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PHILIPPINE VALUATION STANDARDS
1st Edition, 2009
Bureau of Local Government Finance

DEPARTMENT OF FINANCE
Message
The development and publication of the Philippine Valuation Standards represents a
major milestone in the Philippine land reform program. Through its Second Land
Administration and Management Project (LAMP2) Government has made a longterm 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 will help us to meet the programs 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 units 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.
I also recognize that while this publication represents a noteworthy achievement, it is
not the end of the process. The economic, financial, and social environment is a
dynamic one which requires an equally dynamic response. The valuation profession
within the Philippines must be ready to respond to changes both internally within the
country and externally as part of the global community. Under the land reform
program it is intended to establish a National Valuation Authority that will assume
responsibility for the adoption and future maintenance of valuation standards for the
profession as a whole. Therefore, I not only view with pride our achievement in
publishing these first Philippine Valuation Standards, but also look forward to future
editions responding to future requirements and which will continue to reflect
international best practice.
MARGARITO B. TEVES
Secretary
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Message
It is with great pleasure that I am able to introduce this first edition of the Philippine
Valuation Standards. 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. This publication represents the
end product of a process of intensive technical development and review and wideranging 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.
MA. PRESENTACION R. MONTESA

Executive Director
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Republic of the Philippines
DEPARTMENT OF FINANCE
Roxas Boulevard Corner Pablo Ocampo, Sr. Street
Manila 1004
DEPARTMENT ORDER NO. _________
SUBJECT:
Prescribing the Adoption of the Philippine Valuation Standards.
TO:
All Regional Directors of the Bureau of Local Government

Finance, Provincial, City and Municipal Assessors and others
concerned.
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 interAgency 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 broadbased group of stakeholders, through a series of Technical Working Groups
and Exposure Workshops, has developed a set of valuation standards known
as the Philippine Valuation Standards which are harmonized with
International Valuation Standards and international best practices.
NOW THEREFORE, the following are hereby issued:

Section 1. The Philippine Valuation Standards shall be adopted by all Local
Government Units through their Provincial, City and Municipal Assessors
undertaking property valuation;
Section 2. The Philippine Valuation Standards shall be adopted as a
complement to the Local Assessment Regulations No. 1-04, Manual on Real
Property Appraisal and Assessment Operations, and other issuances by the
Department;
Section 3. For purposes of valuation relative to annual 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;
Section 4. All Department Orders or parts thereof that are inconsistent with
this Order are hereby repealed, modified or revoked accordingly;
Section 5. Accordingly, Regional Directors, Provincial, City and Municipal
Assessors, and others concerned, are hereby enjoined to properly, efficiently,
and strictly implement the provisions of the Philippine Valuation Standards
in their respective jurisdictions.
MARGARITO B. TEVES
Secretary
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Contents
Introduction to Philippine Valuation Standards .... 1
Introduction to International Valuation Standards .. 6
Concepts Fundamental to Generally Accepted Valuation Principles (GAVP) ......................... 13
Code of Conduct ................................................................................................................. 22
Property Types .................................................................................................................... 28
Introduction to PVSs 1. 2 and 3 . 38
PVS1 Market Value Basis of Valuation ............................................................................... 42
PVS2 Bases Other Than Market Value ................................................................................ 48
PVS3 Valuation Reporting .................................................................................................. 53
PVA1 Valuation for Financial Reporting ............................................................................... 58
PVA2 Valuation for Secured Lending Purposes .................................................................... 71
PVA3 Valuation of Public Sector Assets for Financial Reporting ........................................... 77
PV GN1 Real Property Valuation ......................................................................................... 88
PV GN2 Valuation of Lease Interests ................................................................................. 102
PV GN3 Valuation of Plant, Machinery and Equipment ..................................................... 107
PV GN4 Valuation of Intangible Assets .............................................................................. 115
PV GN5 Valuation of Personal Property ............................................................................ 123
PV GN6 Business Valuation ............................................................................................... 131
PV GN7 Consideration of Hazardous and Toxic Substances in Valuation ........................... 145
PV GN8 The Cost Approach for Financial Reporting (DRC) .............................................. 151
PV GN9 Discounted Cash Flow (DCF) Analysis for Market Valuations and Investment
Analyses ............................................................................................................................ 156
PV GN10 Valuation of Agricultural Properties .................................................................... 162
PV GN11 Reviewing Valuations.......................................................................................... 167
PV GN12 Valuation of Trade Related Property ................................................................... 170
PV GN13 Mass Appraisal for Property Taxation ................................................................. 173
PV GN14 Valuation of Properties in the Extractive Industries ............................................. 177
PV GN15 The Valuation of Historic Property ...................................................................... 190
Glossary of Terms.............................................................................................................. 196
Supplementary Philippine Glossary ..................................................................................... 260
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Philippine Valuation Standards
Introduction
Background and Context
The publication of these Philippine Valuation Standards 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 Land Administration and Management Project (LAMP) established in 2001, is
spearheading the Governments land valuation reform program, in partnership with
the Australian Government (which provides technical assistance) and the World Bank
(which provides financial support).
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
Introduction to Philippine Valuation Standards
concerning the valuation of real 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.
Objectives and Purpose of the 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

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 threestage 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 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, 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 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
Philippine Valuation Standard 1 (PVS1) and also IVS1. Similarly the Guidance Notes
are referred to as PV GN1 and also IV GN1, etc.
The resultant Philippine Valuation Standards 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 conform with IVS and
represent current international best practice.
Copyright
These Philippine Valuation Standards 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:
Copyright 2009 by the International Valuation Standards Council.

All rights reserved, subject to permission having been granted to the
Department of Finance to reproduce the 8th edition of the
International Valuation Standards (2007) within the national
Philippine Valuation Standards.
No responsibility is accepted by the IVSC for the accuracy of
information contained in the text as republished, the English version
of the IVSC Standards as published by the IVSC from time to time
being the only official version of the IVSC Standards.
The full text of the official version may be obtained from the IVSC
International Headquarters, 12 Great George Street, London SW1P
3AD, UK. http://www.ivsc.org
Scope and Application of Philippine Valuation Standards

These valuation standards comprise a series of recognized concepts and principles,
internationally accepted definitions and guidance notes, and best practice in the
procurement, undertaking and reporting of valuations. Although the individual
standards, applications and guidance notes were developed as 24 separate sections,
the three principal elements of the Philippine Valuation Standards, that is, the three
core Standards, Applications and Guidance Notes are a component part of the whole
and each has equal weight. Therefore, all valuations prepared in compliance with
these standards must conform to the principles and procedures contained in the entire
document. Together they constitute an umbrella or framework for those involved
in undertaking, procuring or using valuations in the Philippines. They are not intended
to describe different valuation techniques in detail or prescribe specific methods of
valuation for different purposes for these reference must be made to appropriate
technical text books, training materials and educational courses.
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 Units 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 accordance with the requirements proscribed by statute or legislation.
The standards recognize and provide for such statutory valuations notwithstanding
that the required valuation methodology may produce results which differ from
Market Value as defined in the standards, or as required for financial reporting or

accounting purposes. Despite this provision, valuers undertaking valuations for real
property tax purposes should not depart from the generality of the standards with
regard to generally accepted valuation concepts and principles and the code of
conduct.
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.
Future Maintenance of the Standards

Amendments and updates to this edition of the Philippine Valuation Standards 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.
The International Valuation Standards Committee

Introduction
Rapid economic changes taking place in the 1970s served to enhance the recognition
given by market participants to the importance of professional property valuations.
The quickening pace in the globalisation of investment markets further underscored
the need for internationally accepted standards for reporting the value of property. It
became obvious that without international valuation standards there was considerable
potential for confusion. Differences of viewpoints among national professional
valuation bodies might lead to unintentional misunderstandings. In response to this
situation, members of a technical committee of the Royal Institution of Chartered
Surveyors (RICS) and representatives of U.S. appraisal organizations began a
dialogue in the late 1970s, which led to the founding of The International Assets
Valuation Standards Committee (TIAVSC) in 1981. The Committee changed its
name in 1994 to the International Valuations Standards Committee (IVSC). The
objectives of the Committee are twofold:
To formulate and publish, in the public interest, valuation Standards for

property valuation and to promote their worldwide acceptance; and
To harmonise Standards among the worlds States1 and to identify and make
disclosure of differences in statements and/or applications of Standards as they
occur.
The IVSC has long recognised 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 recognised in
accounting and other reporting standards, and that Valuers recognise what is needed
from them under standards of other disciplines.
In 2003, the IVSC became an incorporated association, comprising professional
valuation associations from around the world, and bound by Articles of Incorporation.
Throughout this document, the world State conveys the same meaning as it is used by the United
Nations, which recognises and refers to its member States, i.e., politically organised 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
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.
Membership and Organisation

The International Valuation Standards Committee has become a truly international
body in terms of both its membership and mission. The Committee, which was
founded with a membership of twenty national associations, has grown by the year
2007 to include associations with member or observer status representing 52
countries. Member associations in these States subscribe to IVSC objectives
concerning valuation and must have a sufficient number of their members capable of
conducting valuations that comply with Standards. Member associations support the
Standards and Guidance Notes published by IVSC and endeavor to secure recognition
of the Standards where appropriate in their respective States.
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 recognises that Valuers must act legally
and comply with the laws and regulations of the States in which they practise.
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 Organisation
(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 Organisations for Economic Cooperation and Development (OECD), the
World Bank, the International Monetary Fund (IMF), the World Trade Organisation
(WTO), the Commission of the European Union, and the Bank for International
Settlements (BIS), and the International Organisation 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 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 IVSCs international headquarters are in London.
12 Great George Street
London
United Kingdom SWIP 3AD
Telephone: 44 1442 879306
Facsimile: 44 1442 879306
The International Valuation Standards

Objectives and Scope
The development of the International Valuation Standards (IVS) has been guided by
three principal objectives:
To facilitate cross-border transactions and contribute to the viability of

international property markets by promoting transparency in financial
reporting as well as the reliability of valuations performed to secure loans and
mortgages, for transactions involving transfers of ownership, and for
settlements in litigation or tax matters;
To serve as a professional benchmark, or beacon, for Valuers around the

world, thereby enabling them to respond to the demands of international
property markets for reliable valuations and to meet the financial reporting
requirements of the global business community; and
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.
The International Valuation Standards represent accepted, or best, practice in the
Valuation profession, also known as Generally Accepted Valuation Principles
(GAVP). Valuer compliance with the IVSs may be voluntary, mandated by law or
regulation, or at the instruction of clients, intended users and/or national societies or
organisations. Having no enforcement power of its own, the IVSC looks to national
institutes and financial professionals and authorities to enforce standards. It is
intended that the International Valuation Standards and the national standards of
respective Member States shall be complementary and mutually supportive. The
IVSC advocates that differences between statements and/or applications of national
and International Valuation Standards be disclosed.
Detailed examination of methodology and its application to specific property types or

markets is the province of specialist education and literature. For this reason, the
IVSC encourages all professional Valuers to avail themselves of continuing education
programs throughout their careers. The International Valuation Standards prescribe
what Valuers do rather than explain how specific procedures or methodologies are
applied. The IVS recognise that every application is tied in a specific valuation
problem, the solution of which depends on the Valuers ability to select relevant
techniques and exercise appropriate judgment.
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.
Organisation of the International Standards

Various valuation principles and techniques are understood within the valuation
profession and are well established throughout the global business community. The
abbreviated discussions of such principles and techniques included in the Standards,
Applications, and Guidance Notes should not be considered exhaustive. Therefore, it
is important to the understanding and use of these Standards that, although the
individual Standards, Applications, or Guidance Notes may be published as separate
sections, each is a component part of the entirety. Thus, definitions, preface
statements, valuation concepts and principles, and other common elements are to
be understood as pertaining to each component. Although an attempt has been
made to develop each part of the Standards document as a self-contained item, the
requirements of the IVSC Code of Conduct and IVS 3, Valuation Reporting, apply to
all elements. Thus, the reader will benefit most from reading the entire document.
Extensive cross-referencing facilitates the task of tracing related areas throughout the
text. The Standards, Applications, and Guidance Notes include both paragraphs
in bold plain type and bold type, which have equal authority. Paragraphs in
bold type indicate the main principles. Technical Papers published on the IVSC
website supplement the Standards, Applications, and Guidance Notes but are not
considered as integral to the Standards document.
Structure of
Commentary
Standards,
Applications,
Guidance
Notes,
and
The International Valuation Standards Committee (IVSC) recognises the complexity

of professional valuation procedures, the diversity of property situations, the difficulty
other professional disciplines may have in interpreting valuation activities, problems
in the usage and translation of terminology, and the paramount need of the public for
well-founded professional valuations developed in accordance with generally
accepted standards. Accordingly, the content and format of these Standards have
been designed with these issues in mind and an understanding of the structure of the
10
Standards is, therefore, important to their application.

Standards follows:
The organisation of the
1. Introduction - The introduction offers an overview of the origins of the

International Valuation Standards, the work of the International Valuations
Committee, and the general context of the Standards. The organisation of the
Standards is explained and their intended applicability is discussed.
2. Concepts Fundamental to Generally Accepted Valuation Principles - A
full discussion of the body of knowledge constituting valuation methods and
practices is beyond the scope of these Standards. To foster understanding among
professional disciplines and to alleviate difficulties arising from language barriers,
this section aims at providing commentary on basic, legal, economic, and
conceptual frameworks upon which the valuation discipline and its Standards are
based.
Comprehension of these concepts and principles is crucial to
understanding valuation and to the application of these Standards.
3. Code of Conduct A code of conduct addresses the ethical and competency
requirements of Valuers in professional practice. Ethical conduct serves the
public interest, sustains the trust financial institutions necessarily place in the
services of Valuers, and works to the benefit of the valuation profession itself. It
ensure that the results of valuations are reliable, consistent, and unbiased.
4. Property Types Real property, the foundation of any system of wealth, is
distinguished from other categories of property such as personal property,
businesses, and financial interests. These four property types and the distinctions
between them are discussed.
5. Introduction to the Standards All valuations may be classified under two
categories: those prepared on the Basis of Market Value and those prepared on
Bases other than Market Value. After the valuation is completed, the Valuer has
to clearly explain the results and to communicate how those results were obtained.
This introductory section discusses differences between Market and Non-Market
bases of value and the importance of clearly and informatively communicating the
valuation.
6. Standards within the organisation of Standards, Applications, and Guidance
Notes, the Standards are considered as most fundamental and permanent. IVSC
Standards 1 and 2 deal respectively with Market Value and valuation bases other
than Market Value. Standard 3 sets forth the requirements for Valuation
Reporting. The Standards also serve as a foundation for the International
Valuation Applications (IVAs), which deal with the application of valuation for
financial reporting and lending.
7. Applications Valuations are prepared for a variety of purposes. The
application of private and public sector asset valuation to financial statements or
related accounts, and to decisions involving loan or mortgage security is
described.
11
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.
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.
12
Concepts Fundamental to Generally Accepted Valuation

Principles (GAVP)
1.0 Introduction
1.1 The experience of Valuers and dialogue
among nations through the International
Valuation Standards Committee (IVSC)
have demonstrated that, with few
exceptions, there is common worldwide
agreement regarding fundamentals that
underpin the valuation discipline. Local
laws and economic circumstances may, on
occasion, require special (and sometimes
limited) applications, but fundamentals of
valuation methods and techniques are
generally similar throughout the world. It is
an objective of the International Valuation
Standards Committee to avow and promote
these fundamentals.
1.2 IVSCs Standards, Applications and
Guidance Notes (GNs) are based on these
fundamentals, but it is the position of the
Committee that it is inappropriate to
attempt to articulate all appropriate
fundamentals within the body of each
Standard. Instead, this section supplements
each Standard and provides an overview of
fundamentals that are particularly important
to understanding the valuation profession
and to applying the Standards.
2.0 Land and Property Concepts

2.1 Land is essential to our lives and our
existence. Its importance brings land into
focus for consideration by lawyers,
geographers, sociologists, and economists.
As each of these disciplines relates to land
and to uses of land, the societies and
nations of our world are affected.
2.2 Valuation of land as if vacant or of land
and improvements to or on the land, is an
economic concept. Whether vacant or
improved, land is also referred to as real
estate. Value is created by real estates
utility, or capacity to satisfy the needs and

wants of human societies. Contributing to
value are real estates general uniqueness,
durability, fixity of location, relatively
limited supply, and the specific utility of a
given site.
2.3 Property
is
a
legal
concept
encompassing all the interests, rights and
benefits related to ownership. Property
consists of the rights of ownership, which
entitle the owner to a specific interest or
interests in what is owned. To distinguish
between real estate, which is a physical
entity, and its ownership, which is a legal
concept, the ownership of real estate is
called real property. The combination of
rights associated with the ownership of real
property is, in some countries, referred to as
the bundle of rights. The bundle-of-rights
concept likens property ownership to a
bundle of sticks with each stick
representing a distinct and separate right of
the property owner, e.g., the right to use, to
sell, to lease, to give away, or to choose to
exercise all or none of these rights.
2.4 Ownership of an interest in items other
than real estate is referred to as personal
property. The word property, used without
further qualification or identification, may
refer to real property, personal property, or
other types of property such as businesses
and financial interests, or a combination
thereof. (See Section 3 below and Property
Types).
2.5 Property Valuers, Asset Valuers, and
Appraisers are those who deal with the
special discipline of economics associated
with preparing and reporting valuations. As
professionals, Valuers must meet rigorous
tests of education, training, competence,
and demonstrated skills. They must also
exhibit and maintain a Code of Conduct
(ethics and competency) and Standards of
Concepts Fundamental to Generally Accepted Valuation Principles
13
professional practice and follow Generally

Accepted Valuation Principles (GAVP).
2.6 Price changes over time result from
specific and general effects of economic
and social forces. General forces may cause
changes in price levels and in the relative
purchasing power of money. Operating on
their own momentum, specific forces such
as technological change may generate shifts
in supply and demand, and can create
significant price changes.
2.7 Many recognised principles are applied
in valuing real estate. They include the
principles of supply and demand;
competition; substitution; anticipation, or
expectation; change; and others. Common
to all these principles is their direct or
indirect effect on the degree of utility and
productivity of a property. Consequently, it
may be stated that the utility of real estate
reflects the combined influence of all
market forces that come to bear upon the
value of property.
3.0 Real Estate, Property, and

Asset Concepts
3.1 Real estate is defined as the physical
land and those human-made items, which
attach to the land. It is the physical, tangible
thing which can be seen and touched,
together with all additions on, above, or
below the ground. Local laws within each
country
prescribe
the
basis
for
distinguishing real estate from personal
property. Although these legal concepts
may not be recognised in all countries, they
are adopted here to distinguish important
terms and concepts.
3.2 Real property includes all the rights,
interests, and benefits related to the
ownership of real estate. An interest or
interests in real property is normally
demonstrated by some evidence of
ownership (e.g., a title deed) separate from
the physical real estate. Real property is a
non-physical concept.
3.3 Personal property includes interests in

tangible and intangible items which are not
real estate. Items of tangible personal
property are not permanently affixed to real
estate and are generally characterised by
their moveability.
3.4 In accounting terminology, assets are
resources controlled by an entity as a result
of past events and from which some future
economic benefits are expected to flow to
the entity. Ownership of an asset is itself an
intangible. However, the asset owned may
be either tangible or intangible.
3.4.1 The future
economic
benefits
embodied in an asset may flow to the entity
in a number of ways. For example, an asset
may be: (a) used singly or in combination
with other assets in the production of goods
or services to be sold by the entity; (b)
exchanged for other assets; (c) used to settle
a liability; or (d) distributed to the owners
of the entity. (International Financial
Reporting Standards [IFRSs], Framework,
55)
3.4.2 An asset is recognised in the balance
sheet when it is probable that the future
economic benefits will flow to the entity
and the asset has a cost or value that can be
measured reliably. (IFRSs, Framework, 89)
3.5 International
Financial
Reporting
Standards distinguish among tangible and
intangible assets. Of particular importance
are the following terms and concepts:
3.5.1 Current assets. Assets not intended
for use on a continuing basis in the
activities of an entity. Examples include
stocks, obligations owed to the entity, shortterm investments, and cash in bank and in
hand. In certain circumstances real estate,
normally treated as a fixed asset, may be
treated as a current asset. Examples include
land or improved real estate held in
inventory for sale.
3.5.2 Non-current assets (fixed, or longterm, assets). These are tangible and
14
intangible assets which fall into

following two broad categories:
the
3.5.2.1 Property, plant, machinery and

equipment. Assets intended for use on a
continuing basis in the activities of an entity
including land and buildings; plant and
equipment; and other categories of assets,
suitably identified; less accumulated
depreciation. Property, plant, machinery
and equipment are tangible or physical
assets.
Philippine 3.5.2.1.1
In the Philippines, the term Plant is not in
general use. Machinery and Equipment is
the collective term adopted by Valuers,
while Plant and Equipment is adopted by
Accountants. Reference to Plant and
Equipment in the IVS is therefore extended
to Plant, Machinery and Equipment.
3.5.2.2 Other non-current assets. Assets not
intended for use on a continuing basis in the
activities of an entity, but expected to be
held in long-term ownership including
long-term
investments;
long-term
receivables; goodwill; expenditures carried
forward; and patents, trademarks, and
similar assets. This asset category includes
both tangible, or physical assets and
intangible,
or
non-physical
assets.
Intangible assets are considered items of
intangible personal property, and may
include management and marketing skill,
credit rating, goodwill, and various legal
rights or instruments (patents, trademarks,
copyrights, franchises, and contracts).
3.5.3 Where either historic or current cost
accounting conventions are upheld, a
distinction is drawn between operational
and investment assets. Operational assets
are considered requisite to the operations of
the going concern or corporation.
Investment assets that are owned by a
corporation are considered extraneous to
the operational requirements of the
corporate owner.
3.6 Accounting
terminology
differs
somewhat from terms more common to
Valuers.
Within
the
classifications
discussed in para. 3, Valuers of real
property are principally involved with fixed
assets. Technically it is the ownership of the
asset, or the right of ownership, that is
valued rather than the tangible or intangible
asset itself. This concept distinguishes the
economic concept of valuing an asset
objectively based upon its ability to be
purchased and sold in a marketplace from
some subjective concept such as assuming
an intrinsic or other than Market Value
basis. The objective market concept does,
however, have special applications for
limited or non-market property valuation as
discussed in International Valuation
Standard 2.
3.7 The term depreciation is used in
different contexts in valuation and in
financial reporting. In the context of asset
valuation, depreciation, refers to the
adjustments made to the cost of reproducing
or replacing the asset to reflect physical
deterioration and functional (technical) and
external (economic) obsolescence in order
to estimate the value of the asset in a
hypothetical exchange in the market when
there is no direct sales evidence available
(see para. 9.2.1.3, Concepts Fundamental to
Generally Accepted Valuation Principles).
In financial reporting depreciation refers to
the charge made against income to reflect
the systematic allocation of the depreciable
amount of an asset over its useful life to the
entity. It is specific to the particular entity
and its utilisation of the asset, and is not
necessarily affected by the market.
4.0 Price, Cost, Market, and Value

4.1 Imprecision or vagueness of language,
particularly in an international community,
can and does lead to misinterpretations and
misunderstandings. This is particularly a
problem where words commonly used in a
language also have specific meanings
within a given discipline. That is the case
with the terms price, cost, market, and
15
value as they are used in the valuation

discipline.
receives the services as of the effective date

of valuation.
4.2 Price is a term used for the amount

asked, offered, or paid for a good or
service. Sale price is an historical fact,
whether it is publicly disclosed or kept
confidential. Because of the financial
capabilities, motivations, or special interests
of a given buyer and/or seller, the price paid
for goods or services may or may not have
any relation to the value which might be
ascribed to the goods or services by others.
Price is, however, generally an indication of
a relative value placed upon the goods or
services by the particular buyer and/or
seller under particular circumstances.
4.6 Value is therefore a hypothetical price,

and the hypothesis on which the value is
estimated is determined by the valuation
basis adopted. A Basis of Value is defined
in IVS 2 as a statement of the fundamental
measurement principles of a valuation on a
specified date. A Basis of Value defines the
nature of the hypothetical transaction, e.g.,
whether or not there is exposure to a
market, and the assumed motivation and
behaviour of the parties. A Basis of Value is
not a description of the method or approach
used to produce the estimate, and neither
does it describe the state or condition in
which the asset is assumed to be
transferred. It is of paramount importance
to the use and understanding of valuations
that the Basis of Value be clearly disclosed,
and that it is a basis that is appropriate to
the particular valuation assignment. A
change in the Basis of Value can have a
material effect on the valuation.
4.3 Cost is the price paid for goods or

services or the amount required to create or
produce the good or service. When that
good or service has been completed, its cost
is an historical fact. The price paid for a
good or service becomes its cost to the
buyer.
4.4 A market is the environment in which
goods and services trade between buyers
and sellers through a price mechanism. The
concept of a market implies that goods
and/or services may be traded among
buyers and sellers without undue restriction
on their activities. Each party will respond
to supply-demand relationships and other
price-setting factors as well as to the partys
own
capacities
and
knowledge,
understanding of the relative utility of the
goods and/or services, and individual needs
and desires. A market can be local,
regional, national, or international.
4.5 Value is an economic concept referring
to the price most likely to be concluded by
the buyers and sellers of a good or service
that is available for purchase. Value is not a
fact, but an estimate of the likely price to be
paid for goods and services at a given time
in accordance with a particular definition of
value. The economic concept of value
reflects a markets view of the benefits that
accrue to one who owns the goods or
4.7 Professional Valuers, who possess

intimate knowledge of a property market;
understand the interaction of participants in
the market; and are, thereby, able to judge
the most likely prices to be concluded
between buyers and sellers of property in
that market avoid the unqualified term
value by preceding the term with some
adjective describing the particular type of
value involved. Market Value is the most
common type of value associated with
property valuations and is discussed in
International Valuation Standard 1.
4.8 The value concept contemplates a
monetary sum associated with a transaction.
However, sale of the property valued is not
a condition requisite to estimating the price
for which property should sell if it were
sold on the date of valuation under
conditions prescribed in the definition of
Market Value.
4.9 The Market Value of real estate is a
representation of its market-recognised
16
utility rather than its purely physical status.

The utility of assets to a given entity or
individual may differ from that which
would be recognised by the market or by a
particular industry. (Refer to 5.0 below)
between a willing buyer and a willing seller

in an arms-length transaction after proper
marketing wherein the parties had each
acted knowledgeably, prudently, and
without compulsion.
4.9.1 Considerations similar to those

expressed above are applied to the valuation
of property other than real estate. Financial
reporting will require application of Market
Value methods and a clear distinction
between such methods and methods used to
estimate values other than Market Value.
5.3 It is important to stress that the

professionally derived Market Value
estimate is an objective valuation of
identified ownership rights to specific
property as of a given date. Implicit within
this definition is the concept of a general
market comprising the activity and
motivation of many participants rather than
the preconceived view or vested interest of
a particular individual. Market Value is a
market-supported estimate developed in
accordance with these Standards.
4.10 The total cost of a property includes

all direct and indirect costs of its
production. If supplemental capital costs are
incurred by a purchaser subsequent to
acquisition, they will be added to the
historical acquisition cost for cost
accounting purposes. Depending upon how
the utility of such costs is perceived by the
market, they may or may not be fully
reflected in the propertys Market Value.
4.11 A cost estimate for a property may be
based on either an estimate of reproduction
cost or replacement cost. Reproduction cost
is the cost to create a virtual replica of a
property using identical or, if identical
materials are not available, similar
materials. A replacement cost estimate
envisions a modern equivalent of
comparable utility, employing the design,
technology and materials that are currently
used in the market.
5.0 Market Value

5.1 The concept of Market Value reflects
the collective perceptions and actions of a
market and is the basis for valuing most
resources in market-based economies.
Although precise definitions may vary, the
Market Value concept is commonly
understood and applied.
5.2 Market Value is defined as:
The estimated amount for which a property
should exchange on the date of valuation
5.4 Real property is distinguished from

most goods and services because of the
relatively longer period required to market
what is a relatively illiquid commodity in
order to achieve a price that represents its
Market Value. This characteristically longer
exposure time, the absence of a spot
market (a market in which commodities
are available for immediate sale), and the
nature and diversity of properties and
property markets give rise to the need for
Professional Valuers and Valuation
Standards.
5.5 In some countries, the legal term Fair
Market Value is used synonymously with
the term Market Value. Fair Market Value
should not be confused with the accounting
term, Fair Value. (See para. 8.1 below.)
The IVSC position is that the term Market
Value never requires further qualification
and that all countries should move toward
compliance with this usage.
6.0 Highest and Best Use

6.1 Land is regarded as a permanent asset,
but improvements upon or to the land have
a finite life. Because of the immobility of
land, each real estate parcel possesses a
unique location. Lands permanence also
means that it will normally be expected to
17
outlast uses and improvements, which have

a finite life.
projects, and
situations.
6.1.1 The unique characteristics of land

determine its optimal utility. When
improved land is valued separately from
improvements to or upon the land,
economic
principles
require
that
improvements to or on the land be valued as
they contribute to or detract from the total
value of the property. Thus, the Market
Value of land based upon the highest and
best use concept reflects the utility and the
permanence of land in the context of a
market, with improvements constituting the
difference between land value alone and
total Market Value as improved.
6.6 In markets characterised by extreme

volatility or severe disequilibrium between
supply and demand, the highest and best
use of a property may be a holding for
future use. In other situations, where several
types of potential highest and best use are
identifiable, the Valuer should discuss such
alternative uses and anticipated future
income and expense levels. Where land use
and zoning are in a state of change, the
immediate highest and best use of a
property may be an interim use.
6.2 Most properties are valued as a

combination of land and improvements. In
such cases, the Valuer will normally
estimate Market Value by considering the
highest and best use of the property as
improved.
6.3 Highest and best use is defined as:
The most probable use of a property which
is physically possible, appropriately
justified, legally permissible, financially
feasible, and which results in the highest
value of the property being valued.
6.4 A use that is not legally permissible or
physically possible cannot be considered a
highest and best use. A use that is both
legally permissible and physically possible
may nevertheless require an explanation by
the Valuer justifying why that use is
reasonably probable. Once analysis
establishes that one or more uses are
reasonably probable uses, they are then
tested for financial feasibility. The use that
results in the highest value, in keeping with
the other tests, is the highest and best use.
6.5 Application of this definition permits
Valuers to assess the effects of deterioration
and obsolescence in buildings, the most
appropriate improvements for land, the
feasibility of rehabilitation and renovation
many
other
valuation
6.7 The concept of highest and best use is a

fundamental and integral part of Market
Value estimates.
7.0 Utility
7.1 The key criterion in the valuation of any
real or personal property is its utility.
Procedures employed in the valuation
process have the common objective of
defining and quantifying the degree of
utility or usefulness of the property valued.
This process calls for interpretation of the
utility concept.
7.2 Utility is a relative, or comparative
term, rather than an absolute condition. For
example, the utility of agricultural land is
ordinarily measured by its productive
capacity. Its value is a function of the
quantity and quality of produce, which the
land will yield in an agricultural sense, or of
the quantity and quality of buildings
essential to the agricultural operation. If the
land has development potential, however,
its productivity is measured by how
productively it will support a residential,
commercial, industrial, or mixed use.
Consequently, land value is established by
evaluating its utility in terms of the legal,
physical, functional, economic, and
environmental factors that govern its
productive capacity.
18
7.3 Fundamentally, property valuation is

governed by the way specific property is
used and/or how it would ordinarily be
traded in the market. For some property,
optimum utility is achieved if the property
in question is operated on an individual
basis. Other property has greater utility if
operated as part of a group of properties,
e.g., properties owned and managed by a
business entity such as a chain of multiple
retail outlets, fast food restaurants, or
hotels. Therefore, a distinction must be
made between a propertys utility viewed
individually and when considered as a part
of a group. A Valuer will regard the
property as the market views it, whether as
a discrete entity or as part of an aggregate
or portfolio. Typically, the Valuer estimates
and reports the value of the property as an
individual entity. If the value of the
property, taken as part of an aggregate or
portfolio, is other than its individual value,
such value should be considered and
reported.
Market Values in financial statements.

Where the Market Value of an asset can be
established, this value will equate to Fair
Value.
7.4 An individual property may possess an

additional, or special, value above its value
as a separate entity by reason of its physical
or functional association with an adjoining
property owned by others or its
attractiveness to a purchaser with other
special interests. The extent or amount of
such additional, or special, value is
generally reported separately from Market
Value.
8.3 Where normal market conditions are

disrupted or suspended, or where supply
and demand imbalances lead to market
prices that do not meet the Market Value
definition, the Valuer may face a difficult
valuation problem. By using the Market
Value concept and definition, and by
applying market data and reasoning to the
valuation process, Valuers ensure the
relevance and usefulness of asset values
reported in financial statements. As
availability and/or applicability of market
data decrease, the valuation assignment
may require a higher degree of professional
Valuer vigilance, experience, and judgment.
8.0 Other Important Concepts

8.1 The expression Market Value and the
term Fair Value as it commonly appears in
accounting
standards
are
generally
compatible, if not in every instance exactly
equivalent concepts. Fair Value, an
accounting concept, is defined in
International Financial Reporting Standards
and other accounting standards as the
amount for which an asset could be
exchanged, or a liability settled, between
knowledgeable, willing parties in an arms
length transaction. Fair Value is generally
used for reporting both Market and Non-
8.2 Specialised property is property that is

rarely, if ever, sold in the market except by
way of a sale of the business or entity of
which it is part, due to uniqueness arising
from its specialised nature and design, its
configuration, size, location, or otherwise.
Where there is limited or no directly
comparable market information for Valuers
to consider, the valuation process may
become more complex. However, it is the
Valuers responsibility to develop data and
reasoning from the market to support and/or
explain the value conclusion. Each of the
valuation methods may be applied, and all
applicable methods should be considered.
Where possible, the Valuer develops land
value, cost, and accumulated depreciation
estimates from market information, and
explains the basis for the value estimate.
8.4 A Valuer may be required to apply a

particular definition of Market Value to
meet legal or statutory requirements. If so
required, the Valuer must make specific
disclosure of the fact and describe the
impact of any differences upon the value
estimated. Where an assignment is
undertaken in accordance with International
Valuation Standards, the term Market Value
will always conform to the IVS definition.
19
8.5 All valuation reports should make clear

the purpose and intended use of the
valuation. In addition to other reporting
requirements, where financial reporting is
involved the report should specifically
identify the asset class into which each
asset is placed and the basis for such
placement. Each asset class should be
explicitly explained.
8.6 The estimation and reporting of
property and asset values, and related
guidance, are the scope of these
International
Valuation
Standards,
Applications, and related Guidance Notes.
How the results of valuations are to be
compiled, conveyed, and incorporated with
the findings of other professionals is of
crucial importance to Valuers. Proper
understanding of terminology is essential
for Valuers and those who read their
reports. The sound use of experience and
expertise and correct application of
methodology are also essential. These
Standards are intended to serve the common
objectives of those who prepare property
and asset valuations and those who must
rely on their results.
9.0 Valuation Approaches

9.1 In order to estimate the price implied by
the appropriate Basis of Value, the Valuer
will need to apply one or more valuation
approaches. A valuation approach or
method refers to generally accepted
analytical methodologies that are in
common use.
9.2 Market based valuations normally
employ one or more of the valuation
approaches by applying the economic
principle of substitution, using marketderived data. This principle holds that a
prudent person would not pay more for a
good or service than the cost of acquiring
an equally satisfactory substitute good or
service, in the absence of the complicating
factors of time, greater risk, or
inconvenience. The lowest cost of the best
alternative, whether a substitute or the

original, tends to establish Market Value.
9.2.1 Market based valuation approaches
include:
9.2.1.1 Sales Comparison Approach. This
comparative approach considers the sales of
similar or substitute properties and related
market data, and establishes a value
estimate
by
processes
involving
comparison. In general, a property being
valued (a subject property) is compared
with sales of similar properties that have
been transacted in the market. Listings and
offerings may also be considered.
9.2.1.2 Income Capitalisation Approach.
This comparative approach considers
income and expense data relating to the
property being valued and estimates value
through
a
capitalisation
process.
Capitalisation relates income (usually a net
income figure) and a defined value type by
converting an income amount into a value
estimate. This process may consider direct
relationships (known as capitalisation
rates), yield or discount rates (reflecting
measures of return on investment), or both.
In general, the principle of substitution
holds that the income stream which
produces the highest return commensurate
with a given level of risk leads to the most
probable value figure.
9.2.1.3 Cost Approach. This comparative
approach considers the possibility that, as
an alternative to the purchase of a given
property, one could acquire a modern
equivalent asset that would provide equal
utility. In a real estate context, this would
involve the cost of acquiring equivalent
land and constructing an equivalent new
structure.
Unless
undue
time,
inconvenience, and risk are involved, the
price that a buyer would pay for the asset
being valued would not be more than the
cost of the modern equivalent. Often the
asset being valued will be less attractive
than the cost of the modern equivalent
because of age or obsolescence. A
20
depreciation adjustment is required to the

replacement cost to reflect this. (See GN 8,
The Cost Approach for Financial
Reporting-(DRC).)
9.3 Valuations developed for purposes other
than establishing Market Value may apply
similar approaches. For example:
9.3.1 An entity may apply a cost approach
to compare the cost of other buildings with
the cost of a proposed building to the entity,
thereby ascertaining the bargain or
premium accruing a particular property at
variance with the market at large. This
application focuses on a particular property
and what may be a non-market cost.
valuation, including real property, personal

property, businesses, and financial interests.
However, valuation of different types of
property involves different sources of data
that appropriately reflect the market in
which the property (and/or service or
business) is to be valued. For example,
individual buildings are commonly sold and
valued in the relevant real estate market
whereas the values of the shares of stock in
a property company that owns a number of
buildings are reflected by pricing in the
relevant shares market.
9.3.2 An owner of land may pay a premium

price for adjacent property. In applying a
sales comparison approach to determine a
maximum price that owner is willing to pay
for adjacent land, a Valuer arrives at a
figure that may well exceed its Market
Value. Such an estimate is called Special
Value.
9.3.3 An investor may apply a rate of return
that is non-market and particular only to
that investor. In applying an income
capitalisation approach to determine the
price that investor is willing to pay for a
particular investment based on the
investors anticipated rate of return, a
Valuer arrives at an estimate of Investment
Value or Worth rather than Market Value.
9.4 Each valuation approach has alternative
methods of application. The Valuers
expertise and training, local standards,
market requirements, and available data
combine to determine which method or
methods are applied. The reason for having
alternative approaches and methods is to
provide the Valuer with a series of
analytical procedures which will ultimately
be weighed and reconciled into a final value
estimate, depending upon the particular
type of value involved.
9.5 Valuation approaches and methods are
generally common to virtually all types of
21
Code of Conduct
1.0 Introduction
It is fundamental to the operation of
International Valuation Standards that
valuations performed in compliance
therewith should be provided by honest and
competent Professional Valuers, free of bias
or self-interest, whose reports are clear, will
not mislead, and will disclose all matters
essential to the proper understanding of the
valuation. Valuers should always promote
and preserve public trust in the valuation
profession.
Philippine 1.1
Private Sector realty services practitioners
comprising real estate salesmen, real estate
brokers, real estate appraisers and real
estate consultants are currently regulated by
the National Code of Ethics for Real Estate
Service Practitioners (NCERESP) which are
complementary to this Code of Conduct.
Philippine 1.2
The Public Sector, and particularly
Assessors and their staff, must:
i)
Promote and preserve public trust
inherent in the assessment service;
ii) Maintain a high standard of honesty and
integrity and conduct their activities in a
manner not detrimental to the government,
the public and their profession; and
iii) Ensure that all of their staff, persons or
subordinates adhere to this Code of
Conduct.
2.0 Scope
2.1 Valuers comply with these Standards
either by choice or by requirement placed
upon them by law or regulation or at the
Code of Conduct
instructions of clients, intended users, and/or

national societies or organisations.
A
valuation claiming to be prepared under
International Valuation Standards binds the
Valuer to follow this Code of Conduct.
2.2 This Code does not have any formal
authority in law, neither is it intended to be
other than complementary to the rules, bylaws and regulations of national societies or
organisations controlling or monitoring the
activities of the Valuers.
2.3 Valuations prepared under these
Standards would only normally be
acceptable to end users when prepared by a
trained professional member of a recognised
national professional body that itself
enforces
standards
of
qualification,
competence, experience, ethics, and
disclosure in valuation. In those countries
where the infrastructure does not yet exist
for a trained and regulated profession of
valuation, primary responsibility lies with
the client users to satisfy themselves as to
the suitability of Valuers to undertake the
task.
3.0 Definitions
3.1 Assumptions are suppositions taken to be
true. Assumptions involve facts, conditions,
or situations affecting the subject of, or
approach to, a valuation but which may be
capable or worthy of verification. They are
matters that, once declared, are to be
accepted in understanding the valuation. All
assumptions underlying a valuation should
be reasonable.
All valuations are dependent to some degree
on adoption of assumptions. In particular,
the definition of Market Value incorporates
assumptions to ensure consistency of
approach and the Valuer may need to make
further assumptions in respect of facts which
22
cannot be known or facts which could be

determined.
3.2 Limiting Conditions are constraints

imposed on valuations.
If, in any country, there are no appropriate

academic qualifications as stated above, the
Valuer should have a sufficient level of
training and experience in the valuation and
be either:
Limiting conditions may be imposed:

by clients (e.g., where the Valuer is not
permitted to investigate fully one or more of
the significant factors likely to affect
valuation);
by the Valuer (e.g., where the client may not
publish the whole or any part of the
valuation report or valuation certificate
without the Valuers prior written approval
of the form and context in which it may
appear); or
by local statutory law.
3.3 A Valuer is a person who possesses the
necessary qualifications, ability, and
experience to execute a valuation. In some
countries, licensing is required before a
person can act as a Valuer.
The Valuer shall be a person of good repute
who:
has obtained an appropriate degree at a

recognised centre of learning, or an
equivalent academic qualification;
has suitable experience and is competent

in valuing in the market and category of
the asset;
is aware of, understands, and can

correctly employ those recognised
methods and techniques that are
necessary to produce a credible
valuation;
is a member of a recognised national

professional valuation body;
pursues a programme of professional

learning throughout his or her career;
and
Code of Conduct
follows all the requirements of this Code

of Conduct.
a member of a recognised
professional valuation body;
national
or licensed by government or appointed by

the Courts or an Authority of an equivalent
status.
In some countries, to practice as a Valuer a
licence or certification by an independent
body is required by law.
3.4 An Internal Valuer is a Valuer who is in
the employ of either the entity that owns the
assets or the accounting firm responsible for
preparing the entitys financial record and/or
reports. An Internal Valuer is generally
capable of meeting all the requirements of
independence and professional objectivity
required under this Code of Conduct, but for
reasons of public presentation and regulation
may not always be acceptable to fill the role
of independent Valuer in certain types of
assignments.
3.5 An External Valuer is a Valuer who,
together with any associates, has no material
links with the client, an agent acting on
behalf of the client, or the subject of the
assignment.
3.6 Since
all
Valuers
undertaking
assignments under International Valuation
Standards must meet the requirements of
impartiality, professional objectivity and
disclosure required under this Code of
Conduct, such Valuers should meet the
requirements for independence which may
attach to many assignments. With some
clients, and in certain countries, additional
restraints on who may undertake a valuation
for a specific purpose may be applied by
regulation or law. It is not the purpose of
23
this Code to define different degrees of

independence beyond the standard of
independence already required under this
Code. Raymond G. Libiran.
4.0 Ethics
Valuers should at all times maintain a high
standard of honesty and integrity and
conduct their activities in a manner not
detrimental to their clients, the public, their
profession, or their respective national
professional valuation body.
4.1 Integrity
4.1.1 A Valuer must not act in a manner that
is misleading or fraudulent.
4.1.2 A Valuer must not knowingly develop
and communicate a report that contains
false, inaccurate, or biased opinions and
analysis.
4.1.3 A Valuer must not contribute to, or
participate in, a valuation service that
other reasonable Valuers would not regard
to be ethical or justified.
4.1.4 A Valuer must act legally and comply
with the laws and regulations of the country
in which he or she practices or where an
assignment is undertaken.
4.1.5 A Valuer must not claim, or knowingly
let pass, erroneous interpretation of
professional qualifications that he or she
does not possess.
4.1.6 A Valuer should not knowingly use
false, misleading or exaggerated claims or
advertising in an effort to secure
assignments.
4.1.7 A Valuer shall ensure that any staff
person or subordinate assisting with the
assignment adhere to this Code of Conduct.
4.2 Conflicts of Interest
Code of Conduct
4.2.1 A Valuer must not act for two or more

parties in the same matter, except with the
written consent of those concerned.
4.2.2 A Valuer must take all reasonable
precautions to ensure that no conflicts of
duty arise between the interests of his or her
clients and those of other clients, the Valuer,
his or her firm, relatives, friends, or
associates. Potential conflicts should be
disclosed in writing before accepting
instructions. Any such conflicts of which
the Valuer subsequently becomes aware
must be disclosed immediately. If such
conflicts come to the attention of the Valuer
after completion of the valuation, disclosure
must be made within a reasonable time.
4.3 Confidentiality
4.3.1 A Valuer must at all times deal
with clients affairs with proper discretion
and confidentiality.
4.3.2 A Valuer must not disclose sensitive
factual data obtained from a client, or the
results of an assignment prepared for a
client, to anyone other than those
specifically authorised by the client except
when legally required to do so as in
situations where a Valuer must comply with
certain quasi-judicial proceedings within the
recognised national professional valuation
body of which the Valuer is a member.
4.4 Impartiality
4.4.1 A Valuer must perform an assignment
with the strictest independence, objectivity,
and
impartiality,
and
without
accommodation of personal interests.
4.4.2 A Valuer must not accept an
assignment that includes the reporting of
predetermined opinions and conclusions.
4.4.3 Fees connected with an assignment
must not depend on the predetermined
outcome of any valuation or other
24
independent, objective advice contained in

the valuation report.
4.4.4 Whether the Valuers fee is or is not
contingent upon any aspect of the report
must be disclosed.
4.4.5 A Valuer must not rely upon critical
information supplied by a client, or any
other
party,
without
appropriate
qualification or confirmation from an
independent source unless the nature and
extent of such reliance is specified as a
limiting condition.
4.4.6 A Valuer should not accept an
assignment to
report on assumed
hypothetical conditions that are unlikely to
be realised in any reasonable timescale.
4.4.7 Hypothetical conditions that are a
reasonable possibility may be reported on
provided they are accompanied by some
discussion both of the prospects of realising
the hypothesis and a consideration of value
that reflects the true situation prevailing,
e.g., a situation where a client wants to
know what the value of land will be pending
detoxification.
4.4.8 A Valuer should not use or rely on
unsupported conclusions based on prejudice
of any kind or report conclusions reflecting
an opinion that such prejudice is necessary
to maintain or maximise value.
4.4.9 In reviewing another Valuers report, a
Valuer shall exhibit impartial judgment and
justify his or her reasons for agreeing or
disagreeing with the conclusion of the
report.
5.0 Competence
A Valuer must have the knowledge, skill,
and experience to complete the assignment
efficiently in relation to an acceptable
professional standard. Only those Valuers
able to conform to the definition of the
Code of Conduct
Valuer set out in Definitions (para. 3.3

above) should undertake work in connection
with these Standards.
5.1 Acceptance of Instructions
5.2 Prior to accepting an assignment or
entering into an agreement to perform any
assignment, a Valuer must properly identify
the problem to be addressed and be certain
he or she has the experience and knowledge,
or in the event of an assignment overseas,
will be able to associate with a professional
possessing the experience and knowledge of
the market forces, language, and law to
complete the assignment completely.
5.3 Outside Assistance
5.3.1 When engaging the services of outside
assistance necessary to complement a
Valuers own skills, a Valuer should first
establish that those assisting have the
requisite skills and ethical principles.
5.3.2 The clients consent should be
obtained when outside assistance is required,
and the identity of the assistants and extent
of their role should be disclosed in the
Valuers report.
5.4 Efficiency and Diligence
5.4.1 Valuer should act promptly and
efficiently in carrying out the clients
instructions and should keep the client
informed of the Valuers progress.
5.4.2 Instructions should be declined where
circumstances preclude sufficient diligent
enquiry, quality of work, and completion
within a reasonable time.
5.4.3 Before the valuation is reported,
written instructions should be received from
the client and/or confirmed in writing by a
Valuer in sufficient detail to avoid any
misinterpretation.
25
5.4.4 A Valuer should make diligent

enquiries and investigations to ensure that
the data for analysis in the valuation are
correct and can be relied upon.
6.4 Where a Valuer is acting as an Internal

Valuer, the relationship with the entity
controlling the asset should be disclosed in
the valuation report.
5.4.5 A Valuer should prepare a work file

for each assignment which, upon
completion, should contain a true copy, in
paper or electronic form (suitably backedup), of all written reports, correspondence,
and memoranda plus adequate file notes
which substantiate the Valuers opinion by
way of enquiry, objective comparison,
deduction, and calculation.
6.5 Where a Valuer is acting as an External

Valuer but also has worked in a fee-earning
capacity for the client, such relationship
must be disclosed lest a third party, having
to rely on the valuation, deem the Valuers
objectivity compromised.
6.0 Disclosure
6.6 Any limitations to the quality of the

service that a Valuer is able to offer must be
disclosed whether this is due to externally
imposed constraints or peculiar to the Valuer
or the assignment. Where outside assistance
has been sought the Valuer must disclose the
identity of the assistants, the extent of
reliance on, and the nature of, such
assistance.
It is essential that Valuers develop and

communicate their analyses, opinions, and
conclusions to users of their services
through reports that are meaningful and not
misleading and that disclose anything that
might be taken to affect objectivity.
6.7 A Valuer must place a restriction against

the publication of a valuation or its
conclusion without consent so that the
Valuer can keep a measure of control over
the form and context in which his or her
valuations are publicly disclosed.
6.1 The valuation report should set out a

clear and accurate description of the scope
of the assignment and its purpose and
intended use, disclosing any assumptions,
hypothetical
scenarios,
or
limiting
conditions that directly affect the valuations
and, where appropriate, indicating their
effect on the value.
6.8 A Valuer should disclose any departures

from the International Valuation Standards.
5.4.6 The work file for each assignment

should be retained for a period of at least
five years after completion of the
assignment.
6.2 The valuation report must provide

sufficient information to describe the work
performed, the conclusions reached, and the
context in which they were shaped.
6.3 A Valuer must disclose any direct or
indirect personal or corporate relationship
with the property or company that is the
subject of any assignment and that might
lead to a potential conflict of interest.
Code of Conduct
6.8.1 Standards are devised for the

generality of situations and cannot cater to
every eventuality. There will be occasions
where departure from Standards is
inescapable. When such situations arise,
departure would be unlikely to constitute a
breach of these Standards, provided such
departure is reasonable, complies with the
principles of ethics and measures of
competence, and a rationale for such
departure is provided in the valuation report.
7.0 Reporting of Values

Valuation assignments may deal with one or
more properties. The style of the valuation
report must be tailored to the nature of the
assignment and the needs of the client while
26
meeting certain minimum requirements as to

content.
7.1 This paragraph sets out the minimum
contents of any report or certificate. The
following items must be included. (Also see
para. 5.1 of IVS 3, Valuation Reporting.)
the identity of the Valuer and the date of

the report;
the identity of the client;
the instructions, date of the value

estimate, purpose and intended use of
the valuation;
the basis of the valuation, including type

and definition of value;
the identity, tenure, and location (s) of

the interest(s) to be valued;
the date and extent of inspections;
the scope and extent of the work used to

develop the valuation;
any assumptions and limiting conditions,

and
any
special,
unusual,
or
extraordinary assumptions;
a compliance statement that the

valuation has been performed in
accordance with these Standards and any
required disclosures;
the professional qualification

signature of the Valuer; and
as required in some countries, specific

certification by the Valuer in the
prescribed form.
to go into greater detail on the data upon

which the valuation is based and the
reasoning behind the conclusions. Where a
report is being prepared for a portfolio of
properties for use in an audit function, the
level of detailed data required for each of the
properties within the portfolio may be less
extensive.
7.3 This section is not to be taken to
represent the enquiries, research and
analysis needed to perform a proper
valuation, merely the minimum that must be
presented in the report.
and
7.2 The use of the valuation and the

complexity of the property determine the
level of detail appropriate to the report.
Where a single or complex property is being
reported, it may be appropriate for the report
Code of Conduct
27
Property Types
1.0 Introduction
Real property represents a considerable
portion of the worlds wealth, and its
valuation is fundamental to the viability of
global property and financial markets. Real
property has to be distinguished from other
categories of property, namely personal
property, businesses, and financial interests.
Without
further
qualification
or
identification, the word property may refer
to all or any of these categories. Because
Valuers often encounter assignments
involving property types other than real
property or properties whose value includes
several property categories, an understanding
of each property type and its distinguishing
characteristics is essential.
While the
customary division of property into four
discrete categories has long been recognised,
new entities and instruments have
proliferated over recent decades.
The
accepted frame of reference has readily
accommodated these new classes of property
and familiarity with specialised property
type and interests is becoming ever more
integral to valuation practice.
The
International
Valuation
Standards
Committee recognises the following four
property types: real property, personal
property, businesses and financial interests.
2.0 Real Property

2.1 Real Property is an interest in real estate.
This interest is normally recorded in a
formal document, such as a title deed or
lease. Therefore, property is a legal concept
distinct from real estate, which represents a
physical asset. Real property encompasses
all the rights, interests, and benefits related
to the ownership of real estate. In contrast,
real estate encompasses the land itself, all
things naturally occurring on the land, and
all things attached to the land, such as
buildings and site improvements.
Property Types
2.1.1 The term realty is sometimes used to

distinguish either real property or real estate
from items of personal property, which in
certain countries are legally referred to as
personalty.
2.2 The combination of all the rights
associated with the ownership of real
property is sometimes referred to as the
bundle of rights. These can include the right
to use, to occupy, to enter, to sell, to lease, to
bequeath, to give away, or to choose to
exercise any or none of the abovementioned. In many situations, specific
rights may be separated from the bundle and
transferred, leased, or alienated by the
country.
2.2.1 Rights or interests in real property
derive from legal estates. Legal estates are
defined by the laws of the country in which
they exist. Legal estates are usually subject
to outside limitations imposed by the
country, such as taxation (assessments/
ratings), compulsory acquisition (eminent
domain/
compulsory
purchase/
condemnation), regulation (police power/
planning/zoning), or appropriation by
government
in
cases
of
intestacy
(escheat/bona vacantia).
2.2.2 Absolute ownership subject only to
limitations imposed by the country is known
as a fee simple estate, or freehold.
2.2.3 Leases are contractual arrangements,
which create other estates in real property.
Under a lease, the landlord, or lessor,
maintains the ownership interest, known in
some countries as the leased fee estate, with
the right of use and occupancy being
conveyed or granted to a tenant, or lessee.
The interest which the tenant, or lessee,
acquires under the lease, known in some
countries as the leasehold estate, is the right
of use and occupancy for a stated term under
certain conditions.
28
2.2.3.1 Subleaseholds are created when the

tenant or lessee in a prior lease conveys to a
third party, a sublessee, the interest that the
tenant, or lessee, enjoys, i.e., the right to use
and occupy the property.
property is used as collateral to secure

finance or a charge is taken over the
property. An owners equity portion in the
property is considered a separate financial
interest.
2.2.3.2 A Valuer analyses whether any terms

or conditions in a lease may affect property
value.
2.3 Real property, in the terminology of

accounting, usually falls into the category of
fixed, or long-term, assets. Sometimes, real
property may be considered a current asset,
e.g., where land or improved real estate is
held in inventory for sale.
2.2.4 Besides restrictions by the State, other

lawful limitations may be imposed 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
affect the use, development, and conveyance
of ownership.
2.3.2 It is the ownership of the asset that is

valued rather than the real estate as a
physical entity.
2.2.4.2 Easements are non- possessory

(incorporeal) interests in landed property
conveying use, but not ownership, of a
portion of that property. Rights-of-way or
privileges, acquired through use or contract,
to pass over a portion or strip of landed
property owned by another.
2.3.3 Where the ownership of an asset is

purchased and sold in a marketplace, market
participants ascribe specific values to
ownership of particular interests in real
estate. These values ascribed by market
participants form the objective basis for
estimating the Market Value of real property.
2.2.5 Other important ownership and

financial interests may be associated with
real property.
2.4 Valuation of real property is undertaken

for a variety of reasons, which include the
following categories, financial reporting,
transactions
involving
transfers
of
ownership, loans and mortgages to be
secured by property, litigation, tax matters,
and counseling or investment decision
making. With the exception of the last
category, Market Value is the value basis in
all the following groupings:
2.2.5.1 Partial or fractional interests in real

property rights are created by legal divisions
of the ownership interest. For example,
property is not only owned in sole
proprietorships.
It may also be held by
corporations (shareholders), partnerships,
joint tenancies, and tenancies in common.
2.2.5.2 Trusts create another type of interest
in real property rights. The interest of a
beneficiary under a trust is known as the
equitable or equity interest as opposed to the
legal interest of the trustee(s).
(A
beneficiary is said to hold equitable title
while legal title is held by the trustee[s].)
2.2.5.3 Security or financial interests are
created by mortgage pledges where the
Property Types
2.4.1 Valuations of fixed assets prepared for

financial statements and related accounts to
reflect the effect of changing prices or
current values;
2.4.2 Valuations to assist a prospective buyer
in setting an offering, to assist a prospective
seller in establishing an acceptable asking
price, or to help both parties in determining
the sale price for a proposed transaction;
valuations to establish the basis for
29
reorganising or merging the ownership of

multiple properties;
that are included in the valuation (see Para.

3.2 below);
2.4.3 Valuations required to estimate the

value of collateral property offered for a
proposed mortgage loan or to establish a
basis for insuring or underwriting a loan on
the property;
2.5.4 any known easements, restrictions,

encumbrances, leases, covenants, or special
assessments/ratings on the property or other
items of similar nature; and
2.4.4 Valuations performed in compulsory

acquisition (eminent domain/condemnation
proceedings), in litigation or arbitration
involving disputes over contracts and partial
interests, and settlements of damages caused
by environmental accidents or violations;
2.4.5 Valuations
required to estimate
assessed value/rating; to separate assets into
depreciable and non-depreciable items and,
thereby estimate applicable depreciation; or
to determine gift or inheritance taxes;
2.4.6 Valuations and ancillary assignments
performed for a broad spectrum of clients,
e.g., investors, insurers, claims adjusters,
auctioneers or liquidators, and zoning boards
(on the probable effects of planning
proposals) as well as for a diversity of
purposes, e.g., market or feasibility analyses,
cost/benefit analyses, determination of book
value for new stock issues (or revisions
thereof), and the setting of prospective rent
schedules and lease provisions.
2.5.5 Whether the subject property is a

partial or fractional interest or a physical
segment of a larger land parcel.
2.6 The valuation of real property may be
influenced by special considerations, such
as:
2.6.1 A requirement to analyse the merger of
estates (Synergistic Value) or the separation
of property interests (Component Value);
2.6.2 The effects of likely zoning changes
and infrastructure development, e.g., the
extension of public utility systems or
accessed corridors;
2.6.3 Depressed markets characterised by
weak demand, oversupply, and few sale
transactions, where estimates of Market
Value may be difficult to support on the
basis of current or historical evidence. In
such circumstances, the focus of market
participants may shift to other indicators of
property value or performance.
3.0 Personal Property

2.5 In any valuation of real property, the
relevant characteristics of the property must
be identified.
Property characteristics
include:
2.5.1 the location, the physical and legal
description, and the economic or incomeproducing attributes;
2.5.2 the real property interest (fee
simple/freehold, leased fee, leasehold,
subleasehold) to be valued;
2.5.3 any personal property, trade fixtures, or
intangible items that are not real property but
Property Types
3.1 Personal Property refers to ownership of

an interest in items other than real estate.
These items can be tangible, such as a
chattel, or intangible, such as a debt or
patent.
Tangible personal property
represents interests in items that are not
permanently attached or affixed to real estate
and are generally characterised by their
moveability. In some countries, items of
personal property are legally recognised as
personalty in distinction to realty (see
Property Types, para. 2.1.1).
3.2 Examples of personal property includes
interests in:
30
3.2.1 Identifiable, portable, and tangible

objects considered by the general public to
be personal, e.g., furnishing, collectibles,
and appliances. Ownership of the current
assets of a business, trade inventories, and
supplies is considered to be personal
property.
3.2.1.1 In some countries, the above are
referred to as goods and chattels personal.
3.2.2 Non-realty fixtures, also called trade
fixtures or tenants fixtures (fixtures and
fittings), are attached to the property by the
tenant and used in conducting the trade or
business.
Leasehold improvements, or
tenants
improvements,
are
fixed
improvements or additions to the land or
buildings, installed and paid for by the
tenants to meet the tenants needs. Trade or
tenants fixtures are removable by the tenant
upon expiration of the lease. Their removal
causes no serious damage to the real estate.
Leasehold or tenants improvements are
finishings or fittings, such as partitions and
outlets constructed on site. The useful life of
tenants improvements may be shorter or
longer than the term of the lease. If longer
than the lease term, the tenant may be
entitled to compensation reflecting the extent
to which the leasehold improvements have
increased the value of the rented premises.
3.2.2.1 By extension, the above category
may include specialised, non-permanent
buildings, machinery and equipment.
3.2.2.2 In some countries, the term
Furniture, Fixtures and Equipment (FF&Es)
comprises both of the categories described in
para. 3.2.1 and 3.2.2.
3.2.3 Net working capital and securities, or
net current assets, are the sum of liquid
assets less short-term liabilities.
Net
working capital may include cash,
marketable securities, and liquid supplies
less current liabilities such as accounts
payable and short-term loans.
Property Types
3.2.4 Intangible assets are interest held in

intangible entities. Examples of intangible
property interests include the right to recover
a debt and the right to profit from an idea. It
is the right, i.e., to recover or to profit, as
distinct from the intangible entity itself, i.e.,
the debt or the idea, which is the property
and to which value is ascribed.
3.3 A valuation that includes both personal
property and real property must identify the
personal property and consider its effects on
the value estimate given.
3.3.1 Valuations of personal property can be
an element of a larger assignment. The
definition of value by which the personal
property is valued must be consistent with
the purpose of the property valuation,
whether that purpose is to sell, to renovate,
or to demolish the property.
Personal
property may be valued according to its
Market Value under various assumptions,
e.g., that the personal property is included
among the assets of a hotel that was sold as a
going concern, or that the personal property
was among the assets of a hotel, which went
out of business, and consequently were to be
liquidated or sold for salvage. (See IVS 2,
para. 6.9.)
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.,
in assignments undertaken for governmentrelated functions such as taxation or
compulsory acquisition.
3.3.3 In a valuation of business assets, the
Valuer must consider whether such assets
are to be valued as part of a going concern or
as separate assets.
3.4 A Valuer should be familiar with local
customs regarding whether an item is
considered personal property or real
property.
In certain circumstances, a
securely affixed item, normally treated as
personal property, may revert to real
31
property upon termination of occupancy,

especially if its removal and relocation
would result in costly damage to the item
itself or the building in which it is located.
3.5 The techniques used in the three
valuation approaches may be applied to the
valuation of personal property. (See GN 5,
Valuation of Personal Property.)
3.5.1 If a Valuer finds that personal property
included in the property subject to valuation
is either superior or inferior to that typically
found in comparable properties, the Valuer
should make allowance for the differing
contributory value of the personal property.
3.5.2 In certain assignments, a Valuer may
have to determine the degree of physical
deterioration, functional obsolescence, and
external obsolescence afflicting items of
personal property. Such a determination will
also consider the remaining economic life of
the building(s) with which the related
personal property is associated.
4.0 Businesses
4.1 A business is any commercial, industrial,
service or investment entity pursuing an
economic activity. Businesses are generally
profit-making entities operating to provide
consumers with products or services.
Closely related to the concept or business
entity are the terms operating company,
which is a business that performs an
economic activity by making, selling, or
trading a product or service, and going
concern, which is an entity normally viewed
as continuing in operation in the foreseeable
future with neither the intention nor
necessity of liquidation or of curtailing
materially the scale of its operations.
4.2 Business entities are constituted as legal
entities. A business may be unincorporated
or incorporated.
Property Types
4.2.1 Examples of unincorporated entities

include sole proprietorships, joint ventures,
and general and limited partnerships.
4.2.2 Examples of incorporated entities
include closely held corporations, or close
companies, and publicly-held corporations,
or public companies and some joint ventures
whose stock are available to and held by the
public.
4.2.3 Other legal forms of business entities
include trust arrangements whereby control
is vested in either individual trustees or
corporate trustees, and multiple entities
combining parent and associate or subsidiary
corporations, partnership interests, and
trusteeships.
4.3 Business entities cut across an extremely
broad range of economic activities,
encompassing both private and public
sectors.
Business activities include
manufacturing,
wholesaling,
retailing,
lodging, health care, and financial, legal,
educational and social services, among
others.
Business entities established to
provide infrastructure services to the public,
i.e., public utilities, are in many countries set
up as corporations controlled but not owned
by the government.
4.3.1 Investment business or holding
companies, which maintain the controlling
interest in subsidiary companies by virtue of
ownership of stock in those companies,
include property and agricultural businesses,
among others.
4.3.2 Properties such as hotels; fuel stations;
restaurants; and movie theatres, or cinemas,
variously called properties associated with a
business entity, properties with trading
potential, trade related properties or
operational entities, are valued at Market
Value, but their Market Value includes value
components constituting land, buildings,
personal property, intangible assets, and the
business itself. Because these properties are
commonly sold in the market as an operating
32
package, separate identification of land,

building, and other values may be difficult,
so additional care should be taken to identify
the property components included in the
valuation. (See GN 12, Valuation of Trade
Related Property.)
4.4 Under the terminology of accounting,
both tangible and intangible assets are
included among the assets of a business
entity:
4.4.1 Tangible assets include current assets,
and long-term assets such as realty, fixtures,
equipment, and tangible personal property.
4.4.2 Intangible assets, which are considered
intangible personal property, include
management skill, marketing know-how,
credit rating, an assembled work force, an
operational plant, goodwill, and ownership
of various legal rights and instrument (e.g.,
patents,
copyrights,
franchises
and
contracts).
4.4.2.1 Goodwill may include two distinct
components, goodwill that is propertyspecific, or inherent within the property and
transferable to a new owner on sale of the
property, and personal goodwill that is
associated with the proprietor or manager.
4.5 The valuation of businesses (see the
Guidance Note on Business Valuation, GN
6, para. 5.0) is undertaken for a variety of
purposes including:
4.5.1 The acquisition of and disposition of
an individual business, a business merger, or
the estimation of the value of the capital
stock owned by the shareholders in the
business.
4.5.2 Business valuations are often used as a
basis for allocating and reflecting the Value
in Use of the various assets of a business.
Business valuations may also provide the
basis for estimating the extent of
obsolescence of specified fixed assets of a
business.
Property Types
4.6 Business valuations may be based on the

Market Value of the business entity. The
Market Value of a business is not necessarily
equivalent to the Value in Use of the
business. Valuations done for financial
reporting are generally required to report
Fair Value, which may or may not be
equivalent to Market Value.
In such
situations, a Valuer should indicate whether
the value satisfies or does not satisfy both
Market Value and Fair Value definitions.
(See Concepts Fundamental to Generally
Accepted Valuation Principles, para. 8.1).
Valuations of going concerns (defined in
Property Types, para. 4.1) are generally
based on Value in Use. For financial
reporting purposes, Value in Use has a
specific meaning under International
Accounting Standard 36, Impairment of
Assets, which distinguishes the term from its
common usage in valuation practice.
4.7 A Valuer must clearly define the
business (e.g., operating company, holding
company, trading company), business
ownership interest, or security (e.g., closely
held or publicly held company stock, and
investment trust shares) being valued.
4.7.1 An ownership interest may be
undivided, divided among shareholders,
and/or involve a majority interest and
minority interest.
4.7.2 A Valuer must consider the rights,
privileges and conditions that attach to the
ownership interest, whether held in corporate
form, partnership from, or as a
proprietorship.
4.8 Business valuations employ three
approaches to value. Valuers commonly
reconcile the indications derived from two or
more of these approaches and associated
methods, (See the Guidance Note on
Business Valuation, GN 6, para. 5.14.)
33
5.0 Financial Interests

5.1 Financial interests in property result
from the legal division of ownership
interests in businesses and real property
(e.g.,
partnerships,
syndications,
corporations, cotenancies, joint ventures),
from the contractual grant of an optional
right 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 or investment instruments
secured by pooled real estate assets.
5.1.1 Ownership interests may be legally
divided to create partnerships, in which two
or more persons jointly own a business or
property and share in its profits or losses.
5.1.1.1 A general partnership is an
ownership arrangement in which all partners
share in investment gains and losses and
each is fully responsible for all liabilities.
5.1.1.2 A limited partnership is an
ownership arrangement consisting of general
and limited partners; the general partners
manage the business and assume full liability
for partnership debt while the limited
partners are passive and liable only to the
extent of their own capital contributions.
5.1.2 Other legal entities related to
partnerships are syndications and joint
ventures.
5.1.2.1 A syndication is often organized by a
general partner. Investors in the syndication
become limited partners. A syndication pools
funds for the acquisition and development of
real estate projects or other business ventures.
5.1.2.2 A joint venture is a combination of
two or more entities that join to undertake a
specific project. A joint venture differs from
a partnership in that it is limited in duration
and project-specific.
property for a specified period and at a stated

price. An option creates a contractual right,
the exercise of which is generally contingent
upon the fulfillment of specified conditions.
The holder may or may not ultimately choose
to exercise the option. In this respect, an
option differs from a contract to buy or sell a
property. Purchase options may also be
written into leases. Purchase options often
contain the provision that certain parts of all
rents paid may be applied to the purchase
price.
5.1.4 Real estate investment through the
ownership of securities, or instruments
securing both debt and equity positions,
represent an alternative to the direct
ownership of property. Investors are able to
own and trade shares of an interest in a
property or pool or properties in the same
way they would buy and sell shares of
corporate stock.
5.1.4.1 The market for such securities
includes both a private, or institutional, sector
(partnerships,
corporations,
pension/
superannuation
funds,
and
insurance
companies) and a public sector (individual
investors who trade in a securities market).
5.1.4.2 Securitised investment instruments
include real estate investment trusts (REITs)
(property investment or units trusts),
collateralised mortgage obligations (CMOs),
commercial
mortgage-backed
securities
(CMBSs), real estate operating companies
(REOCs), and separate and commingled
accounts. (Such instruments are discussed in
the IVSC White Paper, Valuation of Real
Estate Serving as Collateral for Securitised
Instruments.)
5.2 Financial interests are intangible assets
and can include:
5.2.1 the rights inherent in the ownership of
a business or property, i.e., to use, to occupy,
to sell, to lease, or to manage;
5.1.3 An option is an agreement to keep

open an offer to buy, sell, or lease real
Property Types
34
5.2.2 the rights inherent within a contract

granting an option to buy, or a lease
containing a purchase option, i.e., to exercise
or not to exercise; or
5.2.3 the rights inherent in ownership of a
security issue (i.e., to hold or to dispose
thereof).
5.3 Financial interests require valuation for a
wide variety of reasons.
5.3.1 A financial interest may be included
among the assets of a partner. To establish
the total value of assets owned by the
partner, the value of the financial interest
must be determined. Or a partner may wish
to sell his or her interest, or the interest may
have passed into an estate subject to
inheritance taxes and probate proceedings.
A general partner may also purchase
interests for the purpose of transferring them
to a limited partnership.
5.3.2 Options to buy, which are often
obtainable for a small amount of money,
create considerable leverage, or gearing, the
impact of which must be considered in the
final transaction price.
Lease purchase
options restrict the marketability of the
leased property, and may limit the Market
Value of the leased property and/or leasehold
interest.
5.3.3 Valuations of securitised investment
instruments are done for purposes of
underwriting and rating the securities prior
to initial public offerings.
5.4 International Accounting Standard, IAS
32, Financial Instruments: Disclosure and
Presentation, para. 11, defines financial
asset,
financial
liability,
financial
instrument, and equity instrument; IAS 32,
para. 28, defines compound (financial)
instrument. Under IAS 32, para. 86, an
entity shall disclose information about Fair
Value for each class of financial assets and
financial liabilities, in a way that permits
comparisons with the corresponding
Property Types
carrying amount in the balance sheet, IAS

32, para. 92, summarises the items an entity
is required to disclose.
5.4.1 A financial asset is any asset that is 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; or
d) a contract that will or may be settled in
the entitys 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 entitys 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 entitys own equity
instruments.
5.4.1.1 Common examples of financial
assets representing a contractual right to
receive cash in the future are a) trade
accounts receivable; b) notes receivable;
c) loans receivable; and d) bonds
receivable.1
5.4.2 A financial liability is any liability that
is: (a) a contractual obligation (i) to deliver
cash or another financial asset to another
entity; or (ii) to exchange financial assets or
liabilities with another entity under
conditions that are potentially unfavourable
to the entity; or (b) a contract that will or
may be settled in the entitys own equity
instruments and is (i) a non-derivative for
which the entity is or may be obliged to
deliver a variable number of the entitys 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 as fixed number
of the entitys own equity instruments. For
this purpose the entitys own equity
instruments do not include instruments that
1
The words and payable were deleted from

IVS 5.4.1.1
35
are themselves contracts for the future

receipt or delivery of the entitys own equity
instruments.
(An entity may have a
contractual obligation that it can settle by
delivery of cash or another financial asset,
exchange of financial assets and liabilities,
or by payment in the form of its own equity
instruments, either non-derivative or
derivative.)
including interest rate and currency swaps,

interest rate caps, collars and floors, loan
commitments, note issuance facilities, and
letters of credit. (IAS 32, AG 19)
5.4.2.1 Common examples of financial

liabilities
representing
a
contractual
obligation to deliver cash in the future are a)
trade accounts payable; b) notes payable; c)
loans payable; and d) bonds payable. 2
5.4.4 An equity instrument is any contract

that evidences a residual interest in the assets
of an entity after deducting all its liabilities.
5.4.3 A financial instrument is any contract

that gives rise to both a financial asset of one
entity and a financial liability or equity
instrument of another entity.
Financial
instruments range from traditional primary
instruments such as bonds to various forms
of derivative financial instruments.
5.4.3.1 Derivative financial instruments give
one party a contractual right to exchange
financial assets with another party under
conditions that are potentially favorable, or a
contractual obligation to exchange financial
assets with another party under conditions
that are potentially unfavorable. However,
they generally do not result in a transfer of
the underlying primary financial instrument
on inception of the contract, nor does such a
transfer necessarily take place on maturity of
the contract. (IAS 32, AG 16)
5.4.3.2 Derivative financial instruments
create rights and obligations, effectively
transferring between the parties to the
instrument one or more of the financial risks
inherent in an underlying financial
instrument. (IAS 32, AG 16)
5.4.3.3 Many other types of derivative
financial instruments embody a right or
obligation to make a future exchange,
2
The words receivable and were deleted

from IVS 5.4.2.1
Property Types
5.4.3.4 A finance lease is regarded as a

financial instrument but an operating lease is
not regarded as a financial instrument. (IAS
32, AG 9)
5.4.4.1 Examples of equity instrument

include non-puttable ordinary shares, some
types of preference shares, and warrants or
written call options that allow the holder to
subscribe for or purchase a fixed number of
non-puttable ordinary shares in the issuing
entity in exchange for a fixed amount of cash
or another financial asset (IAS 32, AG 13).
5.4.4.2 A purchased call option or other
similar contract acquired by an entity that
gives it the right to reacquire a fixed number
of its own equity instruments in exchange
for delivering a fixed amount of cash or
another financial asset is not a financial asset
of the entity (IAS 32, AG 14).
5.4.5 A compound (financial) instrument is a
financial instrument that, from the issuers
perspective, contains both a liability and an
equity element.
5.5 The value of the assemblage of all the
various financial interests in a property may
be larger or smaller than simply the sum of
the individual interests in that property.
5.5.1 The value of the 100% ownership
interest (inclusive of all shareholders or
partners) in income-generating properties
held by partnerships or syndications will
likely exceed the aggregate value of minority
interests in the properties. Similarly, the
value of a REIT portfolio, representing an
assemblage of various properties, is likely to
differ from simply the sum of the values of
36
all the properties that make up the portfolio,

a consequence attributable to the specific
assemblage of properties in the portfolio
and/or the management of the portfolio.
5.5.2 A Valuer estimates the value of the
entirety or whole interest in the property
before dealing with the disaggregated or
fragmented ownership interests.
5.5.3 In assignments involving financial
interests, a Valuer must clearly identify the
exact ownership interest being valued,
whether it be a majority or minority
ownership interest in a business or property,
a contractual right, or a majority or minority
ownership interest in securitised real estate
investment. The Valuer must examine the
contractual arrangements between parties or
articles of association (articles of
incorporation or articles of partnership) to
verify the percentage share or stake that the
financial interest in the property represents.
5.6.3 Options to buy are considered at the

cost to the buyer when the option is
exercised. Thus, the cost of an option to buy
that has been exercised is to be added to the
sale price of the realty. A Valuer considers
the effect of leverage, or gearing, produced
by a purchase option on the final transaction
price for a property.
When a purchase
option in a lease is exercised and past rent
payments are credited to the purchase price,
such payments are treated as installment
payments.
5.6.4 Units or shares in securitised real estate
investment are priced in markets where such

securities are traded. Valuations of real
estate assets held as part of a package of
investment instruments may be required for
underwriting or rating purposes prior to an
initial public offering. In such situations, a
Valuer applies those approaches and
methods consistent with the incomegenerating characteristics of the real estate.
5.6 The valuation of financial interests

involves highly specialised considerations.
Therefore, a Valuer must adapt the valuation
approach or approaches to the nature of the
financial interest subject to valuation.
5.6.1 All three approaches may be
appropriate to the valuation of property held
by general partnerships.
5.6.1.1 When comparable sales are analysed
in the sales comparison approach, the
Valuer determines whether non-realty items
were included in the purchase price. If nonrealty items were included, they should be
identified and their effect on value
considered and estimated.
5.6.2 In situations where a general partner
has acquired interests in partnership or
syndications for sale as limited partnership
interests, the Valuer considers the effect of
non-realty items on the transaction price.
These items may include special financing,
guarantees of occupancy or income, and
management services.
Property Types
37

1, 2, and 3
Developing and Communicating
the Valuation
and restrained by limits on purchasing

power.
Valuations are developed on the basis of

the Market Value of an asset or on bases
other than Market Value. Central to all
valuations are the concepts of market,
price, cost and value. These concepts are
relevant both to valuations based on
Market Value and those based on nonmarket criteria. Of equal importance to
the work of Valuers is
clear
communication of the results of the
valuation and an understanding of how
those results have been obtained. A well
prepared Valuation Report fulfills these
functions. It is only appropriate, therefore,
that the International Valuation Standards
should address each of these three
fundamental aspects of valuation: IVS 1,
Market Value Basis of Valuation; IVS 2,
Bases Other Than Market Value; and IVS
3, Valuation Reporting.
1.2 The utility for which a good or service

is produced and the scarcity, or limited
availability, of the good or service are
generally
considered
supply-related
factors. Consumer preferences and
purchasing power, which reflect desire for
the good or service and define the
affordability of the item, are generally
considered demand-related factors.
Bases of Value
1.0 Introduction
At the most fundamental level, value is
created and sustained by the interrelationship of four factors that are
associated with any product, service, or
commodity. These are utility, scarcity,
desire, and purchasing power.
1.1 The working of the economic principle
of supply and demand reflects the complex
interaction of the four factors of value.
The supply of a good or service is affected
by its utility and desirability.
The
availability of the good or service is
limited by its scarcity and effective checks
of the purchasing power of likely
consumers. The demand for a good or
service is, likewise, created by its utility,
influenced by its scarcity and desirability
Introduction to IVSs 1, 2, and 3
2.0 Markets
A market is an environment in which
goods, services, and commodities are
traded between buyers and sellers through
a price mechanism. The concept of a
market implies the ability of buyers and
sellers to carry on their activities without
restriction.
2.1 The principle of supply and demand
states that the price of a good or service, or
commodity varies inversely with the
supply of the item and directly with the
demand for the item.
2.2 In property markets, supply represents
the quantity of property interests that are
available for sale or lease at various prices
in a given market within a given period of
time, assuming labour and production
costs remain constant.
2.3 Demand constitutes the number of
possible buyers or renters seeking specific
types of property interests at various prices
in a given market within a given period of
time, assuming other factors such as
population, income, future prices, and
consumer preferences remain constant.
38
Supply and Demand Curve
Price in Dollars (1,000s)
300
250
Supply
200
150
100
Demand
50
0
1
10
Quantity in Units (1,000s)
3.0 Price, Cost and Value

The distinctions between price, cost, and
value have previously been discussed.
(See section 4.0 of Concepts Fundamental
to
Generally
Accepted
Valuation
Principles.)
These terminological
distinctions are important to the operation
of market because of the specific
functional relationship each describes, i.e.,
price pertains to the actual exchange of the
good of service; cost reflects the expense
of producing the good or service; value
represents the price most likely to be
concluded by the buyers and sellers of a
good or service that is available for
purchase.
3.1 Price is a concept that relates to the
exchange of a commodity, good, or
service. Price is the amount that has been
asked, offered, or paid for the item. Once
the exchange has been transacted, the
price, whether disclosed or undisclosed,
becomes an historic fact. The price paid
represents the intersection of supply and
demand.
3.2 Cost is a production-related concept,

distinct from exchange, which is defined
as the amount of money required to create
or produce a commodity, good, or service.
Once the good is completed or the service
is rendered, its cost becomes an historic
fact.
3.3 The concept of Value addresses the
price most likely to be concluded by the
buyers and sellers of a good or service
available for purchase. Value establishes
the hypothetical, or notional, price that
typically motivated buyers and sellers are
most likely to conclude for the good or
service. Thus, value is not a fact, but an
estimate of the most likely price that will
be paid for a good or service available for
purchase at a given time.
3.4 A Basis of Value describes the nature
of this hypothetical transaction, for
example, whether or not it takes place in a
public market and what accounts for the
motivation and behaviour of the parties.
It does not describe the status of the good
or service involved in the transaction, for
example, whether it is operational or nonoperational, or whether or not it is
39
aggregated with other assets. A Basis of

Valuation will, therefore, usually need to
be accompanied by additional assumptions
in order to adequately define the valuation
hypothesis
adopted.
Different
accompanying assumptions may result in
different values for the same asset, and
therefore, it is vital that these be clearly
understood and expressed.
motivated market participants, valuations

of property may also use measurement
principles that consider alternative
economic utility or function(s) of an asset,
value attributable to unusual or atypical
motivation on the part of the parties to a
transaction, or value specified by statutory
or contractual law.
The concept of Market Value is tied to the

collective perception and behaviour of
market participants. It recognises diverse
factors that may influence transactions in a
market, and distinguishes these from other
intrinsic or non-market considerations
affecting value. Market Value is marketbased and therefore, all inputs should be
developed from market data.
4.2.1 Examples of bases of value other

than Market Value are Fair Value,
Investment Value, Special Value, and
Synergistic Value.
The additional
assumptions required in applying these
bases are often more specific than those
required for establishing Market Value as
they may relate to the circumstances of a
particular party.
For this reason, a
valuation reported on one of these bases
should ensure that it cannot be construed
as Market Value.
4.1 Market-based valuations of property

assume the operation of a market in which
transactions occur without restriction by
non-market forces.
4.2.2 Valuations performed on bases other

Market Value must employ appropriate
procedures and analyse sufficient data to
produce a reasonable estimate of value.
4.0 Basis of Value
4.1.1 Market-based
valuations
must
determine the highest and best use, or
most probable use of the property asset,
which is a significant determinant of
value.
4.1.2 Market-based
valuations
are
developed from data specific to the
appropriate market(s) and through
methods and procedures that try to reflect
the deductive processes of participants in
those markets.
4.1.3 Market-based valuations may be
performed by application of the sales
comparison, income capitalisation, and
cost approaches to value. The data and
criteria employed in each of these
approaches must be derived from the
market.
4.2 Besides the hypothetical exchange
value concluded by two typically
5.0 Communicating the Results of

the Valuation
5.1 The content and presentation of the
Valuation Report are of critical importance
to
5.1.1 communicating the value conclusion
to the client and user(s) of the valuation,
and
5.1.2 confirming the basis of the valuation,
the purpose of the valuation, and any
assumptions or limiting conditions
underlying the valuation.
5.2 To help guide the reader through the
procedures and evidence used by the
Valuer in developing the valuation, the
Valuation Report may also provide the
analytical processes and empirical data
used to arrive at the value conclusion.
40
5.3 Other essential information contained

in the Valuation Report includes:
5.3.1 the name of the Valuer and the date
as of which the value estimate applies,
5.3.2 the property and property rights or
interests subject to the valuation,
5.3.3 the dates of the valuation and
valuation report,
5.3.4 the extent of the inspection,
5.3.5 the applicability of these Standards
and any required disclosures.
41
PVS 1
IVS 1
Market Value Basis of Valuation

This Standard should be read in the
context of the background material and
implementation guidance contained in
Concepts Fundamental to Generally
Accepted Valuation Principles (GAVP);
if applicable and if appropriately and

correctly applied, lead to a common
expression of Market Value when based on
market-derived criteria. Sales comparisons
or other market comparisons should evolve
from market observations.
1.0 Introduction
1.1 The objective of this Standard is to
provide a common definition of Market
Value. This Standard also explains the
general criteria relating to this definition
and to its application in the valuation of
property when the purpose and intended
use of the valuation calls for estimation of
Market Value.
1.2 Market Value is a representation of
value in exchange, or the amount a
property would bring if offered for sale in
the (open) market at the date of valuation
under circumstances that meet the
requirements of the Market Value
definition. To estimate Market Value, a
Valuer must first determine highest and
best use, or most probable use. (See
International Valuation Standards [IVSs],
Concepts fundamental to Generally
Accepted Valuation Principles, paras. 6.3,
6.4, 6.5.) That use may be for continuation
of a propertys existing use or for some
alternative use. These determinations are
made from market evidence.
1.3 Market Value is estimated through
application of valuation methods and
procedures that reflect the nature of
property and the circumstances under
which given property would most likely
trade in the market. The most common
methods used to estimate Market Value
include the sales comparison approach,
the income approach, including discounted
cash flow analysis, and the cost approach.
The income capitalization approach,

including discounted cash flow analysis,
should be based on market-determined
cash flows and market- derived rates of
return.
Construction
costs
and
depreciation should be determined by
reference to an analysis of market-based
estimates of costs and accumulated
depreciation. Although data availability
and circumstances relating to the market or
the property itself will determine which
valuation methods are most relevant and
appropriate, the outcome of using any of
the foregoing procedures must be Market
Value if each method is based on marketderived data.
1.5 The manner in which property would
ordinarily trade in the market distinguishes
the applicability of the various methods of
procedures of estimating Market Value.
When based on market information, each
method is a comparative method. In each
valuation situation one or more methods
are generally most representative of (open)
market activities. The Valuer will consider
each method in every Market Value
engagement and will determine which
methods are most appropriate.
2.0 Scope
2.1 IVS 1 applies to the Market Value of
property, normally real estate and related
elements. It requires that the property
under consideration be viewed as if for sale
on the market, in contrast to being
evaluated for some other purpose.
1.4 All Market Value measurement

methods, techniques, and procedures will,
42
3.0 Definitions
3.1 Market Value is defined for the
purpose of these Standards as follows:
Market Value is the estimated amount for
which a property should exchange on the
date of valuation between a willing buyer
and a willing seller in an arms-length
transaction after proper marketing
wherein the parties had each acted
knowledgeably, prudently, and without
compulsion.
3.2 The term property is used because the
focus of these Standards is the valuation of
property.
Because these Standards
encompass financial reporting, the term
asset may be substituted for general
application of the definition. Each element
of the definition has its own conceptual
framework.
3.2.1 The estimated amount... refers to a
price expressed in terms of money
(normally in the local currency), payable
for the property in an arms-length market
transaction. Market Value is measured as
the most probable price reasonably
obtainable in the market on the date of
valuation in keeping with the Market Value
definition. It is the best price reasonably
obtainable by the seller and the most
advantageous price reasonably obtainable
by the buyer. This estimate specifically
excludes an estimated price inflated or
deflated by special terms or circumstance
such as atypical financing, sale and
leaseback
arrangements,
special
considerations or concessions granted by
anyone associated with the sale, or any
element of Special Value (defined in IVSC
Standard 2, para. 3.5).
3.2.2 a property should exchange
refers to the fact that the value of a
property is an estimated amount rather than
a predetermined amount or actual sale
price. It is the price at which the market
expects a transaction that meets all other
PVS 1
IVS 1
elements of the Market Value definition

should be completed on the date of
valuation.
3.2.3 on the date of valuation
requires that the estimated Market Value is
time-specific as of a given date. Because
markets and market conditions may
change, the estimated value may be
incorrect or inappropriate at another time.
The valuation amount will reflect the
actual market state and circumstances as of
the effective valuation date, not as of either
a past or future date. The definition also
assumes simultaneous exchange and
completion of the contract of sale without
any variation in price that might otherwise
be made.
3.2.4 between a willing buyer refers
to one who is motivated, but not compelled
to buy. This buyer is neither over-eager
nor determined to buy at any price. This
buyer is also one who purchases in
accordance with the realities of the current
market and with current market
expectations, rather than in relation to an
imaginary or hypothetical market that
cannot be demonstrated or anticipated to
exist. The assumed buyer would not pay a
higher price than the market requires. The
present property owner is included among
those who constitute the market. A
Valuer must not make unrealistic
assumptions about market conditions nor
assume a level of Market Value above that
which is reasonably obtainable.
3.2.5 a willing seller is neither an
over-eager nor a forced seller, prepared to
sell at any price, nor one prepared to hold
out for a price not considered reasonable in
the current market. The willing seller is
motivated to sell the property at market
terms for the best price attainable in the
(open) market after proper marketing,
whatever that price may be. The factual
circumstances of the actual property owner
are not a part of this consideration because
the willing seller is a hypothetical owner.
43
3.2.6 in an arms-length transaction

is one between parties who do not have a
particular or special relationship (for
example, parent and subsidiary companies
or landlord and tenant) that may make the
price level uncharacteristic of the market or
inflated because of an element of Special
Value. (See IVS 2, para. 3.8.) The Market
Value transaction is presumed to be
between unrelated parties, each acting
independently.
3.2.7 after proper marketing means
that the property would be exposed to the
market in the most appropriate manner to
effect its disposal at the best price
reasonably obtainable in accordance with
the Market Value definition. The length of
exposure time may vary with market
conditions, but must be sufficient to allow
the property to be brought to the attention
of an adequate number of potential
purchasers. The exposure period occurs
prior to the valuation date.
3.2.8 wherein the parties had each
acted knowledgeably and prudently
presumes that both the willing buyer and
the willing seller are reasonably informed
about the nature and characteristics of the
property, its actual and potential uses, and
the state of the market as of the date of
valuation. Each is further presumed to act
for self-interest with that knowledge, and
prudently to seek the best price for their
respective positions in the transaction.
Prudence is assessed by referring to the
state of the market at the date of valuation,
not with benefit of hindsight at some later
date. It is not necessarily imprudent for a
seller to sell property in a market with
falling prices at a price that is lower than
previous market levels. In such cases, as is
true for other purchase and sale situations
in markets with changing prices, the
prudent buyer or seller will act in
accordance with the best market
information available at the time.
PVS 1
IVS 1
3.2.9 and
without
compulsion
establishes that each party is motivated to
undertake the transaction, but neither is
forced or unduly coerced to complete it.
3.3 Market Value is understood as the
value of an asset estimated without regard
to costs of sale or purchase and without
offset for any associated taxes.
3.4 Highest and Best Use (HABU). The
most probable use of a property which is
physically possible, appropriately justified,
legally permissible, financially feasible,
and which results in the highest value of
the property being valued.
4.0 Relationship
Standards
to
Accounting
4.1 Valuation for financial reporting,

which is the focus of International
Valuation and Application 1 (IVA 1),
should be read in conjunction with this
standard.
4.1.1 IVA 1, Valuation for Financial
Reporting, provides guidance to Valuers,
Accountants, and the Public regarding
valuation standards affecting accountancy.
The Fair Value of fixed assets is usually
their Market Value.
(See Concepts
Fundamental to Generally Accepted
Valuation Principles, para. 8.1.)
4.2 There are numerous examples of terms
used interchangeably by Valuers and
Accountants.
Some
lead
to
misunderstandings and possible Standards
abuses. IVS 1 defines Market Value and
discusses criteria for establishing Market
Value. Other important terms are defined
in IVSs 1 and 2 and contribute to the more
specific requirements discussed in IVA 1,
Valuation for Financial Reporting.
5.0 Statement of Standard

To perform valuations that comply with
these Standards and Generally Accepted
44
Valuation Principles (GAVP), it is

mandatory that Valuers adhere to all
sections of the Code of Conduct
pertaining to Ethics, Competence,
Disclosure, and Reporting (sections 4, 5,
6, and 7).
5.1 In performing and reporting a
Market Value estimate, the Valuer shall
5.1.1 completely and understandably set
forth the valuation in a manner that will
not be misleading;
5.1.2 ensure that the estimate of Market
Value is based on market-derived data;
5.1.3 ensure that the estimate of Market
Value is undertaken using appropriate
methods and techniques;
5.1.4 provide sufficient information to
permit those who read and rely on the
report to fully understand its data,
reasoning, analyses, and conclusions;
and
5.1.5 comply with the requirements of
IVS 3 in reporting the valuation.
Accordingly, the Valuer shall
5.1.5.1 define the value being estimated
and state the purpose and intended use
of the valuation, the effective date of
valuation, and the date of the report;
5.1.5.2 clearly identify and describe the
property and property rights or
interests being valued;
5.1.5.3 describe the scope/extent of the
work undertaken and the
5.1.5.4 extent to which the property was
inspected;
5.1.5.5 state any assumptions and
limiting conditions upon which the
valuation is based;
PVS 1
IVS 1
5.1.5.6 fully and completely explain the

valuation bases/approaches applied and
the reasons for their applications and
conclusions; and
5.1.5.7 include a signed Compliance
Statement attesting to the Valuers
objectivity, professional contributions,
non-bias,
non-contingency
of
professional fees or other compensation,
as well as Standards applicability, and
other disclosures.
6.0 Discussion
6.1 The Market Value concept and
definition are fundamental to all valuation
practice. A brief summary of essential
economic and procedural foundations is
presented in Concepts Fundamental to
Generally Accepted Valuation Principles
and Code of Conduct, the documents upon
which these Standards are predicated.
6.2 The concept of Market Value is not
dependent on an actual transaction taking
place on the date of valuation. Rather,
Market Value is an estimate of the price
that should be realised in a sale at the
valuation date under conditions of the
Market Value definition. Market Value is
a representation of the price to which a
buyer and seller would agree at that time
under the Market Value definition, each
previously
having
had
time
for
investigation of other market opportunities
and alternatives, and notwithstanding the
fact that it may take some time to prepare
formal contracts and related closing
documentation.
6.3 The concept of Market Value presumes
a price negotiated in an open and
competitive market, a circumstance that
occasionally gives rise to the use of the
adjective open before the words Market
Value. The words open and competitive
have no absolute meaning. The market for
one property could be an international
market or a local market. The market
45
could consist of numerous buyers and

sellers, or could be one characterised by a
limited number of participants.
The
market in which the property is exposed
for sale is not a definitionally restrictive or
constricted market. Stated conversely, the
omission of the word open does not
indicate that a transaction would be private
or closed.
6.4 Market valuations are generally based
on information regarding comparable
properties. The Valuation Process requires
a Valuer to conduct adequate and relevant
research, to perform competent analyses,
and to draw informed and supportable
judgments. In this process, Valuers do not
accept data without question but should
consider all pertinent market evidence,
trends, comparable transactions, and other
information.
Where market data are
limited, or essentially non-existent (as for
example with specialised properties), the
Valuer must make proper disclosure of
situation and must state whether the
estimate is in any way limited by
inadequacy of data. All valuations require
exercise of a Valuers judgment, but
reports should disclose whether the Valuer
bases the Market Value estimate on market
evidence, or whether the estimate is more
heavily based upon the Valuers judgment
because of the nature of the property and
lack of comparable market data.
6.5 Because changing conditions are
characteristic of markets, Valuers must
consider whether available data reflect and
meet the criteria for Market Value.
6.5.1 Periods of rapid changes in market
condition are typified by rapidly changing
prices, a condition commonly referred to as
disequilibrium. A period of disequilibrium
may continue over a period of years and
can constitute the current and expected
future market condition.
In other
circumstances, rapid economic change may
give rise to erratic market data. If some
sales are out of line with the market, the
PVS 1
IVS 1
Valuer will generally give them less

weight. It may still be possible for the
Valuer to judge from available data where
the realistic level of the market is.
Individual transaction prices may not be
evidence of Market Value, but analysis of
such market data should be taken into
consideration in the Valuation Process.
6.5.2 In poor or falling markets there may
or may not be a large number of willing
sellers. Some, but not necessarily all,
transactions may involve elements of
financial (or other) duress or conditions
that reduce or eliminate the practical
willingness of certain owners to sell.
Valuers must take into account all
pertinent factors in such market conditions
and attach such weight to individual
transactions that they believe proper to
reflect the market.
Liquidators and
receivers are normally under a duty to
obtain the best price in asset disposals.
Sales, however, may take place without
proper marketing or a reasonable
marketing period. The Valuer must judge
such transactions to determine the degree
to which they meet the requirements of the
Market Value definition and the weight
that such data should be given.
6.5.3 During periods of market transition
characterised by rapidly rising or falling
prices, there is a risk of over- or undervaluation if undue weight is given to
historic information or in unwarranted
assumptions are made regarding future
markets. In these circumstances Valuers
must carefully analyse and reflect the
actions and attitudes of the market and take
care that they fully disclose the results of
their investigations and findings in their
reports.
6.6 The concept of Market Value also
presumes that in a Market Value
transaction a property will be freely and
adequately exposed on the (open) market
for a reasonable period of time and with
reasonable publicity. This exposure is
46
presumed to occur prior to the effective

date of value. Markets for fixed assets
typically differ from those available from
stocks/shares, bonds, and other current
assets. Fixed assets tend to be unique.
They are usually sold less frequently and in
markets which are less formal and more
inefficient than, for example, markets for
listed securities. Further, fixed assets are
less liquid. For these reasons, and because
fixed assets do not commonly trade on a
public exchange, the application of the
concept of Market Value requires the use
of assumptions such as adequate market
exposure over a reasonable time period to
allow for proper marketing, and
completion of negotiations.
6.7 Revenue producing properties held as
long term investments by a property
company, pension (or superannuation
fund), property trust, or similar type of
owner are typically valued on the basis of
individual asset disposal pursuant to an
orderly plan. The aggregate value of such
assets viewed or treated as a portfolio or as
an assembled group of properties could
exceed or could be less than the sum of the
Market Value of each asset individually.
6.8 All valuations should refer to the
purpose and intended use of the valuation.
In addition to other reporting requirements,
the Valuer should make it abundantly clear
into which class each asset has been placed
if the function of the valuation is related to
the preparation of financial statements.
6.9 In exceptional circumstances Market
Value may be expressed as a negative
amount.
Situations include certain
leasehold properties, some specialised
properties, obsolete properties with
demolition costs exceeding land value,
some properties affected by environmental
contamination, and others.
7.0 Disclosure Requirements
PVS 1
IVS 1
7.1 Valuation Reports must not be

misleading. Valuations conducted for
the purpose of estimating and reporting
Market
Value
shall
meet
the
requirements of section 5 above.
Reports shall contain a specific
reference to the definition of Market
Value as set forth in this Standard,
together with specific reference as to
how the property has been viewed in
terms of its utility or its highest and best
use (or most probable use) and a
statement of all substantive assumptions.
7.2 In making Market Value estimates
the Valuer shall clearly identify the
effective date of valuation (the date at
which the value estimate applies), the
purpose and intended use of the
valuation, and such other criteria as are
relevant and appropriate to ensure
adequate and reasonable interpretation
of the Valuers findings, opinions, and
conclusions.
7.3 Although the concept, use, and
application of alternative expressions of
value may be appropriate in certain
circumstances, the Valuer shall ensure
that if such alternative values are
estimated and reported, they should not
be construed as representing Market
Value.
7.4 When valuations are made by an
Internal Valuer, i.e., one who is in the
employ of either the entity that owns the
assets or the accounting firm responsible
for preparing the entitys financial
records and/or reports there shall be a
specific disclosure in the Valuation
Report or Certificate of the existence
and nature of any such relationships.
8.0 Departure Provisions

8.1 In following this Standard any
departures must be in accordance with
directions provided in IVS 3, Valuation
Reporting.
47
PVS 2
IVS 2
Bases Other Than Market Value

This Standard should be read in the
context of the background material and
implementation guidance contained in
Concepts Fundamental to Generally
Accepted Valuation Principles;
1.0 Introduction
1.1 The objectives of International
Valuation Standard 2 (IVS 2) are to
identify, explain and distinguish bases of
value other than Market Value and to
establish standards for their application.
1.2 Market Value is the most appropriate
basis of value for a wide range of
applications.
However, alternative
valuation bases may be appropriate in
specific circumstances. It is essential that
both the Valuer and users of valuations
clearly understand the distinction between
Market Value and these other bases of
valuation and the effects (if any) that
differences between bases may have on
the applicability of the valuation.
1.3 The concept of Market Value is based
on specific, identified assumptions that are
set out in IVS 1. Other bases of valuation
require the application of different
assumptions, which if not clearly
identified, may result in misinterpretation
of the valuation.
2.0 Scope
2.1 This Standard defines and discusses
the application of valuation bases other
than Market Value for purposes other than
financial reporting.
3.0 Definitions
International
Definitions
Valuation
Standards
3.1 Basis of Value. A statement of the

fundamental measurement principles of a
valuation on a specified date.
3.2 Fair Value. The amount for which an
asset could be exchanged between
knowledgeable, willing parties in an
arms-length transaction.
Fair Value, an accounting concept, is
defined
in
International
Financial
Reporting Standards and other accounting
standards as the amount for which an asset
could be exchanged, or a liability settled,
between knowledgeable, willing parties in
an arms length transaction. Fair Value is
generally used for reporting both Market
and Non-Market Values in financial
statements. When undertaking a valuation,
where the Market Value of an asset can be
established, this value will equate to Fair
Value. (See Concepts Fundamental to
Generally Accepted Valuation Principles,
para. 8.1)
3.3 Investment Value, or Worth. The value
of property to a particular investor, or a
class of investors, for identified
investment or operational objectives. This
subjective concept relates specific
property to a specific investor, group of
investors, or entity with identifiable
investment objectives and/or criteria.
3.4 Special Purchaser. A purchaser to
whom a particular asset has Special Value
because of advantages arising from its
ownership that would not be available to
general purchasers in the market.
3.5 Special Value. An amount above the
Market Value that reflects particular
attributes of an asset that are only of value
to a Special Purchaser.
48
3.6 Synergistic Value4. An additional

element of value created by the
combination of two or more interests
where the value of the combined interest is
worth more than the sum of the original
interests.
4.0 Relationship to Accounting

Standards
4.1 For most purposes, valuations under
International
Financial
Reporting
Standards require the use of fair value.
This is a specific application of Fair Value
that may require more restrictive
assumptions than are required in general
use. International Valuation Application
1, Valuation for Financial Reporting,
discusses
the
specific
valuation
requirements under accounting standards.

these
Standards
and
Generally
Accepted Valuation Principles (GAVP),
it is mandatory that Valuers adhere to
all sections of the Code of Conduct
Disclosure and Reporting (sections 4, 5,
6, and 7).
5.1 When carrying out a valuation
under this standard the Valuer shall
ensure that
5.1.1 the estimate of value is based on
data and circumstances appropriate to
the valuation;
5.1.2 the estimate of value is undertaken
using
appropriate
methods
and
techniques;
5.1.3 the valuation is developed on the
basis of sufficient information to
PVS 2
IVS 2
support the analyses and conclusions

therein.
5.2 In reporting an estimate of value
under this standard the Valuer shall
5.2.1 comply with all the requirements
of International Valuation Standard 3,
Valuation Reporting. In particular, the
Valuer shall report the valuation in a
manner that will not be misleading (IVS
3, 5.1.1);
5.2.2 define the basis or bases of value
used and state the purpose and
intended use of the valuation, the
effective date of valuation, and the date
of the report (IVS 3, 5.1.2 and 5.1.3);
5.2.3 clearly identify and describe the
property and property rights and
interests valued and the scope of work
undertaken to develop the valuation
conclusion (IVS 3, 5.1.4 and 5.1.5);
5.2.4 specify all assumptions and
valuation is based (IVS 3, 5.1.6 and
5.1.7);
5.2.5 clearly distinguish the assumptions
that are different from or additional to
those underlying an estimate of Market
Value;
5.2.6 fully
explain
the
valuation
approaches and procedures that have
been applied and the reasoning that
supports the analyses, opinions and
conclusions in the report (IVS 3, 5.1.8);
5.2.7 include a statement that the
valuation has been performed in
accordance with IVSs, disclose any
departure
from
the
specific
requirements of the IVSs and provide
an explanation for such departure. (IVS
3, 5.1.10)
Synergistic Value or Plottage Value may also be

known as Marriage Value.
49
6.0 Discussion
6.1 A Basis of Valuation describes the
fundamental measurement principles of a
valuation. These principles may vary
depending on the purpose of the valuation.
A Basis of Valuation is not a statement of
the method used, nor a description of the
state of an asset or assets when exchanged.
Market Value is the most commonly
required basis and is defined and discussed
in IVS 1. This Standard defines and
discusses other valuation bases. These fall
into three principal categories:
6.1.1 The first category reflects the
benefits that an entity enjoys from
ownership of an asset. The value is
specific to that entity. Although under
some circumstances, it may be the same as
the amount that could be realised from sale
of the asset, this value essentially reflects
the benefits received by holding the asset,
and therefore does not necessarily involve
a hypothetical exchange.
Investment
Value, or Worth, fall into this category.
Differences between the value of an asset
to a particular entity and the Market Value
provide the motivation for buyers or
sellers to enter the market place.
6.1.2 The second category represents price
that would be reasonably agreed between
two specific parties for the exchange of an
asset.
Although the parties may be
unconnected and negotiating at armslength, the asset is not necessarily exposed
in the wider market and the price agreed
may be one that reflects the specific
advantages
(or
disadvantages)
of
ownership to the parties involved rather
than the market at large. This category
includes Fair Value, Special Value and
Synergistic Value.
6.1.3 The third category is value
determined in accordance with a definition
set out in a statute or a contract.
PVS 2
IVS 2
6.2 The application of Fair Value under

accounting standards is discussed in IVA
1. In accounting standards, Fair Value is
normally equated to Market Value.
6.3 For other purposes, Fair Value can be
distinguished from Market Value. Fair
Value requires the assessment of the price
that is fair between two specific parties
taking into account the respective
advantages or disadvantages that each will
gain from the transaction.
6.4 Fair Value is a broader concept than
Market Value. Although in many cases the
price that is fair between two parties will
equate to that obtainable in the general
market, there will be cases where the
assessment of Fair Value will involve
taking into account matters that have to be
disregarded in the assessment of Market
Value.
6.5 A common application of Fair Value
is for assessing the price that is fair for the
shareholding in a business, where
particular synergies between two specific
parties may mean that the price that is fair
between them is different from the price
that might be obtainable in the wider
market. In contrast, Market Value requires
any element of Special Value, of which
Synergistic Value is an example, to be
disregarded.
6.6 Special Value can arise where an asset
has attributes that make it more attractive
to a particular buyer, or to a limited
category of buyers, than to the general
body of buyers in a market. These
attributes can include the physical,
geographic,
economic
or
legal
characteristics of an asset. Market Value
requires the disregard of any element of
Special Value because at any given date it
is only assumed that there is a willing
buyer, not a particular willing buyer.
6.7 Synergistic Value can be a type of
Special Value that specifically arises from
50
the combination of two or more assets to

create a new asset that has a higher value
than the sum of the individual assets.
6.8 When Special Value is reported, it
should always be clearly distinguished
from Market Value.
6.9 A Basis of Valuation should not be
confused with assumptions that may also
be required to clarify the application of the
basis to a specific situation. Some terms
that are often used to describe a valuation
are not distinct bases of value as they
describe the state of the asset or the
circumstances under which it is assumed
to be exchanged, rather than the
underlying measurement objective. The
value may be measured on one of the
bases defined in section 3, or on the basis
of Market Value, see IVS 1. Examples of
such terms that are in common use
include:
6.9.1 Going Concern Value:
This
describes a situation where an entire
business is transferred as an operational
entity. Alternative valuation scenarios to a
going concern could include a transfer of
all the assets as a whole but following the
closure of the business, or a transfer of
specific assets currently used in the
business as individual items.
6.9.2 Liquidation Value: This describes a
situation where a group of assets
employed together in a business are
offered for sale separately, usually
following a closure of business. Although
often associated with a forced sale (see
6.11 below), these terms have distinct
meanings. There is no reason why assets
cannot be liquidated by an orderly sale
following proper marketing.
6.9.3 Salvage Value: This 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.
PVS 2
IVS 2
Philippine 6.9.3.1
Scrap Value: the value that the basic
recoverable materials (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.
6.10 Terms such as those in 6.9 should not
be used without further qualification.
Used alone, they are insufficient as a
reporting basis. By way of illustration, a
business that is a going concern may have
one value to a specific party (Investment
Value), another value between two
specific parties reflecting business
synergies (Fair Value), and yet another
value in the market (Market Value). It is
therefore necessary to state the underlying
valuation basis by the use of expressions
such as Market Value as a going
concern, Market Value for the
liquidation of the assets or Fair Value as
a going concern.
6.11 The term forced sale is often used
in circumstances where a seller is under
compulsion to sell and/or a proper
marketing period is not available. The
price obtainable in these circumstances
will not meet the definition of Market
Value. The price that could be obtained in
these circumstances will depend upon the
nature of the pressure on the seller or the
reasons why proper marketing cannot be
undertaken.
It may also reflect the
consequences for the seller of failing to
sell within a specified period. Unless the
nature of, and reason for, the constraints
on the vendor are known, the price
obtainable in a forced sale cannot
realistically be predicted. The price that a
seller will accept in a forced sale will
reflect its particular circumstances rather
than those of the hypothetical willing
seller in the Market Value definition. The
price obtainable in a forced sale will bear
only a coincidental relationship to Market
Value, or any of the other bases defined in
51
PVS 2
IVS 2
this standard. It is not a Basis of Valuation

as the forced sale is a description of the
situation under which the transfer takes
place, not a distinct measurement
objective.
7.2 If a valuation by an Internal Valuer

is made, there shall be a specific
disclosure in the Valuation Report of
the existence and nature of any such
relationship. (IVS 3, 7.1).
6.12 The third category of valuation bases

comprises those set by statute, regulation
or contract. Statutory bases are often
prescribed
for
taxation
purposes.
Examples of private contracts, prescribing
valuation definitions and assumptions,
include criteria for setting the price
payable under an option or for reviewing
the payments made under a lease. The
detailed interpretation of both statutory
and contract provisions are often subject to
precedent, established by court decisions.
Although many of the bases defined by
statute and contract may appear similar to
bases defined in these standards, unless
unequivocal reference is made to these
standards, their detailed application may
require an approach different from that
required by these Standards. Further
discussion of statutory or contractual
valuation bases is outside the scope of
International Standards.
7.3 If a Valuer is involved in a valuation

assignment in a capacity other than as a
Valuer, for example, as an independent
or impartial agent, as a consultant or
advisor to a business entity, or as a
mediator, the Valuer should disclose the
specific role taken in each assignment.
(IVS 3, 7.2)
7.4 The Valuer shall disclose the
regulatory
framework
and
any
departure
required
from
these
Standards to comply with local
legislations,
regulation
(including
accounting rules), or custom. (IVS 3,
7.3)

8.1 In following this Standard any
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.

7.1 Valuation Reports must not be
misleading. All valuations shall meet
the requirements of section 5 above.
The Code of Conduct requires that the
purpose and intended use of any
valuation be clearly reported, and that
full disclosure be made of the basis for
the valuation estimate, its applicability,
and its limitations.
52
PVS 3
IVS 3
Valuation Reporting
1.0 Introduction
2.0 Scope
1.1 The critical importance of a Valuation

Report, the final step in the valuation
process, lies in communicating the value
conclusion and confirming the basis of the
valuation, the purpose of the valuation,
and any assumptions or limiting
conditions underlying the valuation. The
analytical processes and empirical data
used to arrive at the value conclusion may
also be included in the Valuation Report to
guide the reader through the procedures
and evidence that the Valuer used to
develop the valuation.
2.1 The reporting requirements addressed

in this Standard apply to all types of
Valuation Reports.
1.2 The Valuation Report indicates the

value conclusion. It contains the name of
the Valuer and the date of the valuation. It
identifies the property and property rights
subject to the valuation, the basis of the
valuation, and the intended use of the
valuation.
It discloses all underlying
assumptions and limiting conditions,
specifies the dates of valuation and
reporting, describes the extent of
inspection, refers to the applicability of
these Standards and any required
disclosures, and includes the Valuers
signature.
1.3 Because of the key role of the
Valuation Report in communicating the
conclusion of a valuation to users and
third-party readers, this Standard sets forth
the following as its principal objective.
1.3.1 To discuss reporting requirements
consistent with professional best practice.
1.3.2 To identify essential elements to be
included in Valuation Reports.
Valuation Reporting
2.2 Compliance with these reporting

requirements is incumbent upon both
Internal and External Valuers.
2.3 Some instructions involving valuations
undertaken for specific purposes and
property types, e.g., financial reporting,
and lending, may differ from those given
for other assignments. The reader is
advised to consult those sections of the
International Valuation Standards (IVSs)
that address these situations, i.e.,
International Valuation Applications 1 and
2 (IVA 1 and IVA 2).
3.0 Definitions
3.1 Compliance Statement. An affirmative
statement attesting to the fact that the
Valuer has followed the ethical and
professional requirements of the IVSC
Code of Conduct in performing the
assignment.
3.2 Oral Report.
The results of a
valuation, verbally communicated to a
client or presented before a court either as
expert testimony or by means of
deposition. A report communicated orally
to a client must be supported by a work
file and at a minimum followed up by a
written summary of the valuation.
3.3 Special, unusual, or extraordinary
assumptions.
Before completing the
acquisition of a property, a prudent
purchaser in the market typically exercises
due diligence by making customary
enquiries about the property. It is normal
for a Valuer to make assumptions as to the
53
most likely outcome of this due diligence

process and to rely on actual information
regarding such matters as provided by the
client. Special, unusual, or extraordinary
assumptions may be any additional
assumptions relating to matters covered in
the due diligence process, or may relate to
other issues, such as the identity of the
purchaser, the physical state of the
property, the presence of environmental
pollutants
(e.g.,
ground
water
contamination), or the ability to redevelop
the property. (See para. 5.1.7 below.)
3.4 Specifications for the Valuation
Assignment.
The first step in the
Valuation Process, which establishes the
context and scope/extent of the assignment
and resolves any ambiguity 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 valuation assignment
include the following seven elements:
3.4.1 An identification of the real, personal
(plant, machinery, equipment, furniture
and fixtures), business or other property
subject to the valuation and other classes
of property included in the valuation
besides the primary property category;
3.4.2 An identification of the property
rights (sole proprietorship, partnership, or
partial interest) to be valued;
3.4.3 The intended use of the valuation
and any related limitation; and the
identification of any subcontractors or
agents and their contribution;
3.4.4 A definition of the basis or type of
value sought;
3.4.5 The date as of which the value
estimate applies and the date of the
intended report;
Valuation Reporting
PVS 3
IVS 3
3.4.6 An identification of the scope/extent

of the valuation and of the report; and
3.4.7 An identification of any contingent
and limiting conditions upon which the
valuation is based.
3.5 Valuation Report. A document that
records the instructions for the 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.
3.6 Written Report. The results of a
valuation communicated to a client in
writing, which includes electronic
communication. Written reports may be
detailed narrative documents containing
all pertinent materials examined and
analyses performed to arrive at a value
conclusion or abbreviated pertinent
narrative documents, including periodic
updates of value, forms used by
governmental and other agencies, or letters
to clients.
4.0 Relationship
Standards
to
Accounting
4.1 Where applicable, the Valuation

Report shall meet or exceed the
requirements of the International Financial
Reporting Standards (IFRSs)/International
Accounting Standards (IASs) and the
International Public Sector Accounting
Standards (IPSASs).
4.2 Valuation for Financial Reporting,
which is the focus of IVA 1, should be
read in conjunction with this Standard.
54

these
Standards
and
Generally
it is mandatory that Valuers adhere to
all sections of the IVS Code of Conduct
6, and 7).
5.1 Each Valuation Report shall
5.1.1 clearly and accurately set forth the
conclusions of the valuation in a manner
that is not misleading;
5.1.2 identify the client, the intended
use of the valuation, and relevant dates;
5.1.2.1 the date as of which the value
estimate applies,
5.1.2.2 the date of the report, and
PVS 3
IVS 3
5.1.6 specify all assumptions and

value conclusion is contingent;
5.1.7 identify special, unusual, or
extraordinary assumptions and address
the probability that such conditions will
occur;
5.1.8 include a description of the
information and data examined, the
market
analysis
performed,
the
valuation approaches and procedures
followed, and the reasoning that
supports the analyses, opinions, and
conclusions in the report;
5.1.9 contain a clause specifically
prohibiting the publication of the report
in whole or in part, or any reference
thereto, or to the valuation figures
contained therein, or to the names and
professional affiliation of the Valuers,
without the written approval of the
Valuer;
5.1.2.3 the date of the inspection;

5.1.3 specify the basis of the valuation,
including type and definition of value;
5.1.3.1 When any component of the
valuation is valued on more than one
basis of value, a clear distinction must
be made between the bases.
5.1.4 identify and describe the
5.1.4.1 property rights or interests to be
valued,
5.1.10 include a Compliance Statement

that the valuation has been performed
in accordance with IVSs, disclose any
departure
from
the
specific
requirements of the IVSs and provide
an explanation for such departure in
accordance with the IVS Code of
Conduct;
5.1.11 include the name, professional
qualifications, and signature of the
Valuer.
Philippine 5.1.11.1
5.1.4.2 physical and legal characteristics

of the property, and
5.1.4.3 classes of property included in
the valuation other than the primary
property category;
5.1.5 describe the scope/extent of the
work used to develop the valuation;
Valuation Reporting
It is accepted practice for External

Valuers to stamp their official dry seal
and indicate their license number in a
report for security purposes.
Philippine 5.1.11.2
It is accepted practice to attach to the
valuation report an accompanying
plat/location plan, photographs, and
55
PVS 3
IVS 3
copies of covering title, tax declaration

and survey plan of the property being
valued.
the report, legal requirements, property

type, and the nature and complexity of
the valuation issue or problem.
5.2 When Valuation Reports are

transmitted electronically, a Valuer
shall take reasonable steps to protect
the integrity of the data/text in the
report and to ensure that no errors
occur in transmission. Software should
provide for security of transmission.
5.5 For all Valuation Reports, sufficient

documentation must be retained in the
work file to support the results and
conclusions of the valuation and must
be held for a period of at least five years
after completion.
5.2.1 The origin, date and time of the

sending as well as the destination, date
and time of receipt should be identified.
Software should allow confirmation that
the quantity of data/text transmitted
corresponds to that received and should
render the report as read-only to all
except the author.
5.2.2 The Valuer should ensure that the
digital signature(s) is/are protected and
fully under the Valuers control by
means
of
passwords,
Personal
Identification
Numbers
(PIN),
hardware devices (secure cards), or
other means. A signature affixed to a
report electronically is considered as
authentic and carries the same level of
responsibility as a written signature on
a paper copy report.
5.2.3 A true electronic and/or paper
copy of an electronically transmitted
report must be retained by the Valuer
for the period required by law in his or
her jurisdiction, in any event not less
than five years. Files of the records of
electronically transmitted reports may
be kept on electronic, magnetic, or other
media.
5.3 The presentation of a Valuation
Report is decided by the Valuer and the
client based on the instructions or
specifications for the assignment.
5.4 The type, content, and length of a
report depend on the intended user of
Valuation Reporting
6.0 Discussion
6.1 The context in which a valuation
figure is reported is as important as the
basis and accuracy of the figure itself. The
value conclusion should make reference to
the market evidence, and procedures and
reasoning that support that conclusion.
6.2 Communicating the answer to the
valuation question in a consistent and
logical manner demands a methodical
approach that enables the user to
understand the processes followed and
their relevance to the conclusion.
6.3 The report should convey to the reader
a clear understanding of the opinions
being expressed by the Valuer and also be
readable and intelligible to someone with
no prior knowledge of the property.
6.4 The report should demonstrate clarity,
transparency, and consistency of approach.
6.5 The Valuer should exercise caution
before permitting the valuation to be used
other than for the originally agreed
purpose.

7.1 When valuations are made by an
Internal Valuer, specific disclosure shall
be made in the Valuation Report of the
existence and nature of the relationship
between the Valuer and the entity
controlling the asset.
56
PVS 3
IVS 3
7.2 If a Valuer is involved in a valuation

assignment in a capacity other than as a
Valuer, for example, as an independent
or impartial agent, as a consultant or
advisor to a business entity, or as a
mediator, the Valuer should disclose the
specific role taken in each assignment.
8.3 In any circumstances involving a

departure from the reporting of Market
Value, the Valuer should clearly identify
that the valuation reported is other than
Market Value.

regulatory
framework
and
any
departure
required
from
these
legislation,
regulation
(including
accounting rules), or custom.

8.1 No departure is permissible from
the requirements that each Valuation
Report clearly and accurately set forth
the conclusions of the valuation, and
clearly disclose any assumptions and
limiting conditions, which affect the
valuation and value conclusion.
8.2 If a Valuer is asked to perform an
assignment that departs from these
requirements or calls for something less
than, or different from, the work
normally performed in compliance with
the IVSs and the IVS Code of Conduct,
the Valuer should accept and perform
such services only when the following
conditions can be met:
8.2.1 The Valuer determines that the
instructions will not tend to mislead the
intended users.
8.2.2 The Valuer determines that
valuation is not so limited that
results are no longer reliable
credible for the intended purpose
use of the valuation.
the
the
and
and
8.2.3 The Valuer advises the client that

the instructions for the assignment
involve a departure from the Standards
that must be disclosed in full in the
Valuation Report.
Valuation Reporting
57
PVA1
IVA1
Valuation for Financial Reporting

Material for this Application is drawn
from International Financial Reporting
Standards (IFRSs) published by the
International Accounting Standards Board
(IASB).
IFRSs comprise individually
numbered standards. Those originally
published before 2004 are denoted IASs
(International Accounting Standards) 1-41.
Those published subsequently are prefixed
as IFRSs.
Extracts from IFRSs are
reproduced in this publication of the
International Valuation Standards (IVSs)
with the permission of IASB.
The approved text of the IFRSs is that
published by IASB in the English
language, and copies may be obtained
directly from IASB, 30 Cannon Street,
London EC4M 6HX, United Kingdom, Email: [email protected]
IFRSs, Exposure Drafts and other
publications of the IASB are protected by
the copyright of the IASB.
IFRS, IAS, IASC, IASB and
International Accounting Standards are
Trade Marks of the IASB and should not
be used without the approval of the
International Accounting Standards Board.
1.0 Introduction
1.1 The objective of this Application is to
explain the principles that apply to
valuations prepared for use in financial
statements and related accounts of
business entities. Valuers undertaking
work of this nature should have an
understanding of the accounting concepts
and principles underlying the relevant
International Accounting Standards.
1.2 The Valuers adherence to marketbased definitions, objectivity, and full
disclosure of relevant matters within a
pertinent and user-friendly format are

fundamental to the requirements of
valuation for financial reporting.
2.0 Scope
2.1 This Application applies to all
valuations of asset classes included in any
financial statement, which fall within the
skills and expertise of Valuers.
2.2 IVSs
facilitate
cross-border
transactions and the viability of global
markets through harmonisation and
transparency in financial reporting. As
such this Application is developed in the
context
of
International
Financial
Reporting Standards (IFRSs) as at 31
March 2004.
2.3 IFRSs adopt two models for the
recognition of property assets in the
balance sheet: a cost model, and a fair
value model. Where the fair value model
is applied, a current revaluation of the
asset is required, and this Application
focuses on these particular circumstances
where Market Values are to be reported.
2.4 Legislative, regulatory, accounting, or
jurisprudence requirements may oblige
modification of this Application in some
countries or under certain conditions. Any
departure due to such circumstances must
be referred to and clearly explained in the
Valuation Report.
3.0 Definitions
International
Definitions
Valuation
Standards
3.1 Depreciated Replacement Cost. The

current cost of replacing an asset with its
modern equivalent asset less deductions
58
PVA1
IVA1
for physical deterioration and all relevant

forms of obsolescence and optimisation.
3.2 Improvements. Buildings, structures
or modifications to land, of a permanent
nature, involving expenditures of labour
and capital, and intended to enhance the
value or utility of the property.
Improvements have differing patterns of
use and economic lives.
3.3 Market Value. The estimated amount
for which a property should exchange on
the date of valuation between a willing
buyer and willing seller in an arms-length
transaction after proper marketing wherein
the parties had each acted knowledgeably,
prudently, and without compulsion (IVS 1,
para. 3.1).
3.4 Specialised Property. A property that
is rarely if ever sold in the market, except
by way of sale of the business or entity of
International
Financial
Standards Definitions
Reporting
3.5 Carrying Amount. The amount at

which an asset is recognised after
deducting any accumulated depreciation
(amortisation)
and
accumulated
impairment losses thereon (IAS 36, para.
6).
asset over its useful life (IAS 16, para. 6;

IAS 36, para. 6).
3.9 Economic Life. Either
a) the period over which an asset is
expected to be economically usable by one
or more users; or
b) the number of production or similar
units expected to be obtained from the
asset by one or more users (IAS 17, para.
4).
3.10 Fair Value. The amount for which
an asset could be exchanged or a liability
settled between knowledgeable willing
parties in an arms-length transaction
((IAS 16, para. 6).
3.11 Fair Value Less Costs to Sell. The
amount obtainable from the sale of an
asset or cash-generating unit in an armslength
transaction
between
knowledgeable, willing parties, less the
costs of disposal (IAS 36, para. 6).
3.12 Impairment Loss. The amount by
which the carrying amount of an asset or
cash-generating
unit
exceeds
its
recoverable amount (IAS 36, para. 6).
3.13 Investment Property. Property (land
or building, or part of a building, or both)
held (by the owner or by the lessee under a
finance lease) to earn rentals or for capital
appreciation, or both, rather than for:
3.6 Cash Generating Unit. The smallest

identifiable group of assets that generates
cash inflows that are largely independent
of the cash inflows from other assets or
group of assets (IAS 36, para. 6).
a) use in the production or supply of

goods or services or for administrative
purposes, or
3.7 Depreciable Amount. The cost of an

asset, or other amount substituted for cost
(in the financial statements), less its
residual value (IAS 16, para. 6).
3.14 Net Realisable Value. The estimated

selling price in the ordinary course of
business, less the estimated costs of
completion and the estimated costs
necessary to make the sale (IAS 2, para.
6). Net realisable value refers to the net
amount that an entity expects to realise
3.8 Depreciation.
The systematic
allocation of the depreciable amount of an
b) sale in the ordinary course of business

(IAS 40, para. 5).
59
from the sale of inventory in the ordinary

course of business. Fair Value reflects the
amount for which the same inventory
could
be
exchanged
between
knowledgeable and willing buyers and
sellers in the market place. The former is
an entity-specific value; the latter is not.
Net realisable value for inventories may
not equal fair value less costs to sell (IAS
2, para. 7).
3.15 Owner Occupied Property. Property
held (by the owner or by the lessee under a
finance lease) for use in the production or
supply of goods or services or for
administrative purposes (IAS 40, para. 5).
3.16 Property, Plant, and Equipment.
Tangible items that
PVA1
IVA1

asset by an entity (IAS 16, para. 6; IAS 36,
para. 6; IAS 38, para. 8).
In regard to leases, useful life is defined
as:
The estimated remaining period, from the
commencement of the lease term, without
limitation by the lease term, over which
the economic benefits embodied in the
asset are expected to be consumed by the
entity (IAS 17, para. 4).
3.21 Value in Use. The present value of
the future cash flows expected to be
derived from an asset or cash-generating
unit (IAS 36, para. 6).
a) are held for use in the production or

supply of goods or services, for rental to
others, or for administrative purposes; and
4.0 Relationship
Standards
b) are expected to be used during more

than one period. (IAS 16, para. 6).
4.1 This Application applies the principles

developed in IVS 1, IVS 2, and IVS 3 to
the requirements of IASs/IFRSs.
3.17 Recoverable
Amount.
The
recoverable amount of an asset or cash
generating unit is the higher of its fair
value less costs to sell and its value in use
(IAS 36, para. 6).
3.18 Residual Value.
The estimated
amount that an entity would currently
obtain from disposal of an asset, after
deducting the estimated costs of disposal,
if the asset were already of the age and in
the condition expected at the end of its
useful life (IAS 16, para. 6).
3.19 Revalued Amount. The fair value of
an asset at the date of the revaluation less
any subsequent accumulated depreciation
and subsequent accumulated impairment
losses (IAS 16, para. 31).
3.20 Useful life. Either
to
Accounting
4.2 This Application focuses on valuation

requirements under IAS 16, Property,
Plant and Equipment; IAS 17, Leases; and
IAS 40, Investment Property. Reference is
also made to valuation requirements under
IAS 36, Impairment of Assets, IAS 2,
Inventories; and IFRS 5, Non-current
Assets Held for Sale and Discontinued
Operations.
4.3 IASB is currently undertaking
fundamental reviews of both the
measurement of assets and liabilities in
financial statements and of lease
accounting. Although this Application has
been updated to reflect the revisions made
to various standards in 2003 as part of the
IASB Improvements Project, further
changes may be necessary as a result of
these continuing review projects.

expected to be available for use by an
entity; or
60
PVA1
IVA1
5.0 Application
5.3 IAS 16, Cost and Fair Value

this
Application
and
Generally
it is essential that Valuers adhere to all
sections of the IVS Code of Conduct
6, and 7).
5.3.1 IAS 16 deals with the cost model in

paragraph 30 as follows:
5.1 Classification of Assets.

Valuers
shall obtain from the directors of the
owning entity a list of assets to be
valued, designating them as operational
assets, i.e., assets requisite to the
operations of the entity, or nonoperational assets, being properties held
for future development, investment, or
assets surplus to the operations of the
entity.
5.3.2 The fair value model, which

requires regular revaluations, is
explained in paragraph 31 as follows:
5.2 Applicable
Standards.
The
classification of assets determines which
IAS or IFRS applies. IAS 16 requires
non-current property and plant assets
held for the production or supply of
goods or services to be recognised
initially in the balance sheet at cost and
thereafter carried in accordance with
either the cost model or fair value model
described in 5.3.
Other accounting standards that
require or permit the valuation of
tangible assets include:
Investment Property IAS 40
Leases IAS 17
Impairment of Assets IAS 36
Inventories IAS 2
Business Combinations IFRS 3
Non-current Assets Held for Sale

and Discontinued Operations IFRS 5
After recognition as an asset, an item

of property, plant, and equipment shall
be carried at its cost less any
accumulated depreciation and any
accumulated impairment losses.

of property, plant and equipment whose
fair value can be measured reliably
shall be carried at a revalued amount,
being its fair value at the date of the
revaluation
less
any
subsequent
accumulated
depreciation
and
subsequent accumulated impairment
losses. Revaluations shall be made with
sufficient regularity to ensure that the
carrying amount does not differ
materially from that which would be
determined using fair value at the
balance sheet date.
5.3.3 Fair value is not necessarily
synonymous with Market Value. It is
used throughout IFRSs in differing
contexts.
5.3.4 Financial statements are produced
on the assumption that the entity is a
going concern unless management
either intends to liquidate the entity or
cease trading, or has no realistic
alternative but to do so. (IAS 1, para.
23).
This assumptions therefore
underlies the application of fair value to
property,
plant, machinery,
and
equipment, except in cases where it is
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.
61
5.4
Valuations under IAS 16.
Where an entity adopts the fair value

revaluation option under IAS 16, the
assets are included in the balance sheet
at their fair value as follows:
a) The fair value of land and
buildings is usually determined from
market-based evidence by appraisal
that is normally undertaken by
professionally qualified Valuers. The
fair value of items of plant and
equipment is usually their Market Value
determined by appraisal (IAS 16, para.
32).
b) If there is no market-based
evidence of fair value because of the
specialised nature of the item of
property, plant and equipment and the
item is rarely sold, except as a part of a
continuing business, an entity may need
to estimate fair value using an income
or depreciated replacement cost
approach (IAS 16, para. 33).
5.4.1 IVSC consider that a professional
Valuer undertaking an appraisal for
this purpose should report the Market
Value of the asset. Any assumptions or
qualifications made in applying Market
Value should be discussed with the
entity and disclosed in the report.
5.4.2 The valuation conclusion shall be
reported in accordance with IVS 3,
Valuation Reporting.
Valuers shall
ensure that reports include sufficient
information for the entity to meet the
requirements of IAS 16, para. 77, when
preparing financial statements:
a) the effective date of the revaluation;
b) whether an Independent Valuer was
involved (Note, IVSC interprets this as
an External Valuer);
PVA1
IVA1
c) the
methods
and
assumptions applied;
significant
d) the extent to which the values were

determined directly by reference to
observable prices in an active market or
recent market transactions on armslength terms, or were estimated using
other valuation techniques.
5.5 Valuations under
Investment Property.
IAS
40
Where an entity opts to account for

investment property using the fair value
model, IVSC considers that the
requirements of this model are met by
the Valuer adopting Market Value.
Further guidance on Investment
Property is provided at para. 6.7.
5.5.1 IAS 40, para. 75, requires amongst
others the following disclosures, which
the Valuer should include in the Report
in addition to the requirements of IVS
3:
a) the
methods
and
significant
assumptions applied in determining the
fair value of investment property,
including a statement whether the
determination of fair value was
supported by market evidence or was
more heavily based on other factors
(which the entity should disclose)
because of the nature of the property
and lack of comparable market data;
and
b) the extent to which the fair value of
investment property (as measured or
disclosed in the financial statements) is
based on a valuation by an Independent
Valuer (IVSC interprets this as an
External Valuer), who holds a
recognised and relevant professional
qualification and who has recent
experience in the location and category
of the investment property being
valued.
62
5.6 Valuation Requirements for Leased

Assets IAS 17
5.6.1 Leased assets are classified under
IAS 17 as either finance leases or
operating leases (see para. 6.6.1 below
and Addendum A).
If a lease is
classified as a finance lease, the fair
value of the asset is required to establish
the amount of the asset and liability
recorded by the entity on its balance
sheet. (IAS 17, para. 20).
5.6.2 For leases of land and buildings
special rules apply, which are described
in para. 6.6.3. For all property, other
than investment property, land and
buildings have to be considered
separately for classification as either a
finance lease or an operating lease.
5.6.3 IAS 40 allows Investment Property
held by a lessee to be accounted for as a
finance lease under IAS 17, subject to
further special rules.
Firstly, no
allocation is made between the land and
buildings. Secondly, the fair value is
recognised as the value subject to the
lessees future liabilities under the lease.
5.6.4 IVSC considers that in each case
the requirement to establish the fair
value of the leased asset under IAS 17,
para. 20, is met by the Valuer reporting
the Market Value. For leases of real
estate, this is the Market Value of the
lease interest held by the lessee. For
leases of other assets, it is normally the
Market
Value
of
the
asset
unencumbered by the lease, as the
liability is recorded separately.
5.7 Valuation of Impaired Assets IAS
36
5.7.1 Impairment arises where there is a
permanent decrease in the value of an
asset below its carrying amount. The
entity is required to write down the
carrying amount of an impaired asset to
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the higher of its value in use or fair

value less costs to sell.
The
requirements are discussed further at
para. 6.8.2.
5.8 Valuations
after
Combinations IFRS 3
Business
5.8.1 Where a business acquires or is

merged with another, the acquirer has
to account for the assets and liabilities
of the acquiree at their fair value as of
the acquisition date. For identifiable
assets and liabilities, IVSC considers
that the Valuer should report the
Market Value as they existed at the date
of acquisition.
5.9 Surplus Assets IFRS 5
5.9.1 Under IFRS 5, Non-Current Assets
Held for Sale and Discontinued
Operations. Surplus assets are to be
separately identified. Such assets may
be accounted for individually or as a
disposal group, i.e., a group of assets
to be disposed of together by sale or
otherwise, and the liabilities directly
associated with those assets that will
also be transferred in the transaction.
Surplus assets are to be initially
accounted for at the lower of the
carrying amount and the fair value less
costs to sell, and subsequently at fair
value less cost to sell. Valuers should
therefore ascertain whether surplus
assets are to be valued as individual
items, or as a group or portfolio of
assets that will be disposed of in a single
transaction, and report the Market
Value
with
the
appropriate
assumptions.
5.10 Properties Held for Sale in the
Ordinary Course of Business IAS 2
5.10.1 Valuations of properties held for
sale in the ordinary course of business
should comply with the requirements of
IAS 2, Inventories. These properties
63
are measured at the lower of cost and

net realisable value. Net realisable value
is the Market Value less the costs of sale.
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e) aircraft;
f) motor vehicles;
g) furniture and fixtures;
5.11 Selling Costs
h) office equipment.
5.11.1 When instructed to value

impaired or surplus assets, or assets
that are held for sale in the course of
business, the Valuer must report their
Market Value without deducting selling
costs. If the client requests the Valuer
to advise on the costs to sell the assets,
such costs are to be reported separately.
When an item is revalued, the entire class

to which it belongs should be revalued in
order to avoid both selective revaluations
and the reporting of a mix of costs and fair
values as at different dates. An asset class
for this purpose is a grouping of assets of a
similar nature and use in an entitys
operation.
5.12 Biological Assets IAS 41
6.2 Depreciation IAS 16
5.12.1 These include Agricultural and

Forestry assets. The Valuer should
value these assets in accordance with
the guidance in GN 10.
6.2.1 IAS 16, paras. 43 62, sets out the

requirements for an entity to account for
the depreciation of property, plant and
machinery assets.
Valuers may be
requested to allocate value between
different elements of an asset, to advise on
the residual value or to advise on the
future life of an asset.
5.13 Co-operation
with
Auditors.
Subject to first obtaining the consent of
their client, Valuers shall discuss and
explain their valuations openly with the
entitys auditors.
6.0 Discussion
6.1 Identification of Asset Class
Separate disclosures are required for each
class of property, plant and equipment.
IAS 16, para. 73, requires that financial
statements shall disclose for each class the
measurement basis used for determining
the
gross
carrying
amount,
the
depreciation method used, and the useful
lives or the deprecation rates used. A class
of property, plant or equipment is a
grouping of assets of a similar nature and
use. The following are examples of
separate classes (IAS 16, para. 37):
a) land;
b) land and buildings;
c) machinery;
d) ships;
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
be depreciated separately. Where parts
have a similar useful life and will
depreciate at a similar rate, they may be
grouped in determining the depreciation
charge. Valuers may be consequently
requested to allocate a valuation they have
provided to the different component parts
of an asset in order to enable the entity to
depreciate them separately.
6.2.3 Residual Value. The residual value
is deducted from the carrying amount of
the asset to determine the amount the
entity has to depreciate.
If the
management policy of the entity involves
disposal after a specific time, the useful
life of an asset may be less than its
economic life.
IAS 16, para. 58,
recognises that land normally has an
unlimited useful life and therefore should
be accounted for separately.
It also
64
provides that an increase in the value of

land should not affect the determination of
the depreciable amount of the building.
6.2.4 Future life. A Valuer can advise on
the remaining economic life of the asset.
When reporting the economic life of
buildings, improvements, plant, machinery
and equipment, it should be stated that this
is not necessarily the same as the useful
life to the entity, which is subject to any
policy of the entity on future disposal or
renewal.
6.2.5 Reporting Requirements: When
providing allocations, or estimating the
residual value of an element of an asset
based on an apportionment of the value of
the completes asset, the Valuer should
state that the figures provided are
hypothetical allocations of the value of the
whole item prepared solely for calculating
the appropriate rate of depreciation in the
entitys financial statements, and that these
figures should not be relied upon for any
other purpose.
6.3 Alternative Use Value
If an owner-occupied property has
potential for an alternative use, which
would result in its value in isolation from
the business being higher than its value as
part of the cash-generating unit to which it
belongs, the Valuer shall report the Market
Value for that alternative use. A statement
should also be made that the value for the
alternative use takes no account of issues
such as business closure or disruption and
the associated costs that would be incurred
in achieving the alternative use, and that
these should be considered by the entity
when deciding the appropriate amount to
adopt as fair value.
6.4 Specialised Property
Both IVSs and IAS 16 recognise that there
are categories of assets for which marketbased evidence may be unavailable
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because of their specialised nature. It

endorses the application of either an
income or depreciated replacement cost
approach to the valuation of these assets.
The choice of approach is not dictated by
the type of asset but by the presence or
absence of market evidence. For further
discussion and guidance on the use of
these approaches see paras. 5.12 and 5.13
of GN 1 and section 5 of GN 8.
6.5 Frequency of Revaluation
Paragraph 31 of IAS 16 states:
Revaluations shall be made with
carrying amount does not differ materially
from that which would be determined
using fair value at the balance sheet date.
6.6 IAS 17 Leased Property, Plant and
Equipment
6.6.1 IAS 17 deals with the accounting for
assets that are held under a lease. All
leases require classification as either
operating leases or finance leases (see
para. 5.6.1 above and Addendum A).
Different accounting treatments apply to
each type of lease. A finance lease is
recorded in a lessees balance sheet as
both an asset and a liability at amounts
equal to the fair value of the asset or, if
lower, the present value of the minimum
lease payments, each determined as at the
inception of the lease. Any initial direct
costs incurred by the lessee are added to
the amount recognised as an asset.
6.6.2 Valuers may be required to advise on
the fair value of the asset at the inception
of the lease to enable a lessee to account
for the asset correctly in accordance with
IAS 17.
6.6.3 Special provisions apply to leases of
land and buildings, IAS 17, para. 14, states
that because a characteristic of land is
that it normally has an indefinite economic
life a lease of land will be an operating
65
lease. Where a lease is of land and

buildings, these elements have to be
considered separately for the purposes of
lease classification (IAS 17, para. 15).
Most leases of real property will grant the
lessee rights to occupy both the land and
buildings, following which the interest in
both elements reverts to the lessor. If the
lessee has to maintain the building and
hand it back to the lessor in good repair, it
is probable that both elements will
correctly be classified as operating leases
(see Addendum A). If both elements are
not considered to share the same
classification,
the
minimum
lease
payments (including any initial capital
payment) are allocated between the land
and buildings elements in proportion to the
relative fair values of the leasehold
interests in the two elements at the
inception of the lease.
If the lease
payments cannot be reliably allocated the
entire lease is treated as a finance lease,
unless it is clear that both elements are
operating leases (IAS 17, para. 16). This
allocation is not required in the case of a
lessees interest accounted for as
investment property (IAS 17, para. 18).
6.6.4 For further guidance on Leasehold
interests, see Addendum A.
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for separately. If the parts could not be

sold separately, the property is an
investment
property only
if
an
insignificant proportion is held for the
production or supply of goods or services
or for administrative purposes (IAS 40,
para. 10).
6.7.1.2 Property leased to a subsidiary or
parent under an inter-company leasing
arrangement does not qualify as
investment property in the consolidated
financial statements of the group, but may
be treated as such in the individual
financial statements of the lessor entity
(IAS 40, para. 15).
6.7.2 Investment Property is measured
initially at cost. After initial recognition
an entity may choose to adopt either:
a) The Fair Value Model. Investment
property should be measured at fair value
and changes recognised in the profit and
loss statement; or
b) The Cost Model. The historic cost
model is in accordance with the model
described in IAS 16. An entity that
chooses the (historic) cost model should
nonetheless disclose the fair value of its
investment property.
6.7 IAS 40 Investment Property

6.7.1 IAS 40 defines an investment
property as a property (land or a
buildingor part of a buildingor both)
held by the owner, or by a lessee under a
finance lease, to earn rentals, or for capital
appreciation or both. It excludes owneroccupied property used for the production
or supply of goods and services, or for
administrative purposes, and also property
held for sale in the ordinary course of
business.
6.7.1.1 If part of a property is held as an
investment property and part is owneroccupied, or if the parts could be sold or
leased separately, the parts are accounted
6.7.2.1 The fair value model is described

in detail in IAS 40, paras. 33 55. The
Market Value of the entitys interest in the
investment property derived in accordance
with IVS 1 accords with these detailed
requirements. The Market Value will
reflect any current leases, current cash
flows and any reasonable assumptions
about future rental income or outgoings.
6.7.3 Leasehold investment property. A
property held under a lease, rather than
owned outright, and that otherwise meets
the definition of an investment property,
may be accounted for using the fair value
model. If this option is taken for one such
property held under a lease, all property
66
classified as investment property shall be

accounted for using the fair value model
(IAS 40, para. 6).
6.7.3.1 IAS 40, para. 50(d), recognises that
the fair value of an investment property
held under a lease will reflect the net
income after deduction of future lease
liabilities. Although the entity is required
to add to the reported fair value any
recognised leased liability to arrive at the
carrying amount for accounting purposes,
this does not affect the requirement for the
Valuer to report Market Value.
6.7.3.2 At
initial
recognition
an
investment property held under a lease
shall be accounted for as though it were a
finance lease under IAS 17, para. 20, i.e.,
at the fair value of the property, or if
lower, at the present value of the minimum
lease payments. Any capital sum paid to
acquire the property interest is treated as
part of the minimum lease payments and is
therefore included in the cost of the asset
(IAS 40, para. 25).
6.7.3.3 Subsequent measurement of an
investment property held under an
operating lease requires the fair value
model to be adopted (see para. 6.6.3.1
above).
6.7.4 External Valuations. Entities are
encouraged, but not required, to determine
the fair value of investment property on
the basis of a valuation by an Independent
(External) Valuer who holds a recognised
and relevant professional qualification and
who has recent experience in the location
and category of the investment property
being valued (IAS 40, para. 26).
6.8 Other Requirements under IASs
6.8.1 Portfolios:
A collection or
aggregation of properties held by a single
ownership and jointly managed is referred
to as a portfolio. The Market Value of
such assets viewed or treated as a portfolio
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or as an assembled group of properties

could exceed or could be less than the sum
of the Market Value of each asset
individually. Where this is the case, it
should be reported separately to the
directors or trustees.
6.8.2 Impairment: An entity is required,
under IAS 36, Impairment of Assets, to
review, at each balance sheet date,
whether there is any indication that a
tangible asset may be impaired.
Impairment might be indicated by, for
example, a reduction in the value of the
asset because of market or technological
changes, obsolescence of the asset, asset
underperformance in comparison to the
expected return, or an intention to
discontinue or restructure operations. If
impairment is considered to have arisen,
the carrying amount of the asset, derived
from either its historic cost or an earlier
valuation should be written down to the
recoverable amount, which is the higher of
the assets value in use or its fair value
less costs to sell. Value in use reflects the
value that the entity will obtain from the
asset throughout its remaining useful life
to the business and its eventual disposal.
Although entity-specific, the valuation
inputs for the value in use of an asset
should be market determined wherever
possible. However, if the value an entity
can obtain from the continued use of an
asset is less than the net proceeds that
could be obtained from its immediate
retirement and disposal, the carrying
amount should reflect this latter figure.
The fair value less costs to sell of an asset
is its Market Value less the reasonably
anticipated selling costs.
6.8.3 Disrupted Markets: When markets
are disrupted or suspended, Valuers must
be vigilant in their analyses as explained in
IVS 1, paragraph 6.5. Under IAS 29,
Financial Reporting in Hyperinflationary
Economics, Valuers may be required to
assess balance sheet value.
67
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7.1 The Valuer shall make all
disclosures required under IVS 3,
7.2 For disclosures required under
IFRSs/IASs, see paragraphs 5.4.2, 5.5.1
and 6.1 above.
regulatory
framework
and
any
departure
required
from
these
legislation,
regulation
(including

8.1 In following this Application any
directions made in IVS 3, Valuation
Reporting
68
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Addendum A
Further Guidance on Lease Accounting

Lease Classification
Land and Building Allocation
Lease Classification
Under IAS 17, leases have to be classified
for inclusion in financial statements as
either operating leases or finance leases:
A finance lease is a lease that transfers
substantially all the risks and rewards
incidental to ownership of an asset. Title
may or may not be eventually transferred.
An operating lease is a lease other than a
finance lease.
The following examples are listed in IAS
17, paras. 10-11, as situations that could
be indicative of a finance lease, either
individually or in combination. These are
not absolute tests but illustrations, i.e., one
or more of these circumstances may arise,
but the lease would still not be classified
as a finance lease if it is clear from the
overall context that substantially all the
risks and rewards of ownership have not
been transferred from the lessor to the
lessee.
a) the lease transfers ownership of the
asset to the lessee by the end of the lease
term;
b) the lessee has the option to purchase
the asset on advantageous terms;
c) the lease term is for the major part of
the economic life of the asset even if title
is not transferred;
d) at the inception of the lease the present
value of the minimum lease payments
amounts to at least substantially all of the
fair value of the leased asset;
e) the leased assets are of such a

specialised nature that only the lessee can
use them without major modifications;
f) if the lessee can cancel the lease, the
lessors losses associated with the
cancellation are borne by the lessee;
g) gains or losses from the fluctuation in
the fair value of the residual accrue to the
lessee;
h) the lessee has the ability to continue
the lease for a secondary period at a rent
that is substantially lower than market
rent.
If it is concluded that substantially all the
risks and rewards of ownership are not
transferred to the lessee, then the lease is
an operating lease.
As classification does involve an
assessment of the degree to which
economic benefits are transferred by a
lease, Valuers are likely to be requested to
provide advice to assist classification by
lessor and lessees. IVSC considers that in
the majority of cases, a qualitative
assessment of the lease terms will quickly
indicate the correct classification without
the need for detailed calculation of the
value of the different lease interests. The
relative values of the lessors and lessees
interests are not a key factor in
classification; the key test is whether the
lessor has transferred substantially all the
risks and rewards of ownership.
69
Land and Building Allocation

Where a lease is of land and buildings
together, IAS 17, para. 15, requires that
the two elements be considered separately
for the purposes of classification. If it
appears that the buildings element could
be a finance lease, it will be necessary to
make an allocation of the initial rent based
on the relative fair value of the leasehold
interests in each element at the inception
of the lease (IAS 17, para. 16).
In most leases of real property, the interest
in the land and buildings is not
distinguishable, and in any event the
interest in both normally reverts to the
lessor at the end of the lease. There are
often provisions for the rent to be
reviewed periodically to reflect changes in
the Market Value of the property and also
an obligation on the lessee to hand the
buildings back to the lessor in good repair.
These are all clear indicators that the
lessor has not transferred substantially all
the risks and rewards of ownership of
either the buildings or the land to the
lessee.
Consequently, finance leases of real
property will generally arise only where
the lease is clearly designed as a way of
funding the eventual purchase of the land,
buildings, or both by the lessee, often by
means of an option to acquire the lessors
interest for a nominal sum after the rental
payments have been made. Occasionally
leases that are not clearly structured as
finance agreements may meet some of the
criteria of a finance lease, for example,
where the rental payments do not reflect
the underlying value of the property. In
those cases a more detailed analysis of the
value of the risks and benefits transferred
may be required in order to confirm or
rebut their classification.
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though the investor may hold the

investment property under an operating
lease, the whole is accounted for as though
it were a finance lease.
Where a lease is of a self-contained plot of
land and the building upon it, allocating
the rent to each element is a task that could
be undertaken reliably where there is an
active market for land for similar
development in the locality. In other
situations, for example where the lease is
part of a multi-let building with no
identifiable land attributable to any
particular lease, reliable allocation may be
impossible. IAS 17, para. 16, recognises
that such cases can arise and makes the
proviso that where a reliable allocation
cannot be made, the whole lease should be
treated as a finance lease, unless it is clear
that both elements are operating leases. If
it were clear that both elements were
operating leases from the outset, the
allocation exercise would not be
necessary.
In practice, leases of part of a multi-let
building will normally be operating leases
and the whole property will be classified
as investment property by the lessor. In
such cases allocation will be unnecessary.
In cases where the buildings element is
clearly a finance lease, the land element is
likely to be identifiable.
It will be
comparatively rare for the buildings
element to meet the criteria for
classification as a finance lease and for the
land element not be clearly identifiable. In
such cases, the Valuer should not attempt
an allocation based on unreliable criteria,
but should advise that the allocation
cannot be reliably made. The entity will
then have to treat the whole as a finance
lease.
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
70
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Valuation for Secured Lending Purposes

1.0 Introduction
1.1 The
objective
of
International
Valuation Application 2 (IVA 2) is to
provide a framework for valuations of
assets that are to be offered or taken as
loan security.

is rarely if ever sold in the market, except
by way of sale of the business or entity of
1.2 It
is important
that
Valuers
consistently apply accepted valuation
principles within the scope of these
standards, providing clear, independent
and objective opinions that are relevant to
the needs of valuation users.
3.4 Trade Related Property.

Certain
classes of real property, which are
designed for a specific type of business
and that are normally bought and sold to
the market, having regard to their trading
potential.
2.0 Scope
European Union Legislation Definition
2.1 This Application applies in all

circumstances where valuations are
required of assets that are, or are proposed
to be, held as security for lending. The
lending may be done by different means,
including mortgage or other forms of fixed
or floating charge.
3.0 Definitions
International
Definitions
Valuation
Standards

buyer and willing seller in arms-length
para. 3.1).
3.2 Mortgage. A pledge of an interest in
property as security or collateral for
repayment of a loan with provision for
redemption on repayment. In the event the
borrower (mortgagor) defaults, the lender
(mortgagee) has the power to recover the
property pledged.
3.5 Mortgage Lending Value. The value

of the property as determined by a prudent
assessment of the future marketability of
the property taking into account long term
sustainable aspects of the property, the
normal and local market conditions, and
the current use and alternative appropriate
uses of the property. Speculative elements
shall not be taken into account in the
assessment of the mortgage lending value.
The mortgage lending value shall be
documented in a clear and transparent
manner. (This definition is from Directive
2006/48/EC of the European Parliament.)

Standards
4.1 A valuation prepared for lending
purposes will not necessarily be the same
as one made for accounting purposes,
particularly one made for financial
reporting purposes. Although a similar
base such as Market Value may be
applicable, the assumptions on which the
valuation is based may be different.
4.2 By way of example, the underlying
principle of many valuations for financial
71
reporting is the presumption that the entity

will continue as a going concern.
However, this would not usually be
appropriate for valuations undertaken for
lending purposes. Such a presumption has
particular implications for specialised
assets where the value and marketability
of the secured property, separate from the
business of which it forms part, may be
limited.
5.0 Application
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comment where
following items:
relevant,
on
the
5.4.1 current activity and trends in the

relevant market;
5.4.2 historic, current and anticipated
future demand for the category of
property in the locality;
5.4.3 the potential and likely demand
for alternative uses;

this
Application
and
Generally
Valuers shall adhere to all sections of
the IVS Code of Conduct pertaining to
Ethics, Competence, Disclosure, and
Reporting (sections 4, 5, 6, and 7).
5.4.4 both the current marketability of

the property and if requested, the
likelihood of its sustainability;
5.1 In
performing
valuations
of
property for lending purposes, Valuers
will normally provide the Market Value
of such property in accordance with
these
International
Valuation
Standards.
5.4.6 the valuation approach adopted;

and the extent of market-based evidence
in support of the valuation.
5.2 If the circumstances are such that a

departure from the Market Value basis
is justified, the departure shall be
clearly set out and explained in the
Valuation Report along with the
identification and definition of the
alternative basis used and an
explanation of the reasons for the
departure.
If there is a material
difference between the Market Value of
the property and alternative value, this
should be reported.
5.3 The valuation opinion shall be
5.4 In addition to fulfilling the
requirements of IVS 3, Valuation
Reports for secured lending of real
property
will
normally
include
5.4.5 any impact of foreseeable events

(at the date of valuation) on the value of
the security;
5.5 Valuations for lending purposes may

be required on an assumption there has
been a change in the state or condition
of the property, for example, the
assumed development of a new building,
or upgrade of a building. Such a
valuation will normally be provided on
the assumption that the change has
occurred at the valuation date. It is not
a projection of the value at the date in
the future when the change will have
actually occurred. The report must
make it clear that the valuation is based
on the assumption that the change
specified had already been made at the
valuation date. Use of the term Market
Value without a modifier in these
circumstances can be misleading. The
term Market Value as if complete is
an example of a suitable modification of
Market Value that may be used in these
circumstances.
72
5.6 A valuation of a property may also

be required on the assumption that an
estimated occupancy level had been
achieved. This should also reflect the
realistic expectations and perceptions of
market participants as at the date of the
report.
5.7 Corporate and individual loans from
banks and other financial institutions
are often secured by specific property
assets. Valuers need to have a general
understanding of the requirements of
such institutions, and possibly the
structure of loan terms and agreements.
Lenders will usually require that the
terms of loan be kept confidential, but
this does not relieve the Valuer of the
obligation
to
have
a
general
understanding of the lending process.
6.0 Discussion
6.1 At the outset of an assignment, the
Valuer needs to clearly identify the
property that is to serve as the security.
Particular care is required to distinguish
between property types where real
property and personal property are
combined.
6.2 The manner in which property would
ordinarily trade in the market will
determine the applicability of the various
approaches to assessing Market Value.
Based upon market information, each
approach is a comparative method, and the
use of more than one method may be
required.
6.3 Each relevant valuation method will, if
appropriately and correctly applied, lead to
a similar result. All valuation methods
should be based on market observations.
Construction costs and depreciation, where
they apply, should be determined by
reference to an analysis of market-based
estimates of costs and accumulated
depreciation. The use of an income
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method, particularly discounted cash flow

techniques, will also be based on marketdetermined cash flows and market-derived
rates of return.
6.4 Occasionally a lender may request a
valuation on a basis other than Market
Value. IVS 2 addresses the types, use and
reporting of some common alternative
bases of valuation. The Valuer should
ensure that an alternative basis is not
confused with Market Value. Although
there may be circumstances where an
alternative basis is appropriate for secured
lending, users of such valuations should be
made aware that such value may not be
realisable if the alternative assumptions
made are no longer applicable.
6.5 Investment Properties
6.5.1 Income-producing properties are
usually valued as individual properties.
Lending institutions may also wish to have
a property assessed as part of a portfolio of
properties.
In such instances, the
distinction between the value of the
individual property, assuming it is sold
individually, and its value as part of the
portfolio should be clearly expressed.
6.5.2 Although
the
Valuer
should
comment on the expected demand and
marketability of the property over the life
of the loan (see para. 5.4 above), it is
normally outside the scope of the
valuation exercise to advise on the ability
of a tenant to meet future lease obligations
beyond comment on the markets current
perception of the tenants quality.
6.6 Owner-Occupied Properties
6.6.1 Owner-occupied properties valued
for lending purposes will normally be
valued on the assumption that the property
is transferred unencumbered by the
owners occupancy, i.e., that the buyer is
entitled to full legal control and
73
possession.
This does not preclude
consideration of the existing owner as part
of the market, but it does require that any
special advantage attributable to the
owners occupancy, which may be
reflected in a valuation of the business, be
excluded from the valuation.
6.7 Leases Between Related or Connected
Parties
6.7.1 Caution is required where property
offered as security is subject to a lease to a
party connected to the borrower. If the
Valuer considers that the lease creates a
more favourable income stream than
would be obtainable on a letting to an
unconnected third party in an arms-length
transaction, the lender should be alerted
and it may be appropriate to disregard the
existence of the lease in a valuation of the
property as security.
6.8 Sales Incentives
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possession basis (see para. 6.6.1 above)

and a valuation based on the highest and
best use alternative use is usually
applicable.
This
will
involve
consideration of the costs and risks that
would be involved in achieving that use.
Lenders may not consider specialised
property to be suitable as a security for
lending purposes.
6.9.2 A valuation may be required of a
specialised property where the property is
part of a going-concern business. The
lender should be alerted to the valuation
being dependent on the continuing
profitability (or otherwise) of the going
concern.
If the value on a vacant
possession basis is potentially lower, this
should be drawn to the attention of the
lender.
6.10 Trade Related Properties
6.9 Specialised Properties
6.10.1 Certain classes of property,

including but not limited to hotels and
other trading businesses, where the
property is approved and purposedesigned for only that use, are usually
valued based on profitability but excluding
Personal Goodwill (see GN 12, para.
3.3.2). In such cases, the lender should be
made aware of the significant difference in
value that may exist between an operating
concern and a non-operating concern
where the business is closed, the inventory
is removed, licences (and other intangible
assets such as certificates, franchise
agreements, or permits) are removed or are
in jeopardy, and any other circumstances
exist that may impair future profitability
and value.
6.9.1 Specialised properties by definition

may have limited marketability and
significant value only as part of a business
(see Concepts Fundamental to Generally
Accepted Valuation Principles, para. 8.2).
For loan security purposes, such properties
will normally be valued on a vacant
6.10.2 If the income from a property is

critically dependent on a tenant or tenants
from a single sector or industry or some
other factor, which could cause future
income instability, the Valuer should
address these factors in the Valuation
Report. In certain cases, an assessment of
6.8.1 It is not uncommon for a seller of

property, especially developers of real
property, to offer incentives to buyers.
Examples of such incentives include rental
income guarantees, contributions to the
buyers removal or fitting out costs, or the
supply of personal property such as
furnishings or equipment. Market Value
ignores any price inflated by special
considerations or concessions (IVS 1,
para. 3.2.1). It may also be appropriate to
alert the lender as to the effect that any
incentives being offered have on the actual
selling prices achieved.
74
the value of the property based on an

alternative
use,
assuming
vacant
possession, may be appropriate.
6.11 Development Properties
6.11.1 Properties held for redevelopment
or sites intended for development of
buildings should be valued taking into
account
existing
and
potential
development entitlements and controls.
Any assumptions as to planning issues and
other material factors must be reasonable,
validated by market behaviour and
explicitly stated in the Valuation Report.
6.11.2 The approach to the valuation of
development properties will depend on the
state of development of the property at the
date of valuation and may take into
account the degree to which the
development is pre-sold or pre-leased.
The valuation approach may need to be
discussed with the lender prior to
undertaking the valuation. Care should be
taken by the Valuer to:
6.11.2.1 make a reasoned estimate of the
development period from the date of
valuation.
The effect of additional
development requirements on costs and
revenues, using present value discounting
where appropriate, will be reflected in the
analysis;
6.11.2.2 evaluate as far as is possible at
the date of valuation, market behaviour
during the period of the development;
6.11.2.3 consider and outline the risks
associated with the development; and
6.11.2.4 consider and disclose any known
special relationships between the parties
involved in the development.
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6.12.1 Specific lending issues arise in

relation to the valuation of wasting assets
such as mines or quarries. The lenders
attention needs to be drawn to the risk
associated with this type of a wasting asset
and the planned program for its extraction
or use.
6.12.2 Property rental that exceeds the
current market or economic rent may
constitute a wasting asset because any
value attributable to this factor diminishes
as the term of the lease decreases.
6.13 The Valuer
6.13.1 The nature and scope of the
Valuers engagement should be clear to
the Valuer and user of the valuation.
Valuers should be aware of the risk
associated with valuations for lending
purposes
where
miscommunication,
misunderstanding or error may lead to a
dispute or litigation between the lender
and the Valuer.
6.13.2 In some jurisdictions financial
services legislation requires licencing or
registration of advisers when advice is
related not only to the value of property,
but also to securities issues such as equity,
participatory
interests,
collective
investment schemes, or syndicated loans.
Valuers may be restricted in the advice
they can provide in these jurisdictions.
6.13.3 In undertaking the valuations for
lending purposes, it is particularly
important that the Valuer be independent
of the borrower.
6.13.4 It is important that the Valuer
possess appropriate experience in relation
to the particular property type and locale
for the property involved, or if not, seek
expert assistance.
6.12 Wasting Assets

6.14 Forced Sales and Limited Marketing
or Disposal Periods
75
6.14.1 Lending institutions may request

valuations on a forced, or liquidation, sale
basis or impose a time limit for disposal of
the security. Because the impact of a
constraint on the price obtainable will
depend upon the specific circumstances
under which the sale takes place, it is not
realistic for the Valuer to speculate on a
price that could be obtained without either
knowledge of the reasons for the
constraint, or the circumstances under
which the property might be offered for
sale. An alternative valuation may be
provided based on defined assumptions,
but the Valuer should draw the lenders
attention to the fact that this opinion is
valid only at the valuation date, and may
not be relied upon in the event of a future
default, when both market conditions and
the sale circumstances may be different.
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6.15.3 Mortgage Lending Value is a

long-term, risk assessment technique. As
such, it is not a basis of value. MLV is a
technique that is primarily used by banks
in a number of European countries.
Further information on Mortgage Lending
Value is available on the IVSC website.

7.1 In reporting Market Value for
lending security purposes, the Valuer
shall make all disclosures required
under IVS 3, Valuation Reporting.
7.2 The basis of Valuers engagement is
to be clearly set out in any reports to be
used by third parties. All reports
should be presented in a way that would
not be considered by a reasonable
person to be misleading.
6.15 Lenders Solvency Ratios

6.15.1 Major banks and other lenders are
normally subject to regulations that limit
the total amount they can lend as a
proportion of the lenders assets, known as
the solvency ratio. In the International
context, the Basle II Accord sets out rules
for the minimum solvency ratios to be
maintained by lending institutions and
how those ratios are to be calculated. The
value of assets over which the lender holds
security is used in calculating the solvency
ratio.

regulatory
framework
and
any
departure
required
from
these
legislation, regulation, or custom.

Reporting.
6.15.2 In exceptional circumstances for

well-developed
and
long-established
markets, the Basle II Accord requires the
estimation of the Market Value and
Mortgage Lending Value of a security
backed by commercial real estate. A
preferential risk weight of 50% is assigned
to the tranche of a secured loan that does
not exceed the lower of 50% of the Market
Value or 60% of the Mortgage Lending
Value.
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Valuation of Public Sector Assets for Financial Reporting

1.0 Introduction
1.1 Public sector assets are those assets
owned and/or controlled by governmental
or quasi-governmental entities to provide
goods or services to the general public.
The principles that apply to the valuation
of public sector assets are essentially the
same as for any other assets.
1.2 The valuation of public sector assets
may be undertaken for a range of purposes
including financial reporting, privatisation
planning, loan origination, bond issuance,
and cost-benefit or economic analyses
performed by governments and quasigovernment entities either to determine
whether a public sector asset is being used
and managed efficiently or to set pricing
for monopoly services.
1.3 The International Federation of
Accountants International Public Sector
Accounting Standards Board (IPSASB)
develops accounting standards for public
sector entities, referred to as International
Public Sector Accounting Standards
(IPSASs). IPSASs, which apply to accrual
accounting, are based on the International
Financial Reporting Standards (IFRSs),
issued by the International Accounting
Standards Board (IASB). IPSASs cover
public sector specific financial reporting
issues, some of which are not addressed by
IFRSs.
1.4 IVA 1 generally addresses the
application of valuation bases to
accounting principles in the context of
IFRSs. Because of parallels between
IPSASs and IFRSs, this Application
necessarily repeats some of the content of
IVA 1 while also addressing the specific
requirements for the valuation of public
sector assets and their treatment in
1.5 Property in the public sector comprises

conventional cash-generating and noncash-generating property assets as well as
specialised property assets, including
heritage
and
conservation
assets,
infrastructure assets, public buildings,
public utility plants, and recreational
assets. As with private sector assets,
public sector assets fall into operational
and non-operational categories. Nonoperational assets include investment and
surplus assets.
2.0 Scope
2.1 This Application applies to all
valuations of public sector asset classes,
included in any financial statement, which
fall within the skills and expertise of
Valuers (with the exception of valuations
of Government Business Enterprises or
GBEs that are performed according to
IVA 1).
2.2 IVSs
facilitate
cross-border
transactions and the viability of global
markets through harmonisation and
transparency in financial reporting. As
such, this Application is developed in the
context of International Public Sector
Accounting Standards (IPSASs).
In
September 2005, the IPSAS Board issued
an Exposure Draft of eleven IPSASs that
had been updated to converge with the
amended
International
Accounting
Standards issued by IASB in December
2003 as part of its General Improvements
Project. This Application is developed in
the context of the proposed revisions to
IPSASs contained within this Exposure
Draft.
2.3 IPSASs and IFRSs adopt two models
for the recognition of property assets in the
balance sheet: a cost model, and a fair
value model. Where the fair value model
is applied, a current revaluation of the
77
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asset is required and this Application

focuses on these particular circumstances
where Market Values are to be reported.
2.4 Legislative, regulatory, accounting, or
jurisprudence requirements may require
the modification of this Application in
some countries or under certain
conditions. Any departure due to such
circumstances must be referred to and
clearly explained in the Valuation Report.
3.0 Definitions
International
Definitions
Valuation
or over-engineered, or the asset may have

a greater capacity than that required.
Hence optimisation minimises, rather than
maximises, a resulting valuation where
alternative lower cost replacement options
are available.
3.5 Public Building.
A building that
serves some community or social function
and is held in public ownership. Examples
include courthouses, municipal centres,
schools, prisons, police stations, military
facilities, libraries, hospitals, clinics, and
social or public housing.
Standards

modern equivalent asset less deductions
for physical deterioration and all relevant
buyer and willing seller in an arms-length
para. 3.1).
3.3 Obsolescence. A loss in value due to a
decrease in the usefulness of property
caused by decay, changes in technology,
peoples behavioural patterns and tastes,
or environmental changes. Obsolescence
is sometimes classified according to items
of outmoded design and functionality,
items with structural design unable to meet
current code requirements, and factors
arising outside the asset, such as changes
in user demand.
3.4 Optimisation. The process by which a
least cost replacement option is
determined for the remaining service
potential of an asset. It is a process of
adjusting the replacement cost to reflect
that an asset may be technically obsolete
3.6 Public sector asset. An asset, owned

and/or controlled by a governmental or
quasi-governmental entity, for the
provision of some public service or good.
Public sector assets comprise different
asset types, including conventional assets
as well as heritage and convention assets,
infrastructure assets, public utility plants,
recreational assets, and public buildings
(e.g., military facilities), each category of
which constitutes property, plant and
equipment within the meaning of IPSASs
and IFRSs.
Public sector assets typically include:
a) assets, which have atypical tenure, are
irreplaceable, are non-cash-generating,
or provide goods or services in the
absence of any market competition;
b) land with restrictions on its sale or
leasing; and
c) land, which is designated for a
specialised use that is not necessarily
its highest and best use.
See also Heritage assets, Infrastructure
assets, Public building, Public utility, and
Recreational assets.
3.7 Public Utility. A property that:
78
a) produces a service or good for general

public consumption; and
b) is usually a monopoly or quasimonopoly provider subject to some
form of governmental control.
3.8 Recreational assets. Properties held
in public ownership that:
a) are managed by or on behalf of
national,
municipal,
or
local
governmental authorities; and
b) provide for recreational use by the
general public.
Examples include parks; playgrounds;
greenbelts; walks and trails; swimming
pools; playing courts; fields and courses;
and other properties equipped with
recreational and athletic facilities.
3.9 Service potential. The capacity of an
asset to continue to provide goods and
services in accordance with the entitys
objectives.
3.10 Value of improvements. The value
added to the land by improvements such as
buildings, structure or modifications to the
land, of a permanent nature, involving
expenditures of labour and capital, and
intended to enhance the value or utility of
the property.
Improvements have
differing patterns of use and economic
lives.
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3.13 Depreciation.
The systematic
allocation of the depreciable amount of an
asset over its useful life (IPSAS 17.13,
IPSAS 21.14).
3.14 Government business enterprise
(GBE). An entity that has all of the
following characteristics:
a) is an entity with the power to contract
in its own name;
b) has been assigned the financial and
operational authority to carry on a
business;
c) sells goods and services, in the normal
course of its business, to other entities
at a profit or full cost recovery;
d) is
not reliant on continuing
government funding to be a going
concern (other than purchases of
outputs at arms length); and
e) is controlled by a public service entity.
(IPSAS 21.14).
3.15 Heritage assets. Assets having some
cultural, environmental or historical
significance. Heritage assets may include
historical buildings and monuments,
archeological sites, conservation areas and
nature reserves, and works of art. Heritage
assets often display the following
characteristics
(although
these
characteristics are not necessarily limited
to heritage assets):
3.11 Cash Generating Assets. Assets held

to generate a commercial return. (IPSAS
21.14).
a) their economic benefit in cultural,

environmental,
educational
and
historic terms is unlikely to be fully
reflected in a financial value based
purely on market price;
3.12 Depreciable Amount. The cost of an

asset, or other amount substituted for cost,
less its residual value (IPSAS 17.13).
b) legal and/or statutory obligations may

impose
prohibitions
or
severe
restrictions on disposal by sale;
79
c) they are often irreplaceable and their

economic benefit may increase over
time even if their physical condition
deteriorates; and
d) it may be difficult to estimate their
useful lives, which in some cases could
be hundreds of years.
The above definition is consistent with the
description of heritage assets in IPSAS
17.9.
3.16 Impairment. A loss in the future
economic benefits, or service potential of
an asset, over and above the systematic
recognition of the loss of the assets future
economic benefits or service potential
through depreciation (IPSAS 21.14).
3.17 Infrastructure assets. Assets that
usually display some or all of the
following general characteristics:
a) they are part of a system or network;
b) they are specialised in nature and do
not have alternative uses;
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expected to be available for use by an
entity; or
asset by an entity. (IPSAS 17.13,
IPSAS 21.14).
3.21 Value in use of a non-cash
generating asset. The present value of the
assets remaining service potential.
(IPSAS 21.14).
4.0 Relationship
Standards
to
Accounting
4.1 This Application applies the principles

developed in IVS 1, IVS 2, IVS 3 and IVA
1 to the requirements of IPSASs.
4.2 This Application focuses on valuation
requirements under IPSAS 17 (Exposure
Draft, September 2005), Property, Plant,
and Equipment; and IPSAS 21,
Impairment of Non-Cash-Generating
Assets. Further requirements may become
mandatory, pending publication of revised
IPSAS 17.
c) they are immovable; and

d) they may be subject to constraints on
disposal.
description of infrastructure assets in
IPSAS 17.21.
3.18 Non-cash-generating assets. Assets
other than cash-generating assets (IPSAS
21.14).
3.19 Recoverable service amount. The
higher of a non-cash-generating assets
fair value less costs to sell and its value in
use (IPSAS 21.14).
3.20 Useful life (of property, plant and
equipment). Either
5.0 Application
this
Application
and
Generally
it is essential that Valuers adhere to all
sections of the IVSC Code of Conduct
6, and 7).
5.1 Classification of Assets.
Valuers
shall obtain from the directors of the
owning entity a list of assets to be
valued, designating them as operational
assets, i.e., assets requisite to the
operations of the entity, or nonoperational assets, being properties
held
for
future
development,
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investment, or assets surplus to the

operations of the entity.
5.2 Applicable
Standards.
The
classification of assets determines which
IPSAS applies. IPSAS 17, paras. 26 and
27, requires non-current property, plant
and equipment assets held for the
production or supply of goods or
services to be measured upon
recognition at cost, or where an item is
acquired through a non-exchange
transaction, its cost shall be measured at
its fair value at the date of acquisition.
IPSAS 17, para. 42 requires that after
recognition, such assets be carried in
accordance with either the cost model
or revaluation (fair value) model
described in 5.3. Other accounting
standards that require or permit the
valuation of tangible assets include:
Leases IPSAS 13
Investment Property IPSAS 16
Impairment
of
Non-Cash
Generating Assets IPSAS 21
5.3.3 Fair value is not necessarily

synonymous with Market Value. It is
used throughout IPSASs in differing
contexts.
5.3.4 Financial statements are produced
on the assumption that the entity is a
going concern unless management
either intends to liquidate the entity or
cease operation, or has no realistic
alternative but to do so.
This
assumption therefore underlies the
application of fair value to property,
plant and equipment, except in cases
where it is 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.
5.4 Valuations under IPSAS 17
5.3 IPSAS 17, Cost and Fair Value

5.3.1 IPSAS 17 deals with the cost
model in paragraph 43 as follows:
After recognition as an asset, an
of property, plant and equipment
be carried at its cost less
accumulated depreciation and

losses. Revaluations shall be made with
carrying amount does not differ
materially from that which would be
determined using fair value at the
reporting date.
item
shall
any
any
Where an entity adopts the fair value

revaluation option under IPSAS 17, the
assets are included in the balance sheet
at their fair value as follows:
5.3.2 The fair value model, which

requires regular revaluations, is
explained in paragraph 44 as follows:
a) The fair value of items of property

is usually determined from marketbased evidence by appraisal. The
fair value of items of plant and
equipment is usually their Market
Value determined by appraisal
(IPSAS 17, para. 45).

of property, plant and equipment whose
fair value can be measured reliably
shall be carried at a revalued amount,
being its fair value at the date of the
revaluation
less any
subsequent
accumulated
depreciation
and
b) If no market evidence is available

to determine the Market Value in an
active and liquid market of an item
of property, the fair value of the
item may be established by reference
to other items with similar
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characteristics,
in
similar
circumstances
and
location
transactions on arms length terms,

or were estimated using other
valuation techniques.
c) If there is no market-based
evidence of fair value because of the
specialised nature of the item of
plant and equipment, an entity may
need to estimate fair value using
depreciated replacement cost, or the
restoration cost or service unit
approaches (IPSAS 17, para. 48).
(See paras. 6.5, 6.6, and 6.7 below.)
5.5 Valuations under IPSAS 16

Investment Property
5.4.1 IVSC considers that a professional

Valuer undertaking an appraisal under
5.4 (a) to (c) above should report the
Market Value of the asset.
Any
assumptions or qualifications made in
applying Market Value should be
discussed with the entity and disclosed
in the report.
Where a reliable assessment of Market
Value is not possible, the Valuer must
disclose the basis for this conclusion to
the reporting entity.
5.4.2 The valuation conclusion shall be
Valuers shall
ensure that reports include sufficient
information for the entity to meet the
requirements of IPSAS 17, para. 92,
when preparing financial statements:
a) the effective date of the revaluation;
b) whether an Independent Valuer was
involved (Note, IVSC interprets this
as an External Valuer);
c) the methods applied and significant
assumptions made ; and
d) the extent to which the assets fair
values were determined directly by
reference to observable prices in an
active market or recent market
All public sector investment property is

valued in accordance with IVA 1.
5.6 Valuation Requirements for Leased
Assets IPSAS 13
5.6.1 Leased assets are classified under
IPSAS 13 as either finance leases or
operating leases.
(For further
explanation, see IVA 1, para. 6.6.1 and
Addendum A.) If a lease is classified as
a finance lease, the fair value of the
asset is required to establish the amount
of the asset and liability recorded by the
entity on its balance sheet (IPSAS 13,
para. 20).
5.6.2 For leases of land and buildings
special rules apply. (See IVA 1, para.
6.6.3.) For all property, other than
investment property, land and buildings
have to be considered separately for
classification as either a finance lease or
an operating lease.
5.6.3 IVSC considers that in each case
the requirement to establish the fair
value of the leased asset under IPSAS
13, para. 28, is met by the Valuer
reporting the Market Value. For leases
of real estate, this is the Market Value of
the lease interest held by the lessee.
For leases of other assets, it is normally
the Market Value of the asset
unencumbered by the lease, as the
liability is recorded separately.
5.7 Valuation of Impaired Non-Cash
Generating Assets IPSAS 21
5.7.1 Impairment arises where there is a
permanent decrease in the recoverable
service amount of an asset below its
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carrying amount. IPSAS 21, para. 48,

requires that if, and only if, the
recoverable service amount of an asset
is less than its carrying amount, the
carrying amount of the asset shall be
reduced to its recoverable service
amount.
That reduction is an
impairment loss. IPSAS 21, para. 51,
further states that when the amount
estimated for an impairment loss is
greater than the carrying amount of the
asset to which it relates, an entity shall
recognise a liability if, and only if, that
is required by another IPSAS.
5.7.2 The entity is required to write
down the carrying amount of impaired
cash-generating assets to the higher of
their value in use or fair value less costs
to sell. The requirements for cashgenerating assets are discussed further
in IVA 1, para. 6.8.2.
5.8 Valuations
Combinations
after
Business
5.8.1 Where a governmental or quasigovernmental entity acquires or is

merged with another, the acquirer has
to account for the assets and liabilities
of the acquiree at their fair value as of
the acquisition date. For identifiable
assets and liabilities, IVSC considers
that the Valuer should report their
Market Value as they existed at the date
of acquisition.
5.9 Surplus Assets
5.9.1 Surplus assets are to be separately
identified.
Such assets may be
accounted for individually or as a
disposal group, i.e., a group of assets
to be disposed of together, by sale or
otherwise, and the liabilities directly
associated with those assets that will
also be transferred in the transaction.
Surplus assets are to be initially
accounted for at the lower of the
carrying amount and the fair value less
costs to sell, and subsequently at fair

value less cost to sell. Valuers should
therefore ascertain whether surplus
assets are to be valued as individual
items, or as a group or portfolio of
assets that will be disposed of in a single
transaction, and report the Market
Value
with
the
appropriate
assumptions.
5.10 Properties Held for Sale in the
Ordinary Course of Business IPSAS 12
Inventories
5.10.1 Valuations of properties held for
sale in the ordinary course of business
should comply with the requirements of
IPSAS 12, Inventories.
These
properties are measured at the lower of
cost and net realisable value.
Net
realisable value is the estimated selling
price in the ordinary course of
operations less the estimated costs of
completion and the estimated costs
necessary to make the sale, exchange or
distribution.
5.11 Selling Costs

5.11.1 When instructed to value
impaired or surplus assets, or assets
that are held for sale in the ordinary
course of business, the Valuer must
report their Market Value without
deducting selling costs. If the client
requests the Valuer to advise on the
costs to sell the assets, such costs are to
be reported separately.
5.12 Non-Agricultural Biological Assets
5.12.1 These
include
naturally
occurring flora and fauna. The Valuer
should value these assets in accordance
with the guidance in GN 10.
5.13 Co-operation
with
Auditors.
Subject to first obtaining the consent of
their client, Valuers shall discuss and
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explain their valuations openly with the

entitys auditors.
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replaced with alternative accommodation

because of its significance to the
community. (IPSAS 17, para. 47)
6.0 Discussion
IPSAS 17 and 21 provide the following
clarification, which is useful in
understanding the correct application for
public sector accounting.
6.1 Absence of Market Evidence IPSAS
17
For some public sector assets, it may be
difficult to establish their Market Value
because of the absence of market
transactions for these assets. Some public
sector entities may have significant
holdings of these assets. (IPSAS 17,
para. 46).
6.1.1 If no market evidence is available to
determine the Market Value in an active
and liquid market of an item of property,
the fair value of the item may be
established by reference to other items
with similar characteristics, in similar
circumstances and location. For example,
the fair value of vacant government land
that has been held for a long period during
which time there have been few
transactions may be estimated by reference
to the Market Value of land with similar
features and topography in a similar
location for which market evidence is
available. In the case of specialised
buildings and other man-made structures,
fair value may be estimated by using
depreciated replacement cost, or the
restoration cost or the service units
approach (see IPSAS 21). In many cases,
the depreciated replacement cost of an
asset can be established by reference to the
buying price of similar asset with similar
remaining service potential in an active
and liquid market. In some cases, an
assets reproduction cost will be the best
indicator of its replacement cost. For
example, in the event of loss, a parliament
building may be reproduced rather than
6.1.2 If there is no market-based evidence

of fair value because of the specialised
nature of the item of plant and equipment,
an entity may need to estimate fair value
using depreciated replacement cost, or the
restoration cost or service units approaches
(see IPSAS 21).
The depreciated
replacement cost of an item of plant or
equipment may be established by
reference to the market buying price of
components used to produce the assets or
indexed price for the same or similar asset
based on a price for a previous period.
When an indexed price method is used,
judgment is required to determine whether
technology has changed significantly over
the period, and whether the capacity of the
reference asset is the same as the asset
being valued. (IPSAS 17, para. 48).
6.2 Government Business
(GBEs) IPSAS 21
Enterprises
GBEs include both trading enterprises,

such as utilities, and financial enterprises,
such as financial institutions. GBEs are, in
substance, no different from entities
conducting similar activities in the private
sector. GBEs generally operate to make
profit, although some may have limited
community service obligations under
which they are required to provide some
individuals and organizations in the
community with goods and services at
either no charge or a significantly reduced
charge. (IPSAS 21, para. 15).
Philippine 6.2.1
GBEs comprise the Government Owned
and Controlled Corporations (GOCCs) and
Government Financial Institutions (GFIs)
of the National Government and Economic
Enterprises
(EEs)
of
the
Local
Government Units.
6.3
Cash-Generating Assets IPSAS 21

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Cash-generating assets are those that are

held to generate a commercial return. An
asset generates a commercial return when
it is deployed in a manner consistent with
that adopted by a profit-oriented entity.
Holding an asset to generate a
commercial return indicates that an
entity intends to generate positive cash
inflows from the asset (or of the unit of
which the asset is a part) and earn a return
that reflects the risk involved in holding
the asset. (IPSAS 21, para. 16)
Assets held by GBEs are cash-generating
assets. Public sector entities other than
GBEs may hold assets to generate a
commercial return. For the purposes of
this Standard [IPSAS 21], an asset held by
a non-GBE public sector entity is
classified as a cash-generating asset if the
asset (or unit of which the asset is a part)
is operated with the objective of
generating a commercial return through
the provision of goods and or services to
external parties. (IPSAS 21, para. 17).
6.4 Value in Use IPSAS 21
The value in use of a non-cash generating
asset is the present value of the assets
remaining service potential. Value in use
in this Standard [IPSAS 21] refers to
value in use of a non-cash-generating
asset unless otherwise specified. The
present value of the remaining service
potential of the asset is determined using
any one of the approaches identified in
paragraph 41 to 45, as appropriate.
6.5 Depreciated
Replacement
Approach IPSAS 21
Cost
Under this approach, the present value of

the remaining service potential of an asset
is determined as the depreciated
replacement cost of the asset.
The
replacement cost of an asset is the cost to
replace the assets gross service potential.
This cost is depreciated to reflect the asset
in its used condition. An asset may be
replaced either through reproduction

(replication) of the existing asset or
through replacement of its gross service
potential. The depreciated replacement
cost is measured as the reproduction or
replacement cost of the asset, whichever is
lower, less accumulated depreciation
calculated on the basis of such cost, to
reflect the already consumed or expired
service potential of the asset. (IPSAS 21,
para. 41).
The replacement cost and reproduction
cost of an asset are determined on an
optimized basis. The rationale is that the
entity would not replace or reproduce the
asset with a like asset if the asset to be
replaced or reproduced is an overdesigned
or overcapacity asset.
Overdesigned
assets contain features which are
unnecessary for the goods or services the
asset provides. Overcapacity assets are
assets that have a greater capacity than is
necessary to meet the demand for goods or
services the asset provides. The
determination of the replacement cost or
reproduction cost of an asset on an
optimized basis thus reflects the service
potential required of the asset. (IPSAS
21, para. 42).
In certain cases, standby or surplus
capacity is held for safety or other reasons.
This arises from the need to ensure that
service capacity is available in the
particular circumstances of the entity. For
example, the fire department needs to have
fire engines on standby to deliver services
in emergencies. Such surplus or standby
capacity is part of the required service
potential of the asset. (IPSAS 21, para.
43).
6.6 Restoration Cost Approach IPSAS 21
Restoration cost is the cost of restoring
the service potential of an asset to its preimpaired level. Under this approach, the
present value of the remaining service
potential of the asset is determined by
subtracting the estimated restoration cost
85
of the asset from the current cost of

replacing the remaining service potential
of the asset before impairment. The latter
cost is usually determined as the
depreciated reproduction or replacement
cost of the asset whichever is lower.
6.7 Service Units Approach IPSAS 21
Under this approach, the present value of
the remaining service potential of the asset
is determined by reducing the current cost
of the remaining service potential of the
asset before impairment to conform with
the reduced number of service units
expected from the asset in its impaired
state. As in the restoration cost approach,
the current cost of replacing the remaining
service potential of the asset before
impairment is usually determined as the
depreciated reproduction or replacement
cost of the asset before impairment,
whichever is lower. (IPSAS 21, para.
45).
6.8 Other Considerations
6.8.1 Heritage Assets. Some heritage
assets have service potential other than
their heritage value, for example, an
historic building being used for office
accommodation. In these cases, they may
be recognised and measured on the same
basis as other items of property, plant and
equipment. For other heritage assets, their
service potential is limited to their heritage
characteristics, for example, monuments
and ruins. The existence of alternative
service potential can affect the choice of
measurement base. (IPSAS 17, para. 10)
6.8.2 Non-Agricultural Biological Assets.
Naturally occurring flora and fauna
include special conservation assets, which
may or may not be protected. Some are so
significant that they have international
recognition while others may reflect the
environment in its natural state.
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6.8.3 Absence of Free Cash Flows to

Monopolies. Some public sector entities
can be classed as monopolies. While
monopoly service providers often generate
cash flows, these cash flows cannot be
considered reflective of market levels
since there is no market evidence against
which to check the characteristic
circularity of cash flow, yield, and value.
Thus, a critical feature that differentiates
certain classes of public sector assets from
private sector assets is the absence of
free cash flows to such public sector
entities.
In some cases it may be
appropriate to use the cost approach either
as the primary valuation method or as a
cross check to establish that the rate of
return being earned from the assets being
valued is reasonable. This application
does not apply to government business
enterprises (GBEs), which are valued
according to IVA 1.
6.8.4 Test of Adequate Service Potential.
As non-cash generating assets have no free
cash flows to test the adequate profitability
of a public sector asset, the concept of
service potential becomes the test of an
assets performance. Service Potential is a
measure of the suitability of the asset to
continue meeting the objectives of the
entity. This suitability may be assessed by
reference to financial, social or political
considerations. The measurement may be
tangible, for example the number of
visitors to a museum or users of a public
library, or intangible, e.g., the social
benefits of maintaining an otherwise
uneconomic facility in a particular
location.
Where a non-cash-generating asset is
measured by reference to depreciated
replacement cost, it is subject to the test of
adequate service potential in order to
determine whether the asset is impaired.
(Also see GN 8, para. 5.11.)
6.8.5 Frequency
of
Revaluations.
Revaluations shall be made with
86
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carrying amount does not differ materially
from that which would be determined
using fair value at the reporting date
(IPSAS 17, para. 44)
In volatile markets the entity may be
required to revalue annually whereas in
more stable markets revaluations may be
required every three to five years.

7.1 The Valuer shall make all
disclosures required under IVS 3,
7.2 For disclosures required under
Standards (IPSASs), see paragraph
5.4.2 above.
regulatory
framework,
and any
departure
required
from
these
legislation,
regulation
(including
7.4 When no reliable measurement is
possible, disclosure must be made to the
reporting entity. (See para. 5.4.1 above.)

directions given in IVS 3, Valuation
Reporting.
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Real Property Valuation

1.0 Introduction
1.1 The International Valuation Standards
Committees
(IVSC)
Concepts
Valuation Principles set forth terms and
concepts that are fundamental to all
valuations. The purpose of Guidance Note
1 (GN 1) is to amplify those fundamentals
so they may be better understood in
valuations of real property.
1.2 Real Property constitutes a substantial
portion of the worlds wealth. If the
operations of property markets are to be
established on dependable valuations,
there must be generally agreed upon
Standards by which Market Value and
other value types are determined and
reported
by
Valuers.
Correct
understanding and proper application of
these Standards will inevitably promote
the viability of international and domestic
transactions in real property, improve the
relative position of real property among
other investment alternatives, and reduce
the instances of fraud and abuse.
1.3 The term property in a legal sense may
be defined as ownership rather than the
physical entity of land, buildings, and
tangible personal items. In this context,
the IVSC identifies four general property
types:
1.3.1 Real Property (GN 1)
1.3.2 Personal Property (GNs 3, 4, and 5)
1.3.3 Businesses (GN 6)
1.3.4 Financial Interests
1.4 As with other property types, there are
commonly agreed upon and generally
accepted methods for valuing real
property. It is important to the Valuer and
the users of valuation services that proper

methods be thoroughly understood,
competently applied, and satisfactorily
explained. By meeting this objective,
Valuers contribute to the soundness and
reliability of Market Value estimates and,
thereby, the well-being of the markets in
which they practice.
1.5 Promotion of understanding and
avoidance of abuses in the market require
that the Valuer and user of valuation
services carefully distinguish between the
types of property. Failure to do so can
result in improper or ill-advised market
decisions and misrepresentations of
reported values. Over- or under-reporting
of value is a common result where
property types are confused or mixed. The
same is true when terminology is indistinct
or inadequate.
1.6 Real Property Valuers recognise the
complexities of markets and the real estate
bought and sold therein. Differences in
real estate markets and between individual
properties are reflected accurately and
reliably where Generally Accepted
Valuation
Principles
(GAVP)
are
followed.
1.7 In all IVSC member countries, it is
recognised that the valuation of real
property requires special education,
training, and experience. Just as the
emergence of professional valuation
societies at the national level attests to a
market need for competent and highly
ethical Valuers within each country, the
globalisation of property markets and the
establishment of IVSC reflect the market
need for Valuers to adopt consistent
methods throughout the world. GN 1,
Real Property, provides an international
framework for the application of generally
accepted methods used for real property
valuation.
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1.8 The relationship between GNs 6 and

12, pertaining to business and trade related
property (TRP) valuation, and GN 1,
pertaining to real property valuation, must
be clearly understood. Real property is
valued as a distinct entity, i.e., as
physical assets to which particular
ownership rights apply. For example, an
office building, a residence, a factory, or
other property types generally incorporate
an underlying land component. Business
or TRP valuation, however, values a
business entity or TRP asset of which real
property may be a component.
The
Market Value of real property is always
valued in accordance with International
Valuation Standard 1 (IVS 1). When a
real
property
value
estimate
is
incorporated as an element of a business
valuation, it is a Market Value estimate of
the real property. As discussed in GN 1,
this convention is distinct from the
unacceptable practice of purportedly
developing a Market Value estimate for
real property as an allocation of the value
of a going concern.
2.2.2 a summary of the Valuation Process

and its rationale;
1.9 It is not the objective of GN 1 to

provide specific Guidance as to how a
given valuation should be performed or to
supercede the qualifications for and
procedures applied by Valuers. These are
addressed within the training programs of
each country. It is the IVSCs intent to
establish a framework and requirements
for real property valuation that will serve
to harmonise worldwide valuation
practices.
3.0 Definitions
2.0 Scope
2.1 This GN is provided to assist in the
course of rendering or using real property
valuations.
2.2 Principal elements of GN 1 include
2.2.1 an identification of key terms and
definitions;
2.2.3 an elaboration on the importance of

principles and concepts;
2.2.4 a discussion of proper disclosure and
reporting requirements;
2.2.5 examples
of
misunderstandings; and
abuses
and
2.2.6 a presentation of real property

Guidance.
2.3 The specific application of quantitative
and qualitative valuation procedures is
beyond the scope of GN 1. It is important
to stress, however, that Valuers are trained
in such procedures, and that the
procedures are included in generally
accepted practices. In application, Valuers
commonly apply several procedures in
each valuation and then reconcile the
results into a final indication of Market
Value or other specified value.
3.1 Concepts Fundamental to Generally

Accepted Valuation Principles defines the
concepts of land and property; real estate,
property, and asset; price, cost, and value;
Market Value; highest and best use, and
utility. The Glossary of Terms further
defines many of the concepts and technical
terms used throughout the Standards and
Guidance Notes.
The following
definitions are specific to GN 1 and are
included here for reader convenience.
3.2 Comparable Data. Data generally
used in a valuation analysis to develop
value estimates. Comparable Data relate
to properties that have characteristics
similar to those of the property being
valued (the subject property). Such data
include sale price, rents, income and
expenses,
and
market-derived
capitalisation and yield/discount rates.
89
3.3 Elements of Comparison. Specific

characteristics
of
properties
and
transactions that cause the prices paid for
real estate to vary.
Elements of
comparison include, but are not limited to,
the following: property rights conveyed,
financing terms, conditions of sale, market
conditions, location, and physical and
economic characteristics. (See para. 5.22
of this document for a full presentation of
Elements of Comparison.)
3.4 Highest and Best Use. The most
probable use of a property which is
legally permissible, financially feasible,
and which results in the highest value of
the property being valued. (See Concepts
Valuation Principles, section 6.)
3.5 A Market. The environment in which
goods, services and commodities trade
between buyers and sellers through a price
mechanism.
3.6 Market Value.
Definitions are
included in Concepts Fundamental to
and International Valuation Standard 1,
section 3. [The estimated amount for
which a property should exchange on the
date of valuation between a willing buyer
and a willing seller in an arms-length
transaction after proper marketing
knowledgeably, prudently and without
compulsion.]
3.7 Property Rights. The rights that are
related to the ownership of real estate.
These include the right to develop or not
develop the land, to lease it to others, to
sell it, to give it 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 these property
rights is sometimes referred to as the
bundle of rights inherent in the ownership
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of real estate. Property rights are typically

subject to public or private restrictions
such as easements, rights`-of-ways,
specified development density, zoning and
other restrictions that may encumber the
property.
3.8 Real Estate. Land and all things that
are a natural part of the land, e.g., trees
and minerals, as well as all things that are
attached 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 the real estate. Real estate
includes all attachments, both below and
above the ground. (See also Concepts
Valuation Principles as well as in Glossary
of Terms.)
3.9 Real Property. All the rights, interests,
and benefits related to 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. (See Property Types,
paras. 2.2.1 and 2.2.4.)
3.10 Units of Comparison. Typically a
factor produced by two components,
which reflects precise differences between
properties and facilitates analysis in the
three approaches to value, e.g., price per
square metre or square foot, or the ratio of
a propertys sale price to its net income
(net income multiplier/years purchase).
3.11 The Cost Approach. One of the
approaches to value commonly applied in
Market Value estimates and many other
valuation situations.
Depreciated replacement cost is an
application of the cost approach used in
assessing the value of specialised assets
for financial reporting purposes, where
direct market evidence is limited. (See
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GN 8, The Cost Approach for Financial

Reporting-(DRC).)
4.0 Relationship
Standards
to
Accounting
4.1 For a general discussion of the

accounting requirements for real property
valuations, and the utility of Market Value
in promoting the objectivity and
comparability of real property valuations,
see International Valuation Application 1.
5.0 Guidance
5.1 Value, in its broadest sense, is defined
as the relationship between something
owned and an individual or individuals
who wish(es) to own it. To distinguish
between the broad subjective relationships
that may occur among people, Valuers
must identify a particular type of value as
the basis of any valuation. Market Value
is the most common value type, but
valuation bases other than Market Value
also exist. (See Introduction to Standards
1, 2 and 3; and IVSs 1 and 2.)
5.1.1 Market Value has evolved in concept
and definition under the influence of
market forces and in response to various
principles of real estate economics. By
applying a definition of value such as
Market Value in valuations, Valuers and
the users of their services are afforded
an objective plan of analysis.
5.1.2 When Market Value is the purpose
of a valuation, the Valuer shall apply
definitions, processes, and methods
consistent with IVS 1.
5.2 Where a type of value other than
Market Value is the purpose of a
valuation, the Valuer shall apply the
appropriate definition of value and shall
follow IVS 2 and applicable GNs. It is
the responsibility of the Valuer to avoid
potential
misunderstandings
or
misapplications of the valuation
estimate in situations where a value

other than Market Value is the purpose
of the assignment. Proper disclosures,
identification and definition of terms, and
stated limitations on the applicability of
the valuation and the Valuation Report
normally ensure compliance.
5.3 GN Figure 1-1 illustrates the
Valuation Process as it is applied in many
countries. The process reflects Generally
Accepted Valuation Principles (GAVP)
and is approximated in virtually all
countries, whether or not the particular
steps are explicitly followed.
The
principles from which this process derives
are common to all countries. Although the
process may be used for either Market
Value or applications founded on other
bases of value, Market Value applications
require the development of valuations
solely on the basis of market data.
5.4 A valuation must be distinguished
from a Valuation Report. Valuation
includes all of the research, data,
reasoning, analysis, and conclusions
necessary to arrive at a value estimate.
A Valuation Report communicates
those processes and conclusions.
Although requirements differ among
countries, it is a requisite under these
Standards that adequate records be
kept to demonstrate that a Valuation
Process was followed and that the
conclusions are credible and reliable.
These records must be available in case
reasonable enquiry is subsequently
made. (See IVS Code of Conduct, para.
5.3.5 and 5.3.6.) In practice, some forms
of reporting may incompletely represent
the entire basis for the valuation. If the
report is in any way limited, the Valuer
will generally identify and distinguish
between the scope of the valuation and
that of the Valuation Report.
5.5 It is appropriate and customary that
a clients instruction (para. 5.6 below) be
stated in writing in a letter or contract
91
for services. In Market Value situations it

is also common for the independence, or
external status of the Valuer to be
established in an affirmative statement.
The agreement also sets forth the business
relationship between the Valuer and the
client, fee and payment terms, special
directives and limitations, an identification
of the Standards to be applied, and other
pertinent matters.
5.6 As GN Figure 1-1 indicates, a Valuer
and the valuation client must agree on
the context and scope of the valuation.
The definition of the assignment includes
5.6.1 an identification of the real estate
involved in the valuation;
5.6.2 an identification of the property
rights to be valued;
5.6.3 the intended use of the valuation,
and any related limitations;
5.6.4 the
identification
of
any
subcontractors or agents and their
contribution;
5.6.5 a definition of or the basis of the
value sought;
5.6.6 the date as of which the value
estimate will apply; and the date of the
intended report;
5.6.7 an
identification
of
the
scope/extent of the valuation and of the
report; and
5.6.8 an identification of any contingent
and limiting conditions upon which the
valuation is based.
5.7 In performing the steps of a
preliminary analysis, and data selection
and collection, suggested in the
Valuation Process, the Valuer becomes
familiar with the general market and
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subject property, thereby proceeding to

a position from which more specific
analyses can be made.
5.7.1 General economic data are collected
at the neighbourhood, city, regional, and
even national and international levels,
depending on the property involved.
Social, economic, governmental, and
environmental factors that may have
bearing on Market Value (or other defined
value type) are examined to better
understand the particular property. Any
other specific forces that must be
considered are investigated in detail.
5.7.2 Property-specific data, or data more
directly relevant to the property being
valued and to comparable properties are
also gathered and examined.
These
include site and improvement data, cost
and depreciation data, income and expense
data, capitalisation and yield rate data,
ownership and utilisation histories, and
other information determined to be
significant and generally considered by
buyers and sellers in their negotiations and
transactions.
5.7.3 Supply
and
demand
data
characteristic of the most probable market
for the property are analysed to develop an
inventory of properties that compete with
the subject property for market share as
well as an inventory of existing properties
to be adapted or new properties to be built,
which will increase the competitive
supply. Markets are analysed to determine
market trends, relationships between
supply and demand, absorption rates, and
other market-specific information.
5.8 Once the above data are gathered and
analysed, the Valuer will be able to
determine possible land uses for the
subject property. Because different real
estate parcels may have different use
potentials, the first requisite step toward
selecting sales and other comparable
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Guidance Note Figure 1-1
The Valuation Process
DEFINITION OF THE ASSIGNMENT

IDENTIFY
REAL
ESTATE
IDENTIFY
PROPERTY
RIGHTS
USE OF THE
VALUATION
DEFINE
VALUE
DATE OF
VALUE
SCOPE OF
THE
ASSIGNMENT
OTHER
LIMITING
CONDITIONS
PRELIMINARY ANALYSIS AND DATA SELECTION AND COLLECTION

GENERAL
SPECIFIC
(Regional, city and

neighborhood)
(Subject and comparable data)
SOCIAL
COST AND DEPRECIATION
COMPETITIVE SUPPLY AND

DEMAND
(The subject market)
INCOME AND EXPENSE
INVENTORY AND
COMPETITIVE PROPERTIES
CAPITALISATION RATE
SALES AND LISTINGS
HISTORY OF OWNERSHIP
VACANCIES AND OFFERINGS
ECONOMIC
GOVERNMENTAL
ENVIRONMENTAL
DEMAND STUDIES
USE OF PROPERTY
ABSORPTION RATE
HIGHEST AND BEST USE

Land as though vacant
Property as improved
Specified in terms of Use, Time and Market Participants
LAND VALUE ESTIMATE
APPLICABLE VALUATION APPROACH(ES)

SALES
COMPARISON
APPROACH
INCOME
CAPITALISATION
APPROACH
COST
APPROACH
RECONCILIATION OF VALUE INDICATIONS AND FINAL VALUE ESTIMATE
REPORT OF DEFINED VALUE
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data is to determine the highest and best

use (HABU) of the subject property.
The Valuer considers both the highest
and best use of the land as though vacant
and the highest and best use of the
property as improved. (See the discussion
of HABU in Concepts Fundamental to
para. 6.0 et seq.)
5.8.1 The concept of HABU is based on
the notion that although two or more
parcels of real estate may have physical
similarities and closely resemble one
another, there may be significant
differences in how they can be used. How
a property can be optimally utilised is a
foundation for determining its Market
Value.
5.8.2 Basic determinants of HABU
include the answers to the following
questions:
Is the suggested use a reasonable and

likely one?
Is the use legal, or is there a reasonable

likelihood that a legal entitlement for
the use can be obtained?
Is the property physically suited to the

use or can it be adapted to the use?
Is the suggested
feasible? And
use
financially
Of those uses that meet the first four

tests, is the selected HABU the most
productive use of the land?
5.9 Several methods are used for land

valuation.
Their applicability differs
according to the type of value estimated
and availability of data. For Market
Value estimates, any method chosen
must be supported by market data.
(See para. 5.25 et seq.)
5.10 In many, but not all, countries three

valuation approaches are recognised in
the
Valuation
Process:
sales
cost. While a well-evidenced market may
make the cost approach less relevant, a
lack of comparable data may cause the
cost approach to be predominant. The
laws of some countries preclude or limit
the application of one or more of the three
approaches.
Unless there are such
restrictions, or unless there are other
compelling reasons for a particular
omission, it is reasonable for the Valuer
to consider each approach. In some
countries, the use of each approach is
mandated unless the Valuer can
demonstrate a lack of supporting data or
other valid reason for omission of a
particular approach. Each approach is
based, in part, on the Principle of
Substitution, which holds that when
several
similar
or
commensurate
commodities, goods or services are
available, the one with the lowest price
attracts the greatest demand and widest
distribution. In simple terms, the price of
a property established by a given market is
limited by the prices commonly paid for
properties that compete with it for market
share, the financial alternatives of
investing money elsewhere, and the cost of
building a new property or adapting an old
property to a use similar to that of the
subject property (property being valued).
Philippine 5.10.1
Private appraisers also use Offered
Listings and Inferential Opinion Surveys
in cases of limited or scarce comparable
data (see Concepts Fundamental to
para. 9.2.1.1). In such cases the use of
such data should be clearly disclosed.
5.11 The sales comparison approach
recognises that property prices are
determined by the market. Market Value
can, therefore, be calculated from a
94
study of market prices for properties

that compete with one another for
market share.
The comparative
processes applied are fundamental to the
Valuation Process.
(See Concepts
Valuation Principles, para. 9.2.1.1)
5.11.1 When data are available, the
sales comparison approach is the most
direct and systematic approach to
estimating value.
5.11.2 When data are insufficient, the
applicability of the sales comparison
approach may be limited. Insufficient
research by the Valuer, however, is not an
excuse for omission of this approach
where data are available or could
reasonably be developed. (See section
5.23 et seq. for discussion of market
research, data verification, adjustment
procedure,
and
reconciliation
of
indications.)
5.11.3 After sales data are gathered and
verified, one or more units of
comparison are selected and analysed.
Units of comparison use two components
to produce a factor (e.g., the price per
measurement unit or a ratio such as that
produced by dividing a propertys sale
price by its net income, i.e., net income
multiplier, or years purchase) that reflects
precise differences between properties.
The units of comparison that buyers and
sellers in a given market use in making
their purchase and sale decisions take on
special relevance and may be afforded
greater weight.
5.11.4 Elements of comparison are the
specific characteristics of properties and
transactions that cause the prices paid
for real estate to vary. They are crucial
considerations in the sales comparison
approach.
5.11.5 To make direct comparisons
between a comparable sale property
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and the subject property, a Valuer shall

consider possible adjustments based on
differences in the elements of
comparison. Adjustments can narrow the
differences between each comparable and
the subject. Valuers apply quantitative
and/or qualitative methods to analyse
differences and estimate adjustments.
5.12 The income capitalisation approach
can be applied in both Market Value
assignments and other types of
valuations. However, for Market Value
applications, it is necessary to develop
and
analyse
relevant
market
information. This focus differs distinctly
from the development of subjective
information for a specific owner or the
reflection or viewpoint of a particular
analyst or investor.
5.12.1 The
income
capitalisation
approach is based on the same principles
that apply to other valuation approaches.
In particular, it perceives value as created
by the expectation of future benefits
(income streams). Income capitalisation
employs processes that consider the
present value of anticipated future income
benefits.
5.12.2 As with other approaches, the
income capitalisation approach can be
used reliably only when relevant
comparative data are available. When
such information is not available, the
approach may be used for general analysis
but not for the purpose of direct market
comparison. The income capitalisation
approach is particularly important for
properties that are purchased and sold
on the basis of their earnings
capabilities and characteristics and in
situations where there is market
evidence to support the various
elements incorporated into the analysis.
Nonetheless, the mathematical precision of
the procedures used in the approach must
not be mistaken as an indication of the
precise accuracy of the results.
95
5.12.3 Market research is important to

the income capitalisation approach in a
number of ways. In addition to providing
specific data that will be processed,
market
research
also
furnishes
qualitative information to determine
comparability and to assist in weighing
the applicability of the results of the
analysis. Thus, the approach is not merely
quantitative, or mathematical, but requires
qualitative assessments as well.
5.12.4 Once appropriate market research
is completed and comparable data are
collected and verified, Valuers analyse
the income and expense statement
provided for the subject property. This
step involves a study of the historical
incomes and expenses of the property
under consideration and of other
competing properties for which data are
available. Subsequently, a cash flow
(based upon a reconstructed operating
statement) is developed that reflects
market expectations, eliminates the
special experiences of a particular
owner, and provides a format that
assists further analysis. The purpose of
this step is to estimate the income that can
be earned by the property, which will be
capitalised into an indication of value.
This estimate may reflect income and
expenses for only a single year or a
series of years.
5.12.5 Following the development of a
cash flow (based on a reconstructed
operating statement), the Valuer must
choose a means of capitalisation. Direct
capitalisation applies an overall rate, or
all risks yield, which, when divided into
a single years or stabilized net
operating income, produces a value
indication. Direct capitalisation is used
in particularly, well-evidenced markets.
Yield capitalisation considers the time
value of money, and is applied to a
series of net operating incomes for a
period of years.
A method called
discounted cash flow analysis (DCF) is a
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prominent
example
of
yield
capitalisation. (See Guidance Note 9).
Either direct capitalisation or yield
capitalisation (or both) can be applied to
estimate Market Value if the capitalisation
and yield rates are appropriately supported
by the market. If applied correctly, both
procedures should result in the same value
estimate.
5.12.6 Reconstructed
operating
statements specify that the income
projection is subject to the assumption
that the property is run by a reasonably
efficient operator or average competent
management.
5.13 The cost approach, also known as the
contractors method, is recognised in most
countries. In any application, the cost
approach establishes value by estimating
the costs of acquiring land and building
a new property with equal utility or
adapting an old property to the same
use with no undue expense resulting
from delay. The cost of land is added to
the total cost of construction. (Where
applicable, an estimate of entrepreneurial
incentive, or developers profit/loss, is
commonly added to construction costs.)
The cost approach establishes the upper
limit of what the market would normally
pay for a given property when it is new.
For an older property, some allowance
for
various
forms
of accrued
depreciation (physical deterioration;
functional, or technical, obsolescence;
and economic, or external obsolescence)
is deducted to estimate a price that
approximates Market Value. Depending
upon the extent of market data available
for the calculations, the cost approach
may produce a direct indication of Market
Value. The cost approach is very useful in
estimating the Market Value of proposed
construction, special-purpose properties,
and other properties that are not frequently
exchanged in the market. (See also GN 8,
The Cost Approach for Financial
Reporting- (DRC).)
96
5.14 The three approaches to value are

independent of one another even though
each approach is based on the same
economic principles. All three approaches
are intended to develop an indication of
value, but the final value conclusion
depends on consideration of all data and
processes
employed
and
the
reconciliation of the value indications
derived from different approaches into
a final estimate of value. As shown in
GN Figure 1-1, the reconciliation process
is followed by a report of defined value.
5.15 The requirements for valuation
reports are addressed in the IVSC Code
of Conduct, and IVS 3, Valuation
Reporting.
5.16 Where there is sufficient market
data to support the valuation, Market
Value is derived.
In
other
circumstances,
where
there
is
insufficient market data or special
instructions have been given, the result
will be a value other than Market Value.
5.17 The existence of different types of
value must not confuse Valuers or the
users of valuation services.
Market
Value, the value type most commonly
sought in the market, is distinct from all
other value types. Each of the other
value types has its own rationale and
application and shall be investigated
only in an appropriate context. By
proper reporting, adequate disclosure and
discussion, and the assurance that the
value type identified in the valuation
report suits the intended purpose and use
of the valuation, the Valuer assists in the
market in its reliance on valuations.
5.18 The terms market and markets
imply properties, buyers, sellers, and
some degree of competition.
If a
property chosen for comparison does not,
or cannot, compete in the same market as
the property being valued, it is likely that
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the comparison property belongs to a

different market.
5.19 The totality of private ownership
rights associated with a particular property
is referred to as a freehold interest, a fee
simple interest, or by other appropriate
terms depending on the country.
5.20 In any analysis of comparable
data, it is essential that the properties
from which the comparable data are
collected have characteristics similar to
the property being valued.
These
include legal, physical, locational, and use
characteristics that are consistent with
those of the subject property and reflect
conditions in the market where the subject
property competes. Differences shall be
noted and analysed to develop adjustments
in all three valuation approaches.
5.20.1 In
the
sales
comparison
approach, comparable sales data are
adjusted to reflect the differences between
each comparable property and the subject
property.
Elements of comparison
include real property rights conveyed,
financing terms, conditions of sale,
expenditures made immediately after
purchase, market conditions, location,
physical
characteristics,
economic
characteristics, use, and non-realty
components of a sale.
5.20.2 In the income capitalisation
approach, comparable data include
rental, income, expense, and capitalisation
and yield rate data. The categories of
comparable income and expense data used
in projections of future income and
expenses and in the development of
capitalisation and yield rates must be
identical.
5.20.3 In the cost approach, comparable
data refer to the costs of building or
development, and adjustments are made to
account for differences in quantities,
qualities, and utility. In addition, analysis
97
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of comparable land data and comparable

depreciation estimates is undertaken.
the transaction shall be fully understood,

analysed, and accounted for.
5.21 Suitable units of comparison are

selected to conduct proper analyses.
Different units of comparison may be
used, depending on the property type and
focus of the analyses. Office buildings
and warehouse properties can be compared
using price per square metre or square foot
of leasable or lettable area. In some
markets, comparison of warehouse
properties may use price per cubic metre
or cubic foot; apartments can be compared
using price per apartment unit or flat; and
agricultural properties can be compared
using crop yield per hectare or per acre or
supportable Animal Units (AU) per
hectare or per acre. Units of comparison
are only useful when they are
consistently selected and applied to the
subject property and the comparable
properties in each analysis and most
closely reflect the units of comparison
used by buyers and sellers in a
particular market.
5.22.3 Conditions of sale. The special

motivations of the parties to the
transaction in many situations can affect
the prices paid and even render some
transactions as non-market. Examples of
special conditions of sale include a higher
price paid by a buyer because the parcel
had synergistic, or marriage, value; a
lower price paid because a seller was in a
hurry to conclude the sale; a financial,
business, or family relationship between
the parties involved in the transaction;
unusual tax considerations; lack of
exposure of the property in the (open)
market; or the prospect of lengthy
litigation proceedings.
5.22 Elements of comparison identify

specific characteristics of properties and
transactions that may explain price
variations.
Market analysis identifies
which elements are especially sensitive.
The following elements of comparison
are considered as basic in comparable
sales analysis.
5.22.1 Real property rights conveyed. A
precise identification of the real property
rights conveyed in each comparable
transaction, selected for analysis, is
essential because the transaction price is
always predicated on the property interest
conveyed.
5.22.2 Financing terms. Where different
financing arrangements can cause the price
paid for one property to differ from that of
another identical property, the types and
conditions of financing arrangements in
5.22.4 Expenditures made immediately

after the purchase are expenditures that
would have to be made upon purchase of
the property and that a knowledgeable
buyer may negotiate into the purchase
price. Examples include the cost to repair
or replace structures or parts of structures,
the cost to remediate environmental
contamination, or the costs associated with
zoning changes to permit development.
5.22.5 Market
conditions.
Market
conditions at the time of the sales
transaction of a comparable property may
differ from those on the valuation date of
the property being valued. Factors that
impact market conditions include rapidly
appreciating or depreciating property
values, changes in tax laws, building
restrictions or moratoriums, fluctuations in
supply and demand, or any combination of
forces working in concert to alter market
conditions from one date to another.
5.22.6 Location. The locations of the
comparable sale properties and the subject
property are compared to ascertain
whether location and the immediate
environs are influencing the prices paid.
Extreme locational differences may
98
indicate that a transaction is not truly

comparable and should be disqualified.
5.22.7 Physical
characteristics.
Attributes such as the size, construction
quality, and physical condition of the
subject property and the comparable
properties are described and analysed by
the Valuer. If the physical characteristics
of a comparable property vary from those
of the subject property, each of the
differences is considered, and the Valuer
shall adjust for the impact of each of these
differences on value.
5.22.8 Economic
characteristics.
Qualities such as income, operating
expenses, lease provisions, management,
and tenant mix are used to analyse
income-producing properties.
5.22.9 Use. Zoning and other restrictions
or limitations affect the use of a property.
If there is a difference in the current use or
highest and best use of a comparable
property and that of the subject property,
its impact on value shall be carefully
considered. Generally, only properties
with the same or similar highest and best
uses are used in comparable analysis.
5.22.10 Non-realty components of sale.
Personal property, business interests, or
other items that do not constitute real
property may be included in either the
transaction price or the ownership interest
in the property being valued. These
components shall be analysed separately
from the real property. Typical examples
of personal property are furniture, fixtures,
and equipment (FF&E) in a hotel or
restaurant.
5.23 In applying the sales comparison
approach, a Valuer follows a systematic
procedure. The Valuer will:
5.23.1 Research the market to develop
appropriate market information for similar
properties that compete with the subject
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for market share; this information will

vary among different property types but
will commonly include the property type,
date of sale, size, location, zoning, and
other relevant information.
5.23.2 Verify the information by
confirming that it is accurate and that the
terms and conditions of sale are consistent
with Market Value requirements; where
differences occur, the Valuer will
determine whether the data warrant only
general consideration.
5.23.3 Select
relevant
units
of
comparison (e.g., price per metre or per
square foot; price per room; income
multiplier, or years purchase; or others)
and develop a comparative analysis for
each unit.
5.23.4 Compare the sale properties with
the subject property using the elements
of comparison and adjusting the sale price
of each comparable property when data
are available to support such adjustments.
As an alternative, the Valuer may use the
sales data to bracket or determine a
probable range of values for the property.
If the data are found not to be sufficiently
comparable, the sale property shall be
eliminated as a comparable.
5.23.5 Reconcile the results into a value
indication. Where market conditions are
indefinite, or when an array of the sales
data
shows
varying
degrees
of
comparability, it may be advisable to
develop a range of value indications.
5.24 Highest and best use underlies the
analysis
for all
Market
Value
assignments. An understanding of real
estate market behaviour and dynamics is
essential to the determination of a
propertys highest and best use. Since
market forces create Market Value, the
interaction between market forces and
highest and best use is of fundamental
importance. Highest and best use
99
identifies the most profitable use among

potential uses to which the property can
be put, and is, therefore, market-driven.
5.24.1 It is possible that the highest and
best use (HABU) of land as though it were
vacant and the HABU of an improved
parcel of land are different. In many
countries, it may be illegal to demolish
buildings even if a more productive use is
possible.
Where demolition and site
clearance are legal and possible, the costs
associated with them might make new
construction economically unfeasible.
Thus, it is possible that there is a
difference between the HABU of land as
though vacant and that of the property as
improved. The Valuer must analyse and
report these considerations, and clearly
distinguish which HABU was selected.
The Valuer must also provide support for
the HABU selection.
5.24.2 In many countries, it is necessary
to make a land value estimate based on the
HABU as though there were no
improvements on the land. This HABU
determination is, of course, necessary if
the land is vacant, but it also provides an
economic basis for judging the
productivity of the improvements when
they are present.
The practice also
involves analysing market information to
determine the extent of accrued
depreciation that may be present in the
improvements. In other countries, or in
situations where there is little, if any,
market information on vacant land sales, it
is possible that land value may not be
estimated. Local standards within each
country prescribe practice in these
situations, but in any event such
restrictions shall be fully and clearly
understood.
5.25 The primary methods of valuing
land are:
5.25.1 A sales comparison technique for
land valuation involves direct comparison
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of the subject property with similar land

parcels for which actual data on recent
market
transactions
are
available.
Although sales are the most important,
analysis of listings and prices offered for
similar parcels that compete with the
subject may contribute to greater
understanding of the market.
5.25.2 A
subdivision
development
technique may also be applied to land
valuation. This process entails projecting
the subdivision of a particular property
into a series of lots, developing incomes
and expenses associated with the process,
and discounting the resulting net incomes
into an indication of value. This technique
may be supportable in some situations, but
is subject to a number of assumptions that
may be exceedingly difficult to associate
with the Market Value definition. Caution
is advised in the development of
supportable assumptions, of which the
Valuer is advised to make full disclosure.
Where direct land comparisons are not
available, the following methods can be
applied with caution.
5.25.3 Allocation
is
an
indirect
comparison technique that develops a ratio
between land value and improvement
value or some other relationship between
property components. The result is a
measure that allocates a total market price
between the land and improvements for
comparative purposes.
5.25.4 Extraction is another indirect
comparison technique (sometimes called
abstraction). It provides a value estimate
of improvements by applying a cost less
depreciation analysis and extracting the
result from the total price of otherwise
comparable properties. The residual is an
indication of possible land value.
5.25.5 The land residual technique for
land valuation also applies income and
expense data as elements in its analysis. A
100
financial analysis is made of the net

income that can be obtained by an incomeproducing use and a deduction from the
net income is made for the financial return
required by the improvements.
The
remaining income is considered residual to
the land and is capitalised into a value
indication. The method is limited to
income-producing properties and is most
applicable to newer properties for which
fewer assumptions are required.
5.25.6 Land can also be valued by
ground rent capitalisation. If the land is
capable of independently producing a
ground rental, that rent may be capitalised
into Market Value indication where
sufficient market data are available. Care
must be taken, however, not to be misled
by special terms and conditions in a
ground-rent lease that may not necessarily
be representative of the particular market.
In addition, since ground leases may have
been drawn up many years before the
valuation date, the rents quoted therein
may be outdated, and current income
capitalisation rates may be hard to obtain.
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real estate does not adjust quickly in

response to changes in market demand.
5.26.2 Investment in real estate, which
is relatively illiquid, involves large sums
of money for which appropriate financing
might not be readily available. Valuers
shall recognise these inefficiencies, and
their understanding of the particular
characteristics of a real estate market
and/or sub-market shall produce a credible
and objective analysis for the clients they
serve.
5.27 The use of the cost approach can be
appropriate when properties are new or of
relatively new construction, provided
estimates of items such as land value and
depreciation are validated by market
evidence. In depressed markets, economic
or external obsolescence must be factored
into the indication of value derived from
the cost approach.
5.26 A real estate market may be

defined as the interaction of individuals or
entities that exchange real property rights
for other assets, typically money. Specific
real estate markets are defined by the
property type, location, income-producing
potential, typical tenant characteristics,
attitudes and motivations of typical
investors, or other attributes recognised by
those individuals or entities participating
in the exchange of real property. In turn,
real estate markets are subject to a broad
variety of social, economic, governmental,
and environmental influences.
5.26.1 In comparison to markets in
goods, securities, or commodities, real
estate markets are still considered
inefficient. This feature is attributable to
a variety of factors including the relatively
inelastic supply and the fixed location of
real estate. Consequently, the supply of
101
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Valuation of Lease Interests

1.0 Introduction
1.1 International Valuation Standards
(IVSs)
Concepts
Fundamental
to
(GAVP) distinguish between real estate,
the physical tangible thing (see
Concepts Fundamental to GAVP 3.0), and
real property which pertains to the rights,
interests, and benefits related to the
ownership of real estate. Lease interests
are a form of real property, arising from
the contractual relationship (the terms of
which are conveyed by a lease) between a
lessor, one who owns the property leased
to another, and a lessee, or tenant, one who
typically receives a non-permanent right to
use the leased property in return for rental
payments or other valuable economic
consideration.
1.2 To avoid misunderstandings or
misrepresentations, Valuers and users of
valuation services should recognise the
important distinction between the physical
and the legal issues involved in
considering the value of lease interests.
1.3 This class of ownership is, as for the
fee simple or freehold interest, common to
all types of property assets valued. A
piece of real estate may comprise one or
more property interests, each of which will
have a Market Value provided it is capable
of being freely exchanged.
1.4 In no circumstances is it considered
proper to value different property interests
in the same piece of real estate separately
and then to aggregate their values as an
indication of the real estates total value.
Lease contracts establish unique legal
estates that are different from fee simple,
or freehold, ownership.
1.5 International Financial Reporting

Standards (IFRSs) (including International
Accounting Standards (IASs)) contain
specific accounting requirements for
property that is either held under a lease,
or subject to a lease.
1.6 The relationships between different
legal interests in the same property can be
complex and can be made more confusing
by the different terminology used to
describe the various interests.
This
Guidance Note (GN) seeks to address and
clarify these issues. The diagram on the
following page illustrates the relationship
between lease interests.
2.0 Scope
2.1 This GN sets out definitions,
principles, and important considerations in
the valuation of and related reporting for
lease interests.
2.2 This GN is to be applied with
particular reference to IVSs Concepts
Valuation Principles and to IVSs 1 and 2,
and IVAs 1, 2, and 3.
2.3 This GN applies in countries where a
lessee holds an interest in land and/or
buildings, which is regarded as a separate
legal estate. A lease interest is subordinate
to a superior interest, which itself may be
either another lease interest for a longer
term or the ultimate fee simple, or
freehold, interest.
3.0 Definitions
3.1 Terms basic to the definition and
valuation of legal interests include the
following:
102
3.1.1 Freehold Interest. A fee simple

estate,
representing
the
perpetual
ownership in land.
3.1.2 Freehold subject to leasehold or
Lease Interest/s, has the same meaning as
Leased Fee Interest, representing the
ownership interest of a lessor owning real
estate that is subject to (a) lease(s) to
others.
3.1.3 Ground Lease. Usually a long-term
lease of land with the lessee permitted to
improve or build on the land and to enjoy
those benefits for the term of the lease.
3.1.4 Headlease, or Master Lease. A lease
to a single entity that is intended to be the
holder of subsequent leases to sublessees
that will be the tenants in possession of the
leased premises.
3.1.5 Headleasehold Interest has the same
meaning as Sandwich Lessor Interest. The
holder of a headlease or master lease.
3.1.6 Lease. A contract arrangement in
which rights of use and possession are
conveyed from a propertys title owner
(called the landlord, or lessor) in return for
a promise by another (called a tenant, or
lessee) to pay rents as prescribed by the
lease. In practice the rights and the duties
of the parties can be complex, and are
dependent on the specified terms of their
contract.
3.1.7 Leasehold or Lease Interest, also
known as Lessee Interest, Tenants
Interest, or Leasehold Estate.
The
ownership interest that is created by the
terms of a lease rather than the underlying
rights of real estate ownership. The lease
interest is subject to the terms of a specific
lease arrangement, expires within a
specified time, and may be capable of
subdivision, or subleasing to other parties.
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.
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3.1.9 Marriage Value, Synergistic Value,

Plottage Value or Merged Interests Value.
The excess value, if any, produced by a
merging of two or more interests in a
property, over-and-above the sum of the
values of those individual interests.
3.1.10 Rent Types
3.1.10.1 Market Rent.
The estimated
amount for which a property, or space
within a property, should lease on the date
of valuation between a willing lessor and a
willing lessee on appropriate lease terms
in an arms-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.
3.1.10.2 Contract Rent, or Passing Rent.
The rent specified by a given lease
arrangement; 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.
3.1.10.3 Turnover Rent or Participation
Rent.
Any form of lease rental
arrangement in which the lessor receives a
form of rental that is based on the earnings
of the lessee. Percentage rent is an
example of a turnover rent.
3.1.10.4 Sale and Leaseback.
A
simultaneous sale of real estate and lease
of 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.
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Hierarchy of Property Rights

YEARS
ENTITY A
ENTITY B
FREEHOLD OR FEE
SIMPLE ABSOLUTELY
HELD BY ENTITY A
LEASE INTEREST,
LEASEHOLD, OR
TENANCY HELD BY
ENTITY B
ENTITY C
SUBLEASE INTEREST,
SUBLEASEHOLD, OR
TENANCY HELD BY
ENTITY C
THE ABSOLUTE RIGHT TO SELL, LEASE/LET, OR USE

THE SUBJECT PROPERTY IN PERPETUITY, SUBJECT
ONLY TO COUNTRY RESTRICTIONS.
THE RIGHT TO OCCUPY AND USE THE

PROPERTY FOR SPECIFIC PERIOD AND
FOR A SPECIFIED CONSIDERATION AS SET
OUT IN A LEASE BETWEEN ENTITY A AND
ENTITY B.
THE RIGHT TO OCCUPY AND USE

THE PROPERTY FOR A SPECIFIC
PERIOD AND FOR A SPECIFIED
CONSIDERATION AS SET OUT IN A
LEASE BETWEEN ENTITY B AND
ENTITY C.
THE RIGHTS SPECIFIED IN THE
SUBORDINATE LEASE CANNOT
EXCEED THE RIGHTS GRANTED IN
THE LEASE BETWEEN A & B.
ENTITY D
SUBORDINATE
SUBLEASE
INTEREST HELD
BY ENTITY D
THE RIGHT TO OCCUPY

AND USE THE PROPERTY
FOR A SPECIFIC PERIOD
AND FOR A SPECIFIED
CONSIDERATION AS SET
OUT IN A LEASE BETWEEN
ENTITY C AND ENTITY D.
THE RIGHTS SPECIFIED IN
THE SUBORDINATE LEASE
CANNOT EXCEED THE
RIGHTS GRANTED IN THE
LEASE BETWEEN B & C.
THE VALUER MUST IDENTIFY THE PROPERTY INTEREST TO BE VALUED ALONG WITH
THE PERTINENT RIGHTS AND RESTRICTIONS.
104
4.0 Relationship
Standards
to
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Accounting
4.1 Leased property is accounted for

differently from freehold property, plant
and equipment under IFRSs/IASs. The
valuation requirements are summarized in
IVA 1 and Addendum A to IVA 1.
5.0 Guidance
5.1 Leasehold or lease interests are
valued on the same general principles as
freeholds, but with recognition of the
differences created by the lease contract
encumbering the freehold interest,
which may cause the interest to be
unmarketable or restricted.
5.2 Leasehold or lease interests, in
particular, are often subject to
restrictive covenants or alienation
provisions.
5.3 Freeholds subject to an operating
lease are for accounting purposes
generally
considered
investment
property, and as such are valued on the
basis of Market Value. Headleasehold
interests are also commonly valued on
the basis of Market Value.
5.4 In some countries a lessee may have
a statutory right to purchase the lessors
interest, usually the freehold, or may
have an absolute or conditional right to
a renewal of the lease for a term of
years.
The Valuer should draw
attention to the existence of statutory
rights and indicate in the Valuation
Report whether or not regard has been
paid to them.
5.5 The importance of the distinction
between the physical matter and the
legal interest in it is critical to valuation.
For example, a lease might specify that the
lessee has no right to sell or transfer the
leasehold interest, causing it to be
unmarketable during the term of the lease.

Its value to the lessee, therefore, lies solely
in the rights of use and occupancy. The
leasehold value may be expressed in
monetary terms but is not a Market
Value as the interest cannot be sold in
the market.
However, the lessors
interest (leased fee value) does have a
Market Value, based on the value of the
rental income during the lease together
with any residual value remaining at the
end of the lease.
5.6 Each legal interest in a property
shall be valued as a separate entity and
not treated as though merged with
another interest. Any calculation of
merged interests value, synergistic value
or marriage value should be referred to in
supplementary advice only and may be
undertaken as a valuation based on
specific assumptions only and where the
Valuers Report is appropriately qualified.
5.7 Restrictive
or
onerous
lease
covenants may adversely affect the
Market Value of a lease interest. The
Valuer must draw attention in the
Valuation Report to the existence of
such circumstances. The most common
situation where this adverse effect arises
involves restrictions on assignment, or on
the right to sublet.
5.8 Inter-Company Leases
5.8.1 Where a property is subject to a
lease or tenancy agreement between two
companies in the same group, it is
acceptable to take account of the
existence of that agreement, provided
the relationship between two parties is
disclosed in the report, and that the
agreement is on arms-length in
accordance with normal commercial
practice. When the valuation is being
undertaken for inclusion in a financial
statement, it is acceptable to reflect any
inter-company leases provided the
interests of one of the parties to the lease
105
are being valued. However, if the interest

of the group is being valued for inclusion
in its consolidated accounts, the existence
of any inter-company leases should be
disregarded. (International Accounting
Standard 40, para. B21).
5.9 Leasehold Alterations
5.9.1 When valuing any property
interest that is subject to a lease, it is
important that Valuers establish
whether any alterations or adaptations
have been made to the property by the
lessee. If so the following questions
need to be addressed:
a) has the lessee complied with any
lease conditions or restrictions
relating to the alterations?
b) what is the impact of any state laws
on the rights of the parties in
relation to the alterations?
c) are the alterations obligatory or
voluntary? (see below)
d) is there any obligation on the lessor
to compensate the lessee for the cost
or value of the work, or on the lessee
to remove the alterations at the lease
end?
5.9.2 Leasehold alterations fall into two
main categories:
a) Obligatory alterations: These usually
arise where a property is leased in a
basic state or constructed to a
shell specification that is not
suitable for occupation without the
lessee undertaking further building
or fitting-out work. The lease will
often impose a condition that such
work be carried out by the lessee
within a certain timescale.
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leased in a completed state ready for

immediate occupation, but where
the lessee elects to undertake work
to
improve
or
adapt
the
accommodation to suit the lessees
own
particular
requirements.
Although the tenant may regard these
as alterations, the general market may
not.
5.9.3 Obligatory alterations will usually
have a beneficial impact on the Market
Rent. Voluntary alterations may have a
beneficial, neutral or detrimental effect
on the Market Rent, depending upon
their
nature
and
degree
of
specialisation. The degree to which the
impact on the Market Rent is reflected in
the value of either the lessors or the
lessees interest will depend upon the
answers to the questions in 5.9.1.
5.10 Negative Market Values
5.10.1 Where lease interests are
liabilities to an undertaking, they may
have a negative Market Value.
5.11 General
Due to the relative complexity of
leasehold or lease interest valuations, it
is essential that the client or the clients
legal advisor provide the Valuer with
either copies of all the leases or, for
multi-tenanted property, typical sample
leases together with a summary of lease
terms on the other leases.
b) Voluntary alterations:
Typically
these arise where a property is
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Valuation of Plant, Machinery and Equipment

1.0 Introduction
2.0 Scope
Philippine 1.0.1
2.1 This Guidance Note focuses on the

application of the approaches, principles
and bases described in the Standards to
the valuation of plant, machinery and
equipment.
The following Guidance
Notes may also be relevant to the
valuation of plant, machinery and
equipment:
In the Philippines, the term Plant is not

in general use. Machinery and
Equipment is the collective term adopted
by Valuers, while Plant and Equipment
is adopted by Accountants. Reference to
Plant and Equipment in this Guidance
Note has therefore been extended to
Plant, Machinery and Equipment.
1.1 Plant, machinery and equipment
collectively constitute a general class of
tangible property assets. International
Valuation Application 1 (IVA 1) deals
with valuation requirements for financial
reporting purposes. This Guidance Note
provides additional information to assist
in the application of the International
Valuation Standards to plant, machinery
and equipment assets.
assets have particular characteristics that
distinguish them from most types of real
property and that influence both the
approach to and reporting their value.
Plant, machinery and equipment are
normally capable of being moved or
relocated and often will depreciate at a
significantly faster rate than real property.
Frequently, the value will differ notably
depending on whether an item of plant,
machinery or equipment is valued in
combination with other assets within an
operational unit or whether it is valued as
an individual item for exchange, and
whether it may be considered as either insitu (in place) or for removal.
GN 4, Valuation of Intangible Assets

GN 5, Valuation of Personal Property
GN 6, Business Valuation
GN 7, Consideration of Hazardous and
Toxic Substances in Valuation
GN 8, The Cost Approach for Financial
Reporting (DRC)
2.2 This Guidance Note applies to the
valuation of the plant, machinery and
equipment assets of both private sector
and public sector entities.
3.0 Definitions
International
Definitions
Valuation
Standards
3.1 Fair Value. The amount for which an

asset could be exchanged between
knowledgeable willing parties in an
arms-length transaction.
buyer and a willing seller in an armslength transaction after proper marketing
compulsion.
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3.3 Plant and Equipment.

assets, other than realty, that:
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Tangible
3.6 Property, Plant

Tangible items that:
and
Equipment.
a) are held by an entity for use in the

production or supply of goods, or
services, for rental by others, or for
administrative purposes; and
a) are held for use in the 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.
b)
The categories of plant and equipment

are:
Plant. Assets that are inextricably
combined with others and that may
include specialised buildings, machinery
and equipment.
Philippine 3.3.1
Notwithstanding that the term Plant is
not in general use, it is accepted practice
to include specialised buildings and
structures which cover machinery in the
Machinery and Equipment category. In
such circumstances the valuation report
must clearly state this.
Machinery. Individual machines or a
collection of machines. A machine is an
apparatus used for a specific process in
connection with the operation of the
entity.
Equipment. Other assets that are used to
assist the operation of the enterprise or
entity.
International
Financial
Reporting
3.4 Finance Lease. A lease that transfers

substantially all the risks and rewards
incidental to ownership of an asset. Title
may or may not be eventually transferred
(IAS 17, para. 4).
3.5 Operating Lease. A lease other than
finance lease (IAS 17, para.4)
are expected to be used during more

than one (accounting) period. (IAS
16, para. 6)

Standards
4.1 Under
International
Financial
Reporting Standards (IFRS), Property,
Plant and Equipment may be included on
an entitys balance sheet at either cost
less depreciation less impairment or at
fair value at the date of revaluation less
depreciation less impairment (IAS 16,
paras. 29, 30 and 31). The fair value of
items of plant and equipment is usually
their Market Value determined by
appraisal (IAS 16, para. 32). Plant,
machinery and equipment, together with
other fixed assets, may be subject to other
IFRS, including IAS 2, Inventories; IAS
17, Leases; IAS 36, Impairment of
Assets; IFRS 3, Business Combinations;
and IFRS 5, Non-Current Assets Held for
Sale and Discontinued Operations.
4.2 International Valuation Application
(IVA) 1, Valuation for Financial
Reporting, sets out the valuation and
valuation reporting requirements under
the various IFRS referred to above.
4.3 International
Public
Sector
Accounting Standards (IPSASs) require
that after recognition, items of Property,
Plant and Equipment be carried at either
cost less any accumulated depreciation
and any accumulated impairment losses,
or at a revalued amount being the fair
value at the date of revaluation less any
subsequent accumulated depreciation and
108
losses (IPSAS 17, paras. 43 and 44),

IPSAS 21, Impairment of Non-CashGenerating Assets, may also apply to
plant, machinery and equipment, together
with other fixed assets; International
Valuation Application 3, Valuation of
Public Sector Assets for Financial
Reporting, sets out the valuation and
valuation reporting requirements under
IPSASs.
4.4 The
valuation
approach
and
assumptions applicable to a valuation of
plant, machinery and equipment for
inclusion in a financial statement may be
different from those appropriate for
another purpose. A clear distinction
should be made if values for different
purposes are reported in the same
document.
Different
valuation
assumptions may be appropriate under
different IFRS and IPSAS and therefore it
is important for the Valuer to be familiar
with the basic requirements of the
relevant standard, and to discuss the
appropriate assumptions with the client
before proceeding.
5.0 Guidance
5.1 Valuations of plant, machinery and
equipment can be carried out using
any of the following approaches:
5.1.1 sales comparison approach.
Philippine 5.1.1.1
Due to the lack of direct sales evidence
the use of the sales comparison approach
is often limited to individual freestanding machines such as lathes and
generators, and motor vehicles.
5.1.2 cost
approach
(depreciated
replacement cost) (see GN 8); and
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Philippines 5.1.2.1
Machinery and equipment valuations are
usually carried out using the Depreciated
Replacement Cost approach to reach a
valuation conclusion.
International Guidance Note No.8
provides guidance in the use of the Cost
Approach for Financial Reporting. It
states that depreciated replacement cost
is an application of the cost approach
used in assessing the value of specialised
assets for financial reporting purposes,
where direct market evidence is limited.
It is used where there is insufficient data
to arrive at Market Value by means of
market-based evidence. International
Accounting Standard (IAS) 16 Property,
Plant and Equipment, paragraph 33,
provides that in the absence of marketrelated evidence an entity may need to
estimate the Fair Value of a specialised
asset using a depreciated replacement
cost approach.
In the absence of direct market evidence
depreciated replacement cost is regarded
as an acceptable method of determining
value and since the publication of the IVS
seventh edition (2005) depreciated
replacement cost is recognised as a
market-based methodology.
Where the depreciated replacement cost
method has been used this must be clearly
stated and the valuation conclusion must
be reported in accordance with IVS 3,
Valuation Reporting. Such statements
should include that the valuation
conclusion is subject to the test of
adequate profitability, in accordance with
GN8 5.10.
Plant, machinery and equipment that is
commonly traded in the market must be
distinguished from specialised assets.
Insurance Valuations It is recognised
that where the cost approach is adopted
for valuations for insurance purposes, the
approach and assumptions used will be
109
different to those adopted when

undertaking valuations for financial
reporting. The valuation conclusion using
the cost approach for insurance valuations
will therefore not equate to Market Value.
5.1.3 income capitalization approach.
Philippine 5.1.3.1
In practice, this approach in the valuation
of machinery and equipment is not
adopted. It is recognised that it is rarely
possible to identify an income stream and
allocate it to individual assets. As a result,
it is generally very difficult, if not
impossible, to determine values for
individual assets by reference to the
income approach. It is also arguable that
any cash flow based valuation will, by
default, include more than just the plant,
machinery and equipment assets. It is
almost impossible to distinguish between
goodwill and fixed assets when adopting
a cash flow approach to valuation and as
a result some other valuation approach is
usually required in order to identify
values for the various components. These
will either be the market comparison
approach or the depreciated replacement
cost approach. It is therefore unlikely that
the income capitalisation approach will
be relevant in the Philippine context.
5.2 For many purposes, including
compliance with IFRS, the most
appropriate basis of value is Market
Value. However, Market Value simply
stipulates that an exchange is assumed
to take place on an arms length basis
between knowledgeable and willing
parties; it is silent as to how the
particular asset is to be presented for
sale or any of the other specific
circumstances that could have a
fundamental effect on the valuation.
When undertaking a valuation of
plant, machinery and equipment, the
Valuer must therefore, establish and
state the additional assumptions that
are appropriate, having regard to the
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nature of the asset and the purpose of

the valuation. These assumptions may
include the state of the business in
which the plant, machinery and
equipment are currently utilized, or
the extent to which individual items are
aggregated
with
other
assets.
Examples of assumptions that may be
appropriate in different circumstances,
or for different valuation purposes
include:
5.2.1 That the plant, machinery and
equipment are valued as a whole, insitu (in place) and as part of the
business as a going concern;
Philippine 5.2.1.1
This equates to Value for Continued Use,
where
machinery and
equipment
valuations are usually carried out on the
premise of Value for Continued Use as
part of a going concern, that is, as
continuing in operation for the
foreseeable future. It is assumed that the
entity has neither the intention nor the
necessity of liquidation or curtailing
materially the scale of its operation.
Implicit in the application of this premise
is:
Both buyer and seller contemplate
retention of the asset at its present
location for continuation of the use for
which it was designed and built, or to
which it is currently adapted. The values
are not intended to represent the amount
that might be realised from piecemeal
disposition of the asset in the
marketplace.
The application of the Value for
Continued Use / Value in Use premise is
generally appropriate when:
The asset is fulfilling an
demand for the service which
or houses; the asset has
remaining life expectancy;
economic
it provides
significant
There is
110
responsible ownership and competent

management; Diversion of the asset to an
alternate use would not be economically
feasible; Continuation of existing use by
present or similar users is practical; and
Due consideration is given to the assets
functional utility for its present use. This
premise does not have regard to the
assets Highest and Best Use or the
monetary amount that might be realised
upon its sale.
5.2.2 That the plant and equipment are
valued in-situ but on the assumption
that the business is closed; or
5.2.3 That the plant and equipment is
valued as individual items for removal
from their current location.
Philippine 5.2.3.1
This equates to Liquidation Value.
For assets in the public sector, the
assumption equivalent to a business
continuing as a going concern is that
the public sector assets will continue to
be used for the provision of the
relevant public good or service.
5.3 The list of assumptions above is not
comprehensive. Because of the diverse
nature and transportability of much
plant, machinery and equipment,
Market Value will need appropriate
qualifying assumptions to describe the
state and circumstances in which the
asset is offered to the market. These
assumptions should be discussed with
the client and must be included in the
report. Frequently, it may be appropriate
to report on more than one set of
assumptions, e.g., in order to illustrate the
effect of business closure or cessation of
operations on the Market Value of plant,
machinery and equipment assets, where
closure or cessation is not yet definite.
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5.4 Other factors that can affect the

Market Value of plant, machinery and
equipment include:
5.4.1 the costs of installation and
commissioning where plant, machinery
and equipment are valued in situ;
5.4.2 where they are valued for
removal, any allowance made for the
costs of decommissioning, removal, and
possible
reinstatement
following
removal, and which party is to bear
those costs. In some cases, these costs
can be substantial and therefore the
Valuer should reach an agreement with
the client as to how they should be
reflected
and
which
specific
assumption(s) are to be made.
5.5 Factors such as finite sources or
raw materials, the limited life of the
buildings or limited tenure of the land
and buildings housing the plant, and
statutory restrictions or environmental
legislation can also have a significant
impact on the value of plant and
equipment. These factors will need to be
taken into account by the Valuer and any
necessary assumptions will have to be
made.
5.6 Some plant, machinery and
equipment connected with the supply
or provision of services to a building
will normally be included in any
exchange of the real estate interest.
Examples include plant for the supply of
electricity, gas, heating, cooling or
ventilation and equipment such as
elevators. Although the value of these
items would normally be reflected in the
value of the real estate interest, for
certain purposes, such as depreciation
accounting, it may be necessary to
value these items separately. Where
this is the case, the Valuer should make
it clear that the separate valuation and
treatment of these items will affect the
value of the real estate interest. When
111
different Valuers are employed to

carry out valuations of real estate
assets and plant, machinery and
equipment assets at the same location,
careful liaison is necessary to avoid
either omissions or double counting.
5.7 Intangible assets fall outside the
definition of plant, machinery and
equipment. However, intangible assets
may have an impact on the value of
plant and equipment; For example, the
value of patents and dies is often
inextricably
linked
to
associated
intellectual property rights. In such
cases, the Valuer should establish what
assumptions are appropriate as to the
availability of those intangible assets
before reporting a valuation. Operating
software, technical data, production
records and patents are examples of
intangible assets that can have an impact
on the value of plant, machinery and
equipment depending on whether or not
they are included in the transfer.
Philippine 5.7.1 Current Assets Not
Normally Included
Current Assets such as stock, work-inprogress, finished goods, cash, etc., are in
general those assets which would in the
ordinary course of the entitys operations
be consumed or converted into cash
within twelve months of the end of the
last reporting period of the entity. They
would not normally be included in a
valuation of plant, machinery and
equipment that are classed as non-current
assets.
5.8 An item of plant, machinery and
equipment may be subject to financing
arrangement, such as a finance lease.
Accordingly, the asset cannot be sold
without the lender or lessor being paid
any balance outstanding under the
arrangement. This payment may or may
not exceed the unencumbered value of
the item. Items of plant, machinery and
equipment
subject
to
such
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arrangements should be separately

identified from assets that are
unencumbered, and their value
separately reported. Items which are
subject to operating leases or are
otherwise the property of third parties
are normally excluded as the benefits
of ownership are not transferred to the
lessee.
Guidance on Finance and
Operating Leases is included in
Addendum 1 to IVA 1.
Philippine 5.8.1
It is recognised that finance leases may
apply to whole production plants and
motor vehicles, but rarely to individual
machines.
5.9 Market Value does not imply any
particular method of sale, as for example,
by private treaty, tender, auction, etc.
The conceptual framework in IVS 1
makes it clear that Market Value assumes
a sale after proper marketing in the most
appropriate manner. It is implicit in this
definition that the method of sale will be
the one that will achieve the highest price
for the asset or the defined group of
assets in a given set of circumstances. A
willing and knowledgeable seller would
not voluntarily choose a method of sale
that did not maximize the price.
However, if the exchange is to take
place under circumstances prevented
the seller from choosing the optimal
method of disposal, the anticipated
realization will not be the Market Value
unless the constraint on the seller was
one common to all sales in that
particular market at that time. A
constraint specific to a particular seller
or asset, coupled with a requirement to
sell subject to that constraint, may
result in a forced sale.
assets are more likely to be subject to
forced sale circumstances than real
estate interests. For example, assets
112
sometimes have to be disposed of in a

time frame that precludes proper
marketing because the current owner of
the assets has to vacate or surrender the
land and buildings where they are
located. If such a scenario has actually
arisen, or is reasonably foreseeable, it
may be appropriate for the Valuer to
provide advice on the price that could
be anticipated or that should be
accepted, although before doing so the
Valuer will need to establish the exact
nature of the constraint on the vendor
and understand the consequence for
the vendor of failing to dispose of the
assets within the stipulated time limit.
For example, the assets may be subject to
forfeit or the owner may be subject to a
specific financial penalty. It may also be
necessary to consider any alternatives to
sale, for example, the practicality and
cost of removing the items to another
location for disposal.
Without
knowledge of the actual anticipated
circumstances, the Valuer cannot give
meaningful advice since the exchange
may fall outside the definition of
Market Value. Assumptions regarding
the realization of a transfer under
forced sale circumstances must be
carefully considered and clearly
stipulated.
Philippine 5.11 Materiality
Information is material if its omission or
misstatement could influence the
decisions or assessments of users of that
information.
Materiality with regard to the valuation of
items of low value depends upon the
nature or size of the item in the particular
circumstances. Items that are considered
de minimus may be aggregated and/or
carried as inventory and recognised as an
expense as consumed (that is, they are not
required to be valued).
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Philippine 5.12 Inspection of Mobile

Assets
On occasions it may be impractical, due
to the location of certain assets, for all
assets to be inspected. This may be
because the assets are mobile assets
and/or located in remote and inaccessible
areas. Clients often operate fleets or
groups of similar assets and it may be
possible to inspect a representative
sample of similar equipment sufficient to
enable the Valuer to establish a realistic
view of the quality and value of the entire
fleet. Such assets might include motor
vehicles,
cranes,
forklift
trucks,
locomotives, rolling stock, etc. but could
include a wide variety of plant &
equipment assets.
Philippine 5.13 Sampling Techniques for
Low-Value Items
Plant, machinery & equipment valuations
for major public or corporate clients
generally include a multitude of
individual assets, many of which
considered individually and sometimes
collectively, represent an insignificant
part of the overall asset base. In such
circumstances,
full
comprehensive
inspections of each and every item may
not be practical or necessary and it may
be possible to reliably determine the
value of such assets on a group basis
using sampling techniques.
When sampling techniques are adopted it
is of great importance that the procedures
adopted allow for the identification of
any deficiencies in the integrity of the
base data used. Where such deficiencies
are identified additional steps should be
taken to ensure that the integrity of the
data is improved sufficiently to minimize
the risk of any material misstatements of
value. Sample sizes and composition
should be determined in conjunction with
the entitys management or auditors to
ensure that they pass scrutiny.
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Provided the value reported is unlikely to

result in a material misstatement of the
overall values reported, and/or the value
of the sampled assets is immaterial in the
context of the overall valuation, then
sampling can be an appropriate procedure
as part of a formal valuation.
Great care should be taken when applying
sampling procedures. It is of vital
importance that the procedures employed
are sufficiently detailed and flexible to
allow for variations in equipment types,
ages and condition. It would not be
acceptable for instance to value one asset
by scrutiny and then value all others of
that type at the same value regardless of
variations in age, size, condition, etc.
When sampling techniques are used the
Valuer will not have physically verified
the existence or condition of every asset.
A cautionary note to the reader should be
included to this effect stating that the
Valuer has not verified and is not
attesting to the existence or condition of
all of the subject assets.
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Valuation of Intangible Assets

1.0 Introduction
Committee (IVSC) adopted this Guidance
Note (GN) to improve the consistency and
quality of intangible asset valuations
among the international community for the
benefit of users of financial statements and
users of intangible asset valuations.
1.2 Intangible asset valuations are
commonly sought and performed on the
Market Value basis of valuation applying
the provisions of International Valuation
Standard 1 (IVS 1). Where other bases of
valuation are used with proper explanation
and disclosure, the provisions of IVS 2 are
applied.
1.3 In general, the concepts, processes,
and methods applied in the valuation of
intangible assets are the same as those for
other types of valuations. Certain terms
may have different meanings or uses.
Those differences become important
disclosures wherever they are used. This
GN sets forth important definitions used in
valuations of intangible assets.
1.4 Care should be taken by Valuers and
users of valuation services to distinguish
between the value of individual,
identifiable intangible assets and going
concern considerations, including those
encountered in the valuation of real
property interests. An example of the
latter is valuations of trade related
property.
2.2 In addition to the elements that are

common to other GNs to the International
Valuation Standards, this GN contains a
more expansive discussion of the
intangible asset valuation process. This is
included to typify what is commonly
involved in valuations of intangible assets
and to provide a basis of comparison with
other types of valuations, but the
discussion should not be considered as
either mandatory or limiting except as
provided in this GN or otherwise in the
IVSs.
2.3 Because
other
basic
valuation
principles, the International Valuation
Standards, and Guidance Notes are also
applicable to valuations of intangible
assets, this GN should be understood to
incorporate all other applicable portions of
the IVSs.
3.0 Definitions
3.1 Book Value
3.1.1 With respect to assets, the capitalised
cost of an asset less accumulated
depreciation, depletion, or amortisation as
it appears on the account books of the
business.
3.1.2 With respect to a business entity, the
difference between total assets (net of
depreciation, depletion, and amortisation)
and total liabilities of a business as they
appear on the balance sheet. In this case,
book value is synonymous with net book
value, net worth, and shareholders equity.
2.0 Scope
course of rendering or using valuations of
intangible assets.
3.2 Business Entity.

A commercial,
industrial, or service organisation pursuing
an economic activity.
3.3 Capitalisation
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3.3.1 At a given date, the conversion into

the equivalent capital value of net income
or a series of net receipts, actual or
estimated, over a period.
3.3.2 In business valuation, the term refers
to the capital structure of a business of a
business entity.
3.3.3 In business valuation, this term also
refers to the recognition of an expenditure
as a capital asset rather than a periodic
expense.
3.4 Capitalisation Factor. Any multiple or
divisor used to convert income into capital
value.
3.5 Capitalisation Rate.
Any divisor
(usually expressed as a percentage) that is
used to convert income into capital value.
3.6 Cash Flow
3.6.1 Gross Cash Flow: Net income after
taxes, plus non-cash items such as
depreciation and amortisation.
3.6.2 Net Cash Flow: During an operating
period, that amount of cash that remains
after all cash needs of the business have
been satisfied. Net cash flow is typically
defined as being cash available to equity
or invested capital.
3.6.3 Equity Net Cash Flow: Net income
after taxes, plus depreciation and other
non-cash charges, less increases in
working capital, less capital expenditures,
less decreases in invested capital debt
principal, plus increases in invested capital
debt principal.
3.6.4 Invested Capital Net Cash Flow:
Equity net cash flow, plus interest
payments net of tax adjustment, less net
increases in debt principal.
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receivable in the future, into present value.

A weighted average of the discount rate
applied to intangibles and the discount rate
applied to tangible should correlate with
the weighted average cost of capital for the
business.
3.8 Economic Life. The period over which
property may be profitably used.
Economic life may vary by country
depending on the level of industrial
development and regulatory atmosphere in
each country.
3.9 Effective Date. The date as of which
the Valuers opinion of value applies.
(Also referred to as Valuation Date, and/or
As Of Date.)
3.10 Enterprise. See Business Entity.
3.11 Going Concern.
business.
An operating
The entity is normally viewed as a going

concern, that is, as continuing in operation
for 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. (IAS
1, 23-24, Framework, 23)
3.12 Goodwill.
3.12.1 Future economic benefits arising
from assets that are not capable of being
individually identified and separately
recognised. (IFRS 3, Appendix A).
3.12.2 Personal Goodwill. The value of
profit over and above market expectations,
which would be extinguished upon sale of
the trade related property, together with
those financial factors related specifically
to the current operator of the business,
such as taxation, depreciation policy,
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
116
3.12.3 Transferable Goodwill.

That
intangible asset that arises as a result of
property specific name and reputation,
customer patronage, location, products,
and similar factors, which generate
economic benefits. It is inherent to the
trade related property, and will transfer to
a new owner on sale.
3.13 Income Capitalisation Approach. A
general way of estimating a value
indication of an intangible asset using one
or more methods wherein a value is
estimated by converting anticipated
benefits into capital value.
3.14 Intangible Assets.
Assets that
manifest themselves by their economic
properties. They do not have physical
substance; they grant rights and privileges
to their owner and usually generate
income for their owner. Intangible Assets
can be categorised as arising from Rights,
Relationships, Grouped Intangibles, or
Intellectual Property.
3.14.1 Rights exist according to the terms
of a contract, written or unwritten, that is
of economic benefit to the parties.
Examples
are
supply
contracts,
distribution contracts, providing contracts,
and licensing permits, among others.
3.14.2 Relationships between parties are
normally non-contractual, can be shortlived, and can have great value to the
parties.
Examples are assembled
workforce,
customer
relationships,
supplier
relationships,
distributor
relationships, and structural relationships
between parties, among others.
3.14.3 Grouped Intangibles are the
residual intangible asset value left after all
identifiable intangible assets have been
valued and deducted from total intangible
asset value. Alternative concepts include
patronage, excess earnings, and residual
value. Grouped intangibles are often
called goodwill. Goodwill has, at various
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times, been said to be the tendency for

customers to return to a place business, the
extra income generated by a business over
and above a fair return to the identified
assets, and/or the extra value of the entity
as a whole over and above the aggregate
value of its constituent identifiable assets.
3.14.4 Intellectual Property is a special
classification of intangible assets because
it is usually protected by law from
unauthorised use by others. Examples are
brand names, or tradenames; copyrights;
patents; trademarks; trade secrets, or
know-how; among others.
3.14.5 In
general,
the
accounting
profession limits the recognition of
individual intangible assets to those that
are commonly recognisable, have a
statutory or contractual remaining life,
and/or must be individually transferable
and separable from the business.
3.15 Intangible Property. The rights and
privileges granted to the owner of
intangible assets.
3.16 Legal Life. The life of the intangible
assets allowed by law.
3.17 Market Approach. A general way of
estimating a value indication for an
intangible asset using one or more
methods that compare the subject to
similar assets that have been sold.
3.18 Market Value. See IVS 1, para. 3.1.
[The estimated amount for which a
property should exchange on the date of
valuation between a willing buyer and a
willing seller in an arms-length
prudently, and without compulsion.]
3.19 Rate of Return. An amount of
income (loss) and/or change in value
realised or anticipated on an investment,
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expressed as
investment.
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percentage
of
that
3.20 Replacement Cost New. The current

cost of a similar new item having the
nearest equivalent utility as the item being
appraised.
3.21 Report Date.
The date of the
Valuation Report. May be the same as or
different from the valuation date.
3.22 Reproduction Cost New. The current
cost of an identical new item.
3.23 Valuation Approach. In general, a
way of estimating value using one or more
specific valuation methods. (See Asset
Based Approach, Market Approach, and
Income
Capitalisation
Approach
definitions).
3.24 Valuation Method. Within valuation
approaches, a specific way to estimate a
value.
3.25 Valuation Procedure.
The act,
manner, and technique of performing the
steps of a valuation method.
allocations of value for various assets to

aid in the establishment or restatement of
financial statements.
In this context,
Intangible Asset Valuers reflect the
Market Value of all components of a
businesss balance sheet in order to meet
accounting Standards, having regard to the
convention that reflects the effect of
changing prices.
4.2 International Accounting Standard 38
(IAS 38) prescribes the accounting
treatment for intangible assets, discusses
the criteria an intangible asset must meet
for recognition, specifies the carrying
amount of intangible assets, and sets forth
requirements for disclosures about
intangible assets.
5.0 Guidance
5.1 Valuations of intangible assets may
be required for a number of possible
uses
including
acquisitions
and
dispositions of business or parts of
businesses, mergers, sale of an
intangible asset, financial reporting and
the like.
3.26 Valuation Ratio. A factor wherein a

value or price serves as the numerator and
financial, operating, or physical data serve
as the denominator.
5.1.1 Where the purpose of the

valuation requires a Market Value
estimate, the Valuer shall apply
definitions,
processes,
and
methodologies consistent with their
provision in IVS 1.
3.27 Value in Use. This value type

focuses on the value that specific property
contributes to the entity of which it is a
part without regard to the propertys
highest and best use or the monetary
amount that might be realised upon its
sale. Value in use is the value a specific
property has for a specific use to a specific
user and is, therefore, non-market related.
5.1.2 When an engagement calls for a

value basis other than Market Value, the
Valuer shall clearly identify the type of
value involved, define such value, and
take steps necessary to distinguish the
value estimate from a Market Value
estimate.
4.0 Relationship
Standards
to
Accounting
4.1 Intangible asset valuations are

commonly used as a basis for making
5.2 If, in the opinion of the Valuer, certain

aspects of an engagement indicate that a
departure from any provision of the
International Valuation Standards or of
this GN is necessary and appropriate, such
departure should be considered for
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disclosure along with the reason for

invoking the departure.
5.7 Factors to be considered by the

Intangible Asset Valuer include:
5.3 The Valuer shall take steps to assure

that all data sources relied on are
reliable and appropriate to the
valuation undertaking.
In many
instances it will be beyond the scope of the
Valuers services to perform a complete
verification of secondary or tertiary data
sources. Accordingly, the Valuer shall
verify the accuracy and reasonableness of
data sources as are customary in the
markets and locale of the valuation.
5.7.1 The
rights,
privileges,
or
conditions that attach to the ownership
interest
5.4 Valuers of intangible assets must

frequently rely on information received
from a client or from a clients
representatives. The source of any such
data relied upon must be cited by the
Valuer in oral or written reports, and
the data shall be reasonably verified
wherever possible. The requirements
for Valuation Reports are addressed in
the IVSC Code of Conduct (section 7),
and IVS 3, Valuation Reporting.
5.5 Although many of the principles,
methods, and techniques of intangible
asset valuation are similar to those used in
other fields of valuation, valuations of
intangible assets require special education,
training, skills, and experience.
5.6 A description of the
assignment must include:
valuation
5.6.1 identification of the intangible

asset(s), or the ownership interest in the
intangible asset(s), to be valued;
5.6.2 the effective date of the valuation;
5.6.3 the definition of value;
5.6.4 the owner of the interest; and
5.6.5 the purpose and use of
valuation.
the
5.7.1.1 Ownership rights are set forth in

various legal documents.
In various
countries, or in some legal jurisdictions,
these documents may be called patents,
trademarks, brands, know-how, databases,
and copyrights, to name a few.
5.7.1.2 Whoever owns the interest is
bound by the documents that record such
interest in the intangible assets. There
may be rights and conditions contained in
an
agreement
or
exchange
of
correspondence, and these rights may or
may not be transferrable to a new owner of
the interest.
5.7.2 Remaining economic life and/or
legal life of the intangible asset.
5.7.3 The earnings capacity of the
intangible assets.
5.7.4 The nature and history of the
intangible assets. Since value resides in
the benefits of future ownership, history is
valuable in that it may give a guide to the
expectations of the intangible assets for
the future.
5.7.5 The economic outlook that may
affect the subject intangible assets,
including
political
outlook
and
government policy. Matters such as the
exchange rate and inflation and interest
rates may affect intangible assets that
operate in different sectors of the economy
quite differently.
5.7.6 The condition and outlook of the
specific industry, which may affect the
subject intangible assets.
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5.7.7 Intangible value may also be

contained in undifferentiated assets,
often called goodwill. Note that goodwill
value in this context is similar to goodwill
in the accounting sense in that both are
the residual value after all other assets
have been taken into account.
5.7.8 Prior transactions in ownership
interests of the subject intangible assets.
5.7.9 Other market data, e.g., rates of
return on alternative investments, etc.
5.7.10 The
market
prices
for
acquisition of similar intangible assets
interests or intangible assets.
5.7.10.1 Often, particularly in the use of
acquisition
transactions,
adequate
information is difficult or impossible to
obtain. While the actual transaction price
may be known, the Valuer may not know
what warranties and indemnities were
given by the seller, what terms were given
or received, or what impact taxation
planning had on the transaction.
and securities that have been sold in the

open market.
5.8.1.2 The two most common sources of
data used in the market approach are
markets in which ownership interests of
similar intangible assets are traded and
prior transactions in the ownership of
the subject intangible assets.
5.8.1.2.1 There must be a reasonable
basis for comparison with and reliance
upon the similar intangible assets in the
market approach.
These similar
intangible assets should be in the same
industry as the subject or in an industry
that responds to the same economic
variables. The comparison must be made
in a meaningful manner and must not be
misleading.
5.8.1.3 Through analysis of acquisitions
of intangible assets, the Valuer often
computes valuation ratios, which are
usually price divided by some measure
of income or net assets. Care must be
used in calculating and selecting these
ratios.
5.7.10.2 Comparable data should always

be used with care, and numerous
adjustments may need to be made.
5.8.1.3.1 The ratio(s) selected must

provide meaningful information about the
value of the intangible assets.
5.7.11 Adjustment
of
historical
financial statement to estimate the
economic abilities of and prospects for
the intangible assets.
5.8.1.3.2 The data on the similar intangible

assets used to compute the ratio must be
accurate.
5.7.12 Any other information

Valuer believes to be relevant.
5.8 Intangible
approaches.
asset
the
valuation
5.8.1 Market
(sales
comparison)
approach to intangible asset valuation.
5.8.1.1 The market approach compares
the subject to similar intangible assets
or intangible asset ownership interests
5.8.1.3.3 The calculation of ratios must be

accurate.
5.8.1.3.4 If the data are averaged, the time
period considered and the averaging
method must be appropriate.
5.8.1.3.5 All calculations must be done in
the same way for both the similar
intangible assets and the subject intangible
assets.
120
5.8.1.3.6 The price data used in the ratio(s)

must be valid as of the valuation date and
representative of the market at that time.
5.8.1.3.7 Where appropriate, adjustments
may need to be made to render the similar
intangible assets and the subject intangible
assets more comparable.
5.8.1.3.8 Adjustments may need to be
made for unusual, non-recurring, and nonoperating items.
5.8.1.3.9 The selected ratios must be
appropriate given the differences in risk
and expectations of the similar intangible
assets and the subject intangible assets.
5.8.1.3.10 Several value indications may
be calculated since several valuation
multiples may be selected and applied to
the subject intangible assets.
5.8.1.4 When prior transactions in the
subject intangible assets are used to
provide
valuation
guidance,
adjustments may need to be made for
the passage of time and for changed
circumstances in the economy, the
industry, and the intangible assets.
5.8.2 Income capitalisation approach to
intangible asset valuation
5.8.2.1The income approach estimates
the value of an intangible asset or of
intangible asset ownership interests by
calculating the present value of
anticipated benefits. The two most
common income approach methods are
(direct) capitalisation of income and
discounted cash flow analysis (DCF).
5.8.2.1.1 In (direct) capitalisation of
income, a representative income level is
divided by a capitalisation rate or
multiplied by an income multiple
(capitalisation factor) to convert the
income into value.
5.8.2.1.2 Income is typically allocated to
the various intangible assets by the Valuer.
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Care must be taken so that the income

allocated to all of the individual assets
does not exceed the income available to all
assets.
5.8.2.1.3 In theory, income can consist of
a variety of types of income and cash flow.
In practice, the income measure is usually
pre-tax income or post-tax income. If the
capitalisation methods are used, the
economic life of the assets must be
infinite, or very long.
5.8.2.1.4 In DCF analysis and/or
dividend method, cash receipts are
estimated for each of several future
periods. These receipts are converted to
value by the application of a discount
rate, using present value techniques.
Many definitions of cash flow could be
used. Discounting methods are most
commonly used for intangible assets with
finite economic lives. The time period
covered by the discounting methods is
normally the shorter of the economic
life or the legal life (the definable period
over which the asset or interest therein
is legally protected).
5.8.2.1.4.1 Economic life is measured as
the period when the intangible assets can
be expected to give the owner an
economic return on the assets.
An
example is computer software that may
have an expected life of 36 months before
it is necessary to replace it with an updated
version.
5.8.2.1.4.2 Legal life is measured as the
period when the intangible asset can be
protected by law. An example is a patent
that has a definable life at its inception and
that slowly, over time, goes to zero.
5.8.2.1.5 Capitalisation
rates
and
discount rates are derived from the
market and are expressed as price
multiples (derived from data on
publicly
traded
businesses
or
transactions) or an interest rate
121
(derived from data

investments).
on alternative
5.8.2.2 Anticipated income or benefits

are
converted
to
value
using
calculations that consider the expected
growth and timing of the benefits, the
risk associated with the benefit stream,
and the time value of money.
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Valuation Process. The Valuer should

provide the rationale and justification for
the valuation methods used and for the
weighting of the methods relied on in
reaching the reconciled value conclusion.
5.8.3 The cost approach, often called the

cost to recreate, is also known as the
adjusted asset approach.
5.8.3.1 A cost-based approach is founded
on the Principle of substitution, i.e., an
asset is worth no more than it would cost
to replace all of its constituent parts.
5.8.3.2 In the execution of the cost
approach, the cost of each item in the
creation of the assets, including
developers profit, must be estimated
using the knowledge possessed as of the
valuation date.
5.9 Reconciliation processes
5.9.1 The value conclusion shall be
based upon
5.9.1.1 the definition of value, and
5.9.1.2 all relevant information as of the
valuation date necessary in view of the
scope of the assignment.
5.9.2 The value conclusion shall also be
based on value indications from the
valuation methods performed.
5.9.2.1 The selection of and reliance on
the appropriate approaches, methods, and
procedures depend on the judgment of the
Valuer.
5.9.2.2 The Valuer must use judgment
when determining the relative weight to be
given to each of the value indications
derived during application of the
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Valuation of Personal Property

1.0 Introduction
2.0 Scope
1.1 The objective of this Guidance Note

(GN) is to improve the consistency and
quality of personal property valuations for
the benefit of users of personal property
valuation services.

course of rendering or using personal
property valuations.
1.2 Personal property valuations are

commonly sought and performed on the
Market Value basis of valuation, applying
the provisions of International Valuation
Standard 1 (IVS 1). Where other bases of
valuation are used, the provisions of IVS 2
are applied, subject to proper disclosure
and explanation.

common to other Applications and
Guidance Notes in the International
Valuation Standards, this GN contains an
expanded discussion of the Valuation
Process for personal properties. This is
included to typify what is commonly
involved in personal property valuations
and to provide a basis of comparison with
other types of valuations.
1.3 While certain terms may have

alternative
definitions,
and
the
applicability of specific methods may
diverge, the theory, concepts, and
processes applied in the valuation of
personal property are fundamentally the
same as those for other types of
valuations. Whenever terms that have
different meanings are used, it is important
that those differences be disclosed. This
GN sets forth important definitions used in
personal property valuations.
2.3 Plant, Machinery and Equipment

(PM&E) is a category of personal
property, but PM&E valuation is dealt
with under GN 3.

among the market components and
corresponding Market Values of personal
properties.
One example of such
differentiation is the Market Value of
properties sold at auction vs. that of
properties sold by or acquired from private
dealers where the negotiated price is not
publicly disclosed.
Another example
would be the Market Value of personal
property sold wholesale vs. the Market
Value of the same item(s) sold retail.
3.2 Collectibles. Broad descriptive term

for objects collected because of the
interest they arouse owing to their rarity,
novelty, or uniqueness. In some countries,
the term may be applied to fine art,
antiques, gems and jewelry, musical
instruments, numismatic and philatelic
collections, rare books, and archival
materials, among others. Elsewhere the
term is normally used for these and a wide
variety of other items not found in any
other category.
3.0 Definitions
3.1 Auction Price. The price that is the
final accepted bid at a public auction; may
or may not include any fees or
commissions. See also Hammer Price,
Private Treaty Sale.
3.3 Cost Approach.

A comparative
approach to the value of property or
another asset that considers as a substitute
123
for the purchase of a given property, the

possibility of constructing another
property that is equivalent to the original
or one that could furnish equal utility with
no undue cost resulting from delay. The
Valuers estimate is based on the
reproduction or replacement cost of the
subject property asset, less total (accrued)
depreciation.
3.4 Cost Approach for Valuing Fine Art.
A comparative approach to the value of
fine art that considers as a substitute for
the purchase of a given work of fine art the
possibility of creating another work of fine
art that replaces the original. The Valuers
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.
New for old refers to the cost of
purchasing the same item or, if
unavailable, an item similar in nature and
condition in the retail market for new
works of fine art.
Indemnity basis refers to the cost of
replacing an item with a similar item in
similar condition in the second-hand retail
market for art and antiques.
A replica is a copy of the original item, as
near as possible to the original in terms of
nature, quality, and age of materials but
created by means of modern construction
methods.
A facsimile is an exact copy of the original
item, created with materials of closely
similar nature, quality, and age and using
construction methods of the original
period.
3.5 Fixtures and fittings. The totality of
improvements integral to a property,
valued collectively. See Trade Fixtures or
Tenants Fixtures.
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3.6 Furniture, Fixtures and Equipment,

(FF&E). A term used in North America to
refer to tangible personal property plus
trade fixtures and leasehold improvements.
See also Personal Property.
Philippine 3.6.1
Equipment is usually categorised for
example; office equipment, laboratory
equipment, etc., to distinguish it from
machinery and equipment. See para. 3.15
below.
3.7 Goods and Chattels Personal. In
certain countries, a term used for
identifiable, portable, and tangible objects
considered by the public to be personal
property. See also Personal Property.
3.8 Hammer Price. The accepted and
announced bid, exclusive of any fees or
commissions and therefore, not necessarily
the purchase price. See also Auction
Price, Private Treaty Sale.
3.9 Income Capitalization Approach. A
comparative approach to value that
considers income and expense data
relating to the property being valued and
estimates value through a capitalisation
process.
3.10 Intrinsic Value.
The amount
considered, on the basis of an evaluation
of available facts, to be the true or real
worth of an item. A long-term, NonMarket Value concept that smoothes shortterm price fluctuations.
3.11 Leasehold Improvements or Tenants
Improvements. Fixed improvements or
additions to land or buildings, installed by
and paid for by the tenant to meet the
tenants needs; typically removable by the
tenant upon expiration of the lease;
removal causes no material damage to the
real estate. See also Personal Property,
Trade Fixtures or Tenants Fixtures.
124
3.12 Market Value. See IVS 1, para. 3.1.

3.13 Personal Property. See Concepts
Fundamental to GAVP, para. 3.3.
[Includes interests in tangible and
intangible items which are not real estate.
Items of tangible property are not
permanently affixed to real estate and are
generally
characterised
by
their
moveability.] Personal property is a legal
concept referring to all rights, interests,
and benefits related to ownership of items
other than real estate. In certain countries,
items of personal property are legally
designated as personalty in distinction to
realty, which may either refer to real
property or real estate. Items of personal
property can be tangible, such as a chattel;
or intangible, such as a debt or patent.
Items of tangible personal property
typically are not permanently affixed to
real estate and are generally characterized
by their movability. See also Collectibles,
Fixtures and Fittings; Furniture, Fixtures
and Equipment (FF&E), Goods and
Chattels
Personal;
Leasehold
Improvements or Tenants Improvements;
Plant, Machinery and Equipment; Trade
Fixtures or Tenants Fixtures.
3.14 Personalty. A legal term used in
certain countries to designate items of
personal property in distinction to realty,
which may either refer to real property or
real estate. Personalty includes tangible
and intangible items that are not real
estate. See also Personal Property.
3.15 Plant, Machinery and Equipment.
Tangible Assets, other than realty, that:
(a) are held by an entity for use in the
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(b) are expected to be used over a period
of time.
The categories of plant, machinery and
equipment are:
combined with others and that may
include specialised buildings, machinery
and equipment.
Machinery. Individual machines or a
connection with the operation of the entity.
entity.
3.16 Private Treaty Sale.
A sale
negotiated and transacted between persons
rather than by public auction or another
method. The sale price paid in a private
treaty sale is generally not known except
by the parties to the transaction. See also
Auction Price, Hammer Price.
3.17 Professional Property Valuer. A
person
who
possesses
necessary
qualifications, ability and experience to
estimate property value for a diversity of
purposes including transactions involving
transfers or property ownership, property
considered as collateral to secure loans
and mortgages, property subject to
litigation or pending settlement on taxes,
and property treated as fixed assets in
3.18 Sales Comparison Approach.
A
indication for personal property or an
ownership interest in personal property,
using one or more methods that compare
the subject to similar properties or to
ownership interests in similar properties.
This approach to the valuation of personal
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property is dependent upon the Valuers

market knowledge and experience as well
as recorded data on comparable items.
3.19 Trade Fixtures or Tenants Fixtures.
Non-realty fixtures attached to the
property by the tenant and used in
conducting the trade or business. See also
Leasehold Improvements or Tenants
Improvements, Personal Property.
way of estimating value that employs one
or more specific valuation methods.
Depending on the nature and purpose of
the property, three valuation approaches
may be applied. These are the sales
cost approaches. Their application will
enable the Valuer to determine Market
Value or a value other than Market Value.
3.21 Valuation Method.
Within the
valuation approaches, a specific way to
estimate value.
3.22 Valuation Procedure/Process. The
act, manner, and technique or performing
the steps of a valuation method.
4.0 Relationship
Standards
to
Accounting
4.1 In some instances the valuation of

personal
property
undertaken
in
conjunction with the valuation of real
property and/or a business provides a basis
for determining the extent of depreciation
or obsolescence of certain fixed assets. In
this application, the personal property
valuation per se may or may not be the
principal reason for the valuation, but the
combination of services by a Personal
Property Valuer, a Business Valuer and/or
a Real Property Valuer, is necessary to
properly allocate and reflect the Market
Value of assets to be included in a
financial statement.
5.0 Guidance
5.1 Personal property valuations may be
required for a number of possible uses
including
financial
reporting,
acquisitions and disposals/dispositions,
insurance, and taxation.
5.1.1 Where the purpose of the valuation
requires a Market Value estimate, the
Valuer shall apply definitions, processes,
and methodologies consistent with their
provision in IVS 1.
value basis other than Market Value,
e.g., insurable value, the Valuer shall
clearly identify the type of value involved,
define such value, and take steps necessary
to distinguish the value estimate from a
Market Value estimate as consistent with
IVS 2.
5.2 Steps shall be taken by the Valuer to
assure that all data sources relied upon
are reliable and appropriate to the
In many
instances, it will be beyond the scope of
the Valuers services to perform a
complete verification of secondary or
tertiary data sources. Accordingly, the
Valuer shall take reasonable steps to verify
the accuracy and reasonableness of data
sources as is customary in the market(s)
and locale of the valuation.
5.3 It is common for personal property
valuations to require that the Personal
Property Valuer call for and rely upon the
services of other Professional Property
Valuers and/or other professionals. Thus,
the parameters of responsibility relating
to the classification of property items
must be established between Valuers of
different disciplines to ensure that
nothing has been omitted or double
entered. A common example is reliance
upon a Real Property Valuer to value the
real estate components of a property.
Where the services of other experts are
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relied upon, the Personal Property

Valuer shall
of interest may not be made known for

reason of confidentiality);
5.3.1 take verification steps as are

reasonably necessary to ensure that
such
services
are
competently
performed and that the conclusions
relied upon are reasonable and credible,
or
5.6.5 The purpose and use of the

valuation;
5.3.2 disclose the fact that no such

verification steps were taken.
5.4 Personal Property Valuers must
frequently rely upon information
received from a client or from a clients
representatives. The source of any such
data relied upon shall be cited by the
Valuer in oral or written reports, and
the data shall be reasonably verified
wherever possible.
methods, and techniques of personal
property valuation are similar to those in
other fields of valuation, personal
property valuations require special
education,
training,
skill
and
experience.
5.6 Requirements for Valuation Reports
are addressed in the IVSC Code of
Conduct, and IVS 3, Valuation
Reporting. For personal property the
valuation report must include:
5.6.1 Identification of the property and
owner or ownership interest to be
valued (location of the object of
personal property and address of the
owner);
5.6.6 The conditions of the valuation;

5.6.7 Liens and encumbrances on the
property; and
5.6.8 A Compliance Statement (signed
and dated).
5.7 Factors to be considered (but not
necessarily reported) by the Personal
Property Valuer include:
5.7.1 Rights, privileges, or conditions
that attach to the ownership of the
subject property.
5.7.1.2 Rights and conditions contained in
an owners agreement or exchange of
correspondence; these rights may or may
not be transferable to a new owner of the
subject property.
5.7.1.3 The documents may contain
restrictions on the transfer of the property
and may contain provisions governing the
basis of valuation that has to be adopted in
the event of transfer of the property.
5.7.2 The nature of the property and
history of its ownership (provenance).
5.7.2.1 Previous sales or transfers of the
property
5.6.2 The effective date of the valuation;

5.6.3 The basis or definition of value;
5.6.4 Identification of the owner of
interest or instructing party (n.b., in
some countries, the identity of the owner

affect the subject property, including
political outlook and government policy.
5.7.4 The condition and outlook of a
market specific to the trade of personal
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properties that may affect the subject

property.
5.7.5 Whether or not the
property has intangible value.
subject
5.7.5.1 If intangible value is inherent/

intrinsic in the personal property, the
Valuer must ensure that the intangible
value is fully reflected, whether the
identifiable intangible has been valued
separately or not.
5.7.5.1.1 Intangible value, insofar as can
be reasoned, should be distinguished from
the value of the tangible property.
5.7.5.2 It is essential that the Valuer be
aware of the legal restrictions and
conditions that arise through the laws of
the country in which the property exists.
acquisition
transactions,
adequate
information is difficult to obtain. While
the actual transaction price may be known,
the Valuer may not know what warranties
and indemnities were given by the seller,
whether cash or other assets were taken
from the seller prior to acquisition, how
value should be allocated among the assets
acquired, or what impact taxation planning
had on the transaction.
5.7.5.4 For the reasons explained in para.
5.7.5.3, comparable data should always be
used with care, and adjustments may need
to be made.
When using published
auction results, it must be borne in mind
that those results may represent
transactions for a small market sector.
Adjustments may be needed for
differences due to differing market levels.
5.8.1 The sales comparison approach

compares the subject property to similar
properties and/or property ownership
interests that have been sold/offered in
open markets.
5.8.2 The two most common sources of
data used in the sales comparison
approach are published auction results and
transactions reported by firms regularly
engaged in the trade of similar properties.
5.8.3 There must be a reasonable basis for
comparison with and reliance upon the
similar properties in the sales comparison
approach. These similar properties should
be regularly traded in the same market as
the subject or in a market that responds to
the same economic variables. The
comparison must be made in a meaningful
manner and must not be misleading.
Factors to be considered in whether a
reasonable basis for comparison exists
include:
5.8.3.1 Similarity to the subject property in
terms of qualitative and quantitative
descriptive characteristics.
5.8.3.2 Amount and verifiability of data on
the similar property.
5.8.3.3 Whether the price of the similar
property represents an arms-length
transaction.
5.8.3.4 A thorough, unbiased search for
similar properties is necessary to establish
the independence and reliability of the
valuation. The search should include
simple, objective criteria for selecting
similar properties.
5.7.6 Any other information the Valuer

believes is relevant.
5.8.3.5 A
comparative
analysis
of
qualitative and quantitative similarities
and differences between similar properties
and the subject property must be made.
5.8 Personal
property
valuations
performed by means of the sales
comparison approach.
5.8.3.6 Where appropriate, adjustments

may need to be made to render the value
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of the similar properties more comparable

to the subject property. Adjustments may
need to be made for unusual, nonrecurring and unique items.
5.9.2.1 FF&E may be subject to heavy use

and,
therefore,
require
periodic
replacement to maintain the attractiveness
and utility of the facility.
5.8.3.7 Appropriate
adjustments
for
differences in the subject propertys
ownership and the ownership of similar
properties with regard to the character and
influence of such provenance or
marketability/saleability or lack thereof,
must be made, if applicable.
5.9.2.2 The useful lives of items of FF&E

are estimated on the basis of their quality,
durability, and the amount of use they
receive. A weighted average for the useful
lives of items of FF&E may then be
calculated.
5.8.4 When prior transactions of the

subject property are used to provide
valuation guidance, adjustments may need
to be made for the passage of time, for
changes in the subject property, and for
changed circumstances in the economy,
industry, scholarly appreciation, and the
business in which such properties are
traded.
5.8.5 Anecdotal valuation rules, or rules of
thumb, may be useful in the valuation of a
property or ownership interest in an item
of personal property. However, value
indications derived from the use of such
rules should not be given substantial
weight unless it can be shown that buyers
and sellers place substantial reliance on
them.
5.9 Personal
property
valuations
performed by means of the income
capitalisation approach.
5.9.1 The Income Capitalisation Approach
to value considers income and expense
data relating to the property being valued
and
estimates
value
through
a
capitalisation process.
5.9.2 The application of the income
capitalisation
approach
may
be
appropriate in the valuation of furniture,
fixtures, and equipment (FF&E) essential
to the operation of properties such as
hotels, furnished apartments and care
facilities.
5.9.2.3 An estimate of the future

replacement cost of the items of FF&E is
divided by this figure to arrive at an
annual replacement allowance/renewal
fund. The replacement allowance/renewal
fund is included among the entitys
operating expenses/ outgoings.
5.10 Personal
property
valuations
performed by means of the cost
approach.
5.10.1 The cost approach considers as a
substitute for the purchase of a given item
of personal property, the possibility of
creating another item equivalent to the
original or one that could furnish equal
utility with no undue cost resulting from
delay.
5.10.2 The Valuers estimate is based on
the reproduction or replacement cost of the
subject property or asset.
5.10.2.1 Replacement cost refers to what
one might expect to pay for an object of
similar age, size, color, and condition.
Generally, it seeks to establish the cost of
an alternative example or of a replica, or
copy, of the original item, as near as
possible to the original in terms of nature,
quality, and age of materials but created
by means of modern construction
methods.
5.10.2.1.1 In the case of assets such as
valuable
antiques
or
paintings,
129
replacement may be impractical regardless

of the cost.
5.10.2.1.2 Reproduction cost refers to
what one might expect to pay for a
facsimile, or exact copy, of the original
item, created with materials of closely
construction methods of the original
period.
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given to each of the value estimates during

the Valuation Process. The Valuer should
provide the rationale and justification for
the valuation methods used and for the
weighting of the methods relied on in
reaching the value reconciliation when
requested.
5.10.2.1.3 Over time some items of

personal property that do not suffer
physical depreciation may appreciate since
current cost to replace or reproduce such
items typically outpaces increases in their
current price.
5.10.3 The application of the cost
approach is especially appropriate in
valuations of personal property such as
manufactured products or items for which
multiple copies exist, e.g., prints, porcelain
figurines, or products turned out by a mint.
based upon
5.11.1.1 the definition of value;
5.11.1.2 the purpose and intended use of
the valuation; and
5.11.1.3 all relevant information as of the
valuation date necessary in view of the
scope of the assignment.
5.11.2 The value conclusion shall also be
based on value estimates from the
valuation methods performed
the appropriate approaches, methods, and
procedures depend on the judgment of the
Valuer.
when determining the relative weight to be
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Business Valuation
1.0 Introduction
Committee (IVSC) adopted this Guidance
Note (GN) to improve the consistency and
quality of business valuations among the
international community for the benefit of
users of financial statements and users of
business valuations.
1.2 Business valuations are commonly
sought and performed on the Market Value
basis of valuation applying the provisions
of International Valuation Standard 1 (IVS
1). Where other bases of valuations are
used, with proper explanation and
disclosure, the provisions of IVS 2 are
applied.
1.3 In general the concepts, processes and
methods applied in the valuation of
businesses are the same as those for other
types of valuations. Certain terms may
have different meanings or uses. Those
differences become important disclosures
wherever they are used. This GN sets
forth important definitions used in
business valuations.
between the value of a business entity or
trade related property, the valuation of
assets owned by such entity, and various
possible applications of business or going
concern considerations encountered in the
valuation of real property interests. An
example of the latter is valuations of trade
related property. (See Property Types,
para. 4.3.2.)
2.0 Scope
course of rendering or using business
valuations.
Business Valuation

common to other GNs to the International
Valuation Standards, this GN contains
more expansive discussion of the business
valuation process. This is included to
typify what is commonly involved in
business valuations and to provide a basis
of comparison with other types of
valuations, but the discussion should not
be considered as either mandatory or
limiting except as provided in this GN or
otherwise in the International Valuation
Standards.
2.3 Because
other
basic
valuation
principles,
International
Valuation
Standards, and Guidance Notes are also
applicable to business valuations, this GN
should be understood to incorporate all
other applicable portions of the IVSs.
3.0 Definitions
3.1 Adjusted Book Value. The book value
that results when one or more asset or
liability amounts are added, deleted or
changed from the reported book amounts.
3.2 Asset-based Approach. A means of
estimating the value of a business and/or
equity interest using methods based on the
Market Value of individual business assets
less liabilities.
3.3 Book Value
3.3.1 With respect to assets, the capitalised
cost of an asset less accumulated
depreciation, depletion, or amortisation as
it appears on the account books of the
business.
3.3.2 With respect to a business entity, the
depreciation, depletion, and amortisation)
and total liabilities of a business as they
131
appear on the balance sheet. In this case,

book value is synonymous with net book
value, net worth, and shareholders equity.
3.4 Business Entity.
A commercial,
industrial, service, or investment entity
pursuing an economic activity.
3.5 Business Valuation. The act or process
of arriving at an opinion or estimation of
the value of a business or entity or an
interest therein.
3.6 Business Valuer. A person who, by
education, training, and experience is
qualified to perform a valuation of
business, business ownership interest,
security and/or intangible assets.
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3.11.2 Net Cash Flow:

During an
operating period, that amount of cash that
remains after all cash needs of the business
have been satisfied. Net cash flow is
typically defined as being cash available to
equity or invested capital.
3.11.3 Equity Net Cash Flow: Net income
after taxes, plus depreciation and other
non-cash charges, less increases in
working capital, less capital expenditures,
less decreases in invested capital debt
principal, plus increases in invested capital
debt principal.
3.11.4 Invested Capital Net Cash Flow:
Equity net cash flow, plus interest
payments net of tax adjustment, less net
increases in debt principal.
3.7 Capitalisation
3.7.1 At a given date, the conversion into
the equivalent capital value of net income
or a series of net receipts, actual or
3.7.2 In business valuation, the term refers
to the capital structure of a business entity.
3.7.3 In business valuation, this term also
refers to the recognition of an expenditure
as a capital asset rather than a periodic
expense.
3.8 Capitalisation Factor. Any multiple
used to convert income into value.
3.9 Capitalisation Rate.
Any divisor
(usually expressed as a percentage) that is
used to convert income into value.
3.10 Capital Structure. The composition
of the invested capital.
3.11 Cash Flow.
3.11.1 Gross Cash Flow: Net income
after taxes, plus non-cash items such as
depreciation and amortisation.
3.12 Control. The power to direct the

management and policies of a business.
3.13 Control Premium. The additional
value inherent in the control interest that
reflects its power of control, as contrasted
to a minority interest.
3.14 Discount for Lack of Control. An
amount or percentage deducted from a pro
rata share of the value at 100% of an
equity interest in a business to reflect the
absence of some or all of the powers of
control.
3.15 Discount Rate. A rate of return used
to convert a monetary sum, payable or
3.16 Economic Life. The period over
which property may be profitably used.
3.17 Effective Date. The date as of which
the Valuers opinion of value applies
(Also referred to as Valuation Date, and/or
As Of Date).
3.18 Enterprise. See Business Entity.
3.19 Going Concern
Business Valuation
132
3.19.1 An operating business.

3.19.2 A premise of valuation, under
which Valuers and accountants consider a
business as an established entity that will
continue in operation indefinitely. The
premise of a going concern serves as an
alternative to the premise of liquidation.
Adoption of a going concern premise
allows the business to be valued above
liquidation value and is essential to the
development of Market Value for the
business.
3.19.3 The entity is normally viewed as a
going concern, that is, as continuing in
operation in the foreseeable future. It is
assumed that the entity has neither the
intention nor the necessity of liquidation
or of curtailing materially the scope of its
operations. (IAS 1, 23-24, Framework,
23).
3.20 Goodwill
profit over and above market expectations,
which could be extinguished upon sale of
the trade related property, together with
those financial factors related specifically
to the current operator of the business, such
as taxation, depreciation policy, borrowing
costs and the capital invested in the
business.
3.20.3 Transferable Goodwill.
That
property-specific name and reputation,
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3.21 Holding Company. A business that

receives returns on its assets.
3.22 Income Capitalisation Approach. A
indication of a business, business
ownership interest, or security using one
or more methods wherein a value is
estimated by converting anticipated
benefits into capital value.
3.23 Invested Capital. The sum of the
debt and equity in a business on a longterm basis.
3.24 Majority Control. The degree of
control provided by a majority position.
3.25 Majority Interest.
Ownership
position greater than 50% of the voting
interest in a business.
3.26 Market Approach. A general way of
estimating value indication of a business,
business ownership interest, or security
using one or more methods that compare
the subject to similar businesses, business
ownership interests, or securities that have
been sold.
3.27 Market Value. See IVS 1, para. 3.1
3.28 Marketability Discount. An amount
or percentage deducted from an equity
interest to reflect lack of marketability.
3.29 Minority Discount. A Discount for
lack of control applicable to a minority
interest.
133
3.30 Minority Interest.

Ownership
position less than 50% of the voting
interest in a business.
3.31 Net Assets.
liabilities.
Total assets less total
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financial, operating, or physical data

serves as the denominator.
3.42 Working Capital.
which current assets
liabilities.
The amount by
exceed current
3.32 Net Income. Revenue less expenses,

including taxes.
4.0 Relationship
Standards
3.33 Operating Company. A business

that performs an economic activity by
making, selling, or trading a product or
service.
4.1 Business valuations are commonly

used as a basis for making allocations of
various assets to aid in the establishment
or restatement of financial statements. In
this context, business Valuers reflect the
Market Value of all components of a
businesss balance sheet in order to meet
Accounting Standards, having regard to
the convention that reflects the effect of
changing prices.
3.34 Rate of Return. An amount of

income (loss) and/or change in value
realised or anticipated on an investment,
expressed as a percentage of that
investment.
3.35 Replacement Cost New. The current
cost of a similar new item having the
nearest equivalent utility as the item being
appraised.
3.36 Report Date.
The date of the
Valuation Report. May be the same as or
different from the Valuation Date.
3.37 Reproduction Cost New. The current
cost of an identical new item.
to
Accounting
4.2 In some instances the business

valuation provides a basis for estimating
the extent of obsolescence of certain fixed
assets. In this application the business
valuation may or may not be the principal
reason for the valuation, but the
combination of services by the Business
Valuer and, for example, a Real Property
Valuer, is necessary to properly allocate
and reflect the Market Value of assets to
appear in a financial statement.

way of estimating value using one or more
specific valuation methods. (See Market
Approach,
Income
Capitalisation
Approach, and Asset Based Approach
definitions.)
4.3 Other considerations relative to the

relationship of business valuations and
Accounting Standards are similar to the
provisions discussed in International
Valuation Application 1 (IVA 1).
3.39 Valuation
Method.
Within
approaches, a specific way to estimate
value.
5.0 Guidance
3.40 Valuation Procedure.

The act,
manner, and technique of performing the
steps of a valuation method.
3.41 Valuation Ratio. A factor wherein a
value or price serves as the numerator and
Business Valuation
5.1 Business valuations may be required

for a number of possible uses, including
acquisitions
and
dispositions
of
individual
businesses,
mergers,
valuation of shareholder ownings, and
the like.
134
5.1.1 Where the purpose of the

valuation requires a Market Value
estimate, the Valuer shall apply
definitions,
processes,
and
methodologies consistent with their
provision in IVS 1.
value basis other than Market Value, the
Valuer shall clearly identify the type of
value involved, define such value, and
take steps necessary to distinguish the
value estimate from a Market Value
estimate.
5.2 If, in the opinion of the Valuer,
certain aspects of an engagement
indicate that a departure from any
provision of IVSs or of this Guidance, is
necessary and appropriate, such
departure shall be disclosed and the
reason for invoking the departure
clearly set forth in all Valuation Reports
(oral or written) issued by the Valuer.
The requirements for Valuation
Reports are addressed in the IVSC
Code of Conduct and IVS 3, Valuation
Reporting.
5.3 The Valuer shall take steps to assure
that all data sources relied upon are
reliable and appropriate in the
In many
instances it will be beyond the scope of the
Valuers services to perform a complete
verification of secondary or tertiary data
sources. Accordingly, the Valuer shall
verify the accuracy and reasonableness of
data sources as is customary in the markets
and locale of the valuation.
5.4 Business Valuers must often rely
upon the services of Professional
Property Valuers and/or other experts.
A common example is reliance upon a
Real Property Valuer to value the real
estate components owned by a business.
Where the services of other experts are
relied upon, the Business Valuer shall
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5.4.1 take such verification steps as are

necessary to assure that such services are
competently performed and that the
conclusions relied upon are reasonable and
credible, or
5.4.2 disclose the fact that no such steps
were taken.
5.5 Business Valuers must frequently
rely upon information received from a
client or from a clients representatives.
The source of any such data relied upon
shall be cited by the Valuer in oral or
written Valuation Reports, and the data
shall be reasonably verified wherever
possible.
methods, and techniques of business
valuation are similar to other fields of
valuation, business valuations require
special education, training, skills, and
experience.
5.7 Going concern has several meanings in
accounting and valuation.
In some
contexts, going concern serves as a
premise under which Valuers and
accountants consider a business as an
established entity that will continue in
operation indefinitely.
5.7.1 The premise of a going concern
serves as an alternative to the premise
of liquidation. Adoption of a going
concern premise allows the business to
be valued above liquidation value and is
essential to the development of the
Market Value of the business.
5.7.1.1 In liquidations, the value of most
intangible assets (e.g., goodwill) tends
toward zero, and the value of all tangible
assets reflects the circumstance of
liquidation. Expenses associated with
liquidation (sales fee, commissions, taxes,
other closing costs, administrative costs
during close-out, and loss of value in
inventory) are also calculated and
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deducted from the estimate of business

value.
5.8 Awareness of current market
activity, and knowledge about relevant
economic developments and trends are
essential for competent business
valuations. In order to estimate the
Market Value of a business, Business
Valuers identify and assess the impact of
such considerations in their valuations and
Valuation Reports.
5.9 A description of the business
valuation assignment must include
5.9.1 Identification of the business,
business ownership interest, or security
to be valued;
may be rights and conditions contained in

an owners agreement or exchange of
correspondence, and these rights may or
may not be transferrable to a new owner of
the interest.
5.10.1.3 The documents may contain
restrictions on the transfer of the interest
and may contain provisions governing the
basis of valuation that has to be adopted in
the event of transfer of the interest. For
example, the documents may stipulate that
the interest to be transferred should be
valued as a pro rata fraction of the value of
the entire issued share capital even though
the interest to be transferred represents a
minority interest. In each case the rights
of the interest being valued and the rights
attaching to any other class of interest
must be considered at the outset.
5.9.2 the effective date of the valuation;

5.9.3 the definition of value;
5.9.4 the owner of the interest; and
5.9.5 the purpose and use of
valuation.
the
5.10 Factors to be considered by the

Valuer in the valuation of a business
include:
5.10.1 The rights,
privileges,
or
conditions that attach to the ownership
interest, whether held in corporate
form,
partnership
form,
or
proprietorship.
In various
countries these documents may be called
articles of association and/or the capital
clause in the memorandum of the business,
articles
of
incorporation,
bylaws,
partnership agreements, and shareholder
agreements, to name a few.
5.10.2 The nature of the business and

history of the business. Since value
resides in the benefit of future ownership,
history is valuable in that it may give
guidance as to the expectations of the
business for the future.
affect the subject business, including
political outlook and government policy.
Matters such as exchange rates, inflation
and interest rates may affect businesses
that operate in different sectors of the
economy quite differently.
5.10.4 The condition and outlook of the
specific industry that may affect the
subject business.
5.10.5 The assets, liabilities, and equity
and financial condition of the business.
5.10.6 The earnings and dividend
paying capacity of the business.
5.10.7 Whether or not the business has
intangible value.
5.10.1.2 Whoever owns the interest is

bound by the businesss documents. There
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5.10.7.1 Intangible
value
may
be
embodied in identifiable intangible assets
such as patents, trademarks, copyrights,
brands, know-how, databases, etc.
5.10.7.2 Intangible value may also be
contained in undifferentiated assets, often
called goodwill. Note that goodwill
value in this context is similar to goodwill
in the accounting sense in that both are the
residual value after all other assets have
been taken into account.
5.10.7.3 If the business has intangible
assets, the Valuer must ensure that the
value of the intangibles is fully reflected,
whether the identifiable intangible assets
have been valued separately or not.
5.10.8 Prior
transactions
in
the
ownership interests of the subject
business.
5.10.9 The relative size of
ownership interest to be valued
the
5.10.9.1 There are different levels of

control or lack of control resulting from
differences in the size of ownership
interests. In some instances effective
control may be obtained with less than
50% of the voting rights. Even if one
person owns more than 50% of the voting
rights and has operational control, there
may be certain actions, such as winding
the business up (i.e., putting everything in
order before the business may be
dissolved), that may require more than
50% affirmative vote, and may require an
affirmative vote of all owners.
5.10.9.2 It is essential that the Valuer be
aware of the legal restrictions and
conditions that arise through the laws of
the State in which the business exists.
5.10.10 Other market data, e.g., rates of
return
on
alternative
investments,
advantages of control, disadvantages of
lack of liquidity, etc.
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5.10.11 The market prices of publicly

traded stocks or partnership interests,
acquisition prices for business interests,
or businesses engaged in the same or
similar lines of business.
acquisition
transactions,
adequate
information is difficult or impossible to
obtain. While the actual transaction price
may be known, the Valuer may not know
what warranties and indemnities were
given by the seller, what terms were given
or received, whether cash or other assets
were taken from the business prior to
acquisition, or what impact taxation
planning had on the transaction.
5.10.11.2 Comparable data should always
be used with care, and inevitably
numerous adjustments need to be made.
When using market prices that reflect
public trading, the Valuer must bear in
mind that the market prices are from
transactions for small minority holdings.
The price for the acquisition of an entire
business represents 100% of the business.
Adjustments must be made for differences
arising due to different levels of control.
5.10.12 Any other information
Valuer believes to be relevant.
the
5.11 Use of financial statements

5.11.1 There are three goals of financial
analysis and adjustment:
5.11.1.1 Understanding
of
the
relationships existing in the profit and
loss statement and the balance sheet,
including trends over time, to assess the
risk inherent in the business operations
and
the
prospects
for
future
performance.
5.11.1.2 Comparison
with
similar
businesses to assess risk and value
parameters.
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5.11.1.3 Adjustment
of
historical
financial statements to estimate the
economic abilities of and prospects for
the business.
5.12 To aid in understanding the
economics of and risk in a business
interest, financial statements should be
analysed in terms of 1) money, 2)
percentages (percentage of sales for
items in the income statement and
percentage of total assets for items in
the balance sheet), and 3) financial
ratios.
5.12.1 Analysis in terms of money as
stated in the financial statements is used to
establish trends and relationships between
income and expense accounts in a business
interest over time. These trends and
relationships are used to assess the
expected income flow in the future, along
with the capital needed to allow the
business to provide that income flow.
5.12.2 Analysis in terms of percentages
compares accounts in the profit and loss
statement to revenues, and accounts in the
balance sheets to total assets. Percentage
analysis is used to compare the trends in
relationships, i.e., between revenue and
expense items, or between balance sheet
amounts, for the subject business over
time and among similar businesses.
5.12.3 Analysis in terms of financial
ratios is used to compare the relative risk
of the subject business over time and
among similar businesses.
5.13 For estimates of the Market Value
of a business, common adjustments to
the financial record of the business are
made to more closely approximate
economic reality of both the income
stream and the balance sheet.
5.13.1 Financial statement adjustments
should be made to reported financial
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information for items that are relevant

and significant to the valuation process.
Adjustments may be appropriate for the
following reasons:
5.13.1.1 To adjust revenues and
expenses to levels that are reasonably
representative of expected continuing
operations.
5.13.1.2 To present financial data of the
subject and guideline comparison
businesses on a consistent basis
5.13.1.3 To adjust from reported values
to Market Values.
5.13.1.4 To adjust for non-operating
assets and liabilities and the related
revenue and expenses.
5.13.1.5 To adjust for non-economic
revenue or expense.
5.13.2 Whether an adjustment is
appropriate, or not, may depend on the
degree of control held by the ownership
interest under valuation.
For
controlling
interests,
including
an
ownership interest of 100%, most
adjustments may be appropriate if the
owner could make the changes implied by
the adjustment. For valuation of minority
interests, whose owners do not have the
ability to change most items, the Valuer
should be careful to reflect reality when
considering
potential
adjustments.
Common adjustments include:
5.13.2.1 Elimination of the impact of
non-recurring events from the income
statement and balance sheet, if any.
Since these events are not likely to recur, a
buyer of the interest would not expect to
incur them, and would not include them in
the income stream. Adjustments may be
required in taxes.
These types of
adjustments are typically appropriate for
both majority and minority interest
138
valuations. Examples of non-recurring

items include:
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essential personnel, there is a danger of

overvaluing the business if the expenses
are added back to profit.
5.13.2.1.1 Strikes, if unusual

5.13.2.1.2 New plant startup
5.13.2.1.3 Weather phenomena such as
floods, cyclones, etc.
5.13.2.2 The Valuer should be wary of
adjusting for non-recurring items
whenever non-recurring items arise in
most years, but in each year they
appear to be the result of different
events.
Many businesses have nonrecurring items every year, and the Valuer
should make contingency provisions for
these expenses.
5.13.2.3 Elimination of the impact of
non-operating items from the balance
sheet and the income statement in the
context of valuation of a controlling
shareholders interest. In the context of a
minority shareholders interest, these
adjustments may not be appropriate. If
non-operating items are on the balance
sheet, they should be removed and valued
separately from the operating business.
Non-operating items should be valued at
Market Value. Tax adjustments may be
required. Costs of sale should be taken
into account. Adjustments to the income
statement should include removal of both
income and expense arising from the nonoperating assets, including tax impacts.
Examples of non-operating items and
the appropriate adjustments include:
5.13.2.3.1 Non-essential
personnel.
Eliminate compensation expense and taxes
related to compensation expense and
adjust income taxes. The Valuer should
be wary of adjusting for items such as
non-essential personnel in arriving at a
maintainable profits figure. Unless the
Valuer knows that the acquirer, or
whoever the Valuer is acting for, actually
has the controlling power to make the
change and intends to get rid of non-
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5.13.2.3.2 Non-essential
assets.
Eliminate the value of the non-essential
asset(s) and any associated assets and
liabilities from the balance sheet. (After
the business has been valued, the value of
the non-essential asset(s) is added to
reconciled business value net of costs of
disposal, including taxes if any.).
Eliminate income statement impact of
owning the
non-essential asset(s),
including support expenses (in the case of
an airplane, the fuel, crew, hangar, taxes,
maintenance, etc.) and revenue (charter or
rental income).
5.13.2.3.3 Redundant assets (surplus or
not necessary to the requirements of the
business) should be discussed in the
Valuation Report similarly with nonoperating items. Such redundant assets
may principally include: unemployed
licenses, franchises, copyrights and
patents; investments in land, rental
buildings
and
excess
equipment;
investments in other businesses; a
marketable securities portfolio; and,
excess cash or term deposits. The net
realisable value of redundant assets (net of
income tax and selling costs) must be
added as inflow to operating net cash flow,
especially in the first year of the specified
forecast period.
5.13.2.4 Depreciation may need to be
adjusted from the tax or accounting
deprecation shown in the reported
financial statements to an estimate that
compares more accurately to depreciation
used in similar businesses.
Tax
adjustments may subsequently need to be
made.
5.13.2.5 Inventory accounting may need
to be adjusted to more accurately compare
to similar businesses, whose accounts may
be kept on a different basis from the
139
subject business, or to more accurately

reflect economic reality.
Inventory
adjustments may be different when
considering the income statement and
when considering the balance sheet. For
example, first-in-first-out (a method of
costing inventory that assumes the first
acquired stock will be the first sold) may
most accurately represent the value of the
inventory when constructing a Market
Value balance sheet.
But, when
examining the income statement, last-infirst-out (a method of costing inventory
that assumes the most recently acquired
stock will be the first sold) may more
accurately represent the income level in
times of inflation or deflation.
Tax
made.
5.13.2.6 Compensation of the owner(s)
may need to be adjusted to reflect the
market cost of replacing the labor of the
owner(s).
Severance pay for nonessential personnel may need to be
considered. Tax adjustments may need
to be made. Service contracts may need
to be looked at carefully to adjust for the
value (rather than the face amount of the
cost) of terminating contracts with senior
personnel.
5.13.2.7 Cost of items leased, rented or
otherwise contracted from related
parties may need to be adjusted to reflect
the Market Value payments.
Tax
made.
5.13.3 Some adjustments that would be
made in the context of valuation of the
entire business might not be made in the
context of valuation of a non-controlling
interest in that entity since the noncontrolling interest would not have the
ability to exert an influence that would
warrant adjustment.
5.13.4 Financial statement adjustments
are made for the purpose of assisting
the Valuer in reaching a valuation
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conclusion. If the Valuer is acting as a

consultant to either the buyer or seller in a
proposed transaction, the adjustments
should be understood by the client. For
example, the proposing purchaser should
understand that the value derived after
adjustments may represent the maximum
that should be paid. If the purchaser does
not believe the financial or operational
improvements can be made, a lesser price
may be appropriate.
5.13.5 Adjustments made should be
fully described and supported. The
Valuer should be very careful in making
adjustments to the historical record. Such
adjustments should be discussed fully with
the client. The Valuer should make
adjustments only after sufficient access to
the business to support their validity.
5.14 Business valuation approaches
5.14.1 The Market approach to business
valuation.
5.14.1.1 The market approach compares
the subject to similar businesses,
business ownership interests, and
securities that have been sold in the
market.
5.14.1.2 The three most common
sources of data used in the market
approach are public stock markets in
which ownership interests of similar
businesses are traded, the acquisition
market in which entire businesses are
bought and sold, and prior transactions
in the ownership of the subject business.
5.14.1.3 There must be a reasonable
basis for comparison with and reliance
upon the similar businesses in the
market approach.
These similar
businesses should be in the same industry
as the subject or in an industry that
responds to the same economic variables.
The comparison must be made in a
meaningful manner and must not be
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misleading. Factors to be considered in

whether a reasonable basis for comparison
exists include:
5.14.1.4.5 All calculations must be done

in the same way for both the similar
businesses and the subject business.
5.14.1.3.1 Similarity to the subject

business in terms of qualitative and
quantitative business characteristics.
5.14.1.4.6 The price data used in the ratio

must be valid as of the valuation date.
5.14.1.3.2 Amount and verifiability of

data on the similar business.
5.14.1.3.3 Whether the price of the similar
business represents an arms-length
transaction.
5.14.1.3.3.1 A
thorough,
unbiased
search for similar businesses is necessary
to establish the independence and
reliability of the valuation. The search
should include simple, objective criteria
for selecting similar businesses.
5.14.1.3.3.2 A comparative analysis of
qualitative and quantitative similarities
and differences between similar businesses
and the subject business must be made.
5.14.1.4 Through analysis of the
publicly
traded
businesses
or
acquisitions, the Valuer often computes
valuation ratios, which are usually price
divided by some measure of income or
net assets. Care must be used in
calculating and selecting these ratios.
5.14.1.4.1 The ratio must provide
meaningful information about the value of
the business.
5.14.1.4.2 The data from the similar
businesses used to compute the ratio must
be accurate.
5.14.1.4.3 The calculation of ratios must
be accurate.
5.14.1.4.4 If the data are averaged, the
time period considered and averaging
method must be appropriate.
Business Valuation
5.14.1.4.7 Where appropriate, adjustments

may need to be made to render the similar
businesses and the subject business more
comparable.
5.14.1.4.8 Adjustments may need to be
made for unusual, non-recurring, and nonoperating items.
5.14.1.4.9 The selected ratios must be
appropriate given the differences in risk
and expectations of the similar businesses
and the subject business.
5.14.1.4.10 Several value indications may
be derived since several valuation
multiples may be selected and applied to
the subject business.
5.14.1.4.11 Appropriate adjustments for
differences in the subject ownership
interest and interests in the similar
businesses with regard to control or lack of
control, or marketability or lack of
marketability, must be made, if applicable.
5.14.1.5 When prior transactions in the
subject business are used to provide
valuation guidance, adjustments may
need to be made for the passage of time
and for changed circumstances in the
economy, the industry, and the business.
5.14.1.6 Anecdotal valuation rules, or
rules of thumb, may be useful in the
valuation of a business, business
ownership interest, or security. However,
value indications derived from the use of
such rules should not be given substantial
weight unless it can be shown that buyers
and sellers place significant reliance on
them.
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5.14.2 Income capitalisation approach to

business valuation.
5.14.2.1 The
income
capitalisation
approach estimates the value of a
business, business ownership interest or
security by calculating the present value
of anticipated benefits. The two most
common income approach methods are
capitalisation of income and discounted
cash flow analysis or dividends method.
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calculations that consider the expected

growth and timing of the benefits, the
risk associated with the benefits stream,
and the time value of money.
5.14.2.2.1 Anticipated
income
or
benefits should be estimated considering
the capital structure and historical
performance of the business, expected
outlook for the business, and industry
and economic factors.
5.14.2.1.1 In (direct) capitalisation of

income, a representative income level is
divided by a capitalisation rate or
multiplied by an income multiple to
convert the income into value. In theory,
income can be a variety of definitions of
income and cash flow. In practice, the
income measured is usually either pre-tax
income or post-tax income.
The
capitalisation rate must be appropriate for
the definition of income used.
5.14.2.2.2 The
income
approach
requires
the
estimation
of
a
capitalisation rate, when capitalising
income to arrive at value, or a discount
rate, when discounting cash flow. In
estimating the appropriate rate, the Valuer
should consider such factors as the level of
interest rates, rates of return expected by
investors on similar investments, and the
risk inherent in the anticipated benefit
stream.
5.14.2.1.2 In discounted cash flow

analysis and/or dividends method, cash
receipts are estimated for each of
several future periods. These receipts
are converted to value by the
application of a discount rate using
present value techniques.
Many
definitions of cash flow could be used. In
practice, net cash flow (cash flow that
could be distributed to shareholders), or
actual dividends (particularly in the case
of minority shareholders) are normally
used.
The discount rate must be
appropriate for the definition of cash flow
used.
5.14.2.2.3 In capitalisation methods

that employ discounting, expected
growth is explicitly considered in the
estimate of the future benefit stream.
5.14.2.1.3 Capitalisation
rates
and
discount rates are derived from the
market and are expressed as a price
multiple (derived from data on publicly
traded businesses or transactions) or an
interest rate (derived from data on
alternative investments).
5.14.2.2.5 The capitalisation rate or

discount rate should be consistent with
the type of anticipated benefits used.
For example, pre-tax rates should be used
with pre-tax benefits; net after-income tax
rates should be used with net afterincome-tax benefit streams; and net cash
flow rates should be used with net cash
flow benefits.
5.14.2.2 Anticipated income or benefits

are
converted
to
value
using
Business Valuation
5.14.2.2.4 In capitalisation methods

that do not employ discounting,
expected growth is included in the
capitalisation rate.
The relationship,
stated as a formula, is discount rate minus
long-term growth rate equals capitalisation
rate (R = Y - a where R is the
capitalisation rate; Y is the discount, or
yield, rate; and a is the annualised
change in value).
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5.14.2.2.6 When the forecast income is

expressed in nominal terms (current
prices), nominal rates must be used, and
when the forecast income is expressed in
real terms (level prices), real rates must
be used. Similarly, the expected longterm growth rate of income should be
documented and clearly expressed in
nominal or real terms.
5.14.3 Asset-based business valuation
approach.
5.14.3.1 In business valuation the assetbased approach may be similar to the
cost approach used by Valuers of
different types of assets.
5.14.3.2 The asset-based approach is
founded on the principle of substitution,
i.e., an asset is worth no more than it
would cost to replace all of its constituent
parts.
5.14.3.3 In the execution of the assetbased approach, the cost basis balance
sheet is replaced with a balance sheet
that reports all assets, tangible and
intangible, and all liabilities at Market
Value or some other appropriate
current value. Taxes may need to be
considered. If market or liquidation values
apply, costs of sale and other expenses
may need to be considered.
5.14.3.4 The
asset-based
approach
should be considered in valuation of
controlling interests in business entities
that involve one or more of the
following:
approach used in assignments relating

to operating businesses appraised as
going concerns unless it is customarily
used by sellers and buyers. In such
cases, the Valuer must support the
selection of this approach.
5.14.3.6 If the valuation of an operating
business is not on a going concern basis,
the assets should be valued on a Market
Value basis or on a basis that assumes a
shortened time period for exposure in
the market, if that is appropriate. All
costs related to the sale of the assets or the
closing of the business need to be taken
into account in this type of valuation.
Intangible assets such as goodwill may not
have value under these circumstances,
although other intangible assets such as
patents, trademarks, or brands may retain
their value.
5.14.3.7 If the holding business simply
holds property and receives investment
income from the property, Market
Values should be obtained for each
property.
5.14.3.8 If an investment holding
business is to be valued, the securities
(both quoted and unquoted), the
liquidity of the interest, and the size of
the interest may be relevant and may lead
to a deviation from the quoted price.
based upon:
5.15.1.1 the definition of value;
5.14.3.4.1 An investment or holding

business, such as a property business or
a farming business
5.14.3.4.2 A business valued on a basis
other than as a going-concern
5.14.3.5 The
asset-based
should not be the sole
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5.15.1.2 the purpose and intended use

of the valuation; and
5.15.1.3 all relevant information as of
the valuation date necessary in view of
the scope of the assignment.
approach
valuation
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5.15.2 The value conclusion shall also

be based on value estimates from the
valuation methods performed.
the appropriate approaches, methods and
procedures depends on the judgment of the
Valuer.
when estimating the relative weight to be
given to each of the value estimates
reached during the Valuation Process. The
Valuer should provide the rationale and
justification for the valuation methods
used and for the weighting of the methods
relied on in reaching the reconciled value.
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Consideration of Hazardous and Toxic Substances in

Valuation
1.0 Introduction
(GN) is to assist Valuers in preparing
valuations when specific hazardous or toxic
substances may influence property values.
1.2 Hazardous and toxic substances are
included among a number of possible
environmental
factors
that,
when
appropriate, are specifically considered by
Valuers.
This GN is limited to
consideration of hazardous and toxic
substances because other environmental
factors that may be encountered in
valuations typically have less involvement
with scientific and associated technical
issues, including related law.
1.5 Fundamental to the application of this

GN are the Valuer's adherence to marketbased valuations, objectivity, and full
disclosure of relevant matters. Similarly,
Valuers are obliged to write Valuation
Reports that may be reasonably understood
by clients and others. The obligation for
clarity and full disclosure is particularly
important when scientific, technical, and
legal issues are involved.
1.6 This GN also provides for proper
treatment and disclosure of hazardous and
toxic substance issues when valuing
specialised properties and in other
situations, which preclude the application
of Market Value concepts.
2.0 Scope
1.3 This GN addresses general concepts,
principles, and considerations that guide
Valuers in preparing valuations when
hazardous or toxic materials that may
influence property values are present. It
also discusses concepts that must be
understood by accountants, regulatory
authorities, and other users of valuation
services.
1.4 Valuers
rarely
have
special
qualifications in legal, scientific, or other
technical areas that involve evaluating risks
associated with hazardous or toxic
substances. When considering the market
effects of such risks in property valuations,
Valuers commonly rely upon other experts
advice. As specified in the IVSC Code of
Conduct, paras. 5.2 and 6.6, significant
reliance upon other experts advice must be
disclosed and explained in the context of
the property addressed in the Valuation
Report.
2.1 This GN applies to all valuations of

property including plant, machinery and
equipment. Special provisions of the GN
should be observed when hazardous and
toxic substances that may influence the
propertys Market Value or other defined
value are known or reasonably believed to
be present.
3.0 Definitions
3.1 Hazardous or toxic substances within
the context of this GN involve specific
materials that, by their presence or
proximity, may have adverse effect on
property value because of their potential to
cause harm to life-forms. Such materials
may be incorporated into improvements to
or on the site, or they may be found in or
on the land. They may also be offsite, but
nearby. In some instances they may be
airborne.
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3.1.1 In a more general use beyond this

GN, environmental factors may be
characterized as influences external to the
property being valued which may have
positive effect, negative effect, or no effect
at all on the propertys value. Hazardous
or toxic substances may be found either on
or off the site of the property valued.
3.2 Hazardous substance within the context
of a valuation is any material within,
around, or near the property being valued
that has sufficient form, quantity, and bioavailability to create a negative impact on
the propertys Market Value.
3.3 Toxic describes the status of a material,
whether gas, liquid, or solid, that in its
form, quantity, and location at the date of
valuation has capacity to cause harm to
life-forms. Toxicity refers to the degree or
extent of such capacity.
4.0 Relationship
Standards
to
Accounting
4.1 While the expressions Market Value

and Fair Value may not always be
synonymous (see International Valuation
Standards 1 and 2 [IVSs 1 and 2] and
International Valuation Application 1 [IVA
1]), each type of value reflects market
behaviour under conditions contained
within the respective definitions. To the
extent that property values reported under
either type of value may be affected by
hazardous or toxic substances, proper
disclosure and the application of proper
valuation procedures to the circumstances
are necessary in making and reporting
valuations.
4.2 This GN is applicable to all
circumstances involving public disclosure
of property values, whether reported
individually or in the aggregate, when
hazardous or toxic substances may have
adverse effect on such values. In addition
to the possible effect of such considerations
on the properties valued, it is possible that

there are other accompanying issues such
as
curative
or
restoration
costs,
maintenance or monitoring costs, thirdparty or regulatory liabilities, and the like.
Thus, proper disclosure and handling are
essential in valuations used for preparation
of financial statements and related
accounts.
4.3 In the ordinary course of conducting an
asset valuation, the Valuer will be
instructed by the Directors of the entity as
provided in IVA 1.
Any special
instructions to the Valuer concerning the
handling of hazardous or toxic substance
issues that may have negative impact upon
property value are, under IVA 1, important
disclosures to be discussed by the Valuer in
the Valuation Report. Such disclosures
shall be accompanied by the Valuers
explanation of how the issues are handled
in the Valuation Process; any assumptions
that are made; and the effect, if any, such
considerations have upon the value
reported.
4.4 Although the value effects of hazardous
or toxic substances are derived from the
market in a Market Value assignment, such
effects may not be as readily discerned
when valuing property for which a
Depreciated Replacement Cost method is
appropriate. To comply with IVA 1 when
applying the DRC method, Valuers should
apply the principles of this GN to the extent
possible and should fully disclose the
extent of their analysis and the basis for
their conclusions.
4.5 The
accounting
definition
of
impairment loss is the amount by which the
carrying amount of an asset or a cashgenerating unit exceeds its recoverable
amount (IAS 36, para. 6). The negative
impact of hazardous or toxic materials that
are present in a property may contribute to
its impairment.
The impairment loss
incurred by a property where such
146
substances are present may include the

adverse effect of those substances upon
property value. (See para. 5.4 below.)
5.0 Guidance
5.1 In dealing with a client or
prospective client in matters pertaining
to the valuation of property when known
or
reasonably
discoverable
environmental conditions that may have
adverse influence on the property values
are present, the Valuer should disclose to
the client the extent of his or her
knowledge, experience, and competency
to deal with the situation.
5.1.1 If the environmental factors are
known or are suspected to exist at the time
the Valuer and prospective client are
discussing the potential engagement, the
Valuer should satisfy himself or herself that
the client understands the Valuers
competency and disclosure obligations and
that undertaking the engagement will in no
way compromise these obligations.
5.1.2 If the environmental factors are
discovered
after
commencing
the
engagement, the Valuer should make
known to the client the knowledge,
experience, and competency disclosures
specified by this Guidance, and should then
comply with all other IVSs disclosure
requirements.
5.2 Recognising
that
many
environmental situations will require
advice on physical, legal, scientific, and
other technical issues, if the engagement
is otherwise acceptable to both the client
and the Valuer, the Valuer should take
the necessary steps to complete the
assignment competently.
These steps
may include appropriate personal study;
association with another Valuer who has
the requisite knowledge, experience, and
competency; or obtaining the professional
assistance of others who possess the
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requisite knowledge,
competency.
experience,
and
5.3 Disclosure of the existence of any

hazardous or toxic substance that may
have adverse effect upon a propertys
value is included among the general
reporting requirements of IVSs 1, 2, and
3.
Also required is the Valuers
disclosure regarding how that factor has
been dealt with in the engagement. If the
engagement calls for valuation of the
property as though no such environmental
factor existed, full disclosure must be made
of the limiting assumption, and reporting
must comply with the statements above.
(See paras. 5.1 and 5.2.)
The
requirements for valuation reports are
addressed in the Code of Conduct and
IVS 3, Valuation Reporting.
5.4 Where impairment is present in a
property, the Valuer should estimate the
value of the property as if the
impairment had been removed. Where
possible, the Valuer should identify the
cost of remediation; but if this is not
possible, the Valuer should disclose the
fact that the property is impaired.
5.5 If a property is valued as if
unaffected by hazardous substances, and
such substances are known or suspected
to exist, the Valuation Report should
contain a qualification that clearly limits
the scope of the valuation, an
appropriate statement of purpose,
properly qualified conclusions, and a
restriction against use of the valuation
conclusion
without
accompanying
disclosure of the qualification and its
explanation.
5.6 The names and nature of expert
assistance of others who contributed
specific information concerning effects of
environmental factors on the property
valued should be acknowledged in the
Valuation Report.
147
5.7 When there are no known

environmental factors that may have
adverse effect on property value, the
Valuer should, as a matter of routine
practice, include within the Valuation
Report a contingent and limiting
condition or other disclaimer affirming
that the valuation was made on the
assumption that no such factors were
known to exist at the date of valuation,
but if such factors did exist they could
well have an adverse effect on value.
5.8 There is growing worldwide concern
about the effects of hazardous and toxic
substances upon lives and property. Many
potential hazards have been recently
identified, and others are likely to be added
over time as new and additional discoveries
are made and subsequent controls are
invoked by governments or are required by
the market.
5.9 Some hazardous or toxic substances
can have material effect on property values.
However, as Valuers normally deal with
Market Values, it is the markets reaction
to these substances that is at issue in
Market Value engagements. Over time,
substances once believed to have no
adverse effect on property value may be
determined to have such an effect.
Conversely, materials once believed to
have substantial effect may be found to
have little or no property value effect, or to
have such effect only under certain market
conditions.
5.10 The handling of physical, legal,
scientific, and technical issues involved
with hazardous or toxic substances is
frequently beyond the skill of the Valuer.
However,
the
Valuers
role
in
consideration of such factors will be
facilitated if
5.10.1 Situations
involving
environmentally sensitive substances are
recognised and dealt with in accordance
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with this Guidance, whether they are

encountered prior to undertaking an
engagement or subsequent to its
commencement;
5.10.2 proper reliance is placed upon the
professional advice and assistance of
others when special skills, knowledge,
training, and experience are required,
and any such assistance is acknowledged
and explained in the Valuation Report;
5.10.3 proper treatment is given to the
influence of hazardous or toxic
substances in the Valuation Process, or
alternatively, if the Valuation Process is
to exclude consideration of such matters,
proper disclosure is made of any
assumptions made, the purpose of the
analysis, and the likely effect of the
assumptions on the defined value;
5.10.4 reasonable effort is made to ensure
that reports and the value estimates they
contain are not misleading and can be
reasonably used only for the purpose for
which they are intended.
5.11 Valuers are expected to correctly apply
those recognised methods and techniques
that are necessary to comply with this
Guidance. When valuing property subject
to some hazardous or toxic substance that
adversely influences property value, the
Valuer should apply those processes
necessary to adequately reflect any such
value losses, taking care to neither over- or
understate the value effects. In a Market
Value engagement, it is the Valuers
responsibility to reflect the market effect
of
the
particular
condition
or
circumstance.
5.12 Valuers are cautioned that there can be
considerable controversy among legal,
scientific, and other technical experts upon
whose advice the Valuer may need to rely.
Particular differences may be found in the
methods experts use to determine the extent
of clean-up, maintenance, or monitoring
148
that may be associated with hazardous or

toxic substances and the costs required to
accomplish such clean-up, maintenance, or
monitoring.
5.12.1 Engagements
may
require
valuation of the affected property under
an assumption that any value effect of
the hazardous or toxic substances is
excluded from the reported value. Such
engagements are acceptable, provided that
the resulting valuation is not misleading,
that the client is informed of and agrees to
this limiting assumption, and that the
Valuation Report clearly sets forth the
limitation and the reasons therefore.
5.12.2 Because of technical issues
frequently involved in environmental
matters, it is common for Valuers, directly
or through the client, to seek the counsel of
and rely upon the opinions of those who
hold appropriate qualifications to evaluate
problems involving hazardous or toxic
substances. Valuers should disclose the
level and nature of reliance placed upon
such opinions.
5.13 Valuers and users of valuation
services should recognise that the effect of
a particular hazardous or toxic substance
may vary widely with differences in
properties, locations, and markets. Adverse
value effects may range from none to those
that are more than costs of cure and
remediation. The latter may occur, for
example, where highest and best use of the
property affected is changed by the
condition and where marketability or other
usefulness of the property is altered. In any
case, it is the role of the Valuer to
research and reflect the effects of the
environmental factor on a particular
property in its market.
5.14 In the typical valuation engagement,
the Valuer will not have the skills to make
legal, scientific, or technical findings
regarding hazardous or toxic substances, or
other environmental factors that may have
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adverse effect on value. It is important to

the credibility and usefulness of the
reported value that if any such conditions
exist, they be properly considered and
reported.
5.14.1 When the Valuer knows that a
hazardous or toxic substance is present
in the property specified in a valuation
engagement, the Valuer should follow all
requirements
of
this
Guidance.
Normally, any technical experts upon
whose advice the Valuer may rely will be
engaged by the client or by others.
5.14.2 When the Valuer has some
reason to believe that a potentially
adverse hazardous or toxic substance
may be present, the Valuer should
immediately make the client aware of the
concern and request that the client take
steps to resolve pertinent questions. By
handling this concern on a private,
confidential basis, the Valuer keeps
information confidential that in itself could
affect the property involved.
5.15 Guidelines
for
Valuers
responsibilities to observe, locate, and
identify hazardous or toxic substances or
circumstances may vary from time to time
within and among jurisdictions. In general,
determination of the nature, extent and
physical
effects
of
environmental
conditions is beyond the scope of service of
Valuers.
5.16 In dealing with hazardous or toxic
substances, the Valuer should research
all related issues in a confidential
manner so as not to raise undue
speculation concerning the property.
5.17 It is common for individuals
unfamiliar with hazardous or toxic
substances issues to assume that if there is
a physical effect of such substances, there
must be an adverse economic reaction.
Market experience shows there can be, and
frequently are, important differences
149
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between general public perceptions and

actual market effects of the presence of
such substances. The Valuers role is to
avoid such generally held but possibly
erroneous assumptions and to carefully
consider all significant factors, perform
competent market research, and reflect
relevant market attitudes towards the
situation in Valuation Reports.
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The Cost Approach for Financial Reporting (DRC)

1.0 Introduction
Philippine 3.1.1
1.1 The purpose of this Guidance Note

(GN) is to assist users and preparers of
Valuation Reports in the interpretation of
the meaning and application of depreciated
replacement cost for financial reporting
purposes.
The Depreciated Replacement Cost (DRC)

is commonly known as Replacement Cost
New Less Depreciation (RCNLD).
1.2 Depreciated replacement cost is an

application of the cost approach that may
be used in arriving at the value of
specialised assets for financial reporting
purposes. Depreciated replacement cost
may be the more applicable approach when
comparable sales data is insufficient but
sufficient market data exists concerning
costs and accrued depreciation. As an
application of the cost approach, it is based
on the principle of substitution.
2.0 Scope
2.1 This GN provides background to the
use of depreciated replacement cost in
connection with International Valuation
Application 1 (IVA 1), Valuation for
Financial Reporting.
2.2 The depreciated replacement cost
approach is also discussed in GN 3
(Valuation of Plant, Machinery and
Equipment) and IVA 3 (Valuation of
Public Sector Assets for Financial
Reporting).
3.0 Definitions
modern equivalent asset less deductions for
physical deterioration and all relevant
3.2 Improvements. Buildings, structures, or

some modifications to land, of a permanent
nature, involving expenditures of labour
and capital, and intended to enhance the
value or utility of the property.
Improvements may have differing patterns
of use and economic lives.
3.3 Modern Equivalent Asset. An asset
which has a similar function and equivalent
productive capacity to the asset being
valued, but of a current design and
constructed or made using current materials
and techniques.
3.4 Optimisation. The process by which a
least cost replacement option is determined
for the remaining service potential of an
asset. It is a process of adjusting the
replacement cost to reflect that an asset
may be technically obsolete or overengineered, or the asset may have a greater
capacity than that required.
Hence
optimisation minimises, rather than
alternative lower cost replacement options
are available.
3.5 Plant, Machinery and Equipment.
Tangible assets, other than realty, that:
b) are expected to be used over a period
of time.
equipment are:
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combined with others and that may include
specialised buildings, machinery, and
equipment.
4.2 The application of Fair Value under

accounting standards is discussed in IVA 1.
In accounting standards, Fair Value is
normally equated to Market Value.
Machinery.
Individual machines or a
5.0 Guidance

entity.
3.6 Service Potential. The capacity of an
asset to continue to provide goods and
services in accordance with the entitys
objectives.
is rarely, if ever, sold in the market, except
by way of a sale of the business or entity of
4.0 Relationship
Standards
to
Accounting
4.1 Depreciated replacement cost is used

where there is insufficient market data to
arrive at Market Value by means of marketbased evidence.
4.1.1 International Accounting Standard
(IAS) 16, Property, Plant and Equipment,
paragraph 33, provides that in the absence
of market-based evidence an entity may
need to estimate the fair value of a
specialised asset using an income or a
depreciated replacement cost approach.
4.1.2 International
Public
Sector
Accounting Standard (IPSAS) 17, Property,
Plant and Equipment, paragraphs 42 and
43, prescribe the use of depreciated
replacement cost for valuing specialised
buildings and other man-made structures as
well as items of plant and equipment of a
specialised nature.
5.1 The classification of an asset as

specialised should not automatically lead to
the conclusion that a depreciated
replacement cost valuation must be
adopted. Even though an asset may be
specialised, it may be possible if
sufficient direct market evidence exists
to undertake a valuation of the
specialised property using the sales
comparison approach and/or the income
capitalisation approach.
5.2 In the absence of sufficient direct
market evidence, depreciated replacement
cost is regarded as an acceptable method
of arriving at the value of specialised
assets but must incorporate market
observations by the Valuer with regard
to current costs and depreciation rates.
The method is based on the same
theoretical transaction between rational
informed parties as the Market Value
concept.
5.3 The Valuer estimates the cost of a
modern equivalent asset at the relevant
valuation date.
This may involve
estimating the cost of having a suitable
asset commissioned to order.
The
replacement cost needs to reflect all
incidental costs that would be incurred, for
example for design, delivery, installation
and commissioning.
In the case of
specialised property, the cost of acquiring
land suitable for the development of an
equivalent specialised facility in the market
should be included, together with the cost
of all improvements that would be required
to the land.
5.4 The
Valuer
then
estimates
depreciation by comparing the modern
equivalent asset with the asset being
152
valued. Depreciation rates may be allencompassing or analysed separately

for:
Physical deterioration
Functional obsolescence
External obsolescence
5.4.1 In
estimating
the
physical
deterioration of the actual asset resulting
from wear and tear over time, including
any lack of maintenance, different
valuation methods may be used for
estimating the amount required to
rectify the physical condition of the
improvements.
Estimates of specific
elements of depreciation and contractors
charges can be used or direct unit value
comparisons between properties in similar
condition.
5.4.2 Functional obsolescence can be
caused by advances in technology that
result in new assets being capable of a
more efficient delivery of goods and
services. Modern production methods may
render previously existing assets fully or
partially obsolete in terms of current cost
equivalency.
The application of the
optimisation process will account for many
elements of functional obsolescence.
5.4.3 Obsolescence
resulting
from
external influences may affect the value
of the asset. External factors include
changed economic conditions, which affect
the supply of and demand for goods and
services produced by the asset or the costs
of its operation. External factors also
include the cost and reasonable availability
of raw materials, utilities, and labour.
5.4.4 When valuing specialised property it
is not appropriate to depreciate the cost
of replacing the land element.
5.5 In the application of depreciated
replacement cost, the Valuer shall ensure
that the key elements of a market
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transaction have been considered. These

include:
5.5.1 an understanding of the asset, its
function, and its environment;
5.5.2 research and analysis to determine
the remaining physical life (to estimate
physical deterioration) and economic life
of the asset;
5.5.3 knowledge
of
changes
in
preferences,
technical
innovations,
and/or market standards that may affect
the asset (to estimate functional
obsolescence);
5.5.4 an analysis of potential external
changes that may affect the asset (to
estimate external obsolescence);
5.5.5 familiarity with the class of
property through access to available
market data;
5.5.6 knowledge
of
construction
techniques and materials (to estimate the
cost of a modern equivalent asset); and
5.5.7 sufficient knowledge to determine
the impact of external obsolescence on
the value of the improvements.
5.6 Depreciation rates and estimates of
future economic life are influenced by
market trends and/or the entitys
intentions. Valuers should identify these
trends and intentions and be capable of
using them to support the depreciation rates
applied. The application of depreciated
replacement cost should replicate the
deductive process of a potential buyer with
a limited market for reference.
5.7 In the final stage of the process Valuers
should consider if the actual asset has any
additional features not reflected in the cost
of the modern equivalent asset and make
any appropriate further adjustments. An
example would be a specialised property
153
where there is the possibility of a more

valuable use in the future when the
improvements have reached the end of their
economic life.
5.8 If it is clear that the result based on
the depreciated replacement cost method
is materially lower than a readily
identifiable alternative use that is both
financially and legally feasible at the
date of valuation, the Market Value
based on that alternative use shall be
reported.
This should include a
statement that the value for the
alternative use takes no account of
matters such as business closure or
disruption and any associated costs that
would be incurred. The alternative use
value will be evident from sales
comparison and its valuation is not part
of the depreciated replacement cost
application but a separate valuation.
5.9 If the Valuer considers that the value
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.
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replacement cost to the valuation of public

sector assets and the test of adequate
service potential are discussed at greater
length in IVA 3, Valuation of Public Sector
Assets for Financial Reporting in
paragraphs 5.4, 6.1, 6.5, and 6.8.4.)
5.12 The valuation conclusion shall be
5.12.1 The Valuer reports the result as
Market Value subject to the test of
adequate profitability or justified service
potential, a test which is the
responsibility of the entity.
5.12.2 In reporting the value the Valuer
shall identify the valuation method as
depreciated replacement cost noting that
the value can only be adopted in the
accounts of the entity if the relevant test
of either adequate profitability or service
potential is applied and met.
5.10 Where the value of a specialised

asset is estimated by the depreciated
replacement cost method, a statement
should be made that it is subject to a test
of adequate profitability in relation to
the whole of the assets held by a forprofit entity or the cash-generating unit.
The reasons why this statement is
necessary are explained in Addendum A.
5.11 For not-for-profit public sector
entities, the reference to a test of
adequate profitability is replaced by a
test of adequate service potential, which
should be justifiable by the entity.
Governments place particular emphasis on
the test of adequate service potential in
asset reporting as many agencies utilise
public sector assets in the context of a
service obligation to the general public.
(The
application
of
depreciated
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Addendum A: Profitability Test When Reporting DRC

1. Accounting standards require entities
to periodically review their assets for
impairment, which is a permanent loss
in the value of the asset to the entity. The
appropriate figure to be included in the
balance sheet for an asset following an
impairment review is the higher of
either its Value in Use or its Fair
Value less costs to sell. In simple terms
this means that the amount in the balance
sheet should be written down to the higher
of either the current value of the future
benefits that will be derived by the entity
from the continued use of the asset or the
proceeds it would derive from the assets
immediate retirement and disposal.
2. The Market Value of an asset derived
by reference to the sales of similar assets
will usually approximate to the sum that
the entity could obtain from the retirement
and sale of the asset. If the Value in Use
of the asset is lower than a Market Value
based on sales comparisons, the latter
figure can safely be relied upon as the base
figure for inclusion in the accounts; it is an
amount recoverable by the entity
regardless of whether it continues to use or
retire the asset.
3. In contrast, DRC is used to value
assets, which are rarely, if ever, sold
except as part of a sale of the entire
operation of which they form part. The
assumption that there will be demand for
the use for which the asset is currently
employed is an inherent feature of the
approach. As a consequence, a Market
Value derived using this approach will
often not equate to the figure that would
be obtained if the asset were retired and
sold. If the Value in Use is lower than a
Market Value arrived at using a DRC
approach, the latter figure cannot be relied
upon as the base figure, as it may not bear
any relation to the amount that would be
received following a cessation of
operations.
4. Although the possibility that a

valuation derived using a DRC approach
would be materially affected by a
cessation of operations is covered by the
disclosure requirement in 5.9, the
requirement in 5.12.1 to indicate
additionally that the valuation is subject to
adequate profitability emphasises to the
entity that even if the Value in Use of the
asset is lower than the reported Market
Value, it may still be higher than the Net
Realisable Value on cessation. It may
therefore be necessary to write the
reported Market Value down to the Value
in Use in an impairment review.
5. The need to consider impairment is
also a requirement of public sector
accounting. However, in the public sector,
assets are held for service delivery rather
than profit. A valuation of a public sector
asset using the cost approach has to be
reported to be subject to a continuing
requirement to use the asset for the
provision of the service in question, i.e.,
that it has adequate service potential. This
requirement may arise from political or
social considerations rather than purely
economic criteria. Combined with any
appropriate disclosure under 5.9, this
emphasises to users that the valuation
cannot be relied upon as an indication of
the amount that could be recovered if the
service was discontinued and the asset
retired.
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Discounted Cash Flow (DCF) Analysis for Market

Valuations and Investment Analyses
1.0 Introduction
1.1 Discounted cash flow (DCF) analysis
is a financial modeling technique based on
explicit assumptions regarding the
prospective income and expenses of a
property or business. Such assumptions
pertain to the quantity, quality, variability,
timing, and duration of inflows and
outflows that are discounted to present
value. DCF analysis, with appropriate and
supportable data and discount rates, is one
of the accepted methodologies within the
income capitalisation approach to
valuation.
DCF analysis has gained
widespread application due in part to the
advancement of computer technology.
DCF analysis is applied in valuations of
real property, businesses and intangible
assets; in investment analyses; and as an
accounting procedure to estimate value in
use.
The use of DCF analysis has
increased substantially in institutional,
investment
property
and
business
valuation sectors and is frequently
required by clients, underwriters, financial
advisers and administrators, and portfolio
managers.
1.2 DCF valuations, as with other incomebased valuations, are established on
analysis of historical data and assumptions
about future market conditions affecting
supply, demand, income, expenses, and
the potential for risk. These assumptions
determine the earning capability of a
property or business upon which the
pattern
of
its
income
and
expenditures/outgoings is projected.
(GN) is to prescribe Generally Accepted
Valuation Principles (GAVP), best
practice, and due diligence measures for
Valuers to follow in performing DCF
analysis for market and non-market based

valuations and to distinguish between
applications of DCF analysis in these two
different types of valuation assignments.
2.0 Scope
2.1 This GN applies to market and nonmarket valuations developed by means of
DCF analysis. It discusses the structure
and components of DCF models and the
reporting requirements for valuations
based on DCF analysis.
2.2 The scope of this GN extends to the
reasonableness and supportability of the
assumptions upon which the DCF analysis
are based. Assumptions made in any
valuation directly affect the value
conclusion. In accordance with the IVSC
Code of Conduct, all assumptions
underlying a valuation should be likely,
reasonable, and supportable.
3.0 Definitions
3.1 Discount Rate. A rate of return used to
convert a monetary sum, payable or
Theoretically it should reflect the
opportunity cost of capital, i.e., the rate of
return the capital can earn if put to other
uses having similar risk.
3.2 Discounted Cash Flow Analysis
(DCF). A financial modeling technique
based on explicit assumptions regarding
the prospective cash flow to a property or
business. As an accepted methodology
within the income approach to valuation,
DCF analysis involves the projection of a
series of periodic cash flows either to an
operating property, a development
property, or a business. To this projected
cash flow series, an appropriate, market-
Discounted Cash Flow Analysis for Market Valuations and Investment Analyses
156
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derived discount rate is applied to

establish an indication of the present value
of the income stream associated with the
property or business. In the case of
operating real properties, periodic cash
flow is typically estimated as gross income
less vacancy and collection losses and less
operating expenses/outgoings. The series
of periodic net operating incomes, along
with an estimate of the reversion/terminal
value/exit value, anticipated at the end of
the projection period, is then discounted.
In the case of development properties,
estimates of capital outlays, development
costs, and anticipated sales income are
estimated to arrive at a series of net cash
flows that are then discounted over the
projected development and marketing
periods.
In the case of a business,
estimates of periodic cash flows and the
value of the business at the end of the
projection period are discounted. The
most widely used applications of DCF
analysis are the Present Value (PV), or Net
Present Value (NPV) and the Internal Rate
of Return (IRR) of cash flows.
(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.
3.3 Financial Modeling. The projection of

a business or propertys periodic income
or cash flow pattern from which measures
of financial return can be calculated.
Income or cash flow projections are
generated through the use of a financial
model that takes into account historical
relationships between income, expense,
and capital amounts as well as projections
of those variables. Financial modeling
may also be used as a management tool to
test expectations for property performance,
to gauge the integrity and stability of the
DCF model or as a method to replicate the
steps taken by investors in making
decisions involving the purchase, sale, or
holding of a property or business.
There is little real distinction between

NPV and Present Value (PV). NPV is
normally used to describe the differences
between all discounted inflows and
outflows while PV is often used where the
initial outlay or price is not included in the
cash flow. In a valuation that is done to
arrive at Market Value, where discounted
cash flows and the discount rate are
market derived, the resulting NPV should
be indicative of the Market Value and is
often termed PV rather than NPV.
3.4 Internal Rate of Return (IRR). The

discount rate that equates the present value
of the net cash flows of a project with the
present value of the capital investment. It
is the rate at which the Net Present Value
3.5 Investment Analysis.

A study
undertaken
for
the
purposes
of
development
and
investment,
the
evaluation of investment performance, or
the analysis of a transaction involving
investment properties.
Investment
analyses are variously called (economic)
feasibility studies, market or marketability
analyses, or financial projection studies.
3.6 Net Present Value (NPV).
The
measure of the difference between the
discounted revenues, or inflows, and the
costs, or outflows, in a discounted cash
flow analysis.
4.0 Relationship
Standards
to
Accounting
4.1 Discounting is a standard procedure

employed by accountants in considering
the time value of money.
4.2 The International Financial Reporting
Standards (IFRSs) prescribe a discounting
procedure to estimate the value in use of
157
an asset. An estimate of the value in use

involves a) estimating the future cash
inflows and outflows to be derived from
the continuing use of the asset and from its
ultimate disposal and b) applying the
appropriate discount rate to these future
cash flows. (IAS 36, para. 31)
4.3 IAS 36, para. 55 states that the
discount rate (rates) shall be a pre-tax rate
(rates) that reflect(s) current market
assessments of: (a) the time value of
money; and (b) the risks specific to the
asset for which the future cash flow
estimates have not been adjusted. It is
also true that other measures of income or
cash flow may be used so long as the
discount rate(s) are appropriately matched
with the income flow(s).
5.0 Guidance
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points selected for the cash flow are, for

example, quarterly, the discount rate
must be the effective quarterly rate and
not a nominal rate. As each time period
within a cash flow is in fact set off by
time points, the Valuer must seek to
place the various cash flows at the
correct point in time within the cash
flow. Often the frequency of the cash
flow is decided by the time points at
which rent is collected. If other events
take place at more frequent times, the
Valuer must decide whether to include
them at the time point before or after
they actually occur.
Expenses/
outgoings may be placed at the
accounting point in time rather than the
point of time at which they are carried
out. The obvious best solution is to have
a cash flow frequency that matches the
timing of the most frequent aspect of the
periodic cash flow.
5.1 Discounted cash flow models are

structured upon a specified term, or
duration. In real property analysis,
although events such as rent reviews,
lease renewal/reletting, redevelopment,
or refurbishment can affect the analysis
term, this term is typically driven by
market behaviour that is characteristic
of the class of property and its market
sector. For example, the analysis term
for investment properties typically runs
between five and ten years. The Valuer,
however, should be fully aware of the
implications of different holding
periods, e.g., a short holding period
makes the appraisal conclusion more
dependent upon the estimate of the
terminal value at the expense of the
periodic cash flow.
The initial period (time interval) of a

real property cash flow study is
described as period 0 and this period is
not discounted. Any inflows or outflows
that are expected to occur within this
time period should be included in
period 0. Net income or expenses can be
placed in period 0 and should be
incorporated in this period if the cash
receipts or payments take place during
this period.
For example, many
investment properties receive net
income monthly. Therefore, if annual
intervals are used, the net income
receivable in the initial year must be
placed in period 0, regardless of
whether a beginning or end period
calculation is adopted.
The frequency of inflows and outflows

(monthly, quarterly, annually) should
also be market derived. As with other
accepted methodologies, inflows and
outflows should be appropriate and
reasonably supported.
The correct
discount rate needs to be applied to the
cash flow. If the frequency of the time
Selection of the method for calculating

the reversion/terminal value/exit value
depends upon practices in the subject
market as normally, it represents an
estimate of the Market Value of the
property at the termination date.
Valuers should mirror those market
practices and fully disclose the chosen
method(s) and its (their) application.
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Market Value is understood as the

present value of the future benefits of
ownership. Thus, for an investment
property, this normally means that cash
flows/values at the time point of the
terminal valuation (or depending on the
method adopted, beyond the terminal
valuation date) should be used rather
than those in the period up to that date.
A reversion/terminal value/exit value
can be based on a projection of the net
income for the year following the last
year of the DCF analysis.
As with all other components of DCF
analysis, the discount rate should also
reflect market data, i.e., other market
derived discount rates. Discount rates
should be selected from comparable
properties or businesses in the market.
In order for these properties to be
comparable, the revenue, expenses, risk,
inflation, real rates of return, and
income projections for the properties
must be similar to those of the subject
property.
5.1.1 Present value calculations of cash
flows are most often calculated using
appropriate discount rates for each
class of cash flows. When non-annual
time interval studies, such as monthly or
daily intervals, are used, the annual
discount rate must be adjusted to an
effective and equivalent discount rate
for the selected time interval.
A
reversion/ terminal value/exit value is
capitalised at a terminal capitalisation
rate, or reversion yield, and discounted
to present value at an appropriate
discount rate. In many instances, a
single discount rate is used for all cash
flows.
5.1.2 The cash flows and sale prices of
comparable properties may be analysed
to derive market discount rates or
internal rates of return (IRR).
5.1.3 DCF model cash flow can be
developed both gross or net of tax and
gross or net of debt financing, and in
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real (inflation or cost-index deflated) or

nominal terms. The discount rate will
therefore be based on the assumptions
of the cash flow, gross or net of tax and
gross or net of debt financing, and in
real or nominal terms. Analyses of the
market evidence to determine discount
rate or cash flows must be based on the
same assumptions.
5.2 In keeping with the IVSC Code of
Conduct, it is incumbent on the Valuer
to identify the components of DCF
analysis, including the following:
5.2.1 a projection period wherein the
commencement date of cash flow and
the number and term of periods are
specified;
5.2.2 the components of cash inflow and
cash outflow grouped by category and
the reason behind their selection;
5.2.2.1 for real property valuation, cash
inflow includes income from rents and
tenant services adjusted for collection,
incentives and vacancy loss in the case
of completed or built properties, and for
income from sales, adjusted for cost of
sales, in the case of development
properties.
5.2.2.2 for real property valuation, cash
outflow includes fixed and variable
expenses,
replacement
allowance/renewal fund, and capital
expenditures, where applicable; for
development properties, the hard and
soft costs should be identified.
5.2.2.3 for business valuation, the cash
flow most often includes all cash inflows
and outflows, of both an operating
nature and a capital nature.
The
discounted cash flow then represents the
money that an investor could remove
from the business while leaving
adequate cash to fund its operation and
growth.
159
5.2.3 debt finance or debt service

(payment of interest and principal) per
period and the annual effective rate at
which periodic interest is calculated, if
applicable;
5.2.4 net cash flows per period (the sum
of inflows less the sum of outflows);
5.2.5 the discount rate or rates that are
applied to the net cash flows and the
reasoning behind and support for their
selection;
5.2.6 the terminal capitalisation rate/
reversion yield that is applied to
calculate the reversion/terminal value/
exit value and the reasoning behind its
selection; and
5.2.7 a list of all assumptions underlying
the analysis.
5.3 DCF analysis makes use of available
market evidence and typically reflects
the thought processes, expectations, and
perceptions of investors and other
market participants. As a forecasting
technique, DCF analysis should not be
judged on the basis of whether or not
the specific DCF forecast was ultimately
realised but rather on the degree of
market support for the DCF forecast at
that time it was made.
5.3.1 When DCF is used to develop a
Market Value estimate, the valuation
should meet all criteria for Market
Value estimates as set forth in IVS 1.
5.4 Where a client provides the Valuer
with specific requirements that do not
correspond to those for Market Value
estimates as to holding period, financing
terms, taxation, or discount rate, the
resultant value estimate is to be
considered Non-Market Value.
The
result is an estimate of investment
value/worth specific to the assumptions
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provided rather than an estimate of

Market Value.
5.5 DCF analysis may also be used to
test the validity of conventional views by
analysis of varying assumptions. The
result of this type of sensitivity analysis
is investment value/worth.
If DCF is used in this way, the results
should be identified as a value other
than Market Value, and the valuation
should meet all criteria for non-market
based valuations as set forth in IVS 2.
5.6 A Valuer should carry out sufficient
research to ensure that cash flow
projections and the assumptions that
are the basis for the DCF model are
appropriate and reasonable for the
subject market.
5.6.1 As an example, the lease-by-lease
analysis to support the cash flow
projection for a multi-tenanted property
should address contract/passing rent and
market rent, lease expiration and lease
review dates, rent escalations/stepped
rents,
operating
expenses/outgoings,
expense pass-throughs/recoverable costs,
lease incentives, leasing costs, vacancy
allowances, capital expenditures, and any
other specific provisions that apply.
5.6.2 Assumptions of growth or decline in
income must be premised on analysis of
economic and market conditions. Changes
in operating expenses/outgoings should
reflect all expense trends and specific
trends for significant expense items.
5.6.3 The results of a DCF analysis should
be tested and checked for errors and
reasonableness.
5.7 To derive discount and terminal
capitalisation rates, a Valuer makes use
of various sources of data and
information on real estate and capital
markets. In addition to data on the
160
income streams and resale prices of

comparable properties or businesses,
surveys of investor opinion and rates of
return are useful in selecting discount rates
provided that the market for the subject
property is consistent with the market for
the property acquired by the investors
consulted in the survey.
5.8 It is the responsibility of the Valuer
to ensure that the controlling input is
consistent with market evidence and the
prevailing market outlook. Further, the
Valuer who supervises the construction
of the DCF model or selection of a
proprietary model is responsible for the
integrity of that model in terms of
theoretical
and
mathematical
correctness, the magnitude of the cash
flows, and the appropriateness of all
inputs. A Valuer must have suitable
experience and market knowledge to
structure cash flow and provide other
inputs to the model.
5.9 In reporting the results of a DCF
analysis, a Valuer shall follow the
requirements of the IVSC Code of
Conduct and IVS 3, Valuation
Reporting.
5.9.1 Disclosures must be made under
those circumstances described in IVS 3,
paragraphs 5.1.10, 7.0 and 8.2.3.
5.9.2 Inherent in DCF analysis are the
explicit assumptions that are used as
inputs for the analysis. To provide
users of valuation services the ability to
replicate the results, the Valuer must
disclose the assumptions and support
for their use in developing the DCF
model. Using real property examples,
these include but are not limited to
5.9.2.1 the commencement date, term,
and frequency employed in the model;
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5.9.2.2 the projected rent and other

income and the rate at which income is
projected to change;
5.9.2.3 the projected operating expenses
and the rate at which expenses are
projected to change;
5.9.2.4 the
treatment
of
lease
expirations/break costs, vacancies, and
collection losses; and
5.9.2.5 the discount rate and terminal
capitalisation rate or reversion yield.
5.9.3 The Valuer must
5.9.3.1 indicate the annual effective rate
at which periodic interest is calculated,
where finance debt or debt service
(payment of interest and principal) is a
component of the projected periodic
cash flow;
5.9.3.2 specify the rate(s) of taxation
used, where applicable;
5.9.3.3 explain the reasoning behind any
provision for lease incentives, where
applicable;
5.9.3.4 explain the treatment of any
capital expenditures incurred in the
acquisition or improvement of property
or business assets;
5.9.3.5 explain the basis for the adopted
terminal capitalisation rate/reversion
yield and the adopted discount rate or
the effective, equivalent rate (if
appropriate); and
5.9.3.6 identify the cash flow model by
name of the developer or, if proprietary
software, by product name and version;
describe the methods and assumptions
inherent in the model; and specify the
dates on which the model was developed
and employed.
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Valuation of Agricultural Properties

1.0 Introduction
1.1 In many regions of the world, lands
devoted to the production of agricultural
commodities are the major economic asset
and, frequently, the sole economic base of
a region.
1.2 Lands devoted to agricultural use are
thus a principal subject of valuation
services for a multitude of reasons
including private and public transfer of
ownership, taxation, determination of
collateral for financing, and economic,
land-use, and investment studies. Reliable
valuations of agricultural lands are
essential to ensure the availability of
capital necessary to support the continuity
of the economic base, to promote the
productive use of the land, to maintain the
confidence of capital markets, and to meet
the needs for general financial reporting.
1.3 Providing a reliable and accurate
valuation
service
for
agricultural
properties requires that the Valuer have a
sound knowledge and understanding of the
physical and economic elements that affect
the productive capacity of agricultural
lands and the value of the commodities
produced thereon.
1.4 The
physical
and
economic
characteristics of agricultural lands differ
from those of non-agricultural or urban
environments in degree of importance.
1.4.1 Soils in an urban environment must
be suitable for bearing the improvements
that stand upon them. In agricultural
properties, the soil is the principal agent in
production, varying in its capacity to
support a given amount of a particular
commodity or class of commodities.
1.4.2 In urban environments, the economic
use of a property and/or the amenities it
provides may remain unchanged over a

period of years and may even be
guaranteed by contractual arrangements.
While for some agricultural properties, the
same use may extend over a long duration
(e.g., forests harvested after 25 years), for
others, the economic benefits can vary
from year to year, depending on the
commodities the property is capable of
producing.
1.4.3 The income stream associated with
agricultural property will vary from year
to year, depending on the type of
agriculture for which it is used, the
commodities produced, and the cyclical
nature of the commodity markets.
2.0 Scope
2.1 This GN encompasses
2.1.1 Those characteristics of value
associated with agricultural properties, and
2.1.2 The basic requirements of the
Valuation Standards and Applications as
they apply to the valuation of agricultural
properties.
3.0 Definitions
The agricultural uses of properties may be
classified in several broad groups
definitions of which follow:
3.1 Crop(ping) Farms.
Agricultural
properties used for growing commodities
that are typically planted and harvested
within a twelve-month cycle. Properties
used for annual crop production may grow
more than one type of annual crop over the
same period and may or may not make use
of irrigation to produce the crops. Some
commodities are annual crops that may be
left in the ground beyond a twelve-month
cycle, per contract provisions or in
162
circumstances where market conditions

are unfavorable. These crops will last for
more than one year after harvest but are
considered less than permanent. Also see
irrigated land (para. 3.4), perennial
plantings (para. 3.6).
3.2 Dairy Farms. Agricultural properties
used for the production of milk from cows,
carabaos, goats, etc. or for other dairy
products. These properties usually have
extensive structural improvements (barns,
milking parlours, silos) and equipment
(feed bins, milking machines). Feed may
be produced on the property, imported, or
supplied by both sources.
3.3 Forestry/Timberland.
Agricultural
property used for the growing of nonorchard trees that are periodically
harvested over extended growing periods
(10 to 20 or more years). Considered to be
agricultural properties because they
produce a crop, i.e., wood, even though
that crop requires a long-term growing
period. Also see perennial plantings.
Philippine 3.3.1
There are also non-orchard trees
periodically harvested over growing
periods of less than 10 years (e.g.
Gemelina trees).
3.4 Irrigated Land. Lands used to produce
crops of forage for 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.
3.5 Livestock
Ranches/
Stations.
Agricultural properties used to raise and
feed animals such as cattle, sheep, pigs,
goats, horses, or combinations thereof.
The actual use of these properties can take
many forms. The animals may be bred,
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raised, and sold within the operation of the

property. Young animals may be acquired
from outside the property and then raised
within the property. The animals may be
raised for consumptive use or for breeding
stock. Feed for the animals may be
produced on the property, imported, or
supplied by both sources. Properties used
for the production and feeding of livestock
have significant capital investment in the
structural improvements (pens, livestock
shelters, sheds, division fencing) and the
livestock, which may or may not be
depreciable depending on the laws and
regulations of the local jurisdiction.
3.6 Perennial Plantings.
Crops grown
from plantings that have a life 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 (para.
3.3).
3.7 Specialised Livestock Facilities. See
dairy farms, livestock ranches/stations.
3.8 Specialised, or Special Purpose
Properties. Agricultural properties that do
not typically produce a crop but are used
for the handling, processing, or storage of
crops following harvest. These properties
frequently have a small land base that is
extensively developed with structural
improvements (grain elevators) and
equipment (lifting machinery). Properties
may also be classified as special purpose
by the nature of the commodity produced.
Examples are truck farms, poultry farms,
farms that produce certified crop seeds or
fresh cut flowers, and racehorse breeding
or training stables.
3.9 Agricultural Activity. Management by
an entity of the biological transformation
of biological assets for sale, into
agricultural produce, or into additional
biological assets.
(See International
163
Accounting Standard
Agriculture., para.5).
41
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[IAS
41],
3.10 Biological Asset. A living animal or

plant. (IAS 41, para. 5).
3.11 Integrated Unit. An agricultural
entity that has common ownership of all or
part of the processes involving the
production and marketing of its products
and/or commodities.
Philippine 3.12
Agricultural Land as defined in R.A.
7160, Local Government Code of 1991,
Sec. 199, para. (d): is land devoted
principally to the planting of trees,
raising of crops, livestock and poultry,
dairying, salt making, inland fishing and
similar aqua-cultural activities, and
other agricultural activities, and is not
classified as mineral, timber, residential,
commercial or industrial land.
Philippine 3.13
Integrated Forest Management Agreement
(IFMA)
as
defined
in
DENR
Administrative Order No. 99-53: is a
production sharing contract entered into by
and between the DENR and a qualified
applicant wherein the DENR grants to the
latter the exclusive right to develop,
manage, protect and utilize a specified
area of forestland and forest resources
therein for a period of 25 years and may be
renewed for another 25-year period,
consistent with the principle of sustainable
development and in accordance with an
approved Comprehensive Development
and Management Plan (CDMP) and under
which both parties share in its produce.
4.0 Relationship
Standards
to
Accounting
4.1 International Accounting Standards 16

(Property, Plant and Equipment), 40
(Investment
Property),
and
41
(Agriculture) apply to the valuation of

agricultural property. An entity follows
IAS 16 or IAS 40, depending on which
standard
is
appropriate
in
the
circumstances. IAS 16 requires that land
be measured either at its cost less any
accumulated depreciation and accumulated
impairment losses or at a revalued amount.
IAS 40 requires land that is investment
property to be measured at its fair value, or
cost less any accumulated depreciation and
accumulated impairment losses. IAS 41,
which establishes no new principles for
land related to agricultural activity,
requires that biological assets physically
attached to land (e.g., trees in a plantation
forest) be measured at their fair value less
estimated point-of-sale costs, separately
from the land.
4.2 IAS 41 acknowledges that there may
be no separate market for biological assets
attached to the land but that an active
market may exist for the combined assets,
i.e., the biological assets, raw land, and
land improvements, as a package. An
entity may, therefore, use information
regarding the combined assets to
determine fair value for the biological
assets. The fair value of raw land and land
improvements may be deducted from the
fair value of the combined assets to arrive
at the fair value of the biological assets.
(See IAS 41, para. 25.) IAS 41 also gives
guidance on how to determine fair value
for a biological asset or agricultural
produce where an active market exists as
well as in the absence of an active market.
4.3 Agricultural property assets can be
classified as:
Land
Structural improvements
Plant, machinery and

(attached to the land)
equipment
164
Plant, machinery and equipment (not

attached to the land)
Biological assets (attached to the land)
Biological assets (not attached to the

land)
The Fair Value/Market Value of biological

assets is the contributory, or added, value
they give to the land. IAS 41 requires that
biological assets be measured upon initial
recognition and at each balance sheet date.
4.4 IAS
16
recommends
frequent
revaluations, stating that every three to
five years may be sufficient. IAS 40
requires revaluation on an annual basis.
5.0 Guidance
5.1 Diverse forms of commodity
production and methods of operation
are characteristic of agricultural
properties. These properties may also
represent various combinations of land,
buildings,
equipment,
and
crop
plantings.
Generally
Accepted
Valuation Principles (GAVP) are as
applicable to agricultural properties as
they are to the valuation of other forms
of real property.
5.1.1 The Valuer must have competence in
valuing the various assets that comprise
the property. (See IVSC Code of Conduct,
section 5, Competence.)
5.2 Market Value must be recognised as
the fundamental basis of valuation (IVS
1).
5.2.1 The Valuer shall arrive at the Market
Value for the agricultural property,
ensuring that the valuation is marketderived.
5.2.2 For financial reporting, the Valuer
shall apportion the Market Value in
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accordance with the requirements of the

IAS. For guidance, the reader is referred
to IVA 1.
5.3 Where other bases of valuation are
used, they must be distinguished from
the Market Value basis.
5.3.1 When estimating values other than
Market Value as required for financial
reporting, depreciation schedules, or tax
purposes, the Valuer must ensure that the
distinction is clearly defined and noted.
5.4 Non-Realty Elements
5.4.1 When the valuation is made of an
agricultural property that may include nonrealty elements such as livestock, stored
crops, and equipment, the Valuer needs to
understand when a crop or other
commodity is real property and when it
may become personal property. Timber
for example, is part of the real property
while growing but becomes personal
property when it is removed from the land.
5.5 The Valuer must understand the
unique
nature
of
agricultural
productive factors, commodity markets,
production practices, and cycles in the
market region.
5.5.1 In the valuation of agricultural
properties, the physical and environmental
aspects of the property assume special
importance. These include features such
as climate, soil types and their productive
capability, the availability or absence of
water
for
irrigation,
and
the
feeding/carrying capacity for livestock.
External factors to be considered include
the availability and adequacy of support
facilities required for storage, processing,
and transportation.
The relative
importance of these factors will vary
depending upon the type of agriculture for
which the property is suited or used. The
Valuer needs to consider both internal and
external factors in making a determination
165
of which class of agricultural use the

property is best suited for.
5.5.2 In keeping with the definition of
Market Value, a highest and best use
analysis of the property should always be
conducted in order 1) to warrant that an
agricultural use is to be continued,
especially when it appears that another
land use, e.g., subdivision development
occasioned
by
encroaching
urban/suburban expansion, might be more
appropriate, and 2) to determine whether
the specific agricultural use is to be
continued.
5.5.3 Where the Valuer is specifically
instructed to ignore uses other than the
current agricultural use, the resulting
valuation will not necessarily indicate the
Market Value of the property, and this
should be fully disclosed.
5.6 The estimate of stabilised income to
the agricultural property must be based
on the crop patterns and cycles in the
market area.
5.6.1 The cash flow to agricultural
properties is a function of both the
production cycle followed on the property
and cyclical forces such as commodity
markets. The Valuer should understand
the impact of these cycles on cash flows.
The valuation of the property must be
based on the stabilised pattern of income
that is consistent with the production
cycles commonly practiced in the region
in which the property is located.
5.7 The Valuer of agricultural property
that has more than one physical
component of class of agricultural use
must clearly state whether the value of
each component or use is its value
contribution as part of the whole
property or its value as a separate, freestanding component.
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5.7.1 The various components of a whole

property may have value as separate parts
which is greater or lesser than their value
as part of the whole. The Valuer must
determine whether each component is to
be valued individually or as part of the
whole property.
5.7.2 Agricultural properties may be
managed to simultaneously produce more
than one class of commodity based on
different physical conditions within the
property or on management decisions. In
the valuation of agricultural properties on
which crops of more than one agricultural
classification are cultivated and harvested
at different times, the value of each
agricultural classification must be based
on its contribution to total property value
and not its stand-alone value.
5.7.3 The agricultural use of the property
may
require
extensive
building
improvements, e.g., barns, silos, dairy
machinery. Such improvements, while
requisite to the proper operation of the
property, are frequently secondary to the
principal land asset. Their value must be
based on their contribution to the total
value of the property regardless of their
cost or other measure.
Typically, such improvements have a
value in use, i.e., their contributory value
to the enterprise/entity.
On those
occasions where an allocation of value
between the assets may be required, such
an allocation is not to be taken as an
indication of the individual value of the
improvements as separate assets.
5.8 The requirements for valuation
reports are addressed in the IVSC Code
of Conduct and IVS 3, Valuation
Reporting.
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Reviewing Valuations
1.0 Introduction
1.3.1 Due diligence required of financial

reporting and asset management;
1.1 A valuation review is a review of a

Valuers work undertaken by another
Valuer exercising impartial judgment.
1.3.2 Expert testimony in legal proceeding

and circumstances;
1.2 Because of the need to ensure the

accuracy, appropriateness, and quality of
Valuation Reports, valuation reviews have
become an integral part of professional
practice. In a valuation review, the
correctness, consistency, reasonableness,
and completeness of the valuation are
considered.
1.2.1 A valuation review may call for
input from experts with specialist
knowledge of construction cost, property
income, legal and tax matters, or
environmental problems.
1.2.2 A valuation review provides a
credibility check on the valuation under
review, and tests its strength by focusing
upon
1.2.2.1 The apparent adequacy and
relevance of the data used and enquiries
made;
1.2.2.2 The appropriateness of
methods and techniques employed;
the
1.2.2.3 Whether the analysis, opinions,

and conclusions are appropriate and
reasonable; and
1.2.2.4 Whether the overall product
presented meets or exceeds Generally
Accepted Valuation Principles (GAVP).
1.3 Valuations reviews are performed for a
variety of reasons, including:
1.3.3 A basis for business decisions; and

1.3.4 Determination of whether a report
complies with regulatory requirements,
where
1.3.4.1 Valuations are used as part of the
mortgage lending process, especially
mortgages insured or regulated by the
government; and
1.3.4.2 It is necessary to test whether
Valuers have met regulatory standards and
requirements within their jurisdiction.
2.0 Scope
2.1 The requirements in this GN apply to
the development and reporting of
valuation reviews.
2.2 Compliance with this GN is incumbent
upon any Valuer who, in a supervisory or
managerial capacity, signs a valuation
review, thereby accepting responsibility
for the contents of that review.
3.0 Definitions
3.1 Administrative (Compliance) Review.
A valuation review performed by a client
or user of valuation service as an exercise
in due diligence when the valuation is to
be used for purposes of decision-making
such as underwriting, purchasing, or
selling the property. A Valuer may, on
occasion, perform an administrative
review to assist a client with these
functions. An administrative review is also
undertaken to ensure that a valuation
meets or exceeds the compliance
requirements or guidelines of the specific
167
market and, at a minimum, conforms to

(GAVP).
3.2 Desk Review. A valuation review that
is limited to the data 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
calculation, the reasonableness of data, the
appropriateness of methodology, and
compliance with client guidelines,
regulatory requirements, and professional
standards. Also see field review.
3.3 Field Review. A valuation review that
includes inspection of the exterior and
sometimes the interior of the subject
property and possibly inspection of the
comparable properties to confirm the data
provided in the report. Generally
performed using a checklist that covers the
items examined in a desk review and may
also include confirmation of market data,
research to gather additional data, and
verification of the software used in
preparing the report. Also see desk review.
3.4 Technical Review. A valuation review
performed by a Valuer to form an opinion
as to whether the analyses, opinions, and
conclusions in the report under review are
appropriate, reasonable, and supportable.
3.5 Valuation Review. A valuation
assignment that covers a range of types
and purposes. The principal characteristic
of all valuation reviews have in common is
that one Valuer exercises impartial
judgment in considering the work of
another Valuer. A valuation review may
support the same value conclusion in the
valuation under review or it may result in
disagreement with that value conclusion.
Valuation reviews provide a credibility
check on the valuation as well as check on
the strength of the work of the Valuer who
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developed it, as regards the Valuers

knowledge, experience, and independence.
In some countries a valuation review may
also be an update done by a Valuer of the
same valuation firm that carried out the
original valuation.
Valuation organisations around the world
distinguish between various types of
review, e.g., administrative (compliance)
reviews, technical reviews, desk reviews,
field reviews, reviews to ensure that a
valuation has been carried out in
accordance with professional standards
(where the bases of valuation used in the
valuation under review are accepted),
reviews that muster general market
information to support or contest the value
conclusion, and reviews that examine the
specific data in the valuation under review
with comparable data from a sample
group.
4.0 Relationship
Standards
to
Accounting
4.1 The relationship between accounting

standards and valuation practice is
discussed in IVA 1.
5.0 Guidance
5.1 In developing a valuation review, the
Review Valuer shall
5.1.1 identify the client and intended
users of the Valuation Review, the
intended use of the Review Valuers
opinions and conclusions, and the
purpose of the assignment;
5.1.2 identify the subject property, the
date of the valuation review, the
property and ownership interest valued
in the report under review, the date of
the report under review, the effective
date of the opinion in the report under
review, and the Valuer(s) who
completed the report under review;
168
5.1.3 identify the scope of the review

process to be performed;
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5.1.4 identify all assumptions and

limiting conditions in the valuation
review;
5.3 The Review Valuer shall not

consider events affecting the property
or market that occurred subsequent to a
valuation, but only information that was
readily available in the market at the
time of the valuation.
5.1.5 develop an opinion as to the

completeness of the report under review
within the scope of work applicable to
the assignment;
5.4 Reasons
for
agreement
or
disagreement with the conclusions of a
valuation report should be fully
explained by the Review Valuer.

apparent adequacy and relevance of the
data and any adjustments;
5.4.1 Where the Review Valuer agrees

with the conclusions of a valuation
report, reasons for such agreement
should be fully explained and disclosed.

appropriateness of the methods and
techniques used and develop the reason
for agreement or any disagreement with
the report under review; and
5.1.8 develop an opinion as to whether
the analyses, opinions, and conclusions
in the work under review are
appropriate,
reasonable,
and
supportable.
5.2 In reporting the result of a valuation
review, the Review Valuer shall
5.2.1 state the identity of the client and
intended users, the intended use of the
assignment results, and the purpose of
the assignment;
5.4.2 Where the Review Valuer does not

agree with the conclusions of a
valuation report, the reasons for such
disagreement should be fully explained
and disclosed.
5.4.3 Where the Review Valuer is not in
possession of all the facts and
information on which the Valuer relied,
the Review Valuer must disclose the
limitations of his or her conclusions.
5.5 Where the scope of the work
undertaken is sufficient to constitute a
new valuation, such valuation must
conform to the requirement of the
International Valuation Standards and
IVSC Code of Conduct.
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
5.2.6 include a signed Compliance
Statement in the review report.
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Valuation of Trade Related Property

1.0 Introduction
1.1 Trade Related Properties (TRPs) are
individual properties, such as hotels, fuel
stations, and restaurants that usually
change hands in the marketplace while
remaining operational.
These assets
include not only land and buildings, but
also fixtures and fittings (furniture,
fixtures and equipment) and a business
component made up of intangible assets,
including transferable goodwill.
1.2 This Guidance Note provides direction
on the valuation of TRPs as operating
assets as well as the allocation of TRP
value into its main components.
Component values are usually required for
depreciation and tax purposes.
This
Guidance Note should also be read in
conjunction with the Guidance Notes cited
in para. 2.1 below.
1.3 Some concepts involved in the
valuation of a business not classed as a
TRP (see GN 6, Business Valuation) must
be distinguished from those involved in
the valuation of Trade Related Property.
(Also see paras. 5.6 and 5.7.2 below.)
2.1.4 GN 5, Valuation
Property,
of
Personal
2.1.5 GN 6, Business Valuation,

2.1.6 GN 10, Discounted Cash Flow
Analysis for Market Valuations and
Investment Analyses.
3.0 Definitions
3.1 Capitalisation. At a given date the
conversion into the equivalent capital
value of net income or a series of net
receipts, actual or estimated, over a period.
3.2 Discounted Cash Flow. A financial
modeling technique based on explicit
assumptions regarding the prospective
cash flow to a property or business. The
most widely used applications of DCF
analysis are the Internal Rate of Return
(IRR) and Net Present Value (NPV).
3.3 Goodwill.
2.0 Scope
2.1 This Guidance Note focuses on TRP
valuation. For further insight into the
application of valuation principles, the
following IVSs Guidance Notes should be
consulted:
2.1.1 GN 1, Real Property Valuation,
2.1.2 GN 3, Valuation of Plant and
Equipment,
2.1.3 GN 4,
Assets,
Valuation of Intangible

profit generated over and above market
expectations, which would be extinguished
upon sale of the trade related property,
together with those financial factors
related specifically to the current operator
of the business, such as taxation,
depreciation policy, borrowing costs and
the capital invested in the business.
3.3.3 Transferrable Goodwill.
That
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Valuer should refer to IVA 1, Valuation

for Financial Reporting.
3.4 Reasonably Efficient Operator, or

Average Competent Management.
A
market based concept whereby a potential
purchaser, and thus the Valuer, estimates
the maintainable level of trade and future
profitability that can be achieved by a
competent operator of a business
conducted on the premises, acting in an
efficient manner. The concept involves
the trading potential rather than the actual
level of trade under the existing ownership
so it excludes personal goodwill.
5.3 TRPs are considered as individual

trading concerns and typically are
valued on the basis of their potential
Earnings Before Interest, Taxes,
Depreciation
and
Amortisation
(EBITDA), as adjusted to reflect the
trading of a reasonably efficient
operator and often on the basis of either
DCF methodology or by use of a
capitalisation rate applied to the
EBITDA.
3.5 Trade Related Property.

Certain
classes of real property, which are
designed for a specific type of business
and that are normally bought and sold in
the market, having regard to their trading
potential.
4.0 Relationship
Standards
to
Accounting
4.1 Under
International
Financial
Reporting Standards (IFRSs), like other
types of real property, a TRP may be
carried on an entitys balance sheet at
either cost or at fair value (see IVA 1). It
may be necessary to allocate the value of a
TRP between its different components for
depreciation purposes.
5.0 Guidance
5.1 This Guidance Note describes that
category of property referred to as TRPs
and explains how TRPs are valued in
accordance
with
International
Valuation Standard 1, Market Value
Basis of Valuation.
5.2 When performing a TRP valuation, the
Valuer may also find relevant guidance
in the six Guidance Notes cited in para.
2.1 above. If the valuation is for
inclusion in a Financial Statement, the
5.4 Valuations of TRPs are usually

based on assumptions that there will be
a continuation of trading by a
Reasonably Efficient Operator, with the
benefit of existing licences, trade
inventory,
fixtures,
fittings
and
equipment, and with adequate working
capital. The value of the property
including transferrable goodwill is
derived from an estimated maintainable
level of trade. If the valuation is
required on any other assumption, the
Valuer should make such assumption
explicit through disclosure. While the
actual trading performance may be the
starting point for the assessment of the
fair maintainable level of trade,
adjustments should be made for
atypical revenues or costs so as to reflect
the trade of a reasonably efficient
operator.
5.5 Profit generated, in excess of market
expectations that may be attributed to
the manager is not included. The
managers particular tax position,
depreciation policy, borrowing costs
and capital invested in the business are
not considered for the purpose of
establishing a common basis to compare
different properties under different
managers.
5.6 Although
the
concepts
and
techniques are similar to those often
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used in the valuation of a large-scale

business, to the extent that the valuation
of a TRP does not usually consider tax,
depreciation, borrowing costs and
capital invested in the business, the
valuation is based on different inputs
from those of a valuation of a sizable
business.
5.7 The valuation conclusion may need
to be broken down between the
different asset components for the
purposes of financial reporting, for
property taxation or, when required, for
property lending purposes.
5.7.1 The components of TRP entity
value are typically:
5.8 TRPs are by their nature, specialised

assets that are usually designed for a
specific use.
Changes in market
circumstances, whether structural to the
industry or due to the local competition
or another reason, can have a material
impact on value.
5.9 It is necessary to distinguish
between the asset value of a Trade
Related Property and the ownership
value of the business.
In order to
undertake a valuation of a TRP, a Valuer
will require sufficient knowledge of the
specific market sector so as to be able to
judge the trading potential achievable
by a Reasonably Efficient Operator, as
well as knowledge of the value of the
individual component elements.
5.7.1.1 land;
5.7.1.2 building(s);
5.7.1.3 fixtures and fittings (furniture,
fixtures and equipment), including
software;
5.7.1.4 inventory, which may or may not
be included (this should be disclosed);
5.7.1.5 intangible
assets,
transferrable goodwill; and
5.7.1.6 any licences
required to trade.
including
and
permits
5.7.2 Items such as working capital and

debt are considered in valuing equity
for business, but equity is not valued for
TRPs. TRPs may, however, comprise part
of a business.
5.7.3 An estimation of the individual
values of the components can only
represent an apportionment, unless
direct market evidence is available for
one or more of these components to
isolate component value from the
overall TRP value.
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Mass Appraisal for Property Taxation

1.0 Introduction
1.1 The objective of this Guidance Note is
to provide a framework for the
performance
of
Mass
Appraisal
assignments for Ad Valorem Property
Taxation throughout IVSC member
countries. The Guidance Note provides
assistance in understanding recognised
Mass Appraisal methods, the design and
implementation of property taxation
systems and the relationship of Mass
Appraisal to International Valuation
Standards.
1.2 The Mass Appraisal Process may be
utilised as a methodology for Ad Valorem
Property Taxation, or statistical and
economic studies under government
administrative programs. The appraisal
outputs facilitate revenue raising, revenue
equalisation, and the distribution of
financial benefits or grants to government
authorities.
In this Guidance Note,
reference to Mass Appraisal implies Mass
Appraisal for the above purposes.
1.3 For a property taxation system to be
effective, the following elements must be
in place:
a) a legal system and legal infrastructure
that define, support and protect
property rights;
b) a recording and inventory system for
all parcels of land, which represents
the basis of taxation;
c) sufficient market data from which
valuations may be determined;
d) sufficient resources and trained
personnel to implement the system;
more refined data, more accurate

valuations, and more equitable
taxation; and
f) a process for sampling and testing
developed
models
to
ensure
consistency in methodology and
application.
1.4 The Mass Appraisal process includes:
a) identifying properties to be appraised;
b) defining the market area in terms of
consistent behaviour on the part of
property owners and would-be
purchasers;
c) identifying characteristics of supply
and demand that affect the creation of
value in the defined market area;
d) developing a model structure that
reflects the relationship among the
characteristics affecting value in the
market area;
e) calibrating the model structure to
determine, among other attributes, the
contribution of the individual property
features affecting value;
f) applying the conclusions reflected in
the model to the characteristics of the
property(ies) being appraised;
g) validating the adopted mass appraisal
process, model, measurements or other
readings including the performance
measures, on an ongoing basis and/or
at discrete stages throughout the
process;
h) reviewing and reconciling the Mass
Appraisal results.
e) continued
maintenance
of
the
inventory and databases to ensure
173
1.5 The valuation basis for Mass Appraisal

is Market Value as defined in IVS 1,
Section 3, subject to any modification of
the concept as specified under relevant
instructions or legislation.
If such
instructions or legislation stipulate a
valuation basis other than Market Value as
defined above, Valuers should apply
appropriate
valuation
methods
to
accomplish the objectives of IVSC
Standards under these circumstances. See
IVS 2, Section 5, and also para. 5.5.1 (e)
below under Disclosure in Mass Appraisal
Assignment Reports.
1.6 Mass Appraisals can be prepared with
or without computer assistance. While
computerised methodology has made the
Mass Appraisal process more efficient and
more widespread, it has not altered that
process. Data banks and computerised
applications are used in data storage,
mapping, data analysis, and testing of the
results.
1.7 The development of Mass Appraisal
systems for Property Taxation should
follow recognised scientific standards in
statistical applications.
1.8 While local legal requirements will
take precedence, observance of the IVSC
Code of Conduct is, nonetheless,
incumbent upon assessment personnel,
who carry out Mass Appraisals. The
concept of Market Value is recognised as
the assessment basis in most jurisdictions.
The requirements of the IVSC Code of
Conduct necessarily supplement those of
local law. Requirements under the Code
of Conduct apply to:
a) the mass valuation process itself; and
b) the use of computers and computergenerated models in the mass appraisal
process.
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2.0 Scope
2.1 The professional responsibility of
Valuers is, in most instances, prescribed
by statute or regulations affecting Mass
Appraisal assignments.
It is the
professional duty of the Valuer to be
familiar with, adhere to, and administer
the provisions of the law established in the
Ad Valorem property taxing jurisdiction.
2.2 The various outputs from Mass
Appraisal programs have financial
implications
in
government
administration. For purposes of revenue
raising, revenue equalisation, or the
distribution of benefits or grants, any
departure from an accurate basis of
assessment will result in inequities. Local
statutes prescribe the basis and definitions
of values to be returned (i.e., the
assessments and/or indices developed in
Mass
Appraisal
assignments),
the
administrative
procedures
for
the
collection and delivery of valuation data,
the time-frames between undertaking
Mass Appraisals, and the processes for
appeal of assessments or indices.
2.3 The scope of the completed
assignment shall be consistent with:
a) the expectations of participants in the
market for the same or similar
valuation services; and
b) the requirements of IVSC Standards,
Guidance Notes and Applications for
the same or a similar assignment.
3.0 Definitions
3.1 Ad Valorem Property Taxation. A
revenue-raising procedure, based on the
assessed value of property related to a
scale of charges defined by statute within a
specified time-frame.
3.2 Calibration. The process of analysing
sets of property and market data to
174
determine
the
specific
operating upon a model.
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parameters
3.3 Mass Appraisal.

The practice of
appraising multiple properties as of a
given date by a systematic and uniform
application of appraisal methods and
techniques that allow for statistical review
and analysis of results.
3.4 Mass
Appraisal
Process.
The
procedures applied in mass appraisal
assignments for arriving at assessments
and/or indices. This process includes the
eight steps, identified in para. 1.4 above.
4.0 Relationship
Standards
to
Accounting
4.1 Mass Appraisal does not fall under the

governance of national or international
accounting standards.
4.2 Valuers should be aware that
revaluation procedures for financial
reporting purposes are unrelated to Mass
Appraisal procedures for Ad Valorem
Property Taxation.
4.3 Legislative requirements and standards
of appraisal level and uniformity in
valuations for Ad Valorem Property
Taxation are likely to produce variations
in property values from those determined
for financial reporting purposes.
5.0 Guidance
5.1 Data Collection and System
Recording
5.1.1 A robust data collection system
must be available to the Valuer. The
recording of data has evolved from the
use of manual methods to the creation
of sophisticated data banks that
facilitate computer-assisted appraisal,
often
incorporating
geographic
information systems (GIS). Property
data may be quantitative (e.g., land
areas,
dimensions,
building
specifications)
and/or
qualitative
(assessment of the physical condition,
character, or market desirability of the
improvements).
5.1.1.1 Appraisal data banks are built
around land tenure records, e.g., title
deeds, transfer documents, and sales
information, in national, federal, state or
local government jurisdictions that define
property ownership or interests in land.
5.1.2 Characteristics of the market that
are relevant to the purpose and
intended use of the Mass Appraisal shall
be recorded in the system including:
(a) location of the defined market area;
(b) physical, legal, and economic
attributes of the properties;
(c) time-frame of market activity; and
(d) property interests reflected in the
market.
5.2 The Development and Maintenance
of Assessment Lists
5.2.1 Assessment Lists will contain
information on property ownership,
value definitions, details of the
assessment, date of the assessment, and
date on which the assessment comes into
force.
5.2.2 Assessment Lists must allow for
periodic adjustments or alterations to
ensure the currency and consistency of
assessed values.
5.3 Mass Appraisal Value Definitions
5.3.1 Where
mass
appraisal
is
undertaken for the purpose of Ad
Valorem Property Taxation, value
definitions are generally mandated by
local statute.
Specific valuation
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methodologies may be required under

different value definitions.
5.4 Standards of Appraisal Level and
Uniformity
5.4.1 In the interests of assessment
equity, standards of appraisal level (the
proximity between assessments and
actual prices) and uniformity (the
statistical
measure
of
valuation
consistency) must be observed in the
application of mass appraisal systems.
5.5 Disclosure in Mass
Assignment Reports
Appraisal
5.5.1 Valuers
undertaking
Mass
Appraisal assignments are subject to the
provisions of IVS 3, Valuation
Reporting. The Valuer shall disclose the
following essential data that is specific
to Mass Appraisal reporting:
grouping,
indicating
where
information is stored in the property
record relating to its identity;
(h) the characteristics of the market
that are relevant to the purpose and
intended use of the Mass Appraisal
(see para. 5.1.2).
5.6 Departure
5.6.1 Departure from the instructions in
this Guidance Note should only result
from
required
compliance
with
statutory provisions, administrative
instructions, or the agreed or amended
terms of appraisal contracts.
5.6.2 Further discussion on Departure
provisions is set out in section 6.8 of the
IVSC Code of Conduct and section 8.2 of
International Valuation Standard 3.
(a) the client and other intended users;

(b) the purpose and intended use of the
appraisal;
(c) the scope of work necessary to
complete the assignment, including
any special limiting conditions;
(d) any extraordinary assumptions and
hypothetical conditions needed to
carry out the assignment, provided
these are reasonable and result in a
credible analysis;
(e) the relevant basis of valuation if,
under reasonable terms
and
conditions, the value opinion to be
developed is other than Market
Value;
(f) the characteristics of the properties
that are relevant to the purpose and
intended use of the Mass Appraisal;
(g) a reference to each individual
property in the Assessment List or
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Valuation of Properties in the Extractive Industries

1.0 Introduction
1.1 The purpose of this Guidance Note
(GN) is to provide clarification and
guidance on the valuation of assets or
property interests (rights) held by entities
involved in the Extractive Industries. It is
distinguished among the various property
interests that must be recognised, and
discusses concepts that should be
understood by financial reporting and
regulatory authorities, courts, financiers,
investors, participants in natural resource
transactions, and other users of valuation
services for property involved in the
Extractive Industries.
1.2 Reliable valuations of Extractive
Industries assets, including interests
(rights) in natural resource properties, are
essential to ensure the availability of
capital necessary to support the continuity
of the Extractive Industries component of
the worlds economic base, to promote
the productive use of Mineral and
Petroleum natural resources, and to
maintain the confidence of capital
markets.
1.3 Extractive Industries comprise the
Minerals Industry and
Petroleum
Industry, but do not include activities
focused on the extraction of water from
the earth.
1.4 The
Minerals
and
Petroleum
Industries are characterised by the
extraction from the earth of natural
resources, which may pass through a
series of ownership, processing and
measurement stages. It is important to
Valuers and the users of valuation
services that distinctions are made among
real property, personal property, and
business interests involved in these
stages. Financial reporting requires the
recognition
of
various
asset
classifications into which these interests

may fall. Additionally, clear and precise
understanding of these distinctions is
necessary for valuations to be performed
and used in the public interest, regardless
of the application.
1.5 Valuations in the Extractive Industries
must often rely heavily on information
provided by (a) Technical Expert(s) or
other accredited specialist(s) specific to
the industry.
1.6 A typical characteristic of the
Extractive Industries that sets them apart
from other industries or economic sectors
is the depletion or wasting of natural
resources, that can be replaced in their
original state by natural actions following
extraction only in special cases. Special
cases of natural replacement may occur
for water transported minerals and
geothermal fluid.
The means of
production is extraction from the earth of
natural resources that form part of the
Real Estate.
1.6.1 The ultimate quantity and quality of
material of economic interest that might
be extracted from an Extractive Industry
natural resource property is often not
known at the Effective Date of Valuation.
1.7 Examples of depleting or wasting
natural resources include, but are not
limited to:
1.7.1 metallic Mineral deposits containing
metals such as copper, aluminum, gold,
iron, manganese, nickel, cobalt, zinc,
lead, silver, tin, tungsten, uranium, and
platinum group metals;
1.7.2 non-metallic Mineral deposits such
as coal, potash, phosphates, sulphur,
magnesium, limestone, salt, mineral
sands, diamonds and other gemstones;
177
1.7.3 construction materials such as sand,

gravel, crushed stone, and dimension
stone;
1.7.4 Petroleum deposits including oil,
natural gas, natural gas liquids, other
gases, heavy oil, and oil sands.
1.8 There are contrasts between the
production and transportation phases of
the Minerals and Petroleum Industries
that must be understood:
1.8.1 Items 1.7.1, 1.7.2 and 1.7.3 above
include products by the Mineral Industry,
which extracts valuable mineralization,
generally by mining in a surface mine
(open pit, open-cast, open-cut, or strip
mine; a quarry used to produce
construction material is also considered a
surface mine), or an underground mine.
Some extraction is undertaken through
wells, for example, sulphur extraction,
and in situ leaching (solution mining) by
various salts and uranium minerals.
Some extraction is also done by dredging
the floors of bodies of water, such as for
gravel, mineral sands, diamonds, and
alluvial gold.
Extraction of mineral
products from water, such as halite
(common salt) and magnesium, is also
part of the Mineral Industry.
1.8.2 The Minerals Industry generally has
a planned extraction phase, though this
phase is often extended through Mineral
Reserve additions. Once extraction is
completed, no more known economically
recoverable asset remains in place at that
time.
1.8.3 The raw materials cited in para.
1.7.4 above are produced by the
Petroleum Industry, which extracts
valuable product generally through wells
drilled into the earths crust. Some
extraction is also undertaken using
mining methods, for example, open pit
mining of oil sand and oil shale. The
extraction of a solid asset is more labour
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intensive than the extraction of fluid

asset. A single person may operate oil
and gas extraction by pumps or valves,
with the occasional need for well
maintenance or well work-over crews.
1.8.4 The Petroleum Industry frequently
has more than one economical extraction
phase for crude oil. At the conclusion of
the initial (primary) extraction phase,
much of the initial Petroleum Reserve of
crude oil may remain. Secondary and/or
enhanced recovery methods are often
applied to recover more oil and natural
gas. Generally, a large percent of the
initial oil in place remains in place at the
conclusion of production operations.
1.8.5 Another
significant
difference
between the Minerals and Petroleum
Industries relates to land surface
requirements for processing plant and
infrastructure. Relatively little surface
area is required for oil or gas well
operations. A mining operation often
requires a larger land area for stockpiles
and disposal of waste material, as well as
an open pit if applicable.
1.8.6 Crude oil, natural gas, and refined
Petroleum products are more often than
not transported to market or port by
pipeline. In contrast, a mined product is
generally transported to market or port by
rail or truck, resulting in differing start-up
costs and environmental impacts.
1.9 The
Minerals
and
Petroleum
Industries are both major industries
throughout the world. Their products are
essential in all modern economies by
provision of raw and refined materials for
other downstream industries, such as
energy
generation,
construction,
manufacturing,
transport
and
communications.
1.10 Exploration of Minerals and
Petroleum properties is a high-risk
activity. Considerable work and study
178
must be undertaken to determine

technical and economic viability
production.
The larger majority
Mineral and Petroleum properties do
reach the production stage.
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the
of
of
not
1.11 The projected net earnings derived

or potentially derived from an Extractive
Industry natural resource property is its
main source of value. The net earnings
may vary from year to year, depending on
the type of natural resource commodity,
the cyclical nature of the commodity
markets and prices, and variations in
production rate and costs.
1.12 Mineral and Petroleum natural
resource properties are valued primarily
based on the presence of Mineral or
Petroleum Reserves, and Mineral or
Petroleum Resources, or the potential for
discovery of Resources. The quantity and
quality of such Reserves/Resources may
vary over time due to changing economic
and technical advances, as well as
exploration success. Nevertheless, they
are ultimately finite and will deplete over
time.
1.13 The fixed assets and specialised
plant, machinery and equipment (see
Glossary for definitions) used in the
extraction and processing of raw products
of the Extractive Industries, may retain
relatively little or no value when
separated from production at the site.
surface and subsurface geological and

related information, and its interpretation.
Little may be known about the
characteristics of a deposit that may be
contained within the property until the
deposit is discovered and explored.
1.14.2 Extractive Industries deposits are
often located in remote areas and are
generally substantially or completely
buried below the land surface, and
sometimes below the floor of bodies of
water or under the sea.
1.15 The residual value of the real
property interest, plant, machinery and
equipment as well as environmental
reclamation requirements (as liabilities
and property improvements), are pertinent
factors in the valuation process for
Extractive Industries properties.
2.0 Scope
2.1 This Guidance Note (GN) provides
specific guidance for the valuation of
assets and interests of the Extractive
Industries.
It provides supplemental
guidance for application of the
International Valuation Standards (IVSs
1, 2 and 3), International Valuation
Applications (IVAS 1, 2, and 3) and
Guidance Notes (GNs). In doing so, it
specifically supplements the following
GNs for their application to the Extractive
Industries;
1.14 Exploration Properties have asset

value derived from their potential for the
existence and discovery of economically
viable Mineral or Petroleum deposits
contained within. Exploration Property
interests are bought and sold in the
market.
Many of these transactions
involve partial interest arrangements,
such as farm-in, option or joint venture
arrangements.
GN 1 Real Property Valuation;
1.14.1 The value of an Exploration

Property is largely dependent upon
GN 8 The Cost Approach for Financial

Reporting-(DRC); and
GN 2 Valuation of Lease Interests;

GN 3 Valuation of Plant, Machinery and
Equipment;
GN 4 Valuation of Intangible Assets;
GN 6 Business Valuation
179
GN 9 Discounted Cash Flow Analysis for

Market Valuations and Investment
Analyses.
2.2 The ownership of, or rights to, an
industrial water supply and water storage
system, can form an important component
in the valuation of Properties in the
Extractive Industries. Water rights may
attach to land or may be obtained
elsewhere. Adequate rights and facilities
for transportation and storage of off-site
water may be required for a reliable water
supply. Valuation of the contribution of
such rights poses special problems that
must be addressed by the Valuer.
However, this GN does not provide
specific guidance for valuation of water
ownership, rights, transportation and
storage.
2.3 Where
mark-to-market financial
reporting procedures apply or are
contemplated. Valuers should observe
the provisions of IVA 1, Valuation for
Financial Reporting, in conjunction with
this GN. In some countries, securities
exchanges and administrations may have
specific reporting requirements for the
Minerals and Petroleum Industries that
override IVSs provisions.
2.4 While
providing
supplemental
guidance for the conduct and reporting of
valuations of Extractive Industries
property and interests in accordance with
para. 2.1 above, the provisions of this GN
do not replace provisions elsewhere in the
current edition of the International
Valuation Standards.
3.0 Definitions
3.1 Extractive
Industries.
Those
industries involved in the finding,
extracting and associated processing of
natural resources located on, in or near
the earths crust. They are composed of
the Minerals Industry and the Petroleum
Industry.
They do not include the
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industry sector focused on extraction of

water from the earth, but they do include
extraction of geothermal fluid for its
energy content.
3.2 Exploration Property or Area. A
Mineral or Petroleum real property
interest that is being actively explored for
Mineral
deposits
or
Petroleum
accumulations, but for which economic
viability has not been demonstrated.
Philippine 3.2.1
Mining Area as defined in Republic Act
(RA) 7942, Philippine Mining Act of
1995, Section 3, paragraph (ae): means a
portion of the contract area identified by
the
contractor
for
purposes
of
development, mining, utilization, and
sites for support facilities or in the
immediate vicinity of the mining
operations.
3.3 Feasibility Study in the Extractive
Industries. A comprehensive study of a
Mineral
deposit
or
Petroleum
accumulation, in which all geological,
engineering,
operating,
economic,
marketing, environmental, regulatory and
other relevant factors are considered in
sufficient detail.
The study could
reasonably serve as the basis for a final
decision by a proponent or financial
institution to proceed with, or finance, the
development of the prospective property
for Mineral or Petroleum production. See
also Prefeasibility Study.
3.4 Mineral. Any naturally occurring
material useful to, and/or having a value
placed on it by humankind, and found in
or on the earths crust. For the purposes
of this GN, Minerals include metallic or
non-metallic
minerals,
industrial
minerals, aggregates, precious stones and
fuel minerals; but Minerals do not include
Petroleum, which is defined separately.
180
Philippine 3.4.1
Minerals as defined in RA 7942,
Philippine Mining Act of 1995, Section 3:
paragraph (aa): refers to all naturally
occurring inorganic substance in solid,
gas, liquid, or any intermediate state
excluding energy materials such as coal,
petroleum, natural gas, radioactive
materials, and geothermal energy.
Philippine 3.4.2
Mineral Lands as defined in RA 7160,
Local Government Code, 1991, Section
199, paragraph (p): are lands in which
minerals, metallic or non-metallic, exist
in sufficient quantity or grade to justify
the necessary expenditures to extract and
utilize such materials.
3.5 Mineral Reserve. As defined by the
Combined
[Mineral]
Reserves
International
Reporting
Standard
Committee
(CRIRSCO):
the
economically mineable part of a
Measured and/or Indicated Mineral
Resource. It includes diluting materials
and allowances for losses, which may
occur when the material is mined.
Appropriate assessments that may include
Feasibility Studies, have been carried out,
and include consideration of, and
modification by, realistically assumed
mining,
metallurgical,
economic,
marketing, legal, environmental, social
and governmental factors.
These
assessments demonstrate at the time of
reporting that extraction is justified.
Mineral Reserves are subdivided in order
of increasing confidence into Probable
Mineral Reserves and Proved Mineral
Reserves.
The
United
Nations
Framework
Classification (UNFC) similarly defines a
Mineral Reserve and its subdivisions,
applying the UNFC coding system.
Entities electing to adopt the UNFC or
other definitions of Mineral Reserve for
public financial reporting purposes must
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reconcile the Mineral Reserves to the

CRIRSCO Proved and Probable Mineral
Reserve
categories
for
valuation
purposes.
Philippine 3.5.1
Mineral Reservations as defined in RA
7942, Philippine Mining Act of 1995,
Section 5: paragraph (bb): refer to areas
established and proclaimed as such by the
President upon the recommendation of the
Director through the Secretary, including
all submerged lands within the contiguous
zone and Exclusive Economic Zone.
3.6 Mineral Resources. As defined by
CRIRSCO:
a
concentration
of
occurrence of material of intrinsic
economic interest in or on the earths
crust (a deposit) in such form and
quantity that there are reasonable
prospects
for
eventual
economic
extraction. The location, quantity, grade,
geological characteristics and continuity
of a Mineral Resource are known,
estimated or interpreted from specific
geological evidence and knowledge.
Mineral Resources are subdivided, in
order of increasing geological confidence,
into Inferred, Indicated and Measured
categories. Portions of a deposit that do
not have reasonable prospects for
eventual economic extraction must not be
included in a Mineral Resource.
The
United
Nations
Framework
Classification (UNFC) similarly defines a
Mineral Resource and its subdivision,
applying the UNFC coding system. For
the purposes of this GN, mineralisation
classified into the UNFCs G4
(Reconnaissance Study) category, is
excluded from a Mineral Resource.
Entities electing to adopt the UNFC or
other definitions of Mineral Resources for
public financial reporting purposes must
reconcile the Mineral Resources to the
CRIRSCO Inferred, Indicated and
Measured Mineral Resource categories
for valuation purposes.
181
3.7 Minerals Industry. Entities involved

in exploration for Minerals, and the
mining, processing and marketing of
Minerals. This GN is not designed to
cover assets downstream from the metals
refineries or minerals processing plants,
such as assets involved in the distribution
of refined metals to metals fabricators, or
mineral products to retailers or the final
market.
3.8 Petroleum. Any naturally occurring
hydrocarbon, whether in a gaseous, liquid
or solid state. Raw Petroleum products
are primarily crude oil and natural gas.
3.9 Petroleum Industry. Entities involved
in exploration for Petroleum, and the
extraction processing, refining and
marketing of crude Petroleum and
associated gases.
This GN is not
designed to cover assets downstream
from the petroleum refineries and natural
gas processing plants, such as assets
involved in the distribution of refined
petroleum products to retailers.
3.10 Petroleum Reserves. As defined by
the Society of Petroleum Engineers (SPE)
and the World Petroleum Congress
(WPC): those quantities of Petroleum,
which are anticipated to be commercially
recovered from known accumulations
from a given date forward.
All
(Petroleum) Reserve estimates involve
some degree of uncertainty.
The
uncertainty depends chiefly on the
amount of reliable geologic and
engineering data available at the time of
the estimate and the interpretation of
these data.
The relative degree of
uncertainty may be conveyed by placing
reserves into one of two principal
classifications, Proved or Unproved.
Unproved Reserves are less certain to be
recovered than Proved Reserves and may
be further sub-classified as Probable and
Possible Reserves to denote progressively
increasing
uncertainty
in
their
recoverability. Proved Reserves can be
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categorised
Undeveloped.
as
Developed
or
The
United
Nations
Framework
Classification (UNFC) similarly defines
Petroleum
Reserves
and
their
subdivisions, applying the UNFC coding
system.
3.11 Petroleum Resources.
For the
purpose of this GN, petroleum resources
comprise only Petroleum Reserves and
Contingent Resources.
Contingent
Resources as defined by the Society of
Petroleum
Engineers
(SPE)/World
Petroleum
Congress
(WPC),
in
conjunction
with
the
American
Association of Petroleum Geologists
(AAPG), are those quantities of
petroleum, which are estimated on a
given date, to be potentially recoverable
from known accumulations, but which are
not
currently considered
to
be
commercially recoverable.
The
United
Nations
Framework
Classification (UNFC) similarly defines
Petroleum
Reserves
and
their
subdivisions, applying the UNFC coding
system.
For the purpose of this GN,
petroleum accumulations classified into
the UNFCs G4 (Potential Geological
Conditions) category are excluded from
Petroleum Resources.
3.12 Prefeasibility
Study
in
the
Extractive Industries. A study of a
Mineral or Petroleum deposit, in which
all geological, engineering, operating,
economic, environmental and other
relevant factors, are considered in
sufficient detail to serve as the reasonable
basis for a decision to proceed to a
Feasibility Study.
3.13 Royalty or Royalty Interest in the
Extractive Industries. The landowners
or lessors share of production, in money
or product, free of charge for expenses of
production. An Overriding Royalty is
a share of mineral or petroleum produced,
182
free of the expense of production, paid to

someone other than the lessor, over and
above any lessors Royalty.
Philippine 3.13.1
According to RA 7942, Philippine
Mining Act of 1995, Sec. 5, 2 nd
paragraph: A ten per centum (10%)
share of all royalties and revenues to be
derived by the government from the
development and utilization of the
mineral resources within mineral
reservations as provided under this Act
shall accrue to the Mines and
Geosciences Bureau5 to be allotted for
special projects and other administrative
expenses related to the exploration and
development
of
other
mineral
reservations
Philippine 3.13.2
As cited in RA 7942, Philippine Mining
Act of 1995, Sec. 26): Modes of Mineral
Agreement: For purposes of mining
operations a mining agreement may take
the following forms as herein defined: a)
Mineral production sharing agreement is
an agreement where the Government
grants to the contractor the exclusive right
to conduct mining operations within a
contract area and shares in the gross
output. The contractor shall provide the
financing, technology, management and
personnel
necessary
for
the
implementation of this agreement; b) Coproduction agreement is an agreement
between the Government and the
contractor wherein the Government shall
provide inputs to the mining operations
other than the mineral resource; c) Joint
venture agreement is an agreement where
a joint-venture company is organized by
the Government and the contractor with
both parties having equity shares. Aside
from earnings in equity, the Government
5
A line agency of the Department of Environment

and Natural Resources (DENR) directly in charge
in the administration and disposition of the
countrys mineral lands and mineral resources;
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shall be entitled to a share in the gross

output.
3.14 Technical Expert in the Extractive
Industries (called Technical Expert
elsewhere in this GN). A person, who is
responsible for all or part of the Technical
Assessment that supports an Extractive
Industry Valuation. A Technical Expert
must have appropriate experience
relevant to the subject matter, and in
countries where required by statute or
regulation, must be a member or licenceholder in good standing of a professional
organisation that has the authority to
sanction members or licensees.
An
accredited specialist may not take
responsibility for all or part of a
Technical Assessment without also being
a Technical Expert.
3.15 Technical Assessment in the
Extractive Industries.
A technical
document, prepared by (a) Technical
Expert(s) that supports the Extractive
Industry Valuation and is appended to, or
forms part of, a Valuation Report.

Standards
4.1 Amongst national GAAPs there are
currently
several
approaches
to
measurement of Upstream Activities
that include exploration for, discovery of,
and acquisition or development of,
Mineral or Petroleum Resources up to
when the Reserves are first capable of
being sold or used. The extreme highrisk element in expenditure on these
activities has led to two main approaches
to Historical Cost accounting for the
Extractive Industries, those being:
a) all exploration and evaluation costs
to be written off unless such costs are
expected to be recouped, or the
activities have not yet established
whether the costs are economically
recoverable (i.e., adaptations of a
183
successful efforts approach). In

applications of this approach, there
are variations as to which types of
cost are permitted to be capitalised
and the treatment of costs prior to the
determination of success, or
otherwise, of the exploration and
evaluation activities; and
b) all expenditures incurred in finding
and
developing
Mineral
and
Petroleum Reserves to be capitalised
and treated as a part of the cost of
whatever Reserves may have been
found (i.e., a full cost approach).
4.2 In December 2004, the International
Accounting Standards Board (IASB)
released IFRS 6 Exploration for and
Evaluation of Mineral Resources. Under
the provisions of the Standard, entities are
permitted to recognise their exploration
and
evaluation
expenditures
as
exploration and evaluation assets. The
Standard requires such assets to be
measured at cost at initial recognition.
After initial recognition, an entity may
choose to apply a cost or revaluation
model (as outlined in either IAS 16
Property, Plant and Equipment, or IAS
38 Intangible Assets) to measure their
exploration and evaluation assets.
4.2.1 The concept of exploration and
evaluation assets, and the costs that make
up those assets, apply equally to the cost
and revaluation models described above.
4.3 IFRS 6 states at paragraph 9 that: An
entity shall determine a policy for which
expenditures
are
recognised
as
exploration and evaluation assets and
apply the policy consistently. In making
this determination, an entity considers the
degree to which the expenditure can be
associated with finding specific mineral
resources. The following are examples of
expenditures that might be included in the
initial measurement of exploration and
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evaluation assets
exhaustive):
(the
list
is
not
acquisition of rights to explore;
topographical,
geological,
geochemical, and geophysical studies;
exploratory drilling;
trenching;
sampling; and
activities in relation to evaluating

technical feasibility and commercial
viability of extracting a mineral
resource.
4.3.1 IFRS 6, paragraph 5(a), excludes

activities that precede the exploration for
an evaluation of mineral resources from
the scope of the Standard.
4.3.2 IFRS 6, paragraph 10, additionally
states that: Once the technical feasibility
and commercial viability of extracting a
mineral resource are demonstrable,
expenditures related to the development
of that mineral resource shall not be
recognised as exploration and evaluation
assets. The Framework and IAS 38
Intangible Assets provide guidance on the
recognition of assets arising from
development (or the development phase
of an internal project).
4.3.3 When facts and circumstances
stated in paragraph 20 of the Standard
suggest that the carrying amount of
exploration and evaluation assets may
exceed their recoverable amount, entities
are required to measure and disclose any
resulting impairment loss. The level at
which such assets are assessed for
impairment may comprise one or more
cash-generating-units, which is a higher
level of aggregation than that otherwise
allowed under IAS 36.
184
4.3.4 In the context of the IFRS 6, a

minerals resource includes minerals, oil,
natural gas and similar non-regenerative
resources (see the Defined Terms in
Appendix A to IFRS 6) and also in
paragraphs 3.6 and 3.11 above.
4.4 IASB Standards that require value
determinations to be provided under the
provisions of this GN include:
IAS 36 Impairment of Assets for

determining the recoverable amount
of an asset (including assets that
incorporate reserves and resources) in
order to ascertain whether the asset is
impaired.
This process requires
determination of fair value less costs
to sell and/or value in use as
defined in the Standard.
IFRS 3 Business Combinations for

determining the carrying amount of
assets that were acquired in the
acquisition of a business (including
assets that incorporate reserves and
resources); and
IAS 16 Property, Plant and

Equipment for the revaluation (if
chosen) of property, plant and
equipment that relates to extractive
operations.
4.5 This Guidance Note recognises that

the Historical Cost of finding and
developing Mineral and Petroleum
Reserves is usually not indicative of the
realisable value of such Reserves once
they have become established.
5.0 Guidance
5.1 Valuation Concepts
5.1.1 The provisions of this GN are
designed to assure application of
Generally
Accepted
Valuation
Principles (GAVP) to Extractive
Industries Valuations, in accordance
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with the valuation fundamentals

expressed in the IVSs Concepts
Valuation Principles.
5.1.2 The standard of value is Market
Value defined in IVS 1, Market Value
Basis of Valuation. If some other type
of value is to be determined in
accordance with IVS 2, Bases Other
Than Market Value, a clear definition
of that value should be provided by the
Valuer and highlighted in the
Valuation Report as prescribed in IVS
3, and a clear and conspicuous
explanation provided.
5.1.3 The property type(s) involved in
valuation of Minerals and Petroleum
Industry property must be correctly
identified in order to correctly select
the applicable IVSC Standards and
GNs.
Naturally occurring in situ
Minerals and Petroleum are a part of
physical land and Real Estate. The
ownership of such in situ Minerals and
Petroleum, an interest in such natural
resources, and the right to explore and
extract such natural resources, are
Real Property, except where otherwise
defined by statute.
Minerals and
Petroleum are Personal Property
during transportation and processing.
The operation of a mine, quarry or
petroleum well is a business activity, as
is the transportation and processing of
Minerals and Petroleum.
Such
business activity is generally conducted
by an Extractive Industries business
enterprise that owns real property and
personal property assets, and the
activity contributes to the Going
Concern Value of the enterprise.
5.1.4 A key aspect of the valuation of
an
Extractive
Industry
natural
resource property is that the property
interests and related rights being
valued must be properly identified.
185
5.1.5 A Market Valuation of an

Extractive Industry property as Real
Property must be based on the Highest
and Best Use (HABU) of the property.
This requires consideration of nonMinerals or non-Petroleum uses for the
property, if such uses are possible.
Consideration must also be given to a
change in exploration, development or
operating strategy, or potential for
leasing the property, in order to
maximise its economic benefit.
5.1.6 In determining the HABU, the
Valuer should determine the most
probable use that is physically possible,
appropriately
justified,
legally
permissible, financially feasible, and
which results in the highest value of the
property being valued.
5.1.7 In
conducting
a
Market
Valuation,
the
three
Valuation
Approaches are generally available for
consideration:
(a) Sales
(termed
Business
indirect
below);
Comparison
Approach
Market Approach for
Valuations), generally by
means (see para. 5.3.1
(b) Income (Capitalisation) Approach,

including
market-related
discounted cash flow;
(c) Cost Approach (termed AssetBased Approach for Business
Valuations), including depreciated
replacement cost and equivalent
cost analysis.
5.1.8 Where one or more of the above
Valuation Approaches has been
applied in preference to others, the
reason must be stated.
5.1.9 As applied to Mineral and
Petroleum natural resource property
interests, the appropriate Valuation
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Methods employed depend upon the

stage of exploration or development of
the property.
For convenience, such
Mineral and Petroleum properties can be
categorised as four main types, though the
categorisation is sometimes the subject of
the opinion of a Valuer or Technical
Expert.
Exploration properties;
Resource properties;
Development properties;
Production properties.
5.1.10 Exploration Properties are defined

at para. 3.2.
5.1.11 Resource properties contain a
Mineral Resource or Petroleum Resource
but have not been demonstrated by a
Prefeasibility Study or a Feasibility Study
to be economically viable.
5.1.12 Development
properties,
in
general, have been demonstrated by a
Feasibility Study to be economically
viable but are not yet in production.
5.1.13 Production properties contain a
Mineral
or
Petroleum
producing
operation active at the time of Valuation.
5.1.14 The different stages of exploration
and development carry different levels of
risk. The risk pertains to the likelihood of
eventual or continued Mineral or
Petroleum production. As an Exploration
Property is advanced to a Resource
property, to a Development property, and
to a Production property, more technical
information is collected, enabling
technical
analysis,
including
Prefeasibility and Feasibility Studies, to
be carried out, and thereby reducing the
risk factor, as the amount of capital
investment at risk rapidly increases.
5.1.15 The results from the Valuation
Approaches and Methods employed
186
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must be weighed and reconciled into a

concluding opinion of value.
The
reasons for giving a higher weighting to
one Approach or Method over another
must be stated.
5.2 Competence and Impartiality
5.2.1 Valuations prepared under this
Guidance Note shall comply with all
provisions of the IVSC Code of Conduct.
5.2.2 To develop a Valuation of an
Extractive Industry asset or interest, the
Valuer must have competence relevant to
the subject asset or interest, or retain the
services of (an) appropriately skilled
Technical Expert(s).
5.2.3 Providing a reliable and accurate
valuation typically requires the Valuer to
have specialised training, or assistance
from (a) Technical Expert(s) or other
accredited specialist(s), in geology,
Resource and Reserve estimation,
engineering,
and
economic
and
environmental aspects relevant to the
subject natural resource type and
geographic setting. The defined term
Technical Expert includes Competent
Person, Independent Valuer, and
similar requirements that may apply in
some countries, if the intended use of the
Valuation Report is related to public
financial reporting or other regulatory
purpose.
5.2.4 The Valuer is responsible for the
decision to rely on a Technical
Assessment, data, or opinion provided
by other experts or specialists. This
includes responsibility for conducting
reasonable verification that those
persons are appropriately qualified
and competent and that their work is
credible.
5.3 Special
Considerations
Extractive Industries Valuations
of
5.3.1 Each Mineral deposit, Petroleum

accumulation and Exploration Property is
unique. Therefore, direct comparison of
Mineral or Petroleum natural resource
property transaction is often difficult or
inappropriate. However, sales analysis is
an important valuation tool.
Sales
adjustment or ratio analysis can
frequently be applied for indirect sales
comparison purposes. Sales analysis and
other market analysis can often yield
market factors such as a market discount
rate, a risk factor or uncertainty factor
that may be used in the Income
Approach.
5.3.2 For a Valuation Report to provide
an estimate of Market Value, the
valuation analysis must be based on
market evidence and current expectations
and perceptions of market participants for
the property valued, and such market
evidence must be consistently applied in
the Valuers analysis.
5.3.3 The method most commonly used
by businesses for investment decisionmaking within the Extractive Industries is
net present value analysis/discounted cash
flow analysis (NPV analysis/DCF
analysis). The Valuer is cautioned that
this and other methods, such as those
based on option theory, will yield other
than Market Value estimates of
Investment Value or Value in Use, unless
great care is taken to assure that a Market
Value estimate is obtained. For the
Valuer to report a Market Value estimate
resulting from such an analysis, all inputs
and assumptions must reflect available
market-based evidence and current
expectations and perceptions of market
participants, in accordance with GN 9.
Any departure from the requirements and
analysis protocol of GN 9 must be
specified.
5.3.4 The Market Value of Extractive
Industries natural resource properties and
businesses are usually more or less than
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the value of the sum of their parts or

component values. For example, the
Market Value of a real estate tract owned
in fee simple, that contains a Mineral
deposit, is rarely the sum of the
independent values of the Minerals, land
surface, and plant, machinery and
equipment. Similar situations may often
occur in the Petroleum Industry.
the status of tenements, rights and

other interests;
all Mineral or Petroleum deposits

within the boundaries of the
tenements or rights;
access to markets and the quality and

quantity of product that can be sold;
5.3.5 For a producing Mineral or

Petroleum Industry natural resource
property, there may be separate
ownership rights over component parts
utilized by the enterprise, such as the
Reserve, Royalties, and plant, machinery
and equipment. It is important for a
Valuer of the enterprise to correctly
recognise these. There may also be a
requirement to provide valuations of the
separate ownership interests.
services and infrastructures, and any

toll arrangements, fees or liabilities
related thereto;
environmental
assessments
rehabilitation liabilities;
any Native Title or Ancestral Domain

Title aspects;
capital and operating costs;
timing and completion of capital

projects;
residual value estimates;
material agreements and statutory/

legal requirements;
taxation and Royalties;
liabilities and financial exposures;
site rehabilitation, reclamation and

closure costs;
any other aspect that has a material

bearing on the Valuation.
5.3.6 Material data relied on in

developing the value estimate should be
verified for accuracy whenever
reasonable to do so. This may include
selective
review
of
drill
hole
information and samples and related
analytical data for a subject natural
resource property, and confirmation of
published information pertaining to
transactions of similar properties.
5.3.7 If there is more than one estimate
of the quantity and quality of
Resources and Reserves for a subject
natural resource property, the Valuer
shall decide which estimates it is
appropriate to disclose and discuss,
and which estimate to use as the basis
in the Valuation process, and shall state
the reasons. A critique of alternative
estimates may be submitted with the
Valuation Report.
5.3.8 The Valuer shall take account of,
and make reference to other matters that
have a material impact on the Valuation.
Dependent on the property type and
rights being valued, these may include:
and
5.4 Disclosure in Extractive Industries

Valuation Reports
5.4.1 The Valuation Report shall
properly identify the property type(s),
specific property interest(s) and related
rights being valued as specified in IVS
3.
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disclose
the
name,
professional
qualifications and relevant industry
experience of the Valuer, and other
Technical Expert(s) whose Technical
Assessment has been relied upon to
support the Valuation.
5.4.3 The Valuation Report shall be
supported by disclosure of relevant
Extractive Industries Codes, Standards
or Rules of Practice applicable to the
Valuation and supporting Technical
Assessment. All estimates of a Mineral
or Petroleum Resource or Reserve
disclosed in the valuation report or
supporting Technical Assessment shall
abide by the definitions provided in
Section 3 above, and the classification
systems referenced in those definitions,
unless
jurisdictional
or
other
reasonable cause is disclosed.
5.4.4 Maps,
geological
sections,
diagrams, and photographs shall be
included in the Valuation Report, if
appropriate and possible, to aid the
communication
of
information.
Relevant
technical
information
supporting the Valuation of a subject
natural
resource
property(ies),
including estimates of Resources and
Reserves being valued, shall be
disclosed and discussed in a Technical
Assessment.
disclose whether or not the entity
employing/retaining the Valuer, or the
owner of the subject asset or its
operating management, has provided
the Valuer with a statement that all
available
data and
information
requested by the Valuer or otherwise
relevant to the Valuation have been
supplied
to
the
Value.
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The Valuation of Historic Property

1.0 Introduction
adaptation to some other use, including

commercial use, is permissible.
1.1 Historic properties are assets that

embody a cultural, historic, and/ or
architectural heritage.
2.0 Scope
1.2 Historic properties may have legal or

statutory protection because of their
cultural and economic importance. Many
governments have enacted measures to
safeguard specific historic properties or to
protect whole areas of special architectural
or historic interest.
1.3 Private organisations play a significant
role in promoting historic preservation and
education about historic properties. In some
cases, historic properties also bring
economic benefits through increased
tourism in the communities where they are
located.
1.4 The valuation of historic properties
requires consideration of a variety of
factors that are associated with the
importance of these properties, including
the legal and statutory protections to which
they are subject; the various restraints upon
their use, alteration and disposal; and
possible financial grants or rate/tax
exemption to the owners of such properties
in some jurisdictions.
1.5 The costs to restore and maintain
historic properties may be considerable and
these costs, in turn, affect the value of
properties.
1.6 The assessment of the highest and
best use of historic properties will depend
on the specific restrictions that apply to
them. In some situations, the use of
historic properties is limited to restoration
for non-commercial use while in others,
2.1 This Guidance Note covers real

property that has cultural and historic
significance, specifically focusing upon
historic buildings and sites. It does not
address either natural heritage assets or
heritage assets that are personal property,
e.g., works of art. (Guidance Note 5 offers
direction on the valuation of personal
property.)
2.2 This Guidance Note applies to the
valuation of historic properties in both
public and private sectors. Historic
properties owned either by public sector or
private sector entities are distinguished by
similar cultural characteristics, and share
common problems in regard to restoration
and/or adaptation. But the specific legal
and statutory protections that apply to
private and public historic properties and
other restraints upon their use, alteration
and disposal may differ.
2.3 Historic property is a broad term,
encompassing many property types. Some
historic properties have been restored to
their original condition; some have been
partially restored (e.g., the building faade);
and others have not been restored. Historic
property also includes properties partially
adapted to current standards (e.g., the
interior space), and properties that have
been extensively modernised. All historic
properties (buildings and/or sites) have
some degree of historic character. This
Guidance Note addresses properties having
historic character to some degree or other.
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3.0 Definitions
International
Definitions
Valuation
Standards
3.1 Historic House Owner Associations.

Not-for-profit membership associations that
promote the preservation of historic
properties and provide their ownermembers with advice on matters such as
the management, repair, maintenance,
taxation and insurance of historic
properties.
3.2 Historic Property. Real property
publicly recognised or officially designated
by a government-chartered body as having
cultural or historic importance because of
its association with an historic event or
period, with an architectural style, or with
the nations heritage. Four characteristics
are commonly associated with historic
properties: 1) their historic, architectural
and/or cultural importance; 2) the statutory
or legal protection to which they may be
subject; 3) restraints and limitations placed
upon their use, alteration and disposal; and
4) the frequent obligation in some
jurisdictions that they be accessible to the
public. The terms, historic property and
heritage asset, often overlap but are not in
all cases equivalent. See also Heritage
Asset, Publicly Designated Historic
Properties.
3.3 Listing of (Heritage) Buildings or
Historic Properties Register. A recording
of officially designated historic properties.
Not all historic properties are necessarily
listed in registers. Many properties publicly
recognised as having cultural and historic
importance also qualify as historic
properties.
3.4 Preservation Incentives. Incentives to
the owners of historic properties, primarily
fiscal in nature, to promote the restoration
and maintenance of such properties.
Examples may include exemptions on
inheritance
taxes
for
conservation
properties gifted to heritage trusts,

government subsidies, exemptions in
municipal rates/taxes, investment tax
credits to owners of historic properties,
transferable development rights and
deductions
taken
on
conservation
easements
donated
to
nonprofit
organisations.
3.5 Publicly
Designated
Historic
Properties. Those properties, the historic
status of which is officially recognised by
government-chartered bodies to identify
historic properties and to promote historic
preservation. Such bodies may be
established
by
national/federal,
state/provincial,
or
country/municipal
governments. Local non-governmental
historical societies may also designate
historic properties and maintain private
historic property lists or registers that
confer many of the same benefits while
remaining exempt from government
restrictions. See also Listing of (Heritage)
Buildings or Historic Register.
Standards Definition
3.6 Heritage Asset. An asset having some
cultural, environmental, or historical
significance. Heritage assets may include
historical buildings and monuments,
natural reserves, and works of art. Heritage
assets often display the following
characteristics
(although
these
characteristics are not necessarily limited to
heritage assets):
a) Their economic benefit in cultural,
educational and historic terms is
unlikely to be fully reflected in a
financial value based purely on market
price;
b) Legal and/or statutory obligations may
impose
prohibitions
or
severe
restrictions on disposal by sale;
191
c) They are often irreplaceable and their

economic benefits may increase over
time even if their physical condition
deteriorates; and
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and the test of authenticity. (World

Heritage Convention, Article II, UNESCO,
1972)
Philippine 3.9
d) It may be difficult to estimate their

useful lives, which in some cases could
be hundreds of years.
Classifications of Historic Sites and

Structures

description of heritage and conservation
assets in IPSAS 17.9 (n.b., IPSAS 17 does
not currently contain a formal definition of
heritage assets).
As cited in the National Historic Act of the

Philippines (Presidential Decree No. 260
and Presidential Decree No. 1505) and of
the Flag and Heraldic Code of the
Philippines, otherwise known as Republic
Act No. 8491:
Definitions from the UNESCO Glossary

of World Heritage Terms
3.7 Cultural Heritage. Three groups of
assets are recognised:
1. Monuments: architectural works, works
of monumental sculpture and painting,
elements
or
structures
of an
archaeological nature, inscriptions, cave
dwellings and combinations of features,
which are of outstanding universal
value from the point of view of history,
art or science;
2. Groups of buildings: groups of separate
or connected buildings which, because
of their architecture, their homogeneity
or their place in the landscape, are of
outstanding universal value from the
point of view of history, art or science:
and
3. Sites: works of man or the combined
works of nature and man, and areas
including archaeological sites, which
are of outstanding universal value from
the historical, aesthetic, ethnological or
anthropological point of view.
World Heritage Convention, Article I,
UNESCO, 1972
3.8 Cultural Property. Property inscribed in
the World Heritage List after having met at
least one of the cultural heritage criteria
Under existing procedures, the framework

adopted by the National Historical Institute
(NHI) in the classification of historic sites
and structures for preservation consists
of the following:
1. National Shrine historic site or object
hallowed and honored for their history
or association, e.g.: Rizal ShrineCalamba, Laguna; Rizal Shrine-Fort
Santiago,
Intramuros,
Manila;
Aguinaldo Shrine, Kawit, Cavite;
Pinaglabanan Memorial Shrine, San
Juan, Metro Manila; Quezon Memorial
Shrine, Quezon City; and, Mabini
Shrine, Tanauan, Batangas.
2. National Monuments objects,
structures or sites dedicated to
memorialize or give reverence to a
special historic personage or event, e.g:
Rizal National Monument, Rizal Park;
A. Bonifacio National Monument,
Caloocan City.
3. National Landmarks sites or
structures that are associated with an
event, achievement, characteristic, or
modification that makes a turning point
or stage in Philippine history, e.g.:
Paoay Church Historical Landmark
[also a World Heritage Site], Ilocos
Norte; Miagao Church Historical
Landmark [also a World Heritage Site],
Iloilo; Barasoain Church Historical
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Landmark, Malolos, Bulacan; Sheik

Mahkdum Historical Landmark, TawiTawi; Taal (Town Center) Historical
Landmark; and, Pila (Town Center)
Historical Landmark, Pila, Laguna.
4. Heritage Houses houses of ancestry
with notable historical and cultural
significance, e.g.: Syquia Mansion,
Vigan City, Ilocos Sur; Houses in Silay
City, Negros Occidental.
5. Historic Sites natural areas or places
with historical significance, and places
recognised, marked or declared such as;
Biak-na-Bato, San Miguel, Bulacan;
Pamitinan Cave, Montalban, Rizal.
6. Classified structures and sites not
falling under the above 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.
All sites and structures must fall within the
NHI Criteria for Identification of Historic
Sites and Structures. In the identification
procedure, all sites and structures must, at
least be 50 years old and display a high
degree of authenticity to qualify for
consideration.
4.0 Relationship
Standards
to
Accounting
4.1 International Public Sector Accounting

Standard 17 (Property, Plant and
Equipment) does not require an entity to
recognise heritage assets that would
otherwise meet the definition of, and
recognition criteria for, property, plant and
equipment. If an entity does recognise
heritage assets, it must apply the disclosure
requirements of IPSAS 17 and may, but is
not required to, apply the measurement
requirements of IPSAS 17 (paras. 2 and 8).

The IPSAS Discussion Paper on Heritage
Assets (January 2006) requires the
valuation of heritage assets where this is
practicable. However, where valuation is
impracticable, an entity would be required
to make relevant disclosures, including
reasons why valuation is not practicable.
4.2 This Guidance Note considers historic
structures as a category of heritage and
conservation assets.
5.0 Guidance
5.1 The valuation of historic properties
involves special considerations dealing
with the nature of older construction
methods and materials, the current
efficiency and performance of such
properties in terms of modern equivalent
assets, the appropriateness of methods
used to repair, restore, refurbish, or
rehabilitate the properties, and the
character and extent of legal and
statutory protections affecting the
properties.
5.2 The sales comparison, cost and
income capitalisation approaches may be
employed in the valuation of historic
properties. The selection of the approach
or approaches to be used depends on the
availability of data required to apply
that or those approaches
5.2.1 In applying the sales comparison
approach, the historic nature of the
property may change the order of
priority normally given to attributes of
comparable properties. It is especially
important that the Valuer find
comparable properties with historic
features similar to those of the subject.
Criteria for the selection of comparable
properties include similarity in location
(i.e., in zoning, permissible use, legal
protection, and concentration of historic
properties), architectural style, property
size, and the specific cultural or historic
associations of the subject property. A
193
variety of adjustments may have to be

made to the comparable sales. These
involve differences in location, costs of
restoration or rehabilitation, or specific
encumbrances. Adjustments are made in
the following situations:
5.2.1.1 when costs must be incurred to
restore or rehabilitate the subject property,
but not the comparable sales; and
5.2.1.2 where the specific encumbrances
upon the subject, e.g., restrictive covenants
or preservation easements, differ from
those upon the comparable properties.
5.2.2 Historic properties having a
commercial use are often valued by
means of the income capitalisation
approach.
Where
the
distinctive
architecture and ambiance of an historic
property contribute to its drawing power
under an income-producing use and that
income-producing use is considered to be
the highest and best use of the historic
property, the valuation will address the
following:
5.2.2.1 All work proposed to restore, adapt
or rehabilitate the historic property must
meet existing zoning requirements and
covenant obligations.
5.2.2.2 Where listed building consents or a
zoning variance and/or building code
exemptions are required, the projected
timeframe to obtain such authorisation
needs to be taken into consideration.
5.2.2.3 The income capitalisation approach
should consider the cost effectiveness of an
income-producing historic property in
terms of the rental and/or commercial
income the property is able to generate. In
particular, it should address the additional
costs involved in maintaining the property,
especially those costs incurred due to
functional obsolescence or reserves set
aside for any required sinking fund.
5.2.3 When applying the cost approach
to historic property, the Valuer needs to
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consider whether the historic features of

a building would be of intrinsic value in
the market for that property. Some
historic buildings will be of value simply
because of their symbolic status, for
example a famous art gallery where the
building is as, or more, important than
the function it fulfills. In other words,
the service potential of such a building is
inseparable from its historic features.
The modern equivalent of such
properties would need to reflect either
the cost of reproducing a replica, or if
this is not possible because the original
materials or techniques are no longer
available, the cost of the modern
building with a similarly distinctive and
high specification.
In many cases the historic features will
add no value, or be viewed as an
encumbrance by a purchaser in the
market, for example a hospital operating
in an historic building. In such cases the
modern equivalent would reflect the cost
of a new building constructed to a
conventional modern specification.
In all cases the adjustments for physical
deterioration
and
functional
obsolescence will need to reflect factors
such as the higher cost of maintenance
associated with historic property and the
loss of flexibility for adapting the
building to the changing needs of an
occupier.
The land or site, upon which an historic
property stands, may be subject to
constraints upon its use. In turn, any
such constraints will affect land and
overall property value.
5.3 Historic, or heritage assets, for which
there is no reliable or relevant sales
evidence, which have no potential for
generating income, and which would or
could not be replaced may be incapable
of reliable valuation. An example could
be a partially ruined building with no
income generating potential. Where a
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reliable assessment of value is not

possible, the Valuer must disclose the
reasons for this conclusion in the report.
5.4 Legal measures to safeguard historic
properties may limit or restrict the use,
intensity of use or alteration of an
historic property. Examples include
restrictive covenants that run with the
land
regardless
of
the
owner;
preservation easements that prohibit
certain physical changes, usually based
on the condition of the property at the
time the easement was acquired or
immediately after proposed restoration
of the property; and conservation
easements that limit the future use of a
property so as to protect open space,
natural features, or wildlife habitat.
5.4.1 Restrictive
covenants
and
preservation easements, whether existing
or proposed, may have a major influence
on the highest and best use of an historic
property, and thereby have a significant
effect on property value. Preservation
easements can be donated, purchased, or
obtained
by
compulsory
acquisition/eminent domain.
5.5 The valuation conclusion shall be
195
IVS Glossary of Terms
Glossary of Terms
International Valuation Standards, International Financial
Reporting Standards and International Accounting Standards
referred to in the Glossary are:
IVS (8th Edition)
Introduction
Code of Conduct
Property Types
International Valuation Standards:
IVS 1: Market Value Basis of Valuation
IVS 2: Bases other than Market Value
IVS 3: Valuation Reporting
International Valuation Applications:

IVA 1: Valuation for Financial Reporting
IVA 2: Valuation for Secured Lending Purposes
IVA 3: Valuation of Public Sector Assets for Financial Reporting
Guidance Notes:
GN 1: Real Property Valuation
GN 2: Valuation of Lease Interests
GN 3: Valuation of Plant and Equipment
GN 4: Valuation of Intangible Assets
GN 5: Valuation of Personal Property
GN 6: Business Valuation
GN 7: Consideration of Hazardous and Toxic Substances in Valuation
GN 8: Cost Approach for Financial Reporting (DRC)
GN 9: Discounted Cash Flow Analysis for Market Valuations and
Investment Analyses
GN 10:Valuation of Agricultural Properties
GN 11:Reviewing Valuations
GN 12:Valuation of Trade Related Property
GN 13:Mass Appraisal for Property Taxation
196
GN 14:Valuation of Properties in the Extractive Industries

GN 15:The Valuation of Historic Property
IFRS & IAS
Framework for the Preparation and Presentation of Financial Statements

IFRS 3, Business Combinations
IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations
IFRS 6, Exploration for and Evaluation of Mineral Resources
IAS 1, Presentation of Financial Statements
IAS 2, Inventories
IAS 16, Property, Plant and Equipment
IAS 17, Leases
IAS 27, Consolidated and Separate Financial Statements
IAS 31, Interests in Joint Ventures
IAS 32, Financial Instruments: Disclosure and Presentation
IAS 36, Impairment of Assets
IAS 38, Intangible Assets
IAS 40, Investment Property
IAS 41, Agriculture
International Public Sector Accounting Standards (IPSAS)
IPSAS 16, Investment Property

IPSAS 17, Property, Plant and Equipment
IPSAS 21, Impairment of Non-Cash-Generating Assets
The UNESCO document referred to in the Glossary

World Heritage Convention, Articles I and II
197
The book value that results when one or more

asset or liability amounts are added, deleted or
changed from the reported book amounts.
GN6, 3.1
Administrative A valuation review performed by a client or

user of valuation services as an exercise in
(Compliance)
Review
due diligence when the valuation is to be used
for purposes of decision-making such as
underwriting, purchasing, or selling the
property.
A Valuer may, on occasion,
perform an administrative review to assist a
client with these functions. An administrative
review is also undertaken to ensure that a
valuation meets or exceeds the compliance
requirements or guidelines of the specific
market and, at a minimum, conforms to
(GAVP).
GN11, 3.2
A revenue-raising procedure, based on the

assessed value of property related to a scale of
charges defined by statute within a specified
timeframe.
GN13, 3.1
Adjusted
Book Value
Ad Valorem
Property
Taxation
See also Assessed, Rateable, or Taxable

Value.
Agricultural
Activity
Management by an entity of the biological

transformation of biological assets for sale,
into agricultural produce, or into additional
biological assets.
All Risk Yield

(ARY)
See capitalisation rate.
Appraiser
See Professional Property Valuer.
Annuity
A series of payments made or received at

intervals either for life or for a fixed number
of periods.
Arms-Length
Transaction
A transaction between parties who do not

have a particular or special relationship (for
example, parent and subsidiary companies or
landlord and tenant) that may make the price
level uncharacteristic of the market or inflated
IAS41, 5
IVS1, 3.2.6
198
because of an element of Special Value. The

Market Value transaction is presumed to be
between unrelated parties, each acting
independently.
Assessed,
Rateable, or
Taxable Value
A value which is based upon definitions

contained within applicable laws referring to
the assessment, rating, and/or taxation of
property.
Although some jurisdictions may cite market
value as the assessment basis, required
valuation methodology may produce results,
which differ from market value as defined
herein. The term, assessed value, is North
American
usage;
rateable
value
is
Commonwealth usage.
See also Ad Valorem Property Taxation.
Asset
i)
A resource owned or controlled by an

entity as a result or past events and
from which some future economic
benefit(s) can be expected to flow to
the entity. Ownership of an asset is
itself an intangible. However, the
asset owned may be either tangible or
intangible.
ii) A resource controlled by an entity as
a result of past events, and from
which future economic benefits are
expected to flow to the entity.
iii) An item of property, plant and
equipment should be recognised as an
asset when:
a) it is probable that future economic
benefits associated with the asset
will flow to the entity; and
b) the cost of the asset to the entity
can be measured reliably.
The term is used to denote real and personal
property, both tangible and intangible.
Ownership of an asset is itself an intangible.
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 3.4
IAS Framework
49(a); IAS38, 8
See also Current Assets, Fixed or Long-term

Assets, Investment Asset, Operational Asset,
Specialised Asset, Surplus Asset.
199
Asset-Based
Approach
Assumptions
A means of estimating the value of a business

and/or equity interest using methods based on
the Market Value of individual business assets
less liabilities.
GN6, 3.2
An approach to value that examines the

balance sheet of the business that reports all
assets, tangible and intangible, and all
liabilities at Market Value, or some other
appropriate current value. The asset-based
approach should not be the sole valuation
approach used in assignments involving
operating businesses appraised as going
concerns unless it is customarily used by
sellers and buyers.
GN6, 5.14,
Suppositions taken to be true. Assumptions

involve facts, conditions, or situations
affecting the subject of, or approach to, a
valuation but which may not be capable or
worthy of verification. They are matters that,
once declared, are to be accepted in
understanding the valuation. All assumptions
underlying a valuation should be reasonable.
3.3, 5.14.3.5
Code of Conduct
3.1
See also Special, Unusual, or Extraordinary

Assumptions.
GN5, 3.1
Auction Price
The price that is the final accepted bid at a

public auction; may or may not include any
fees or commissions.
Average
Competent
Management
See Reasonably Efficient Operator.
Basis of Value
A statement of the fundamental measurement

principles of a valuation on a specified date.
IVS2, 3.1
Biological
Asset
A living animal or plant.
IAS41, 5
Book Value
With respect to assets, the capitalised cost of

an asset less accumulated depreciated,
depletion or amortisation as it appears on the
GN4, 3.1.1;
GN6, 3.3.1
200
account books of the business.

With respect to a business entity, the
depreciation, depletion and amortisation) and
total liabilities of a business as they appear on
the balance sheet. It is synonymous with net
book value, net worth and shareholders
equity.
GN4, 3.1.1;
GN6, 3.3.2
See also Adjusted Book Value.

Business
Entity
A commercial, industrial, service or

investment entity pursuing an economic
activity; generally, a profit-making entity. A
business entity may be unincorporated (sole
proprietorships, partnerships) or incorporated
(closely-held or publicly held), or take the
form of trust arrangements, or multiple
entities. The ownership interest in a business
may be
undivided, divided
among
shareholders, and/or involve a majority
interest and minority interest.
Property Types,
4.1, 4.2, 4.7, 4.8;
GN6, 3.4
See also Going Concern, Holding Company

or Investment, Business, Operating Company,
Trade Related Property.
Business
Valuation
The act or process of arriving at an opinion or

estimation of the value of a business or entity
or an interest therein.
GN6, 3.5
Business
Valuer
A person, who by education, training and

experience is qualified to perform a valuation
of a business, business ownership interest,
security and /or intangible assets.
GN6, 3.6
Calibration
The process of analysing sets of property and

market data to determine the specific
parameters operating upon a model.
GN13, 3.2
Capitalisation
i) At a given date, the conversion into the

equivalent capital value of net income or
a series of net receipts, actual or
ii) In business valuation, the term refers to
the capital structure of a business entity.
GN4, 3.3;
GN6, 3.7;
GN12, 3.1
201
iii) In business valuation, this term also refers

to the recognition of an expenditure as a
capital asset rather than a periodic
expense.
Method of arriving at the value of a property
by reference to net returns and an expected
percentage yield or return. In some countries,
capitalisation refers to the conversion of a
stream of income into capital value using a
single conversion factor.
Capitalisation
Factor
Any multiple or divisor used to convert

income into capital value.
See also Capitalisation
Multiplier, Valuation Ratio.
Rate,
GN4, 3.4;
GN6, 3.8
Income
Capitalisation Any divisor (usually expressed as a

Rate (All Risks percentage) that is used to convert income
into capital value.
Yield)
GN4, 3.5;
GN6, 3.9
The interest rate or yield at which the annual

net income from an investment is capitalised
to ascertain its capital value at a given date.
The term, overall capitalisation rate, is North
American usage; all risks yield is
Commonwealth usage.
See also Terminal Capitalisation Rate.
Capital
Structure
The composition of invested capital.
GN6, 3.10
Carrying
Amount
The amount at which an asset is recognised

after deducting any accumulated depreciation
(amortisation) and accumulated impairment
losses thereon.
IAS16, 6;
The amount at which an asset is recognised in

the statement of financial position.
IAS36, 6;
IAS38, 8
IPSAS16, 6
See also net carrying amount.
202
Cash
Generating
Assets
Assets held to generate a commercial return.
Cash Flow
The actual or estimated periodic net income

produced
by
the
revenues
and
expenditures/outgoings in the operation and
ultimate resale of an income-producing
property.
Gross Cash Flow: Net income after taxes,
plus non-cash items such as depreciation and
amortisation.
Net Cash Flow: During an operating period,
that amount of cash that remains after all cash
needs of the business have been satisfied. Net
cash flow is typically defined as being cash
available to equity or invested capital.
Equity Net Cash Flow: Net income after
taxes, plus depreciation and other non-cash
charges, less increases in working capital, less
capital expenditures, less decreases in
invested capital dept principal, plus increases
in invested capital debt principal.
Invested Capital Net Cash Flow: Equity net
cash flow, plus interest payments net of tax
adjustment, less net increases in debt
principal.
Cash
Generating
Unit
The smallest identifiable group of assets that

generates cash inflows that are largely
independent of the cash inflows from other
assets or group of assets.
Certification
of Value
The statement of a valuation in a proscribed

format to meet statutory or regulatory
requirements.
IPSAS21, 14
GN4, 3.6.1;
GN6, 3.11.1
GN4, 3.6.2;
GN6, 3.11.2
GN4, 3.6.3;
GN6, 3.11.3
GN4, 3.6.4;
GN6, 3.11.4
IAS36, 6
See also Compliance Statement, Valuation

Report.
Collectibles
Broad descriptive term for objects collected

because of the interest they arouse owing to
their rarity, novelty, or uniqueness. In some
GN1, 3.2
203
countries, the term may be applied to fine art,

antiques, gems and jewelry, musical
instruments, numismatic and philatelic
collections, rate books, and archival materials,
among others.
Elsewhere the term is
normally used for these and a wide variety of
other items not found in any other category.
GN1, 3.2
Comparable
Data
Data generally used in a valuation analysis to

develop a value estimates; comparable data
relate to properties that characteristics similar
to those of the property being valued (the
subject property). Such data include sales
prices, rents, income and expenses, and
market
derived
capitalisation
and
yield/discount rates.
Comparable
Sales Method
(Market or
Direct Market
Comparison
Method)
See Sales Comparison Approach.
Compliance
Review
See Administrative Review.
Compliance
Statement
An affirmative statement attesting to the fact

that the Valuer has followed the ethical and
professional requirements of the IVSC Code
of conduct in performing the assignment, IVS
3, 5.1.10 and 5.1.10.1 deal with the contents
of a compliance statement.
IVS3, 3.1
Component
Value
The value of those components created by the

separation of property interests.
Property Types,
2.6.1
See also Marriage Value.

Compulsory
Acquisition/
Purchases/
Expropriation
In accordance with statutory procedures and

practices, the governments taking of private
property for public use upon the payment of
compensation as provided by the statute.
The term, compulsory acquisition/ purchase,
is Commonwealth usage.
The term,
204
expropriation, is used in the Philippines. The

terms, condemnation and damages, are used
in North America.
See also Condemnation.
Condemnation The act or process of enforcing the right of
eminent domain. In condemnation, the loss in
value to the remainder, resulting from a
partial taking, is known as damages.
The terms, condemnation and damages, are
North American usage.
See also Compulsory Acquisition/ Purchase.
Conservation
of Assets
See Heritage and Conservation Assets.
Contract Rent
or Passing
Rent
The rent specified by a given lease

arrangement; 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.
GN2, 3.1.10.2
The term, contract rent is North American

usage; passing rent is Commonwealth usage.
Contractors
Method
See Cost Approach.
Control
The power to direct the management and

policies of a business.
GN6, 3.12
Control
Premium
The additional value inherent in the control

interest that reflects its power of control, as
contrasted to a minority interest. See also
Discount for Lack of Control.
GN6, 3.13
Cost
i) The price paid for goods or services

becomes its cost to the buyer
Concepts
Fundamental to
Generally
ii) The amount required to create or produce

the good or service.
Accepted
Cost is a production-related concept, distinct Valuation
from exchange. Once the good is completed Principles, 4.3,
or the service is rendered, its cost becomes an
205
historic fact.
The total cost of a property includes all direct
and indirect costs of its production.
See also Price, Value.
Cost
Approach
One of the approaches to value commonly

applied in Market Value estimates and many
other valuation situations.
A comparative approach to the value of
property or another asset, that considers as a
substitute for the purchase of a given
property, the possibility of constructing
another property that is an equivalent to the
original or one that could furnish equal utility
with no undue cost resulting from delay. The
Valuers estimate is based on the reproduction
or replacement cost of the subject property or
asset, less total (accrued) depreciation.
The cost approach establishes the value of a
real property by estimating the cost of
acquiring land and building a new property
with equal utility or adapting an old property
to the same use with no undue cost due to
delay.
An estimate of entrepreneurial
incentive or developers profit/loss is
commonly added to land and construction
costs. For older properties, the cost approach
develops an estimate of depreciation including
items of physical deterioration and functional
obsolescence.
4.10;
Introduction to
IVSs1, 2, and 3,
3.2
GN1, 3.11
GN5, 3.3
Property Types,
2.7.3
See also Depreciated Replacement Cost,

Depreciation,
Replacement
Cost,
Reproduction Cost.
Cost
Approach for
Valuing Fine
Art
A comparative approach to the value of fine

art that considers as a substitute for the
purchase of a given work of fine art the
possibility of creating another work of fine art
that replaces the original. The Valuers
estimate is based on the reproduction or
replacement cost of the subject work of fine
GN5, 3.4
206
art, and the nature of the replacement, i.e.,

whether it be new for old, indemnity basis, a
replica, or a facsimile.
New for old refers to the cost of replacing
an item with a similar item in similar
condition in the second-hand retail market for
art and antiques.
A replica is a copy of the original item, as
near as possible to the original in terms of
nature, quality, and age of materials but
created by means of modern construction
methods.
A facsimile is an exact copy of the original
item, created with materials of a closely
construction methods of the original period.
Cost Model
After recognition as an asset, an item of

property, plant, machinery and equipment
shall be carried at its cost less any
accumulated
depreciation
and
any
See also Revaluation Model.
Crop(ping)
Farms
Agricultural properties used for growing

commodities that are typically planted and
harvested within a twelve-month cycle.
Properties used for annual crop production
may grow more than one type of annual crop
over the same period and may or may not
make use of irrigation to produce the crops.
Some commodities are annual crops that may
be left in the ground beyond a twelve-month
cycle, per contract provisions or in
circumstances where market conditions are
unfavorable. These crops will last for more
than one year after harvest but are considered
less than permanent.
GN10, 3.1
See also Irrigated Land, Perennial Plantings.

Cultural
Three groups of (cultural heritage) assets are
World Heritage
207
Heritage
recognised:
1. Monuments; architectural works, works
of monumental sculpture and painting,
elements or structures of an architectural
nature, inscriptions, cave dwellings and
combinations of features, which are of
point of view of history, art or science;
2. Groups of buildings, groups of separate
or connected buildings which, because of
their architecture, their homogeneity or
their place in the landscape, are of
point of view of history, art or science;
and
3. Sites, works of man or the combined
works of nature and man, and areas
including archeological sites, which are
of outstanding universal value from the
historical, aesthetic, ethnological or
anthropological point of view.
Cultural
Property
Property inscribed in the World Heritage List

after having met at least one of the cultural
heritage criteria and the test of authenticity.
Current Assets i) Assets not intended for use on a continuing

basis in the activities of the entity such as
stocks, obligations owed to the entity,
short-term investments, and cash in ban and
in hand. In certain circumstances real
estate, normally treated as a fixed asset may
be treated as a current asset. Examples
include improved real estate held in
inventory for sale.
ii) An asset which satisfies any of the
following criteria:
a) it is expected to be realised in, or is held
for sale or consumption in, the entitys
normal operating cycle;
b) it is held primarily for the purpose of
being traded;
c) it is expected to be realised within
twelve months after the balance sheet
date; or
d) it is cash or cash equivalent (as defined
in IAS 7 Cash Flow Statements) unless it
Convention,
Article 1,
UNESCO
World Heritage
Convention,
Article II,
UNESCO
IAS1, 57
208
is restricted from being exchanged or

used to settle a liability for at least
twelve months after the balance sheet
date.
All other assets shall be classified as noncurrent.
See also Non-Current Assets.
Dairy Farms
Agricultural properties used for the

production of milk from cows or for other
dairy products. These properties usually have
extensive structural improvements (barns,
milking parlours, silos) and equipment (feed
bins, milking machines).
Feed may be
produced on the property, imported, or
supplied by both sources.
GN10, 3.2
Damages
See Condemnation.
Debenture
Written acknowledgement or evidence of a

debt, especially stock issued as security by a
company for borrowed money.
Deed
Restrictions
and
Restrictive
Covenants
Lawful limitations, which run with the land,

and may affect the use, development, and
conveyance of ownership.
Property Types,
2.2.4.1
Depreciable
Amount
i) the cost of an asset, or other amount

substituted for cost (in the financial
statements), less its residual value
ii) that element of an asset that depreciates
over its useful life. The depreciable
amount represents the wasting element of
the asset, the balance being the residual
amount. However, leasehold land would
also be depreciable.
IAS16, 6;
IAS36, 6;
IAS38, 8;
IPSAS17, 14
209
Depreciated
Replacement
Cost
An application of the cost approach used in

assessing the value of specialised assets for
financial reporting purposes, where direct
market evidence is limited or unavailable.
The current cost of replacing an asset with its
modern equivalent asset less deductions for
physical deterioration and all relevant forms
of obsolescence and optimisation.
See also Cost Approach.
Depreciation
Desk Review
i) In the context of asset valuation,

depreciation refers to the adjustments
made to the costs of reproducing or
replacing the asset to reflect physical
deterioration and functional (technical)
and economic (external) obsolescence in
order to estimate the value of the asset in
a hypothetical exchange in the market
when there is no direct sales evidence
available.
In financial reporting,
depreciation refers to the charge made
against income to reflect the systematic
allocation of the depreciable amount of
an asset over its useful life to the entity.
It is specific to a particular entity and its
utilisation of the asset, and is not
necessarily affected by the market.
ii) The systematic allocation of the
depreciable amount of an asset over its
useful life.
A valuation review that is limited to the data
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.
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 9. 4
IVA1, 3.1; IVA3,

3.1; GN8, 3.1
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 3.7
IAS16, 6; IAS 36,

6; IPSAS17. 13;
IPSAS21, 14
GN11, 3.4
See also Field Review.

Develop
To carry out any building, engineering,

mining or other operations in, on, over or
under the land or the making of any material
210
change in the use of any building or land.

Discount for
Lack of
Control
An amount or percentage deducted from a

pro-rata share of the value of 100 percent of
an equity interest in a business, to reflect the
absence of some or all of the powers of
control.
GN6, 3.14
See also Control Premium.

Discount Rate
A rate of return used to convert a monetary

sum, 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.
GN9, 3.1
Discounted
Cash Flow
(DCF)
Analysis
A financial modeling technique based on

explicit assumptions regarding the prospective
cash flow to a property or business. As an
accepted methodology within the income
approach to valuation. DCF analysis involves
the projection of a series of periodic cash
flows either to an operating property, a
development property, or a business. To this
projected cash flow series, an appropriate,
market-derived discount rate is applied to
establish an indication of the present value of
the income stream associated with the
property or business. In the case of operating
real properties, periodic cash flow is typically
estimated as gross income less vacancy and
collection losses and less operating
expenses/outgoings. The series of periodic
net operating incomes, along with an estimate
of the reversion/terminal value/exit value,
anticipated at the end of the projection period,
is then discounted.
In the case of
development properties, estimates of capital
outlays, development costs, and anticipated
sales income are estimated to arrive at a series
of net cash flows that are then discounted over
the projected development and marketing
periods. In the case of business, estimates of
periodic cash flows and the value of the
GN9, 3.2;
GN12, 3.2
211
business at the end of the projection period

are discounted.
The most widely used
applications of DCF analysis are the Present
Value (PV), or Net Present Value (NPV), and
the internal rate of return (IRR) of cash flows.
Dividends
Method
See Discounted Cash Flow Analysis.
Easement
No possessory (incorporeal) interest in landed

property conveying use, but not ownership, of
a portion of that property.
Property Types,
2.2.4.2
See also Rights of Way.

Economic Life
Either
IAS17, 4
i) the period over which an asset is expected

to be economically usable by one or more
users; or
ii) the number of production or similar units
expected to be obtained from the asset by
one or more users.
Economic
Obsolescence
See External Obsolescence.
Economic
Rent
See Market Rent.
Elements of
Comparison
Specific characteristics of properties and

transactions that cause the prices paid for real
estate to vary. Elements of comparison
include, but are not limited to, the following:
property rights conveyed, financing terms,
conditions of sale, market conditions,
location, and physical and economic
characteristics.
Equipment
See Plant, Machinery and Equipment.
Equitable or
Equity
Interest
The interest of a beneficiary under a trust as

opposed to the legal interest of the trustee(s).
GN1, 3.3
Property Types,
2.2.5.2
A beneficiary is said to hold equitable title

while legal title is held by the trustee(s).
212
Exploration
Property or
Area
A Mineral or Petroleum real property interest

that is being actively explored for Mineral
deposits or Petroleum accumulations, but for
which economic viability has not been
demonstrated.
GN14, 3.2
External
Obsolescence
A loss in value due to factors outside the

subject asset.
GN14, 3.2
External obsolescence is also called

economic, environmental or locational
obsolescence.
Examples of external
obsolescence are changes in competition or in
surrounding land uses like an industrial plant
near a residential area. It is deemed incurable
as the expense to cure the problem is
impractical.
External
Valuer
A Valuer who, together with any associates,

has no material links with the client, an agent
acting on behalf of a client, or the subject of
the assignment.
Code of Conduct,
3.5
See also Independent Valuer, Internal Valuer.
Extractive
Industries
Those industries involved in the finding,

extracting and associated processing of
natural resources located on, or near the
earths crust. They are composed of the
Minerals Industry and the Petroleum Industry.
They do not include the industry sector
focused on extraction of water from the earth,
but they do include extraction of geothermal
fluid for its energy content.
GN14, 3.1
Fair Value
The amount for which an asset could be

exchanged between knowledgeable, willing
parties in an arms-length transaction.
IVS2, 3.2;
The amount obtainable from the sale of an

asset or cash-generating unit in arms-length
transaction between knowledgeable, willing
parties, less the costs of disposal.
IAS 36, 6
Fair Value
Less Costs to
Sell
GN3, 3.1
213
Fair Value
Model
See Revaluation Model.
Feasibility
Study in the
Extractive
Industries
A comprehensive study of a Mineral deposit

or Petroleum accumulation, in which all
geological, engineering, operating, economic,
marketing, environmental, regulatory and
other relevant factors are considered in
sufficient detail. The study could reasonably
serve as the basis for a final decision by a
proponent or financial institution to proceed
with, or finance, the development of the
prospective property for Mineral or Petroleum
production.
GN14, 3.3
See also Prefeasibility Study in the Extractive

Industries.
Fee Simple
(Estate)
Absolute ownership subject only to

limitations imposed by the country; also
called a freehold.
Property Types,
2.2.2
Field Review
A valuation review that includes inspection of

the exterior and sometimes the interior of the
subject property and possibly inspection of
the comparable properties to confirm the data
provided in the report. Generally performed
using a checklist that covers the items
examined in a desk review and may also
include confirmation of market data, research
to gather additional data, and verification of
the software used in preparing the report.
GN11, 3.5
See also Desk Review.

Finance Lease
A lease that transfers substantially all the risks

and rewards incident to ownership of an asset.
Title may or may eventually be transferred.
IAS17, 4
See also Operating Lease.

Financial
Asset
Any asset that is
IAS32, 11
a) cash;
b) an equity instrument of another entity;
c) a contractual right:
i) to receive cash or another financial
214
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 entitys own equity instruments and
is:
i) a non-derivative for which the entity is
or may be obliged to receive a variable
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
entitys own equity instruments. For
this purpose the entitys own equity
instruments do not include instruments
that are themselves contracts for the
future receipt or delivery of the entitys
own equity instruments.
Financial
Instrument
Any contract that gives rise to a financial

asset of one entity and a financial liability or
equity instrument of another entity.
IAS32, 11
Financial
Interests
The interests created by mortgage pledges

where the property is used as collateral to
secure finance or a charge is taken over the
property.
Property Types,
2.2.5.3
An owners equity position is considered a

separate financial interest.
Financial interests result from the legal
division 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.
Financial
Any liability that is
Property Types,
5.1
IAS32, 11
215
Liability
Financial
Modeling
(a) a contractual obligation

i) to deliver cash or another
financial asset to another entity; or
ii) to exchange financial assets or
financial liabilities with another
entity under conditions that are
potentially unfavourable to the
entity.
(b) a contract that will or may be settled in
the entitys own equity instruments and
is:
i) a non-derivative for which the
entity is or may be obliged to
deliver a variable number of the
entitys 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
instruments. For this purpose the
entitys own equity instruments
do not include instruments that are
themselves contracts for the future
receipt or delivery of the entitys
own equity instruments.
The projection of a business or propertys
periodic income or cash flow pattern from
which measures of financial return can be
calculated. Income or cash flow projections
are generated through the use of a financial
model that takes into account historical
relationships between income, expense, and
capital amounts as well as projections of
those variables. Financial modeling may also
be used as a management tool to test
expectations for property performances, to
gauge the integrity and stability of the DCF
model, or as a method to replicate the steps
taken by investors in making decisions
involving the purchase, sale, or holding of a
property, or business.
GN9, 3.3
See also Discounted Cash Flow Analysis.
216
Financial
Statements
i) A complete set or financial statements

(which) comprises;
a) balance sheet;
b) income statement;
c) a statement showing either:
(i) all changes in equity; or
(ii) changes in equity other than
those arising from transactions
with equity holders acting in
their capacity as equity holders;
d) a cash flow statement; and
e) notes, comprising a summary of
significant accounting policies and
other explanatory notes.
ii) In accounting, these comprise the balance
sheet and income and expenditure
statement (Profit and Loss Account).
They are written statements of the
financial position of a person or
company;
iii) Financial records of prescribed content
and form for publication in the interests
of common information needs of a wide
range of third party users who are not
necessarily identifiable.
There is a
measure
of public
accountability
associated with financial statements that
are developed within a regulatory
framework of accounting standards and
the law. Financial statements are used to
report the financial position and
performance of an entity.
Fixed or Long- See Non-Current Assets.

term Assets
Forced Sale
A circumstance where a seller is under

compulsion to sell and/or a proper marketing
period is not available. The price obtainable
under these circumstances will not meet the
definition of Market Value. Rather the price
obtainable will depend on the nature of the
pressure on the seller or the reasons why
proper marketing cannot be undertaken. The
price may also reflect the consequences for
the seller of failing to sell within a specified
IVS2, 6.11
217
period. The price obtainable in a force sale

typically cannot be predicted, but will reflect
the particular circumstances of the forced sale
rather than a hypothetical exchange where the
seller is acting without compulsion and/or the
transaction occurs after a proper marketing
period.
Forestry/
Timberland
Agricultural property used for the growing of

non-orchard trees that are periodically
harvested over extended growing periods (10
to 20 years). Considered to be agricultural
properties because they produce a crop, i.e.,
wood, even though that crop requires a longterm growing period.
GN10, 3.3
Also see Perennial Planting.

Fractional
Interests
See Partial Interests.
Freehold
Absolute ownership subject to limitations

imposed by the country; also known as a fee
simple estate.
Property Types,
2.2.2
An estate held for perpetuity.

Freehold
Interest
A fee simple estate, representing the perpetual

ownership in land.
GN2, 3.1.1
Freehold
subject to
Lease
Interest/s
Has the same meaning as leased fee interest,

representing the ownership interest of a lessor
owning estate that is subject to (a) lease(s) to
others.
GN2, 3.1.2
Functional
Obsolescence
A loss in value within a structure due to

changes in tastes, preferences, technical
innovations, or market standards.
GN2, 3.1.2
Functional obsolescence includes excess

capital costs and excess operating costs. It
may be curable or incurable.
Also called Technical Obsolescence.
Furniture,
Fixtures, and
Equipment
Tangible personal property plus trade fixtures

and leasehold improvements.
Property Types,
3.2.2.2; GN 5, 3.6
218
(FF&E)
GAVP
Generally Accepted Valuation Principles; best

practice in the Valuation profession.
Introduction/IVS
Objectives and
Scope
Going
Concern
The entity is normally viewed as a going

concern, that is, as continuing in operation for
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.
IAS Framework
23; IAS 1, 23-24
An operating business. Going concern also

serves as a valuation premise, under which
Valuers and accountants consider a business
as an established entity that will continue in
operation indefinitely. The premise of a
going concern serves as an alternative to the
premise of liquidation.
GN4, 3.11;
Goods and
Chattels
Personal
In certain countries, the term used for

identifiable, portable, and tangible objects
considered by the general public to be
personal property.
GN6, 3.19.1
Property Types,
3.2.1; GN 5, 3.7

Goodwill
i) An intangible but marketable asset based

on the probability that customers will
continue to resort to the same premises
where the business is carried on under a
particular name, or where goods are sold
or services provided under a trade name,
with the continuing prospect of earning
an acceptable profit being likely.
ii) Goodwill may include two distinct
components; goodwill that is property
specific, or inherent within the property
and transferable to a new owner on sale
of the property, and personal goodwill
that is associated with the proprietor or
manager. (In such case, the goodwill
element will be extinguished upon sale of
the property.
iii) Future economic benefits arising from
assets that are capable of being
Property Types,
4.4.2.1
219
recognised.
See also Personal Goodwill, Transferable
Goodwill.
Government
Business
Enterprise
(GBE)
Ground Lease
An entity that has all of the following

characteristics:
IPSAS21, 14
a) is an entity with the power to contract in

its own name;
b) has been assigned the financial and
operational authority to carry on a
business;
c) sells goods and services, in the normal
course of its business, to other entities at
a profit or full cost recovery;
d) is not reliant on continuing government
funding to be a going concern (other than
purchases of outputs at arms- length);
and
e) is controlled by a public service entity.
Usually long-term lease or land with the
lessee 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

any fees or commissions and, therefore, not
necessarily the purchase price.
GN2, 3.1.3
GN5, 3.8
See also Auction Price, Private Treaty Sale.

Hazardous
Substance
In the context of valuation, any material

within, around, or near the property being
valued that has sufficient form, quantity, and
bio-availability to create a negative impact on
the propertys Market Value.
GN7, 3.2
Headlease or
Master Lease
A lease to a single entity that is intended to be

the holder of subsequent lease to sublessees
that will be the tenants in possession of the
leased premises.
GN2, 3.1.4
Headlease is Commonwealth usage; master

lease is North American usage.
220
Headleasehold The holder of a headlease or master lease.

Interest or
Headleasehold interest in Commonwealth
Sandwich
Lessor Interest usage; sandwich lease is North American
usage.
Heritage Asset
GN2, 3.1.5
An asset having some cultural, environmental

or historical significance. Heritage assets
include historical buildings and monuments,
nature reserves, and works of art. Heritage
assets
often
display
the
following
characteristics (although these characteristics
are not necessarily limited to heritage assets):
a) their economic benefit in cultural,
educational and historic terms is unlikely
to be fully reflected in a financial value
based purely on market price;
b) legal and/or statutory obligations may
impose prohibitions or severe restrictions
on disposal by sale;
c) they are often irreplaceable and their
economic benefit may increase over time
even if their physical condition
deteriorates; and
d) it may be difficult to estimate their useful
lives, which in some cases could be
hundreds of years.
This definition is consistent with the
definition of heritage assets in IPSAS 17, 9.
Highest and
Best Use
The most probable use of a property which is

legally permissible, financially feasible, and
which results in the highest value of the
property being valued.
See also Market Value.
Historic
(Historical)
Cost
Convention
(Accounting)
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 6.3
i) The traditional accounting convention for

the compilation of financial statements on
the basis of costs actually incurred by the
current owner.
The use of such
accounting convention may not reflect the
underlying value of the assets at the date
of the annual accounts.
ii) Assets are recorded at the amount of cash
221
or cash equivalents paid or the fair value

of the consideration given to acquire
them at the time of their acquisition.
Liabilities are recorded at the amount of
proceeds received in exchange for the
obligation, or in some circumstances (for
example, income taxes), at the amounts
of cash or cash equivalents, expected to
be paid to satisfy the liability in the
normal course of business.
IAS Framework,
100(a)
See also Current Cost Convention.

Historic House Not-for-profit membership associations that
promote the preservation of historic
Owner
Associations
properties, and provide their owner-members
with advice on matters such as the
management, repair, maintenance, taxation
and insurance of historic properties.
GN15, 3.1
Real property publicly recognised or officially

designated by a government-chartered body as
having cultural or historic importance because
of its association with an historic event or
period, with an architectural style, or with the
nations heritage. Four characteristics are
commonly associated with historic properties:
1) their historic, architectural and/ or cultural
importance; 2) the statutory or legal
protection to which they may be subject; 3)
restraints and limitations placed upon their
use, alteration and disposal; and 4) the
frequent obligation in some jurisdictions that
they may be accessible to the public. The
terms, historic property and heritage asset,
often overlap but are not in all cases
equivalent.
GN15, 3.2
Historic
Property
See also Heritage Assets, Publicly Designated

Historic Properties.
Holding
Company or
Investment
Business
An entity which maintains the controlling

interest in subsidiary companies by virtue of
ownership of stock in those companies.
Property Types,
4.3.1
A business which receives returns on its
GN6, 3.2.1
222
assets.
Impairment
A loss in the future economic benefits, or

service potential of an asset, over and above
the systematic recognition of the loss of the
assets future economic benefits or service
potential through depreciation.
IPSAS21, 14
Impairment
Loss
The amount by which the carrying amount of

an asset or a cash-generating unit exceeds its
recoverable amount.
IAS36, 6
Improvements
Buildings, structures, or some modifications

to land, of a permanent nature, involving
expenditures of labour and capital, intended to
enhance the value or utility of the property.
Improvements have differing patterns of use
and economic lives.
IVA1, 3.2; GN 8,
3.2
See also Land, Value of Improvements.

Income
Capitalisation
Approach
A comparative approach to value that

Concepts
considers income and expense data relating to
Fundamental to
Generally
the property being valued and estimates value
through
a
capitalisation
process.
Accepted
Capitalisation relates income (usually net
Valuation
income) and a defined value type by
Principles,
9.2.1.2;
converting an income amount into a value
Property Types,
estimate. This process may consider direct
2.7.2.1;
relationships
(whereby
an
overall
capitalisation rate or all risks yield is applied
GN1, 5.12.1;
to a single years income), yield or discount
GN5, 3.9
rates (reflecting measures of return on
investment) applied to a series of incomes
over a projected period, or both. The income
approach reflects the principles of substitution
and anticipation.
Income
Multiplier or
Years
The ratio between the sale price or value of a

property and the average annual income or
income expectancy; may be based on gross or
net income. It is applied to income to arrive
223
Purchase
at a capital value.
The term, income multiplier, is North
American usage; years purchase is
Commonwealth usage.
See also Capitalisation Factor, Investment
Method, Valuation Ratio.
Independent
Valuer
A Valuer who meets the specific requirements

of independence, which may attach to many
assignments, and are applied by regulation or
by law with some clients and in certain
countries.
Code of Conduct,
3.6; IVA2, 6.8.3
See also External Valuer.

Infrastructure
Assets
Assets that usually display some or all of the

following general characteristics:
a) they are part of a system or network;
b) they are specialised in nature and do not
have alternative uses;
c) they are immovable; and
d) they may be subject to constraints at time
of disposal.
definition of infrastructure assets in IPSAS
17, 21.
Intangible
Assets
Assets that manifest themselves by their

economic properties; they do not have
physical substance; they grant rights and
privileges to their owner; and usually generate
income for their owner. Intangible Assets can
be categorised as arising from Rights;
Relationships; Grouped Intangibles; or
Intellectual Property Rights.
In general, the accounting profession limits
the recognition of individual intangible assets
to those that are: commonly recognisable;
have a statutory or contractual remaining life;
and/or must be individually transferable and
separable from the business.
An identifiable non-monetary asset without
GN4, 3.14, 3.14.5
IAS38, 8
224
physical substance.
Intangible
Property
The rights and privileges granted to the owner

of intangible assets.
GN4, 3.15
Integrated
Unit
An agricultural entity that has common

ownership of all or part of the processes
involving the production and marketing of its
products and/or commodities.
GN10, 3.9
Internal Rate
of Return
(IRR)
The discount rate that equates the present

value of the net cash flows of a project with
the 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.
GN9, 3.4
Used in discounted cash flow analysis to find

the implied or expected rate of return which
gives a zero net present value (NPV).
Internal
Valuer
A Valuer who is in the employ of either the

entity that owns the assets or the accounting
firm responsible for preparing the entitys
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.
Code of Conduct,
3.4
See also External Valuer.

Intrinsic Value The amount considered on the basis of an
evaluation of available facts, to be the true
or real worth of an item. A Long-term,
GN5, 3.10
225
Non-Market Value concepts that smoothes

short-term price fluctuations.
GN6, 3.23
Invested
Capital
The sum of the debt and equity in a business

on a long-term basis.
Invested Cash
Flow
See Cash Flow.
Investment
Analysis
A study undertaken for the purposes of

development and investment. The evaluation
of investment performance, or the analysis of
a transaction involving investment properties.
Investment analyses are variously called
(economic) feasibility studies, market or
marketability analyses, or financial projection
studies.
GN9, 3.5
Investment
Asset
An asset owned by a corporation and

considered extraneous to the operational
requirements of the corporate owner.
Concepts
Fundamental to
Generally
Land and/or buildings held to earn a present

or future rental income and/or for the
preservation or gain of capital value or both.
It is not held for use in the production or
supply of goods or services or for
administrative purposes, or for sale in the
ordinary course of business.
Accepted
Valuation
Principles, 3.5.3
See also Operational Asset.

Investment
Method
A valuation procedure that capitalises

expected future income or utility as a basis for
estimating the Market Value of the subject
asset.
The underlying assumption is that one
investor will pay no more for the subject asset
than would have to be paid for another asset
with an income stream of comparable amount,
duration, and certainty.
See also Income Capitalisation Approach.
Investment
Property
i) Property (land or building or part of a

building or both) held (by the owner or
by the lessee under a finance lease) to
IAS40, 5;
226
Investment
Value or
Worth
earn rentals or for capital appreciation or

both, rather than for:
a) use in the production or supply of
goods
or
services
or
for
administrative purposes; or
b) sale in the ordinary course of
operations.
ii) In real estate, property owned for the
purpose of leasing to a third party, for
possible future occupation by the owner,
or for future development to earn rental
income or profit on resale.
IPSAS16, 6
The value of property to a particular investor,

or a class of investors, for identified
investment or operational objectives. This
subjective concept relates specific property to
a specific investor, group of investors, or
entity with identifiable investment objectives
and/or criteria.
IVS3, 3.3
The investment value, or worth, of a property

asset may be higher or lower than the Market
Value of the property asset. The term
investment value, or worth, should not be
confused with the Market Value of an
investment property.
The term, investment value, is North
American usage; worth is Commonwealth
usage.
Irrigated Land Lands used to produce crops or forage for
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 to undertake a specific project; differs
from a partnership in that it is limited in
duration and project specific.
GN10, 3.4
Property Types,
5.1.2.2
A contractual arrangement whereby two or

227
Land
more parties undertake an economic activity

which is subject to joint control.
IAS31, 3
Valuation of land as if vacant, and of land and

improvements to or on the land, is an
economic concept.
Whether vacant or
improved, land is also referred to as real
estate.
Concepts
Fundamental to
Generally
The earths surface, the space beneath which

extends to the centre of the earth, and the
space above which extends to the sky.
Accepted
Valuation
Principles, 2.1.2.2
The ownership of land and the rights attached

to the ownership are subject to the laws of a
particular country.
See also Improvements, Property, Real Estate,
Real Property.
i) A contract arrangement in which rights of
use and possession are conveyed from a
propertys title owner (called the
landlord, or lessor) in return for a promise
by another (called a tenant or lessee) to
pay rents as prescribed by the lease. In
practice the rights and the duties of the
parties can be complex, and are
dependent upon the specified terms of
their contract.
ii) An agreement whereby the lessor
conveys to the lessee in return for a
payment or series of payments the right to
use an asset for an agreed period of time.
GN2, 3.1.6
Lease Interest
Also known as Lessee Interest, Tenants

Interest, or Leasehold Estate. The ownership
interest that is created by the terms of a lease
rather than the underlying rights of real estate
ownership. The lease of interest is subject to
the terms of a specific lease arrangement,
expires within a specified time, and may be
capable of subdivision, or subleasing to other
parties.
GN2, 3.1.7
Lease Fee
The ownership interest that the landlord or

lessor maintains in a property under a lease
Property Types,
Lease
IAS17, 4
228
Estate
with the rights of use and occupancy being

conveyed or granted to a tenant or lessee.
2.2.3
The ownership interest in a lease property.

Compare Leasehold Estate.
Leasehold
Estate
The interest which a tenant or lessee acquires

under a lease including rights of use and
occupancy for a stated term under certain
conditions (e.g., the payment of a premium
and/or rent).
Property Types,
2.2.3
Leaseholds may be of various duration such

as 25 years, 60 years and 99 years, etc.
Leasehold
Improvements
or Tenants
Improvements
Fixed improvements or additions to land or

buildings, installed by and paid for by the
tenant to meet the tenants needs; typically
removable by the tenant upon expiration of
the lease; removal causes no material damage
to the real estate.
Property Types,
3.2.2; GN5, 3.11
See also Personal Property, Trade Fixtures or

Tenants Fixtures
Leasehold
Interest
See Lease Interest.
Legal Estates
Rights or interests in real property derive from

legal estates; legal estates are defined by the
laws of the country in which they exist, and
are usually subject to outside limitations
imposed by the country, e.g., taxation,
compulsory acquisition, regulation, or
appropriation in cases of intestacy.
Property Types,
2.2.1
Legal Life
The life of the intangible asset allowed by law

(i.e., the period of legal or contractual
projection of the intangible asset).
GN4, 3.16;
5.8.2.1.4.2
Lessee
A person to whom a property is rented under a

lease. The lessee is commonly called the
tenant.
Lessee Interest
See Lease Interest.
229
Lessor
One who owns the rights to use an asset,

which is transferred to another (lessee) under
a lease agreement. The lessor is usually
referred to as the landlord.
Lessor Interest The interest held by the lessor to any of the

circumstances set out in (in the provisions of)
a Freehold subject to Lease Interest/s, a
Headlease or Master Lease, or a
Headleasehold Interest.
GN2, 3.1.8
Limiting
Conditions
Constraints which are imposed on valuations Code of Conduct,

by clients, the Valuer, or local statutory law.
3.2
Liquidation
Value
The value of assets estimated with regard to

specific circumstances under which the assets
are sold. Liquidation value describes a
situation where a group of assets employed
together in a business are offered for sale
separately, usually following a closure of the
business. Although associated with forced
sale, these terms have distinct meanings.
There is no reason why assets cannot be
liquidated by an orderly sale following proper
marketing.
IVS2, 6.9.2
Listing of
(Heritage)
Buildings or
Historic
Properties
Register
A recording of officially designated historic

properties. Not all historic properties are
necessarily listed in registers. Many historic
properties publicly recognised as having
cultural and historic importance also qualify
as historic properties.
GN15, 3.3
Livestock
Ranches/
Stations
Agricultural properties used to raise and feed

animals such as cattle, sheep, pigs, goats,
horses, or combinations thereof. The actual
use of these properties can take many forms.
The animals may be bred, raised, and sold
within the operation of the property. Young
animals may be acquired from outside the
property and then raised within the property.
The animals may be raised for consumptive
use or for breeding stock. Feed for the
animals may be produced on the property,
GN10, 3.5
230
imported, or supplied by both sources.

Properties used for the production and feeding
of livestock have significant capital
investment in the structural improvements
(pens, livestock shelters, sheds, division
fencing) and the livestock, which may or may
not be depreciable depending on the laws and
regulations of the local jurisdiction.
Loan Security
An asset which is legally nominated to be

available to a tender for realization and
recovery of money owned following default
by the borrower.
Machinery
Majority
Control
The degree of control provided by a majority

position.
GN6, 3.24
Majority
Interest
Ownership position greater than 50% of the

voting interest in a business.
GN6, 3.25
Market Rent
The estimated amount for which a property,

or space within a property, should lease on the
date of valuation between a willing lessor and
a willing lessee on appropriate terms in an
arms-length transaction, after proper
marketing wherein the parties had each acted
compulsion.
Whenever Market Rent is
provided, the appropriate lease terms which
it reflects should also be stated.
GN2, 3.10.1
Market Value
The estimated amount for which a property

should exchange on the date of valuation
between a willing buyer and a willing seller in
an arms-length transaction wherein the
parties had each acted knowledgeably,
prudently, and without compulsion.
IVS1, 3.1
See also Highest and Best Use.
Marketability
Discount
An amount or percentage deducted from an

equity interest to reflect lack of marketability.
GN6, 3.28
231
Mortgage
Value
See Synergistic Value.
Mass
Appraisal
The practice of appraising multiple properties

as of a given date by a systematic and uniform
application of appraisal methods and
techniques that allow for statistical review and
analysis of results.
Master Lease
See Headlease.
Mineral
Any naturally occurring material useful to,

and/or having a value place on it by
humankind, and found in or on the earths
crust. For the purposes of GN 14, Minerals
include metallic or non-metallic minerals,
industrial minerals, aggregates, precious
stones and fuel minerals, but Minerals do not
include Petroleum, which is defined
separately.
GN13, 3.3
GN14, 3.4
See also Petroleum.

Mineral
Reserve
As defined by the Combined [Mineral]

Reserves International Reporting Standard
Committee (CRIRSCO): the economically
mineable part of a Measured and/or Indicated
Mineral Resource.
It includes diluting
materials and allowances for losses, which
may occur when the material is mined.
Appropriate assessments that may include
Feasibility Studies, have been carried out, and
include consideration of, and modification by,
realistically assumed mining, metallurgical,
economic, marketing, legal, environmental,
social and governmental factors.
These
assessments demonstrate at the time of
reporting that extraction is justified. Mineral
Reserves are subdivided in order of increasing
confidence into Probable Mineral Reserves
and Proved Mineral Reserves.
GN14, 3.5
Mineral
Resource
As defined by CRIRSCO: a concentration of

occurrence of material of intrinsic economic
interest in or on the earths crust (a deposit) in
such form and quantity that there are
GN14, 3.6
232
reasonable prospects for eventual economic

extraction. The location, quantity, grade,
geological characteristics and continuity of a
Mineral Resource are known, estimated or
interpreted from specific geological evidence
and knowledge.
Mineral Resources are
subdivided, in order of increasing geological
confidence, into Interred, Indicated and
Measured categories. Portions of a deposit
that do not have reasonable prospects for
eventual economic extraction must not be
included in a Mineral Resource.
Minerals
Industry
Entities involved in exploration for Minerals,

and the mining, processing and marketing of
Minerals. This GN is not designed to cover
assets downstream from the metals refineries
or minerals processing plants, such as assets
involved in the distribution of refined metals
to metals fabricators, or mineral products to
retailers or the final market.
GN14, 3.7
Minority
Discount
A discount for lack of control applicable to a

minority interest.
GN6, 3.29
Minority
Interest
Ownership position of less than 50% of the

voting interest in a business.
GN6, 3.30
That portion of the profit and loss and net

assets of a subsidiary attributable to equity
interests that are not owned, directly or
indirectly through subsidiaries, by the parent.
IAS27, 4; IFRS 3,
A
An asset which has a similar function and

equivalent productive capacity to the asset
being valued, but of a current design and
constructed or made using current materials
and techniques.
GN8, 3.3
Modern
Equivalent
Asset (MEA)
The term, modern equivalent asset,

Commonwealth usage.
Mortgage
is
A pledge of an interest in property as security

or collateral for repayment of a loan with
provision for redemption or repayment. In the
event the borrower (mortgagor) defaults, the
IVA2, 3.2
233
lender (mortgagee) has the power to recover

the property pledged.
Mortgage
Lending Value
(MLV)
The value of the property as determined by a

prudent assessment of the future marketability
of the property taking into account long- term
sustainable aspects of the property, the normal
and local market conditions, and the current
use and alternative appropriate uses of the
property. Speculative elements shall not be
taken into account to the assessment of
mortgage lending value.
The mortgage
lending value shall be documented in a
transparent and clear manner.
Directive
2006/48/EC
Net Present
Value (NPV)
The measure of the differences between the

discounted revenues, or inflows, and the costs,
or outflows, in a discounted cash flow
analysis.
GN9, 3.6
Net Realisable
Value
The estimated selling price of an asset in the

ordinary course of business, less the estimated
costs of completion and the estimated costs
necessary to make the sale.
IAS2, 6; 2, 7
of the European
Parliament
Net realisable value refers to the net amount

that an entity expects to realise from the sale
of inventory in the ordinary course of
business. Fair value reflects the amount for
which the same inventory could be exchanged
between knowledgeable and willing buyers
and sellers in the marketplace. The former is
an entity specific value; the latter is not. Net
realisable value for inventories may not equal
fair value less costs to sell.
Non-CashGenerating
Assets
Assets other than cash-generating assets.
Non-Current
Assets
Tangible and intangible assets, which fall into

two broad categories, namely property, plant,
and equipment, and other non-current assets.
Also called fixed, or long-term assets.
IPSAS21, 14
Concepts
Fundamental to
Generally
Accepted
Valuation
234
Principles, 3.5.2
Obsolescence
A loss in value due to a decrease in the

usefulness of property caused by decay,
changes in technology, peoples behavioural
patterns and tastes, or environmental changes.
Obsolescence
is sometimes classified
according to items of outmoded design and
functionality, items with structural design
unable to meet current code requirements, and
factors arising outside the asset, such as
changes in user demand.
IVA3, 3.3
Operating
Company
A business that performs an economic activity

by making, selling, or trading a product or
services.
GN6,3.3
Operating
Lease
A lease other than a finance lease.
IAS17, 4
Operational
Asset
An asset considered requisite to the operations

of a going concern or corporation.
See also Finance Lease.

Concepts
Fundamental to
Generally Accepted
See also Investment Asset.
Optimisation
Option
Valuation
Principles, 3.5.3
The process by which a least cost replacement

option is determined for the remaining service
potential of an asset. It is a process of
adjusting the replacement cost to reflect that
an asset may be technically obsolete or overengineered, or the asset may have a greater
capacity than that required. Hence,
optimisation
minimises,
rather
than
alternative lower cost replacement options are
available.
IVA3, 3.4;
An agreement to keep open an offer to buy,

sell, or lease real property for a specified
period at a stated price. An option creates a
contractual right, the exercise of which is
generally contingent upon the fulfillment of
specified conditions.
Property Types,
5.1.3
GN8, 3.4
235
Oral Report
The results of a valuation, verbally

communicated to a client or presented before
a court either as expert testimony or by means
of deposition. A report communicated orally
to a client should be supported by a work file
and at a minimum followed by a written
summary of valuation.
IVS3, 3.2
See also Written Report.

IAS40, 5;
OwnerOccupied
Property
Property held (by the owner or by the lessee

under a finance lease) for use in the
production or supply of goods or services or
for administrative purposes.
Partial or
Fractional
Interest
Rights in real property created by legal

divisions of the ownership interest. For
example, real property is not only owned in
sole proprietorships, but may also be held by
corporations (shareholders), partnerships,
joint tenancies, and tenancies in common.
Participation
Rent
See Turnover Rent.
Partnership
An ownership interest in which two or more

persons jointly own a business or property and
share its profits and losses. Partnerships may
be general or limited.
Passing Rent
See Contract Rent.
Percentage
Rent
See Turnover Rent.
Perennial
Plantings
Crops grown from plantings that have a life

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
Goodwill
The value of profit generated over and above GN4, 3.12.2; GN6,
market expectations, which would be
3.20.2; GN12,
3.3.2
extinguished upon sale of the trade related
property, together with those financial factors
IPSAS16, 6
Property Types,
2.2.5.1
Property Types,
5.1.1
GN10, 3.5
236
related specifically to the current operator of

the business, such as taxation, depreciation,
policy, borrowing costs and the capital
invested in the business.
See also Goodwill, Transferable Goodwill.
Personal
Property
A legal concept referring to all rights,

interests, and benefits related to ownership of
items other than real estate. In certain
countries, items of personal property are
legally designated as personalty in distinction
to realty, which may either refer to real
property or real estate. Items of personal
property can be tangible, such as chattel, or
intangible, such as a debt or patent. Items of
tangible personal property typically are not
permanently affixed to real estate and are
generally characterized by their moveability.
GN5, 3.13
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 2.4
Personal property includes interests in

tangible and intangible items, which are not
real estate.
Personalty
A legal term used in certain countries to

designate items of personal property in
distinction to realty, which may either reflect
to real property or real estate. Personalty
includes tangible and intangible items, which
are not real estate.
GN5, 3.14
See also Personal Property, Realty.

Petroleum
Any naturally occurring hydrocarbon, whether

in a gaseous, liquid or solid state. Raw
Petroleum products are primarily crude oil
and natural gas.
GN14, 3.8
See also Extractive Industries.

Petroleum
Industry
Entities involved in exploration for

Petroleum, and the extraction processing,
refining and marketing of crude Petroleum
and associated gases. GN 14 is not designed
to cover assets downstream from the
petroleum refineries and natural gas
GN14, 3.9
237
processing plants, such as assets involved in

the distribution of refined petroleum products
to retailers.
Petroleum
Reserves
As defined by the Society of Petroleum

Engineers (SPE) and the World Petroleum
Congress (WPC): those quantities of
Petroleum, which are anticipated to be
commercially
recovered
from
known
accumulations for a given date forward. All
(Petroleum) Reserve estimates involve some
degree of uncertainty.
The uncertainty
depends chiefly on the amount of reliable
geologic and engineering data available at the
time of the estimate and the interpretation of
these data. The relative degree of uncertainty
may be conveyed by placing reserves into one
of two principal classifications, Proved or
Unproved. Unproved Reserves are less certain
to be recovered than Proved Reserves and
may be further sub-classified as Probable and
Possible Reserves to denote progressively
increasing uncertainty in their recoverability.
Proved Reserves can be categorised as
Developed or Undeveloped.
GN14, 3.10
Petroleum
Resources
For the purpose of GN 14, petroleum

resources comprise only Petroleum Reserves
and Contingent Resources.
Contingent
Resources as defined by the Society o
Petroleum Engineers (SPE)/World Petroleum
Congress (WPC), in conjunction with the
American
Association
of
Petroleum
Geologists (AAPG), are those quantities of
petroleum, which are estimated on a given
date, to be potentially recoverable from
known accumulations, but which are not
currently considered to be commercially
recoverable.
GN14, 3.11
Plant
Plant,
Machinery
and
Tangible assets, other than realty, that:
GN3, 3.3;

production of supply of goods, or
GN5, 3.15;
238
Equipment

GN8, 3.5
b) are expected to be used over a period of

time.
equipment are:
Plant. Assets that are inextricably combined
with others and that may include specialized
buildings, machinery and equipment.
Machinery.
Individual machines or a
assist the operation of the enterprise or entity.
Tangible items that:
a)
are held for use in the production or

supply of goods or services, for rental to
others, or for administrative purposes,
and
b) are expected to be used during more than

one (accounting) period.
Portfolio
An assemblage of the various properties held

or managed by a single entity.
Prefeasibility
Study in the
Extractive
Industries
A study of a Mineral or Petroleum deposit, in

which all geological, engineering, operating,
economic, environmental and other relevant
factors, are considered in sufficient detail to
serve as the reasonable basis for a decision to
proceed to Feasibility Study.
GN14, 3.12
See also Feasibility Study in the Extractive

Industries.
Present Value
See Net Present Value.
239
Preservation
Incentives
Incentives to the owners of historic properties,

primarily fiscal in nature, to promote the
restoration and maintenance of such
properties.
Examples may include
exemptions on inheritance taxes for
conservation properties gifted to heritage
trusts, government subsidies, exemptions in
municipal rates/taxes, investment tax credits
to owners of historic properties, transferable
development rights and deductions taken on
conservation easements donated to nonprofit
organizations.
GN15, 3.4
Price
An amount asked, offered, or paid for a good

or service.
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 4.2
The concept of price relates to the exchange

of a commodity, good or service. Price is the
amount asked, offered, or paid for the item.
Once the exchange has been transacted, the
price, whether disclosed or undisclosed,
becomes an historic fact. The price paid
represents the intersection of supply and
demand.
Introduction to
IVSs
1, 2, and 3, 3.1
See also Cost, Value.

Principle of
Substitution
A prudent person will not pay more for a good

or service than the cost of acquiring an
equally satisfactory substitute good or service,
in the absence of the complicating factors of
time, greater risk, or inconvenience. The
lowest cost of the best alternative, whether a
substitute or the original, tends to establish
Market Value.
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 9.2
This principle is fundamental to the three

approaches to Market Value.
Private Treaty
Sale
A sale negotiated and transacted between

persons rather than by public auction or
another method. The sale price paid in a
private treaty sale is generally not known
except by the parties to the transaction. See
also Auction Price, Hammer Price.
GN5, 3.16
240
Professional
Property
Valuer
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 on 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.
Introduction/
IVS Objectives
and Scope, GN 5,
3.17
See also External Valuer, Independent Valuer,

Internal Valuer, Valuer.
Property
A legal concept encompassing all the

Concepts
interests, rights and benefits related to
Fundamental to
ownership. Property consists of the rights of
Generally
ownership, which entitle the owner to a
Accepted
specific interest or interests in what is owned.
Valuation
To distinguish between real estate, a physical Principles, 2.3, 2.4
entity, and its ownership, a legal concept, the
ownership of real estate is called real
property. Ownership of an interest in items
other than real estate is referred to as personal
property.
The International Valuation Standards
Committee recognises the following four
property types: real property, personal
property, businesses and financial interests.
Property Types,
1.0
See also Personal Property, Real Property.

Property
Company
A holding company in real property.
Property,
Plant,
Machinery
and
Equipment
i) Assets intended for use on a continuing

basis in the activities of an entity
including land and buildings; plant,
machinery and equipment; and other
categories of assets, suitably identified;
less accumulated depreciation. Property,
Concepts
Fundamental to
Generally
Accepted
Valuation
241
plant, machinery and equipment are

tangible or physical assets.
ii) Tangible items that: a) are held for use in
the production of goods or services, for
rental to others, or for administrative
purposes; and b) are expected to be used
during more than one period.
Principles, 3.5.2.1
Property
Rights
The rights that are related to the ownership of

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 these property rights is
sometimes referred to as the bundle of rights
inherent in the ownership of real estate.
Property rights are typically subject to public
or private restrictions such as easements,
right-of-ways, specified development density,
zoning and other restrictions that may
encumber the property.
GN1, 3.7
Property with
Trading
Potential
See Trade Related Property.
Public
Building
A building that serves some community or

social function and is held in public
ownership. Examples include courthouses,
municipal centres, schools, prisons, police
stations, military facilities, libraries, hospitals,
clinics, and social or public housing.
IVA3, 3.5
Public Sector
Asset
A property, owned and/or controlled by

governmental or quasi-governmental entity,
for the provision of some public service or
good. Public sector assets comprise different
asset types, infrastructure assets, public utility
plants, recreational assets, and public
buildings (e.g., military facilities), each
category of which constitutes property, plant
and equipment within the meaning of IPSASs
IVA3, 3.6
(PPM&E)
IAS16, 6;
IPSAS17, 12
242
and IFRSs.
Public sector assets typically include:
a) assets, which have atypical tenure, are
irreplaceable, are non-cash-generating,
or provide goods or services in the
absence of any market competition;
b) land with restrictions on its sale or
leasing; and
c) land, which is designated for a
specialised use that is not necessarily its
highest and best use.
See also Heritage assets, Infrastructure assets,
Public building, Public utility, and
Recreational assets.
Public Utility
A property that:
IVA3, 3.7
a) produces a service or good for general

public consumption; and
b) is usually a monopoly or quasimonopoly provider subject to some
form of governmental control.
Publicly
Designated
Historic
Properties
Those properties, the historic status of which

is officially recognised by governmentchartered bodies to identify historic properties
and to promote historic preservation. Such
bodies may be established by national/federal,
state/provincial,
or
country/municipal
governments.
Local non-governmental
historical societies may also designate historic
properties and maintain private historic
property lists or registers that confer many of
the same benefits while remaining exempt
from governmental restrictions.
GN15, 3.5
See also Listing of (Heritage) Buildings or

Historic Registers.
Rate of Return An amount of income (loss) and/or change in
value realised or anticipated on an investment,
expressed as a percentage of that investment.
GN4, 3.19;
GN6, 3.34
243
Real Estate
Land and all things that are a natural part of

the land, e.g., trees and minerals, as well as all
things that are attached 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 the real
estate. Real estate includes all attachments,
both below and above the ground.
GN1, 3.8
See also Improvements, Land, Real Property.

Real Property
All the rights, interests, and benefits related to

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.
GN1, 3.9
See also Property, Real Estate.

Realty
A term used to distinguish either real property

or real estate from items of personal property,
which in certain countries are legally referred
to as personalty.
Property Types,
2.1.1
See also Personalty.

The term, realty, is North American usage.
Reasonably
Efficient
Operator, or
Average
Competent
Management
A market-based concept whereby a potential

purchaser, and thus the Valuer, estimates the
maintainable level of trade and future
profitability that can be achieved by a
competent operator of a business conducted
on the premises, acting in an efficient manner.
The concept involves the trading potential
rather than the actual level of trade under the
existing ownership, so that it excludes
personal goodwill.
GN12, 3.4
Recognition
The process of incorporating in the balance

sheet or income statement an item that meets
the definition of an element and satisfies the
IAS Framework,
82, 83
244
following criteria for recognition:

a) it is probable that any future economic
benefit associated with the item will flow
to or from the entity; and
b) the item has a cost or value that can be
measured with reliability.
Recoverable
Amount
The recoverable amount of an asset or a cashgenerating unit is the higher of its fair value
less costs to sell and its value in use.
Recoverable
Costs
See Expense Pass-throughs.
Recoverable
Service Value
The higher of a non-cash-generating assets

fair value less costs to sell and its value in use.
Recreational
Assets
Properties held in public ownership that:
Rent(al)
See Contract Rent, Market Rent, Turnover

Rent.
Rent
Escalations or
Stepped Rents
Upward rental adjustments based on some

external change or indexing, and specified in
a lease clause.
Replacement
Cost (New)
A replacement cost estimate envisions

constructing a structure of comparable utility,
employing the design and materials that are
currently used in the market.
IAS36, 6
IPSAS21, 14
IVA3, 3.8
a) are managed by or on behalf of

national,
municipal,
or
local
governmental authorities; and
b) provide for recreational use by the
general public.
Examples include parks; playgrounds;
greenbelts; walks and trails; swimming pools;
playing courts; fields and courses; and other
properties equipped with recreational and
athletic facilities.
The current cost of a similar new item having

the nearest equivalent utility as the item being
appraised.
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 4.11
The cost of replacing an asset with an equally

245
satisfactory substitute asset; normally derived

from the current acquisition cost of a similar
asset, new or used, or of an equivalent
productive capacity or service potential.
replacement cost assumes the use of modern
materials, techniques and designs.
See also Modern
Reproduction Cost.
Equivalent
GN4, 3.20;
GN6, 3.35
Asset,
Report Date
The date of valuation report. May be the

same or different from the valuation date.
GN4, 3.21; GN6,

3.36
Reproduction
Cost (New)
The cost to create a virtual replica of the

existing structure, employing the same design
and similar building materials.
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 4.11
The current cost of an identical new item.

In the market for fine art, reproduction cost is
equivalent to the cost of creating a facsimile
of the original item.
GN4, 3.22,;
GN6, 3.37
See also Cost Approach for Valuing Fine Art,

Replacement Cost.
Residual
Value
The estimated amount that an entity would

currently obtain from disposal of an asset,
after deducting the estimated costs of
disposal, if the asset were already of the age
and in the condition expected at the end of its
useful life.
IAS16, 6
IPSAS17, 12
The net amount which the entity expects to
obtain for an asset at the end of its useful life
after deducting the expected costs of
disposal.
The remaining value of an asset at the end of
a prescribed period of time (in this definition
residual value is similar to scrap value).
Revaluation
Model
After recognition as an asset, an item of

property, plant and equipment whose fair
value can be measured reliably shall be
carried at a revalued amount, being its fair
IAS16, 31
246
value at the date of the revaluation less any

subsequent accumulated depreciation and
subsequent accumulated impairment loss.
Revaluations shall be made with sufficient
regularity to ensure that the carrying amount
does not differ materially from that which
would be determined using fair value at the
balance sheet date.
See also Cost Model.
Revalued
Amount
The fair value of an asset at the date of a

revaluation less any subsequent accumulated
depreciation and subsequent accumulated
impairment losses.
IAS16, 31
The value of a property, plant and equipment

as established by appraisal or valuation
normally undertaken by professionally
qualified Valuers.
Reversion
Yield
See Terminal Capitalisation Rate.
Rights of Way
Rights or privileges, acquired through use or

contract, to pass over a portion or strip of
landed property owned by another.
Property Types,
2.2.4.2
Royalty or
Royalty
Interest in
the Extractive
Industries
The landowners or lessors share of

production, in money or product, free of
charge for expenses of production.
An
Overriding Royalty is a share of mineral or
petroleum produced, free of the expense of
production, paid to someone other than the
lessor, over and above any lessors Royalty.
GN14, 3.13
Sale and
Leaseback
A simultaneous sale of real estate and lease of

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.
GN2, 3.1.11
247
Sales
Comparison
Approach
A comparative approach to value that

considers the sales of similar or substitute
properties and related market data, and
establishes a value estimate by processes
involving comparison. In general, a property
being valued (a subject property) is compared
with sales of similar properties that have been
transacted in the market. Listings and
offerings may also be considered.
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 9.2.1.2
GN5, 3.18
A general way of estimating a value
indication for personal property or an
ownership interest in personal property, using
one or more methods that compare the subject
to similar properties or to ownership interests
in similar properties. This approach to the
valuation of personal property is dependent
upon the Valuers market knowledge and
experience as well as recorded data on
comparable items
Salvage Value
The value of an asset estimated with regard to

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.
IVS2, 6.9.3
See Headleasehold Interest.

Sandwich
Lessor Interest
Securitised
Investment
Instruments
Instruments securing both debt and equity

positions, representing an alternative to the
direct ownership of property. Investors are
able to own and trade shares of an interest in a
property or pool of properties in the same way
they would buy and sell shares of corporate
stock. The market for such securities includes
both a private, or institutional, sector and a
public sector; examples include real estate
investment trusts (REITs), collateralised
mortgaged obligations (CMOs), commercial
mortgaged-backed securities (CMBs), real
estate operating companies (REOCs) and
Property Types,
5.1.4; 5.1.4.1;
5.1.4.3
248
separate and commingled funds.

Service
Potential
The capacity of an asset to continue to

provide goods and services in accordance
with the entitys objectives.
IVA3, 3.9,
GN8, 3.6
In the public sector, the concept of service

potential takes the place of the test of
adequate profitability applied in the private
sector.
Special
Purchaser
A purchaser to whom a particular asset has

Special Value because of advantages arising
from its ownership that would not be available
to general purchasers in the market.
IVS2, 3.4
See also Special Value.

Special,
Unusual, or
Extraordinary
Assumptions
Before completing the acquisition of a

property, a prudent purchaser in the market
typically exercises due diligence by making
customary enquiries about the property. It is
normal for a Valuer to make assumptions as
to the most likely outcome of this due
diligence process and to rely on actual
information regarding such matters as
provided by the client. Special, unusual, or
extraordinary assumptions may be any
additional assumptions relating to matters
covered in the due diligence process, or may
relate to other issues, such as the identity of
the purchaser, the physical state of the
property, the presence of environmental
pollutants (e.g., ground water contamination),
or the ability to redevelop the property.
IVS3, 3.5
See also Assumptions.

Specialised
Livestock
Facilities
See Dairy Farms, Livestock Ranches/Stations.
Specialised or
Special
Purpose
Agricultural
Agricultural properties that do not typically

produce a crop but are used for the handling,
processing, or storage of crops following
harvest. These properties frequently have a
GN10, 3.8
249
Properties
small land base that is extensively developed

with
structural
improvements
(grain
elevators) and equipment (lifting machinery).
Properties may also be classified as special
purpose by the nature of the commodity
produced. Examples are truck farms, poultry
farms, farms that produce certified crop seeds
or fresh cut flowers, and racehorse breeding
or training stables.
Specialised
Property
A property that is rarely if ever sold in the

market, except by way of sale of the business
or entity of which it is part, due to uniqueness
arising from its specialised nature and design,
its configuration, size, location, or otherwise.
IVA1, 3.4;
IVA2, 3.3; GN8,
3.7
Examples of specialised properties include

refineries, power stations, docks, specialised
manufacturing facilities, public facilities,
churches, museums, and properties located in
particular
geographical
locations
for
operational or business reasons.
Specialised
Trading
Property
(STP)
See Trade Related Property.
Special Value
An amount above the Market Value that

reflects particular attributes of an asset that
are only of value to a Special Purchaser.
IVS 2, 3.5
See also Synergistic Value.

Specifications
for the
Valuation
Assignment
The first step in the Valuation Process, which

establishes the context and scope/extent of the
assignment and resolves any ambiguity
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 valuation assignment
include the following seven elements:
IVS , 3.4
1. An identification of the real, personal

(plant and machinery; furniture, fixtures,
250
2.
3.
4.
5.
6.
7.
and equipment), business or other

property subject to the valuation and
other classes of property included in the
valuation besides the primary property
category;
An identification of the property rights
(sole proprietorship, partnership, or
partial interest) to be valued;
The intended use of the valuation and any
related limitation; and the identification
of any subcontractors or agents and their
contribution;
A definition of the basis or type of value
sought;
The date as of which the value estimate
applies and the date of the intended
report;
An identification of the scope/extent of
the valuation and of the report; and
An identification of any contingent and
valuation is based.
Stepped Rents
See Rent Escalations.
Subleasehold
A leasehold position created when a tenant or

lessee in a prior lease conveys to a third party,
a sublessee, the interest that the tenant, or
lessee, enjoys.
See also Headlease or
Headleasehold Interest.
Master
Property Types,
2.2.3.1
Lease,
Subsequent
Costs
Under the recognition principle in IAS 16, 7,

an entity recognises in the carrying amount of
an item of property, plant and equipment the
cost of replacing part of such an item when
that cost is incurred if the recognition criteria
are met.
Substitution
See Principle of Substitution.
Summation
Approach
See Cost Approach.
Syndication
Legal entity related to a partnership, when

organized by a general partner with investors
as limited partners, whereby funds are pooled
IAS16, 13
Property Types,
5.1.2; 5.1.2.1
251
for the acquisition and development of real

estate projects or business ventures.
Synergistic
Value
An additional element of value created by the

combination of two or more interest where the
value of the combined interests is worth more
than the sum of the original interests.
IVS2, 3.6
Also called Marriage Value.

Tangible
Assets
Assets with a physical manifestation.
Technical
Assessment in
the Extractive
Industries.
A technical document, prepared by (a)

Technical Expert(s) that supports the
Extractive Industry Valuation and is appended
to, or forms part of, a Valuation Report.
Technical
Expert in the
Extractive
Industries
A person, who is responsible for all or part of

the Technical Assessment that supports an
Extractive Industry Valuation. A Technical
Expert must have appropriate experience
relevant to the subject matter, and in countries
where required by statute or regulation, must
be a member or licence-holder in good
standing of a professional organisation that
has the authority to sanction members or
licensees. An accredited specialist may not
take responsibility for all or part of a
Technical Assessment without also being a
Technical Expert.1
Technical
Obsolescence
Term used by PP&E Valuers for Functional

Obsolescence.
Technical
Review
A valuation review performed by a Valuer to

form an opinion as to whether the analyses,
opinions, and conclusions in the report under
review are appropriate, reasonable, and
supportable.
Tenants
See Lease Interest.
Examples include land and buildings, plant

and machinery, fixtures and fittings, tools and
equipment, and assets in the course of
construction and development.
GN14, 3.15
GN11, 3.3
252
Interest
Terminal
Capitalisation
Rate or
Reversion
Yield
The capitalisation rate used to convert income

into an indication of the anticipated value of
the property at the end of the holding period
of property resale value.
Timberland
See Forestry/Timberland.
Toxic
The status of a material, whether gas, liquid,

or solid, that in its form, quantity, and location
at the date of valuation has capacity to cause
harm to life-forms. Toxicity refers to the
degree or extent of such capacity.
In North America, the terminal capitalisation

rate is also called a residual capitalisation rate
or a coming-out capitalisation rate. In the
Commonwealth, it is known as a reversion
yield.
Trade Fixtures Non-realty fixtures attached to property by the

tenant and used in conducting the trade or
or Tenants
business.
Fixtures
GN7, 3.3
Property Types,
3.2.2; GN5, 3.19
See also Leasehold Improvements or Tenants

Improvements, Personal Property.
Trade Related
Property
Certain classes of real property, which are

designed for a specific types of business and
that are normally bought and sold in the
market, having regard to their trading
potential.
IVA2, 3.4;
Trading
Potential
Future profits to be derived from the sale of

goods and products, e.g., fuel, food and drink,
or the provision of specialised facilities for
lodging, parking, gaming, or entertainment.
Trading potential is associated with a category
of properties (fuel stations, restaurants, hotels,
casinos, cinemas and theatres), the market
value of which includes not only land,
buildings, and personal property but also
intangibles, such as goodwill, and the
business itself.
IVA2, 3.4;
GN2, 3.5
GN12, 3.5
253
Transferable
Goodwill
That intangible asset that arises as a result of GN4, 3.12.1; GN6,

3.20.3; GN12,
3.3.3
customer patronage, location, products and
similar factor, which generate economic
benefits. It is inherent to the trade related
property, and will transfer to a new owner on
sale.
See also Goodwill, Personal Goodwill.
Any form of lease rental arrangement in
which the lessor receives a form of rental that
is based upon the earnings of the lessee.
Percentage rent is an example of a turnover
rent.
GN2, 3.10.3
Units(s) of
Comparison
Typically a factor produced by two

components,
which
reflects
precise
differences between properties and facilitates
analysis in the three approaches to value, e.g.,
price per square metre or square foot, or the
ratio of a propertys sale price to its net
income
(net
income
multiplier/years
purchase).
GN1, 3.10
Useful Life
Either
(of Property,
a)
Turnover
Rent or
Participation
Rent
Plant and
Equipment)
the period over which an asset is expected

to be available for use by an entity; or
b) the number of production or similar units
expected to be obtained from the asset by
an entity.
In regard to leases, useful life is defined as:
The estimated remaining period, from the
commencement of the lease term, without
limitation by the lease term, over which the
economic benefits embodied in the asset are
expected to be consumed by the entity.
Utility
A relative or comparative term rather than an

absolute condition that refers to the degree of
usefulness of a property.
The utility of agricultural land is ordinarily
measured by its productive capacity. If the
land has development potential, however, its
IAS16, 6; IAS 36,

6; IAS38, 8;
IPSAS17, 13;
IPSAS21, 14
IAS17, 4
Concepts
Fundamental to
Generally
Accepted
Valuation
Principles, 7.1,
254
productivity is measured by how productively

it will support a residential, commercial,
industrial, or mixed use.
7.2, 7.3. 7.6, 7.7
Optimum utility is achieved if the property in

question is operated on an individual basis.
Other property has greater utility if operated
as part of a group of properties, or held and
managed within an aggregate or portfolio of
properties.
Utility is generally measured from a longterm perspective, ordinarily over the useful
life of a property or group of properties.
When a property may not have a readily
discernible degree of utility at the date of
valuation, full disclosure of the value
definition, supporting data, and extent of
special assumptions or limiting conditions is
required.
Vacant
Possession
In real estate this refers to a right to

possession of land or built-up property in
respect of which there is no current occupant.
The
term,
vacant
Commonwealth usage.
possession,
is
Valuation
The process of estimating value.
Valuation
Approach
In general, a way of estimating value using

one or more specific valuation methods.
Depending on the nature and purpose of the
property, three valuation approaches may be
applied. These are the sales comparison,
income capitalization, and cost approaches.
Their application will enable the Valuer to
determine Market Value or a value other than
Market Value.
GN4, 3.23; GN 5,
3.20; GN 6, 3.38
See Asset-Based Approach, Cost Approach,

Income Capitalisation Approach, Principle of
Substitution, Sales Comparison Approach.
Valuation
Assignment
See Specifications
Assignment.
for
the
Valuation
255
Valuation
Brief
See Specification
Assignment.
for
Valuation
Date
The date as of which the Valuers opinion of

value applies.
Valuation
Method
Within valuation approaches, a specific way

to estimate a value.
GN4, 3.24; GN 5,
3.21; GN6, 3.39
Valuation
Procedure/
Process
The act, manner, and technique of performing

the steps of a valuation method.
GN4, 3.25; GN 5,
3.22; GN6, 3.40
Valuation
Ratio
A factor wherein a value or price serves as the

numerator and financial, operating, or
physical data serve as the denominator.
GN4, 3.26; GN 6,
3.41
See also Capitalisation

Multiplier.
the
Factor,
Valuation
Income
Valuation
Report
A document that records the instructions for

the 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.
IVS3, 3.5
Valuation
Review
A Valuation assignment that covers a range of

types
and
purposes.
The
principal
characteristic all valuation reviews have in
common is that one Valuer exercises impartial
judgment in considering the work of another
Valuer. A valuation review may support the
same value conclusion in the valuation under
review or it may result in disagreement with
that value conclusion. Valuation reviews
provide a credibility check on the valuation as
well as a check on the strength of the work of
the Valuer who developed it, as regards the
GN11, 3.1
256
Valuers
knowledge,
independence.
experience,
and
Valuation organisations around the world

distinguish between various types of reviews,
e.g., administrative (compliance) reviews,
technological reviews, desk reviews, field
reviews, reviews to ensure that a valuation has
been carried out in accordance with
professional standards (where the bases of
valuation used in the valuation under review
are accepted), reviews that muster general
market information to support or contest the
value conclusion, and reviews that examine
the specific data in the valuation under review
with comparable data from a sample group.
Valuation
Standards
The International Valuation Standards (IVSs),

unless otherwise specified.
Value
The price most likely to be concluded by the

buyers and sellers or a good or service that is
available for purchase. Value establishes the
hypothetical or notional price that buyers and
sellers are most likely to conclude for the
good or service. Thus, value is not a fact, but
an estimate of the likely price to be paid for
purchase at a given time.
Introduction to
IVSs
1, 2 and 3, 3.3
See also Cost, Price.

Value in
Exchange
i)
The value as recognised by a market in

which exchange of asset ownership
hypothetically, or notionally, takes place.
The IVSC definition of Market Value
appropriate for financial reporting is
based upon the principle of value in
exchange, not value in use.
ii) The value, in terms of cash, or a property
which is bartered for another asset or
assets. Cash being the yardstick by
which the comparative value of each unit
can be assessed.
IVS2, 6.1
Value in Use
i) The present value of estimated future

cash flows expected to arise from the
continuing use of an asset and from its
IFRS5,
of a Non-Cash-
257
Generating
Asset
disposal at the end of its useful life.

ii) The present value of the future cash flows
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.
The present value of the assets remaining

Value in Use
of a Non-Cash- service potential.
Generating
Asset
Value of
Improvements
The value added to the land by improvements

such as buildings, structure or modifications
to the land, of a permanent nature, involving
expenditures of labour and capital, and
intended to enhance the value or utility of the
property.
Improvements have different
patterns of use and economic lives.
Appendix A
IAS16, 6
IPSAS21, 14
IVA3, 3.10
See also Improvements.

Valuer
One
who
possesses
the
necessary
qualifications, ability, and experience to
execute a valuation. In some countries,
licensing is required before a person can act
as a Valuer.
Code of Conduct,
3.3
See also Professional Property Valuer.

Wasting Asset
An asset which in real terms will generally

depreciate in value over time.
Examples include leaseholds and extractive
interests.
Working
Capital
The amount by which current assets exceed

current liabilities.
Worth
See Investment Value.
Written
Report
The results of a valuation communicated to a

client in writing, which includes electronic
communication. Written reports may be
GN6, 3.42
IVS3, 3.6
258
detailed narrative documents containing all

pertinent materials examined and analyses
performed to arrive at a value conclusion or
abbreviated pertinent narrative documents,
including periodic updates of value, forms
used by governmental and other agencies, or
letters to clients. See also Oral Reports.
259

Supplementary Philippine Glossary
Agricultural
Lands
Lands devoted principally to the planting of

trees, raising of crops, livestock and poultry,
dairying, salt making, inland fishing and similar
aqua-cultural activities, and other agricultural
activities and is not classified as mineral, timber,
residential, commercial or industrial land. (Sec.
199, para. (d), Local Government Code, R.A.
7160).
PV GN10
Ancestral
Domain Title
Certificate of title(s) covering ancestral lands

actually possessed, occupied or utilized by
Indigenous Cultural Communities or through their
ancestors in accordance with their customs and
traditions, which is defined and delineated by law.
(RA 7942, Philippine Mining Act of 1995, Sec.
3).
PV GN14
Classified
Structures and sites not falling under the above

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.
PV GN15
CoProduction
Agreement
An agreement between the Government and the

contractor wherein the Government shall provide
inputs to the mining operations other than the
mineral resource. (RA 7942, Philippine Mining
Act of 1995, Sec. 26).
PV GN14
Economic
Enterprises
The term used in the Philippines applicable to

business enterprise(s) of the local government
units which is equivalent to the term
Government Business Enterprise in the IVS.
PVA3
Government
Financial
Institutions

financial institutions owned and controlled by
the national government which is equivalent to
the term Government Business Enterprise in the
IVS.
PVA3
Government
Owned and
Controlled
Corporations

corporations owned and controlled by the
national government which is equivalent to the
term Government Business Enterprise in the
IVS.
PVA3
260

Heritage
Houses
Houses of ancestry with notable historical and

cultural significance.
PV GN15
Historic Sites
Natural areas or places with historical

significance, and places recognised, marked or
declared.
PV GN15
Integrated
Forest
Management
Agreement
(IFMA)
A production sharing contract entered into by

and between the DENR and a qualified applicant
wherein the DENR grants to the latter the
exclusive right to develop, manage, protect and
utilize a specified area of forestland and forest
resources therein for a period of 25 years and
may be renewed for another 25-year period,
consistent with the principle of sustainable
development and in accordance with an
approved Comprehensive Development and
Management Plan (CDMP) and under which
both parties share in its produce. (DENR
Administrative Order No. 99-53)
PV GN10
Joint Venture
Agreement
An agreement where a joint-venture company is

organized by the Government and the contractor
with both parties having equity shares. Aside
from earnings in equity, the Government shall be
entitled to a share in the gross output. (RA 7942,
Philippine Mining Act of 1995, Sec. 26).
PV GN14
Materiality
Information is material if its omission or

misstatement could influence the decisions or
assessments of users of that information.
PV GN3
Materiality with regard to valuation of items of

low value depends upon the nature or size of the
item in the particular circumstances. Items that
are considered de minimus may be aggregated
and/or carried as inventory and recognised as an
expense as consumed (that is, they are not
required to be valued.)
Minerals
Refers to all naturally occurring inorganic

substance in solid, gas, liquid, or any
intermediate state excluding energy materials
such as coal, petroleum, natural gas, radioactive
materials, and geothermal energy. (RA 7942,
Philippine Mining Act of 1995, Section 3:
paragraph aa).
PV GN14
Mineral
Lands
Lands in which minerals, metallic or nonmetallic, exist in sufficient quantity or grade to

justify the necessary expenditures to extract and
PV GN14
261

utilize such materials. (RA 7160, Local

Government Code, 1991, Section 199, paragraph
p).
Mineral
Production
Sharing
Agreement
An agreement where the Government grants to

the contractor the exclusive right to conduct
mining operations within a contract area and
shares in the gross output. The contractor shall
provide the financing, technology, management
and personnel necessary for the implementation
of this agreement. (RA 7942, Philippine Mining
Act of 1995, Sec. 26).
PV GN14
Mineral
Resources
Refer to areas established and proclaimed as such

by the President upon the recommendation of the
Director through the Secretary, including all
submerged lands within the contiguous zone and
Exclusive Economic Zone.
PV GN14
Mining Area
A portion of the contract area identified by the

contractor for purposes of development, mining,
utilization, and sites for support facilities or in
the immediate vicinity of the mining operations.
[Republic Act (RA) 7942, Philippine Mining Act
of 1995, Section 3, paragraph ae].
PV GN14
National
Landmarks
Sites or structures that are associated with an

event,
achievement,
characteristic,
or
modification that makes a turning point or stage
in Philippine history.
PV GN15
National
Monuments
Objects, structures or sites dedicated to

memorialize or give reverence to a special
historic personage or event.
PV GN15
National
Shrine
Historic site or object hallowed and honored for

their history or association.
PV GN15
Plottage
Value
The increase in value resulting from adding an

adjacent parcel or parcels to an existing parcel.
The Dictionary of Real Estate Appraisal defines
plottage: as the increment of value created
when two or more sites are combined to produce
greater utility.
PVS2
Plant,
Machinery
and
Equipment
The collective term used by Valuers in the

Philippines, which is equivalent to the term Plant
and Equipment in the IVS.
PV GN3
262

The term used by Valuers in the Philippines

Replacement
Cost New Less equivalent to the term Depreciated Replacement
Cost (DRC) in the IVS.
Depreciation
(RCNLD)
PV GN8
Sampling
Technique
The method employed in the valuation of plant,

machinery & equipment for major public or
corporate clients especially in circumstances
wherein full comprehensive inspections of each
and every item may not be practical or necessary
and it may be possible to reliably determine the
value of assets on a group basis. For example, a
multitude of individual assets, many of which
considered
individually
and
sometimes
collectively which, represent an insignificant
part of the overall asset base.
PV GN3
Scrap Value
The value that the basic recoverable materials

(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.
PVS2
263

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PHILIPPINE VALUATION STANDARDS

1st Edition, 2009

Bureau of Local Government Finance

MA. PRESENTACION R. MONTESA

Republic of the Philippines

DEPARTMENT ORDER NO. _________

Prescribing the Adoption of the Philippine Valuation Standards.

All Regional Directors of the Bureau of Local Government

NOW THEREFORE, the following are hereby issued:

Philippine Valuation Standards

Implement a valuation system that will assess property values at their

Introduction to Philippine Valuation Standards

Philippine Valuation Standards

Objectives and Purpose of the Standards

To raise the quality of public and private sector valuations and

Development of the Philippine Valuation Standards

Introduction to Philippine Valuation Standards

Philippine Valuation Standards

Introduction to Philippine Valuation Standards

Philippine Valuation Standards

Copyright 2009 by the International Valuation Standards Council.

Scope and Application of Philippine Valuation Standards

Introduction to Philippine Valuation Standards

Philippine Valuation Standards

Market Value as defined in the standards, or as required for financial reporting or

Future Maintenance of the Standards

Introduction to Philippine Valuation Standards

Philippine Valuation Standards

The International Valuation Standards Committee

To formulate and publish, in the public interest, valuation Standards for

Introduction to International Valuation Standards

Philippine Valuation Standards

Membership and Organisation

Introduction to International Valuation Standards

Philippine Valuation Standards

Introduction to International Valuation Standards

Philippine Valuation Standards

The International Valuation Standards

To facilitate cross-border transactions and contribute to the viability of

To serve as a professional benchmark, or beacon, for Valuers around the

Introduction to International Valuation Standards

Philippine Valuation Standards

Detailed examination of methodology and its application to specific property types or

Organisation of the International Standards

The International Valuation Standards Committee (IVSC) recognises the complexity

Introduction to International Valuation Standards

Philippine Valuation Standards

Standards is, therefore, important to their application.

The organisation of the

1. Introduction - The introduction offers an overview of the origins of the

Introduction to International Valuation Standards

Philippine Valuation Standards

8. Guidance Notes Issues that relate to the application of the Standards

Introduction to International Valuation Standards

Philippine Valuation Standards

Concepts Fundamental to Generally Accepted Valuation

2.0 Land and Property Concepts

utility, or capacity to satisfy the needs and

Concepts Fundamental to Generally Accepted Valuation Principles

Philippine Valuation Standards