Analyzing changes in IVS 2017
The fourth revision of the International Valuation Standards (IVS) released by the International Valuation Standards Council (IVSC) in 2017 comes into effect on July 1, 2017.
The IVS is widely used by valuers as a guide at the international level regulating the sequencing of valuation procedures and stimulating greater transparency of such procedures. Keeping track of the new IVS revisions and their application in valuation procedures remains to be the paramount aspect of the valuers’ expertise.
IVS 2017 comprises five General Standards that establish the terms and contents of a valuation engagement, describe the investigation practice and coordination of valuation activities, reporting, define the bases of value, approaches, and methods.
IVS 101. Scope of Work (Terms of Engagement)
IVS 101 describes the fundamental terms of a valuation engagement such as the asset(s) being valued, the purpose of the valuation, and the responsibilities of parties involved in a valuation.
1. An identification of the Client(s) and potential users of the valuation findings were divided into two separate paragraphs. This information should be arranged the same way in valuation reports.
2. The valuation currency was added as a separate element of the scope of work.
3. IVS 101 introduces a new assumption attribute — significant assumptions that can be used together with special assumptions.
4. A written scope of work may be unnecessary in certain circumstances and may be specified during a valuation engagement. However, a written scope of work is strongly encouraged.
5. When analyzing the reliability and credibility of the information used, the purpose of valuation and independence of the information source from the subject property should be taken into account.
IVS 102. Investigations and Compliance
IVS 102 includes units covering the ongoing investigations, work records, as well as the principles of compliance with other standards (regulatory and other authoritative requirements established by law). To comply with the IVS standards, all of these paragraphs must meet the valuation purposes and conditions established in the scope of work, while all departures must remain within the national legal framework.
1. The name IVS 102 was updated from “Implementation” to “Investigations and Compliance” to better reflect the contents of this standard.
2. It is noted that the use of information provided by the client or other stakeholders requires the valuer to substantiate the use of such information (in view of the non-arm’s length aspect emerging), however, an audit of the information provided is not mandatory.
3. The standard also excluded a requirement on the publicity of the information since no matter if the information was disclosed or not, its use would not affect the valuation results significantly.
IVS 103. Reporting
The key purpose of IVS 103 is to regulate the valuation reporting.
1. With account for a wide range of the terms of engagements, the contents of the valuation report were excluded (including 14 paragraphs earlier). However, due consideration must be given to the following:
− the scope of work;
− the method or methods applied;
− the key inputs used,
− the assumptions made;
− the conclusion(s) of value;
− the date the report was prepared.
2. A regulation of contents in valuation reviews is another fundamentally new change, which was not set in the earlier revision IVS 2013. According to IVS 2017, the contents of this type of reports include the following:
− scope of the review performed;
− the valuation report being reviewed, as well as the inputs and assumptions the completed valuation is based upon;
− the reviewer’s conclusions on the work under review;
− the date the report was prepared.
3. Limitations existing prior to examination of the property valued should be indicated in the report.
IVS 104. Bases of Value
IVS 104 requires that a valuer selected an appropriate value base and met all requirements related to this base of value.
1. This standard defines the following value bases:
— Market Value;
— Market Rent;
— Equitable Value;
— Investment Value/Worth;
— Synergistic Value;
— Liquidation Value.
Other valuation bases comprise:
— Fair Value (according to the International Financial Reporting Standards, model law “On commercial corporation” and Canadian case law (Manning v Harris Steel Group Inc);
— Fair Market Value (according to the Organisation for Economic Cooperation and Development, as well as the US Internal Revenue Service);
2. Inclusion of the paragraph “Premise of value” with the valuation principles describing the circumstances of how an asset or liability is used. This section extends the following sections of IVS 2013: forced sale, highest and best use, current use/existing use, and orderly liquidation.
3. A number of notions was placed to separate paragraphs of IVS 104, previously located in the IVS Framework. These include entity-specific factors, synergies (previously — “synergistic value”), assumptions.
IVS 105. Valuation Approaches and Methods
IVS 105 regulates the approaches and methods to valuation used in valuation activities.
Since the IVS 2013 came to effect, the users have detected a number of significant issues in these standards: the information containing a description of approaches and the methods applied in valuation was not detailed and structured enough; it was located in sections covering the valuation of specific assets, which complicated the work.
The need to summarize this information led to creation of a separate general standard IVS 105 (Valuation Approaches and Methods).
IVS 105 (Valuation Approaches and Methods), which appeared in the IVS 2017 comprises:
− an introductory section about valuation approaches and methods describing the process for selecting one or multiple valuation methods and approaches;
− more detailed sections on each of the three approaches describing the valuation methods, circumstances regulating the use of each approach as a single one, main or in combination with other approaches.
This standard highlights the well-known conventional approaches to valuation:
− Market Approach;
− Income Approach;
− Cost Approach.
Methods applicable under the market approach:
- Comparable Transaction Method (Guideline Transactions Method);
- Guideline Publicly-Traded Comparable Method
- Prior Transaction Method.
It should be noted that the description of the market approach in IVS 2017 has been reworked substantially against IVS 2013.
In addition to widely applicable methods, the standard now includes a new valuation method — Prior Transaction Method. The purpose of this method is to analyze the company’s own stock quote.
Methods applicable under the income approach:
- Discounted Cash Flow (DCF) Method.
There are certain points to consider when applying the discounted cash flow:
- it is expected that the discount rate should reflect only a systematic risk (para 40.5);
- assumptions of the cash flow forecasts should depend on the valuation purpose (para 50.13);
- risks may be reflected in both the discount rate and the cash flow forecast (paras 50.16-50.17).
Methods applicable under the comparable method:
- Replacement cost method;
- Reproduction Cost Method;
- Summation Method.
We would like to note that the Summation Method is another first-timer in the standard.
All information regarding the types of obsolescence of an asset and its accounting, which was fragmented in the IVS 2013 across various sections, is now collected in a single place in the section titled Depreciation/Obsolescence.