Commonly Used International Valuation Standards

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Commonly Used International Valuation Standards
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• Some say valuation is an art. If this is true
  then so is the concept that art without rules can
  never reach its true potential and cannot
  flourish. Hence it is important that valuers
  follow certain guiding principles when doing
  valuations. Luckily for us we have in hand
  International Valuation Standards (IVS) issued by
  the The International Valuation Standards Council
  (IVSC). In this article we shall look at the few
  of the earliest issued and most commonly used
  IVS.
• International valuation standard 101 (IVS
  101)-Scope of Work
• What is IVS 101?
• IVS 101 gives the general knowledge about
  application of IVSs and scope of work of the
  valuer. This describes the terms of engagement
  like the asset under valuation, the
  responsibilities of the parties involved in the
  valuation. General Principles of IVS 101 IVS
  applies to valuation assignments as well as
  valuation review. The purpose of IVS 101 is that
  the intended recipient must understand
• what will the appointed valuer do?
• what are the limitations on using the valuation
  advice until the report is finalised.
  

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• Scope of Work
• A written document shall be prepared setting out
  the scope of work of the valuer to avoid the
  conflict and fixing the responsibilities of the
  valuer. Some of the inclusions that are to be
  made in the document include valuers identity,
  independence declaration Professional
  competence of valuer, Purpose of valuation, Basis
  of Value etc Are changes in scope of work
  allowed? It can be done If at the start of
  engagement, some matters are not able to be
  determined. If some additional information
  becomes available that requires investigation
• Scope of work is an integral part of the overall
  valuation process and hence cannot be ignored.
  International valuation standard 102 (IVS 102)
  Investigation and Compliances What is the
  purpose of IVS 102? As from its name it
  suggests, IVS 102 was drafted for two purposes
• a) what do we, valuers need to do while
  performing a valuation assignment including
  valuation review.
• b) what are the compliances and documentation
  needed to be done.
• Investigation To support our valuation
  results, sufficient evidence needs to be
  collected. Evidence can be collected by means of
  
• inspection for e.g., sampling, checking documents
• computation
• inquiry for e.g., contacting third party
• analysis for e.g., as to which method will be apt
  in the given situation

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• Format This standard does not set out a
  particular format of report but requires the
  report to be clear and not ambiguous, accurate
  and not dubious. It should serve the purpose. It
  should also be sufficient in such a manner that a
  valuation professional can understand the
  assignment performed by studying the report.
• Minimums of a valuation assignment report
• a) scope of work
• b) approach(es) adopted
• c) method(s) adopted
• d) key inputs/ assumptions
• e) conclusion reached and reasons thereof
• f) date of report
• Minimums of a valuation review report
• scope of review
• valuation report which is being reviewed and the
  inputs on which that valuation was based
• conclusion reached and reasons thereof
• date of report
• Some of the minimums can be set out in the report
  itself or the valuation professional can give the
  reference to other documents. For e.g., if scope
  of work document is prepared then scope of work
  need not to be again mentioned in the report and
  the reference to the scope of work can be made in
  the report. This valuation report sets out the
  details about what is expected to be given in the
  valuation report and hence is one of the
  important IVS.

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• International Valuation Standard 104 Bases of
  Value
• IVS 104 is a general standard which applies to
  any type of valuation assignment or review. IVS
  104 cites about basis (or bases) of value. Bases
  of value are statement of those fundamental
  assumptions that aids in selection of inputs and
  methods of valuation. Due to the aid, there is a
  direct impact on the opinion. Hence, the bases
  must be apt to terms and purpose of valuation
  assignment. The bases of value must be stated in
  the report making the report understandable.
  Generally, IVS has defined the bases of value but
  it is not exhaustive. IVS permits the use of
  other bases if they fulfil the purpose of
  valuation. Those can be taken from other statute,
  regulation, private contract or document. There
  are different bases of value but most of them
  have some common elements like assumed
  transaction, assumed date of transaction or
  assumed parties to transaction. For e.g.- date of
  transaction is assumed so that the professional
  can decide as to what information is relevant for
  the purpose. Parties to a transaction are assumed
  so that the market for the assets or liability in
  valuation can be determined and valuation can be
  performed in the manner apt for those assumed
  parties. Some bases of value are market value,
  market rent, fair value and liquidation value.
  For instance, market value is the estimated
  amount for which an asset or liability can be
  exchanged between two willing parties on the
  valuation date in arms length transaction and
  without compulsion. Premises of value define the
  way of using an asset or liability. It may be
  similar to its existing or current use or may be
  a different one. Different bases of value can
  have different premise(s). For example a
  building currently in commercial use can be
  converted into a residential unit by undertaking
  some costs so that it fetches best value. So it
  is responsibility of the valuer to determine that
  what is best for the asset or liability taking in
  consideration all the factors. As in the above
  example, the cost to convert will play a major
  role. There are some factors which are specific
  to an entity like synergies (financial benefits
  associated with combining particular assets and
  liabilities), tax benefits available to an
  entity, etc. So, being not omnipresent they are
  generally excluded from the inputs considered in
  valuation. They can be considered as an input, if
  and only if, multiple market participants could
  have those factors by exchange. Assumptions and
  special assumptions (assumptions that assume fact
  different from those existing on the date of
  valuation) made to clarify the state of asset or
  the circumstances in which the asset is assumed
  to be exchanged must be reasonable and relevant.
  Special assumption can be an assumption that a
  proposed building had been actually completed on
  the valuation date. Transaction costs are not
  taken as an input in calculating value but are an
  important factor for determination of market and
  its participants. Overall, IVS 104 needs to be
  closely followed so that a proper method of
  valuation can be selected and the assignment can
  be performed.
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