Transcript Valuation Reporting

Fair Value
The Valuers’ Perspective
Chris Thorne FRICS FCIArb
Board Member IVSC
Stanley Booton MA MRICS
Chairman: RICS Valuation for
Financial Statements Group
Overview
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Nature and objectives of IVSC
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Valuation for financial reporting:
• Where we are now
• Fair value and Market Value
• Other practical issues
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What do valuers need from IASB?
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What is IVSC?
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Formed in 1981 by various professional bodies
involved in real estate valuation
Members are professional bodies. Over 50
countries now represented.
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Non Governmental Organisation member of UN
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Latest standards (7th edition) published early 2005
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IVS now adopted or incorporated into national
standards in many developed economies – USA
have agreed convergence of USPAP and IVS
Membership and standards now extend beyond real
estate to other classes of asset and liability
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IVSC funding
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Members pay a annual fee
Majority of funding comes from sponsorship
Current sponsors include:
• larger professional institutes, e.g. RICS and
Appraisal Institute (USA).
• Major firms of real estate valuers, e.g. Atisreal, CBRE,
Cushman Wakefield, DTZ, Jones Lang LaSalle, King Sturge,
Knight Frank,
• Users of real estate valuations, e.g. Verband
Deutscher Hypothekenbanken.
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Funds committed from some accountancy firms for
current business valuation project
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IVSC restructuring
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Current structure considered inappropriate for
further development.
Need to:
• broaden scope of markets addressed
• Improve relevance to different applications
• Increase output
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All require additional funding
Strategic review underway; future structure may
well be modeled on IASCF /IASB
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Role of IVSC
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IVSC’s role is to produce, publish and promote
valuation standards:
•
It is not a regulatory body
•
It has no individual members
•
It has no power to enforce or compel compliance
with the standards
Compliance with IVS is through the member
organisations of IVS.
“Red Book” is RICS regulatory document that
requires members to adopt IVS, supported by
monitoring and compliance powers.
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What are Standards?
 They ARE statements of:
• recognised principles and concepts
• best practice in procurement and reporting
• accepted definitions
 They do NOT:
• Prescribe specific methods of valuation for
different purposes
• Teach valuers how to value!
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Valuation for Financial Reporting
 Accounting Standards were original motivation
for Valuation Standards
 Although IVS cover valuation generally, principal
“driver” remains IFRS
 In states such as UK and Australia, long tradition
of valuation in financial statements
 Also long tradition of valuers liaising with
national accounting standard setters
 In UK FRS 15 quotes RICS Red Book and vice
versa
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Valuation for Financial Reporting
 IVSC has had more limited influence on IASB
 Although IAS /IFRS allowed valuation option, not
widely adopted outside Commonwealth
 National standards, such as FRS 15, and
equivalents in other countries had clear
guidance on valuation bases and assumptions
 IAS in contrast just stipulate “fair value”, with
only a definition and limited guidance on
application
 Accordingly existing IVS guidance also vague
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Light at the end of the tunnel?
 IVSC welcomes both Canadian Measurement and
FASB Fair Value projects
 Both shine light on some of the issues that have
been troubling valuers and auditors, e.g.:
• What is Fair Value?
• Is Fair Value the same as Market Value?
• Is FV always applied in the same context under
different standards?
• How is Fair Value determined?
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Fair Value
“the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction.”
(IAS 16 para. 6)
 Currently no conceptual framework for application.
 IAS 16 and 1AS 40 provide some help by
stipulating that normally determined having regard
to market evidence or current market conditions,
but:
•
In general use fair value is price that is fair to the
particular parties in the transaction
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It reflects the advantages and disadvantages to them of
the transaction – synergistic value is expressly included
•
Commonly used in share transfers and business
combinations
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Other FV Definitions
FASB October 05 –
•
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Fair value is the price that would be received for an
asset or paid to transfer a liability in a current
transaction between marketplace participants in the
reference market for the asset or liability
FASB March 06 –
•
Fair value is the price that would be received for an
asset or paid to transfer a liability in a transaction
between market participants at the measurement
date
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Market Value
“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 arm’s-length transaction after
proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion.” (IVS 1)
 Supported by Conceptual Framework in IVS
 Definition well tested and now becoming
established in regulation international – e.g. EU
Directive on Solvency Ratios
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Market Value
Conceptual Framework – highlights include:
• “estimated amount” excludes any element of
special value – ie synergy gains available from
a specific party have to be disregarded.
• a “willing buyer” is motivated but not compelled
to buy
• a “willing seller” is neither over eager or forced
but motivated to sell at whatever price is
available in current market
• “proper marketing” means property has been
exposed to market in most appropriate manner
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Definitions of Value
The Valuers’ View
FAIR VALUE
may be represented by
Current Cost
(Net) Realisable
Value
Value in Use to
the Entity
(price in exchange)
Reproduction
Cost
Replacement
Cost
Recoverable
Amount
(can be same at NRV)
(higher of above values)
Deprival Value
(lower of above values)
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Fair v Market Value
In many cases price obtainable in the general
market for that asset will be a price that is deemed
“fair” by both parties
However:
• MV disregards any such synergistic value as this
could only be realised if a specific party was
willing to transact on date of valuation
• MV does not require price to be “fair” to either
party – it is simply the price determined by
market participants generally
• FV is generally a “broader” concept than MV.
For many purposes ignoring synergistic value
and whether deal was “right” for the particular
entity would be wholly inappropriate
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Fair v Market Value
 Fair Value and Market Value overlapping
concepts but are NOT synonymous
 FASB had proposed in include in its Fair Value
definition a direct comparison to a “reference
market”.
• Also clear from Canadian paper that entity
specific considerations should normally be
disregarded.
• Is not obvious solution to stipulate that MV as
defined in IVS as appropriate measure for
financial reporting?
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Practical Issues
Is asset measured under going concern concept?
 IAS 1 stipulates that accounts prepared on going
concern basis – unless intention is to liquidate
 Measurement takes place at asset level not
entity level
 Assets (or liabilities) can have markedly different
market values depending on which assumption
made:
•
that they are part of a transfer of the whole
operation or,
•
that they are sold away from the enterprise as
a separate item
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Practical Issues
Is asset measured under going concern concept? - 2
 Potential conflict between IAS 16 and IAS 36
• Is Fair Value under revaluation option supposed
to be the same as Fair Value in impairment test?
• Intention of IAS 36 appears to be to establish
minimum carrying amount by comparing ViU of
holding asset with net proceeds of liquidation
(FV less costs)
• Same FV (without costs deduction) might be
thought to be carrying amount under IAS 16.
However, this figure then used to calculate
depreciation under same standard, which
assumes asset continuing useful life to entity.
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Practical Issues
Real Estate
Real estate has characteristics that distinguish it
from other types of asset and liability:
• It has to be transacted in-situ – if owner
occupied the entity has to remove or relocate if
not transferred as part of going concern
• Land does not normally depreciate
• Land and buildings may have potential for more
valuable uses
• Buildings often adapted to suit particular
operation
These pose particular measurement questions…
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Practical Issues
Real Estate Measurement Questions - 1
 If land and buildings declared surplus liabilities
for contamination may be triggered – but not if
transferred as part of going concern
 Land may have higher value for alternative use
but this could not be realised without closure or
relocation – must be correct that potential is
revealed in notes but :
• is it logical that carrying amount reflects a use
inconsistent with the going concern assumption?
• If carrying amount does reflect alternative use,
how are costs consequential on realising the
higher value reflected?
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Practical Issues
Real Estate Measurement Questions - 2
 An entity may construct a building that is
specialised for its operation – includes buildings
that are otherwise conventional but that are of
abnormal size or in an abnormal location
• If valued on assumption that transfer of real
estate interest is as part of transfer of whole
entity the estimated price will reflect need of
purchaser for that facility
• If valued without regard to going concern, ie as if
surplus, there may be no identifiable purchaser
at all, and price will reflect costs of
redevelopment or reconfiguration for uses that
would be in demand.
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Practical Issues
What do valuers need from accounting standards?
 Stipulating Fair Value alone will not achieve
consistency, transparency and credibility in IFRS
 Problems identified are not valuation problems;
valuers can provide answers under any of the
alternative scenarios
 Standards need to clarify the measurement
objective for different purposes e.g. initial
recognition, subsequent recognition,
depreciating accounting or assessing
impairment write downs
 Valuation standards can then stipulate
appropriate assumptions for each purpose
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Reasons to be Cheerful
Part 1
 “Canadian Project” recognises some of the
issues that can affect the assessment of value.
 IVSC generally in agreement with main
conclusions, pleased to see that impact of
different assumptions (“value-affecting
properties”) is acknowledged and discussed
 Draft FASB Standard also advances debate.
Clarifies that:
• FV for Financial Reports should normally reflect
MV
• Discusses affect of “valuation premise” on value
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Reasons to be Cheerful
Part 2
 IVSC has recently met with both IASB and FASB
Boards and Fair Value project teams
 Board level commitments to improve
understanding of issues and produce suitable
guidance
 IVSC broadening its scope and in dialogue with
other groups interested in valuation of
intangibles
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Fair Value
The Valuers’ Perspective
Chris Thorne FRICS FCIArb
Board Member IVSC
Stanley Booton MA MRICS
Chairman: RICS Valuation for
Financial Statements Group