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STANDARDS
WHEREAS, Sections 33 (1) and (2) of Executive Order No. 292, series of 1987, otherwise
known as the “Administrative Code of 1987” provide that the Bureau of Local Government Finance
(BLGF) shall “Assist in the formulation and implementation of policies on local government
revenue administration and fund management; Exercise administrative and technical supervision
and coordination over treasury and assessment operation of local governments”;
WHEREAS, Section 201 of the Local Government Code of 1991 and Article 291 of its
Implementing Rules and Regulations (IRR) provide that the Department of Finance (DOF) shall
promulgate the necessary rules and regulations for the classification, appraisal and assessment of
real property;
WHEREAS, the Philippine Government has committed to pursue economic growth by
improving among others, procedures for valuing real property through the Land Administration
and Management Project (LAMP), an inter-Agency undertaking of which the DOF is one of the
departments tasked to promote reform in property valuation;
WHEREAS, the DOF through BLGF and the National Tax Research Center (NTRC), is
implementing real property valuation and taxation reforms under Component 4 of the second phase
of the Land Administration and Management Project (LAMP 2), which aims to: “Improve the
quality of government and private sector appraisal performance through the adoption of Uniform
Valuation Standards and a single valuation base for taxation; Pursue property taxation reforms; and
Lay the foundation through education and training for the future expansion of property valuation
and appraisal activities”;
WHEREAS, the DOF through the BLGF and in conjunction with a broad-based group of
stakeholders, through a series of Technical Working Groups and Exposure Workshops, concluded
that the International Valuation Standards (IVS) is the most appropriate valuation standards for
valuation under Philippine setting;
WHEREAS, adaptation to Philippine setting had been incorporated to the IVS to reflect
national laws, policies and Philippine conditions; nonetheless, in case any conflict arises in the
implementation of the Philippine Valuation Standards, domestic laws shall take precedence over
the standards and principles advocated therein.
NOW THEREFORE, the following are hereby issued:
Section 4. For purposes of valuations for real property taxation the section
entitled Mass Appraisal for Property Taxation (GN 13) shall specifically
be complied with. For all other valuations for non-taxation purposes,
the Philippine Valuation Standards as a whole shall be complied with;
MARGARITO B. TEVES
Secretary
Republic of the Philippines
DEPARTMENT OF FINANCE
Roxas Boulevard Corner Pablo Ocampo, Sr. Street
Manila 1004
MESSAGE
The development and publication of the Philippine Valuation Standards (1st Edition) –
Adoption of the IVSC Valuation Standards under Philippine Setting represents a major milestone
in the Philippine land reform program. Through its Second Land Administration and Management
Project (LAMP2) Government has made a long-term commitment to a broad program of reforms
which include improving the quality of government and private sector property appraisal
performance. The implementation of the Philippine Valuation Standards (1st Edition) – Adoption
of the IVSC Valuation Standards under Philippine Setting will help us to meet the program’s core
objectives of ‘Implementing a valuation system that will assess property values at their true market
levels’ and ‘Developing an effective and transparent land valuation system that is in line with
internationally accepted standards’.
Valuation Standards are the foundation of the property valuation process and are relevant
to many other aspects of the land reform program including the professionalization of real estate
services, legislative reform and educational training. Their application will improve the accuracy,
quality, fairness, and transparency of valuations and valuation reporting, which in turn will lead
to greater confidence and reduce financial risk for those using them. In particular, the adoption
by the public sector of a uniform set of valuation standards which is consistent with international
best practice will provide consistency within local government assessors and national government
agencies, develop a wider understanding by the general public and help to provide equitable solutions
to those affected by valuations. At the same time it will afford greater protection for government
from financial loss due to conflicting approaches, misunderstandings, or negligence. Perhaps
most importantly, the adoption of these standards is a major achievement in the harmonization of
valuation service provision in the Philippines with international best practice and their impact will
be felt across the valuation profession.
MARGARITO B. TEVES
Secretary
REPUBLIC OF THE PHILIPPINES
BUREAU OF LOCAL GOVERNMENT FINANCE
DEPARTMENT OF FINANCE
8th Floor EDPC Building, Bangko Sentral ng Pilipinas Complex
Roxas Boulevard, Manila 1004. Telefax Nos. 527-2780 / 527-2790
Email: blgf@blgf.gov.ph
MESSAGE
It is with great pleasure that I am able to introduce the Philippine Valuation Standards (1st
Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting. Its publication is
particularly timely during this period of significant change in the context of both the wider land
reform program upon which the Government of the Philippines has embarked and also the current
global financial crisis.
The Bureau of Local Government and Finance is proud to be taking a lead role in the
Philippine land valuation reform program and in particular in facilitating the development of the
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under
Philippine Setting. This publication represents the end product of a process of intensive technical
development and review and wide-ranging exposure. Care has been taken to include representatives
from the main stakeholders involved in undertaking, procuring, or using property valuations in this
process. The Exposure Workshops formed an important part of the development process, providing
an opportunity not simply for the transfer of information, but also for open discussion and the
opportunity for participants to influence the outcome.
The publication and adoption of these valuation standards will provide valuers with a
framework of recognized principles and concepts and internationally accepted definitions and best
practices in undertaking and reporting valuations. This in turn will help us to achieve our goals of
raising the quality and reliability of public and private sector valuations and their reporting and to
provide transparent and equitable real property taxation.
Accordingly, my thanks go out to all of those involved, from the core team of government
staff and national and international advisers, to members of the Technical Working Groups and
those who participated in the numerous Exposure Workshops, whose tireless efforts and enthusiasm
have brought about this result. I would particularly like to acknowledge the Australian Agency for
International Development (AusAID) for providing technical assistance and the World Bank for its
financial support.
Introduction
Background and Context
The publication of these Philippine Valuation Standards (1st Edition) – Adoption of the IVSC
Valuation Standards under Philippine Setting is part of a wider on-going program of land reform
in the Philippines. The Government has made a long-term commitment to alleviate
poverty and to sustain economic growth by improving the land tenure security of the
Filipino people and by fostering efficient land markets. This will be achieved through a
land reform program that promotes a clear, coherent and consistent set of land
administration policies and laws; an efficient land administration system supported by a
sustainable financing mechanism; and an effective and transparent land valuation system
that is in line with internationally accepted standards.
The Department of Finance (DOF), through the Bureau of Local Government Finance
(BLGF) and the National Tax Research Center (NTRC), is tasked with implementing
reforms specifically concerning property valuation and taxation. These reforms will:
• Implement a valuation system that will assess property values at their true
market levels;
• Establish an independent national authority that will set and enforce
valuation standards;
• Develop valuation standards for use by government and private sectors;
and
• Raise the level of and professionalize the property valuation industry.
These specific property valuation and taxation reforms have resulted in fundamental
changes to the regulatory framework aimed at overcoming the multiplicity of fragmented
policies and regulations which have previously characterized both the public and private
sectors.
The new Real Estate Service Act, 2009, will greatly assist the professionalization of the
real estate service practice, particularly by transferring the regulatory function of the
Department of Trade and Industry (DTI) to the Professional Regulation Commission
(PRC). Through its new Professional Board of Real Estate Services (PBRES) it will have
direct supervision and regulatory control, which will include adherence to a professional
code of ethics, over the real estate service practice and for the first time both the public
and the private sectors will become unified under a single integrated association.
In addition, the proposed Valuation Reform Act will establish a consistent real property
valuation system based on internationally accepted valuation standards, concepts,
principles and practices. The current Bill seeks to create a National Valuation Authority
(NVA) as the primary agency of Government on matters concerning the valuation of real
Introduction 1
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
property. Its mandate will be to provide policy direction to local and national government
units, and leadership to private sector institutions and practitioners.
As part of its functions, the NVA will be responsible for developing, maintaining and
enforcing valuation standards for real property, and regulating valuation activities in the
public sector. Once passed, the Act will require that the uniform valuation standards will
be used by all appraisers and assessors of national and local government units, and the
private sector, in the valuation of land, buildings and machinery for taxation and other
purposes.
The proposed Act specifically requires that the valuation standards shall conform to the
generally accepted valuation principles and internationally accepted standards and
practices. It is expected to be enacted by 2010, which will see the establishment of the
National Valuation Authority and the legal requirement for the adoption of national
valuation standards.
In anticipation of the regulatory changes, the DOF created the Property Valuation Staff
(PVS) in 2007 as its technical arm responsible for pursuing the valuation reform agenda.
The PVS established the main objectives for the valuation standards, which were:
• To raise the quality of public and private sector valuations and reporting of
valuations;
• To provide consistency and understanding between providers and users of
valuations at national and international levels;
• To promote transparency and reliability of valuations for disposal of
government assets, financial reporting, secured lending, transfers of
ownership, litigation and taxation; and
• To reduce financial risk for users of valuations.
In short, the PVS established that users of valuations carried out in compliance with the
standards should be able to rely on them, as having been carried out by competent
professionals who subscribe to high standards of ethical conduct and international best
practices.
Development of the Philippine Valuation Standards (1st Edition) – Adoption of the IVSC
Valuation Standards under Philippine Setting
Having established the objectives for the valuation standards, the PVS considered it
essential to have a transparent and interactive process for their development that would
benefit from the input of key stakeholders. This was achieved through a three-stage
process involving the PVS core team, Technical Working Groups and Exposure ‗Road-
shows‘. The Technical Working Groups comprised of representatives from public and
private sector valuers and accountants associations, banks, academic institutions and
National Government Agencies. Exposure meetings in Metro Manila and the regions
involved even wider audiences. This broad exposure also ensured that the draft standards
Introduction 2
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
would be consistent with the requirements of the current legal framework, national
accounting standards and the various statutory bodies.
The important first step in drafting the standards was to choose an appropriate format or
template upon which they could be based. A review of existing standards found that they
were either specific national standards developed historically for use in their home
countries, or regional or international standards which did not specifically provide for the
Philippine context. However, the International Valuation Standards (IVS) published by the
International Valuation Standards Council (IVSC) was found to be a purpose-built model
that could be easily modified to accommodate Philippine practice and terminology. It was
therefore decided to develop a set of national standards that were based on the latest
edition of the IVS (8th Edition) but that would appropriately reflect the Philippine context.
Accordingly, each section of the IVS was adopted as an initial draft and subjected to
individual detailed review and discussion during the Technical Working Group and
Exposure meetings. Where it was felt that modification, amendment or further explanation
was necessary to more fully reflect conditions in the Philippines the draft was amended.
For ease of identification and future updating all such changes have been highlighted in
grey ‗boxes‘ within the text of this edition of the Philippine Valuation Standards (1st
Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting, which
otherwise retains the format of the IVS. This format comprises the IVS Introduction,
Concepts Fundamental to Generally Accepted Valuation Principles, Code of Conduct,
description of Property Types, core Standards, Applications, Guidance Notes and
Glossary. In addition to the amendments highlighted in grey the Philippine Valuation
Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting include
this supplementary Introduction and a supplementary Glossary.
The use of the term ‗valuer‘ has been adopted throughout this document in order to reflect
the broad potential for adoption of the standards. To use the term ‗Assessor‘ could, for
example, indicate a limited use to Local Government Assessors. Therefore, the term
‗valuer‘ is taken in this context to mean those who deal with the special discipline of
preparing and reporting valuations. With the development of the valuation profession in
the Philippines this should be extended to meet the generally accepted international
criteria with respect to education, training, competence, skill and adherence to a
professional code of conduct.
During the development stage, the separate chapters were given a temporary numbering
system and were referred to as the 24 national standards. In publishing the Philippine
Valuation Standards the IVS numbering system has been mirrored in order to facilitate
cross-referencing. Thus, the core standard for Market Value is known as PVS-IVS1.
Similarly the Valuation Applications are referred to as PVA-IVA1, etc.
The resultant Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation
Standards under Philippine Setting are therefore national standards designed and for use in the
Philippines, but which are based upon International Valuation Standards. None of the
changes constitutes a departure from the principles of the IVS and as a result the
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under
Philippine Setting conform with IVS and represent current international best practice.
Introduction 3
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
Copyright
These Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards
under Philippine Setting are based upon the International Valuation Standards and as such it
has been necessary to obtain permission for the right to reproduce them within this
publication. The IVSC is fully supportive of this approach and has provided the following
statement:
Scope and Application of Philippine Valuation Standards (1st Edition) – Adoption of the
IVSC Valuation Standards under Philippine Setting
Through the Secretary of Finance Department Order, and the offices of the Bureau of
Local Government Finance, implementation of these standards by all local government
assessors and other concerned DOF agencies is mandatory.
Where LGUs undertake or procure valuations for non-taxation purposes the standards
shall apply in their entirety.
For the purpose of annual real property revisions, Guidance Note 13, Mass Appraisal for
Property Taxation, specifically provides that the mass appraisal process may be utilized as
a methodology for Ad Valorem property taxation, whereby value is determined in
Introduction 4
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
National Government Agencies (NGAs) are subject to their respective statutory directives
– legislation, implementing rules and regulations, orders, etc. The Secretary of Finance
does not have jurisdiction to mandate the adoption of these standards by NGAs, however,
individual NGAs may adopt these standards voluntarily once appropriate statutory
amendments or directives have been issued. Prior to their formal adoption by NGAs, these
standards may be used as a guidance and example of best practice.
Private sector valuers are required to comply with these standards when undertaking
valuations for non-taxation purposes on behalf of LGUs, and where instructed by NGAs
or other public or private sector clients. Forthcoming institutional reforms may require all
valuations in the Philippines to be undertaken in compliance with these standards and it is
hoped that, due to the inclusive nature of the process in their development, private sector
valuers will also see fit to adopt them in advance of the planned institutional reforms.
The scope of the standards is therefore wide-reaching and their impact will be felt across
the valuation profession. Of particular importance will be the impact of the standards on
valuation education, training and professional development as they will become one of the
cornerstones for all future education and training programs.
Amendments and updates to the Philippine Valuation Standards (1st Edition) – Adoption of
the IVSC Valuation Standards under Philippine Setting will be published in response to changing
requirements as and when necessary. Such requirements may result from changing
conditions within the Philippines, or changes in the global context. Such amendments and
updates may take the form of either supplementary papers or new editions replacing this
edition in its entirety, at the discretion of the responsible authority at the time.
Introduction 5
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
To formulate and publish, in the public interest, valuation Standards for property
valuation and to promote their worldwide acceptance; and
To harmonies Standards among the world‘s States1 and to identify and make
disclosure of differences in statements and/or applications of Standards as they
occur.
The IVSC has long recognized the diversity of purposes for which property valuations are
required, including use in financial statements, decisions on loans and mortgages secured
by property, transactions involving transfers or ownership, and litigation and tax
settlements. Beyond Standards, the IVSC began publishing Applications dealing with
valuation for financial reporting and secured lending purposes, as well as Guidance Notes
regarding specific valuation issues and the applications of Standards in more specific
business and service-providing situations. In particular, the IVSC has sought that the
International Valuation Standards (IVSs) be recognized in accounting and other reporting
standards, and that Valuers recognize what is needed from them under standards of other
disciplines.
1
Throughout this document, the word ‗State‘ conveys the same meaning as it is used by the United Nations,
which recognizes and refers to its member States, i.e., politically organized communities having their own
apparatus of government and occupying sovereign territory. However, the term ‗country‘ has been
substituted in this publication.
Introduction to International Valuation Standards 6
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
The IVSC has undertaken eight revisions of the International Valuations Standards, which
were published in 1985, 1994/97, 2000, 2001, 2003, 2005 and 2007. The evolution of
these Standards attests to the recognition by IVSC that change is inevitable and continuous
even when gradual and not easily discernible. The ongoing development of Standards
reflects s the commitment of the IVSC to ensure that fundamental valuation definitions
and guidance stay current in a dynamic world.
Member associations are enjoined to disclose to the IVSC any significant differences
between domestic and International Standards so that such differences can be reported to
the international community. The IVSC recognizes that Valuers must act legally and
comply with the laws and regulations of the States in which they practice. Member
associations work with controlling and regulatory authorities, both statutory and
voluntary, and other professional societies to ensure that valuations comply with the IVSC
Standards and Guidance Notes. They also play an educative and consultative role in the
area of valuation standards within their respective States.
Achievements of IVSC
The International Valuation Standards Committee is a Non-Government Organization
(NGO) member of the United Nations, having been granted Roster status with the United
Nations Economic and Social Council in May 1985. The IVSC works cooperatively with
Member States and maintain liaison with international agencies, such as the Organizations
for Economic Cooperation and Development (OECD), the World Bank, the International
Monetary Fund (IMF), the World Trade Organization (WTO), the Commission of the
European Union, and the Bank for International Settlements (BIS), and the International
Organization of Security Commissions (IOSCO). The IVSC also maintains a close
relationship with the International Accounting Standards Board (IASB), the International
Federation of Accountants (IFAC)—the International Public Sector Accounting Standards
Board and the International Auditing and Assurance Standards Board.
IVSC provides the accounting profession with advice and counsel relating to valuation,
seeks to coordinate its Standards and work programs with those related professional
Introduction to International Valuation Standards 7
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
discipline in the public interest, and cooperates international bodies in determining and
promulgating new Standards. In order to ensure that the international standards governing
valuation practice are consistent with the requirements of Valuers under international
financial reporting standards, the IVSC annually reviews each new edition of the
International Financial Reporting Standards (IFRSs), which include the International
Accounting Standards (IASs), promulgated by the International Accounting Standards
Board (IASB), and the International Public Sector Accounting Standards (IPSAS),
promulgated by the International Public Sector Accounting Standards Board. The IVSs
make reference to these accounting standards wherever they apply to the work of Valuers.
The IVSC publishes White Papers and Technical Papers at its website. At the time this
edition was released, the following papers were available: two White Papers, Valuation in
Emerging Markets and the Valuation in Emerging Markets and The Valuation of Real
Estate Serving as Collateral for Securitised Instruments; and one Technical Paper, Mass
Appraisal for Property Taxation.
Headquarters
The IVSC‘s international headquarters are in London.
To provide Standards of valuation and financial reporting that meet the needs of
emerging and newly industrialized countries.
Users of valuations under IVS should be able to rely on such valuations as having been
carried out by competent professionals who subscribe to high standards of ethical conduct.
As the scope of valuation practice becomes broader, the term property valuation has
gained currency over the more restrictive term asset valuation, a term referring to
valuations performed primarily for use in financial reporting. A Professional Property
Valuer is a person who possesses the necessary qualifications, ability, and experience to
estimate property value for a diversity of purposes including transactions involving
transfers of property ownership, property considered as collateral to secure loans and
mortgages, property subject to litigation or pending settlement of taxes, and property
treated as fixed assets in financial reporting. A Professional Property Valuer may also
possess the specific expertise to perform valuations of other categories of property, i.e.,
personal property, businesses, and financial interests.
Where the standards of other disciplines, such as accounting, may apply to Valuations, the
IVSC advises property Valuers to understand the accounting use to which their valuations
are put.
Committee, and the general context of the Standards. The organization of the
Standards is explained and their intended applicability is discussed.
7. Applications – The application of both private and public sector asset valuation to
financial statements or related accounts, and to decisions involving loan or mortgage
security is described.
8. Guidance Notes – Issues that relate to the application of the Standards frequently
arise in valuation practice and from those who use valuation services. The Guidance
Notes provide guidance on specific valuation issues and how Standards are to be
applied in more specific business and service-providing situations. The Guidance
Notes complement and expand on the Standards and Applications, with which they
have equal importance. Compliance with the Guidance Notes as with the Standards
and Applications is, therefore, mandatory for all Valuers preparing assignments under
the International Valuation Standards.
9. Glossary – The glossary provides a summary of all terms are defined in the
Standards, Applications and Guidance Notes.
Introduction to International Valuation Standards 11
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
The three principal elements of the International Valuation Standards, i.e., the
Standards, Applications and Guidance Notes, have equal weight, and all valuations
prepared in compliance with the IVSs must conform to the principles and
procedures elaborated throughout the entire document.
The Committee will continue to develop Standards, Applications and Guidance Notes as
the users of valuations and the market require.
professional practice and follow Generally 3.3 Personal property includes interests in
Accepted Valuation Principles (GAVP). tangible and intangible items which are not
real estate. Items of tangible personal
2.6 Price changes over time result from property are not permanently affixed to real
specific and general effects of economic estate and are generally characterized by
and social forces. General forces may cause their moveability.
changes in price levels and in the relative
purchasing power of money. Operating on 3.4 In accounting terminology, assets are
their own momentum, specific forces such resources controlled by an entity as a result
as technological change may generate shifts of past events and from which some future
in supply and demand, and can create economic benefits are expected to flow to
significant price changes. the entity. Ownership of an asset is itself an
intangible. However, the asset owned may
2.7 Many recognized principles are applied be either tangible or intangible.
in valuing real estate. They include the
principles of supply and demand; 3.4.1 The future economic benefits
competition; substitution; anticipation, or embodied in an asset may flow to the entity
expectation; change; and others. Common in a number of ways. For example, an asset
to all these principles is their direct or may be: (a) used singly or in combination
indirect effect on the degree of utility and with other assets in the production of goods
productivity of a property. Consequently, it or services to be sold by the entity; (b)
may be stated that the utility of real estate exchanged for other assets; (c) used to settle
reflects the combined influence of all a liability; or (d) distributed to the owners
market forces that come to bear upon the of the entity. (International Financial
value of property. Reporting Standards [IFRSs], Framework,
55)
3.0 Real Estate, Property, and
3.4.2 An asset is recognized in the balance
Asset Concepts sheet when it is probable that the future
3.1 Real estate is defined as the physical economic benefits will flow to the entity
land and those human-made items, which and the asset has a cost or value that can be
attach to the land. It is the physical, tangible measured reliably. (IFRSs, Framework, 89)
―thing‖ which can be seen and touched,
together with all additions on, above, or 3.5 International Financial Reporting
below the ground. Local laws within each Standards distinguish among tangible and
country prescribe the basis for intangible assets. Of particular importance
distinguishing real estate from personal are the following terms and concepts:
property. Although these legal concepts 3.5.1 Current assets. Assets not intended
may not be recognized in all countries, they for use on a continuing basis in the
are adopted here to distinguish important activities of an entity. Examples include
terms and concepts. stocks, obligations owed to the entity, short-
3.2 Real property includes all the rights, term investments, and cash in bank and in
interests, and benefits related to the hand. In certain circumstances real estate,
ownership of real estate. An interest or normally treated as a fixed asset, may be
interests in real property is normally treated as a current asset. Examples include
demonstrated by some evidence of land or improved real estate held in
ownership (e.g., a title deed) separate from inventory for sale.
the physical real estate. Real property is a 3.5.2 Non-current assets (fixed, or long-
non-physical concept. term, assets). These are tangible and
intangible assets which fall into the 3.6 Accounting terminology differs
following two broad categories: somewhat from terms more common to
Valuers. Within the classifications
3.5.2.1 Property, plant, machinery and discussed in para. 3, Valuers of real
equipment. Assets intended for use on a property are principally involved with fixed
continuing basis in the activities of an entity assets. Technically it is the ownership of the
including land and buildings; plant and asset, or the right of ownership, that is
equipment; and other categories of assets, valued rather than the tangible or intangible
suitably identified; less accumulated asset itself. This concept distinguishes the
depreciation. Property, plant, machinery economic concept of valuing an asset
and equipment are tangible or physical objectively based upon its ability to be
assets. purchased and sold in a marketplace from
some subjective concept such as assuming
Philippine 3.5.2.1.1
an intrinsic or other than Market Value
In the Philippines, the term „Plant‟ is not in basis. The objective market concept does,
general use. ‗Machinery and Equipment‘ is however, have special applications for
the collective term adopted by Valuers, limited or non-market property valuation as
while ‗Plant and Equipment‘ is adopted by discussed in International Valuation
Accountants. Reference to „Plant and Standard 2.
Equipment‟ in the IVS is therefore extended 3.7 The term depreciation is used in
to „Plant, Machinery and Equipment‟. different contexts in valuation and in
3.5.2.2 Other non-current assets. Assets not financial reporting. In the context of asset
intended for use on a continuing basis in the valuation, depreciation, refers to the
activities of an entity, but expected to be adjustments made to the cost of reproducing
held in long-term ownership including or replacing the asset to reflect physical
long-term investments; long-term deterioration and functional (technical) and
receivables; goodwill; expenditures carried external (economic) obsolescence in order
forward; and patents, trademarks, and to estimate the value of the asset in a
similar assets. This asset category includes hypothetical exchange in the market when
both tangible, or physical assets and there is no direct sales evidence available
intangible, or non-physical assets. (see para. 9.2.1.3, Concepts Fundamental to
Intangible assets are considered items of Generally Accepted Valuation Principles).
intangible personal property, and may In financial reporting depreciation refers to
include management and marketing skill, the charge made against income to reflect
credit rating, goodwill, and various legal the systematic allocation of the depreciable
rights or instruments (patents, trademarks, amount of an asset over its useful life to the
copyrights, franchises, and contracts). entity. It is specific to the particular entity
and its utilization of the asset, and is not
3.5.3 Where either historic or current cost necessarily affected by the market.
accounting conventions are upheld, a
distinction is drawn between operational 4.0 Price, Cost, Market, and Value
and investment assets. Operational assets
are considered requisite to the operations of 4.1 Imprecision or vagueness of language,
the going concern or corporation. particularly in an international community,
Investment assets that are owned by a can and does lead to misinterpretations and
corporation are considered extraneous to misunderstandings. This is particularly a
the operational requirements of the problem where words commonly used in a
corporate owner. language also have specific meanings
within a given discipline. That is the case
with the terms price, cost, market, and
value as they are used in the valuation receives the services as of the effective date
discipline. of valuation.
4.2 Price is a term used for the amount 4.6 Value is therefore a hypothetical price,
asked, offered, or paid for a good or and the hypothesis on which the value is
service. Sale price is an historical fact, estimated is determined by the valuation
whether it is publicly disclosed or kept basis adopted. A Basis of Value is defined
confidential. Because of the financial in IVS 2 as a statement of the fundamental
capabilities, motivations, or special interests measurement principles of a valuation on a
of a given buyer and/or seller, the price paid specified date. A Basis of Value defines the
for goods or services may or may not have nature of the hypothetical transaction, e.g.,
any relation to the value which might be whether or not there is exposure to a
ascribed to the goods or services by others. market, and the assumed motivation and
Price is, however, generally an indication of behavior of the parties. A Basis of Value is
a relative value placed upon the goods or not a description of the method or approach
services by the particular buyer and/or used to produce the estimate, and neither
seller under particular circumstances. does it describe the state or condition in
which the asset is assumed to be
4.3 Cost is the price paid for goods or transferred. It is of paramount importance
services or the amount required to create or to the use and understanding of valuations
produce the good or service. When that that the Basis of Value be clearly disclosed,
good or service has been completed, its cost and that it is a basis that is appropriate to
is an historical fact. The price paid for a the particular valuation assignment. A
good or service becomes its cost to the change in the Basis of Value can have a
buyer. material effect on the valuation.
4.4 A market is the environment in which 4.7 Professional Valuers, who possess
goods and services trade between buyers intimate knowledge of a property market;
and sellers through a price mechanism. The understand the interaction of participants in
concept of a market implies that goods the market; and are, thereby, able to judge
and/or services may be traded among the most likely prices to be concluded
buyers and sellers without undue restriction between buyers and sellers of property in
on their activities. Each party will respond that market avoid the unqualified term
to supply-demand relationships and other value by preceding the term with some
price-setting factors as well as to the party‘s adjective describing the particular type of
own capacities and knowledge, value involved. Market Value is the most
understanding of the relative utility of the common type of value associated with
goods and/or services, and individual needs property valuations and is discussed in
and desires. A market can be local, International Valuation Standard 1.
regional, national, or international.
4.8 The value concept contemplates a
4.5 Value is an economic concept referring monetary sum associated with a transaction.
to the price most likely to be concluded by However, sale of the property valued is not
the buyers and sellers of a good or service a condition requisite to estimating the price
that is available for purchase. Value is not a for which property should sell if it were
fact, but an estimate of the likely price to be sold on the date of valuation under
paid for goods and services at a given time conditions prescribed in the definition of
in accordance with a particular definition of Market Value.
value. The economic concept of value
reflects a market‘s view of the benefits that 4.9 The Market Value of real estate is a
accrue to one who owns the goods or representation of its market-recognized
utility rather than its purely physical status. between a willing buyer and a willing seller
The utility of assets to a given entity or in an arm‘s-length transaction after proper
individual may differ from that which marketing wherein the parties had each
would be recognized by the market or by a acted knowledgeably, prudently, and
particular industry. (Refer to 5.0 below) without compulsion.
4.9.1 Considerations similar to those 5.3 It is important to stress that the
expressed above are applied to the valuation professionally derived Market Value
of property other than real estate. Financial estimate is an objective valuation of
reporting will require application of Market identified ownership rights to specific
Value methods and a clear distinction property as of a given date. Implicit within
between such methods and methods used to this definition is the concept of a general
estimate values other than Market Value. market comprising the activity and
motivation of many participants rather than
4.10 The total cost of a property includes
the preconceived view or vested interest of
all direct and indirect costs of its
a particular individual. Market Value is a
production. If supplemental capital costs are
market-supported estimate developed in
incurred by a purchaser subsequent to
accordance with these Standards.
acquisition, they will be added to the
historical acquisition cost for cost 5.4 Real property is distinguished from
accounting purposes. Depending upon how most goods and services because of the
the utility of such costs is perceived by the relatively longer period required to market
market, they may or may not be fully what is a relatively illiquid commodity in
reflected in the property‘s Market Value. order to achieve a price that represents its
Market Value. This characteristically longer
4.11 A cost estimate for a property may be
exposure time, the absence of a ‗spot
based on either an estimate of reproduction
market‘ (a market in which commodities
cost or replacement cost. Reproduction cost
are available for immediate sale), and the
is the cost to create a virtual replica of a
nature and diversity of properties and
property using identical or, if identical
property markets give rise to the need for
materials are not available, similar
Professional Valuers and Valuation
materials. A replacement cost estimate
Standards.
envisions a modern equivalent of
comparable utility, employing the design, 5.5 In some countries, the legal term Fair
technology and materials that are currently Market Value is used synonymously with
used in the market. the term Market Value. Fair Market Value
should not be confused with the accounting
5.0 Market Value term, Fair Value. (See para. 8.1 below.)
The IVSC position is that the term Market
5.1 The concept of Market Value reflects
Value never requires further qualification
the collective perceptions and actions of a
and that all countries should move toward
market and is the basis for valuing most
compliance with this usage.
resources in market-based economies.
Although precise definitions may vary, the 6.0 Highest and Best Use
Market Value concept is commonly
understood and applied. 6.1 Land is regarded as a permanent asset,
but improvements upon or to the land have
5.2 Market Value is defined as:
a finite life. Because of the immobility of
The estimated amount for which a property land, each real estate parcel possesses a
should exchange on the date of valuation unique location. Land‘s permanence also
means that it will normally be expected to
outlast uses and improvements, which have projects, and many other valuation
a finite life. situations.
6.1.1 The unique characteristics of land 6.6 In markets characterized by extreme
determine its optimal utility. When volatility or severe disequilibrium between
improved land is valued separately from supply and demand, the highest and best
improvements to or upon the land, use of a property may be a holding for
economic principles require that future use. In other situations, where several
improvements to or on the land be valued as types of potential highest and best use are
they contribute to or detract from the total identifiable, the Valuer should discuss such
value of the property. Thus, the Market alternative uses and anticipated future
Value of land based upon the ―highest and income and expense levels. Where land use
best use‖ concept reflects the utility and the and zoning are in a state of change, the
permanence of land in the context of a immediate highest and best use of a
market, with improvements constituting the property may be an interim use.
difference between land value alone and
total Market Value as improved. 6.7 The concept of highest and best use is a
fundamental and integral part of Market
6.2 Most properties are valued as a Value estimates.
combination of land and improvements. In
such cases, the Valuer will normally 7.0 Utility
estimate Market Value by considering the
highest and best use of the property as 7.1 The key criterion in the valuation of any
improved. real or personal property is its utility.
Procedures employed in the valuation
6.3 Highest and best use is defined as: process have the common objective of
defining and quantifying the degree of
The most probable use of a property which utility or usefulness of the property valued.
is physically possible, appropriately This process calls for interpretation of the
justified, legally permissible, financially utility concept.
feasible, and which results in the highest
value of the property being valued. 7.2 Utility is a relative, or comparative
term, rather than an absolute condition. For
6.4 A use that is not legally permissible or example, the utility of agricultural land is
physically possible cannot be considered a ordinarily measured by its productive
highest and best use. A use that is both capacity. Its value is a function of the
legally permissible and physically possible quantity and quality of produce, which the
may nevertheless require an explanation by land will yield in an agricultural sense, or of
the Valuer justifying why that use is the quantity and quality of buildings
reasonably probable. Once analysis essential to the agricultural operation. If the
establishes that one or more uses are land has development potential, however,
reasonably probable uses, they are then its productivity is measured by how
tested for financial feasibility. The use that productively it will support a residential,
results in the highest value, in keeping with commercial, industrial, or mixed use.
the other tests, is the highest and best use. Consequently, land value is established by
evaluating its utility in terms of the legal,
6.5 Application of this definition permits physical, functional, economic, and
Valuers to assess the effects of deterioration environmental factors that govern its
and obsolescence in buildings, the most productive capacity.
appropriate improvements for land, the
feasibility of rehabilitation and renovation
7.4 An individual property may possess an 8.3 Where normal market conditions are
additional, or special, value above its value disrupted or suspended, or where supply
as a separate entity by reason of its physical and demand imbalances lead to market
or functional association with an adjoining prices that do not meet the Market Value
property owned by others or its definition, the Valuer may face a difficult
attractiveness to a purchaser with other valuation problem. By using the Market
special interests. The extent or amount of Value concept and definition, and by
such additional, or special, value is applying market data and reasoning to the
generally reported separately from Market valuation process, Valuers ensure the
Value. relevance and usefulness of asset values
reported in financial statements. As
8.0 Other Important Concepts availability and/or applicability of market
data decrease, the valuation assignment
8.1 The expression Market Value and the may require a higher degree of professional
term Fair Value as it commonly appears in Valuer vigilance, experience, and judgment.
accounting standards are generally
compatible, if not in every instance exactly 8.4 A Valuer may be required to apply a
equivalent concepts. Fair Value, an particular definition of Market Value to
accounting concept, is defined in meet legal or statutory requirements. If so
International Financial Reporting Standards required, the Valuer must make specific
and other accounting standards as the disclosure of the fact and describe the
amount for which an asset could be impact of any differences upon the value
exchanged, or a liability settled, between estimated. Where an assignment is
knowledgeable, willing parties in an arm‘s undertaken in accordance with International
length transaction. Fair Value is generally Valuation Standards, the term Market Value
used for reporting both Market and Non- will always conform to the IVS definition.
8.5 All valuation reports should make clear alternative, whether a substitute or the
the purpose and intended use of the original, tends to establish Market Value.
valuation. In addition to other reporting
requirements, where financial reporting is 9.2.1 Market based valuation approaches
involved the report should specifically include:
identify the asset class into which each
9.2.1.1 Sales Comparison Approach. This
asset is placed and the basis for such
comparative approach considers the sales of
placement. Each asset class should be
similar or substitute properties and related
explicitly explained.
market data, and establishes a value
8.6 The estimation and reporting of estimate by processes involving
property and asset values, and related comparison. In general, a property being
guidance, are the scope of these valued (a subject property) is compared
International Valuation Standards, with sales of similar properties that have
Applications, and related Guidance Notes. been transacted in the market. Listings and
How the results of valuations are to be offerings may also be considered.
compiled, conveyed, and incorporated with
the findings of other professionals is of 9.2.1.2 Income Capitalization Approach.
crucial importance to Valuers. Proper This comparative approach considers
understanding of terminology is essential income and expense data relating to the
for Valuers and those who read their property being valued and estimates value
reports. The sound use of experience and through a capitalization process.
expertise and correct application of Capitalization relates income (usually a net
methodology are also essential. These income figure) and a defined value type by
Standards are intended to serve the common converting an income amount into a value
objectives of those who prepare property estimate. This process may consider direct
and asset valuations and those who must relationships (known as capitalization
rely on their results. rates), yield or discount rates (reflecting
measures of return on investment), or both.
9.0 Valuation Approaches In general, the principle of substitution
holds that the income stream which
9.1 In order to estimate the price implied by produces the highest return commensurate
the appropriate Basis of Value, the Valuer with a given level of risk leads to the most
will need to apply one or more valuation probable value figure.
approaches. A valuation approach or
method refers to generally accepted 9.2.1.3 Cost Approach. This comparative
analytical methodologies that are in approach considers the possibility that, as
common use. an alternative to the purchase of a given
property, one could acquire a modern
9.2 Market based valuations normally equivalent asset that would provide equal
employ one or more of the valuation utility. In a real estate context, this would
approaches by applying the economic involve the cost of acquiring equivalent
principle of substitution, using market- land and constructing an equivalent new
derived data. This principle holds that a structure. Unless undue time,
prudent person would not pay more for a inconvenience, and risk are involved, the
good or service than the cost of acquiring price that a buyer would pay for the asset
an equally satisfactory substitute good or being valued would not be more than the
service, in the absence of the complicating cost of the modern equivalent. Often the
factors of time, greater risk, or asset being valued will be less attractive
inconvenience. The lowest cost of the best than the cost of the modern equivalent
because of age or obsolescence. A
Code of Conduct
1.0 Introduction instructions of clients, intended users, and/or
national societies or organizations. A
It is fundamental to the operation of valuation claiming to be prepared under
International Valuation Standards that International Valuation Standards binds the
valuations performed in compliance Valuer to follow this Code of Conduct.
therewith should be provided by honest and
competent Professional Valuers, free of bias 2.2 This Code does not have any formal
or self-interest, whose reports are clear, will authority in law, neither is it intended to be
not mislead, and will disclose all matters other than complementary to the rules, by-
essential to the proper understanding of the laws and regulations of national societies or
valuation. Valuers should always promote organizations controlling or monitoring the
and preserve public trust in the valuation activities of the Valuers.
profession.
2.3 Valuations prepared under these
Philippine 1.1 Standards would only normally be
acceptable to end users when prepared by a
Private Sector realty services practitioners trained professional member of a recognized
comprising real estate salesmen, real estate national professional body that itself
brokers, real estate appraisers and real enforces standards of qualification,
estate consultants are currently regulated by competence, experience, ethics, and
the National Code of Ethics for Real Estate disclosure in valuation. In those countries
Service Practitioners (NCERESP) which are where the infrastructure does not yet exist
complementary to this Code of Conduct. for a trained and regulated profession of
valuation, primary responsibility lies with
the client users to satisfy themselves as to
Philippine 1.2 the suitability of Valuers to undertake the
task.
The Public Sector, and particularly
Assessors and their staff, must: 3.0 Definitions
i) Promote and preserve public trust 3.1 Assumptions are suppositions taken to be
inherent in the assessment service; true. Assumptions involve facts, conditions,
or situations affecting the subject of, or
ii) Maintain a high standard of honesty and approach to, a valuation but which may be
integrity and conduct their activities in a capable or worthy of verification. They are
manner not detrimental to the government, matters that, once declared, are to be
the public and their profession; and accepted in understanding the valuation. All
iii) Ensure that all of their staff, persons or assumptions underlying a valuation should
subordinates adhere to this Code of be reasonable.
Conduct. All valuations are dependent to some degree
on adoption of assumptions. In particular,
2.0 Scope
the definition of Market Value incorporates
2.1 Valuers comply with these Standards assumptions to ensure consistency of
either by choice or by requirement placed approach and the Valuer may need to make
upon them by law or regulation or at the further assumptions in respect of facts which
Code of Conduct 22
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
cannot be known or facts which could be follows all the requirements of this Code
determined. of Conduct.
3.2 Limiting Conditions are constraints If, in any country, there are no appropriate
imposed on valuations. academic qualifications as stated above, the
Valuer should have a sufficient level of
Limiting conditions may be imposed: training and experience in the valuation and
be either:
by clients (e.g., where the Valuer is not
permitted to investigate fully one or more of a member of a recognized national
the significant factors likely to affect professional valuation body;
valuation);
or licensed by government or appointed by
by the Valuer (e.g., where the client may not the Courts or an Authority of an equivalent
publish the whole or any part of the status.
valuation report or valuation certificate
without the Valuer‘s prior written approval In some countries, to practice as a Valuer a
of the form and context in which it may licence or certification by an independent
appear); or body is required by law.
is aware of, understands, and can 3.6 Since all Valuers undertaking
correctly employ those recognized assignments under International Valuation
methods and techniques that are Standards must meet the requirements of
necessary to produce a credible impartiality, professional objectivity and
valuation; disclosure required under this Code of
Conduct, such Valuers should meet the
is a member of a recognized national requirements for independence which may
professional valuation body; attach to many assignments. With some
clients, and in certain countries, additional
pursues a programme of professional restraints on who may undertake a valuation
learning throughout his or her career; for a specific purpose may be applied by
and regulation or law. It is not the purpose of
Code of Conduct 23
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
this Code to define different degrees of 4.2.1 A Valuer must not act for two or more
independence beyond the standard of parties in the same matter, except with the
independence already required under this written consent of those concerned.
Code. Raymond G
4.2.2 A Valuer must take all reasonable
4.0 Ethics precautions to ensure that no conflicts of
duty arise between the interests of his or her
Valuers should at all times maintain a high clients and those of other clients, the Valuer,
standard of honesty and integrity and his or her firm, relatives, friends, or
conduct their activities in a manner not associates. Potential conflicts should be
detrimental to their clients, the public, their disclosed in writing before accepting
profession, or their respective national instructions. Any such conflicts of which
professional valuation body. the Valuer subsequently becomes aware
must be disclosed immediately. If such
4.1 Integrity conflicts come to the attention of the Valuer
after completion of the valuation, disclosure
4.1.1 A Valuer must not act in a manner that must be made within a reasonable time.
is misleading or fraudulent.
4.3 Confidentiality
4.1.2 A Valuer must not knowingly develop
and communicate a report that contains 4.3.1 A Valuer must at all times deal
false, inaccurate, or biased opinions and with client‘s affairs with proper discretion
analysis. and confidentiality.
4.1.3 A Valuer must not contribute to, or 4.3.2 A Valuer must not disclose sensitive
participate in, a valuation service that other factual data obtained from a client, or the
reasonable Valuers would not regard to be results of an assignment prepared for a
ethical or justified. client, to anyone other than those
specifically authorized by the client except
4.1.4 A Valuer must act legally and comply when legally required to do so as in
with the laws and regulations of the country situations where a Valuer must comply with
in which he or she practices or where an certain quasi-judicial proceedings within the
assignment is undertaken. recognized national professional valuation
body of which the Valuer is a member.
4.1.5 A Valuer must not claim, or knowingly
let pass, erroneous interpretation of 4.4 Impartiality
professional qualifications that he or she
does not possess. 4.4.1 A Valuer must perform an assignment
with the strictest independence, objectivity,
4.1.6 A Valuer should not knowingly use and impartiality, and without
false, misleading or exaggerated claims or accommodation of personal interests.
advertising in an effort to secure
assignments. 4.4.2 A Valuer must not accept an
assignment that includes the reporting of
4.1.7 A Valuer shall ensure that any staff predetermined opinions and conclusions.
person or subordinate assisting with the
assignment adhere to this Code of Conduct. 4.4.3 Fees connected with an assignment
must not depend on the predetermined
4.2 Conflicts of Interest outcome of any valuation or other
Code of Conduct 24
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
4.4.8 A Valuer should not use or rely on 5.3 Efficiency and Diligence
unsupported conclusions based on prejudice
of any kind or report conclusions reflecting 5.3.1 Valuer should act promptly and
an opinion that such prejudice is necessary efficiently in carrying out the client‘s
to maintain or maximise value. instructions and should keep the client
informed of the Valuer‘s progress.
4.4.9 In reviewing another Valuer‘s report, a
Valuer shall exhibit impartial judgment and 5.3.2 Instructions should be declined where
justify his or her reasons for agreeing or circumstances preclude sufficient diligent
disagreeing with the conclusion of the enquiry, quality of work, and completion
report. within a reasonable time.
Code of Conduct 25
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
the data for analysis in the valuation are controlling the asset should be disclosed in
correct and can be relied upon. the valuation report.
5.3.5 A Valuer should prepare a work file 6.5 Where a Valuer is acting as an External
for each assignment which, upon Valuer but also has worked in a fee-earning
completion, should contain a true copy, in capacity for the client, such relationship
paper or electronic form (suitably backed- must be disclosed lest a third party, having
up), of all written reports, correspondence, to rely on the valuation, deem the Valuer‘s
and memoranda plus adequate file notes objectivity compromised.
which substantiate the Valuer‘s opinion by
way of enquiry, objective comparison, 6.6 Any limitations to the quality of the
deduction, and calculation. service that a Valuer is able to offer must be
disclosed whether this is due to externally
5.3.6 The work file for each assignment imposed constraints or peculiar to the Valuer
should be retained for a period of at least or the assignment. Where outside assistance
five years after completion of the has been sought the Valuer must disclose the
assignment. identity of the assistants, the extent of
reliance on, and the nature of, such
6.0 Disclosure assistance.
It is essential that Valuers develop and 6.7 A Valuer must place a restriction against
communicate their analyses, opinions, and the publication of a valuation or its
conclusions to users of their services conclusions without consent so that the
through reports that are meaningful and not Valuer can keep a measure of control over
misleading and that disclose anything that the form and context in which his or her
might be taken to affect objectivity. valuations are publicly disclosed.
6.1 The valuation report should set out a 6.8 A Valuer should disclose any departures
clear and accurate description of the scope from the International Valuation Standards.
of the assignment and its purpose and
intended use, disclosing any assumptions, 6.8.1 Standards are devised for the
hypothetical scenarios, or limiting generality of situations and cannot cater to
conditions that directly affect the valuations every eventuality. There will be occasions
and, where appropriate, indicating their where departure from Standards is
effect on the value. inescapable. When such situations arise,
departure would be unlikely to constitute a
6.2 The valuation report must provide breach of these Standards, provided such
sufficient information to describe the work departure is reasonable, complies with the
performed, the conclusions reached, and the principles of ethics and measures of
context in which they were shaped. competence, and a rationale for such
departure is provided in the valuation report.
6.3 A Valuer must disclose any direct or
indirect personal or corporate relationship 7.0 Reporting of Values
with the property or company that is the
subject of any assignment and that might Valuation assignments may deal with one or
lead to a potential conflict of interest. more properties. The style of the valuation
report must be tailored to the nature of the
6.4 Where a Valuer is acting as an Internal assignment and the needs of the client while
Valuer, the relationship with the entity meeting certain minimum requirements as to
content.
Code of Conduct 26
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
7.1 This paragraph sets out the minimum report is being prepared for a portfolio of
contents of any report or certificate. The properties for use in an audit function, the
following items must be included. (Also see level of detailed data required for each of the
para. 5.1 of IVS 3, Valuation Reporting.) properties within the portfolio may be less
extensive.
the identity of the Valuer and the date of
the report; 7.3 This section is not to be taken to
represent the enquiries, research and
the identity of the client; analysis needed to perform a proper
valuation, merely the minimum that must be
the instructions, date of the value presented in the report.
estimate, purpose and intended use of
the valuation;
Code of Conduct 27
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
Property Types
Property Types 28
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
maintains the ownership interest, known in 2.2.5.2 Trusts create another type of interest
some countries as the leased fee estate, with in real property rights. The interest of a
the right of use and occupancy being beneficiary under a trust is known as the
conveyed or granted to a tenant, or lessee. equitable or equity interest as opposed to the
The interest which the tenant, or lessee, legal interest of the trustee(s). (A
acquires under the lease, known in some beneficiary is said to hold equitable title
countries as the leasehold estate, is the right while legal title is held by the trustee[s].)
of use and occupancy for a stated term under
certain conditions. 2.2.5.3 Security or financial interests are
created by mortgage pledges where the
2.2.3.1 Subleaseholds are created when the property is used as collateral to secure
tenant or lessee in a prior lease conveys to a finance or a charge is taken over the
third party, a sublessee, the interest that the property. An owners‘ equity portion in the
tenant, or lessee, enjoys, i.e., the right to use property is considered a separate financial
and occupy the property. interest.
2.2.3.2 A Valuer analyzes whether any terms 2.3 Real property, in the terminology of
or conditions in a lease may affect property accounting, usually falls into the category of
value. fixed, or long-term, assets. Sometimes, real
property may be considered a current asset,
2.2.4 Besides restrictions by the country, e.g., where land or improved real estate is
other lawful limitations may be imposed held in inventory for sale.
upon the rights inherent in the ownership of
real property. 2.3.1 The asset is the interest held in the real
estate, i.e., the asset is the real property.
2.2.4.1 Deed restrictions and restrictive
covenants, which run with the land, may 2.3.2 It is the ownership of the asset that is
affect the use, development, and conveyance valued rather than the real estate as a
of ownership. physical entity.
2.2.4.2 Easements are non- possessory 2.3.3 Where the ownership of an asset is
(incorporeal) interests in landed property purchased and sold in a marketplace, market
conveying use, but not ownership, of a participants ascribe specific values to
portion of that property. Rights-of-way or ownership of particular interests in real
privileges, acquired through use or contract, estate. These values ascribed by market
to pass over a portion or strip of landed participants form the objective basis for
property owned by another. estimating the Market Value of real property.
2.2.5 Other important ownership and 2.4 Valuation of real property is undertaken
financial interests may be associated with for a variety of reasons, which include the
real property. following categories, financial reporting,
transactions involving transfers of
2.2.5.1 Partial or fractional interests in real ownership, loans and mortgages to be
property rights are created by legal divisions secured by property, litigation, tax matters,
of the ownership interest. For example, and counseling or investment decision
property is not only owned in sole making. With the exception of the last
proprietorships. It may also be held by category, Market Value is the value basis in
corporations (shareholders), partnerships, all the following groupings:
joint tenancies, and tenancies in common.
Property Types 29
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
2.4.1 Valuations of fixed assets prepared for 2.5.1 the location, the physical and legal
financial statements and related accounts to description, and the economic or income-
reflect the effect of changing prices or producing attributes;
current values;
2.5.2 the real property interest (fee
2.4.2 Valuations to assist a prospective buyer simple/freehold, leased fee, leasehold,
in setting an offering, to assist a prospective subleasehold) to be valued;
seller in establishing an acceptable asking
price, or to help both parties in determining 2.5.3 any personal property, trade fixtures, or
the sale price for a proposed transaction; intangible items that are not real property but
valuations to establish the basis for that are included in the valuation (see Para.
reorganizing or merging the ownership of 3.2 below);
multiple properties;
2.5.4 any known easements, restrictions,
2.4.3 Valuations required to estimate the encumbrances, leases, covenants, or special
value of collateral property offered for a assessments/ratings on the property or other
proposed mortgage loan or to establish a items of similar nature; and
basis for insuring or underwriting a loan on
the property; 2.5.5 Whether the subject property is a
partial or fractional interest or a physical
2.4.4 Valuations performed in compulsory segment of a larger land parcel.
acquisition (eminent domain/condemnation
proceedings), in litigation or arbitration 2.6 The valuation of real property may be
involving disputes over contracts and partial influenced by special considerations, such
interests, and settlements of damages caused as:
by environmental accidents or violations;
2.6.1 A requirement to analyze the merger of
2.4.5 Valuations required to estimate estates (Synergistic Value) or the separation
assessed value/rating; to separate assets into of property interests (Component Value);
depreciable and non-depreciable items and,
thereby estimate applicable depreciation; or 2.6.2 The effects of likely zoning changes
to determine gift or inheritance taxes; and infrastructure development, e.g., the
extension of public utility systems or
2.4.6 Valuations and ancillary assignments accessed corridors;
performed for a broad spectrum of clients, 2.6.3 Depressed markets characterized by
e.g., investors, insurers, claims adjusters, weak demand, oversupply, and few sale
auctioneers or liquidators, and zoning boards transactions, where estimates of Market
(on the probable effects of planning Value may be difficult to support on the
proposals) as well as for a diversity of basis of current or historical evidence. In
purposes, e.g., market or feasibility analyses, such circumstances, the focus of market
cost/benefit analyses, determination of book participants may shift to other indicators of
value for new stock issues (or revisions property value or performance.
thereof), and the setting of prospective rent
schedules and lease provisions. 3.0 Personal Property
2.5 In any valuation of real property, the 3.1 Personal Property refers to ownership of
relevant characteristics of the property must an interest in items other than real estate.
be identified. Property characteristics These items can be tangible, such as a
include: chattel, or intangible, such as a debt or
patent. Tangible personal property
Property Types 30
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
represents interests in items that are not 3.2.2.1 By extension, the above category
permanently attached or affixed to real estate may include specialized, non-permanent
and are generally characterized by their buildings, machinery and equipment.
moveability. In some countries, items of
personal property are legally recognized as 3.2.2.2 In some countries, the term
personalty in distinction to realty (see Furniture, Fixtures and Equipment (FF&Es)
Property Types, para. 2.1.1). comprises both of the categories described in
para. 3.2.1 and 3.2.2.
Philippine 3.1.1
A definition of movable or personal 3.2.3 Net working capital and securities, or
property is provided in Article Nos. 414-(2) net current assets, are the sum of liquid
& 416, Book II of the Civil Code (see assets less short-term liabilities. Net
Supplementary Philippine Glossary) working capital may include cash,
marketable securities, and liquid supplies
3.2 Examples of personal property includes less current liabilities such as accounts
interests in: payable and short-term loans.
3.2.1 Identifiable, portable, and tangible 3.2.4 Intangible assets are interest held in
objects considered by the general public to intangible entities. Examples of intangible
be personal, e.g., furnishing, collectibles, property interests include the right to recover
and appliances. Ownership of the current a debt and the right to profit from an idea. It
assets of a business, trade inventories, and is the right, i.e., to recover or to profit, as
supplies is considered to be personal distinct from the intangible entity itself, i.e.,
property. the debt or the idea, which is the property
and to which value is ascribed.
3.2.1.1 In some countries, the above are
referred to as goods and chattels personal. 3.3 A valuation that includes both personal
property and real property must identify the
3.2.2 Non-realty fixtures, also called trade personal property and consider its effects on
fixtures or tenant‟s fixtures (fixtures and the value estimate given.
fittings), are attached to the property by the
tenant and used in conducting the trade or 3.3.1 Valuations of personal property can be
business. Leasehold improvements, or an element of a larger assignment. The
tenant‟s improvements, are fixed definition of value by which the personal
improvements or additions to the land or property is valued must be consistent with
buildings, installed and paid for by the the purpose of the property valuation,
tenants to meet the tenant‘s needs. Trade or whether that purpose is to sell, to renovate,
tenant‘s fixtures are removable by the tenant or to demolish the property. Personal
upon expiration of the lease. Their removal property may be valued according to its
causes no serious damage to the real estate. Market Value under various assumptions,
Leasehold or tenant‘s improvements are e.g., that the personal property is included
finishings or fittings, such as partitions and among the assets of a hotel that was sold as a
outlets constructed on site. The useful life of going concern, or that the personal property
tenant‘s improvements may be shorter or was among the assets of a hotel, which went
longer than the term of the lease. If longer out of business, and consequently were to be
than the lease term, the tenant may be liquidated or sold for salvage. (See IVS 2,
entitled to compensation reflecting the extent para. 6.9.)
to which the leasehold improvements have
increased the value of the rented premises. 3.3.2 A Valuer must be able to distinguish
personal property from real property and on
occasion may be required to exclude it, e.g.,
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4.3.2 Properties such as hotels; fuel stations; stock owned by the shareholders in the
restaurants; and movie theatres, or cinemas, business.
variously called properties associated with a
business entity, properties with trading 4.5.2 Business valuations are often used as a
potential, trade related properties or basis for allocating and reflecting the Value
operational entities, are valued at Market in Use of the various assets of a business.
Value, but their Market Value includes value Business valuations may also provide the
components constituting land, buildings, basis for estimating the extent of
personal property, intangible assets, and the obsolescence of specified fixed assets of a
business itself. Because these properties are business.
commonly sold in the market as an operating
package, separate identification of land, 4.6 Business valuations may be based on the
building, and other values may be difficult, Market Value of the business entity. The
so additional care should be taken to identify Market Value of a business is not necessarily
the property components included in the equivalent to the Value in Use of the
valuation. (See GN 12, Valuation of Trade business. Valuations done for financial
Related Property.) reporting are generally required to report
Fair Value, which may or may not be
4.4 Under the terminology of accounting, equivalent to Market Value. In such
both tangible and intangible assets are situations, a Valuer should indicate whether
included among the assets of a business the value satisfies or does not satisfy both
entity: Market Value and Fair Value definitions.
(See Concepts Fundamental to Generally
4.4.1 Tangible assets include current assets, Accepted Valuation Principles, para. 8.1).
and long-term assets such as realty, fixtures, Valuations of going concerns (defined in
equipment, and tangible personal property. Property Types, para. 4.1) are generally
based on Value in Use. For financial
4.4.2 Intangible assets, which are considered reporting purposes, Value in Use has a
intangible personal property, include specific meaning under International
management skill, marketing know-how, Accounting Standard 36, Impairment of
credit rating, an assembled work force, an Assets, which distinguishes the term from its
operational plant, goodwill, and ownership common usage in valuation practice.
of various legal rights and instrument (e.g.,
patents, copyrights, franchises and 4.7 A Valuer must clearly define the
contracts). business (e.g., operating company, holding
company, trading company), business
4.4.2.1 Goodwill may include two distinct ownership interest, or security (e.g., closely
components, goodwill that is property- held or publicly held company stock, and
specific, or inherent within the property and investment trust shares) being valued.
transferable to a new owner on sale of the
property, and personal goodwill that is 4.7.1 An ownership interest may be
associated with the proprietor or manager. undivided, divided among shareholders,
and/or involve a majority interest and
4.5 The valuation of businesses (see the minority interest.
Guidance Note on Business Valuation, GN
6, para. 5.0) is undertaken for a variety of 4.7.2 A Valuer must consider the rights,
purposes including: privileges and conditions that attach to the
ownership interest, whether held in corporate
4.5.1 The acquisition of and disposition of form, partnership from, or as a
an individual business, a business merger, or proprietorship.
the estimation of the value of the capital
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4.8 Business valuations employ three 5.1.2 Other legal entities related to
approaches to value. Valuers commonly partnerships are syndications and joint
reconcile the indications derived from two or ventures.
more of these approaches and associated
methods, (See the Guidance Note on 5.1.2.1 A syndication is often organized by a
Business Valuation, GN 6, para. 5.14.) general partner. Investors in the syndication
become limited partners. A syndication pools
5.0 Financial Interests funds for the acquisition and development of
real estate projects or other business ventures.
5.1 Financial interests in property result
from the legal division of ownership 5.1.2.2 A joint venture is a combination of
interests in businesses and real property two or more entities that join to undertake a
(e.g., partnerships, syndications, specific project. A joint venture differs from
corporations, cotenancies, joint ventures), a partnership in that it is limited in duration
from the contractual grant of an optional and project-specific.
right to buy or sell property (e.g., realty
stocks, or other financial instruments) at a Philippine 5.1.2.2.1
stated price within a specified period, or A joint venture is a form of partnership and
from the creation or investment instruments should thus be governed by the law of
secured by pooled real estate assets. partnerships. (Aurbach vs. Sanitary Wares
Manufacturing Corp., 180 SCRA 130 [1989])
5.1.1 Ownership interests may be legally
divided to create partnerships, in which two 5.1.3 An option is an agreement to keep
or more persons jointly own a business or open an offer to buy, sell, or lease real
property and share in its profits or losses. property for a specified period and at a stated
price. An option creates a contractual right,
5.1.1.1 A general partnership is an the exercise of which is generally contingent
ownership arrangement in which all partners upon the fulfillment of specified conditions.
share in investment gains and losses and The holder may or may not ultimately choose
each is fully responsible for all liabilities. to exercise the option. In this respect, an
option differs from a contract to buy or sell a
Philippine 5.1.1.1.1 property. Purchase options may also be
See Supplementary Philippine Glossary for written into leases. Purchase options often
definition cited in Article 1775, Book V of contain the provision that certain parts of all
the Civil Code. rents paid may be applied to the purchase
price.
5.1.1.2 .A limited partnership is an
ownership arrangement consisting of general Philippine 5.1.3.1
and limited partners; the general partners See Supplementary Philippine Glossary for
manage the business and assume full liability definition cited in Article 1324, Book IV of
for partnership debt while the limited the Civil Code.
partners are passive and liable only to the
extent of their own capital contributions. 5.1.4 Real estate investment through the
ownership of securities, or instruments
Philippine 5.1.1.2.1 securing both debt and equity positions,
See Supplementary Philippine Glossary for represent an alternative to the direct
definition cited in Article 1775, Book V of ownership of property. Investors are able to
the Civil Code. own and trade shares of an interest in a
property or pool or properties in the same
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Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
way they would buy and sell shares of interests for the purpose of transferring them
corporate stock. to a limited partnership.
5.1.4.1 The market for such securities 5.3.2 Options to buy, which are often
includes both a private, or institutional, obtainable for a small amount of money,
sector (partnerships, corporations, pension/ create considerable leverage, or gearing, the
superannuation funds, and insurance impact of which must be considered in the
companies) and a public sector (individual final transaction price. Lease purchase
investors who trade in a securities market). options restrict the marketability of the
leased property, and may limit the Market
5.1.4.2 Securitised investment instruments Value of the leased property and/or leasehold
include real estate investment trusts (REITs) interest.
(property investment or unit trusts),
collateralized mortgage obligations (CMOs), 5.3.3 Valuations of securitized investment
commercial mortgage-backed securities instruments are done for purposes of
(CMBSs), real estate operating companies underwriting and rating the securities prior
(REOCs), and separate and commingled to initial public offerings.
accounts. (Such instruments are discussed in
the IVSC White Paper, Valuation of Real 5.4 International Accounting Standard, IAS
Estate Serving as Collateral for Securitised 32, Financial Instruments: Disclosure and
Instruments.) Presentation, para. 11, defines financial
asset, financial liability, financial
5.2 Financial interests are intangible assets instrument, and equity instrument; IAS 32,
and can include: para. 28, defines compound (financial)
instrument. Under IAS 32, para. 86, an
5.2.1 the rights inherent in the ownership of entity shall disclose information about Fair
a business or property, i.e., to use, to occupy, Value for each class of financial assets and
to sell, to lease, or to manage; financial liabilities, in a way that permits
comparison with the corresponding carrying
5.2.2 the rights inherent within a contract amount in the balance sheet, IAS 32, para.
granting an option to buy, or a lease 92, summarizes the items an entity is
containing a purchase option, i.e., to exercise required to disclose.
or not to exercise; or
5.4.1 A financial asset is any asset that is a)
5.2.3 the rights inherent in ownership of a cash; b) an equity instrument of another
security issue (i.e., to hold or to dispose entity; c) a contractual right; (i) to receive
thereof). cash or another financial asset from another
entity; or (ii) to exchange financial
5.3 Financial interests require valuation for a instruments with another entity under
wide variety of reasons. conditions that are potentially favorable; or
d) a contract that will or may be settled in
5.3.1 A financial interest may be included the entity‘s own equity instruments and is:
among the assets of a partner. To establish (i) a non-derivative for which the entity is or
the total value of assets owned by the may be obliged to receive a variable number
partner, the value of the financial interest of the entity‘s own equity instruments; or (ii)
must be determined. Or a partner may wish a derivative that will or may be settled other
to sell his or her interest, or the interest may than by the exchange of a fixed amount of
have passed into an estate subject to cash or another financial asset for a fixed
inheritance taxes and probate proceedings. number of the entity‘s own equity
A general partner may also purchase instruments.
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5.4.4.2 A purchased call option or other 5.6 The valuation of financial interests
similar contract acquired by an entity that involves highly specialized considerations.
gives it the right to reacquire a fixed number Therefore, a Valuer must adapt the valuation
of its own equity instruments in exchange approach or approaches to the nature of the
for delivering a fixed amount of cash or financial interest subject to valuation.
another financial asset is not a financial asset
of the entity (IAS 32, AG 14). 5.6.1 All three approaches may be
appropriate to the valuation of property held
5.4.5 A compound (financial) instrument is a by general partnerships.
financial instrument that, from the issuer‘s
perspective, contains both a liability and an 5.6.1.1 When comparable sales are analyzed
equity element. in the sales comparison approach, the
Valuer determines whether non-realty items
5.5 The value of the assemblage of all the were included in the purchase price. If non-
various financial interests in a property may realty items were included, they should be
be larger or smaller than simply the sum of identified and their effect on value
the individual interests in that property. considered and estimated.
5.5.1 The value of the 100% ownership 5.6.2 In situations where a general partner
interest (inclusive of all shareholders or has acquired interests in partnership or
partners) in income-generating properties syndications for sale as limited partnership
held by partnerships or syndications will interests, the Valuer considers the effect of
likely exceed the aggregate value of minority non-realty items on the transaction price.
interests in the properties. Similarly, the These items may include special financing,
value of a REIT portfolio, representing an guarantees of occupancy or income, and
assemblage of various properties, is likely to management services.
differ from simply the sum of the values of
all the properties that make up the portfolio, 5.6.3 Options to buy are considered at the
a consequence attributable to the specific cost to the buyer when the option is
assemblage of properties in the portfolio exercised. Thus, the cost of an option to buy
and/or the management of the portfolio. that has been exercised is to be added to the
sale price of the realty. A Valuer considers
5.5.2 A Valuer estimates the value of the the effect of leverage, or gearing, produced
entirety or whole interest in the property by a purchase option on the final transaction
before dealing with the disaggregated or price for a property. When a purchase
fragmented ownership interests. option in a lease is exercised and past rent
payments are credited to the purchase price,
5.5.3 In assignments involving financial such payments are treated as installment
interests, a Valuer must clearly identify the payments.
exact ownership interest being valued,
whether it be a majority or minority 5.6.4 Units or shares in securitized real
ownership interest in a business or property, estate investment are priced in markets
a contractual right, or a majority or minority where such securities are traded. Valuations
ownership interest in securitized real estate of real estate assets held as part of a package
investment. The Valuer must examine the of investment instruments may be required
contractual arrangements between parties or for underwriting or rating purposes prior to
articles of association (articles of an initial public offering. In such situations,
incorporation or articles of partnership) to a Valuer applies those approaches and
verify the percentage share or stake that the methods consistent with the income-
financial interest in the property represents. generating characteristics of the real estate.
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Valuations are developed on the basis of 1.2 The utility for which a good or service
the Market Value of an asset or on bases is produced and the scarcity, or limited
other than Market Value. Central to all availability, of the good or service are
valuations are the concepts of market, generally considered supply-related
price, cost and value. These concepts are factors. Consumer preferences and
relevant both to valuations based on purchasing power, which reflect desire for
Market Value and those based on non- the good or service and define the
market criteria. Of equal importance to affordability of the item, are generally
the work of Valuers is clear considered demand-related factors.
communication of the results of the
valuation and an understanding of how 2.0 Markets
those results have been obtained. A well
prepared Valuation Report fulfills these A market is an environment in which
functions. It is only appropriate, therefore, goods, services, and commodities are
that the International Valuation Standards traded between buyers and sellers through
should address each of these three a price mechanism. The concept of a
fundamental aspects of valuation: IVS 1, market implies the ability of buyers and
Market Value Basis of Valuation; IVS 2, sellers to carry on their activities without
Bases Other Than Market Value; and IVS restriction.
3, Valuation Reporting.
2.1 The principle of supply and demand
Bases of Value states that the price of a good or service, or
commodity varies inversely with the
1.0 Introduction supply of the item and directly with the
demand for the item.
At the most fundamental level, value is
created and sustained by the inter- 2.2 In property markets, supply represents
relationship of four factors that are the quantity of property interests that are
associated with any product, service, or available for sale or lease at various prices
commodity. These are utility, scarcity, in a given market within a given period of
desire, and purchasing power. time, assuming labor and production costs
remain constant.
1.1 The working of the economic principle
of supply and demand reflects the complex 2.3 Demand constitutes the number of
interaction of the four factors of value. possible buyers or renters seeking specific
The supply of a good or service is affected types of property interests at various prices
by its utility and desirability. The in a given market within a given period of
availability of the good or service is time, assuming other factors such as
limited by its scarcity and effective checks population, income, future prices, and
on the purchasing power of likely consumer preferences remain constant.
consumers. The demand for a good or
service is, likewise, created by its utility,
influenced by its scarcity and desirability
300
150
100
50 Demand
0
1 2 3 4 5 6 7 8 9 10
Quantity in Units (1,000s)
limited number of participants. The Valuer to judge from available data where
market in which the property is exposed the realistic level of the market is.
for sale is not a definitionally restrictive or Individual transaction prices may not be
constricted market. Stated conversely, the evidence of Market Value, but analysis of
omission of the word open does not such market data should be taken into
indicate that a transaction would be private consideration in the Valuation Process.
or closed.
6.5.2 In poor or falling markets there may
6.4 Market valuations are generally based or may not be a large number of ―willing
on information regarding comparable sellers.‖ Some, but not necessarily all,
properties. The Valuation Process requires transactions may involve elements of
a Valuer to conduct adequate and relevant financial (or other) duress or conditions
research, to perform competent analyses, that reduce or eliminate the practical
and to draw informed and supportable willingness of certain owners to sell.
judgments. In this process, Valuers do not Valuers must take into account all
accept data without question but should pertinent factors in such market conditions
consider all pertinent market evidence, and attach such weight to individual
trends, comparable transactions, and other transactions that they believe proper to
information. Where market data are reflect the market. Liquidators and
limited, or essentially non-existent (as for receivers are normally under a duty to
example with specialized properties), the obtain the best price in asset disposals.
Valuer must make proper disclosure of Sales, however, may take place without
situation and must state whether the proper marketing or a reasonable
estimate is in any way limited by marketing period. The Valuer must judge
inadequacy of data. All valuations require such transactions to determine the degree
exercise of a Valuer‘s judgment, but to which they meet the requirements of the
reports should disclose whether the Valuer Market Value definition and the weight
bases the Market Value estimate on market that such data should be given.
evidence, or whether the estimate is more
heavily based upon the Valuer‘s judgment 6.5.3 During periods of market transition
because of the nature of the property and characterized by rapidly rising or falling
lack of comparable market data. prices, there is a risk of over- or under-
valuation if undue weight is given to
6.5 Because changing conditions are historic information or if unwarranted
characteristic of markets, Valuers must assumptions are made regarding future
consider whether available data reflect and markets. In these circumstances Valuers
meet the criteria for Market Value. must carefully analyze and reflect the
actions and attitudes of the market and take
6.5.1 Periods of rapid changes in market care that they fully disclose the results of
condition are typified by rapidly changing their investigations and findings in their
prices, a condition commonly referred to as reports.
disequilibrium. A period of disequilibrium
may continue over a period of years and 6.6 The concept of Market Value also
can constitute the current and expected presumes that in a Market Value
future market condition. In other transaction a property will be freely and
circumstances, rapid economic change may adequately exposed on the (open) market
give rise to erratic market data. If some for a reasonable period of time and with
sales are out of line with the market, the reasonable publicity. This exposure is
Valuer will generally give them less presumed to occur prior to the effective
weight. It may still be possible for the date of value. Markets for fixed assets
This Standard should be read in the 3.1 Basis of Value. A statement of the
context of the background material and fundamental measurement principles of a
implementation guidance contained in valuation on a specified date.
Concepts Fundamental to Generally
Accepted Valuation Principles; 3.2 Fair Value. The amount for which an
asset could be exchanged between
1.0 Introduction knowledgeable, willing parties in an
arm‘s-length transaction.
1.1 The objectives of International
Valuation Standard 2 (IVS 2) are to ―Fair Value, an accounting concept, is
identify, explain and distinguish bases of defined in International Financial
value other than Market Value and to Reporting Standards and other accounting
establish standards for their application. standards as the amount for which an asset
could be exchanged, or a liability settled,
1.2 Market Value is the most appropriate between knowledgeable, willing parties in
basis of value for a wide range of an arm‘s length transaction. Fair Value is
applications. However, alternative generally used for reporting both Market
valuation bases may be appropriate in and Non-Market Values in financial
specific circumstances. It is essential that statements. When undertaking a valuation,
both the Valuer and users of valuations where the Market Value of an asset can be
clearly understand the distinction between established, this value will equate to Fair
Market Value and these other bases of Value.‖ (See Concepts Fundamental to
valuation and the effects (if any) that Generally Accepted Valuation Principles,
differences between bases may have on para. 8.1)
the applicability of the valuation.
3.3 Investment Value, or Worth. The value
1.3 The concept of Market Value is based of property to a particular investor, or a
on specific, identified assumptions that are class of investors, for identified
set out in IVS 1. Other bases of valuation investment or operational objectives. This
require the application of different subjective concept relates specific
assumptions, which if not clearly property to a specific investor, group of
identified, may result in misinterpretation investors, or entity with identifiable
of the valuation. investment objectives and/or criteria.
6.12 The third category of valuation bases 7.3 If a Valuer is involved in a valuation
comprises those set by statute, regulation assignment in a capacity other than as a
or contract. Statutory bases are often Valuer, for example, as an independent
prescribed for taxation purposes. or impartial agent, as a consultant or
Examples of private contracts, prescribing advisor to a business entity, or as a
valuation definitions and assumptions, mediator, the Valuer should disclose the
include criteria for setting the price specific role taken in each assignment.
payable under an option or for reviewing (IVS 3, 7.2)
the payments made under a lease. The
detailed interpretation of both statutory 7.4 The Valuer shall disclose the
and contract provisions are often subject to regulatory framework and any
precedent, established by court decisions. departure required from these
Although many of the bases defined by Standards to comply with local
statute and contract may appear similar to legislations, regulation (including
bases defined in these standards, unless accounting rules), or custom. (IVS 3,
unequivocal reference is made to these 7.3)
standards, their detailed application may
require an approach different from that 8.0 Departure Provisions
required by these Standards. Further
discussion of statutory or contractual 8.1 In following this Standard any
valuation bases is outside the scope of departures must be in accordance with
International Standards. directions provided in IVS 3, Valuation
Reporting.
6.13 All valuations will involve different
assumptions, which must be clearly
identified by the Valuer and reported with
the valuation. In some situations, it may
be appropriate to provide alternative
valuations based on alternative
assumptions to illustrate the effect of these
assumptions.
Valuation Reporting
1.0 Introduction 2.2 Compliance with these reporting
requirements is incumbent upon both
1.1 The critical importance of a Valuation Internal and External Valuers.
Report, the final step in the valuation
process, lies in communicating the value 2.3 Some instructions involving valuations
conclusion and confirming the basis of the undertaken for specific purposes and
valuation, the purpose of the valuation, property types, e.g., financial reporting,
and any assumptions or limiting and lending, may differ from those given
conditions underlying the valuation. The for other assignments. The reader is
analytical processes and empirical data advised to consult those sections of the
used to arrive at the value conclusion may International Valuation Standards (IVSs)
also be included in the Valuation Report to that address these situations, i.e.,
guide the reader through the procedures International Valuation Applications 1 and
and evidence that the Valuer used to 2 (IVA 1 and IVA 2).
develop the valuation.
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PVS-IVS 3
other issues, such as the identity of the 3.5 Valuation Report. A document that
purchaser, the physical state of the records the instructions for the assignment,
property, the presence of environmental the basis and purpose of the valuation, and
pollutants (e.g., ground water the results of the analysis that led to the
contamination), or the ability to redevelop opinion of value. A Valuation Report may
the property. (See para. 5.1.7 below.) also explain the analytical processes
undertaken in carrying out the valuation,
3.4 Specifications for the Valuation and present meaningful information used
Assignment. The first step in the in the analysis. Valuation Reports can be
Valuation Process, which establishes the either oral or written. The type, content
context and scope/extent of the assignment and length of a report vary according to
and resolves any ambiguity involving the the intended user, legal requirements, the
valuation issue or problem. A Valuer property type, and the nature and
ensures that the analyses, information and complexity of the assignment.
conclusions presented in the report fit the
specifications for the assignment. The 3.6 Written Report. The results of a
specifications for the valuation assignment valuation communicated to a client in
include the following seven elements: writing, which includes electronic
communication. Written reports may be
3.4.1 An identification of the real, personal detailed narrative documents containing
(plant, machinery, equipment, furniture all pertinent materials examined and
and fixtures), business or other property analyses performed to arrive at a value
subject to the valuation and other classes conclusion or abbreviated pertinent
of property included in the valuation narrative documents, including periodic
besides the primary property category; updates of value, forms used by
governmental and other agencies, or letters
3.4.2 An identification of the property to clients.
rights (sole proprietorship, partnership, or
partial interest) to be valued; 4.0 Relationship to Accounting
Standards
3.4.3 The intended use of the valuation
and any related limitation; and the 4.1 Where applicable, the Valuation
identification of any subcontractors or Report shall meet or exceed the
agents and their contribution; requirements of the International Financial
Reporting Standards (IFRSs)/International
3.4.4 A definition of the basis or type of Accounting Standards (IASs) and the
value sought; International Public Sector Accounting
Standards (IPSASs).
3.4.5 The date as of which the value
estimate applies and the date of the 4.2 Valuation for Financial Reporting,
intended report; which is the focus of IVA 1, should be
read in conjunction with this Standard.
3.4.6 An identification of the scope/extent
of the valuation and of the report; and
5.0 Statement of Standard
3.4.7 An identification of any contingent
To perform valuations that comply with
and limiting conditions upon which the
these Standards and Generally
valuation is based.
Accepted Valuation Principles (GAVP),
it is mandatory that Valuers adhere to
all sections of the IVS Code of Conduct
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PVS-IVS 3
shall take reasonable steps to protect work file to support the results and
the integrity of the data/text in the conclusions of the valuation and must
report and to ensure that no errors be held for a period of at least five years
occur in transmission. Software should after completion.
provide for security of transmission.
6.0 Discussion
5.2.1 The origin, date and time of the
sending as well as the destination, date 6.1 The context in which a valuation
and time of receipt should be identified. figure is reported is as important as the
Software should allow confirmation that basis and accuracy of the figure itself. The
the quantity of data/text transmitted value conclusion should make reference to
corresponds to that received and should the market evidence, and procedures and
render the report as „read-only‟ to all reasoning that support that conclusion.
except the author.
6.2 Communicating the answer to the
5.2.2 The Valuer should ensure that the valuation question in a consistent and
digital signature(s) is/are protected and logical manner demands a methodical
fully under the Valuer‟s control by approach that enables the user to
means of passwords, Personal understand the processes followed and
Identification Numbers (PIN), their relevance to the conclusion.
hardware devices (secure cards), or
other means. A signature affixed to a 6.3 The report should convey to the reader
report electronically is considered as a clear understanding of the opinions
authentic and carries the same level of being expressed by the Valuer and also be
responsibility as a written signature on readable and intelligible to someone with
a paper copy report. no prior knowledge of the property.
5.2.3 A true electronic and/or paper 6.4 The report should demonstrate clarity,
copy of an electronically transmitted transparency, and consistency of approach.
report must be retained by the Valuer
for the period required by law in his or 6.5 The Valuer should exercise caution
her jurisdiction, in any event not less before permitting the valuation to be used
than five years. Files of the records of other than for the originally agreed
electronically transmitted reports may purpose.
be kept on electronic, magnetic, or other
media. 7.0 Disclosure Requirements
5.3 The presentation of a Valuation 7.1 When valuations are made by an
Report is decided by the Valuer and the Internal Valuer, specific disclosure shall
client based on the instructions or be made in the Valuation Report of the
specifications for the assignment. existence and nature of the relationship
between the Valuer and the entity
5.4 The type, content, and length of a controlling the asset.
report depend on the intended user of
the report, legal requirements, property 7.2 If a Valuer is involved in a valuation
type, and the nature and complexity of assignment in a capacity other than as a
the valuation issue or problem. Valuer, for example, as an independent
or impartial agent, as a consultant or
5.5 For all Valuation Reports, sufficient advisor to a business entity, or as a
documentation must be retained in the
Valuation Reporting 56
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
PVS-IVS 3
Valuation Reporting 57
Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting
PVA-IVA1
Material for this Application is drawn pertinent and user-friendly format are
from International Financial Reporting fundamental to the requirements of
Standards (IFRSs) published by the valuation for financial reporting.
International Accounting Standards Board
(IASB). IFRSs comprise individually 2.0 Scope
numbered standards. Those originally
published before 2004 are denoted IASs 2.1 This Application applies to all
(International Accounting Standards) 1-41. valuations of asset classes included in any
Those published subsequently are prefixed financial statement, which fall within the
as IFRSs. Extracts from IFRSs are skills and expertise of Valuers.
reproduced in this publication of the
International Valuation Standards (IVSs) 2.2 IVSs facilitate cross-border
with the permission of IASB. transactions and the viability of global
The approved text of the IFRSs is that markets through harmonization and
transparency in financial reporting. As
published by IASB in the English
such this Application is developed in the
language, and copies may be obtained
context of International Financial
directly from IASB, 30 Cannon Street,
Reporting Standards (IFRSs) as at 31
London EC4M 6HX, United Kingdom, E-
March 2004.
mail: publications@iasb.org.uk
IFRSs, Exposure Drafts and other 2.3 IFRSs adopt two models for the
publications of the IASB are protected by recognition of property assets in the
the copyright of the IASB. balance sheet: a cost model, and a fair
value model. Where the fair value model
―IFRS‖, ―IAS‖, ―IASC‖, ―IASB‖ and is applied, a current revaluation of the
―International Accounting Standards‖ are asset is required, and this Application
Trade Marks of the IASB and should not focuses on these particular circumstances
be used without the approval of the where Market Values are to be reported.
International Accounting Standards Board.
2.4 Legislative, regulatory, accounting, or
1.0 Introduction jurisprudence requirements may oblige
modification of this Application in some
1.1 The objective of this Application is to countries or under certain conditions. Any
explain the principles that apply to departure due to such circumstances must
valuations prepared for use in financial be referred to and clearly explained in the
statements and related accounts of Valuation Report.
business entities. Valuers undertaking
work of this nature should have an 3.0 Definitions
understanding of the accounting concepts
and principles underlying the relevant International Valuation Standards
International Accounting Standards.
Definitions
1.2 The Valuer‘s adherence to market- 3.1 Depreciated Replacement Cost. The
based definitions, objectivity, and full current cost of replacing an asset with its
disclosure of relevant matters within a modern equivalent asset less deductions
for physical deterioration and all relevant asset over its useful life (IAS 16, para. 6;
forms of obsolescence and optimization. IAS 36, para. 6).
3.4 Specialized Property. A property that 3.11 Fair Value Less Costs to Sell. The
is rarely if ever sold in the market, except amount obtainable from the sale of an
by way of sale of the business or entity of asset or cash-generating unit in an arm‘s-
which it is part, due to uniqueness arising length transaction between
from its specialized nature and design, its knowledgeable, willing parties, less the
configuration, size, location, or otherwise. costs of disposal (IAS 36, para. 6).
amount that an entity expects to realize a) the period over which an asset is
from the sale of inventory in the ordinary expected to be available for use by an
course of business. Fair Value reflects the entity; or
amount for which the same inventory
could be exchanged between b) the number of production or similar
knowledgeable and willing buyers and units expected to be obtained from the
sellers in the market place. The former is asset by an entity (IAS 16, para. 6; IAS 36,
an entity-specific value; the latter is not. para. 6; IAS 38, para. 8).
Net realizable value for inventories may
In regard to leases, useful life is defined
not equal fair value less costs to sell (IAS
as:
2, para. 7).
The estimated remaining period, from the
3.15 Owner-Occupied Property. Property commencement of the lease term, without
held (by the owner or by the lessee under a limitation by the lease term, over which
finance lease) for use in the production or the economic benefits embodied in the
supply of goods or services or for asset are expected to be consumed by the
administrative purposes (IAS 40, para. 5). entity (IAS 17, para. 4).
3.16 Property, Plant, and Equipment. 3.21 Value in Use. The present value of
Tangible items that the future cash flows expected to be
derived from an asset or cash-generating
a) are held for use in the production or unit (IAS 36, para. 6).
supply of goods or services, for rental to
others, or for administrative purposes; and 4.0 Relationship to Accounting
b) are expected to be used during more
Standards
than one period. (IAS 16, para. 6).
4.1 This Application applies the principles
3.17 Recoverable Amount. The developed in IVS 1, IVS 2, and IVS 3 to
recoverable amount of an asset or cash- the requirements of IASs/IFRSs.
generating unit is the higher of its fair
value less costs to sell and its value in use 4.2 This Application focuses on valuation
(IAS 36, para. 6). requirements under IAS 16, Property,
Plant and Equipment; IAS 17, Leases; and
3.18 Residual Value. The estimated IAS 40, Investment Property. Reference is
amount that an entity would currently also made to valuation requirements under
obtain from disposal of an asset, after IAS 36, Impairment of Assets, IAS 2,
deducting the estimated costs of disposal, Inventories; and IFRS 5, Non-current
if the asset were already of the age and in Assets Held for Sale and Discontinued
the condition expected at the end of its Operations.
useful life (IAS 16, para. 6).
4.3 IASB is currently undertaking
3.19 Revalued Amount. The fair value of fundamental reviews of both the
an asset at the date of the revaluation less measurement of assets and liabilities in
any subsequent accumulated depreciation financial statements and of lease
and subsequent accumulated impairment accounting. Although this Application has
losses (IAS 16, para. 31). been updated to reflect the revisions made
to various standards in 2003 as part of the
3.20 Useful life. Either IASB ―Improvements Project‖, further
changes may be necessary as a result of
these continuing review projects.
To perform valuations that comply with 5.3.1 IAS 16 deals with the cost model in
this Application and Generally paragraph 30 as follows:
Accepted Valuation Principles (GAVP),
it is essential that Valuers adhere to all “After recognition as an asset, an item
sections of the IVS Code of Conduct of property, plant, and equipment shall
pertaining to Ethics, Competence, be carried at its cost less any
Disclosure, and Reporting (sections 4, 5, accumulated depreciation and any
6, and 7). accumulated impairment losses.”
5.1 Classification of Assets. Valuers 5.3.2 The fair value model, which
shall obtain from the directors of the requires regular revaluations, is
owning entity a list of assets to be explained in paragraph 31 as follows:
valued, designating them as operational
assets, i.e., assets requisite to the “After recognition as an asset, an item
operations of the entity, or non- of property, plant and equipment whose
operational assets, being properties held fair value can be measured reliably
for future development, investment, or shall be carried at a revalued amount,
assets surplus to the operations of the being its fair value at the date of the
entity. revaluation less any subsequent
accumulated depreciation and
5.2 Applicable Standards. The subsequent accumulated impairment
classification of assets determines which losses. Revaluations shall be made with
IAS or IFRS applies. IAS 16 requires sufficient regularity to ensure that the
non-current property and plant assets carrying amount does not differ
held for the production or supply of materially from that which would be
goods or services to be recognized determined using fair value at the
initially in the balance sheet at cost and balance sheet date.”
thereafter carried in accordance with
either the cost model or fair value model 5.3.3 Fair value is not necessarily
described in 5.3. Other accounting synonymous with Market Value. It is
standards that require or permit the used throughout IFRSs in differing
valuation of tangible assets include: contexts.
Investment Property – IAS 40
5.3.4 Financial statements are produced
Leases – IAS 17 on the assumption that the entity is a
going concern unless management
Impairment of Assets – IAS 36 either intends to liquidate the entity or
cease trading, or has no realistic
Inventories – IAS 2 alternative but to do so. (IAS 1, para.
23). This assumptions therefore
Business Combinations – IFRS 3 underlies the application of fair value to
property, plant, machinery, and
Non-current Assets Held for Sale equipment, except in cases where it is
and Discontinued Operations – IFRS 5 clear that there is either an intention to
dispose of a particular asset or that
option of disposal has to be considered,
e.g., when undertaking an impairment
review.
5.6 Valuation Requirements for Leased the higher of its value in use or fair
Assets – IAS 17 value less costs to sell. The
requirements are discussed further at
5.6.1 Leased assets are classified under para. 6.8.2.
IAS 17 as either finance leases or
operating leases (see para. 6.6.1 below 5.8 Valuations after Business
and Addendum A). If a lease is Combinations – IFRS 3
classified as a finance lease, the fair
value of the asset is required to establish 5.8.1 Where a business acquires or is
the amount of the asset and liability merged with another, the acquirer has
recorded by the entity on its balance to account for the assets and liabilities
sheet. (IAS 17, para. 20). of the acquiree at their fair value as of
the acquisition date. For identifiable
5.6.2 For leases of land and buildings assets and liabilities, IVSC considers
special rules apply, which are described that the Valuer should report the
in para. 6.6.3. For all property, other Market Value as they existed at the date
than investment property, land and of acquisition.
buildings have to be considered
separately for classification as either a 5.9 Surplus Assets – IFRS 5
finance lease or an operating lease.
5.9.1 Under IFRS 5, Non-Current Assets
5.6.3 IAS 40 allows Investment Property Held for Sale and Discontinued
held by a lessee to be accounted for as a Operations. Surplus assets are to be
finance lease under IAS 17, subject to separately identified. Such assets may
further special rules. Firstly, no be accounted for individually or as a
allocation is made between the land and “disposal group”, i.e., a group of assets
buildings. Secondly, the fair value is to be disposed of together by sale or
recognized as the value subject to the otherwise, and the liabilities directly
lessee‟s future liabilities under the lease. associated with those assets that will
also be transferred in the transaction.
5.6.4 IVSC considers that in each case Surplus assets are to be initially
the requirement to establish the fair accounted for at the lower of the
value of the leased asset under IAS 17, carrying amount and the fair value less
para. 20, is met by the Valuer reporting costs to sell, and subsequently at fair
the Market Value. For leases of real value less cost to sell. Valuers should
estate, this is the Market Value of the therefore ascertain whether surplus
lease interest held by the lessee. For assets are to be valued as individual
leases of other assets, it is normally the items, or as a group or portfolio of
Market Value of the asset assets that will be disposed of in a single
unencumbered by the lease, as the transaction, and report the Market
liability is recorded separately. Value with the appropriate
assumptions.
5.7 Valuation of Impaired Assets – IAS
36 5.10 Properties Held for Sale in the
Ordinary Course of Business – IAS 2
5.7.1 Impairment arises where there is a
permanent decrease in the value of an 5.10.1 Valuations of properties held for
asset below its carrying amount. The sale in the ordinary course of business
entity is required to write down the should comply with the requirements of
carrying amount of an impaired asset to IAS 2, Inventories. These properties
5.12.1 These include Agricultural and 6.2.1 IAS 16, paras. 43 – 62, sets out the
Forestry assets. The Valuer should requirements for an entity to account for
value these assets in accordance with the depreciation of property, plant and
the guidance in GN 10. machinery assets. Valuers may be
requested to allocate value between
5.13 Co-operation with Auditors. different elements of an asset, to advise on
Subject to first obtaining the consent of the residual value or to advise on the
their client, Valuers shall discuss and future life of an asset.
explain their valuations openly with the
entity‟s auditors. 6.2.2 Elements of cost. Any part of an
item, which has a cost that is significant in
relation to the total cost of the item, has to
6.0 Discussion
be depreciated separately. Where parts
have a similar useful life and will
6.1 Identification of Asset Class
depreciate at a similar rate, they may be
grouped in determining the depreciation
Separate disclosures are required for each
charge. Valuers may be consequently
class of property, plant and equipment.
requested to allocate a valuation they have
IAS 16, para. 73, requires that financial
provided to the different component parts
statements shall disclose for each class the
of an asset in order to enable the entity to
measurement basis used for determining
depreciate them separately.
the gross carrying amount, the
depreciation method used, and the useful
6.2.3 Residual Value. The residual value
lives or the deprecation rates used. A class
is deducted from the carrying amount of
of property, plant or equipment is a
the asset to determine the amount the
grouping of assets of a similar nature and
entity has to depreciate. If the
use. The following are examples of
management policy of the entity involves
separate classes (IAS 16, para. 37):
disposal after a specific time, the useful
a) land; life of an asset may be less than its
economic life. IAS 16, para. 58,
b) land and buildings; recognizes that land normally has an
c) machinery; unlimited useful life and therefore should
be accounted for separately. It also
d) ships;
lease‖. Where a lease is of land and for separately. If the parts could not be
buildings, these elements have to be sold separately, the property is an
considered separately for the purposes of investment property only if an
lease classification (IAS 17, para. 15). insignificant proportion is held for the
Most leases of real property will grant the production or supply of goods or services
lessee rights to occupy both the land and or for administrative purposes (IAS 40,
buildings, following which the interest in para. 10).
both elements reverts to the lessor. If the
lessee has to maintain the building and 6.7.1.2 Property leased to a subsidiary or
hand it back to the lessor in good repair, it parent under an inter-company leasing
is probable that both elements will arrangement does not qualify as
correctly be classified as operating leases investment property in the consolidated
(see Addendum A). If both elements are financial statements of the group, but may
not considered to share the same be treated as such in the individual
classification, the minimum lease financial statements of the lessor entity
payments (including any initial capital (IAS 40, para. 15).
payment) are allocated between the land
and buildings elements in proportion to the 6.7.2 Investment Property is measured
relative fair values of the leasehold initially at cost. After initial recognition
interests in the two elements at the an entity may choose to adopt either:
inception of the lease. If the lease
payments cannot be reliably allocated the a) The Fair Value Model. Investment
entire lease is treated as a finance lease, property should be measured at fair value
unless it is clear that both elements are and changes recognized in the profit and
operating leases (IAS 17, para. 16). This loss statement; or
allocation is not required in the case of a
lessee‘s interest accounted for as b) The Cost Model. The ―historic‖ cost
investment property (IAS 17, para. 18). model is in accordance with the model
described in IAS 16. An entity that
6.6.4 For further guidance on Leasehold chooses the (historic) cost model should
interests, see Addendum A. nonetheless disclose the fair value of its
investment property.
6.7 IAS 40 – Investment Property
6.7.2.1 The fair value model is described
6.7.1 IAS 40 defines an investment in detail in IAS 40, paras. 33 – 55. The
property as a property (land or a Market Value of the entity‘s interest in the
building—or part of a building—or both) investment property derived in accordance
held by the owner, or by a lessee under a with IVS 1 accords with these detailed
finance lease, to earn rentals, or for capital requirements. The Market Value will
appreciation or both. It excludes owner- reflect any current leases, current cash
occupied property used for the production flows and any reasonable assumptions
or supply of goods and services, or for about future rental income or outgoings.
administrative purposes, and also property
held for sale in the ordinary course of 6.7.3 Leasehold investment property. A
business. property held under a lease, rather than
owned outright, and that otherwise meets
6.7.1.1 If part of a property is held as an the definition of an investment property,
investment property and part is owner- may be accounted for using the fair value
occupied, or if the parts could be sold or model. If this option is taken for one such
leased separately, the parts are accounted property held under a lease, all property
Addendum A
Land and Building Allocation though the investor may hold the
investment property under an operating
Where a lease is of land and buildings lease, the whole is accounted for as though
together, IAS 17, para. 15, requires that it were a finance lease.
the two elements be considered separately
for the purposes of classification. If it Where a lease is of a self-contained plot of
appears that the buildings element could land and the building upon it, allocating
be a finance lease, it will be necessary to the rent to each element is a task that could
make an allocation of the initial rent based be undertaken reliably where there is an
on the relative fair value of the leasehold active market for land for similar
interests in each element at the inception development in the locality. In other
of the lease (IAS 17, para. 16). situations, for example where the lease is
part of a multi-let building with no
In most leases of real property, the interest identifiable land attributable to any
in the land and buildings is not particular lease, reliable allocation may be
distinguishable, and in any event the impossible. IAS 17, para. 16, recognizes
interest in both normally reverts to the that such cases can arise and makes the
lessor at the end of the lease. There are proviso that where a reliable allocation
often provisions for the rent to be cannot be made, the whole lease should be
reviewed periodically to reflect changes in treated as a finance lease, unless it is clear
the Market Value of the property and also that both elements are operating leases. If
an obligation on the lessee to hand the it were clear that both elements were
buildings back to the lessor in good repair. operating leases from the outset, the
These are all clear indicators that the allocation exercise would not be
lessor has not transferred substantially all necessary.
the risks and rewards of ownership of
either the buildings or the land to the In practice, leases of part of a multi-let
lessee. building will normally be operating leases
and the whole property will be classified
Consequently, finance leases of real as investment property by the lessor. In
property will generally arise only where such cases allocation will be unnecessary.
the lease is clearly designed as a way of In cases where the buildings element is
funding the eventual purchase of the land, clearly a finance lease, the land element is
buildings, or both by the lessee, often by likely to be identifiable. It will be
means of an option to acquire the lessor‘s comparatively rare for the buildings
interest for a nominal sum after the rental element to meet the criteria for
payments have been made. Occasionally classification as a finance lease and for the
leases that are not clearly structured as land element not be clearly identifiable. In
finance agreements may meet some of the such cases, the Valuer should not attempt
criteria of a finance lease, for example, an allocation based on unreliable criteria,
where the rental payments do not reflect but should advise that the allocation
the underlying value of the property. In cannot be reliably made. The entity will
those cases a more detailed analysis of the then have to treat the whole as a finance
value of the risks and benefits transferred lease.
may be required in order to confirm or
rebut their classification.
Under IAS 17, para. 17, allocation
between the land and buildings elements
of an investment property held under a
lease in not required. Under IAS 40, even
4.2 By way of example, the underlying Reports for secured lending of real
principle of many valuations for financial property will normally include
reporting is the presumption that the entity comment where relevant, on the
will continue as a going concern. following items:
However, this would not usually be
appropriate for valuations undertaken for 5.4.1 current activity and trends in the
lending purposes. Such a presumption has relevant market;
particular implications for specialized
assets where the value and marketability 5.4.2 historic, current and anticipated
of the secured property, separate from the future demand for the category of
business of which it forms part, may be property in the locality;
limited.
5.4.3 the potential and likely demand
5.0 Application for alternative uses;
To perform valuations that comply with 5.4.4 both the current marketability of
this Application and Generally the property and if requested, the
Accepted Valuation Principles (GAVP), likelihood of its sustainability;
Valuers shall adhere to all sections of
the IVS Code of Conduct pertaining to 5.4.5 any impact of foreseeable events
Ethics, Competence, Disclosure, and (at the date of valuation) on the value of
Reporting (sections 4, 5, 6, and 7). the security;
5.6 A valuation of a property may also method, particularly discounted cash flow
be required on the assumption that an techniques, will also be based on market-
estimated occupancy level had been determined cash flows and market-derived
achieved. This should also reflect the rates of return.
realistic expectations and perceptions of
market participants as at the date of the 6.4 Occasionally a lender may request a
report. valuation on a basis other than Market
Value. IVS 2 addresses the types, use and
5.7 Corporate and individual loans from reporting of some common alternative
banks and other financial institutions bases of valuation. The Valuer should
are often secured by specific property ensure that an alternative basis is not
assets. Valuers need to have a general confused with Market Value. Although
understanding of the requirements of there may be circumstances where an
such institutions, and possibly the alternative basis is appropriate for secured
structure of loan terms and agreements. lending, users of such valuations should be
Lenders will usually require that the made aware that such value may not be
terms of loan be kept confidential, but realizable if the alternative assumptions
this does not relieve the Valuer of the made are no longer applicable.
obligation to have a general
understanding of the lending process. 6.5 Investment Properties
6.2 The manner in which property would 6.5.2 Although the Valuer should
ordinarily trade in the market will comment on the expected demand and
determine the applicability of the various marketability of the property over the life
approaches to assessing Market Value. of the loan (see para. 5.4 above), it is
Based upon market information, each normally outside the scope of the
approach is a comparative method, and the valuation exercise to advise on the ability
use of more than one method may be of a tenant to meet future lease obligations
required. beyond comment on the market‘s current
perception of the tenant‘s quality.
6.3 Each relevant valuation method will, if
appropriately and correctly applied, lead to 6.6 Owner-Occupied Properties
a similar result. All valuation methods
should be based on market observations. 6.6.1 Owner-occupied properties valued
Construction costs and depreciation, where for lending purposes will normally be
they apply, should be determined by valued on the assumption that the property
reference to an analysis of market-based is transferred unencumbered by the
estimates of costs and accumulated owner‘s occupancy, i.e., that the buyer is
depreciation. The use of an income entitled to full legal control and
possession. This does not preclude possession basis (see para. 6.6.1 above)
consideration of the existing owner as part and a valuation based on the highest and
of the market, but it does require that any best use alternative use is usually
special advantage attributable to the applicable. This will involve
owner‘s occupancy, which may be consideration of the costs and risks that
reflected in a valuation of the business, be would be involved in achieving that use.
excluded from the valuation. Lenders may not consider specialized
property to be suitable as a security for
6.7 Leases Between Related or Connected lending purposes.
Parties
6.9.2 A valuation may be required of a
6.7.1 Caution is required where property specialized property where the property is
offered as security is subject to a lease to a part of a going-concern business. The
party connected to the borrower. If the lender should be alerted to the valuation
Valuer considers that the lease creates a being dependent on the continuing
more favorable income stream than would profitability (or otherwise) of the going
be obtainable on a letting to an concern. If the value on a vacant
unconnected third party in an arm‘s-length possession basis is potentially lower, this
transaction, the lender should be alerted should be drawn to the attention of the
and it may be appropriate to disregard the lender.
existence of the lease in a valuation of the
property as security. 6.10 Trade Related Properties
the value of the property based on an 6.12.1 Specific lending issues arise in
alternative use, assuming vacant relation to the valuation of wasting assets
possession, may be appropriate. such as mines or quarries. The lender‘s
attention needs to be drawn to the risk
6.11 Development Properties associated with this type of a wasting asset
and the planned program for its extraction
6.11.1 Properties held for redevelopment or use.
or sites intended for development of
buildings should be valued taking into 6.12.2 Property rental that exceeds the
account existing and potential current market or economic rent may
development entitlements and controls. constitute a wasting asset because any
Any assumptions as to planning issues and value attributable to this factor diminishes
other material factors must be reasonable, as the term of the lease decreases.
validated by market behavior and
explicitly stated in the Valuation Report. 6.13 The Valuer
6.11.2 The approach to the valuation of 6.13.1 The nature and scope of the
development properties will depend on the Valuer‘s engagement should be clear to
state of development of the property at the the Valuer and user of the valuation.
date of valuation and may take into Valuers should be aware of the risk
account the degree to which the associated with valuations for lending
development is pre-sold or pre-leased. purposes where miscommunication,
The valuation approach may need to be misunderstanding or error may lead to a
discussed with the lender prior to dispute or litigation between the lender
undertaking the valuation. Care should be and the Valuer.
taken by the Valuer to:
6.13.2 In some jurisdictions financial
6.11.2.1 make a reasoned estimate of the services legislation requires licencing or
development period from the date of registration of advisers when advice is
valuation. The effect of additional related not only to the value of property,
development requirements on costs and but also to securities issues such as equity,
revenues, using present value discounting participatory interests, collective
where appropriate, will be reflected in the investment schemes, or syndicated loans.
analysis; Valuers may be restricted in the advice
they can provide in these jurisdictions.
6.11.2.2 evaluate as far as is possible at
the date of valuation, market behavior 6.13.3 In undertaking the valuations for
during the period of the development; lending purposes, it is particularly
important that the Valuer be independent
6.11.2.3 consider and outline the risks of the borrower.
associated with the development; and
6.13.4 It is important that the Valuer
6.11.2.4 consider and disclose any known possess appropriate experience in relation
special relationships between the parties to the particular property type and locale
involved in the development. for the property involved, or if not, seek
expert assistance.
6.12 Wasting Assets
6.14 Forced Sales and Limited Marketing Value or 60% of the Mortgage Lending
or Disposal Periods Value.
asset is required and this Application or over-engineered, or the asset may have
focuses on these particular circumstances a greater capacity than that required.
where Market Values are to be reported. Hence optimization minimizes, rather than
maximizes, a resulting valuation where
2.4 Legislative, regulatory, accounting, or alternative lower cost replacement options
jurisprudence requirements may require are available.
the modification of this Application in
some countries or under certain 3.5 Public Building. A building that
conditions. Any departure due to such serves some community or social function
circumstances must be referred to and and is held in public ownership. Examples
clearly explained in the Valuation Report. include courthouses, municipal centers,
schools, prisons, police stations, military
3.0 Definitions facilities, libraries, hospitals, clinics, and
social or public housing.
International Valuation Standards
Definitions 3.6 Public sector asset. An asset, owned
and/or controlled by a governmental or
3.1 Depreciated Replacement Cost. The quasi-governmental entity, for the
current cost of replacing an asset with its provision of some public service or good.
modern equivalent asset less deductions Public sector assets comprise different
for physical deterioration and all relevant asset types, including conventional assets
forms of obsolescence and optimization. as well as heritage and conservation assets,
infrastructure assets, public utility plants,
3.2 Market Value. The estimated amount recreational assets, and public buildings
for which a property should exchange on (e.g., military facilities), each category of
the date of valuation between a willing which constitutes property, plant and
buyer and willing seller in an arm‘s-length equipment within the meaning of IPSASs
transaction after proper marketing wherein and IFRSs.
the parties had each acted knowledgeably,
prudently, and without compulsion (IVS 1, Public sector assets typically include:
para. 3.1).
a) assets, which have atypical tenure, are
3.3 Obsolescence. A loss in value due to a irreplaceable, are non-cash-generating,
decrease in the usefulness of property or provide goods or services in the
caused by decay, changes in technology, absence of any market competition;
people‘s behavioral patterns and tastes, or
environmental changes. Obsolescence is b) land with restrictions on its sale or
sometimes classified according to items of leasing; and
outmoded design and functionality, items
with structural design unable to meet c) land, which is designated for a
current code requirements, and factors specialized use that is not necessarily
arising outside the asset, such as changes its highest and best use.
in user demand.
See also Heritage assets, Infrastructure
3.4 Optimization. The process by which a assets, Public building, Public utility, and
least cost replacement option is Recreational assets.
determined for the remaining service 3.7 Public Utility. A property that:
potential of an asset. It is a process of
adjusting the replacement cost to reflect
that an asset may be technically obsolete
3.12 Depreciable Amount. The cost of an b) legal and/or statutory obligations may
asset, or other amount substituted for cost, impose prohibitions or severe
less its residual value (IPSAS 17.13). restrictions on disposal by sale;
c) they are often irreplaceable and their a) the period over which an asset is
economic benefit may increase over expected to be available for use by an
time even if their physical condition entity; or
deteriorates; and
b) the number of production or similar
d) it may be difficult to estimate their units expected to be obtained from the
useful lives, which in some cases could asset by an entity. (IPSAS 17.13,
be hundreds of years. IPSAS 21.14).
The above definition is consistent with the 3.21 Value in use of a non-cash
description of heritage assets in IPSAS generating asset. The present value of the
17.9. asset‘s remaining service potential.
(IPSAS 21.14).
3.16 Impairment. A loss in the future
economic benefits, or service potential of 4.0 Relationship to Accounting
an asset, over and above the systematic Standards
recognition of the loss of the asset‘s future
economic benefits or service potential 4.1 This Application applies the principles
through depreciation (IPSAS 21.14). developed in IVS 1, IVS 2, IVS 3 and IVA
1 to the requirements of IPSASs.
3.17 Infrastructure assets. Assets that
usually display some or all of the 4.2 This Application focuses on valuation
following general characteristics: requirements under IPSAS 17 (Exposure
Draft, September 2005), Property, Plant,
a) they are part of a system or network; and Equipment; and IPSAS 21,
Impairment of Non-Cash-Generating
b) they are specialized in nature and do Assets. Further requirements may become
not have alternative uses; mandatory, pending publication of revised
IPSAS 17.
c) they are immovable; and
5.0 Application
d) they may be subject to constraints on
disposal. To perform valuations that comply with
this Application and Generally
The above definition is consistent with the Accepted Valuation Principles (GAVP),
description of infrastructure assets in it is essential that Valuers adhere to all
IPSAS 17.21. sections of the IVSC Code of Conduct
3.18 Non-cash-generating assets. Assets pertaining to Ethics, Competence,
other than cash-generating assets (IPSAS Disclosure, and Reporting (sections 4, 5,
21.14). 6, and 7).
5.1 Classification of Assets. Valuers
3.19 Recoverable service amount. The shall obtain from the directors of the
higher of a non-cash-generating asset‘s owning entity a list of assets to be
fair value less costs to sell and its value in valued, designating them as operational
use (IPSAS 21.14). assets, i.e., assets requisite to the
operations of the entity, or non-
3.20 Useful life (of property, plant and operational assets, being properties
equipment). Either held for future development,
carrying amount. IPSAS 21, para. 48, costs to sell, and subsequently at fair
requires that if, and only if, the value less cost to sell. Valuers should
recoverable service amount of an asset therefore ascertain whether surplus
is less than its carrying amount, the assets are to be valued as individual
carrying amount of the asset shall be items, or as a group or portfolio of
reduced to its recoverable service assets that will be disposed of in a single
amount. That reduction is an transaction, and report the Market
impairment loss. IPSAS 21, para. 51, Value with the appropriate
further states that when the amount assumptions.
estimated for an impairment loss is
greater than the carrying amount of the 5.10 Properties Held for Sale in the
asset to which it relates, an entity shall Ordinary Course of Business – IPSAS 12
recognize a liability if, and only if, that Inventories
is required by another IPSAS.
5.10.1 Valuations of properties held for
5.7.2 The entity is required to write sale in the ordinary course of business
down the carrying amount of impaired should comply with the requirements of
cash-generating assets to the higher of IPSAS 12, Inventories. These
their value in use or fair value less costs properties are measured at the lower of
to sell. The requirements for cash- cost and net realizable value. Net
generating assets are discussed further realizable value is the estimated selling
in IVA 1, para. 6.8.2. price in the ordinary course of
operations less the estimated costs of
5.8 Valuations after Business completion and the estimated costs
Combinations necessary to make the sale, exchange or
distribution.
5.8.1 Where a governmental or quasi-
governmental entity acquires or is 5.11 Selling Costs
merged with another, the acquirer has
to account for the assets and liabilities 5.11.1 When instructed to value
of the acquiree at their fair value as of impaired or surplus assets, or assets
the acquisition date. For identifiable that are held for sale in the ordinary
assets and liabilities, IVSC considers course of business, the Valuer must
that the Valuer should report their report their Market Value without
Market Value as they existed at the date deducting selling costs. If the client
of acquisition. requests the Valuer to advise on the
costs to sell the assets, such costs are to
5.9 Surplus Assets be reported separately.
explain their valuations openly with the replaced with alternative accommodation
entity‟s auditors. because of its significance to the
community‖. (IPSAS 17, para. 47)
6.0 Discussion
6.1.2 ―If there is no market-based evidence
IPSAS 17 and 21 provide the following of fair value because of the specialized
clarification, which is useful in nature of the item of plant and equipment,
understanding the correct application for an entity may need to estimate fair value
using depreciated replacement cost, or the
public sector accounting.
restoration cost or service units approaches
6.1 Absence of Market Evidence – IPSAS (see IPSAS 21). The depreciated
17 replacement cost of an item of plant or
equipment may be established by
“For some public sector assets, it may be reference to the market buying price of
difficult to establish their Market Value components used to produce the assets or
because of the absence of market indexed price for the same or similar asset
transactions for these assets. Some public based on a price for a previous period.
sector entities may have significant When an indexed price method is used,
holdings of these assets‖. (IPSAS 17, judgment is required to determine whether
para. 46). technology has changed significantly over
the period, and whether the capacity of the
6.1.1 ―If no market evidence is available to reference asset is the same as the asset
determine the Market Value in an active being valued‖. (IPSAS 17, para. 48).
and liquid market of an item of property,
the fair value of the item may be 6.2 Government Business Enterprises
established by reference to other items (GBEs) – IPSAS 21
with similar characteristics, in similar
circumstances and location. For example, “GBEs include both trading enterprises,
the fair value of vacant government land such as utilities, and financial enterprises,
that has been held for a long period during such as financial institutions. GBEs are, in
which time there have been few substance, no different from entities
transactions may be estimated by reference conducting similar activities in the private
to the Market Value of land with similar sector. GBEs generally operate to make
features and topography in a similar profit, although some may have limited
location for which market evidence is community service obligations under
available. In the case of specialized which they are required to provide some
buildings and other man-made structures, individuals and organizations in the
fair value may be estimated by using community with goods and services at
depreciated replacement cost, or the either no charge or a significantly reduced
restoration cost or the service units charge‖. (IPSAS 21, para. 15).
approach (see IPSAS 21). In many cases,
the depreciated replacement cost of an Philippine 6.2.1
asset can be established by reference to the
buying price of similar asset with similar GBEs comprise the Government Owned
remaining service potential in an active and Controlled Corporations (GOCCs) and
and liquid market. In some cases, an Government Financial Institutions (GFIs)
asset‘s reproduction cost will be the best of the National Government and Economic
indicator of its replacement cost. For Enterprises (EEs) of the Local
example, in the event of loss, a parliament Government Units.
building may be reproduced rather than
6.3 Cash-Generating Assets – IPSAS 21 This cost is depreciated to reflect the asset
in its used condition. An asset may be
―Cash-generating assets are those that are replaced either through reproduction
held to generate a commercial return. An (replication) of the existing asset or
asset generates a commercial return when through replacement of its gross service
it is deployed in a manner consistent with potential. The depreciated replacement
that adopted by a profit-oriented entity. cost is measured as the reproduction or
Holding an asset to generate a replacement cost of the asset, whichever is
‗commercial return‘ indicates that an lower, less accumulated depreciation
entity intends to generate positive cash calculated on the basis of such cost, to
inflows from the asset (or of the unit of reflect the already consumed or expired
which the asset is a part) and earn a return service potential of the asset‖. (IPSAS 21,
that reflects the risk involved in holding para. 41).
the asset‖. (IPSAS 21, para. 16)
―The replacement cost and reproduction
―Assets held by GBEs are cash-generating cost of an asset are determined on an
assets. Public sector entities other than ‗optimized‘ basis. The rationale is that the
GBEs may hold assets to generate a entity would not replace or reproduce the
commercial return. For the purposes of asset with a like asset if the asset to be
this Standard [IPSAS 21], an asset held by replaced or reproduced is an overdesigned
a non-GBE public sector entity is or overcapacity asset. Overdesigned
classified as a cash-generating asset if the assets contain features which are
asset (or unit of which the asset is a part) unnecessary for the goods or services the
is operated with the objective of asset provides. Overcapacity assets are
generating a commercial return through assets that have a greater capacity than is
the provision of goods and or services to necessary to meet the demand for goods or
external parties‖. (IPSAS 21, para. 17). services the asset provides. The
determination of the replacement cost or
6.4 Value in Use – IPSAS 21 reproduction cost of an asset on an
optimized basis thus reflects the service
―The value in use of a non-cash generating potential required of the asset‖. (IPSAS
asset is the present value of the asset‘s 21, para. 42).
remaining service potential. ‗Value in use‘
in this Standard [IPSAS 21] refers to ―In certain cases, standby or surplus
‗value in use of a non-cash-generating capacity is held for safety or other reasons.
asset‘ unless otherwise specified. The This arises from the need to ensure that
present value of the remaining service service capacity is available in the
potential of the asset is determined using particular circumstances of the entity. For
any one of the approaches identified in example, the fire department needs to have
paragraph 41 to 45, as appropriate‖. fire engines on standby to deliver services
(IPSAS 21, para. 40). in emergencies. Such surplus or standby
capacity is part of the required service
6.5 Depreciated Replacement Cost potential of the asset‖. (IPSAS 21, para.
Approach – IPSAS 21 43).
―Under this approach, the present value of 6.6 Restoration Cost Approach – IPSAS 21
the remaining service potential of an asset
is determined as the depreciated ―Restoration cost is the cost of restoring
replacement cost of the asset. The the service potential of an asset to its pre-
replacement cost of an asset is the cost to impaired level. Under this approach, the
replace the asset‘s gross service potential. present value of the remaining service
1.8 The relationship between GNs 6 and 2.2.2 a summary of the Valuation Process
12, pertaining to business and trade related and its rationale;
property (TRP) valuation, and GN 1,
pertaining to real property valuation, must 2.2.3 an elaboration on the importance of
be clearly understood. Real property is principles and concepts;
valued as a distinct ―entity,‖ i.e., as
physical assets to which particular 2.2.4 a discussion of proper disclosure and
ownership rights apply. For example, an reporting requirements;
office building, a residence, a factory, or
other property types generally incorporate 2.2.5 examples of abuses and
an underlying land component. Business misunderstandings; and
or TRP valuation, however, values a
business entity or TRP asset of which real 2.2.6 a presentation of real property
property may be a component. The Guidance.
Market Value of real property is always
valued in accordance with International 2.3 The specific application of quantitative
Valuation Standard 1 (IVS 1). When a and qualitative valuation procedures is
real property value estimate is beyond the scope of GN 1. It is important
incorporated as an element of a business to stress, however, that Valuers are trained
valuation, it is a Market Value estimate of in such procedures, and that the
the real property. As discussed in GN 1, procedures are included in generally
this convention is distinct from the accepted practices. In application, Valuers
unacceptable practice of purportedly commonly apply several procedures in
developing a Market Value estimate for each valuation and then reconcile the
real property as an allocation of the value results into a final indication of Market
of a going concern. Value or other specified value.
2.1 This GN is provided to assist in the 3.2 Comparable Data. Data generally
course of rendering or using real property used in a valuation analysis to develop
valuations. value estimates. Comparable Data relate
to properties that have characteristics
2.2 Principal elements of GN 1 include similar to those of the property being
valued (the subject property). Such data
2.2.1 an identification of key terms and include sale price, rents, income and
definitions; expenses, and market-derived
capitalization and yield/discount rates.
3.3 Elements of Comparison. Specific of real estate. Property rights are typically
characteristics of properties and subject to public or private restrictions
transactions that cause the prices paid for such as easements, rights`-of-ways,
real estate to vary. Elements of specified development density, zoning and
comparison include, but are not limited to, other restrictions that may encumber the
the following: property rights conveyed, property.
financing terms, conditions of sale, market
conditions, location, and physical and 3.8 Real Estate. Land and all things that
economic characteristics. (See para. 5.22 are a natural part of the land, e.g., trees
of this document for a full presentation of and minerals, as well as all things that are
Elements of Comparison.) attached by people, e.g., buildings and site
improvements. All permanent building
3.4 Highest and Best Use. The most attachments such as plumbing, heating and
probable use of a property which is cooling systems; electrical wiring; and
physically possible, appropriately justified, built-in items like elevators, or lifts, are
legally permissible, financially feasible, also part of the real estate. Real estate
and which results in the highest value of includes all attachments, both below and
the property being valued. (See Concepts above the ground. (See also Concepts
Fundamental to Generally Accepted Fundamental to Generally Accepted
Valuation Principles, section 6.) Valuation Principles as well as in Glossary
of Terms.)
3.5 A Market. The environment in which
goods, services and commodities trade 3.9 Real Property. All the rights, interests,
between buyers and sellers through a price and benefits related to the ownership of
mechanism. real estate. Real property is a legal
concept distinct from real estate, which is
3.6 Market Value. Definitions are a physical asset. There may also be
included in Concepts Fundamental to potential limitations upon ownership rights
Generally Accepted Valuation Principles to real property. (See Property Types,
and International Valuation Standard 1, paras. 2.2.1 and 2.2.4.)
section 3. [The estimated amount for
which a property should exchange on the 3.10 Units of Comparison. Typically a
date of valuation between a willing buyer factor produced by two components,
and a willing seller in an arm‘s-length which reflects precise differences between
transaction after proper marketing properties and facilitates analysis in the
wherein the parties had each acted three approaches to value, e.g., price per
knowledgeably, prudently and without square meter or square foot, or the ratio of
compulsion.] a property‘s sale price to its net income
(net income multiplier/years‘ purchase).
3.7 Property Rights. The rights that are
related to the ownership of real estate. 3.11 The Cost Approach. One of the
These include the right to develop or not approaches to value commonly applied in
develop the land, to lease it to others, to Market Value estimates and many other
sell it, to give it away, to farm it, to mine valuation situations.
it, to alter its topography, to subdivide it,
to assemble it, to use it for waste disposal, Depreciated replacement cost is an
or to choose to exercise none of these application of the cost approach used in
rights. The combination of these property assessing the value of specialized assets
rights is sometimes referred to as the for financial reporting purposes, where
bundle of rights inherent in the ownership direct market evidence is limited. (See
for services. In Market Value situations it a position from which more specific
is also common for the independence, or analyses can be made.
external status of the Valuer to be
established in an affirmative statement. 5.7.1 General economic data are collected
The agreement also sets forth the business at the neighborhood, city, regional, and
relationship between the Valuer and the even national and international levels,
client, fee and payment terms, special depending on the property involved.
directives and limitations, an identification Social, economic, governmental, and
of the Standards to be applied, and other environmental factors that may have
pertinent matters. bearing on Market Value (or other defined
value type) are examined to better
5.6 As GN Figure 1-1 indicates, a Valuer understand the particular property. Any
and the valuation client must agree on other specific forces that must be
the context and scope of the valuation. considered are investigated in detail.
The definition of the assignment includes
5.7.2 Property-specific data, or data more
5.6.1 an identification of the real estate directly relevant to the property being
involved in the valuation; valued and to comparable properties are
5.6.2 an identification of the property also gathered and examined. These
rights to be valued; include site and improvement data, cost
and depreciation data, income and expense
5.6.3 the intended use of the valuation, data, capitalization and yield rate data,
and any related limitations; ownership and utilization histories, and
other information determined to be
5.6.4 the identification of any significant and generally considered by
subcontractors or agents and their buyers and sellers in their negotiations and
contribution; transactions.
5.6.5 a definition of or the basis of the 5.7.3 Supply and demand data
value sought; characteristic of the most probable market
for the property are analyzed to develop an
5.6.6 the date as of which the value inventory of properties that compete with
estimate will apply; and the date of the the subject property for market share as
intended report; well as an inventory of existing properties
to be adapted or new properties to be built,
5.6.7 an identification of the which will increase the competitive
scope/extent of the valuation and of the supply. Markets are analyzed to determine
report; and market trends, relationships between
supply and demand, absorption rates, and
5.6.8 an identification of any contingent other market-specific information.
and limiting conditions upon which the
valuation is based. 5.8 Once the above data are gathered and
analyzed, the Valuer will be able to
5.7 In performing the steps of a determine possible land uses for the
preliminary analysis, and data selection subject property. Because different real
and collection, suggested in the estate parcels may have different use
Valuation Process, the Valuer becomes potentials, the first requisite step toward
familiar with the general market and selecting sales and other comparable
subject property, thereby proceeding to
Property as improved
SALES INCOME
COMPARISON CAPITALIZATION COST
APPROACH APPROACH APPROACH
data is to determine the highest and best 5.10 In many, but not all, countries three
use (HABU) of the subject property. valuation approaches are recognized in
The Valuer considers both the highest the Valuation Process: sales
and best use of the land as though vacant comparison, income capitalization, and
and the highest and best use of the cost. While a well-evidenced market may
property as improved. (See the discussion make the cost approach less relevant, a
of HABU in Concepts Fundamental to lack of comparable data may cause the
Generally Accepted Valuation Principles, cost approach to be predominant. The
para. 6.0 et seq.) laws of some countries preclude or limit
the application of one or more of the three
5.8.1 The concept of HABU is based on approaches. Unless there are such
the notion that although two or more restrictions, or unless there are other
parcels of real estate may have physical compelling reasons for a particular
similarities and closely resemble one omission, it is reasonable for the Valuer
another, there may be significant to consider each approach. In some
differences in how they can be used. How countries, the use of each approach is
a property can be optimally utilized is a mandated unless the Valuer can
foundation for determining its Market demonstrate a lack of supporting data or
Value. other valid reason for omission of a
particular approach. Each approach is
5.8.2 Basic determinants of HABU based, in part, on the Principle of
include the answers to the following Substitution, which holds that when
questions: several similar or commensurate
commodities, goods or services are
Is the suggested use a reasonable and available, the one with the lowest price
likely one? attracts the greatest demand and widest
distribution. In simple terms, the price of
Is the use legal, or is there a reasonable a property established by a given market is
likelihood that a legal entitlement for limited by the prices commonly paid for
the use can be obtained? properties that compete with it for market
share, the financial alternatives of
Is the property physically suited to the investing money elsewhere, and the cost of
use or can it be adapted to the use? building a new property or adapting an old
property to a use similar to that of the
Is the suggested use financially subject property (property being valued).
feasible? And
Philippine 5.10.1
Of those uses that meet the first four
Private appraisers also use Offered
tests, is the selected HABU the most
Listings and Inferential Opinion Surveys
productive use of the land?
in cases of limited or scarce comparable
data (see Concepts Fundamental to
5.9 Several methods are used for land
Generally Accepted Valuation Principles,
valuation. Their applicability differs
para. 9.2.1.1). In such cases the use of
according to the type of value estimated
and availability of data. For Market such data should be clearly disclosed.
Value estimates, any method chosen 5.11 The sales comparison approach
must be supported by market data. recognizes that property prices are
(See para. 5.25 et seq.) determined by the market. Market Value
can, therefore, be calculated from a
study of market prices for properties and the subject property, a Valuer shall
that compete with one another for consider possible adjustments based on
market share. The comparative differences in the elements of
processes applied are fundamental to the comparison. Adjustments can narrow the
Valuation Process. (See Concepts differences between each comparable and
Fundamental to Generally Accepted the subject. Valuers apply quantitative
Valuation Principles, para. 9.2.1.1) and/or qualitative methods to analyze
differences and estimate adjustments.
5.11.1 When data are available, the
sales comparison approach is the most 5.12 The income capitalization approach
direct and systematic approach to can be applied in both Market Value
estimating value. assignments and other types of
valuations. However, for Market Value
5.11.2 When data are insufficient, the applications, it is necessary to develop
applicability of the sales comparison and analyze relevant market
approach may be limited. Insufficient information. This focus differs distinctly
research by the Valuer, however, is not an from the development of subjective
excuse for omission of this approach information for a specific owner or the
where data are available or could reflection or viewpoint of a particular
reasonably be developed. (See section analyst or investor.
5.23 et seq. for discussion of market
research, data verification, adjustment 5.12.1 The income capitalization
procedure, and reconciliation of approach is based on the same principles
indications.) that apply to other valuation approaches.
In particular, it perceives value as created
5.11.3 After sales data are gathered and by the expectation of future benefits
verified, one or more units of (income streams). Income capitalization
comparison are selected and analyzed. employs processes that consider the
Units of comparison use two components present value of anticipated future income
to produce a factor (e.g., the price per benefits.
measurement unit or a ratio such as that
produced by dividing a property‘s sale 5.12.2 As with other approaches, the
price by its net income, i.e., net income income capitalization approach can be
multiplier, or years‘ purchase) that reflects used reliably only when relevant
precise differences between properties. comparative data are available. When
The units of comparison that buyers and such information is not available, the
sellers in a given market use in making approach may be used for general analysis
their purchase and sale decisions take on but not for the purpose of direct market
special relevance and may be afforded comparison. The income capitalization
greater weight. approach is particularly important for
properties that are purchased and sold
5.11.4 Elements of comparison are the on the basis of their earnings
specific characteristics of properties and capabilities and characteristics and in
transactions that cause the prices paid situations where there is market
for real estate to vary. They are crucial evidence to support the various
considerations in the sales comparison elements incorporated into the analysis.
approach. Nonetheless, the mathematical precision of
the procedures used in the approach must
5.11.5 To make direct comparisons not be mistaken as an indication of the
between a comparable sale property precise accuracy of the results.
5.14 The three approaches to value are the comparison property belongs to a
independent of one another even though different market.
each approach is based on the same
economic principles. All three approaches 5.19 The totality of private ownership
are intended to develop an indication of rights associated with a particular property
value, but the final value conclusion is referred to as a freehold interest, a fee
depends on consideration of all data and simple interest, or by other appropriate
processes employed and the terms depending on the country.
reconciliation of the value indications
derived from different approaches into 5.20 In any analysis of comparable
a final estimate of value. As shown in data, it is essential that the properties
GN Figure 1-1, the reconciliation process from which the comparable data are
is followed by a report of defined value. collected have characteristics similar to
the property being valued. These
5.15 The requirements for valuation include legal, physical, locational, and use
reports are addressed in the IVSC Code characteristics that are consistent with
of Conduct, and IVS 3, Valuation those of the subject property and reflect
Reporting. conditions in the market where the subject
property competes. Differences shall be
5.16 Where there is sufficient market noted and analyzed to develop adjustments
data to support the valuation, Market in all three valuation approaches.
Value is derived. In other
circumstances, where there is 5.20.1 In the sales comparison
insufficient market data or special approach, comparable sales data are
instructions have been given, the result adjusted to reflect the differences between
will be a value other than Market Value. each comparable property and the subject
property. Elements of comparison
5.17 The existence of different types of include real property rights conveyed,
value must not confuse Valuers or the financing terms, conditions of sale,
users of valuation services. Market expenditures made immediately after
Value, the value type most commonly purchase, market conditions, location,
sought in the market, is distinct from all physical characteristics, economic
other value types. Each of the other characteristics, use, and non-realty
value types has its own rationale and components of a sale.
application and shall be investigated
only in an appropriate context. By 5.20.2 In the income capitalization
proper reporting, adequate disclosure and approach, comparable data include
discussion, and the assurance that the rental, income, expense, and capitalization
value type identified in the valuation and yield rate data. The categories of
report suits the intended purpose and use comparable income and expense data used
of the valuation, the Valuer assists in the in projections of future income and
market in its reliance on valuations. expenses and in the development of
capitalization and yield rates must be
5.18 The terms market and markets identical.
imply properties, buyers, sellers, and
some degree of competition. If a 5.20.3 In the cost approach, comparable
property chosen for comparison does not, data refer to the costs of building or
or cannot, compete in the same market as development, and adjustments are made to
the property being valued, it is likely that account for differences in quantities,
qualities, and utility. In addition, analysis
of comparable land data and comparable the transaction shall be fully understood,
depreciation estimates is undertaken. analyzed, and accounted for.
5.21 Suitable units of comparison are 5.22.3 Conditions of sale. The special
selected to conduct proper analyses. motivations of the parties to the
Different units of comparison may be transaction in many situations can affect
used, depending on the property type and the prices paid and even render some
focus of the analyses. Office buildings transactions as non-market. Examples of
and warehouse properties can be compared special conditions of sale include a higher
using price per square meter or square foot price paid by a buyer because the parcel
of leasable or lettable area. In some had synergistic, or marriage, value; a
markets, comparison of warehouse lower price paid because a seller was in a
properties may use price per cubic meter hurry to conclude the sale; a financial,
or cubic foot; apartments can be compared business, or family relationship between
using price per apartment unit or flat; and the parties involved in the transaction;
agricultural properties can be compared unusual tax considerations; lack of
using crop yield per hectare or per acre or exposure of the property in the (open)
supportable Animal Units (AU) per market; or the prospect of lengthy
hectare or per acre. Units of comparison litigation proceedings.
are only useful when they are
consistently selected and applied to the 5.22.4 Expenditures made immediately
subject property and the comparable after the purchase are expenditures that
properties in each analysis and most would have to be made upon purchase of
closely reflect the units of comparison the property and that a knowledgeable
used by buyers and sellers in a buyer may negotiate into the purchase
particular market. price. Examples include the cost to repair
or replace structures or parts of structures,
5.22 Elements of comparison identify the cost to remediate environmental
specific characteristics of properties and contamination, or the costs associated with
transactions that may explain price zoning changes to permit development.
variations. Market analysis identifies
which elements are especially sensitive. 5.22.5 Market conditions. Market
The following elements of comparison conditions at the time of the sales
are considered as basic in comparable transaction of a comparable property may
sales analysis. differ from those on the valuation date of
the property being valued. Factors that
5.22.1 Real property rights conveyed. A impact market conditions include rapidly
precise identification of the real property appreciating or depreciating property
rights conveyed in each comparable values, changes in tax laws, building
transaction, selected for analysis, is restrictions or moratoriums, fluctuations in
essential because the transaction price is supply and demand, or any combination of
always predicated on the property interest forces working in concert to alter market
conveyed. conditions from one date to another.
5.22.2 Financing terms. Where different 5.22.6 Location. The locations of the
financing arrangements can cause the price comparable sale properties and the subject
paid for one property to differ from that of property are compared to ascertain
another identical property, the types and whether location and the immediate
conditions of financing arrangements in environs are influencing the prices paid.
Extreme locational differences may
indicate that a transaction is not truly for market share; this information will
comparable and should be disqualified. vary among different property types but
will commonly include the property type,
5.22.7 Physical characteristics. date of sale, size, location, zoning, and
Attributes such as the size, construction other relevant information.
quality, and physical condition of the
subject property and the comparable 5.23.2 Verify the information by
properties are described and analyzed by confirming that it is accurate and that the
the Valuer. If the physical characteristics terms and conditions of sale are consistent
of a comparable property vary from those with Market Value requirements; where
of the subject property, each of the differences occur, the Valuer will
differences is considered, and the Valuer determine whether the data warrant only
shall adjust for the impact of each of these general consideration.
differences on value.
5.23.3 Select relevant units of
5.22.8 Economic characteristics. comparison (e.g., price per meter or per
Qualities such as income, operating square foot; price per room; income
expenses, lease provisions, management, multiplier, or years‘ purchase; or others)
and tenant mix are used to analyze and develop a comparative analysis for
income-producing properties. each unit.
5.22.9 Use. Zoning and other restrictions 5.23.4 Compare the sale properties with
or limitations affect the use of a property. the subject property using the elements
If there is a difference in the current use or of comparison and adjusting the sale price
highest and best use of a comparable of each comparable property when data
property and that of the subject property, are available to support such adjustments.
its impact on value shall be carefully As an alternative, the Valuer may use the
considered. Generally, only properties sales data to bracket or determine a
with the same or similar highest and best probable range of values for the property.
uses are used in comparable analysis. If the data are found not to be sufficiently
comparable, the sale property shall be
5.22.10 Non-realty components of sale. eliminated as a comparable.
Personal property, business interests, or
other items that do not constitute real 5.23.5 Reconcile the results into a value
property may be included in either the indication. Where market conditions are
transaction price or the ownership interest indefinite, or when an array of the sales
in the property being valued. These data shows varying degrees of
components shall be analyzed separately comparability, it may be advisable to
from the real property. Typical examples develop a range of value indications.
of personal property are furniture, fixtures,
and equipment (FF&E) in a hotel or 5.24 Highest and best use underlies the
restaurant. analysis for all Market Value
assignments. An understanding of real
5.23 In applying the sales comparison estate market behavior and dynamics is
approach, a Valuer follows a systematic essential to the determination of a
procedure. The Valuer will: property‘s highest and best use. Since
market forces create Market Value, the
5.23.1 Research the market to develop interaction between market forces and
appropriate market information for similar highest and best use is of fundamental
properties that compete with the subject importance. Highest and best use
identifies the most profitable use among of the subject property with similar land
potential uses to which the property can parcels for which actual data on recent
be put, and is, therefore, market-driven. market transactions are available.
Although sales are the most important,
5.24.1 It is possible that the highest and analysis of listings and prices offered for
best use (HABU) of land as though it were similar parcels that compete with the
vacant and the HABU of an improved subject may contribute to greater
parcel of land are different. In many understanding of the market.
countries, it may be illegal to demolish
buildings even if a more productive use is 5.25.2 A subdivision development
possible. Where demolition and site technique may also be applied to land
clearance are legal and possible, the costs valuation. This process entails projecting
associated with them might make new the subdivision of a particular property
construction economically unfeasible. into a series of lots, developing incomes
Thus, it is possible that there is a and expenses associated with the process,
difference between the HABU of land as and discounting the resulting net incomes
though vacant and that of the property as into an indication of value. This technique
improved. The Valuer must analyze and may be supportable in some situations, but
report these considerations, and clearly is subject to a number of assumptions that
distinguish which HABU was selected. may be exceedingly difficult to associate
The Valuer must also provide support for with the Market Value definition. Caution
the HABU selection. is advised in the development of
supportable assumptions, of which the
5.24.2 In many countries, it is necessary Valuer is advised to make full disclosure.
to make a land value estimate based on the
HABU as though there were no Where direct land comparisons are not
improvements on the land. This HABU available, the following methods can be
determination is, of course, necessary if applied with caution.
the land is vacant, but it also provides an
economic basis for judging the 5.25.3 Allocation is an indirect
productivity of the improvements when comparison technique that develops a ratio
they are present. The practice also between land value and improvement
involves analyzing market information to value or some other relationship between
determine the extent of accrued property components. The result is a
depreciation that may be present in the measure that allocates a total market price
improvements. In other countries, or in between the land and improvements for
situations where there is little, if any, comparative purposes.
market information on vacant land sales, it
is possible that land value may not be 5.25.4 Extraction is another indirect
estimated. Local standards within each comparison technique (sometimes called
country prescribe practice in these abstraction). It provides a value estimate
situations, but in any event such of improvements by applying a cost less
restrictions shall be fully and clearly depreciation analysis and extracting the
understood. result from the total price of otherwise
comparable properties. The residual is an
5.25 The primary methods of valuing indication of possible land value.
land are:
5.25.5 The land residual technique for
5.25.1 A sales comparison technique for land valuation also applies income and
land valuation involves direct comparison expense data as elements in its analysis. A
financial analysis is made of the net real estate does not adjust quickly in
income that can be obtained by an income- response to changes in market demand.
producing use and a deduction from the
net income is made for the financial return 5.26.2 Investment in real estate, which
required by the improvements. The is relatively illiquid, involves large sums
remaining income is considered residual to of money for which appropriate financing
the land and is capitalized into a value might not be readily available. Valuers
indication. The method is limited to shall recognize these inefficiencies, and
income-producing properties and is most their understanding of the particular
applicable to newer properties for which characteristics of a real estate market
fewer assumptions are required. and/or sub-market shall produce a credible
and objective analysis for the clients they
5.25.6 Land can also be valued by serve.
ground rent capitalization. If the land is
capable of independently producing a 5.27 The use of the cost approach can be
ground rental, that rent may be capitalized appropriate when properties are new or of
into Market Value indication where relatively new construction, provided
sufficient market data are available. Care estimates of items such as land value and
must be taken, however, not to be misled depreciation are validated by market
by special terms and conditions in a evidence. In depressed markets, economic
ground-rent lease that may not necessarily or external obsolescence must be factored
be representative of the particular market. into the indication of value derived from
In addition, since ground leases may have the cost approach.
been drawn up many years before the
valuation date, the rents quoted therein
may be outdated, and current income
capitalization rates may be hard to obtain.
3.1.1 Freehold Interest. A fee simple 3.1.9 Marriage Value, Synergistic Value,
estate, representing the perpetual Plottage Value or Merged Interests Value.
ownership in land. The excess value, if any, produced by a
merging of two or more interests in a
3.1.2 Freehold subject to leasehold or property, over-and-above the sum of the
Lease Interest/s, has the same meaning as values of those individual interests.
Leased Fee Interest, representing the
ownership interest of a lessor owning real 3.1.10 Rent Types
estate that is subject to (a) lease(s) to
others. 3.1.10.1 Market Rent. The estimated
amount for which a property, or space
3.1.3 Ground Lease. Usually a long-term within a property, should lease on the date
lease of land with the lessee permitted to of valuation between a willing lessor and a
improve or build on the land and to enjoy willing lessee on appropriate lease terms
those benefits for the term of the lease. in an arm‘s-length transaction, after proper
3.1.4 Headlease, or Master Lease. A lease marketing wherein the parties had each
to a single entity that is intended to be the acted knowledgeably, prudently, and
holder of subsequent leases to sublessees without compulsion.
that will be the tenants in possession of the
leased premises. Whenever Market Rent is provided, the
―appropriate lease terms‖ which it reflects
3.1.5 Headleasehold Interest has the same should also be stated.
meaning as Sandwich Lessor Interest. The
3.1.10.2 Contract Rent, or Passing Rent.
holder of a headlease or master lease.
The rent specified by a given lease
3.1.6 Lease. A contract arrangement in arrangement; although a given contract
which rights of use and possession are rent may equate to the Market Rent, in
conveyed from a property‘s title owner practice they may differ substantially,
(called the landlord, or lessor) in return for particularly for older leases with fixed
a promise by another (called a tenant, or rental terms.
lessee) to pay rents as prescribed by the
lease. In practice the rights and the duties 3.1.10.3 Turnover Rent or Participation
of the parties can be complex, and are Rent. Any form of lease rental
dependent on the specified terms of their arrangement in which the lessor receives a
contract. form of rental that is based on the earnings
of the lessee. Percentage rent is an
3.1.7 Leasehold or Lease Interest, also example of a turnover rent.
known as Lessee Interest, Tenant‟s
Interest, or Leasehold Estate. The 3.1.11 Sale and Leaseback. A
ownership interest that is created by the simultaneous sale of real estate and lease of
terms of a lease rather than the underlying the same property to the seller. The buyer
rights of real estate ownership. The lease becomes the lessor, or landlord, and the
interest is subject to the terms of a specific seller becomes the lessee, or tenant.
lease arrangement, expires within a Because there may be unique
specified time, and may be capable of circumstances or relationships between the
subdivision, or subleasing to other parties. parties, sale and leaseback transactions may
or may not involve typical market terms.
3.1.8 Lessor Interest. The interest held by
the lessor in any of the circumstances set
out in paras. 3.1.2, 3.1.4, or 3.1.5 above.
0 ∞
FREEHOLD OR FEE
THE ABSOLUTE RIGHT TO SELL, LEASE/LET, OR USE
SIMPLE ABSOLUTELY
ENTITY A THE SUBJECT PROPERTY IN PERPETUITY, SUBJECT
HELD BY ENTITY A
ONLY TO COUNTRY RESTRICTIONS.
THE VALUER MUST IDENTIFY THE PROPERTY INTEREST TO BE VALUED ALONG WITH
THE PERTINENT RIGHTS AND RESTRICTIONS.
b) are expected to be used over a period b) are expected to be used during more
of time. than one (accounting) period. (IAS
16, para. 6)
The categories of plant and equipment
are: 4.0 Relationship to Accounting
Plant. Assets that are inextricably
Standards
combined with others and that may
4.1 Under International Financial
include specialized buildings, machinery
Reporting Standards (IFRS), Property,
and equipment.
Plant and Equipment may be included on
an entity‘s balance sheet at either cost
Philippine 3.3.1
less depreciation less impairment or at
Notwithstanding that the term „Plant‟ is fair value at the date of revaluation less
not in general use, it is accepted practice depreciation less impairment (IAS 16,
to include specialized buildings and paras. 29, 30 and 31). The fair value of
structures which cover machinery in the items of plant and equipment is usually
‗Machinery and Equipment‘ category. In their Market Value determined by
such circumstances the valuation report appraisal (IAS 16, para. 32). Plant,
must clearly state this. machinery and equipment, together with
other fixed assets, may be subject to other
Machinery. Individual machines or a IFRS, including IAS 2, Inventories; IAS
collection of machines. A machine is an 17, Leases; IAS 36, Impairment of
apparatus used for a specific process in Assets; IFRS 3, Business Combinations;
connection with the operation of the and IFRS 5, Non-Current Assets Held for
entity. Sale and Discontinued Operations.
Equipment. Other assets that are used to 4.2 International Valuation Application
assist the operation of the enterprise or (IVA) 1, Valuation for Financial
entity. Reporting, sets out the valuation and
valuation reporting requirements under
International Financial Reporting
the various IFRS referred to above.
Standards Definitions
4.3 International Public Sector
3.4 Finance Lease. A lease that transfers Accounting Standards (IPSASs) require
substantially all the risks and rewards that after recognition, items of Property,
incidental to ownership of an asset. Title Plant and Equipment be carried at either
may or may not be eventually transferred cost less any accumulated depreciation
(IAS 17, para. 4). and any accumulated impairment losses,
or at a revalued amount being the fair
3.5 Operating Lease. A lease other than value at the date of revaluation less any
finance lease (IAS 17, para.4) subsequent accumulated depreciation and
subsequent accumulated impairment
3.6 Property, Plant and Equipment. losses (IPSAS 17, paras. 43 and 44),
Tangible items that: IPSAS 21, Impairment of Non-Cash-
Generating Assets, may also apply to
a) are held for use in the production or plant, machinery and equipment, together
supply of goods or services, for rental with other fixed assets; International
5.2 For many purposes, including Both buyer and seller contemplate
compliance with IFRSs, the most retention of the asset at its present
appropriate basis of value is Market location for continuation of the use for
Value. However, Market Value simply which it was designed and built, or to
stipulates that an exchange is assumed which it is currently adapted. The values
to take place on an arm‟s length basis are not intended to represent the amount
between knowledgeable and willing that might be realized from piecemeal
parties; it is silent as to how the disposition of the asset in the
particular asset is to be presented for marketplace.
sale or any of the other specific The application of the Value for
circumstances that could have a Continued Use / Value in Use premise is
fundamental effect on the valuation. generally appropriate when:
When undertaking a valuation of
plant, machinery and equipment, the The asset is fulfilling an economic
Valuer must therefore, establish and demand for the service which it provides
state the additional assumptions that or houses; the asset has significant
are appropriate, having regard to the remaining life expectancy; there is
nature of the asset and the purpose of responsible ownership and competent
the valuation. These assumptions may management; diversion of the asset to an
include the state of the business in alternate use would not be economically
which the plant, machinery and feasible; continuation of existing use by
equipment are currently utilized, or present or similar users is practical; and
the extent to which individual items are due consideration is given to the asset‘s
aggregated with other assets. functional utility for its present use. This
premise does not have regard to the 5.4.2 where they are valued for
asset‘s Highest and Best Use or the removal, any allowance made for the
monetary amount that might be realized costs of decommissioning, removal, and
upon its sale. possible reinstatement following
removal, and which party is to bear
5.2.2 That the plant, machinery and those costs. In some cases, these costs
equipment are valued in-situ but on the can be substantial and therefore the
assumption that the business is closed; Valuer should reach an agreement with
or the client as to how they should be
reflected and which specific
5.2.3 That the plant, machinery and assumption(s) are to be made.
equipment are valued as individual
items for removal from their current 5.5 Factors such as finite sources or
location. raw materials, the limited life of the
buildings or limited tenure of the land
Philippine 5.2.3.1 and buildings housing the plant, and
statutory restrictions or environmental
This equates to ‗Liquidation Value‘. legislation can also have a significant
impact on the value of plant and
For assets in the public sector, the
equipment. These factors will need to be
assumption equivalent to a business
taken into account by the Valuer and any
continuing as a going concern is that
necessary assumptions will have to be
the public sector assets will continue to
made.
be used for the provision of the
relevant public good or service.
5.6 Some plant, machinery and
5.3 The list of assumptions above is not equipment connected with the supply
comprehensive. Because of the diverse or provision of services to a building
nature and transportability of much will normally be included in any
plant, machinery and equipment, exchange of the real estate interest.
Market Value will need appropriate Examples include plant for the supply of
qualifying assumptions to describe the electricity, gas, heating, cooling or
state and circumstances in which the ventilation and equipment such as
asset is offered to the market. These elevators. Although the value of these
assumptions should be discussed with items would normally be reflected in the
the client and must be included in the value of the real estate interest, for
report. Frequently, it may be appropriate certain purposes, such as depreciation
to report on more than one set of accounting, it may be necessary to
assumptions, e.g., in order to illustrate the value these items separately. Where
effect of business closure or cessation of this is the case, the Valuer should make
operations on the Market Value of plant, it clear that the separate valuation and
machinery and equipment assets, where treatment of these items will affect the
closure or cessation is not yet definite. value of the real estate interest. When
different Valuers are employed to
5.4 Other factors that can affect the carry out valuations of real estate
Market Value of plant, machinery and assets and plant, machinery and
equipment include: equipment assets at the same location,
careful liaison is necessary to avoid
5.4.1 the costs of installation and either omissions or double counting.
commissioning where plant, machinery
and equipment are valued in situ;
5.7 Intangible assets fall outside the of ownership are not transferred to the
definition of plant, machinery and lessee. Guidance on Finance and
equipment. However, intangible assets Operating Leases is included in
may have an impact on the value of Addendum 1 to IVA 1.
plant, machinery and equipment; For
example, the value of patterns and dies is Philippine 5.8.1
often inextricably linked to associated
intellectual property rights. In such It is recognized that finance leases may
cases, the Valuer should establish what apply to whole production plants and
assumptions are appropriate as to the motor vehicles, but rarely to individual
availability of those intangible assets machines.
before reporting a valuation. Operating
software, technical data, production 5.9 Market Value does not imply any
records and patents are examples of particular method of sale, as for example,
intangible assets that can have an impact by private treaty, tender, auction, etc.
on the value of plant, machinery and The conceptual framework in IVS 1
equipment depending on whether or not makes it clear that Market Value assumes
they are included in the transfer. a sale after proper marketing in the most
appropriate manner. It is implicit in this
Philippine 5.7.1 Current Assets Not definition that the method of sale will be
Normally Included the one that will achieve the highest price
for the asset or the defined group of
Current Assets such as stock, work-in- assets in a given set of circumstances. A
progress, finished goods, cash, etc., are in willing and knowledgeable seller would
general those assets which would in the not voluntarily choose a method of sale
ordinary course of the entity‘s operations that did not maximize the price.
be consumed or converted into cash However, if the exchange is to take
within twelve months of the end of the place under circumstances prevented
last reporting period of the entity. They the seller from choosing the optimal
would not normally be included in a method of disposal, the anticipated
valuation of plant, machinery and realization will not be the Market Value
equipment that are classed as non-current unless the constraint on the seller was
assets. one common to all sales in that
particular market at that time. A
5.8 An item of plant, machinery and constraint specific to a particular seller
equipment may be subject to financing or asset, coupled with a requirement to
arrangement, such as a finance lease. sell subject to that constraint, may
Accordingly, the asset cannot be sold result in a forced sale.
without the lender or lessor being paid
any balance outstanding under the 5.10 Plant, machinery and equipment
arrangement. This payment may or may assets are more likely to be subject to
not exceed the unencumbered value of forced sale circumstances than real
the item. Items of plant, machinery and estate interests. For example, assets
equipment subject to such sometimes have to be disposed of in a
arrangements should be separately time frame that precludes proper
identified from assets that are marketing because the current owner of
unencumbered, and their value the assets has to vacate or surrender the
separately reported. Items which are land and buildings where they are
subject to operating leases or are located. If such a scenario has actually
otherwise the property of third parties arisen, or is reasonably foreseeable, it
are normally excluded as the benefits
may be appropriate for the Valuer to areas. Clients often operate fleets or
provide advice on the price that could groups of similar assets and it may be
be anticipated or that should be possible to inspect a representative
accepted, although before doing so the sample of similar equipment sufficient to
Valuer will need to establish the exact enable the Valuer to establish a realistic
nature of the constraint on the vendor view of the quality and value of the entire
and understand the consequence for fleet. Such assets might include motor
the vendor of failing to dispose of the vehicles, cranes, forklift trucks,
assets within the stipulated time limit. locomotives, rolling stock, etc. but could
For example, the assets may be subject to include a wide variety of plant &
forfeit or the owner may be subject to a equipment assets.
specific financial penalty. It may also be
necessary to consider any alternatives to
sale, for example, the practicality and Philippine 5.13 Sampling Techniques for
cost of removing the items to another ‗Low-Value‘ Items
location for disposal. Without
knowledge of the actual anticipated Plant, machinery & equipment valuations
circumstances, the Valuer cannot give for major public or corporate clients
meaningful advice since the exchange generally include a multitude of
may fall outside the definition of individual assets, many of which
Market Value. Assumptions regarding considered individually and sometimes
the realization of a transfer under collectively, represent an insignificant
forced sale circumstances must be part of the overall asset base. In such
carefully considered and clearly circumstances, full comprehensive
stipulated. inspections of each and every item may
not be practical or necessary and it may
Philippine 5.11 Materiality be possible to reliably determine the
value of such assets on a group basis
Information is material if its omission or using sampling techniques.
misstatement could influence the
decisions or assessments of users of that When sampling techniques are adopted it
information. is of great importance that the procedures
adopted allow for the identification of
Materiality with regard to the valuation of any deficiencies in the integrity of the
items of low value depends upon the base data used. Where such deficiencies
nature or size of the item in the particular are identified additional steps should be
circumstances. Items that are considered taken to ensure that the integrity of the
de minimus may be aggregated and/or data is improved sufficiently to minimize
carried as inventory and recognized as an the risk of any material misstatements of
expense as consumed (that is, they are not value. Sample sizes and composition
required to be valued). should be determined in conjunction with
the entity‘s management or auditors to
ensure that they pass scrutiny.
Philippine 5.12 Inspection of Mobile
Assets Provided the value reported is unlikely to
result in a material misstatement of the
On occasions it may be impractical, due overall values reported, and/or the value
to the location of certain assets, for all of the sampled assets is immaterial in the
assets to be inspected. This may be context of the overall valuation, then
because the assets are mobile assets sampling can be an appropriate procedure
and/or located in remote and inaccessible as part of a formal valuation.
3.3.1 At a given date, the conversion into receivable in the future, into present value.
the equivalent capital value of net income A weighted average of the discount rate
or a series of net receipts, actual or applied to intangibles and the discount rate
estimated, over a period. applied to tangible should correlate with
the weighted average cost of capital for the
3.3.2 In business valuation, the term refers business.
to the capital structure of a business of a
business entity. 3.8 Economic Life. The period over which
property may be profitably used.
3.3.3 In business valuation, this term also Economic life may vary by country
refers to the recognition of an expenditure depending on the level of industrial
as a capital asset rather than a periodic development and regulatory atmosphere in
expense. each country.
3.4 Capitalization Factor. Any multiple or 3.9 Effective Date. The date as of which
divisor used to convert income into capital the Valuer‘s opinion of value applies.
value. (Also referred to as Valuation Date, and/or
As Of Date.)
3.5 Capitalization Rate. Any divisor
(usually expressed as a percentage) that is 3.10 Enterprise. See Business Entity.
used to convert income into capital value.
3.11 Going Concern. An operating
3.6 Cash Flow business.
3.6.1 Gross Cash Flow: Net income after The entity is normally viewed as a going
taxes, plus non-cash items such as concern, that is, as continuing in operation
depreciation and amortization. for the foreseeable future. It is assumed
that the entity has neither the intention nor
3.6.2 Net Cash Flow: During an operating the necessity of liquidation or of curtailing
period, that amount of cash that remains materially the scale of its operations. (IAS
after all cash needs of the business have 1, 23-24, Framework, 23)
been satisfied. Net cash flow is typically
defined as being cash available to equity 3.12 Goodwill.
or invested capital.
3.12.1 Future economic benefits arising
3.6.3 Equity Net Cash Flow: Net income from assets that are not capable of being
after taxes, plus depreciation and other individually identified and separately
non-cash charges, less increases in recognized. (IFRS 3, Appendix A).
working capital, less capital expenditures,
less decreases in invested capital debt 3.12.2 Personal Goodwill. The value of
principal, plus increases in invested capital profit over and above market expectations,
debt principal. which would be extinguished upon sale of
the trade related property, together with
3.6.4 Invested Capital Net Cash Flow: those financial factors related specifically
Equity net cash flow, plus interest to the current operator of the business,
payments net of tax adjustment, less net such as taxation, depreciation policy,
increases in debt principal. borrowing costs and the capital invested in
the business.
3.7 Discount Rate. A rate of return used to
convert a monetary sum, payable or
3.12.3 Transferable Goodwill. That times, been said to be the tendency for
intangible asset that arises as a result of customers to return to a place business, the
property specific name and reputation, extra income generated by a business over
customer patronage, location, products, and above a fair return to the identified
and similar factors, which generate assets, and/or the extra value of the entity
economic benefits. It is inherent to the as a whole over and above the aggregate
trade related property, and will transfer to value of its constituent identifiable assets.
a new owner on sale.
3.14.4 Intellectual Property is a special
3.13 Income Capitalization Approach. A classification of intangible assets because
general way of estimating a value it is usually protected by law from
indication of an intangible asset using one unauthorized use by others. Examples are
or more methods wherein a value is brand names, or tradenames; copyrights;
estimated by converting anticipated patents; trademarks; trade secrets, or
benefits into capital value. know-how; among others.
disclosure along with the reason for 5.7 Factors to be considered by the
invoking the departure. Intangible Asset Valuer include:
5.3 The Valuer shall take steps to assure 5.7.1 The rights, privileges, or
that all data sources relied on are conditions that attach to the ownership
reliable and appropriate to the interest
valuation undertaking. In many
instances it will be beyond the scope of the 5.7.1.1 Ownership rights are set forth in
Valuer‘s services to perform a complete various legal documents. In various
verification of secondary or tertiary data countries, or in some legal jurisdictions,
sources. Accordingly, the Valuer shall these documents may be called patents,
verify the accuracy and reasonableness of trademarks, brands, know-how, databases,
data sources as are customary in the and copyrights, to name a few.
markets and locale of the valuation.
5.7.1.2 Whoever owns the interest is
5.4 Valuers of intangible assets must bound by the documents that record such
frequently rely on information received interest in the intangible assets. There
from a client or from a client‟s may be rights and conditions contained in
representatives. The source of any such an agreement or exchange of
data relied upon must be cited by the correspondence, and these rights may or
Valuer in oral or written reports, and may not be transferrable to a new owner of
the data shall be reasonably verified the interest.
wherever possible. The requirements
for Valuation Reports are addressed in 5.7.2 Remaining economic life and/or
the IVSC Code of Conduct (section 7), legal life of the intangible asset.
and IVS 3, Valuation Reporting.
5.7.3 The earnings capacity of the
5.5 Although many of the principles, intangible assets.
methods, and techniques of intangible
asset valuation are similar to those used in 5.7.4 The nature and history of the
other fields of valuation, valuations of intangible assets. Since value resides in
intangible assets require special education, the benefits of future ownership, history is
training, skills, and experience. valuable in that it may give a guide to the
expectations of the intangible assets for
5.6 A description of the valuation the future.
assignment must include:
5.7.5 The economic outlook that may
5.6.1 identification of the intangible affect the subject intangible assets,
asset(s), or the ownership interest in the including political outlook and
intangible asset(s), to be valued; government policy. Matters such as the
exchange rate and inflation and interest
5.6.2 the effective date of the valuation; rates may affect intangible assets that
operate in different sectors of the economy
5.6.3 the definition of value; quite differently.
5.6.4 the owner of the interest; and 5.7.6 The condition and outlook of the
specific industry, which may affect the
5.6.5 the purpose and use of the subject intangible assets.
valuation.
5.7.7 Intangible value may also be and securities that have been sold in the
contained in undifferentiated assets, open market.
often called goodwill. Note that goodwill
value in this context is similar to goodwill 5.8.1.2 The two most common sources of
in the accounting sense in that both are the data used in the market approach are
residual value (historical cost in markets in which ownership interests of
accounting terms) after all other assets similar intangible assets are traded and
have been taken into account. prior transactions in the ownership of
the subject intangible assets.
5.7.8 Prior transactions in ownership
5.8.1.2.1 There must be a reasonable
interests of the subject intangible assets.
basis for comparison with and reliance
upon the similar intangible assets in the
5.7.9 Other market data, e.g., rates of
market approach. These similar
return on alternative investments, etc.
intangible assets should be in the same
industry as the subject or in an industry
5.7.10 The market prices for that responds to the same economic
acquisition of similar intangible assets variables. The comparison must be made
interests or intangible assets. in a meaningful manner and must not be
misleading.
5.7.10.1 Often, particularly in the use of
acquisition transactions, adequate 5.8.1.3 Through analysis of acquisitions
information is difficult or impossible to of intangible assets, the Valuer often
obtain. While the actual transaction price computes valuation ratios, which are
may be known, the Valuer may not know usually price divided by some measure
what warranties and indemnities were of income or net assets. Care must be
given by the seller, what terms were given used in calculating and selecting these
or received, or what impact taxation ratios.
planning had on the transaction.
5.8.1.3.1 The ratio(s) selected must
5.7.10.2 Comparable data should always provide meaningful information about the
be used with care, and numerous value of the intangible assets.
adjustments may need to be made.
5.8.1.3.2 The data on the similar intangible
5.7.11 Adjustment of historical assets used to compute the ratio must be
financial statement to estimate the accurate.
economic abilities of and prospects for
the intangible assets. 5.8.1.3.3 The calculation of ratios must be
accurate.
5.7.12 Any other information the
Valuer believes to be relevant. 5.8.1.3.4 If the data are averaged, the time
period considered and the averaging
5.8 Intangible asset valuation method must be appropriate.
approaches.
5.8.1.3.5 All calculations must be done in
5.8.1 Market (sales comparison) the same way for both the similar
approach to intangible asset valuation. intangible assets and the subject intangible
assets.
5.8.1.1 The market approach compares
the subject to similar intangible assets
or intangible asset ownership interests
5.8.1.3.6 The price data used in the ratio(s) 5.8.2.1.2 Income is typically allocated to
must be valid as of the valuation date and the various intangible assets by the Valuer.
representative of the market at that time. Care must be taken so that the income
allocated to all of the individual assets
5.8.1.3.7 Where appropriate, adjustments does not exceed the income available to all
may need to be made to render the similar assets.
intangible assets and the subject intangible
assets more comparable. 5.8.2.1.3 In theory, income can consist of
a variety of types of income and cash flow.
5.8.1.3.8 Adjustments may need to be In practice, the income measure is usually
made for unusual, non-recurring, and non- pre-tax income or post-tax income. If the
operating items. capitalization methods are used, the
economic life of the assets must be
5.8.1.3.9 The selected ratios must be infinite, or very long.
appropriate given the differences in risk
5.8.2.1.4 In DCF analysis and/or
and expectations of the similar intangible
dividend method, cash receipts are
assets and the subject intangible assets.
estimated for each of several future
periods. These receipts are converted to
5.8.1.3.10 Several value indications may
value by the application of a discount
be calculated since several valuation
rate, using present value techniques.
multiples may be selected and applied to
Many definitions of cash flow could be
the subject intangible assets.
used. Discounting methods are most
commonly used for intangible assets with
5.8.1.4 When prior transactions in the finite economic lives. The time period
subject intangible assets are used to
covered by the discounting methods is
provide valuation guidance,
normally the shorter of the economic
adjustments may need to be made for
life or the legal life (the definable period
the passage of time and for changed
over which the asset or interest therein
circumstances in the economy, the
is legally protected).
industry, and the intangible assets.
5.8.2.1.4.1 Economic life is measured as
5.8.2 Income capitalization approach to the period when the intangible assets can
intangible asset valuation be expected to give the owner an
economic return on the assets. An
5.8.2.1The income approach estimates example is computer software that may
the value of an intangible asset or of have an expected life of 36 months before
intangible asset ownership interests by it is necessary to replace it with an updated
calculating the present value of version.
anticipated benefits. The two most
common income approach methods are 5.8.2.1.4.2 Legal life is measured as the
(direct) capitalization of income and period when the intangible asset can be
discounted cash flow analysis (DCF). protected by law. An example is a patent
5.8.2.1.1 In (direct) capitalization of that has a definable life at its inception and
income, a representative income level is that slowly, over time, goes to zero.
divided by a capitalization rate or
multiplied by an income multiple 5.8.2.1.5 Capitalization rates and
(capitalization factor) to convert the discount rates are derived from the
income into value. market and are expressed as price
multiples (derived from data on
publicly traded businesses or
1.3 While certain terms may have 2.3 Plant, Machinery and Equipment
alternative definitions, and the (PM&E) is a category of personal
applicability of specific methods may property, but PM&E valuation is dealt
diverge, the theory, concepts, and with under GN 3.
processes applied in the valuation of
personal property are fundamentally the 3.0 Definitions
same as those for other types of
valuations. Whenever terms that have 3.1 Auction Price. The price that is the
different meanings are used, it is important final accepted bid at a public auction; may
that those differences be disclosed. This or may not include any fees or
GN sets forth important definitions used in commissions. See also Hammer Price,
personal property valuations. Private Treaty Sale.
1.4 Care should be taken by Valuers and 3.2 Collectibles. Broad descriptive term
users of valuation services to distinguish for objects collected because of the
among the market components and interest they arouse owing to their rarity,
corresponding Market Values of personal novelty, or uniqueness. In some countries,
properties. One example of such the term may be applied to fine art,
differentiation is the Market Value of antiques, gems and jewelry, musical
properties sold at auction vs. that of instruments, numismatic and philatelic
properties sold by or acquired from private collections, rare books, and archival
dealers where the negotiated price is not materials, among others. Elsewhere the
publicly disclosed. Another example term is normally used for these and a wide
would be the Market Value of personal variety of other items not found in any
property sold wholesale vs. the Market other category.
Value of the same item(s) sold retail.
3.3 Cost Approach. A comparative
approach to the value of property or
another asset that considers as a substitute
for the purchase of a given property, the 3.6 Furniture, Fixtures and Equipment,
possibility of constructing another (FF&E). A term used in North America to
property that is equivalent to the original refer to tangible personal property plus
or one that could furnish equal utility with trade fixtures and leasehold improvements.
no undue cost resulting from delay. The See also Personal Property.
Valuer‘s estimate is based on the
reproduction or replacement cost of the Philippine 3.6.1
subject property asset, less total (accrued)
depreciation. Equipment is usually categorized for
example; office equipment, laboratory
3.4 Cost Approach for Valuing Fine Art. equipment, etc., to distinguish it from
A comparative approach to the value of machinery and equipment. See para. 3.15
fine art that considers as a substitute for below.
the purchase of a given work of fine art the
possibility of creating another work of fine 3.7 Goods and Chattels Personal. In
art that replaces the original. The Valuer‘s certain countries, a term used for
estimate is based on the reproduction or identifiable, portable, and tangible objects
replacement cost of the subject work of considered by the public to be personal
fine art, and the nature of the replacement, property. See also Personal Property.
i.e., whether it be new for old, indemnity
basis, a replica, or a facsimile. 3.8 Hammer Price. The accepted and
announced bid, exclusive of any fees or
New for old refers to the cost of commissions and therefore, not necessarily
purchasing the same item or, if the purchase price. See also Auction
unavailable, an item similar in nature and Price, Private Treaty Sale.
condition in the retail market for new
works of fine art. 3.9 Income Capitalization Approach. A
comparative approach to value that
Indemnity basis refers to the cost of considers income and expense data
replacing an item with a similar item in relating to the property being valued and
similar condition in the second-hand retail estimates value through a capitalization
market for art and antiques. process.
A replica is a copy of the original item, as 3.10 Intrinsic Value. The amount
near as possible to the original in terms of considered, on the basis of an evaluation
nature, quality, and age of materials but of available facts, to be the ―true‖ or ―real‖
created by means of modern construction worth of an item. A long-term, Non-
methods. Market Value concept that smoothes short-
term price fluctuations.
A facsimile is an exact copy of the original
item, created with materials of closely 3.11 Leasehold Improvements or Tenant‟s
similar nature, quality, and age and using Improvements. Fixed improvements or
construction methods of the original additions to land or buildings, installed by
period. and paid for by the tenant to meet the
3.5 Fixtures and fittings. The totality of tenant‘s needs; typically removable by the
improvements integral to a property, tenant upon expiration of the lease;
valued collectively. See Trade Fixtures or removal causes no material damage to the
Tenant‘s Fixtures. real estate. See also Personal Property,
Trade Fixtures or Tenant‘s Fixtures.
3.12 Market Value. See IVS 1, para. 3.1. services, for rental by others, or for
[The estimated amount for which a administrative purposes; and
property should exchange on the date of
valuation between a willing buyer and a (b) are expected to be used over a period
willing seller in an arm‘s-length of time.
transaction after proper marketing wherein
the parties had each acted knowledgeably, The categories of plant, machinery and
prudently, and without compulsion.] equipment are:
3.13 Personal Property. See Concepts Plant. Assets that are inextricably
Fundamental to GAVP, para. 3.3. combined with others and that may
[Includes interests in tangible and include specialized buildings, machinery
intangible items which are not real estate. and equipment.
Items of tangible property are not
permanently affixed to real estate and are Machinery. Individual machines or a
generally characterized by their collection of machines. A machine is an
moveability.] Personal property is a legal apparatus used for a specific process in
concept referring to all rights, interests, connection with the operation of the entity.
and benefits related to ownership of items
Equipment. Other assets that are used to
other than real estate. In certain countries,
assist the operation of the enterprise or
items of personal property are legally
entity.
designated as personalty in distinction to
realty, which may either refer to real 3.16 Private Treaty Sale. A sale
property or real estate. Items of personal negotiated and transacted between persons
property can be tangible, such as a chattel; rather than by public auction or another
or intangible, such as a debt or patent. method. The sale price paid in a private
Items of tangible personal property treaty sale is generally not known except
typically are not permanently affixed to by the parties to the transaction. See also
real estate and are generally characterized Auction Price, Hammer Price.
by their movability. See also Collectibles,
Fixtures and Fittings; Furniture, Fixtures 3.17 Professional Property Valuer. A
and Equipment (FF&E), Goods and person who possesses necessary
Chattels Personal; Leasehold qualifications, ability and experience to
Improvements or Tenant‘s Improvements; estimate property value for a diversity of
Plant, Machinery and Equipment; Trade purposes including transactions involving
Fixtures or Tenant‘s Fixtures. transfers or property ownership, property
considered as collateral to secure loans
3.14 Personalty. A legal term used in and mortgages, property subject to
certain countries to designate items of litigation or pending settlement on taxes,
personal property in distinction to realty, and property treated as fixed assets in
which may either refer to real property or financial reporting.
real estate. Personalty includes tangible
and intangible items that are not real 3.18 Sales Comparison Approach. A
estate. See also Personal Property. general way of estimating a value
indication for personal property or an
3.15 Plant, Machinery and Equipment. ownership interest in personal property,
Tangible Assets, other than realty, that: using one or more methods that compare
the subject to similar properties or to
(a) are held by an entity for use in the ownership interests in similar properties.
production or supply of goods or This approach to the valuation of personal
relied upon, the Personal Property of interest may not be made known for
Valuer shall reason of confidentiality);
5.3.1 take verification steps as are 5.6.5 The purpose and use of the
reasonably necessary to ensure that valuation;
such services are competently
performed and that the conclusions 5.6.6 The conditions of the valuation;
relied upon are reasonable and credible,
or 5.6.7 Liens and encumbrances on the
property; and
5.3.2 disclose the fact that no such
verification steps were taken. 5.6.8 A Compliance Statement (signed
and dated).
5.4 Personal Property Valuers must
frequently rely upon information 5.7 Factors to be considered (but not
received from a client or from a client‟s necessarily reported) by the Personal
representatives. The source of any such Property Valuer include:
data relied upon shall be cited by the
Valuer in oral or written reports, and 5.7.1 Rights, privileges, or conditions
the data shall be reasonably verified that attach to the ownership of the
wherever possible. subject property.
5.5 Although many of the principles, 5.7.1.1 Ownership rights are set forth in
methods, and techniques of personal various legal documents.
property valuation are similar to those in
other fields of valuation, personal 5.7.1.2 Rights and conditions contained in
property valuations require special an owner‘s agreement or exchange of
education, training, skill and correspondence; these rights may or may
experience. not be transferable to a new owner of the
subject property.
5.6 Requirements for Valuation Reports
are addressed in the IVSC Code of 5.7.1.3 The documents may contain
Conduct, and IVS 3, Valuation restrictions on the transfer of the property
Reporting. For personal property the and may contain provisions governing the
valuation report must include: basis of valuation that has to be adopted in
the event of transfer of the property.
5.6.1 Identification of the property and
owner or ownership interest to be 5.7.2 The nature of the property and
valued (location of the object of history of its ownership (provenance).
personal property and address of the
owner); 5.7.2.1 Previous sales or transfers of the
property
5.6.2 The effective date of the valuation;
5.7.3 The economic outlook that may
5.6.3 The basis or definition of value; affect the subject property, including
political outlook and government policy.
5.6.4 Identification of the owner of
interest or instructing party (n.b., in 5.7.4 The condition and outlook of a
some countries, the identity of the owner market specific to the trade of personal
properties that may affect the subject 5.8.1 The sales comparison approach
property. compares the subject property to similar
properties and/or property ownership
5.7.5 Whether or not the subject interests that have been sold/offered in
property has intangible value. open markets.
5.7.5.1 If intangible value is inherent/ 5.8.2 The two most common sources of
intrinsic in the personal property, the data used in the sales comparison
Valuer must ensure that the intangible approach are published auction results and
value is fully reflected, whether the transactions reported by firms regularly
identifiable intangible has been valued engaged in the trade of similar properties.
separately or not.
5.8.3 There must be a reasonable basis for
5.7.5.1.1 Intangible value, insofar as can comparison with and reliance upon the
be reasoned, should be distinguished from similar properties in the sales comparison
the value of the tangible property. approach. These similar properties should
be regularly traded in the same market as
5.7.5.2 It is essential that the Valuer be the subject or in a market that responds to
aware of the legal restrictions and the same economic variables. The
conditions that arise through the laws of comparison must be made in a meaningful
the country in which the property exists. manner and must not be misleading.
Factors to be considered in whether a
5.7.5.3 Often, particularly in the use of reasonable basis for comparison exists
acquisition transactions, adequate include:
information is difficult to obtain. While
the actual transaction price may be known, 5.8.3.1 Similarity to the subject property in
the Valuer may not know what warranties terms of qualitative and quantitative
and indemnities were given by the seller, descriptive characteristics.
whether cash or other assets were taken
from the seller prior to acquisition, how 5.8.3.2 Amount and verifiability of data on
value should be allocated among the assets the similar property.
acquired, or what impact taxation planning
had on the transaction. 5.8.3.3 Whether the price of the similar
property represents an arm‘s-length
5.7.5.4 For the reasons explained in para. transaction.
5.7.5.3, comparable data should always be
used with care, and adjustments may need 5.8.3.4 A thorough, unbiased search for
to be made. When using published similar properties is necessary to establish
auction results, it must be borne in mind the independence and reliability of the
that those results may represent valuation. The search should include
transactions for a small market sector. simple, objective criteria for selecting
Adjustments may be needed for similar properties.
differences due to differing market levels.
5.8.3.5 A comparative analysis of
5.7.6 Any other information the Valuer qualitative and quantitative similarities
believes is relevant. and differences between similar properties
and the subject property must be made.
5.8 Personal property valuations
5.8.3.6 Where appropriate, adjustments
performed by means of the sales
may need to be made to render the value
comparison approach.
of the similar properties more comparable 5.9.2.1 FF&E may be subject to heavy use
to the subject property. Adjustments may and, therefore, require periodic
need to be made for unusual, non- replacement to maintain the attractiveness
recurring and unique items. and utility of the facility.
5.8.3.7 Appropriate adjustments for 5.9.2.2 The useful lives of items of FF&E
differences in the subject property‘s are estimated on the basis of their quality,
ownership and the ownership of similar durability, and the amount of use they
properties with regard to the character and receive. A weighted average for the useful
influence of such provenance or lives of items of FF&E may then be
marketability/saleability or lack thereof, calculated.
must be made, if applicable.
5.9.2.3 An estimate of the future
5.8.4 When prior transactions of the
replacement cost of the items of FF&E is
subject property are used to provide
divided by this figure to arrive at an
valuation guidance, adjustments may need
annual replacement allowance/renewal
to be made for the passage of time, for
fund. The replacement allowance/renewal
changes in the subject property, and for
fund is included among the entity‘s
changed circumstances in the economy,
operating expenses/ outgoings.
industry, scholarly appreciation, and the
business in which such properties are
traded. 5.10 Personal property valuations
performed by means of the cost
5.8.5 Anecdotal valuation rules, or rules of approach.
thumb, may be useful in the valuation of a
5.10.1 The cost approach considers as a
property or ownership interest in an item
substitute for the purchase of a given item
of personal property. However, value
of personal property, the possibility of
indications derived from the use of such
creating another item equivalent to the
rules should not be given substantial
original or one that could furnish equal
weight unless it can be shown that buyers
utility with no undue cost resulting from
and sellers place substantial reliance on
delay.
them.
5.10.2 The Valuer‘s estimate is based on
5.9 Personal property valuations
the reproduction or replacement cost of the
performed by means of the income
subject property or asset.
capitalization approach.
5.10.2.1 Replacement cost refers to what
5.9.1 The Income Capitalization Approach
one might expect to pay for an object of
to value considers income and expense
similar age, size, color, and condition.
data relating to the property being valued
Generally, it seeks to establish the cost of
and estimates value through a
an alternative example or of a replica, or
capitalization process.
copy, of the original item, as near as
possible to the original in terms of nature,
5.9.2 The application of the income
quality, and age of materials but created
capitalization approach may be
by means of modern construction
appropriate in the valuation of furniture,
methods.
fixtures, and equipment (FF&E) essential
to the operation of properties such as 5.10.2.1.1 In the case of assets such as
hotels, furnished apartments and care valuable antiques or paintings,
facilities.
replacement may be impractical regardless given to each of the value estimates during
of the cost. the Valuation Process. The Valuer should
provide the rationale and justification for
5.10.2.1.2 Reproduction cost refers to the valuation methods used and for the
what one might expect to pay for a weighting of the methods relied on in
facsimile, or exact copy, of the original reaching the value reconciliation when
item, created with materials of closely requested.
similar nature, quality, and age and using
construction methods of the original
period.
Business Valuation
1.0 Introduction
2.2 In addition to the elements that are
1.1 The International Valuation Standards common to other GNs to the International
Committee (IVSC) adopted this Guidance Valuation Standards, this GN contains
Note (GN) to improve the consistency and more expansive discussion of the business
quality of business valuations among the valuation process. This is included to
international community for the benefit of typify what is commonly involved in
users of financial statements and users of business valuations and to provide a basis
business valuations. of comparison with other types of
valuations, but the discussion should not
1.2 Business valuations are commonly be considered as either mandatory or
sought and performed on the Market Value limiting except as provided in this GN or
basis of valuation applying the provisions otherwise in the International Valuation
of International Valuation Standard 1 (IVS Standards.
1). Where other bases of valuations are
used, with proper explanation and 2.3 Because other basic valuation
disclosure, the provisions of IVS 2 are principles, International Valuation
applied. Standards, and Guidance Notes are also
applicable to business valuations, this GN
1.3 In general the concepts, processes and should be understood to incorporate all
methods applied in the valuation of other applicable portions of the IVSs.
businesses are the same as those for other
types of valuations. Certain terms may 3.0 Definitions
have different meanings or uses. Those
differences become important disclosures 3.1 Adjusted Book Value. The book value
wherever they are used. This GN sets that results when one or more asset or
forth important definitions used in liability amounts are added, deleted or
business valuations. changed from the reported book amounts.
1.4 Care should be taken by Valuers and 3.2 Asset-based Approach. A means of
users of valuation services to distinguish estimating the value of a business and/or
between the value of a business entity or equity interest using methods based on the
trade related property, the valuation of Market Value of individual business assets
assets owned by such entity, and various less liabilities.
possible applications of business or going
concern considerations encountered in the 3.3 Book Value
valuation of real property interests. An
example of the latter is valuations of trade 3.3.1 With respect to assets, the capitalized
related property. (See Property Types, cost of an asset less accumulated
para. 4.3.2.) depreciation, depletion, or amortization as
it appears on the account books of the
2.0 Scope business.
2.1 This GN is provided to assist in the 3.3.2 With respect to a business entity, the
course of rendering or using business difference between total assets (net of
valuations. depreciation, depletion, and amortization)
and total liabilities of a business as they
appear on the balance sheet. In this case, 3.11.2 Net Cash Flow: During an
book value is synonymous with net book operating period, that amount of cash that
value, net worth, and shareholder‟s equity. remains after all cash needs of the business
have been satisfied. Net cash flow is
3.4 Business Entity. A commercial, typically defined as being cash available to
industrial, service, or investment entity equity or invested capital.
pursuing an economic activity.
3.11.3 Equity Net Cash Flow: Net income
3.5 Business Valuation. The act or process after taxes, plus depreciation and other
of arriving at an opinion or estimation of non-cash charges, less increases in
the value of a business or entity or an working capital, less capital expenditures,
interest therein. less decreases in invested capital debt
principal, plus increases in invested capital
3.6 Business Valuer. A person who, by debt principal.
education, training, and experience is
qualified to perform a valuation of a 3.11.4 Invested Capital Net Cash Flow:
business, business ownership interest, Equity net cash flow, plus interest
security and/or intangible assets. payments net of tax adjustment, less net
increases in debt principal.
3.7 Capitalization
3.12 Control. The power to direct the
3.7.1 At a given date, the conversion into management and policies of a business.
the equivalent capital value of net income
or a series of net receipts, actual or 3.13 Control Premium. The additional
estimated, over a period. value inherent in the control interest that
reflects its power of control, as contrasted
3.7.2 In business valuation, the term refers to a minority interest.
to the capital structure of a business entity.
3.14 Discount for Lack of Control. An
3.7.3 In business valuation, this term also amount or percentage deducted from a pro
refers to the recognition of an expenditure rata share of the value at 100% of an
as a capital asset rather than a periodic equity interest in a business to reflect the
expense. absence of some or all of the powers of
control.
3.8 Capitalization Factor. Any multiple
used to convert income into value. 3.15 Discount Rate. A rate of return used
to convert a monetary sum, payable or
3.9 Capitalization Rate. Any divisor receivable in the future, into present value.
(usually expressed as a percentage) that is
used to convert income into value. 3.16 Economic Life. The period over
which property may be profitably used.
3.10 Capital Structure. The composition
of the invested capital. 3.17 Effective Date. The date as of which
the Valuer‘s opinion of value applies
3.11 Cash Flow. (Also referred to as Valuation Date, and/or
As Of Date).
3.11.1 Gross Cash Flow: Net income
after taxes, plus non-cash items such as 3.18 Enterprise. See Business Entity.
depreciation and amortization.
3.19 Going Concern
5.1.1 Where the purpose of the 5.4.1 take such verification steps as are
valuation requires a Market Value necessary to assure that such services are
estimate, the Valuer shall apply competently performed and that the
definitions, processes, and conclusions relied upon are reasonable and
methodologies consistent with their credible, or
provision in IVS 1.
5.4.2 disclose the fact that no such steps
5.1.2 When an engagement calls for a were taken.
value basis other than Market Value, the
Valuer shall clearly identify the type of 5.5 Business Valuers must frequently
value involved, define such value, and rely upon information received from a
take steps necessary to distinguish the client or from a client‟s representatives.
value estimate from a Market Value The source of any such data relied upon
estimate. shall be cited by the Valuer in oral or
written Valuation Reports, and the data
5.2 If, in the opinion of the Valuer, shall be reasonably verified wherever
certain aspects of an engagement possible.
indicate that a departure from any
provision of IVSs or of this Guidance, is 5.6 Although many of the principles,
necessary and appropriate, such methods, and techniques of business
departure shall be disclosed and the valuation are similar to other fields of
reason for invoking the departure valuation, business valuations require
clearly set forth in all Valuation Reports special education, training, skills, and
(oral or written) issued by the Valuer. experience.
The requirements for Valuation
Reports are addressed in the IVSC 5.7 Going concern has several meanings in
Code of Conduct and IVS 3, Valuation accounting and valuation. In some
Reporting. contexts, going concern serves as a
premise under which Valuers and
5.3 The Valuer shall take steps to assure accountants consider a business as an
that all data sources relied upon are established entity that will continue in
reliable and appropriate in the operation indefinitely.
valuation undertaking. In many
instances it will be beyond the scope of the 5.7.1 The premise of a going concern
Valuer‘s services to perform a complete serves as an alternative to the premise
verification of secondary or tertiary data of liquidation. Adoption of a going
sources. Accordingly, the Valuer shall concern premise allows the business to
verify the accuracy and reasonableness of be valued above liquidation value and is
data sources as is customary in the markets essential to the development of the
and locale of the valuation. Market Value of the business.
5.4 Business Valuers must often rely 5.7.1.1 In liquidations, the value of most
upon the services of Professional intangible assets (e.g., goodwill) tends
Property Valuers and/or other experts. toward zero, and the value of all tangible
A common example is reliance upon a assets reflects the circumstance of
Real Property Valuer to value the real liquidation. Expenses associated with
estate components owned by a business. liquidation (sales fee, commissions, taxes,
Where the services of other experts are other closing costs, administrative costs
relied upon, the Business Valuer shall during close-out, and loss of value in
inventory) are also calculated and
deducted from the estimate of business may be rights and conditions contained in
value. an owner‘s agreement or exchange of
correspondence, and these rights may or
5.8 Awareness of current market may not be transferrable to a new owner of
activity, and knowledge about relevant the interest.
economic developments and trends are
essential for competent business 5.10.1.3 The documents may contain
valuations. In order to estimate the restrictions on the transfer of the interest
Market Value of a business, Business and may contain provisions governing the
Valuers identify and assess the impact of basis of valuation that has to be adopted in
such considerations in their valuations and the event of transfer of the interest. For
Valuation Reports. example, the documents may stipulate that
the interest to be transferred should be
5.9 A description of the business valued as a pro rata fraction of the value of
valuation assignment must include the entire issued share capital even though
the interest to be transferred represents a
5.9.1 Identification of the business, minority interest. In each case the rights
business ownership interest, or security of the interest being valued and the rights
to be valued; attaching to any other class of interest
must be considered at the outset.
5.9.2 the effective date of the valuation;
5.10.2 The nature of the business and
5.9.3 the definition of value; history of the business. Since value
resides in the benefit of future ownership,
5.9.4 the owner of the interest; and history is valuable in that it may give
guidance as to the expectations of the
5.9.5 the purpose and use of the business for the future.
valuation.
5.10.3 The economic outlook that may
5.10 Factors to be considered by the affect the subject business, including
Valuer in the valuation of a business political outlook and government policy.
include: Matters such as exchange rates, inflation
and interest rates may affect businesses
5.10.1 The rights, privileges, or that operate in different sectors of the
conditions that attach to the ownership economy quite differently.
interest, whether held in corporate
form, partnership form, or 5.10.4 The condition and outlook of the
proprietorship. specific industry that may affect the
subject business.
5.10.1.1 Ownership rights are set forth in
various legal documents. In various 5.10.5 The assets, liabilities, and equity
countries these documents may be called and financial condition of the business.
articles of association and/or the capital
clause in the memorandum of the business, 5.10.6 The earnings and dividend
articles of incorporation, bylaws, paying capacity of the business.
partnership agreements, and shareholder
agreements, to name a few. 5.10.7 Whether or not the business has
intangible value.
5.10.1.2 Whoever owns the interest is
bound by the business‘s documents. There
5.10.10 Other market data, e.g., rates of 5.11.1.2 Comparison with similar
return on alternative investments, businesses to assess risk and value
advantages of control, disadvantages of parameters.
lack of liquidity, etc.
when considering the balance sheet. For example, the proposing purchaser should
example, first-in-first-out (a method of understand that the value derived after
costing inventory that assumes the first adjustments may represent the maximum
acquired stock will be the first sold) may that should be paid. If the purchaser does
most accurately represent the value of the not believe the financial or operational
inventory when constructing a Market improvements can be made, a lesser price
Value balance sheet. But, when may be appropriate.
examining the income statement, last-in-
first-out (a method of costing inventory 5.13.5 Adjustments made should be
that assumes the most recently acquired fully described and supported. The
stock will be the first sold) may more Valuer should be very careful in making
accurately represent the income level in adjustments to the historical record. Such
times of inflation or deflation. Tax adjustments should be discussed fully with
adjustments may subsequently need to be the client. The Valuer should make
made. adjustments only after sufficient access to
the business to support their validity.
5.13.2.6 Compensation of the owner(s)
may need to be adjusted to reflect the 5.14 Business valuation approaches
market cost of replacing the labor of the
owner(s). Severance pay for non- 5.14.1 The Market approach to business
essential personnel may need to be valuation.
considered. Tax adjustments may need
to be made. Service contracts may need 5.14.1.1 The market approach compares
to be looked at carefully to adjust for the the subject to similar businesses,
value (rather than the face amount of the business ownership interests, and
cost) of terminating contracts with senior securities that have been sold in the
personnel. market.
5.13.2.7 Cost of items leased, rented or
5.14.1.2 The three most common
otherwise contracted from related
parties may need to be adjusted to reflect sources of data used in the market
the Market Value payments. Tax approach are public stock markets in
adjustments may subsequently need to be which ownership interests of similar
businesses are traded, the acquisition
made.
market in which entire businesses are
5.13.3 Some adjustments that would be bought and sold, and prior transactions
made in the context of valuation of the in the ownership of the subject business.
entire business might not be made in the
context of valuation of a non-controlling 5.14.1.3 There must be a reasonable
interest in that entity since the non- basis for comparison with and reliance
controlling interest would not have the upon the similar businesses in the
ability to exert an influence that would market approach. These similar
warrant adjustment. businesses should be in the same industry
as the subject or in an industry that
5.13.4 Financial statement adjustments responds to the same economic variables.
are made for the purpose of assisting The comparison must be made in a
the Valuer in reaching a valuation meaningful manner and must not be
conclusion. If the Valuer is acting as a misleading. Factors to be considered in
consultant to either the buyer or seller in a whether a reasonable basis for comparison
proposed transaction, the adjustments exists include:
should be understood by the client. For
5.14.1.3.1 Similarity to the subject 5.14.1.4.6 The price data used in the ratio
business in terms of qualitative and must be valid as of the valuation date.
quantitative business characteristics.
5.14.1.4.7 Where appropriate, adjustments
5.14.1.3.2 Amount and verifiability of may need to be made to render the similar
data on the similar business. businesses and the subject business more
comparable.
5.14.1.3.3 Whether the price of the similar
business represents an arm‘s-length 5.14.1.4.8 Adjustments may need to be
transaction. made for unusual, non-recurring, and non-
operating items.
5.14.1.3.3.1 A thorough, unbiased
search for similar businesses is necessary 5.14.1.4.9 The selected ratios must be
to establish the independence and appropriate given the differences in risk
reliability of the valuation. The search and expectations of the similar businesses
should include simple, objective criteria and the subject business.
for selecting similar businesses.
5.14.1.4.10 Several value indications may
5.14.1.3.3.2 A comparative analysis of be derived since several valuation
qualitative and quantitative similarities multiples may be selected and applied to
and differences between similar businesses the subject business.
and the subject business must be made.
5.14.1.4.11 Appropriate adjustments for
5.14.1.4 Through analysis of the differences in the subject ownership
publicly traded businesses or interest and interests in the similar
acquisitions, the Valuer often computes businesses with regard to control or lack of
valuation ratios, which are usually price control, or marketability or lack of
divided by some measure of income or marketability, must be made, if applicable.
net assets. Care must be used in
calculating and selecting these ratios. 5.14.1.5 When prior transactions in the
subject business are used to provide
5.14.1.4.1 The ratio must provide valuation guidance, adjustments may
meaningful information about the value of need to be made for the passage of time
the business. and for changed circumstances in the
economy, the industry, and the business.
5.14.1.4.2 The data from the similar
businesses used to compute the ratio must 5.14.1.6 Anecdotal valuation rules, or
be accurate. rules of thumb, may be useful in the
valuation of a business, business
5.14.1.4.3 The calculation of ratios must ownership interest, or security. However,
be accurate. value indications derived from the use of
such rules should not be given substantial
5.14.1.4.4 If the data are averaged, the weight unless it can be shown that buyers
time period considered and averaging and sellers place significant reliance on
method must be appropriate. them.
5.14.2.1 The income capitalization risk associated with the benefits stream,
approach estimates the value of a and the time value of money.
business, business ownership interest or
security by calculating the present value 5.14.2.2.1 Anticipated income or
of anticipated benefits. The two most benefits should be estimated considering
common income approach methods are the capital structure and historical
capitalization of income and discounted performance of the business, expected
cash flow analysis or dividends method. outlook for the business, and industry
and economic factors.
5.14.2.1.1 In (direct) capitalization of
income, a representative income level is 5.14.2.2.2 The income approach
divided by a capitalization rate or requires the estimation of a
multiplied by an income multiple to capitalization rate, when capitalizing
convert the income into value. In theory, income to arrive at value, or a discount
income can be a variety of definitions of rate, when discounting cash flow. In
income and cash flow. In practice, the estimating the appropriate rate, the Valuer
income measured is usually either pre-tax should consider such factors as the level of
income or post-tax income. The interest rates, rates of return expected by
capitalization rate must be appropriate for investors on similar investments, and the
the definition of income used. risk inherent in the anticipated benefit
stream.
5.14.2.1.2 In discounted cash flow
analysis and/or dividends method, cash 5.14.2.2.3 In capitalization methods
receipts are estimated for each of that employ discounting, expected
several future periods. These receipts growth is explicitly considered in the
are converted to value by the estimate of the future benefit stream.
application of a discount rate using
present value techniques. Many 5.14.2.2.4 In capitalization methods
definitions of cash flow could be used. In that do not employ discounting,
practice, net cash flow (cash flow that expected growth is included in the
could be distributed to shareholders), or capitalization rate. The relationship,
actual dividends (particularly in the case stated as a formula, is discount rate minus
of minority shareholders) are normally long-term growth rate equals capitalization
used. The discount rate must be rate (R = Y - ∆a where R is the
appropriate for the definition of cash flow capitalization rate; Y is the discount, or
used. yield, rate; and ∆a is the annualised
change in value).
5.14.2.1.3 Capitalization rates and
discount rates are derived from the 5.14.2.2.5 The capitalization rate or
market and are expressed as a price discount rate should be consistent with
multiple (derived from data on publicly the type of anticipated benefits used.
traded businesses or transactions) or an For example, pre-tax rates should be used
interest rate (derived from data on with pre-tax benefits; net after-income tax
alternative investments). rates should be used with net after-
income-tax benefit streams; and net cash
5.14.2.2 Anticipated income or benefits flow rates should be used with net cash
are converted to value using flow benefits.
calculations that consider the expected
growth and timing of the benefits, the 5.14.2.2.6 When the forecast income is
expressed in nominal terms (current
prices), nominal rates must be used, and going concerns unless it is customarily
when the forecast income is expressed in used by sellers and buyers. In such
real terms (level prices), real rates must cases, the Valuer must support the
be used. Similarly, the expected long- selection of this approach.
term growth rate of income should be
documented and clearly expressed in 5.14.3.6 If the valuation of an operating
nominal or real terms. business is not on a going concern basis,
the assets should be valued on a Market
5.14.3 Asset-based business valuation Value basis or on a basis that assumes a
approach. shortened time period for exposure in
the market, if that is appropriate. All
5.14.3.1 In business valuation the asset- costs related to the sale of the assets or the
based approach may be similar to the closing of the business need to be taken
cost approach used by Valuers of into account in this type of valuation.
different types of assets. Intangible assets such as goodwill may not
have value under these circumstances,
5.14.3.2 The asset-based approach is although other intangible assets such as
founded on the principle of substitution, patents, trademarks, or brands may retain
i.e., an asset is worth no more than it their value.
would cost to replace all of its constituent
parts. 5.14.3.7 If the holding business simply
holds property and receives investment
5.14.3.3 In the execution of the asset- income from the property, Market
based approach, the cost basis balance Values should be obtained for each
sheet is replaced with a balance sheet property.
that reports all assets, tangible and
intangible, and all liabilities at Market 5.14.3.8 If an investment holding
Value or some other appropriate business is to be valued, the securities
current value. Taxes may need to be (both quoted and unquoted), the
considered. If market or liquidation values liquidity of the interest, and the size of
apply, costs of sale and other expenses the interest may be relevant and may lead
may need to be considered. to a deviation from the quoted price.
3.1.1 In a more general use beyond this on the properties valued, it is possible that
GN, environmental factors may be there are other accompanying issues such
characterized as influences external to the as curative or restoration costs,
property being valued which may have maintenance or monitoring costs, third-
positive effect, negative effect, or no effect party or regulatory liabilities, and the like.
at all on the property‘s value. Hazardous Thus, proper disclosure and handling are
or toxic substances may be found either on essential in valuations used for preparation
or off the site of the property valued. of financial statements and related
accounts.
3.2 Hazardous substance within the context
of a valuation is any material within, 4.3 In the ordinary course of conducting an
around, or near the property being valued asset valuation, the Valuer will be
that has sufficient form, quantity, and bio- instructed by the Directors of the entity as
availability to create a negative impact on provided in IVA 1. Any special
the property‘s Market Value. instructions to the Valuer concerning the
handling of hazardous or toxic substance
3.3 Toxic describes the status of a material, issues that may have negative impact upon
whether gas, liquid, or solid, that in its property value are, under IVA 1, important
form, quantity, and location at the date of disclosures to be discussed by the Valuer in
valuation has capacity to cause harm to the Valuation Report. Such disclosures
life-forms. Toxicity refers to the degree or shall be accompanied by the Valuer‘s
extent of such capacity. explanation of how the issues are handled
in the Valuation Process; any assumptions
4.0 Relationship to Accounting that are made; and the effect, if any, such
Standards considerations have upon the value
reported.
4.1 While the expressions Market Value
and Fair Value may not always be 4.4 Although the value effects of hazardous
synonymous (see International Valuation or toxic substances are derived from the
Standards 1 and 2 [IVSs 1 and 2] and market in a Market Value assignment, such
International Valuation Application 1 [IVA effects may not be as readily discerned
1]), each type of value reflects market when valuing property for which a
behavior under conditions contained within Depreciated Replacement Cost method is
the respective definitions. To the extent appropriate. To comply with IVA 1 when
that property values reported under either applying the DRC method, Valuers should
type of value may be affected by hazardous apply the principles of this GN to the extent
or toxic substances, proper disclosure and possible and should fully disclose the
the application of proper valuation extent of their analysis and the basis for
procedures to the circumstances are their conclusions.
necessary in making and reporting
valuations. 4.5 The accounting definition of
impairment loss is the amount by which the
4.2 This GN is applicable to all carrying amount of an asset or a cash-
circumstances involving public disclosure generating unit exceeds its recoverable
of property values, whether reported amount (IAS 36, para. 6). The negative
individually or in the aggregate, when impact of hazardous or toxic materials that
hazardous or toxic substances may have are present in a property may contribute to
adverse effect on such values. In addition its impairment. The impairment loss
to the possible effect of such considerations incurred by a property where such
substances are present may include the requisite knowledge, experience, and
adverse effect of those substances upon competency.
property value. (See para. 5.4 below.)
5.3 Disclosure of the existence of any
5.0 Guidance hazardous or toxic substance that may
have adverse effect upon a property‟s
5.1 In dealing with a client or value is included among the general
prospective client in matters pertaining reporting requirements of IVSs 1, 2, and
to the valuation of property when known 3. Also required is the Valuer‟s
or reasonably discoverable disclosure regarding how that factor has
environmental conditions that may have been dealt with in the engagement. If the
adverse influence on the property values engagement calls for valuation of the
are present, the Valuer should disclose to property as though no such environmental
the client the extent of his or her factor existed, full disclosure must be made
knowledge, experience, and competency of the limiting assumption, and reporting
to deal with the situation. must comply with the statements above.
(See paras. 5.1 and 5.2.) The
5.1.1 If the environmental factors are requirements for valuation reports are
known or are suspected to exist at the time addressed in the Code of Conduct and
the Valuer and prospective client are IVS 3, Valuation Reporting.
discussing the potential engagement, the
5.4 Where impairment is present in a
Valuer should satisfy himself or herself that
property, the Valuer should estimate the
the client understands the Valuer‘s
value of the property as if the
competency and disclosure obligations and
impairment had been removed. Where
that undertaking the engagement will in no
possible, the Valuer should identify the
way compromise these obligations.
cost of remediation; but if this is not
possible, the Valuer should disclose the
5.1.2 If the environmental factors are
fact that the property is impaired.
discovered after commencing the
engagement, the Valuer should make 5.5 If a property is valued as if
known to the client the knowledge, unaffected by hazardous substances, and
experience, and competency disclosures such substances are known or suspected
specified by this Guidance, and should then to exist, the Valuation Report should
comply with all other IVSs disclosure contain a qualification that clearly limits
requirements. the scope of the valuation, an
appropriate statement of purpose,
5.2 Recognizing that many properly qualified conclusions, and a
environmental situations will require restriction against use of the valuation
advice on physical, legal, scientific, and conclusion without accompanying
other technical issues, if the engagement disclosure of the qualification and its
is otherwise acceptable to both the client explanation.
and the Valuer, the Valuer should take
the necessary steps to complete the 5.6 The names and nature of expert
assignment competently. These steps assistance of others who contributed
may include appropriate personal study; specific information concerning effects of
association with another Valuer who has environmental factors on the property
the requisite knowledge, experience, and valued should be acknowledged in the
competency; or obtaining the professional Valuation Report.
assistance of others who possess the
5.7 When there are no known with this Guidance, whether they are
environmental factors that may have encountered prior to undertaking an
adverse effect on property value, the engagement or subsequent to its
Valuer should, as a matter of routine commencement;
practice, include within the Valuation
Report a contingent and limiting 5.10.2 proper reliance is placed upon the
condition or other disclaimer affirming professional advice and assistance of
that the valuation was made on the others when special skills, knowledge,
assumption that no such factors were training, and experience are required,
known to exist at the date of valuation, and any such assistance is acknowledged
but if such factors did exist they could and explained in the Valuation Report;
well have an adverse effect on value.
5.10.3 proper treatment is given to the
5.8 There is growing worldwide concern influence of hazardous or toxic
about the effects of hazardous and toxic substances in the Valuation Process, or
substances upon lives and property. Many alternatively, if the Valuation Process is
potential hazards have been recently to exclude consideration of such matters,
identified, and others are likely to be added proper disclosure is made of any
over time as new and additional discoveries assumptions made, the purpose of the
are made and subsequent controls are analysis, and the likely effect of the
invoked by governments or are required by assumptions on the defined value;
the market.
5.10.4 reasonable effort is made to ensure
5.9 Some hazardous or toxic substances that reports and the value estimates they
can have material effect on property values. contain are not misleading and can be
However, as Valuers normally deal with reasonably used only for the purpose for
Market Values, it is the market‟s reaction which they are intended.
to these substances that is at issue in
5.11 Valuers are expected to correctly apply
Market Value engagements. Over time,
those recognized methods and techniques
substances once believed to have no
that are necessary to comply with this
adverse effect on property value may be
Guidance. When valuing property subject
determined to have such an effect.
to some hazardous or toxic substance that
Conversely, materials once believed to
adversely influences property value, the
have substantial effect may be found to
Valuer should apply those processes
have little or no property value effect, or to
necessary to adequately reflect any such
have such effect only under certain market
value losses, taking care to neither over- or
conditions.
understate the value effects. In a Market
5.10 The handling of physical, legal, Value engagement, it is the Valuer‟s
scientific, and technical issues involved responsibility to reflect the market effect
with hazardous or toxic substances is of the particular condition or
frequently beyond the skill of the Valuer. circumstance.
However, the Valuer‟s role in
5.12 Valuers are cautioned that there can be
consideration of such factors will be
considerable controversy among legal,
facilitated if
scientific, and other technical experts upon
5.10.1 situations involving whose advice the Valuer may need to rely.
environmentally sensitive substances are Particular differences may be found in the
recognized and dealt with in accordance methods experts use to determine the extent
of clean-up, maintenance, or monitoring
1.1 The purpose of this Guidance Note The Depreciated Replacement Cost (DRC)
(GN) is to assist users and preparers of is commonly known as Replacement Cost
Valuation Reports in the interpretation of New Less Depreciation (RCNLD).
the meaning and application of depreciated
replacement cost for financial reporting 3.2 Improvements. Buildings, structures, or
purposes. some modifications to land, of a permanent
nature, involving expenditures of labor and
1.2 Depreciated replacement cost is an capital, and intended to enhance the value
application of the cost approach that may or utility of the property. Improvements
be used in arriving at the value of may have differing patterns of use and
specialized assets for financial reporting economic lives.
purposes. Depreciated replacement cost
may be the more applicable approach when 3.3 Modern Equivalent Asset. An asset
comparable sales data is insufficient but which has a similar function and equivalent
sufficient market data exists concerning productive capacity to the asset being
costs and accrued depreciation. As an valued, but of a current design and
application of the cost approach, it is based constructed or made using current materials
on the principle of substitution. and techniques.
Plant. Assets that are inextricably 4.2 The application of Fair Value under
combined with others and that may include accounting standards is discussed in IVA 1.
specialized buildings, machinery, and In accounting standards, Fair Value is
equipment. normally equated to Market Value.
Machinery. Individual machines or a 5.0 Guidance
collection of machines. A machine is an
apparatus used for a specific process in
5.1 The classification of an asset as
connection with the operation of the entity. specialized should not automatically lead to
Equipment. Other assets that are used to the conclusion that a depreciated
assist the operation of the enterprise or replacement cost valuation must be
entity. adopted. Even though an asset may be
specialized, it may be possible if
3.6 Service Potential. The capacity of an sufficient direct market evidence exists
asset to continue to provide goods and to undertake a valuation of the
services in accordance with the entity‘s specialized property using the sales
objectives. comparison approach and/or the income
capitalization approach.
3.7 Specialized Property. A property that
is rarely, if ever, sold in the market, except 5.2 In the absence of sufficient direct
by way of a sale of the business or entity of market evidence, depreciated replacement
which it is part, due to uniqueness arising cost is regarded as an acceptable method
from its specialized nature and design, its of arriving at the value of specialized
configuration, size, location, or otherwise. assets but must incorporate market
observations by the Valuer with regard
4.0 Relationship to Accounting to current costs and depreciation rates.
Standards The method is based on the same
theoretical transaction between rational
4.1 Depreciated replacement cost is used informed parties as the Market Value
where there is insufficient market data to concept.
arrive at Market Value by means of market-
based evidence. 5.3 The Valuer estimates the cost of a
modern equivalent asset at the relevant
4.1.1 International Accounting Standard valuation date. This may involve
(IAS) 16, Property, Plant and Equipment, estimating the cost of having a suitable
paragraph 33, provides that in the absence asset commissioned to order. The
of market-based evidence an entity may replacement cost needs to reflect all
need to estimate the fair value of a incidental costs that would be incurred, for
specialized asset using an income or a example for design, delivery, installation
depreciated replacement cost approach. and commissioning. In the case of
specialized property, the cost of acquiring
4.1.2 International Public Sector land suitable for the development of an
Accounting Standard (IPSAS) 17, Property, equivalent specialized facility in the market
Plant and Equipment, paragraphs 42 and should be included, together with the cost
43, prescribe the use of depreciated of all improvements that would be required
replacement cost for valuing specialized to the land.
buildings and other man-made structures as
well as items of plant and equipment of a 5.4 The Valuer then estimates
specialized nature. depreciation by comparing the modern
equivalent asset with the asset being
valued. Depreciation rates may be all- transaction have been considered. These
encompassing or analyzed separately include:
for:
5.5.1 an understanding of the asset, its
Physical deterioration function, and its environment;
Functional obsolescence 5.5.2 research and analysis to determine
External obsolescence the remaining physical life (to estimate
physical deterioration) and economic life
5.4.1 In estimating the physical of the asset;
deterioration of the actual asset resulting
from wear and tear over time, including 5.5.3 knowledge of changes in
any lack of maintenance, different preferences, technical innovations,
valuation methods may be used for and/or market standards that may affect
estimating the amount required to the asset (to estimate functional
rectify the physical condition of the obsolescence);
improvements. Estimates of specific
elements of depreciation and contractors‘ 5.5.4 an analysis of potential external
charges can be used or direct unit value changes that may affect the asset (to
comparisons between properties in similar estimate external obsolescence);
condition.
5.5.5 familiarity with the class of
5.4.2 Functional obsolescence can be property through access to available
caused by advances in technology that market data;
result in new assets being capable of a
more efficient delivery of goods and 5.5.6 knowledge of construction
services. Modern production methods may techniques and materials (to estimate the
render previously existing assets fully or cost of a modern equivalent asset); and
partially obsolete in terms of current cost
equivalency. The application of the 5.5.7 sufficient knowledge to determine
optimization process will account for many the impact of external obsolescence on
elements of functional obsolescence. the value of the improvements.
5.4.3 Obsolescence resulting from 5.6 Depreciation rates and estimates of
external influences may affect the value future economic life are influenced by
of the asset. External factors include market trends and/or the entity‟s
changed economic conditions, which affect intentions. Valuers should identify these
the supply of and demand for goods and trends and intentions and be capable of
services produced by the asset or the costs using them to support the depreciation rates
of its operation. External factors also applied. The application of depreciated
include the cost and reasonable availability replacement cost should replicate the
of raw materials, utilities, and labor. deductive process of a potential buyer with
a limited market for reference.
5.4.4 When valuing specialized property it
is not appropriate to depreciate the cost 5.7 In the final stage of the process Valuers
of replacing the land element. should consider if the actual asset has any
additional features not reflected in the cost
5.5 In the application of depreciated of the modern equivalent asset and make
replacement cost, the Valuer shall ensure any appropriate further adjustments. An
that the key elements of a market example would be a specialized property
where there is the possibility of a more replacement cost to the valuation of public
valuable use in the future when the sector assets and the test of adequate
improvements have reached the end of their service potential are discussed at greater
economic life. length in IVA 3, Valuation of Public Sector
Assets for Financial Reporting in
5.8 If it is clear that the result based on paragraphs 5.4, 6.1, 6.5, and 6.8.4.)
the depreciated replacement cost method
is materially lower than a readily 5.12 The valuation conclusion shall be
identifiable alternative use that is both reported in accordance with IVS 3,
financially and legally feasible at the Valuation Reporting.
date of valuation, the Market Value
based on that alternative use shall be 5.12.1 The Valuer reports the result as
reported. This should include a Market Value subject to the test of
statement that the value for the adequate profitability or justified service
alternative use takes no account of potential, a test which is the
matters such as business closure or responsibility of the entity.
disruption and any associated costs that
would be incurred. The alternative use 5.12.2 In reporting the value the Valuer
value will be evident from sales shall identify the valuation method as
comparison and its valuation is not part depreciated replacement cost noting that
of the depreciated replacement cost the value can only be adopted in the
application but a separate valuation. accounts of the entity if the relevant test
of either adequate profitability or service
5.9 If the Valuer considers that the value potential is applied and met.
of the asset would be materially different
if it ceases to be part of the going
concern, a statement to this effect should
be included in the report.
Discounted Cash Flow Analysis for Market Valuations and Investment Analyses 156
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derived discount rate is applied to (NPV) equals zero. The IRR reflects both
establish an indication of the present value the return on the invested capital and the
of the income stream associated with the return of the original investment, which
property or business. In the case of are basic considerations of potential
operating real properties, periodic cash investors. Therefore, deriving the IRR
flow is typically estimated as gross income from analysis of market transactions of
less vacancy and collection losses and less similar properties having comparable
operating expenses/outgoings. The series income patterns is a proper method for
of periodic net operating incomes, along developing market discount rates for use
with an estimate of the reversion/terminal in valuations to arrive at Market Value.
value/exit value, anticipated at the end of
the projection period, is then discounted. 3.5 Investment Analysis. A study
In the case of development properties, undertaken for the purposes of
estimates of capital outlays, development development and investment, the
costs, and anticipated sales income are evaluation of investment performance, or
estimated to arrive at a series of net cash the analysis of a transaction involving
flows that are then discounted over the investment properties. Investment
projected development and marketing analyses are variously called (economic)
periods. In the case of a business, feasibility studies, market or marketability
estimates of periodic cash flows and the analyses, or financial projection studies.
value of the business at the end of the
projection period are discounted. The 3.6 Net Present Value (NPV). The
most widely used applications of DCF measure of the difference between the
analysis are the Present Value (PV), or Net discounted revenues, or inflows, and the
Present Value (NPV) and the Internal Rate costs, or outflows, in a discounted cash
of Return (IRR) of cash flows. flow analysis.
3.3 Financial Modeling. The projection of There is little real distinction between
a business‘ or property‘s periodic income NPV and Present Value (PV). NPV is
or cash flow pattern from which measures normally used to describe the differences
of financial return can be calculated. between all discounted inflows and
Income or cash flow projections are outflows while PV is often used where the
generated through the use of a financial initial outlay or price is not included in the
model that takes into account historical cash flow. In a valuation that is done to
relationships between income, expense, arrive at Market Value, where discounted
and capital amounts as well as projections cash flows and the discount rate are
of those variables. Financial modeling market derived, the resulting NPV should
may also be used as a management tool to be indicative of the Market Value and is
test expectations for property performance, often termed PV rather than NPV.
to gauge the integrity and stability of the
DCF model or as a method to replicate the 4.0 Relationship to Accounting
steps taken by investors in making Standards
decisions involving the purchase, sale, or
holding of a property or business. 4.1 Discounting is a standard procedure
employed by accountants in considering
3.4 Internal Rate of Return (IRR). The the time value of money.
discount rate that equates the present value
of the net cash flows of a project with the 4.2 The International Financial Reporting
present value of the capital investment. It Standards (IFRSs) prescribe a discounting
is the rate at which the Net Present Value procedure to estimate the value in use of
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an asset. An estimate of the value in use points selected for the cash flow are, for
involves a) estimating the future cash example, quarterly, the discount rate
inflows and outflows to be derived from must be the effective quarterly rate and
the continuing use of the asset and from its not a nominal rate. As each time period
ultimate disposal and b) applying the within a cash flow is in fact set off by
appropriate discount rate to these future time points, the Valuer must seek to
cash flows. (IAS 36, para. 31) place the various cash flows at the
correct point in time within the cash
4.3 IAS 36, para. 55 states that ―the flow. Often the frequency of the cash
discount rate (rates) shall be a pre-tax rate flow is decided by the time points at
(rates) that reflect(s) current market which rent is collected. If other events
assessments of: (a) the time value of take place at more frequent times, the
money; and (b) the risks specific to the Valuer must decide whether to include
asset for which the future cash flow them at the time point before or after
estimates have not been adjusted‖. It is they actually occur. Expenses/
also true that other measures of income or outgoings may be placed at the
cash flow may be used so long as the accounting point in time rather than the
discount rate(s) are appropriately matched point of time at which they are carried
with the income flow(s). out. The obvious best solution is to have
a cash flow frequency that matches the
5.0 Guidance timing of the most frequent aspect of the
periodic cash flow.
5.1 Discounted cash flow models are
The initial period (time interval) of a
structured upon a specified term, or
real property cash flow study is
duration. In real property analysis,
described as period 0 and this period is
although events such as rent reviews,
not discounted. Any inflows or outflows
lease renewal/reletting, redevelopment,
that are expected to occur within this
or refurbishment can affect the analysis
time period should be included in
term, this term is typically driven by
period 0. Net income or expenses can be
market behavior that is characteristic of
placed in period 0 and should be
the class of property and its market
incorporated in this period if the cash
sector. For example, the analysis term
receipts or payments take place during
for investment properties typically runs
this period. For example, many
between five and ten years. The Valuer,
investment properties receive net
however, should be fully aware of the
income monthly. Therefore, if annual
implications of different holding
intervals are used, the net income
periods, e.g., a short holding period
receivable in the initial year must be
makes the appraisal conclusion more
placed in period 0, regardless of
dependent upon the estimate of the
whether a beginning or end period
terminal value at the expense of the
calculation is adopted.
periodic cash flow.
Selection of the method for calculating
The frequency of inflows and outflows the reversion/terminal value/exit value
(monthly, quarterly, annually) should depends upon practices in the subject
also be market derived. As with other market as normally, it represents an
accepted methodologies, inflows and estimate of the Market Value of the
outflows should be appropriate and property at the termination date.
reasonably supported. The correct Valuers should mirror those market
discount rate needs to be applied to the practices and fully disclose the chosen
cash flow. If the frequency of the time method(s) and its (their) application.
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5.2.6 the terminal capitalization rate/ 5.6 A Valuer should carry out sufficient
reversion yield that is applied to research to ensure that cash flow
calculate the reversion/terminal value/ projections and the assumptions that
exit value and the reasoning behind its are the basis for the DCF model are
selection; and appropriate and reasonable for the
subject market.
5.2.7 a list of all assumptions underlying
the analysis. 5.6.1 As an example, the lease-by-lease
analysis to support the cash flow
5.3 DCF analysis makes use of available projection for a multi-tenanted property
market evidence and typically reflects should address contract/passing rent and
the thought processes, expectations, and market rent, lease expiration and lease
perceptions of investors and other review dates, rent escalations/stepped
market participants. As a forecasting rents, operating expenses/outgoings,
technique, DCF analysis should not be expense pass-throughs/recoverable costs,
judged on the basis of whether or not lease incentives, leasing costs, vacancy
the specific DCF forecast was ultimately allowances, capital expenditures, and any
realized but rather on the degree of other specific provisions that apply.
market support for the DCF forecast at
that time it was made. 5.6.2 Assumptions of growth or decline in
income must be premised on analysis of
5.3.1 When DCF is used to develop a economic and market conditions. Changes
Market Value estimate, the valuation in operating expenses/outgoings should
should meet all criteria for Market reflect all expense trends and specific
Value estimates as set forth in IVS 1. trends for significant expense items.
5.4 Where a client provides the Valuer 5.6.3 The results of a DCF analysis should
with specific requirements that do not be tested and checked for errors and
correspond to those for Market Value reasonableness.
estimates as to holding period, financing
terms, taxation, or discount rate, the 5.7 To derive discount and terminal
resultant value estimate is to be capitalization rates, a Valuer makes use
considered Non-Market Value. The of various sources of data and
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information on real estate and capital 5.9.2.2 the projected rent and other
markets. In addition to data on the income and the rate at which income is
income streams and resale prices of projected to change;
comparable properties or businesses,
surveys of investor opinion and rates of 5.9.2.3 the projected operating expenses
return are useful in selecting discount rates and the rate at which expenses are
provided that the market for the subject projected to change;
property is consistent with the market for
the property acquired by the investors 5.9.2.4 the treatment of lease
consulted in the survey. expirations/break costs, vacancies, and
collection losses; and
5.8 It is the responsibility of the Valuer
to ensure that the controlling input is 5.9.2.5 the discount rate and terminal
consistent with market evidence and the capitalization rate or reversion yield.
prevailing market outlook. Further, the
Valuer who supervises the construction 5.9.3 The Valuer must
of the DCF model or selection of a
proprietary model is responsible for the 5.9.3.1 indicate the annual effective rate
integrity of that model in terms of at which periodic interest is calculated,
theoretical and mathematical where finance debt or debt service
correctness, the magnitude of the cash (payment of interest and principal) is a
flows, and the appropriateness of all component of the projected periodic
inputs. A Valuer must have suitable cash flow;
experience and market knowledge to
structure cash flow and provide other 5.9.3.2 specify the rate(s) of taxation
inputs to the model. used, where applicable;
5.9 In reporting the results of a DCF 5.9.3.3 explain the reasoning behind any
analysis, a Valuer shall follow the provision for lease incentives, where
requirements of the IVSC Code of applicable;
Conduct and IVS 3, Valuation
Reporting. 5.9.3.4 explain the treatment of any
capital expenditures incurred in the
5.9.1 Disclosures must be made under acquisition or improvement of property
those circumstances described in IVS 3, or business assets;
paragraphs 5.1.10, 7.0 and 8.2.3.
5.9.3.5 explain the basis for the adopted
5.9.2 Inherent in DCF analysis are the terminal capitalization rate/reversion
explicit assumptions that are used as yield and the adopted discount rate or
inputs for the analysis. To provide the effective, equivalent rate (if
users of valuation services the ability to appropriate); and
replicate the results, the Valuer must
disclose the assumptions and support 5.9.3.6 identify the cash flow model by
for their use in developing the DCF name of the developer or, if proprietary
model. Using real property examples, software, by product name and version;
these include but are not limited to describe the methods and assumptions
inherent in the model; and specify the
5.9.2.1 the commencement date, term, dates on which the model was developed
and frequency employed in the model; and employed.
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circumstances where market conditions raised, and sold within the operation of the
are unfavorable. These crops will last for property. Young animals may be acquired
more than one year after harvest but are from outside the property and then raised
considered less than permanent. Also see within the property. The animals may be
irrigated land (para. 3.4), perennial raised for consumptive use or for breeding
plantings (para. 3.6). stock. Feed for the animals may be
produced on the property, imported, or
3.2 Dairy Farms. Agricultural properties supplied by both sources. Properties used
used for the production of milk from cows, for the production and feeding of livestock
carabaos, goats, etc. or for other dairy have significant capital investment in the
products. These properties usually have structural improvements (pens, livestock
extensive structural improvements (barns, shelters, sheds, division fencing) and the
milking parlors, silos) and equipment livestock, which may or may not be
(feed bins, milking machines). Feed may depreciable depending on the laws and
be produced on the property, imported, or regulations of the local jurisdiction.
supplied by both sources.
3.6 Perennial Plantings. Crops grown
3.3 Forestry/Timberland. Agricultural from plantings that have a life extending
property used for the growing of non- beyond one year or one-crop cycle.
orchard trees that are periodically Examples are vineyards and orchards.
harvested over extended growing periods These types of properties can have
(10 to 20 or more years). Considered to be significant capital investment in the
agricultural properties because they plantings, which represent a depreciable
produce a crop, i.e., wood, even though asset. Also see forestry/timberland (para.
that crop requires a long-term growing 3.3).
period. Also see perennial plantings.
3.7 Specialized Livestock Facilities. See
Philippine 3.3.1 dairy farms, livestock ranches/stations.
Plant, machinery and equipment (not accordance with the requirements of the
attached to the land) IAS. For guidance, the reader is referred
to IVA 1.
Biological assets (attached to the land)
5.3 Where other bases of valuation are
Biological assets (not attached to the used, they must be distinguished from
land) the Market Value basis.
of which class of agricultural use the 5.7.1 The various components of a whole
property is best suited for. property may have value as separate parts
which is greater or lesser than their value
5.5.2 In keeping with the definition of as part of the whole. The Valuer must
Market Value, a highest and best use determine whether each component is to
analysis of the property should always be be valued individually or as part of the
conducted in order 1) to warrant that an whole property.
agricultural use is to be continued,
especially when it appears that another 5.7.2 Agricultural properties may be
land use, e.g., subdivision development managed to simultaneously produce more
occasioned by encroaching than one class of commodity based on
urban/suburban expansion, might be more different physical conditions within the
appropriate, and 2) to determine whether property or on management decisions. In
the specific agricultural use is to be the valuation of agricultural properties on
continued. which crops of more than one agricultural
classification are cultivated and harvested
5.5.3 Where the Valuer is specifically at different times, the value of each
instructed to ignore uses other than the agricultural classification must be based
current agricultural use, the resulting on its contribution to total property value
valuation will not necessarily indicate the and not its stand-alone value.
Market Value of the property, and this
should be fully disclosed. 5.7.3 The agricultural use of the property
may require extensive building
5.6 The estimate of stabilised income to improvements, e.g., barns, silos, dairy
the agricultural property must be based machinery. Such improvements, while
on the crop patterns and cycles in the requisite to the proper operation of the
market area. property, are frequently secondary to the
principal land asset. Their value must be
5.6.1 The cash flow to agricultural based on their contribution to the total
properties is a function of both the value of the property regardless of their
production cycle followed on the property cost or other measure.
and cyclical forces such as commodity
markets. The Valuer should understand Typically, such improvements have a
the impact of these cycles on cash flows. value in use, i.e., their contributory value
The valuation of the property must be to the enterprise/entity. On those
based on the stabilised pattern of income occasions where an allocation of value
that is consistent with the production between the assets may be required, such
cycles commonly practiced in the region an allocation is not to be taken as an
in which the property is located. indication of the individual value of the
improvements as separate assets.
5.7 The Valuer of agricultural property
that has more than one physical 5.8 The requirements for valuation
component of class of agricultural use reports are addressed in the IVSC Code
must clearly state whether the value of of Conduct and IVS 3, Valuation
each component or use is its value Reporting.
contribution as part of the whole
property or its value as a separate, free-
standing component.
Reviewing Valuations
1.2.1 A valuation review may call for 1.3.4.2 It is necessary to test whether
input from experts with specialist Valuers have met regulatory standards and
knowledge of construction costs, property requirements within their jurisdiction.
income, legal and tax matters, or 2.0 Scope
environmental problems.
2.1 The requirements in this GN apply to
1.2.2 A valuation review provides a the development and reporting of
credibility check on the valuation under valuation reviews.
review, and tests its strength by focusing
upon 2.2 Compliance with this GN is incumbent
upon any Valuer who, in a supervisory or
1.2.2.1 The apparent adequacy and managerial capacity, signs a valuation
relevance of the data used and enquiries review, thereby accepting responsibility
for the contents of that review.
made;
3.0 Definitions
1.2.2.2 The appropriateness of the
methods and techniques employed; 3.1 Administrative (Compliance) Review.
A valuation review performed by a client
1.2.2.3 Whether the analysis, opinions,
or user of valuation service as an exercise
and conclusions are appropriate and
in due diligence when the valuation is to
reasonable; and
be used for purposes of decision-making
1.2.2.4 Whether the overall product such as underwriting, purchasing, or
presented meets or exceeds Generally selling the property. A Valuer may, on
Accepted Valuation Principles (GAVP). occasion, perform an administrative
review to assist a client with these
1.3 Valuations reviews are performed for a functions. An administrative review is also
variety of reasons, including: undertaken to ensure that a valuation
meets or exceeds the compliance
requirements or guidelines of the specific
3.5 Valuation Review. A valuation 5.1.1 identify the client and intended
assignment that covers a range of types users of the Valuation Review, the
and purposes. The principal characteristic intended use of the Review Valuer‟s
of all valuation reviews have in common is opinions and conclusions, and the
that one Valuer exercises impartial purpose of the assignment;
judgment in considering the work of
5.1.2 identify the subject property, the
another Valuer. A valuation review may
date of the valuation review, the
support the same value conclusion in the
property and ownership interest valued
valuation under review or it may result in
in the report under review, the date of
disagreement with that value conclusion.
the report under review, the effective
Valuation reviews provide a credibility
date of the opinion in the report under
check on the valuation as well as check on
review, and the Valuer(s) who
the strength of the work of the Valuer who
completed the report under review;
5.1.3 identify the scope of the review 5.3 The Review Valuer shall not
process to be performed; consider events affecting the property
or market that occurred subsequent to a
5.1.4 identify all assumptions and valuation, but only information that was
limiting conditions in the valuation readily available in the market at the
review; time of the valuation.
5.1.6 develop an opinion as to the 5.4.1 Where the Review Valuer agrees
apparent adequacy and relevance of the with the conclusions of a valuation report,
data and any adjustments; reasons for such agreement should be fully
explained and disclosed.
5.1.7 develop an opinion as to the
appropriateness of the methods and 5.4.2 Where the Review Valuer does not
techniques used and develop the reason agree with the conclusions of a valuation
for agreement or any disagreement with report, the reasons for such disagreement
the report under review; and should be fully explained and disclosed.
5.1.8 develop an opinion as to whether 5.4.3 Where the Review Valuer is not in
the analyses, opinions, and conclusions possession of all the facts and information
in the work under review are on which the Valuer relied, the Review
appropriate, reasonable, and Valuer must disclose the limitations of his
supportable. or her conclusions.
5.2 In reporting the result of a valuation 5.5 Where the scope of the work
review, the Review Valuer shall undertaken is sufficient to constitute a new
valuation, such valuation must conform to
5.2.1 state the identity of the client and the requirement of the International
intended users, the intended use of the Valuation Standards and IVSC Code of
assignment results, and the purpose of Conduct.
the assignment;
5.2.2 state the information that must be
identified in accordance with
paragraphs 5.1.1-5.1.4 above;
5.2.3 state the nature, extent, and detail
of the review process undertaken;
5.2.4 state the opinions, reasons and
conclusions required in paragraphs
5.1.5-5.1.8 above;
5.2.5 indicate whether all known
pertinent information is included; and
trade related property, and will transfer to Valuer should refer to IVA 1, Valuation
a new owner on sale. for Financial Reporting.
used in the valuation of a large-scale 5.8 TRPs are by their nature, specialized
business, to the extent that the valuation assets that are usually designed for a
of a TRP does not usually consider tax, specific use. Changes in market
depreciation, borrowing costs and circumstances, whether structural to the
capital invested in the business, the industry or due to the local competition
valuation is based on different inputs or another reason, can have a material
from those of a valuation of a sizable impact on value.
business.
5.9 It is necessary to distinguish
5.7 The valuation conclusion may need between the asset value of a Trade
to be broken down between the Related Property and the ownership
different asset components for the value of the business. In order to
purposes of financial reporting, for undertake a valuation of a TRP, a Valuer
property taxation or, when required, for will require sufficient knowledge of the
property lending purposes. specific market sector so as to be able to
judge the trading potential achievable
5.7.1 The components of TRP entity by a Reasonably Efficient Operator, as
value are typically: well as knowledge of the value of the
individual component elements.
5.7.1.1 land;
5.7.1.2 building(s);
of values to be returned (i.e., the 4.1 Mass Appraisal does not fall under the
assessments and/or indices developed in governance of national or international
Mass Appraisal assignments), the accounting standards.
administrative procedures for the
collection and delivery of valuation data, 4.2 Valuers should be aware that
the time-frames between undertaking revaluation procedures for financial
Mass Appraisals, and the processes for reporting purposes are unrelated to Mass
appeal of assessments or indices. Appraisal procedures for Ad Valorem
Property Taxation.
2.3 The scope of the completed
assignment shall be consistent with: 4.3 Legislative requirements and standards
of appraisal level and uniformity in
a) the expectations of participants in the valuations for Ad Valorem Property
market for the same or similar Taxation are likely to produce variations
valuation services; and in property values from those determined
for financial reporting purposes.
b) the requirements of IVSC Standards,
Guidance Notes and Applications for 5.0 Guidance
the same or a similar assignment.
5.1 Data Collection and System
3.0 Definitions Recording
(b) physical, legal, and economic following essential data that is specific
attributes of the properties; to Mass Appraisal reporting:
(c) time-frame of market activity; and (a) the client and other intended users;
(d) property interests reflected in the (b) the purpose and intended use of the
market. appraisal;
5.2 The Development and Maintenance (c) the scope of work necessary to
of Assessment Lists complete the assignment, including
any special limiting conditions;
5.2.1 Assessment Lists will contain
information on property ownership, (d) any extraordinary assumptions and
value definitions, details of the hypothetical conditions needed to
assessment, date of the assessment, and carry out the assignment, provided
date on which the assessment comes into these are reasonable and result in a
force. credible analysis;
5.2.2 Assessment Lists must allow for (e) the relevant basis of valuation if,
periodic adjustments or alterations to under reasonable terms and
ensure the currency and consistency of conditions, the value opinion to be
assessed values. developed is other than Market
Value;
5.3 Mass Appraisal Value Definitions
(f) the characteristics of the properties
5.3.1 Where mass appraisal is that are relevant to the purpose and
undertaken for the purpose of Ad intended use of the Mass Appraisal;
Valorem Property Taxation, value
definitions are generally mandated by (g) a reference to each individual
local statute. Specific valuation property in the Assessment List or
methodologies may be required under grouping, indicating where
different value definitions. information is stored in the property
record relating to its identity;
5.4 Standards of Appraisal Level and
Uniformity (h) the characteristics of the market
that are relevant to the purpose and
5.4.1 In the interests of assessment intended use of the Mass Appraisal
equity, standards of appraisal level (the (see para. 5.1.2).
proximity between assessments and
actual prices) and uniformity (the 5.6 Departure
statistical measure of valuation
consistency) must be observed in the 5.6.1 Departure from the instructions in
application of mass appraisal systems. this Guidance Note should only result
from required compliance with
5.5 Disclosure in Mass Appraisal statutory provisions, administrative
Assignment Reports instructions, or the agreed or amended
terms of appraisal contracts.
5.5.1 Valuers undertaking Mass
Appraisal assignments are subject to the 5.6.2 Further discussion on Departure
provisions of IVS 3, Valuation provisions is set out in section 6.8 of the
Reporting. The Valuer shall disclose the IVSC Code of Conduct and section 8.2 of
International Valuation Standard 3.
1.7.3 construction materials such as sand, intensive than the extraction of fluid
gravel, crushed stone, and dimension asset. A single person may operate oil
stone; and gas extraction by pumps or valves,
with the occasional need for well
1.7.4 Petroleum deposits including oil, maintenance or well work-over crews.
natural gas, natural gas liquids, other
gases, heavy oil, and oil sands. 1.8.4 The Petroleum Industry frequently
has more than one economical extraction
1.8 There are contrasts between the phase for crude oil. At the conclusion of
production and transportation phases of the initial (primary) extraction phase,
the Minerals and Petroleum Industries much of the initial Petroleum Reserve of
that must be understood: crude oil may remain. Secondary and/or
enhanced recovery methods are often
1.8.1 Items 1.7.1, 1.7.2 and 1.7.3 above applied to recover more oil and natural
include products of the Mineral Industry, gas. Generally, a large percent of the
which extracts valuable mineralization, initial oil in place remains in place at the
generally by mining in a surface mine conclusion of production operations.
(open pit, open-cast, open-cut, or strip
mine; a quarry used to produce 1.8.5 Another significant difference
construction material is also considered a between the Minerals and Petroleum
surface mine), or an underground mine. Industries relates to land surface
Some extraction is undertaken through requirements for processing plant and
wells, for example, sulphur extraction, infrastructure. Relatively little surface
and in situ leaching (solution mining) of area is required for oil or gas well
various salts and uranium minerals. operations. A mining operation often
Some extraction is also done by dredging requires a larger land area for stockpiles
the floors of bodies of water, such as for and disposal of waste material, as well as
gravel, mineral sands, diamonds, and an open pit if applicable.
alluvial gold. Extraction of mineral
products from water, such as halite 1.8.6 Crude oil, natural gas, and refined
(common salt) and magnesium, is also Petroleum products are more often than
part of the Mineral Industry. not transported to market or port by
pipeline. In contrast, a mined product is
1.8.2 The Minerals Industry generally has generally transported to market or port by
a planned extraction phase, though this rail or truck, resulting in differing start-up
phase is often extended through Mineral costs and environmental impacts.
Reserve additions. Once extraction is
completed, no more known economically 1.9 The Minerals and Petroleum
recoverable asset remains in place at that Industries are both major industries
time. throughout the world. Their products are
essential in all modern economies by
1.8.3 The raw materials cited in para. provision of raw and refined materials for
1.7.4 above are produced by the other downstream industries, such as
Petroleum Industry, which extracts energy generation, construction,
valuable product generally through wells manufacturing, transport and
drilled into the earth‘s crust. Some communications.
extraction is also undertaken using
mining methods, for example, open pit 1.10 Exploration of Minerals and
mining of oil sand and oil shale. The Petroleum properties is a high-risk
extraction of a solid asset is more labor activity. Considerable work and study
free of the expense of production, paid to shall be entitled to a share in the gross
someone other than the lessor, over and output.‖
above any lessor‘s Royalty.
3.14 Technical Expert in the Extractive
Philippine 3.13.1 Industries (called Technical Expert
elsewhere in this GN). A person, who is
According to RA 7942, Philippine responsible for all or part of the Technical
Mining Act of 1995, Sec. 5, 2nd Assessment that supports an Extractive
paragraph: ―A ten per centum (10%) Industry Valuation. A Technical Expert
share of all royalties and revenues to be must have appropriate experience
derived by the government from the relevant to the subject matter, and in
development and utilization of the countries where required by statute or
mineral resources within mineral regulation, must be a member or licence-
reservations as provided under this Act holder in good standing of a professional
shall accrue to the Mines and organization that has the authority to
Geosciences Bureau5 to be allotted for sanction members or licensees. An
special projects and other administrative accredited specialist may not take
expenses related to the exploration and responsibility for all or part of a
development of other mineral Technical Assessment without also being
reservations…‖ a Technical Expert.
Philippine 3.13.2 3.15 Technical Assessment in the
Extractive Industries. A technical
As cited in RA 7942, Philippine Mining document, prepared by (a) Technical
Act of 1995, Sec. 26): “Modes of Mineral Expert(s) that supports the Extractive
Agreement: For purposes of mining Industry Valuation and is appended to, or
operations a mining agreement may take forms part of, a Valuation Report.
the following forms as herein defined: a)
Mineral production sharing agreement is
an agreement where the Government
4.0 Relationship to Accounting
grants to the contractor the exclusive right Standards
to conduct mining operations within a
contract area and shares in the gross 4.1 Amongst national GAAPs there are
output. The contractor shall provide the currently several approaches to
financing, technology, management and measurement of ―Upstream Activities‖
personnel necessary for the that include exploration for, discovery of,
implementation of this agreement; b) Co- and acquisition or development of,
production agreement is an agreement Mineral or Petroleum Resources up to
between the Government and the when the Reserves are first capable of
contractor wherein the Government shall being sold or used. The extreme high-
provide inputs to the mining operations risk element in expenditure on these
other than the mineral resource; c) Joint activities has led to two main approaches
venture agreement is an agreement where to Historical Cost accounting for the
a joint-venture company is organized by Extractive Industries, those being:
the Government and the contractor with
both parties having equity shares. Aside a) all ―exploration and evaluation costs‖
from earnings in equity, the Government to be written off unless such costs are
expected to be recouped, or the
5
A line agency of the Department of Environment activities have not yet established
and Natural Resources (DENR) directly in charge whether the costs are economically
in the administration and disposition of the recoverable (i.e., adaptations of a
country’s mineral lands and mineral resources;
must be weighed and reconciled into a 5.3.1 Each Mineral deposit, Petroleum
concluding opinion of value. The accumulation and Exploration Property is
reasons for giving a higher weighting to unique. Therefore, direct comparison of
one Approach or Method over another Mineral or Petroleum natural resource
must be stated. property transaction is often difficult or
inappropriate. However, sales analysis is
5.2 Competence and Impartiality an important valuation tool. Sales
adjustment or ratio analysis can
5.2.1 Valuations prepared under this frequently be applied for indirect sales
Guidance Note shall comply with all comparison purposes. Sales analysis and
provisions of the IVSC Code of Conduct. other market analysis can often yield
market factors such as a market discount
5.2.2 To develop a Valuation of an rate, a risk factor or uncertainty factor
Extractive Industry asset or interest, the that may be used in the Income
Valuer must have competence relevant to Approach.
the subject asset or interest, or retain the
services of (an) appropriately skilled 5.3.2 For a Valuation Report to provide
Technical Expert(s). an estimate of Market Value, the
valuation analysis must be based on
5.2.3 Providing a reliable and accurate market evidence and current expectations
valuation typically requires the Valuer to and perceptions of market participants for
have specialized training, or assistance the property valued, and such market
from (a) Technical Expert(s) or other evidence must be consistently applied in
accredited specialist(s), in geology, the Valuer‘s analysis.
Resource and Reserve estimation,
engineering, and economic and 5.3.3 The method most commonly used
environmental aspects relevant to the by businesses for investment decision-
subject natural resource type and making within the Extractive Industries is
geographic setting. The defined term net present value analysis/discounted cash
Technical Expert includes ―Competent flow analysis (NPV analysis/DCF
Person‖, ―Independent Valuer‖, and analysis). The Valuer is cautioned that
similar requirements that may apply in this and other methods, such as those
some countries, if the intended use of the based on option theory, will yield other
Valuation Report is related to public than Market Value estimates of
financial reporting or other regulatory Investment Value or Value in Use, unless
purpose. great care is taken to assure that a Market
Value estimate is obtained. For the
5.2.4 The Valuer is responsible for the Valuer to report a Market Value estimate
decision to rely on a Technical resulting from such an analysis, all inputs
Assessment, data, or opinion provided and assumptions must reflect available
by other experts or specialists. This market-based evidence and current
includes responsibility for conducting expectations and perceptions of market
reasonable verification that those participants, in accordance with GN 9.
persons are appropriately qualified Any departure from the requirements and
and competent and that their work is analysis protocol of GN 9 must be
credible. specified.
the value of the sum of their parts or the status of tenements, rights and
component values. For example, the other interests;
Market Value of a real estate tract owned
in fee simple, that contains a Mineral all Mineral or Petroleum deposits
deposit, is rarely the sum of the within the boundaries of the
independent values of the Minerals, land tenements or rights;
surface, and plant, machinery and
equipment. Similar situations may often access to markets and the quality and
occur in the Petroleum Industry. quantity of product that can be sold;
5.3.7 If there is more than one estimate liabilities and financial exposures;
of the quantity and quality of
Resources and Reserves for a subject site rehabilitation, reclamation and
natural resource property, the Valuer closure costs;
shall decide which estimates it is
appropriate to disclose and discuss, any other aspect that has a material
and which estimate to use as the basis bearing on the Valuation.
in the Valuation process, and shall state
the reasons. A critique of alternative 5.4 Disclosure in Extractive Industries
estimates may be submitted with the Valuation Reports
Valuation Report.
5.4.1 The Valuation Report shall
5.3.8 The Valuer shall take account of, properly identify the property type(s),
and make reference to other matters that specific property interest(s) and related
have a material impact on the Valuation. rights being valued as specified in IVS
Dependent on the property type and 3.
rights being valued, these may include:
c) They are often irreplaceable and their and the test of authenticity. (World
economic benefits may increase over Heritage Convention, Article II, UNESCO,
time even if their physical condition 1972)
deteriorates; and
Philippine 3.9
d) It may be difficult to estimate their
Classifications of Historic Sites and
useful lives, which in some cases could
Structures
be hundreds of years.
As cited in the National Historic Act of the
The above definition is consistent with the
Philippines (Presidential Decree No. 260
description of heritage and conservation
and Presidential Decree No. 1505) and of
assets in IPSAS 17.9 (n.b., IPSAS 17 does
the Flag and Heraldic Code of the
not currently contain a formal definition of
Philippines, otherwise known as Republic
heritage assets).
Act No. 8491:
Definitions from the UNESCO Glossary
of World Heritage Terms Under existing procedures, the framework
adopted by the National Historical Institute
3.7 Cultural Heritage. Three groups of (NHI) in the classification of historic sites
assets are recognized: and structures for preservation consists
of the following:
1. Monuments: architectural works, works
of monumental sculpture and painting, 1. National Shrine – historic site or object
elements or structures of an hallowed and honored for their history
archaeological nature, inscriptions, cave or association, e.g.: Rizal Shrine-
dwellings and combinations of features, Calamba, Laguna; Rizal Shrine-Fort
which are of outstanding universal Santiago, Intramuros, Manila;
value from the point of view of history, Aguinaldo Shrine, Kawit, Cavite;
art or science; Pinaglabanan Memorial Shrine, San
Juan, Metro Manila; Quezon Memorial
2. Groups of buildings: groups of separate Shrine, Quezon City; and, Mabini
or connected buildings which, because Shrine, Tanauan, Batangas.
of their architecture, their homogeneity
or their place in the landscape, are of 2. National Monuments – objects,
outstanding universal value from the structures or sites dedicated to
point of view of history, art or science: memorialize or give reverence to a
and special historic personage or event, e.g:
Rizal National Monument, Rizal Park;
3. Sites: works of man or the combined A. Bonifacio National Monument,
works of nature and man, and areas Caloocan City.
including archaeological sites, which
are of outstanding universal value from 3. National Landmarks – sites or
the historical, aesthetic, ethnological or structures that are associated with an
anthropological point of view. event, achievement, characteristic, or
modification that makes a turning point
World Heritage Convention, Article I, or stage in Philippine history, e.g.:
UNESCO, 1972 Paoay Church Historical Landmark
[also a World Heritage Site], Ilocos
3.8 Cultural Property. Property inscribed in Norte; Miagao Church Historical
the World Heritage List after having met at Landmark [also a World Heritage Site],
least one of the cultural heritage criteria Iloilo; Barasoain Church Historical
Glossary of Terms
Guidance Notes:
Adjusted The book value that results when one or more GN6, 3.1
asset or liability amounts are added, deleted or
Book Value changed from the reported book amounts.
Auction Price The price that is the final accepted bid at a GN5, 3.1
public auction; may or may not include any fees
or commissions.
Book Value With respect to assets, the capitalized cost of an GN4, 3.1.1; GN6,
asset less accumulated depreciated, depletion or 3.3.1
amortization as it appears on the account books
of the business.
Capitalization i) At a given date, the conversion into the GN4, 3.3; GN6,
equivalent capital value of net income or a 3.7; GN12, 3.1
series of net receipts, actual or estimated,
over a period.
ii) In business valuation, the term refers to the
capital structure of a business entity.
iii) In business valuation, this term also refers
to the recognition of an expenditure as a
capital asset rather than a periodic expense.
Capitalization Any multiple or divisor used to convert income GN4, 3.4; GN6, 3.8
Factor into capital value.
Contract Rent The rent specified by a given lease arrangement; GN2, 3.1.10.2
or Passing Rent although a given contract rent may equate to the
Market Rent, in practice they may differ
substantially, particularly for older leases with
fixed rental terms.
Cost Approach A comparative approach to the value of fine art GN5, 3.4
for Valuing that considers as a substitute for the purchase of
Fine Art a given work of fine art the possibility of
creating another work of fine art that replaces
the original. The Valuer‘s estimate is based on
the reproduction or replacement cost of the
subject work of fine art, and the nature of the
replacement, i.e., whether it be new for old,
indemnity basis, a replica, or a facsimile.
Dairy Farms Agricultural properties used for the production GN10, 3.2
of milk from cows or for other dairy products.
These properties usually have extensive
structural improvements (barns, milking parlors,
silos) and equipment (feed bins, milking
machines). Feed may be produced on the
property, imported, or supplied by both sources.
Deed Lawful limitations, which run with the land, and Property Types,
Restrictions may affect the use, development, and 2.2.4.1
and Restrictive conveyance of ownership.
Covenants
The current cost of replacing an asset with its IVA1, 3.1; IVA3,
modern equivalent asset less deductions for 3.1; GN8, 3.1
physical deterioration and all relevant forms of
obsolescence and optimization.
Desk Review A valuation review that is limited to the data GN11, 3.4
presented in the report, which may or may not
be independently confirmed. Generally
performed using a checklist of items. The
reviewer checks for the accuracy of calculations,
the reasonableness of data, the appropriateness
of methodology, and compliance with client
guidelines, regulatory requirements, and
professional standards.
Discount Rate A rate of return used to convert a monetary sum, GN9, 3.1
payable or receivable in the future, into present
value. Theoretically it should reflect the
opportunity cost of a capital, i.e., the rate of
return the capital can earn if put to other uses
having similar risk.
users;
or
ii) the number of production or similar units
expected to be obtained from the asset by
one or more users.
External A Valuer who, together with any associates, has Code of Conduct,
Valuer no material links with the client, an agent acting 3.5
on behalf of a client, or the subject of the
assignment.
Fair Value The amount for which an asset could be IVS2, 3.2; GN3, 3.1
exchanged between knowledgeable, willing
parties in an arm‘s-length transaction.
Fair Value Less The amount obtainable from the sale of an asset IAS 36, 6
Costs to Sell or cash-generating unit in arm‘s-length
transaction between knowledgeable, willing
parties, less the costs of disposal.
Finance Lease A lease that transfers substantially all the risks IAS17, 4
and rewards incident to ownership of an asset.
Title may or may eventually be transferred.
a) cash;
b) an equity instrument of another entity;
c) a contractual right:
i) to receive cash or another financial asset
from another entity; or
ii) to exchange financial instruments with
another entity under conditions that are
potentially favorable to the entity; or
d) a contract that will or may be settled in the
entity‘s own equity instruments and is:
i) a non-derivative for which the entity is
or may be obliged to receive a variable
number of the entity‘s own equity
instruments; or
ii) a derivative that will or may be settled
other than by the exchange of a fixed
amount of cash or another financial asset
for a fixed number of the entity‘s own
equity instruments. For this purpose the
entity‘s own equity instruments do not
include instruments that are themselves
contracts for the future receipt or
delivery of the entity‘s own equity
instruments.
Financial interests result from the legal division Property Types, 5.1
of ownership interests in businesses and real
property (e.g., partnerships, syndications,
corporations, cotenancies, joint ventures), from
the contractual grant of an option to buy or sell
property (e.g., realty, stocks, or other financial
instruments) at a stated price within a specified
period, or from the creation of investment
instruments secured by pooled real estate assets.
simple estate.
Freehold Has the same meaning as leased fee interest, GN2, 3.1.2
subject to representing the ownership interest of a lessor
Lease Interest/s owning estate that is subject to (a) lease(s) to
others.
Going Concern The entity is normally viewed as a going IAS Framework 23;
concern, that is, as continuing in operation for IAS 1, 23-24
the foreseeable future. It is assumed that the
entity has neither the intention nor the necessity
of liquidation or of curtailing materially the
scale of its operations.
Goods and In certain countries, the term used for Property Types,
Chattels identifiable, portable, and tangible objects 3.2.1; GN 5, 3.7
Personal considered by the general public to be personal
property.
Ground Lease Usually long-term lease or land with the lessee GN2, 3.1.3
permitted to improve or build on the land and to
enjoy those benefits for the term of the lease.
Hammer Price The accepted and announced bid, exclusive of GN5, 3.8
any fees or commissions and, therefore, not
necessarily the purchase price.
21.
Intangible The rights and privileges granted to the owner of GN4, 3.15
Property intangible assets.
Internal Rate The discount rate that equates the present value GN9, 3.4
of Return of the net cash flows of a project with the
(IRR) present value of the capital investment. It is the
rate at which the Net Present Value (NPV)
equals zero. The IRR reflects both the return on
the invested capital and the return of the original
investment, which are basic considerations of
potential investors. Therefore, deriving the IRR
from analysis of market transactions of similar
properties having comparable income patterns is
a proper method for developing market discount
rates for use in valuations to arrive at Market
Value.
Internal Valuer A Valuer who is in the employ of either the Code of Conduct,
entity that owns the assets or the accounting firm 3.4
responsible for preparing the entity‘s financial
records and/or reports. An Internal Valuer is
generally capable of meeting all the
requirements of independence and professional
objectivity required under the Code of Conduct,
but for reasons or public presentation and
regulation may not always be acceptable to fill
the role of Independent Valuer in certain types
of assignments.
Invested The sum of the debt and equity in a business on GN6, 3.23
Capital a long-term basis.
Irrigated Land Lands used to produce crops or forage for GN10, 3.4
livestock and which require the application of
water other than that from natural rainfall, are
called irrigated crop(ping) farms or irrigated
grazing land. Properties that lack a water source
other than natural rainfall are referred to as dry
land agricultural properties.
Joint Venture A combination of two or more entities that join Property Types,
to undertake a specific project; differs from a 5.1.2.2
partnership in that it is limited in duration and
project specific.
Lease Fee The ownership interest that the landlord or Property Types,
Estate lessor maintains in a property under a lease with 2.2.3
the rights of use and occupancy being conveyed
or granted to a tenant or lessee.
Legal Estates Rights or interests in real property derive from Property Types,
legal estates; legal estates are defined by the 2.2.1
laws of the country in which they exist, and are
usually subject to outside limitations imposed by
the country, e.g., taxation, compulsory
Legal Life The life of the intangible asset allowed by law GN4, 3.16;
(i.e., the period of legal or contractual protection 5.8.2.1.4.2
of the intangible asset).
Lessor Interest The interest held by the lessor to any of the GN2, 3.1.8
circumstances set out in (in the provisions of) a
Freehold subject to Lease Interest/s, a Headlease
or Master Lease, or a Headleasehold Interest.
Market Rent The estimated amount for which a property, or GN2, 3.10.1
space within a property, should lease on the date
of valuation between a willing lessor and a
willing lessee on appropriate terms in an arm‘s-
length transaction, after proper marketing
wherein the parties had each acted
knowledgeably, prudently and without
compulsion. Whenever Market Rent is
provided, the ―appropriate lease terms‖ which it
reflects should also be stated.
Market Value The estimated amount for which a property IVS1, 3.1
should exchange on the date of valuation
between a willing buyer and a willing seller in
an arm‘s-length transaction after proper
That portion of the profit and loss and net assets IAS27, 4; IFRS 3,
of a subsidiary attributable to equity interests A
that are not owned, directly or indirectly through
subsidiaries, by the parent.
Commonwealth usage.
Net Present The measure of the differences between the GN9, 3.6
Value (NPV) discounted revenues, or inflows, and the costs,
or outflows, in a discounted cash flow analysis.
Optimization The process by which a least cost replacement IVA3, 3.4; GN8,
option is determined for the remaining service 3.4
potential of an asset. It is a process of adjusting
the replacement cost to reflect that an asset may
be technically obsolete or over-engineered, or
the asset may have a greater capacity than that
required. Hence, optimization minimizes, rather
than maximizes, a resulting valuation where
alternative lower cost replacement options are
available.
Perennial Crops grown from plantings that have a life GN10, 3.6
Plantings extending beyond one year or one crop cycle.
Examples are vineyards and orchards. These
types of properties can have significant capital
investment in the plantings, which represent a
depreciable asset. Also see forestry/timberland.
Personal The value of profit generated over and above GN4, 3.12.2; GN6,
Goodwill market expectations, which would be 3.20.2; GN12, 3.3.2
Plant, Tangible assets, other than realty, that: GN3, 3.3; GN5,
Machinery and
Equipment a) are held by an entity for use in the 3.15; GN8, 3.5
production or supply of goods or services,
for rental to others, or for administrative
purposes; and
b) are expected to be used over a period of
time.
Industries.
Principle of A prudent person will not pay more for a good Concepts
Substitution or service than the cost of acquiring an equally Fundamental to
satisfactory substitute good or service, in the Generally Accepted
absence of the complicating factors of time, Valuation
greater risk, or inconvenience. The lowest cost Principles, 9.2
of the best alternative, whether a substitute or
the original, tends to establish Market Value.
Property The rights that are related to the ownership of GN1, 3.7
Rights the real estate. These include the right to
develop or not develop the land, to lease it to
others, to sell it, to give away, to farm it, to mine
it, to alter its topography, to subdivide it, to
assemble it, to use it for waste disposal, or to
choose to exercise none of these rights. The
combination of property rights is sometimes
referred to as the bundle of rights. Property
rights are typically subject to public and private
restrictions such as easements, rights of way,
specified development density, zoning and other
restrictions that may encumber the property.
Rate of Return An amount of income (loss) and/or change in GN4, 3.19; GN6,
value realized or anticipated on an investment, 3.34
expressed as a percentage of that investment.
Real Estate Land and all things that are a natural part of the GN1, 3.8
land, e.g., trees and minerals, as well as things
that are attached to the land by people, e.g.,
buildings and site improvements. All permanent
building attachments such as plumbing, heating
and cooling systems; electrical wiring; and built-
in items like elevators, or lifts, are also part of
real estate. Real estate includes all attachments,
both below and above the ground.
Real Property All the rights, interests, and benefits related to GN1, 3.9
the ownership of real estate. Real property is a
legal concept distinct from real estate, which is a
physical asset. There may also be potential
limitations upon ownership rights to real
property.
The current cost of a similar new item having GN4, 3.20; GN6,
the nearest equivalent utility as the item being 3.35
appraised.
Report Date The date of valuation report. May be the same GN4, 3.21; GN6,
or different from the valuation date. 3.36
Sale and A simultaneous sale of real estate and lease of GN2, 3.1.11
Leaseback the same property to the seller. The buyer
becomes the lessor, or landlord, and the seller
becomes the lessee, or tenant. Because there
may be unique circumstances or relationships
between the parties, sale and leaseback
transactions may or may not involve typical
market terms.
Salvage Value The value of an asset estimated with regard to IVS2, 6.9.3
the specific circumstances under which the asset
is sold. Salvage value describes the value of an
asset that has reached the end of its economic
life for the purpose it was made. The asset may
still have value for an alternative use or for
recycling.
Specialized A property that is rarely if ever sold in the IVA1, 3.4; IVA2,
Property market, except by way of sale of the business or 3.3; GN8, 3.7
entity of which it is part, due to uniqueness
arising from its specialized nature and design, its
configuration, size, location, or otherwise.
Special Value An amount above the Market Value that reflects IVS 2, 3.5
particular attributes of an asset that are only of
value to a Special Purchaser.
Specifications The first step in the Valuation Process, which IVS3, 3.4
for the establishes the context and scope/extent of the
Valuation assignment and resolves any ambiguity
Assignment involving the valuation issue or problem. A
Valuer ensures that the analyses, information
and conclusions presented in the report fit the
specifications for the assignment. The
specifications for the value assignment include
the following seven elements:
Trade Related Certain classes of real property, which are IVA2, 3.4; GN12,
Property designed for a specific types of business and that 3.5
are normally bought and sold in the market,
having regard to their trading potential.
Transferable That intangible asset that arises as a result of GN4, 3.12.3; GN6,
Goodwill property-specific name and reputation, customer 3.20.3; GN12, 3.3.3
patronage, location, products and similar factors,
which generate economic benefits. It is inherent
to the trade related property, and will transfer to
Turnover Rent Any form of lease rental arrangement in which GN2, 3.1.10.3
or the lessor receives a form of rental that is based
Participation upon the earnings of the lessee. Percentage rent
Rent is an example of a turnover rent.
Valuation A document that records the instructions for the IVS3, 3.5
Report assignment, the basis and purpose of the
valuation, and the results of the analysis that led
to the opinion of value. A Valuation Report
may also explain the analytical processes
undertaken in carrying out the valuation, and
present meaningful information used in the
analysis. Valuation Reports can be either oral or
written. The type, content and length of a report
vary according to the intended user, legal
requirements, the property type, and the nature
and complexity of the assignment.
Value in Use i) The present value of estimated future cash IFRS5, Appendix A
flows expected to arise from the continuing
use of an asset and from its disposal at the
end of its useful life.
ii) The present value of the future cash flows IAS16, 6
expected to be derived from an asset or
cash-generating unit.
It should be noted that the above definitions,
which apply to financial reporting, consider the
value of an asset at the end of its useful life.
This meaning differs from the way the term is
commonly used in valuation practice.
Classified Structures and sites not falling under the above GN15
five categories and marked are listed as
Classified and recorded in the NHI's National
Registry of Historic Structures. e.g.: All
Philippine colonial churches which are more
than 50 years old, with or without the official
historical marker of the National Historical
Institute, by virtue of NHI Board Resolution No.
3, s.1991.
Scrap Value The value that the basic recoverable materials PVS-IV2
(usually metals) of a physical property would
have as junk if it were completely broken up or
too badly deteriorated to serve its normal
purpose; the value of an asset at the end of its
physical life.
Private Appraisers
Marissa Y. Benitez Assistant Director, Colliers International Philippines, Inc.
Rafael M. Fajardo President, Philippine Association of Realty Appraisers
(PARA)
Federico C. Cuervo President & CEO, Cuervo Valuers and Advisory, Inc.
Rodolfo D. Leonen Treasurer, Institute of Philippine Real Estate Appraisers
(IPREA)
Filipina L. Tuazon Executive Vice President, Asian Appraisal, Inc.
Domingo D. De Vera Director, Philippine Associations of Realtors & Brokers
(PAREB)
Private Accountants
Atty. Francisco B. Gonzales Executive Director, Philippine Institute of Certified Public
Accountants (PICPA)
Academe
Cesar Z. Luna Assistant Professor, University of the Philippines -
Open University
Government Banks
Ricardo H. Domingo Assistant Manager, Asset Valuation Department -
Bangko Sentral ng Pilipinas
National Government Agencies
Engr. Jose A. Damole State Auditor, Technical Services/Management Services
Sector - Commission on Audit (COA)
Belinda I. Fajardo OIC - Director, Environmental and Social Services Office,
Department of Public Works & Highways (DPWH)
Iluminada V. Lucio Chief, Asset Valuation Division - Bureau of Internal
Revenue (BIR)
Eduardo L. Del Rosario Regional Director, Bureau of Local Government Finance -
Region IV-A
Assessors
Soledad E. Samonte City Assessor,Paranaque City Assessors Office;
President, Association of Treasurers and Assessors of
Metro Manila (ASTRAMM)
Consolacion R. Viray Municipal Assessor, Province of Rizal Assessors Office;
President, Rizal Association of Assessing Officers
LAMP2 COMPONENT 4 TECHNICAL ADVISERS