Understand commonly used International Valuation Standards (IVS) – IVS 101, IVS 102, IVS 103, and IVS 104. Explore their scopes, principles, investigation processes, reporting requirements, and bases of value.
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: –
a) what will the appointed valuer do?
b) what are the limitations on using the valuation advice until the report is finalised.
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 valuer’s 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: –
a) inspection for e.g., sampling, checking documents
b) computation
c) inquiry for e.g., contacting third party
d) analysis for e.g., as to which method will be apt in the given situation
What is sufficient depends upon the judgement of the valuer.
“Credibility of information received”
Information received from anyone other than the valuer himself needs to be tested on the parameters of credibility and reliability.
The valuer needs to see whether the information can be relied upon without adversely affecting the credibility of result of the valuation. Credibility of the inputs or information received can be judged by performing investigation, assessment or corroboration (finding supportive evidence for that information or input). For e.g., documents are more reliable than said words. If also after performing these, credibility cannot be obtained, then, such input or information must be excluded.
There are some factors which affect the credibility: –
A) Purpose of valuation
B) Significance of the information to the assignment
C) expertise of the source of information
D) expertise of the valuer/ subcontractor (a person hired for performing some part of the assignment).
E) independence of the source of information/ input.
“Limitations”
Limitations, if any, applied must be noted in the scope of work. But if a limitation is such that it restricts the valuer to perform sufficient evaluation of the inputs/ information/ assumption/ evidence then it must not be stated that the assignment has been performed in accordance with IVS.
“Valuation Record”
Documentation of work done must be kept for reasonable period which includes
a) inputs/ information
b) calculations performed
c) investigation
d) analysis
e) copy of draft/ final report provided to client
“Departure”
If any statutory, legal, regulatory, or authoritative requirements differ from the requirements of IVS then the valuer must follow the former. This is called departure and it does not rule the valuation out of IVS compliance.
“Other Standards”
Any other requirement set out by Practicing Valuers Association (PVAI – VPO) or any other bodies generally require more obligations on the part of valuers and they may be followed as long as IVS is complied with.
International valuation standard 103- Reporting (IVS 103)
IVS 103 speaks on the matter of reporting of valuation assignment including valuation review.
Purpose of Valuation Report
a) to communicate information necessary for proper understanding of the assignment
b) shall be comparable, relevant, credible.
Ranges of valuation report
a) comprehensive narrative
b) abbreviated summary
Factors affecting the level of detailing of report
a) purpose of valuation
b) complexity of asset being valued
c) users’ requirement
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
a) scope of review
b) valuation report which is being reviewed and the inputs on which that valuation was based
c) conclusion reached and reasons thereof
d) 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.
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 arm’s 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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