Overview 10
Introduction 20
Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for Plant and Equipment 80
Financing Arrangements 90
10 Overview
101 The principles contained in the General Standards apply to valuations of
plant and equipment This standard only includes modifications additional
principles or specific examples of how the General Standards apply for
valuations to which this standard applies
20 Introduction
201 Items of plant and equipment (which may sometimes be categorised as a
type of personal property) are tangible assets that are usually held by an
entity for use in the manufacturingproduction or supply of goods or services
for rental by others or for administrative purposes and that are expected to
be used over a period of time
202 For lease of machinery and equipment the right to use an item of machinery
and equipment (such as a right arising from a lease) would also follow
the guidance of this standard It must also be noted that the right to use
an asset could have a different life span than the service life (that takes
into consideration of both preventive and predictive maintenance) of the
underlying machinery and equipment itself and in such circumstances the
service life span must be stated
203 Assets for which the highest and best use is in use as part of a group of
assets must be valued using consistent assumptions Unless the assets
belonging to the subsystems may reasonably be separated independently
from its main system then the subsystems may be valued separately
having consistent assumptions within the subsystems This will also
cascade down to subsubsystems and so on
204 Intangible assets fall outside the classification of plant and equipment
assets However an intangible asset may have an impact on the value of
plant and equipment assets For example the value of patterns and dies is
often inextricably linked to associated intellectual property rights Operating
software technical data production records and patents are further
examples of intangible assets that can have an impact on the value of plant
and equipment assets depending on whether or not they are included in the Asset Standards
Asset Standards – IVS 300 Plant and Equipment
75
valuation In such cases the valuation process will involve consideration
of the inclusion of intangible assets and their impact on the valuation of the
plant and equipment assets When there is an intangible asset component
the valuer should also follow IVS 210 Intangible Assets
205 A valuation of plant and equipment will normally require consideration of
a range of factors relating to the asset itself its environment and physical
functional and economic potential Therefore all plant and equipment
valuers should normally inspect the subject assets to ascertain the condition
of the plant and also to determine if the information provided to them
is usable and related to the subject assets being valued Examples of
factors that may need to be considered under each of these headings
include the following
(a) Assetrelated
1 the asset’s technical specification
2 the remaining useful economic or effective life considering both
preventive and predictive maintenance
3 the asset’s condition including maintenance history
4 any functional physical and technological obsolescence
5 if the asset is not valued in its current location the costs of
decommissioning and removal and any costs associated with the
asset’s existing inplace location such as installation and
recommissioning of assets to its optimum status
6 for machinery and equipment that are used for rental purposes the
lease renewal options and other endoflease possibilities
7 any potential loss of a complementary asset eg the operational life
of a machine may be curtailed by the length of lease on the building
in which it is located
8 additional costs associated with additional equipment transport
installation and commissioning etc and
9 in cases where the historical costs are not available for the machinery
and equipment that may reside within a plant during a construction
the valuer may take references from the Engineering Procurement
Construction (EPC) contract
(b) Environmentrelated
1 the location in relation to the source of raw material and market for
the product The suitability of a location may also have a limited life
eg where raw materials are finite or where demand is transitory
2 the impact of any environmental or other legislation that either
restricts utilisation or imposes additional operating or
decommissioning costs
3 radioactive substances that may be in certain machinery and
equipment have a severe impact if not used or disposed of International Valuation Standards
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76
appropriately This will have a major impact on expense consideration
and the environment
4 toxic wastes which may be chemical in the form of a solid liquid or
gaseous state must be professionally stored or disposed of This is
critical for all industrial manufacturing and
5 licences to operate certain machines in certain countries may
be restricted
(c) Economicrelated
1 the actual or potential profitability of the asset based on comparison
of operating costs with earnings or potential earnings (see IVS 200
Business and Business Interests)
2 the demand for the product manufactured by the plant with regard to
both macro and microeconomic factors could impact on demand and
3 the potential for the asset to be put to a more valuable use than the
current use (ie highest and best use)
206 Valuations of plant and equipment should reflect the impact of all forms of
obsolescence on value
207 To comply with the requirement to identify the asset or liability to be valued
in IVS 101 Scope of Work para 203(d) to the extent it impacts on value
consideration must be given to the degree to which the asset is attached to
or integrated with other assets For example
(a) assets may be permanently attached to the land and could not
be removed without substantial demolition of either the asset or any
surrounding structure or building
(b) an individual machine may be part of an integrated production line where
its functionality is dependent upon other assets
(c) an asset may be considered to be classified as a component of the
real property (eg a Heating Ventilation and Air Conditioning System
(HVAC))
In such cases it will be necessary to clearly define what is to be included
or excluded from the valuation Any special assumptions relating to the
availability of any complementary assets must also be stated (see also
para 208)
208 Plant and equipment connected with the supply or provision of services to a
building are often integrated within the building and once installed are not
separable from it These items will normally form part of the real property
interest Examples include plant and equipment with the primary function
of supplying electricity gas heating cooling or ventilation to a building and
equipment such as elevators If the purpose of the valuation requires these
items to be valued separately the scope of work must include a statement
to the effect that the value of these items would normally be included in the
real property interest and may not be separately realisable When different
valuation assignments are undertaken to carry out valuations of the real Asset Standards
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77
property interest and plant and equipment assets at the same location care
is necessary to avoid either omissions or double counting
209 Because of the diverse nature and transportability of many items of plant
and equipment additional assumptions will normally be required to describe
the situation and circumstances in which the assets are valued In order to
comply with IVS 101 Scope of Work para 203(k) these must be considered
and included in the scope of work Examples of assumptions that may be
appropriate in different circumstances include
(a) that the plant and equipment assets are valued as a whole in place and
as part of an operating business
(b) that the plant and equipment assets are valued as a whole in place but
on the assumption that the business is not yet in production
(c) that the plant and equipment assets are valued as a whole in place but
on the assumption that the business is closed
(d) that the plant and equipment assets are valued as a whole in place but
on the assumption that it is a forced sale (See IVS 104 Bases of Value)
(e) that the plant and equipment assets are valued as individual items for
removal from their current location
2010 In some circumstances it may be appropriate to report on more than one
set of assumptions eg in order to illustrate the effect of business closure or
cessation of operations on the value of plant and equipment
2011 In addition to the minimum requirements in IVS 103 Reporting a valuation
report on plant and equipment must include appropriate references to
matters addressed in the scope of work The report must also include
comment on the effect on the reported value of any associated tangible or
intangible assets excluded from the actual or assumed transaction scenario
eg operating software for a machine or a continued right to occupy the land
on which the item is situated
2012 Valuations of plant and equipment are often required for different purposes
including financial reporting leasing secured lending disposal taxation
litigation and insolvency proceedings
30 Bases of Value
301 In accordance with IVS 104 Bases of Value a valuer must select the
appropriate basis(es) of value when valuing plant and equipment
302 Using the appropriate basis(es) of value and associated premise of value
(see IVS 104 Bases of Value sections 140170) is particularly crucial in
the valuation of plant and equipment because differences in value can be
pronounced depending on whether an item of plant and equipment is valued
under an in use premise orderly liquidation or forced liquidation (see IVS
104 Bases of Value para 801) The value of most plant and equipment is
particularly sensitive to different premises of value
303 An example of forced liquidation conditions is where the assets have to be
removed from a property in a timeframe that precludes proper marketing International Valuation Standards
Asset Standards – IVS 300 Plant and Equipment
78
because a lease of the property is being terminated The impact of such
circumstances on value needs careful consideration In order to advise
on the value likely to be realised it will be necessary to consider any
alternatives to a sale from the current location such as the practicality
and cost of removing the items to another location for disposal within the
available time limit and any diminution in value due to moving the item from
its working location
40 Valuation Approaches and Methods
401 The three principal valuation approaches described in the IVS may all
be applied to the valuation of plant and equipment assets depending
on the nature of the assets the information available and the facts and
circumstances surrounding the valuation
50 Market Approach
501 For classes of plant and equipment that are homogenous eg motor vehicles
and certain types of office equipment or industrial machinery the market
approach is commonly used as there may be sufficient data of recent
sales of similar assets However many types of plant and equipment are
specialised and where direct sales evidence for such items will not be
available care must be exercised in offering an income or cost approach
opinion of value when available market data is poor or nonexistent In such
circumstances it may be appropriate to adopt either the income approach or
the cost approach to the valuation
60 Income Approach
601 The income approach to the valuation of plant and equipment can be
used where specific cash flows can be identified for the asset or a group
of complementary assets eg where a group of assets forming a process
plant is operating to produce a marketable product However some of the
cash flows may be attributable to intangible assets and difficult to separate
from the cash flow contribution of the plant and equipment Use of the
income approach is not normally practical for many individual items of plant
or equipment however it can be utilised in assessing the existence and
quantum of economic obsolescence for an asset or asset group
602 When an income approach is used to value plant and equipment the
valuation must consider the cash flows expected to be generated over
the life of the asset(s) as well as the value of the asset at the end of its
life Care must be exercised when plant and equipment is valued on an
income approach to ensure that elements of value relating to intangible
assets goodwill and other contributory assets is excluded (see IVS 210
Intangible Assets)
70 Cost Approach
701 The cost approach is commonly adopted for plant and equipment
particularly in the case of individual assets that are specialised or
specialuse facilities The first step is to estimate the cost to a market
participant of replacing the subject asset by reference to the lower of
either reproduction or replacement cost The replacement cost is the
cost of obtaining an alternative asset of equivalent utility this can either
be a modern equivalent providing the same functionality or the cost of Asset Standards
Asset Standards – IVS 300 Plant and Equipment
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reproducing an exact replica of the subject asset After concluding on a
replacement cost the value should be adjusted to reflect the impact on value
of physical functional technological and economic obsolescence on value
In any event adjustments made to any particular replacement cost should
be designed to produce the same cost as the modern equivalent asset from
an output and utility point of view
702 An entity’s actual costs incurred in the acquisition or construction of an
asset may be appropriate for use as the replacement cost of an asset
under certain circumstances However prior to using such historical cost
information the valuer should consider the following
(a) Timing of the historical expenditures An entity’s actual costs may not be
relevant or may need to be adjusted for inflationindexation to an
equivalent as of the valuation date if they were not incurred recently due
to changes in market prices inflationdeflation or other factors
(b) The basis of value Care must be taken when adopting a particular
market participant’s own costings or profit margins as they may not
represent what typical market participants might have paid The valuer
must also consider the possibility that the entity’s costs incurred may
not be historical in nature due to prior purchase accounting or the
purchase of used plant and equipment assets In any case historical
costs must be trended using appropriate indices
(c) Specific costs included A valuer must consider all significant costs that
have been included and whether those costs contribute to the value of
the asset and for some bases of value some amount of profit margin on
costs incurred may be appropriate
(d) Nonmarket components Any costs discounts or rebates that would
not be incurred by or available to typical market participants should
be excluded
703 Having established the replacement cost deductions must be made to
reflect the physical functional technological and economic obsolescence as
applicable (see IVS 105 Valuation Approaches and Methods section 80)
CosttoCapacity Method
704 Under the costtocapacity method the replacement cost of an asset with an
actual or required capacity can be determined by reference to the cost of a
similar asset with a different capacity
705 The costtocapacity method is generally used in one of two ways
(a) to estimate the replacement cost for an asset or assets with one capacity
where the replacement costs of an asset or assets with a different
capacity are known (such as when the capacity of two subject assets
could be replaced by a single asset with a known cost) or
(b) to estimate the replacement cost for a modern equivalent asset with
capacity that matches foreseeable demand where the subject asset has
excess capacity (as a means of measuring the penalty for the lack of
utility to be applied as part of an economic obsolescence adjustment) International Valuation Standards
Asset Standards – IVS 300 Plant and Equipment
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706 This method may only be used as a check method unless there is an
existence of an exact comparison plant of the same designed capacity that
resides within the same geographical area
707 It is noted that the relationship between cost and capacity is often not linear
so some form of exponential adjustment may also be required
80 Special Considerations for Plant and Equipment
801 The following section Financing Arrangements addresses a nonexhaustive
list of topics relevant to the valuation of plant and equipment
90 Financing Arrangements
901 Generally the value of an asset is independent of how it is financed
However in some circumstances the way items of plant and equipment
are financed and the stability of that financing may need to be considered
in valuation
902 An item of plant and equipment may be subject to a leasing or financing
arrangement Accordingly the asset cannot be sold without the lender or
lessor being paid any balance outstanding under the financing arrangement
This payment may or may not exceed the unencumbered value of the item to
the extent unusualexcessive for the industry Depending upon the purpose
of the valuation it may be appropriate to identify any encumbered assets
and to report their values separately from the unencumbered assets
903 Items of plant and equipment that are subject to operating leases are the
property of third parties and are therefore not included in a valuation of
the assets of the lessee subject to the lease meeting certain conditions
However such assets may need to be recorded as their presence may
impact on the value of owned assets used in association In any event prior
to undertaking a valuation the valuer should establish (in conjunction with
client andor advisors) whether assets are subject to operating lease finance
lease or loan or other secured lending The conclusion on this regard and
wider purpose of the valuation will then dictate the appropriate basis and
valuation methodologyAsset Standards
Asset Standards – IVS 400 Real Property Interests
81
IVS 400 Real Property Interests
Contents Paragraphs
Overview 10
Introduction 20
Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for Real Property Interests 80
Hierarchy of Interests 90
Rent 100
10 Overview
101 The principles contained in the General Standards apply to valuations of
real property interests This standard contains additional requirements for
valuations of real property interests
20 Introduction
201 Property interests are normally defined by state or the law of individual
jurisdictions and are often regulated by national or local legislation Before
undertaking a valuation of a real property interest a valuer must understand
the relevant legal framework that affects the interest being valued
202 A real property interest is a right of ownership control use or occupation of
land and buildings There are three main types of interest
(a) the superior interest in any defined area of land The owner of this
interest has an absolute right of possession and control of the land and
any buildings upon it in perpetuity subject only to any subordinate
interests and any statutory or other legally enforceable constraints
(b) a subordinate interest that normally gives the holder rights of exclusive
possession and control of a defined area of land or buildings for a
defined period eg under the terms of a lease contract andor
(c) a right to use land or buildings but without a right of exclusive
possession or control eg a right to pass over land or to use it only for a
specified activity
203 Intangible assets fall outside the classification of real property assets
However an intangible asset may be associated with and have a material
impact on the value of real property assets It is therefore essential to be
clear in the scope of work precisely what the valuation assignment is to
include or exclude For example the valuation of a hotel can be inextricably
linked to the hotel brand In such cases the valuation process will involve
consideration of the inclusion of intangible assets and their impact on the International Valuation Standards
Asset Standards – IVS 400 Real Property Interests
82
valuation of the real property and plant and equipment assets When there
is an intangible asset component the valuer should also follow IVS 210
Intangible Assets
204 Although different words and terms are used to describe these types of
real property interest in different jurisdictions the concepts of an unlimited
absolute right of ownership an exclusive interest for a limited period or
a nonexclusive right for a specified purpose are common to most The
immovability of land and buildings means that it is the right that a party holds
that is transferred in an exchange not the physical land and buildings The
value therefore attaches to the legal interest rather than to the physical land
and buildings
205 To comply with the requirement to identify the asset to be valued in IVS 101
Scope of Work para 203(d) the following matters must be included
(a) a description of the real property interest to be valued and
(b) identification of any superior or subordinate interests that affect the
interest to be valued
206 To comply with the requirements to state the extent of the investigation and
the nature and source of the information to be relied upon in IVS 101 Scope
of Work para 203(j) and IVS 102 Investigations and Compliance the
following matters must be considered
(a) the evidence required to verify the real property interest and any relevant
related interests
(b) the extent of any inspection
(c) responsibility for information on the site area and any building
floor areas
(d) responsibility for confirming the specification and condition of
any building
(e) the extent of investigation into the nature specification and adequacy
of services
(f) the existence of any information on ground and foundation conditions
(g) responsibility for the identification of actual or potential
environmental risks
(h) legal permissions or restrictions on the use of the property and any
buildings as well as any expected or potential changes to legal
permissions and restrictions
207 Typical examples of special assumptions that may need to be agreed
and confirmed in order to comply with IVS 101 Scope of Work para 203
(k) include
(a) that a defined physical change had occurred eg a proposed building is
valued as if complete at the valuation dateAsset Standards
Asset Standards – IVS 400 Real Property Interests
83
(b) that there had been a change in the status of the property eg a vacant
building had been leased or a leased building had become vacant at the
valuation date
(c) that the interest is being valued without taking into account other existing
interests and
(d) that the property is free from contamination or other environmental risks
208 Valuations of real property interests are often required for different purposes
including secured lending sales and purchases taxation litigation
compensation insolvency proceedings and financial reporting
30 Bases of Value
301 In accordance with IVS 104 Bases of Value a valuer must select the
appropriate basis(es) of value when valuing real property interests
302 Under most bases of value a valuer must consider the highest and best
use of the real property which may differ from its current use (see IVS 104
Bases of Value para 303) This assessment is particularly important to real
property interests which can be changed from one use to another or that
have development potential
40 Valuation Approaches and Methods
401 The three valuation approaches described in the IVS 105 Valuation
Approaches and Methods can all be applicable for the valuation of a real
property interest
402 When selecting an approach and method in addition to the requirements
of this standard a valuer must follow the requirements of IVS 105 Valuation
Approaches and Methods including para 103 and 104
50 Market Approach
501 Property interests are generally heterogeneous (ie with different
characteristics) Even if the land and buildings have identical physical
characteristics to others being exchanged in the market the location will
be different Notwithstanding these dissimilarities the market approach is
commonly applied for the valuation of real property interests
502 In order to compare the subject of the valuation with the price of other
real property interests valuers should adopt generally accepted and
appropriate units of comparison that are considered by participants
dependent upon the type of asset being valued Units of comparison that
are commonly used include
(a) price per square metre (or per square foot) of a building or per hectare
for land
(b) price per room and
(c) price per unit of output eg crop yields
503 A unit of comparison is only useful when it is consistently selected and
applied to the subject property and the comparable properties in each
analysis To the extent possible any unit of comparison used should be one
commonly used by participants in the relevant marketInternational Valuation Standards
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84
504 The reliance that can be applied to any comparable price data in the
valuation process is determined by comparing various characteristics of the
property and transaction from which the data was derived with the property
being valued Differences between the following should be considered in
accordance with IVS 105 Valuation Approaches and Methods para 308
Specific differences that should be considered in valuing real property
interests include but are not limited to
(a) the type of interest providing the price evidence and the type of interest
being valued
(b) the respective locations
(c) the respective quality of the land or the age and specification
of the buildings
(d) the permitted use or zoning at each property
(e) the circumstances under which the price was determined and the basis
of value required
(f) the effective date of the price evidence and the valuation date and
(g) market conditions at the time of the relevant transactions and how they
differ from conditions at the valuation date
60 Income Approach
601 Various methods are used to indicate value under the general heading of
the income approach all of which share the common characteristic that the
value is based upon an actual or estimated income that either is or could
be generated by an owner of the interest In the case of an investment
property that income could be in the form of rent (see paras 901903) in
an owneroccupied building it could be an assumed rent (or rent saved)
based on what it would cost the owner to lease equivalent space
602 For some real property interests the incomegenerating ability of the
property is closely tied to a particular use or businesstrading activity (for
example hotels golf courses etc) Where a building is suitable for only a
particular type of trading activity the income is often related to the actual or
potential cash flows that would accrue to the owner of that building from the
trading activity The use of a property’s trading potential to indicate its value
is often referred to as the profits method
603 When the income used in the income approach represents cash flow from a
businesstrading activity (rather than cash flow related to rent maintenance
and other real propertyspecific costs) the valuer should also comply
as appropriate with the requirements of IVS 200 Business and Business
Interests and where applicable IVS 210 Intangible Assets
604 For real property interests various forms of discounted cash flow models
may be used These vary in detail but share the basic characteristic that
the cash flow for a defined future period is adjusted to a present value
using a discount rate The sum of the present day values for the individual
periods represents an estimate of the capital value The discount rate in a
discounted cash flow model will be based on the time cost of money and the
risks and rewards of the income stream in question Asset Standards
Asset Standards – IVS 400 Real Property Interests
85
605 Further information on the derivation of discount rates is included in IVS 105
Valuation Approaches and Methods paras 50295031 The development
of a yield or discount rate should be influenced by the objective of the
valuation For example
(a) if the objective of the valuation is to establish the value to a particular
owner or potential owner based on their own investment criteria the rate
used may reflect their required rate of return or their weighted average
cost of capital and
(b) if the objective of the valuation is to establish the market value the
discount rate may be derived from observation of the returns implicit
in the price paid for real property interests traded in the market between
participants or from hypothetical participants’ required rates or return
When a discount rate is based on an analysis of market transactions
valuers should also follow the guidance contained in IVS 105 Valuation
Approaches and Methods paras 307 and 308
606 An appropriate discount rate may also be built up from a typical riskfree
return adjusted for the additional risks and opportunities specific to the
particular real property interest
70 Cost Approach
701 In applying the cost approach valuers must follow the guidance contained in
IVS 105 Valuation Approaches and Methods paras 7017014
702 This approach is generally applied to the valuation of real property interests
through the depreciated replacement cost method
703 It may be used as the primary approach when there is either no evidence
of transaction prices for similar property or no identifiable actual or notional
income stream that would accrue to the owner of the relevant interest
704 In some cases even when evidence of market transaction prices or an
identifiable income stream is available the cost approach may be used as a
secondary or corroborating approach
705 The first step requires a replacement cost to be calculated This is normally
the cost of replacing the property with a modern equivalent at the relevant
valuation date An exception is where an equivalent property would need
to be a replica of the subject property in order to provide a participant
with the same utility in which case the replacement cost would be that of
reproducing or replicating the subject building rather than replacing it with a
modern equivalent The replacement cost must reflect all incidental costs
as appropriate such as the value of the land infrastructure design fees
finance costs and developer profit that would be incurred by a participant in
creating an equivalent asset
706 The cost of the modern equivalent must then as appropriate be subject
to adjustment for physical functional technological and economic
obsolescence (see IVS 105 Valuation Approaches and Methods section 80)
The objective of an adjustment for obsolescence is to estimate how much
less valuable the subject property might or would be to a potential buyer
than the modern equivalent Obsolescence considers the physical condition
functionality and economic utility of the subject property compared to the
modern equivalentInternational Valuation Standards
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80 Special Considerations for Real Property Interests
801 The following sections address a nonexhaustive list of topics relevant to the
valuation of real property interests
(a) Hierarchy of Interests (section 90)
(b) Rent (section 100)
90 Hierarchy of Interests
901 The different types of real property interests are not mutually exclusive
For example a superior interest may be subject to one or more subordinate
interests The owner of the absolute interest may grant a lease interest in
respect of part or all of his interest Lease interests granted directly by the
owner of the absolute interest are head lease interests Unless prohibited
by the terms of the lease contract the holder of a head lease interest can
grant a lease of part or all of that interest to a third party which is known
as a sublease interest A sublease interest will always be shorter than or
coterminous with the head lease out of which it is created
902 These property interests will have their own characteristics as illustrated in
the following examples
(a) Although an absolute interest provides outright ownership in perpetuity
it may be subject to the effect of subordinate interests These
subordinate interests could include leases restrictions imposed by a
previous owner or restrictions imposed by statute
(b) A lease interest will be for a defined period at the end of which the
property reverts to the holder of the superior interest out of which it was
created The lease contract will normally impose obligations on the
lessee eg the payment of rent and other expenses It may also impose
conditions or restrictions such as in the way the property may be used or
on any transfer of the interest to a third party
(c) A right of use may be held in perpetuity or may be for a defined period
The right may be dependent on the holder making payments or
complying with certain other conditions
903 When valuing a real property interest it is therefore necessary to identify
the nature of the rights accruing to the holder of that interest and reflect any
constraints or encumbrances imposed by the existence of other interests
in the same property The sum of the individual values of various different
interests in the same property will frequently differ from the value of the
unencumbered superior interest
100 Rent
1001 Market rent is addressed as a basis of value in IVS 104 Bases of Value
1002 When valuing either a superior interest that is subject to a lease or an
interest created by a lease valuers must consider the contract rent and
in cases where it is different the market rentAsset Standards
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87
1003 The contract rent is the rent payable under the terms of an actual lease It
may be fixed for the duration of the lease or variable The frequency and
basis of calculating variations in the rent will be set out in the lease and must
be identified and understood in order to establish the total benefits accruing
to the lessor and the liability of the lessee
 International Valuation Standards
Asset Standards – IVS 410 Development Property
88
IVS 410 Development Property
Contents Paragraphs
Overview 10
Introduction 20
Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for a Development Property 80
Residual Method 90
Existing Asset 100
Special Considerations for Financial Reporting 110
Special Considerations for Secured Lending 120
10 Overview
101 The principles contained in the General Standards IVS 101 to IVS 105
apply to valuations of development property This standard only includes
modifications additional requirements or specific examples of how the
General Standards apply for valuations to which this standard applies
Valuations of development property must also follow IVS 400 Real
Property Interests
20 Introduction
201 In the context of this standard development properties are defined as
interests where redevelopment is required to achieve the highest and
best use or where improvements are either being contemplated or are in
progress at the valuation date and include
(a) the construction of buildings
(b) previously undeveloped land which is being provided with infrastructure
(c) the redevelopment of previously developed land
(d) the improvement or alteration of existing buildings or structures
(e) land allocated for development in a statutory plan and
(f) land allocated for a higher value uses or higher density in a
statutory plan
202 Valuations of development property may be required for different purposes
It is the valuer’s responsibility to understand the purpose of a valuation
A nonexhaustive list of examples of circumstances that may require a
development valuation is provided below Asset Standards
Asset Standards – IVS 410 Development Property
89
(a) when establishing whether proposed projects are financially feasible
(b) as part of general consulting and transactional support engagements for
acquisition and loan security
(c) for tax reporting purposes development valuations are frequently
needed for ad valorem taxation analyses
(d) for litigation requiring valuation analysis in circumstances such as
shareholder disputes and damage calculations
(e) for financial reporting purposes valuation of a development property
is often required in connection with accounting for business
combinations asset acquisitions and sales and impairment
analysis and
(f) for other statutory or legal events that may require the valuation of
development property such as compulsory purchases
203 When valuing development property valuers must follow the applicable
standard for that type of asset or liability (for example IVS 400 Real
Property Interests)
204 The residual value or land value of a development property can be very
sensitive to changes in assumptions or projections concerning the income or
revenue to be derived from the completed project or any of the development
costs that will be incurred This remains the case regardless of the method
or methods used or however diligently the various inputs are researched in
relation to the valuation date
205 This sensitivity also applies to the impact of significant changes in either the
costs of the project or the value on completion of the current value If the
valuation is required for a purpose where significant changes in value over
the duration of a construction project may be of concern to the user (eg
where the valuation is for loan security or to establish a project’s viability)
the valuer must highlight the potentially disproportionate effect of possible
changes in either the construction costs or end value on the profitability of
the project and the value of the partially completed property A sensitivity
analysis may be useful for this purpose provided it is accompanied by a
suitable explanation
30 Bases of Value
301 In accordance with IVS 104 Bases of Value a valuer must select the
appropriate basis(es) of value when valuing development property
302 The valuation of development property often includes a significant number
of assumptions and special assumptions regarding the condition or status of
the project when complete For example special assumptions may be made
that the development has been completed or that the property is fully leased
As required by IVS 101 Scope of Work significant assumptions and special
assumptions used in a valuation must be communicated to all parties to the
valuation engagement and must be agreed and confirmed in the scope of
work Particular care may also be required where reliance may be placed by
third parties on the valuation outcomeInternational Valuation Standards
Asset Standards – IVS 410 Development Property
90
303 Frequently it will be either impracticable or impossible to verify every feature
of a development property which could have an impact on potential future
development such as where ground conditions have yet to be investigated
When this is the case it may be appropriate to make assumptions (eg that
there are no abnormal ground conditions that would result in significantly
increased costs) If this was an assumption that a participant would not
make it would need to be presented as a special assumption
304 In situations where there has been a change in the market since a project
was originally conceived a project under construction may no longer
represent the highest and best use of the land In such cases the costs to
complete the project originally proposed may be irrelevant as a buyer in the
market would either demolish any partially completed structures or adapt
them for an alternative project The value of the development property under
construction would need to reflect the current value of the alternative project
and the costs and risks associated with completing that project
305 For some development properties the property is closely tied to a particular
use or businesstrading activity or a special assumption is made that the
completed property will trade at specified and sustainable levels In such
cases the valuer must as appropriate also comply with the requirements
of IVS 200 Business and Business Interests and where applicable IVS 210
Intangible Assets
40 Valuation Approaches and Methods
401 The three principal valuation approaches described in IVS 105 Valuation
Approaches and Methods may all be applicable for the valuation of a real
property interest There are two main approaches in relation to the valuation
the development property These are
(a) the market approach (see section 50) and
(b) the residual method which is a hybrid of the market approach the
income approach and the cost approach (see sections 4070) This is
based on the completed gross development value and the deduction of
development costs and the developer’s return to arrive at the residual
value of the development property (see section 90)
402 When selecting an approach and method in addition to the requirements
of this standard a valuer must follow the requirements of IVS 105 Valuation
Approaches and Methods including para 103
403 The valuation approach to be used will depend on the required basis of
value as well as specific facts and circumstances eg the level of recent
transactions the stage of development of the project and movements in
property markets since the project started and should always be that which
is most appropriate to those circumstances Therefore the exercise of
judgement in the selection of the most suitable approach is critical
50 Market Approach
501 Some types of development property can be sufficiently homogenous and
frequently exchanged in a market for there to be sufficient data from recent
sales to use as a direct comparison where a valuation is required Asset Standards
Asset Standards – IVS 410 Development Property
91
502 In most markets the market approach may have limitations for larger or
more complex development property or smaller properties where the
proposed improvements are heterogeneous This is because the number
and extent of the variables between different properties make direct
comparisons of all variables inapplicable though correctly adjusted market
evidence (See IVS 105 Valuation Approaches and Methods section 205)
may be used as the basis for a number of variables within the valuation
503 For development property where work on the improvements has
commenced but is incomplete the application of the market approach is
even more problematic Such properties are rarely transferred between
participants in their partiallycompleted state except as either part of a
transfer of the owning entity or where the seller is either insolvent or facing
insolvency and therefore unable to complete the project Even in the unlikely
event of there being evidence of a transfer of another partiallycompleted
development property close to the valuation date the degree to which work
has been completed would almost certainly differ even if the properties
were otherwise similar
504 The market approach may also be appropriate for establishing the value
of a completed property as one of the inputs required under the residual
method which is explained more fully in the section on the residual method
(section 90)
60 Income Approach
601 Establishing the residual value of a development property may involve the
use of a cash flow model in some markets
602 The income approach may also be appropriate for establishing the value of a
completed property as one of the inputs required under the residual method
which is explained more fully in the section on the residual method (see
section 90)
70 Cost Approach
701 Establishing the development costs is a key component of the residual
approach (see para 905)
702 The cost approach may also exclusively be used as a means of indicating
the value of development property such as a proposed development of a
building or other structure for which there is no active market on completion
703 The cost approach is based on the economic principle that a buyer will pay
no more for an asset than the amount to create an asset of equal utility To
apply this principle to development property the valuer must consider the
cost that a prospective buyer would incur in acquiring a similar asset with the
potential to earn a similar profit from development as could be obtained from
development of the subject property However unless there are unusual
circumstances affecting the subject development property the process of
analysing a proposed development and determining the anticipated costs
for a hypothetical alternative would effectively replicate either the market
approach or the residual method as described above which can be applied
directly to the subject propertyInternational Valuation Standards
Asset Standards – IVS 410 Development Property
92
704 Another difficulty in applying the cost approach to development property
is in determining the profit level which is its utility to a prospective buyer
Although a developer may have a target profit at the commencement of a
project the actual profit is normally determined by the value of the property
at completion Moreover as the property approaches completion some of
the risks associated with development are likely to reduce which may impact
on the required return of a buyer Unless a fixed price has been agreed
profit is not determined by the costs incurred in acquiring the land and
undertaking the improvements
80 Special Considerations for a Development Property
801 The following sections address a nonexhaustive list of topics relevant to the
valuation of development property
(a) Residual Method (section 90)
(b) Existing Asset (section 100)
(c) Special Considerations for Financial Reporting (section 110)
(d) Special Considerations for Secured Lending (section 120)
90 Residual Method
901 The residual method is so called because it indicates the residual amount
after deducting all known or anticipated costs required to complete the
development from the anticipated value of the project when completed after
consideration of the risks associated with completion of the project This is
known as the residual value The residual value derived from the residual
method may or may not equate to the market value of the development
property in its current condition
902 The residual value can be highly sensitive to relatively small changes in the
forecast cash flows and the practitioner should provide separate sensitivity
analyses for each significant factor
903 Caution is required in the use of this method because of the sensitivity of the
result to changes in many of the inputs which may not be precisely known
on the valuation date and therefore have to be estimated with the use of
assumptions
904 The models used to apply the residual method vary considerably in
complexity and sophistication with the more complex models allowing for
greater granularity of inputs multiple development phases and sophisticated
analytical tools The most suitable model will depend on the size duration
and complexity of the proposed development
905 In applying the residual method a valuer should consider and evaluate the
reasonableness and reliability of the following
(a) the source of information on any proposed building or structure eg any
plans and specification that are to be relied on in the valuation and
(b) any source of information on the construction and other costs that will be
incurred in completing the project and which will be used in the valuationAsset Standards
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906 The following basic elements require consideration in any application of the
method to estimate the market value of development property and if another
basis is required alternative inputs may be required
(a) Completed property value
(b) Construction costs
(c) Consultants fees
(d) Marketing costs
(e) Timetable
(f) Finance costs
(g) Development profit
(h) Discount rate
Value of Completed Property
907 The first step requires an estimate of the value of the relevant interest in
the real property following notional completion of the development project
which should be developed in accordance with IVS 105 Valuation Methods
and Approaches
908 Regardless of the methods adopted under either the market or income
approach the valuer must adopt one of the two basic underlying
assumptions
(a) the estimated market value on completion is based on values that
are current on the valuation date on the special assumption the project
had already been completed in accordance with the defined plans and
specification or
(b) the estimated value on completion is based on the special assumption
that the project is completed in accordance with the defined plans and
specification on the anticipated date of completion
909 Market practice and availability of relevant data should determine which of
these assumptions is more appropriate However it is important that there is
clarity as to whether current or projected values are being used
9010 If estimated gross development value is used it should be made clear that
these are based on special assumptions that a participant would make
based on information available on the valuation date
9011 It is also important that care is taken to ensure that consistent assumptions
are used throughout the residual value calculation ie if current values are
used then the costs should also be current and discount rates derived from
analysis of current prices
9012 If there is a presale or prelease agreement in place that is conditional
on the project or a relevant part being completed this will be reflected in
the valuation of the completed property Care should be taken to establish
whether the price in a presale agreement or the rent and other terms
in a prelease agreement reflect those that would be agreed between
participants on the valuation date International Valuation Standards
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9013 If the terms are not reflective of the market adjustments may need to be
made to the valuation
9014 It would also be appropriate to establish if these agreements would be
assignable to a purchaser of the relevant interest in the development
property prior to the completion of the project
Construction Costs
9015 The costs of all work required at the valuation date to complete the project to
the defined specification need to be identified Where no work has started
this will include any preparatory work required prior to the main building
contract such as the costs of obtaining statutory permissions demolition or
offsite enabling work
9016 Where work has commenced or is about to commence there will normally
be a contract or contracts in place that can provide the independent
confirmation of cost However if there are no contracts in place or if the
actual contract costs are not typical of those that would be agreed in the
market on the valuation date then it may be necessary to estimate these
costs reflecting the reasonable expectation of participants on the valuation
date of the probable costs
9017 The benefit of any work carried out prior to the valuation date will be
reflected in the value but will not determine that value Similarly previous
payments under the actual building contract for work completed prior to the
valuation date are not relevant to current value
9018 In contrast if payments under a building contract are geared to the work
completed the sums remaining to be paid for work not yet undertaken at the
valuation date may be the best evidence of the construction costs required
to complete the work
9019 However contractual costs may include special requirements of a
specific end user and therefore may not reflect the general requirements
of participants
9020 Moreover if there is a material risk that the contract may not be fulfilled
(eg due to a dispute or insolvency of one of the parties) it may be more
appropriate to reflect the cost of engaging a new contractor to complete the
outstanding work
9021 When valuing a partly completed development property it is not appropriate
to rely solely on projected costs and income contained in any project plan or
feasibility study produced at the commencement of the project
9022 Once the project has commenced this is not a reliable tool for measuring
value as the inputs will be historic Likewise an approach based on
estimating the percentage of the project that has been completed prior to
the valuation date is unlikely to be relevant in determining the current market
value
Consultants’ Fees
9023 These include legal and professional costs that would be reasonably
incurred by a participant at various stages through the completion of
the project Asset Standards
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Marketing Costs
9024 If there is no identified buyer or lessee for the completed project it will
normally be appropriate to allow for the costs associated with appropriate
marketing and for any leasing commissions and consultants’ fees incurred
for marketing not included under para 9023
Timetable
9025 The duration of the project from the valuation date to the expected date of
physical completion of the project needs to be considered together with the
phasing of all cash outflows for construction costs consultants’ fees etc
9026 If there is no sale agreement in place for the relevant interest in the
development property following practical completion an estimate should
be made of the marketing period that might typically be required following
completion of construction until a sale is achieved
9027 If the property is to be held for investment after completion and if there are
no preleasing agreements the time required to reach stabilised occupancy
needs to be considered (ie the period required to reach a realistic longterm
occupancy level) For a project where there will be individual letting units
the stabilised occupancy levels may be less than 100 percent if market
experience indicates that a number of units may be expected to always
be vacant and allowance should be considered for costs incurred by the
owner during this period such as additional marketing costs incentives
maintenance andor unrecoverable service charges
Finance Costs
9028 These represent the cost of finance for the project from the valuation date
through to the completion of the project including any period required
after physical completion to either sell the interest or achieve stabilised
occupancy As a lender may perceive the risks during construction to differ
substantially from the risks following completion of construction the finance
cost during each period may also need to be considered separately Even if
an entity is intending to selffund the project an allowance should be made
for interest at a rate which would be obtainable by a participant for borrowing
to fund the completion of the project on the valuation date
Development Profit
9029 Allowance should be made for development profit or the return that would
be required by a buyer of the development property in the market place for
taking on the risks associated with completion of the project on the valuation
date This will include the risks involved in achieving the anticipated income
or capital value following physical completion of the project
9030 This target profit can be expressed as a lump sum a percentage return on
the costs incurred or a percentage of the anticipated value of the project
on completion or a rate of return Market practice for the type of property
in question will normally indicate the most appropriate option The amount
of profit that would be required will reflect the level of risk that would be
perceived by a prospective buyer on the valuation date and will vary
according to factors such as International Valuation Standards
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(a) the stage which the project has reached on the valuation date A project
which is nearing completion will normally be viewed as being less risky
than one at an early stage with the exception of situations where a party
to the development is insolvent
(b) whether a buyer or lessee has been secured for the completed
project and
(c) the size and anticipated remaining duration of the project The longer
the project the greater the risk caused by exposure to fluctuations in
future costs and receipts and changing economic conditions generally
9031 The following are examples of factors that may typically need to be
considered in an assessment of the relative risks associated with the
completion of a development project
(a) unforeseen complications that increase construction costs
(b) potential for contract delays caused by adverse weather or other matters
outside of developer’s control
(c) delays in obtaining statutory consents
(d) supplier failures
(e) entitlement risk and changes in entitlements over the
development period
(f) regulatory changes and
(g) delays in finding a buyer or lessee for the completed project
9032 Whilst all of the above factors will impact the perceived risk of a project and
the profit that a buyer or the development property would require care must
be taken to avoid double counting either where contingencies are already
reflected in the residual valuation model or risks in the discount rate used to
bring future cash flows to present value
9033 The risk of the estimated value of the completed development project
changing due to changed market conditions over the duration of the project
will normally be reflected in the discount rate or capitalisation rate used to
value the completed project
9034 The profit anticipated by the owner of an interest in development property
at the commencement of a development project will vary according to the
valuation of its interest in the project once construction has commenced
The valuation should reflect those risks remaining at the valuation date and
the discount or return that a buyer of the partially completed project would
require for bringing it to a successful conclusion
Discount Rate
9035 In order to arrive at an indication of the value of the development property
on the valuation date the residual method requires the application of a
discount rate to all future cash flows in order to arrive at a net present value
This discount rate may be derived using a variety of methods (see IVS 105
Valuation Approaches and Methods paras 50295031Asset Standards
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9036 If the cash flows are based on values and costs that are current on the
valuation date the risk of these changing between the valuation date and
the anticipated completion date should be considered and reflected in the
discount rate used to determine the present value If the cash flows are
based on prospective values and costs the risk of those projections proving
to be inaccurate should be considered and reflected in the discount rate
100 Existing Asset
1001 In the valuation of development property it is necessary to establish the
suitability of the real property in question for the proposed development
Some matters may be within the valuer’s knowledge and experience but
some may require information or reports from other specialists Matters that
typically need to be considered for specific investigation when undertaking a
valuation of a development property before a project commences include
(a) whether or not there is a market for the proposed development
(b) is the proposed development the highest and best use of the property in
the current market
(c) whether there are other nonfinancial obligations that need to be
considered (political or social criteria)
(d) legal permissions or zoning including any conditions or constraints on
permitted development
(e) limitations encumbrances or conditions imposed on the relevant interest
by private contract
(f) rights of access to public highways or other public areas
(g) geotechnical conditions including potential for contamination or other
environmental risks
(h) the availability of and requirements to provide or improve necessary
services eg water drainage and power
(i) the need for any offsite infrastructure improvements and the rights
required to undertake this work
(j) any archaeological constraints or the need for archaeological
investigations
(k) sustainability and any client requirements in relation to green buildings
(l) economic conditions and trends and their potential impact on costs and
receipts during the development period
(m) current and projected supply and demand for the proposed future uses
(n) the availability and cost of funding
(o) the expected time required to deal with preparatory matters prior to
starting work for the completion of the work and if appropriate to rent or
sell the completed property and
(p) any other risks associated with the proposed development International Valuation Standards
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1002 Where a project is in progress additional enquires or investigations will
typically be needed into the contracts in place for the design of the project
for its construction and for supervision of the construction
110 Special Considerations for Financial Reporting
1101 The accounting treatment of development property can vary depending on
how it is classified by the reporting entity (eg whether it is being held for
sale for owner occupation or as investment property) This may affect the
valuation requirements and therefore the classification and the relevant
accounting requirements need to be determined before selecting an
appropriate valuation method
1102 Financial statements are normally produced on the assumption that the
entity is a going concern It is therefore normally appropriate to assume that
any contracts (eg for the construction of a development property or for its
sale or leasing on completion) would pass to the buyer in the hypothetical
exchange even if those contracts may not be assignable in an actual
exchange An exception would be if there was evidence of an abnormal risk
of default by a contracted party on the valuation date
120 Special Considerations for Secured Lending
1201 The appropriate basis of valuation for secured lending is normally market
value However in considering the value of a development property
regard should be given to the probability that any contracts in place eg for
construction or for the sale or leasing of the completed project may become
void or voidable in the event of one of the parties being the subject of formal
insolvency proceedings Further regard should be given to any contractual
obligations that may have a material impact on market value Therefore it
may be appropriate to highlight the risk to a lender caused by a prospective
buyer of the property not having the benefit of existing building contracts
andor preleases and presales and any associated warrantees and
guarantees in the event of a default by the borrower
 Asset Standards
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IVS 500 Financial Instruments
Contents Paragraphs
Overview 10
Introduction 20
Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for Financial Instruments 80
Valuation Inputs 90
Credit Risk Adjustments 100
Liquidity and Market Activity 110
Valuation Control and Objectivity 120
10 Overview
101 The principles contained in the General Standards apply to valuations of
financial instruments This standard only includes modifications additional
requirements or specific examples of how the General Standards apply for
valuations to which this standard applies
20 Introduction
201 A financial instrument is a contract that creates rights or obligations between
specified parties to receive or pay cash or other financial consideration
Such instruments include but are not limited to derivatives or other
contingent instruments hybrid instruments fixed income structured
products and equity instruments A financial instrument can also be created
through the combination of other financial instruments in a portfolio to
achieve a specific net financial outcome
202 Valuations of financial instruments conducted under IVS 500 Financial
Instruments can be performed for many different purposes including but not
limited to
(a) acquisitions mergers and sales of businesses or parts of businesses
(b) purchase and sale
(c) financial reporting
(d) legal or regulatory requirements (subject to any specific requirements set
by the relevant authority)
(e) internal risk and compliance procedures
(f) tax and
(g) litigationInternational Valuation Standards
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203 A thorough understanding of the instrument being valued is required to
identify and evaluate the relevant market information available for identical
or comparable instruments Such information includes prices from recent
transactions in the same or a similar instrument quotes from brokers or
pricing services credit ratings yields volatility indices or any other inputs
relevant to the valuation process
204 When valuations are being undertaken by the holding entity that are
intended for use by external investors regulatory authorities or other
entities to comply with the requirement to confirm the identity and status
of the valuer in IVS 101 Scope of Work para 203(a) reference must
be made to the control environment in place as required by IVS 105
Valuation Approaches and Methods and IVS 500 Financial Instruments
paras 12011203 regarding control environment
205 To comply with the requirement to identify the asset or liability to be
valued as in IVS 101 Scope of Work para 203(d) the following matters
must be addressed
(a) the class or classes of instrument to be valued
(b) whether the valuation is to be of individual instruments or a portfolio and
(c) the unit of account
206 IVS 102 Investigations and Compliance paras 202204 provide that the
investigations required to support the valuation must be adequate having
regard to the purpose of the assignment To support these investigations
sufficient evidence supplied by the valuer andor a credible and reliable third
party must be assembled To comply with these requirements the following
are to be considered
(a) All market data used or considered as an input into the valuation process
must be understood and as necessary validated
(b) Any model used to estimate the value of a financial instrument shall be
selected to appropriately capture the contractual terms and economics of
the financial instrument
(c) Where observable prices of or market inputs from similar financial
instruments are available those imputed inputs from comparable price(s)
andor observable inputs should be adjusted to reflect the contractual
and economic terms of the financial instrument being valued
(d) Where possible multiple valuation approaches are preferred If
differences in value occur between the valuation approaches the valuer
must explain and document the differences in value
207 To comply with the requirement to disclose the valuation approach(es) and
reasoning in IVS 103 Reporting para 201 consideration must be given
to the appropriate degree of reporting detail The requirement to disclose
this information in the valuation report will differ for different categories of
financial instruments Sufficient information should be provided to allow
users to understand the nature of each class of instrument valued and the
primary factors influencing the values Information that adds little to a users’
understanding as to the nature of the asset or liability or that obscures the Asset Standards
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primary factors influencing value must be avoided In determining the level
of disclosure that is appropriate regard must be had to the following
(a) Materiality The value of an instrument or class of instruments in relation
to the total value of the holding entity’s assets and liabilities or the
portfolio that is valued
(b) Uncertainty The value of the instrument may be subject to significant
uncertainty on the valuation date due to the nature of the instrument the
model or inputs used or to market abnormalities Disclosure of the cause
and nature of any material uncertainty should be made
(c) Complexity The greater the complexity of the instrument the greater
the appropriate level of detail to ensure that the assumptions and inputs
affecting value are identified and explained
(d) Comparability The instruments that are of particular interest to users
may differ with the passage of time The usefulness of the valuation
report or any other reference to the valuation is enhanced if it reflects
the information demands of users as market conditions change
although to be meaningful the information presented should allow
comparison with previous periods
(e) Underlying instruments If the cash flows of a financial instrument are
generated from or secured by identifiable underlying assets or liabilities
the relevant factors that influence the underlying value must be provided
in order to help users understand how the underlying value impacts the
estimated value of the financial instrument
30 Bases of Value
301 In accordance with IVS 104 Bases of Value a valuer must select the
appropriate basis(es) of value when valuing financial instruments
302 Often financial instrument valuations are performed using bases of value
defined by entitiesorganisations other than the IVSC (some examples
of which are mentioned in IVS 104 Bases of Value) and it is the valuer’s
responsibility to understand and follow the regulation case law tax law
and other interpretive guidance related to those bases of value as of the
valuation date
40 Valuation Approaches and Methods
401 When selecting an approach and method in addition to the requirements
of this chapter a valuer must follow the requirements of IVS 105 Valuation
Approaches and Methods
402 The three valuation approaches described in IVS 105 Valuation Approaches
and Methods may be applied to the valuation of financial instruments
403 The various valuation methods used in financial markets are based on
variations of the market approach the income approach or the cost
approach as described in the IVS 105 Valuation Approaches and Methods
This standard describes the commonly used methods and matters that need
to be considered or the inputs needed when applying these methodsInternational Valuation Standards
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404 When using a particular valuation method or model it is important to ensure
that it is calibrated with observable market information where available on
a regular basis to ensure that the model reflects current market conditions
As market conditions change it may become necessary to change to a
more suitable model(s) or to modify the existing model and recalibrate and
or make additional adjustments to the valuation inputs Those adjustments
should be made to ensure consistency with the required valuation basis
which in turn is determined by the purpose for which the valuation is
required see the IVS Framework
50 Market Approach
501 A price obtained from trading on a liquid exchange on or very close to the
time or date of valuation is normally the best indication of the market value
of a holding of the identical instrument In cases where there have not been
recent relevant transactions the evidence of quoted or consensus prices or
private transactions may also be relevant
502 It may be necessary to make adjustments to the price information if the
observed instrument is dissimilar to that being valued or if the information
is not recent enough to be relevant For example if an observable price is
available for similar instruments with one or more different characteristics
to the instrument being valued then the implied inputs from the comparable
observable price are to be adjusted to reflect the specific terms of the
financial instrument being valued
503 When relying on a price from a pricing service the valuer must understand
how the price was derived
60 Income Approach
601 The value of financial instruments may be determined using a discounted
cash flow method The terms of an instrument determine or allow
estimation of the undiscounted cash flows The terms of a financial
instrument typically set out
(a) the timing of the cash flows ie when the entity expects to realise the
cash flows related to the instrument
(b) the calculation of the cash flows eg for a debt instrument the interest
rate that applies or for a derivative instrument how the cash flows are
calculated in relation to the underlying instrument or index (or indices)
(c) the timing and conditions for any options in the contract eg put or call
prepayment extension or conversion options and
(d) protection of the rights of the parties to the instrument eg terms relating
to credit risk in debt instruments or the priority over or subordination to
other instruments held
602 In establishing the appropriate discount rate it is necessary to assess
the return that would be required on the instrument to compensate for the
time value of money and potential additional risks from but not limited to
the following
(a) the terms and conditions of the instrument eg subordinationAsset Standards
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(b) the credit risk ie uncertainty about the ability of the counterparty to
make payments when due
(c) the liquidity and marketability of the instrument
(d) the risk of changes to the regulatory or legal environment and
(e) the tax status of the instrument
603 Where future cash flows are not based on fixed contracted amounts
estimates of the expected cash flows will need to be made in order to
determine the necessary inputs The determination of the discount rate
must reflect the risks of and be consistent with the cash flows For
example if the expected cash flows are measured net of credit losses then
the discount rate must be reduced by the credit risk component Depending
upon the purpose of the valuation the inputs and assumptions made into
the cash flow model will need to reflect either those that would be made
by participants or those that would be based on the holder’s current
expectations or targets For example if the purpose of the valuation is
to determine market value or fair value as defined in IFRS the assumptions
should reflect those of participants If the purpose is to measure
performance of an asset against management determined benchmarks
eg a target internal rate of return then alternative assumptions may
be appropriate
70 Cost Approach
701 In applying the cost approach valuers must follow the guidance contained in
IVS 105 Valuation Approaches and Methods paras 7017014
80 Special Considerations for Financial Instruments
801 The following sections address a nonexhaustive list of topics relevant to the
valuation of financial instruments
(a) Valuation Inputs (section 90)
(b) Credit Risk (section 100)
(c) Liquidity and Market Activity (section 110)
(d) Control Environment (section 120)
90 Valuation Inputs
901 As per IVS 105 Valuation Approaches and Methods para 107 any data set
used as a valuation input understanding the sources and how inputs are
adjusted by the provider if any is essential to understanding the reliance
that should be given to the use of the valuation input
902 Valuation inputs may come from a variety of sources Commonly used
valuation input sources are broker quotations consensus pricing services
the prices of comparable instruments from third parties and market data
pricing services Implied inputs can often be derived from such observable
prices such as volatility and yields
903 When assessing the validity of broker quotations as evidence of how
participants would price an asset the valuer should consider the followingInternational Valuation Standards
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(a) Brokers generally make markets and provide bids in respect of more
popular instruments and may not extend coverage to less liquid
instruments Because liquidity often reduces with time quotations may
be harder to find for older instruments
(b) A broker is concerned with trading not supporting valuation and they
have little incentive to research an indicative quotation as thoroughly
as they would an executable quotation A valuer is required to
understand whether the broker quote is a binding executable quote or
a nonbinding theoretical quote In the case of a nonbinding quote the
valuer is required to gather additional information to understand if the
quote should be adjusted or omitted from the valuation
(c) There is an inherent conflict of interest where the broker is the
counterparty to an instrument
(d) Brokers have an incentive to encourage trading
904 Consensus pricing services operate by collecting price or valuation input
information about an instrument from several participating subscribers
They reflect a pool of quotations from different sources sometimes with
adjustment to compensate for any sampling bias This overcomes the
conflict of interest problems associated with single brokers However as
with a broker quotation it may not be possible to find a suitable input for
all instruments in all markets Additionally despite its name a consensus
price may not necessarily constitute a true market consensus but rather is
more of a statistical estimate of recent market transactions or quoted prices
Therefore the valuer needs to understand how the consensus pricing
was estimated and if such estimates are reasonable given the instrument
being valuedInformation and inputs relevant to the valuation of an illiquid
instrument can often be gleaned through comparable transactions (see
section 110 for further details)
100 Credit Risk Adjustments
1001 Understanding the credit risk is often an important aspect of valuing a
financial instrument and most importantly the issuer Some of the common
factors that need to be considered in establishing and measuring credit risk
include the following
(a) Own credit and counterparty risk Assessing the financial strength of
the issuer or any credit support providers will involve consideration of not
only historical and projected financial performance of the relevant entity
or entities but also consideration of performance and prospects for the
industry sector in which the business operates In addition to
issuer credit the valuer must also consider the credit exposure of any
counterparties to the asset or liability being valued In the case of a
clearing house settlement process many jurisdictions now require
certain derivatives to be transacted through a central counterparty
which can mitigate risk however residual counterparty risk needs to
be considered
(b) The valuer also needs to be able to differentiate between the credit
risk of the instrument and the credit risk of the issuer andor counterparty
Generally the credit risk of the issuer or counterparty does not consider
specific collateral related to the instrumentAsset Standards
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(c) Subordination Establishing the priority of an instrument is critical in
assessing the default risk Other instruments may have priority over an
issuer’s assets or the cash flows that support the instrument
(d) Leverage The amount of debt used to fund the assets from which an
instrument’s return is derived can affect the volatility of returns to the
issuer and credit risk
(e) Netting agreements Where derivative instruments are held between
counterparties credit risk may be reduced by a netting or offset
agreement that limits the obligations to the net value of the transactions
ie if one party becomes insolvent the other party has the right to
offset sums owed to the insolvent party against sums due under
other instruments
(f) Default protection Many instruments contain some form of protection
to reduce the risk of nonpayment to the holder Protection might take
the form of a guarantee by a third party an insurance contract a credit
default swap or more assets to support the instrument than are needed
to make the payments Credit exposure is also reduced if subordinated
instruments take the first losses on the underlying assets and therefore
reduce the risk to more senior instruments When protection is in the
form of a guarantee an insurance contract or a credit default swap it
is necessary to identify the party providing the protection and assess that
party’s creditworthiness Considering the credit worthiness of a third
party involves not only the current position but also the possible effect
of any other guarantees or insurance contracts the entity has written
If the provider of a guarantee has also guaranteed other correlated debt
securities the risk of its nonperformance will likely increase
1002 For parties for which limited information is available if secondary trading in
a financial instrument exists there may be sufficient market data to provide
evidence of the appropriate risk adjustment If not it might be necessary
to look to credit indices information available for entities with similar
risk characteristics or estimate a credit rating for the party using its own
financial information The varying sensitivities of different liabilities to credit
risk such as collateral andor maturity differences should be taken into
account in evaluating which source of credit data provides the most relevant
information The risk adjustment or credit spread applied is based on the
amount a participant would require for the particular instrument
being valued
1003 The own credit risk associated with a liability is important to its value as the
credit risk of the issuer is relevant to the value in any transfer of that liability
Where it is necessary to assume a transfer of the liability regardless of any
actual constraints on the ability of the counterparties to do so eg in order
to comply with financial reporting requirements there are various potential
sources for reflecting own credit risk in the valuation of liabilities These
include the yield curve for the entity’s own bonds or other debt issued credit
default swap spreads or by reference to the value of the corresponding
asset However in many cases the issuer of a liability will not have the
ability to transfer it and can only settle the liability with the counterpartyInternational Valuation Standards
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1004 Collateral The assets to which the holder of an instrument has recourse in
the event of default need to be considered In particular the valuer needs
to be understand whether recourse is to all the assets of the issuer or only
to specified asset(s) The greater the value and liquidity of the asset(s) to
which an entity has recourse in the event of default the lower the overall risk
of the instrument due to increased recovery In order not to double count
the valuer also needs to consider if the collateral is already accounted for in
another area of the balance sheet
1005 When adjusting for own credit risk of the instrument it is also important
to consider the nature of the collateral available for the liabilities being
valued Collateral that is legally separated from the issuer normally reduces
the credit exposure If liabilities are subject to a frequent collateralisation
process there might not be a material own credit risk adjustment because
the counterparty is mostly protected from loss in the event of default
110 Liquidity and Market Activity
1101 The liquidity of financial instruments range from those that are standardised
and regularly transacted in high volumes to those that are agreed between
counterparties that are incapable of assignment to a third party This range
means that consideration of the liquidity of an instrument or the current
level of market activity is important in determining the most appropriate
valuation approach
1102 Liquidity and market activity are distinct The liquidity of an asset is a
measure of how easily and quickly it can be transferred in return for cash
or a cash equivalent Market activity is a measure of the volume of trading
at any given time and is a relative rather than an absolute measure Low
market activity for an instrument does not necessarily imply the instrument
is illiquid
1103 Although separate concepts illiquidity or low levels of market activity pose
similar valuation challenges through a lack of relevant market data ie data
that is either current at the valuation date or that relates to a sufficiently
similar asset to be reliable The lower the liquidity or market activity the
greater the reliance that will be needed on valuation approaches that use
techniques to adjust or weight the inputs based on the evidence of other
comparable transactions to reflect either market changes or differing
characteristics of the asset
120 Valuation Control and Objectivity
1201 The control environment consists of the internal governance and control
procedures that are in place with the objective of increasing the confidence
of those who may rely on the valuation in the valuation process and
conclusion Where an external valuer is placing reliance upon an internally
performed valuation the external valuer must consider the adequacy and
independence of the valuation control environment
1202 In comparison with other asset classes financial instruments are more
commonly valued internally by the same entity that creates and trades
them Internal valuations bring into question the independence of the
valuer and hence this creates risk to the perceived objectivity of valuations
Please reference 401 and 402 of the IVS Framework regarding valuation
performed by internal valuers and the need for procedures to be in place Asset Standards
Asset Standards – IVS 500 Financial Instruments
107
to ensure the objectivity of the valuation and steps that should be taken
to ensure that an adequate control environment exists to minimise threats
to the independence of the valuation Many entities which deal with the
valuation of financial instruments are registered and regulated by statutory
financial regulators Most financial regulators require banks or other
regulated entities that deal with financial instruments to have independent
price verification procedures These operate separately from trading desks
to produce valuations required for financial reporting or the calculation of
regulatory capital guidance on the specific valuation controls required by
different regulatory regimes This is outside the scope of this standard
However as a general principle valuations produced by one department
of an entity that are to be included in financial statements or otherwise
relied on by third parties should be subject to scrutiny and approval by an
independent department of the entity Ultimate authority for such valuations
should be separate from and fully independent of the risktaking functions
The practical means of achieving a separation of the function will vary
according to the nature of the entity the type of instrument being valued and
the materiality of the value of the particular class of instrument to the overall
objective The appropriate protocols and controls should be determined by
careful consideration of the threats to objectivity that would be perceived by
a third party relying on the valuation
1203 When accessing your valuation controls the following include items you
should consider in the valuation process
(a) establishing a governance group responsible for valuation policies and
procedures and for oversight of the entity’s valuation process including
some members external to the entity
(b) systems for regulatory compliance if applicable
(c) a protocol for the frequency and methods for calibration and testing of
valuation models
(d) criteria for verification of certain valuations by different internal or
external experts
(e) periodic independent validation of the valuation model(s)
(f) identifying thresholds or events that trigger more thorough investigation
or secondary approval requirements and
(g) identifying procedures for establishing significant inputs that are
not directly observable in the market eg by establishing pricing or
audit committeesInternational Valuation Standards
Index
108
Index
A
adjustments
cost approach 45–47
credit risk 104–106
for depreciationobsolescence 46–47 85
income approach 52–53 62–63
market approach 31 33 34–36 60 102
asset standards see IVS Asset Standards
assets and liabilities 3 6 26
contributory assets 62 63
existing asset 97–98
intangible see Intangible Assets (IVS 210)
lease liabilities 21–22 74 80 86–87
operating and nonoperating 55–56
subject asset 4
wasting assets 41–42
assumed use 24–26
assumptions 10 11 27–28
development property 93
plant and equipment 77
see also special assumptions
attrition 71–72
B
bases of value 10
business and business interests 50
development property 89–90
financial instruments 101
intangible assets 59–60
plant and equipment 77–78
real property interests 83
Bases of Value (IVS 104) 16–28
assumptions and special assumptions 27–28
entityspecific factors 26
fair market value 23
fair value 23–24
IVS defined 18–22
equitable value 21–22
investment valueworth 22
liquidation value 22
market rent 21 86
market value 18–20
synergistic value 22
Index
Index
109
premise of value 24–26
current useexisting use 25
forced sale 25–26
highest and best use 24
orderly liquidation 25
synergies 26–27
transaction cost 28
blockage discounts 36
broker quotations 103–104
Business and Business Interests (IVS 200) 49–56
special considerations 53–56
business information 54–55
capital structure 56
economic and industry 55
operating and nonoperating assets 55–56
ownership rights 54
valuation approaches and methods 50–53
business information 54–55
C
capital structure considerations 56
capitalisation rate 52
cash flow 38–40
changes to the scope of work 11
client 3 10
collateral 106
comparable listings method 32
comparable transactions method 31–33
competence 7
completed property value 93–94
compliance with standards 6
see also Investigations and Compliance (IVS 102)
consensus pricing services 104
constant growth model 41
construction costs 94
consultants’ fees 94
contract rent 21 86–87
contributory asset charge (CAC) 63
contributory assets 62 63
control environment 106–107
control premiums 35–36 54
cost approach 42–47
adjustments 45–47
business and business interests 53
development property 91–92
financial instruments 103
intangible assets 68–69
plant and equipment 78–80
real property interests 85
cost approach methods 43–47
costtocapacity method 79–80
replacement cost 44
reproduction cost 44
summation method 44–45International Valuation Standards
Index
110
costtocapacity method 79–80
counterparty risk 104
credit risk adjustments 104–106
currency 10 38–39
current use 25
D
default protection 105
departure 7 11 13
depreciation 46–47
development profit 95–96
Development Property (IVS 410) 88–98
assumptions and special assumptions 89–90
special considerations 92–98
completed property value 93–94
construction costs 94
consultants’ fees 94
development profit 95–96
discount rate 96–97
existing asset 97–98
finance costs 95
for financial reporting 98
marketing costs 95
for secured lending 98
timetable 95
valuation approaches and methods 90–97
residual method 92–97
disaggregated method 67–68
discount rates 38 40 42
business and business interests 52
derivation of 42 85 102–103
development property 96–97
financial instruments 102–103
intangible assets 69–70 73
real property interests 84–85
discounted cash flow (DCF) 37–42 102–103
discounts for lack of control (DLOC) 35–36
discounts for lack of marketability (DLOM) 35
disposal cost 41–42
distributor method 67–68
E
economic and industry considerations 55
economic life of an intangible asset 70–72
enterprise value 50 52
entityspecific factors 26
equitable value 21–22
equity value 50 52
excess earnings method 62–64
existing asset 97–98
existing use 25
exit value 41
explicit forecast period 39Index
Index
111
F
fair market value (OECD) 23
fair market value (USIRS) 23
fair value (IFRS) 23
fair value (legalstatutory) 23–24
finance costs 95
Financial Instruments (IVS 500) 99–107
special considerations 103–107
control environment 106–107
credit risk 104–106
liquidity and market activity 106
valuation inputs 103–104
valuation approaches and methods 101–103
financial reporting 23 98 105
financing arrangements 80
forced sale 25–26
G
general standards see IVS General Standards
glossary 3–5
goodwill 58–59 63
Gordon growth model 41
greenfield method 67
guideline publiclytraded comparable method 33–35
guideline transactions method 31–33
H
hierarchy of interests 86
highest and best use 20 24
I
income approach 36–42
adjustments 52–53 62–63
business and business interests 51–53
development property 91
financial instruments 102–103
intangible assets 61–68
plant and equipment 78
real property interests 84–85
income approach methods 37–42
discounted cash flow (DCF) 37–42 102–103
distributor method 67–68
excess earnings method 62–64
greenfield method 67
relieffromroyalty method 64–65
withandwithout method 66–67
information provided 12–13
Intangible Assets (IVS 210) 57–73
business and business interests 49–50
plant and equipment 74–75
real property interests 81–82International Valuation Standards
Index
112
special considerations 69–73
discount raterate of return 69–70 73
economic life 70–72
tax amortisation benefit (TAB) 72–73
valuation approaches and methods 60–69
International Valuation Standards Board 1 2
International Valuation Standards Council (IVSC) 1
Investigations and Compliance (IVS 102) 12–13
financial instruments 100
intangible assets 59
plant and equipment 75–78
real property interests 82
investment property 84 95
investment value 22
IVS Asset Standards 2
Business and Business Interests (IVS 200) 49–56
Development Property (IVS 410) 88–98
Financial Instruments (IVS 500) 99–107
Intangible Assets (IVS 210) 57–73
Plant and Equipment (IVS 300) 74–80
Real Property Interests (IVS 400) 81–87
IVS Definitions 3–5 18–22
IVS Framework 2 6–7
IVS General Standards 2
Bases of Value (IVS 104) 16–28
Investigations and Compliance (IVS 102) 12–13
Reporting (IVS 103) 14–15
Scope of Work (IVS 101) 9–11
Valuation Approaches and Methods (IVS 105) 29–47
J
jurisdiction 3
L
land see Development Property (IVS 410) Real Property Interests (IVS 400)
lease liabilities 21–22 86–87
plant and equipment 74 80
leverage 105
liabilities see assets and liabilities
liquidation value 22
liquidity 106
M
market activity 106
market approach 30–36 41
adjustments 31 33 34–36 60 102
business and business interests 50–51
development property 90–91
financial instruments 102
intangible assets 60–61
plant and equipment 78
real property interests 83–84Index
Index
113
market approach methods 31–36
comparable transactions method 31–33
guideline publiclytraded comparable method 33–35
Market Participant Acquisition Premiums (MPAPs) 35–36
market rent 21 86
market value 18–20
development property 93 98
marketing costs 95
materialmateriality 4
matrix pricing 32
may 3
multiple approaches 29–30
must 3
N
netting agreements 105
O
objectivity 9–10 106–107
IVS Framework 6–7
obsolescence 46–47
intangible assets 69
plant and equipment 76 78 79
real property interests 85
operating and nonoperating assets 55–56
operating value 50
orderly liquidation 25
ownership rights 54
P
participant 4
Plant and Equipment (IVS 300) 74–80
financing arrangements 80
special considerations 80
valuation approaches and methods 78–80
premise of value 24–26
prior transactions method 31
property interests see Development Property (IVS 410) Real Property
Interests (IVS 400)
prospective financial information (PFI) 39–40
purpose of valuation 4 10
business and business interests 50
development property 88–89
financial instruments 99
intangible assets 58–59
plant and equipment 76 77
real property interests 83
R
Real Property Interests (IVS 400) 81–87
special considerations 86–87International Valuation Standards
Index
114
hierarchy of interests 86
rent 86–87
valuation approaches and methods 83–85
relieffromroyalty method 64–65
rent 21 86–87
replacement cost method 44
intangible assets 69
plant and equipment 78–80
real property interests 85
Reporting (IVS 103) 14–15
financial instruments 100–101
plant and equipment 77
reproduction cost method 44
residual method 92–97
risk assessment 63 69–70
credit risk adjustments 104–106
development property 95–96
royalty rate 64–65
S
salvage value 41–42
Scope of Work (IVS 101) 9–11
business and business interests 50
development property 89–90
financial instruments 100
plant and equipment 76–77
real property interests 82–83
secured lending 98
sensitivity analysis 89
should 4
significant andor material 4
special assumptions 10 11
bases of value (IVS 104) 25 27–28
development property 89–90 93
real property interests 82–83
reporting (IVS 103) 14
special considerations
business and business interests 53–56
development property 92–98
financial instruments 103–107
for financial reporting 98
intangible assets 69–73
plant and equipment 80
real property interests 86–87
for secured lending 98
standards of value see Bases of Value (IVS 104)
subject or subject asset 4
subordination 105
summation method 44–45
synergies 26–27
synergistic value 22Index
Index
115
T
tax amortisation benefit (TAB) 72–73
terminal value 40–42
timetable 95
total invested capital value 50
transaction cost 28
transactions 17 19 31–33
U
units of comparison 32 83
V
valuation approaches
business and business interests 50–53
development property 90–97
financial instruments 101–103
intangible assets 60–69
plant and equipment 78–80
real property interests 83–85
Valuation Approaches and Methods (IVS 105) 29–47
cost approach 42–47
cost considerations 45–46
depreciationobsolescence 46–47
methods 44–45
income approach 36–42
methods 37–42
market approach 30–36
methods 31–35
other considerations 35–36
valuation control 106–107
valuation date 10 19–20
valuation inputs 103–104
valuation purpose see purpose of valuation
valuation record 13
valuation report see Reporting (IVS 103)
valuation review reports 15
valuation reviewer 5 6
valuer 3 4 5
objectivity 6–7 9–10
W
wasting assets 41–42
weight 5
weighting 5
withandwithout method 66–67
worth 22International Valuation Standards
2
International Valuation Standards 2
International Valuation Standards
International Valuation Standards Council
United Kingdom
Email c @ivscorg Web wwwivscorg
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