INTERNATIONAL

VALUATION
STANDARDS
EFFECTIVE 31 JANUARY 2025

INTERNATIONAL VALUATION
STANDARDS COUNCIL
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INTERNATIONAL
VALUATION
STANDARDS

Effective 31 January 2025

 In Memory of
Rt Hon Alistair Darling
Chairman, Board of Trustees
2019–2023

In Memoriam
This edition of the International Valuation Standards (IVS)
honours the memory of Rt Hon Alistair Darling, former Chair
of the International Valuation Standards Council (IVSC), who
passed away in November 2023. A dedicated advocate for
advancing global standards, Alistair’s influence significantly
shaped the field of valuation and the wider financial system.

Alistair’s leadership at the IVSC, informed by his experience

as UK Chancellor of the Exchequer during the Global Financial
Crisis, was characterised by a commitment to transparency,
collaboration, and professional excellence. His focus was
always on improving standards in the public interest,
enhancing the integrity and trust in global valuation practices.

We remember Alistair Darling for his exceptional leadership

and dedication to public service. His contributions have
left a legacy that continues to guide the work of the
IVSC and the entire valuation profession, towards a
more transparent, reliable, and strong financial world.

iii
 Contents

Foreword5

Glossary8

General Standards 12

IVS 100 Valuation Framework13

IVS 101 Scope of Work16

IVS 102 Bases of Value19

IVS 103 Valuation Approaches31

IVS 104 Data and Inputs52

Contents

IVS 105 Valuation Models56

IVS 106 Documentation and Reporting59

Asset Standards62

IVS 200 Businesses and Business Interests63

IVS 210 Intangible Assets76

IVS 220 Non-Financial Liabilities92

IVS 230 Inventory102

IVS 300 Plant, Equipment and Infrastructure110

IVS 400 Real Property Interests122

IVS 410 Development Property131

IVS 500 Financial Instruments145

iv
IVS Foreword

The International Valuation Standards Council (IVSC) is an independent, not-for-

profit organisation committed to advancing quality in the valuation profession. Our
primary objective is to build confidence and public trust in valuation by producing
transparent and consistent standards and securing their universal adoption
and implementation for the valuation of assets across the world. International
Valuation Standards (IVS) are a fundamental part of the financial system.

Valuations are widely used and relied upon in financial markets and other settings,
whether for inclusion in financial statements, for regulatory compliance or to
support secured lending and transactional activity.

The purpose of IVS is to promote and maintain a high level of public trust in
valuation practice. As such, they establish appropriate global requirements for
valuations that apply both to the parties involved in the process and to those who
oversee this process.

IVS are international principle-based valuation standards. They outline a process

Foreword
that can be used in conjunction with other standards, laws, and regulations
requiring a value.

IVS describe the valuation process, which may involve multiple parties (including
specialists and service organisations). The valuer is ultimately responsible for the
assertion of compliance with IVS.

IVS are drafted on the basis that valuers who use the standards are competent and
have the requisite knowledge, skills, experience, training, and education to perform
valuations. For the purposes of IVS, a valuer is defined as an individual, group of
individuals or individual within an entity, regardless of whether employed (internal)
or engaged (contracted/external), possessing the necessary qualifications, ability
and experience to execute a valuation in an objective, unbiased, ethical and
competent manner. In some jurisdictions, licensing is required before an entity
or an individual can act as a valuer (see IVSC Code of Ethical Principles for Valuers).

The use of IVS can either be mandated or voluntarily adopted by:

• a body having legal jurisdiction over the purpose for which the valuation is
required, or
• a valuation professional organisation requiring their use by members for
specific purposes, or
• agreement between the party requiring the valuation and a valuer.

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 International Valuation Standards

Structure of International Valuation Standards (IVS)

International Valuation Standards comprise General Standards that are applicable

across all valuations, and Asset Standards that relate to specific valuation
disciplines. Appendices, which are part of International Valuation Standards,
provide additional information for certain concepts articulated. In order to provide
an IVS-compliant valuation, all IVS General Standards, Asset Standards and
Appendices must be followed.

IVS 100 IVS 101 IVS 102 IVS 103 IVS 104 IVS 105 IVS 106 IVS
IVS
Valuation Scope of Bases of Valuation Data and Valuation Documentation Asset Compliant
Framework Work Value Approaches Inputs Models and Reporting Standards

General Standards
General Standards apply to all valuations. The General Standards are structured
as follows.

IVS 100 Valuation Framework

IVS 101 Scope of Work
IVS 102 Bases of Value
Appendix: IVS-Defined Bases of Value
Other Bases of Value
Foreword

Premise of Value
IVS 103 Valuation Approaches
Appendix: Valuation Method
IVS 104 Data and Inputs
Appendix: Environmental, Social and Governance Considerations
IVS 105 Valuation Models
IVS 106 Documentation and Reporting

Asset Standards
In addition to the requirements of the General Standards, Asset Standards apply to
specific types of assets and liabilities as follows:

IVS 200 Businesses and Business Interests

IVS 210 Intangible Assets
IVS 220 Non-Financial Liabilities
IVS 230 Inventory
IVS 300 Plant, Equipment and Infrastructure
IVS 400 Real Property Interests
IVS 410 Development Property
IVS 500 Financial Instruments

6
7
 Glossary

This glossary forms an integral part of the standards and defines certain
terms used in IVS. All glossary definitions are italicised.

10. Defined Terms

10.01 Asset or Assets
The right to an economic benefit.

10.02 Automated Valuation Model (AVM)

A type of model that provides an automated calculation for a specified
asset at a specified date, using an algorithm or other calculation
techniques without the valuer applying professional judgement over the
model, including assessing, and selecting inputs or reviewing outputs.

10.03 Basis (bases) of Value

The fundamental premises on which the reported values are or will be
based (examples are included in IVS 102 Bases of Value, section 10).
Glossary

10.04 Client(s)
The person who engages the valuer for a given valuation. “Clients” may be
internal (ie, valuations performed for an employer) or external (ie, when
the valuer is engaged by a third-party).

10.05 Cost(s) (noun)

The consideration or expenditure required to acquire or create an asset.

10.06 Data
Quantitative and qualitative information available to the valuer.

10.07 Discount Rate(s)

A rate of return used to convert a monetary sum, payable or receivable in
the future, into a present value.

10.08 Environmental, Social and Governance (ESG)

The criteria that together establish the framework for assessing the
impact of the sustainability and ethical practices, financial performance
or operations of a company, asset or liability. ESG comprises three pillars:
Environmental, Social and Governance, all of which may collectively impact
performance, the wider markets and society.

10.09 Equitable Value

This is the estimated price for the transfer of an asset or liability between
identified knowledgeable and willing parties that reflects the respective
interests of those parties.

8
 Glossary

10.10 Input
Data, assumptions, and adjustments determined to be relevant and
assessed or selected by the valuer to be used in the valuation, based upon
professional judgement.

10.11 Intangible Asset

An identifiable non-monetary asset with no physical substance.

10.12 Intended Use

The reason(s) for which a value is developed as described in the scope of
work. This is also known as intended purpose.

10.13 Intended User

Any party identified by the client and valuer in the scope of work as users of
the valuation.

10.14 Investment Value

The value of an asset to the owner or a prospective owner given individual
investment or operational objectives. This may also be known as “worth”.

10.15 Jurisdiction
The legal and regulatory environment in which a valuation is performed.

Glossary
10.16 Liability
The present obligation to transfer an economic benefit. A liability has the
following two essential characteristics:

(a) it is a present obligation,

(b) the obligation requires an entity to transfer or otherwise provide
economic benefits to others.

10.17 Liquidation Value

The gross amount that would be realised when an asset or group of assets
are sold from a liquidation sale, with the seller being compelled to sell as
of a specific date. Liquidation value can be determined under two different
premises of value (see IVS 102 Bases of Value, Appendix A60):

(a) an orderly transaction with a typical marketing period, or

(b) a forced transaction with a shortened marketing period.

10.18 Market Value

The estimated amount for which an asset or liability should exchange on
the valuation date between a willing buyer and a willing seller in an arm’s
length transaction, after proper marketing and where the parties had each
acted knowledgeably, prudently and without compulsion.

10.19 Must
Actions or procedures that are mandatory.

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 International Valuation Standards

10.20 Observable Data

Information that is readily available to market participants about actual
events or transactions that are used in determining the value for the asset
and/or liability.

10.21 Price (noun)

The monetary or other consideration asked, offered or paid for an asset or
to transfer a liability. Price and value may be different.

10.22 Professional Judgement

The use of accumulated knowledge and experience, as well as critical
reasoning, to make an informed decision.

10.23 Professional Scepticism

Professional scepticism is an attitude that includes a questioning mind and
critical assessment of valuation evidence.

10.24 Service Organisation

An entity (or segment of an entity) that provides information, reports or
opinions including but not limited to providing market data, credit ratings
or other services to support the valuation.

10.25 Should
Glossary

The valuer is expected to comply with requirements of this type unless the
valuer can demonstrate that alternative actions are sufficient.

10.26 Significant
Any aspect of a valuation which, in the professional judgement of the valuer,
greatly impacts the resultant value.

10.27 Specialist

An individual or group of individuals possessing technical skills, experience

and knowledge required to perform or assist in the valuation or the review
and challenge process. A specialist can be internally employed or externally
engaged.

10.28 Synergistic Value

The result of a combination of two or more assets or interests where
the combined value is more than the sum of the separate values. If the
synergies are only available to one specific buyer, then synergistic value
will differ from market value, as the synergistic value will reflect particular
attributes of an asset that are only of value to a specific purchaser. The
added value above the aggregate of the respective interests is often
referred to as marriage value.

10.29 Tangible Asset

A physical measurable asset such as, but not limited to, property, plant,
and equipment.

10
 Glossary

10.30 Valuation
The act or process of forming a conclusion on a value as of a valuation date
that is prepared in compliance with IVS.

10.31 Valuation Approach

A generic term for the use of the cost, income or market approach.

10.32 Valuation Date

The point in time to which the valuation applies.

10.33 Valuation Method

Within a valuation approach, a specific technique to conclude a value.

10.34 Valuation Model

A quantitative implementation of a method in whole or in part that
converts inputs into outputs used in the development of a value.

10.35 Valuation Process Review

An analysis by the valuer to assess compliance with IVS or a component of
IVS applicable as at a valuation date. This does not include an opinion on
the value.

10.36 Valuation Review

Glossary
A valuation review is either a valuation process review or a value review or
both.

10.37 Valuation Risk

The possibility that the value is not appropriate for its intended use.

10.38 Value (noun)

The valuer’s quantitative conclusion on the results of a valuation process
that is fully compliant with the requirements of IVS as of a valuation date.

10.39 Valuer
An individual, group of individuals or individual within an entity, regardless
of whether employed (internal) or engaged (contracted/external),
possessing the necessary qualifications, ability and experience to execute
a valuation in an objective, unbiased, ethical and competent manner. In
some jurisdictions, licensing is required before one can act as a valuer.

10.40 Value Review

An analysis by the valuer applying IVS to assess and provide an opinion on
the value of another valuer’s work. This does not include an opinion on the
valuation process.

10.41 Weight
The amount of reliance placed on a particular indication of value in
reaching a conclusion of value.

11
 

General
Standards
IVS 100 Valuation Framework

IVS 100 IVS 101 IVS 102 IVS 103 IVS 104 IVS 105 IVS 106
Valuation Scope of Bases of Valuation Data and Valuation Documentation
Framework Work Value Approaches Inputs Models and Reporting

ContentsParagraphs
Valuer Principles 10
Valuation Process Quality Control 20
Use of a Specialist or Service Organisation 30
Compliance40
Effective Date50

General Standards: IVS 100 Valuation Framework

General Standards apply to all assets and liabilities and are the starting point
for any valuation. Asset Standards provide requirements in addition to the
General Standards for specific types of assets and liabilities.
Compliance with IVS includes adherence to General Standards, applicable
Asset Standards, and the Appendices.
In performing valuations, the valuer must comply with the Valuer Principles.

10. Valuer Principles

10.01 Ethics

The valuer must follow the ethical principles of integrity, objectivity,

impartiality, confidentiality, competence, and professionalism to provide a
non-biased valuation and to promote and preserve the public trust.

10.02 Competency
The valuer must have the technical skills, knowledge and experience
required to appropriately complete a valuation.

10.03 Compliance
The valuer must disclose or report that IVS were used for the valuation and
that they complied with those standards in performing the valuation.

10.04 Professional Scepticism

The valuer must apply an appropriate level of professional scepticism at
every stage of the valuation.

20. Valuation Process Quality Control

20.01 There must be valuation process quality controls (“the controls”) around
the valuation process.

20.02 The controls help ensure that valuations are performed objectively,
transparently, without bias and in compliance with IVS.

13
 International Valuation Standards

20.03 The extent of the controls should be determined having regard to the
intended use, intended user, the asset and/or liability being valued and the
complexity of the valuation.

20.04 The controls should assess the judgements made during the valuation
including their reasonableness and freedom from bias in determining the
value.

20.05 The controls should be documented. The documentation should contain

sufficient detail to allow another valuer, applying professional judgement, to
understand the effectiveness of the controls.

20.06 There should be periodic assessment of the controls to ensure that their
integrity and completeness are appropriate as of the valuation date. The
periodic assessment should be documented.

20.07 If the valuer is able to address valuation risk they may then perform
General Standards: IVS 100 Valuation Framework

monitoring procedures with respect to their own compliance and control

policies and procedures.

20.08 The valuer should conclude that the level of valuation risk, subject to
controls in place, is appropriate given the intended use, intended user, the
characteristics of the asset or liability being valued and the complexity of
the valuation.

30. Use of a Specialist or Service Organisation

30.01 If the valuer does not possess the necessary technical skills, experience,
data or knowledge to perform all aspects of a valuation, it is acceptable
for the valuer to seek assistance from a specialist or service organisation,
providing this is agreed and disclosed.

30.02 Prior to using a specialist or service organisation the valuer must assess
and document the knowledge, skill and ability of the specialist or service
organisation. Relevant factors include but are not limited to:

(a) experience in the type of work performed,

(b) professional certification, licence, or professional accreditation of the
specialist or service organisation in the relevant field,
(c) reputation and standing of the specialist or service organisation in the
particular field.

30.03 When a specialist or service organisation is used, the valuer must obtain an
understanding of the process and findings to establish a reasonable basis
to rely on their work based on the valuer’s professional judgment.

40. Compliance
40.01 In order to be IVS compliant, the valuation must meet the requirements
of the General Standards, the Appendices, as well as Asset Standards, if
applicable.

40.02 IVS consist of mandatory requirements that must be followed in order to

state that a valuation was performed in compliance with IVS.

14
 General Standards

40.03 Certain aspects of IVS do not direct or mandate any specific action but
provide fundamental principles and concepts that should be considered in
undertaking a valuation.

40.04 If legal, statutory, regulatory and/or other authoritative requirements

appropriate for the purpose and jurisdiction of the valuation conflict with
IVS, such requirements should be prioritised, explained, documented, and
reported in order to remain compliant with IVS.

40.05 If there are any legal, statutory, and regulatory or other authoritative
requirements that significantly affect the nature of the procedures
performed, inputs and assumptions used, and/or value(s), the valuer must
also disclose the specific legislative, regulatory or other authoritative
requirements and the significant ways in which they differ from the
requirements of IVS (for example, identifying that the relevant jurisdiction
requires the use of only a market approach in a circumstance where IVS
would indicate that the income approach should be considered).

General Standards: IVS 100 Valuation Framework

40.06 Any other deviations would render the valuation not compliant with IVS.

40.07 For assets and/or liabilities that may fall within multiple Assets Standards
(IVS 200 Businesses and Business Interests to IVS 500 Financial Instruments),
the valuer should follow the General Standards and explain, justify and
document which of the Asset Standard(s) were used. For example, both
IVS 200 Businesses and Business Interests and IVS 500 Financial Instruments
apply to some assets and/or liabilities.

40.08 In certain instances, the valuer may be asked to conduct a valuation review
for compliance with IVS. In such instances, the valuer should comply with
IVS and the applicable review framework as defined in the scope of work.

50. Effective Date

50.01 This version of International Valuation Standards is published on 31
January 2024, with an effective date of 31 January 2025 for valuations
performed on or after this date. The IVSC permits early adoption from the
date of publication.

50.02 When undertaking valuations or valuation reviews with a retrospective or

historical valuation date, the valuer should document the editions of IVS
that:

(a) they have relied upon, and

(b) are applicable at the valuation date.

15
 IVS 101 Scope of Work

IVS 100 IVS 101 IVS 102 IVS 103 IVS 104 IVS 105 IVS 106
Valuation Scope of Bases of Valuation Data and Valuation Documentation
Framework Work Value Approaches Inputs Models and Reporting

ContentsParagraphs
Introduction10
Valuation Requirements 20
Valuation Process Review and Value Review Requirements 30

This section requires the client and valuer to agree the scope of work for a
valuation or valuation review that is appropriate for the intended use. It
General Standards: IVS 101 Scope of Work

provides the minimum valuation or valuation review requirements for that

scope of work.

10. Introduction
10.01 A scope of work (sometimes referred to as terms or letter of engagement)
describes the fundamental terms of a valuation or valuation review. These
include but are not limited to the asset(s) and/or liability(ies) being valued,
the intended use of the valuation and the responsibilities of parties involved
in the valuation.

10.02 A scope of work for a valuation review describes the fundamental terms
such as the components of the valuation or value being reviewed.

10.03 A scope of work is required for all valuations and valuation reviews whether
the values are for internal or external use.

10.04 The client and the valuer must agree on the scope of work and that the
valuation or valuation review scope is appropriate for the intended use.

10.05 If, in the valuer’s professional judgement, the scope of work is overly
restrictive, then this may not result in an IVS-compliant valuation.

20. Valuation Requirements

20.01 The scope of work must specify the following:

(a) asset(s) and/or liability(ies) being valued; the subject asset(s) and/
or liability(ies) in the valuation must be clearly identified. The client is
responsible for the accuracy and completeness of that information.
(b) clients; the person, persons, or entity who appoints the valuer for a
given valuation. clients may be internal (ie, valuations performed for an
employer) or external (ie, when the valuer is engaged by a third-party
client).
(c) intended use (if any): the reason for which a valuation is developed,
(d) intended user (if any); any party, as identified, by the client in the scope
of work as a user of the valuation.

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 General Standards

(e) the valuer: The valuer may be an individual, group of individuals,

or an individual within an entity, regardless of whether employed
(internal) or engaged (contracted/external), possessing the necessary
qualifications, ability and experience to execute a valuation in an
objective, unbiased, ethical and competent manner. The valuer must
disclose any potential conflict of interest or bias.
(f) valuation currency: The currency for the valuation and the final
valuation report or conclusion must be established.
(g) valuation date: The valuation date must be stated. If the valuation date
is different from the date on which the valuation is reported, then that
date should also be stated.
(h) basis/bases of value used: As required by IVS 102 Bases of Value, the
valuation must be appropriate for the intended use. The source of
the definition of any basis of value used must be cited or the basis
explained.
(i) the nature and extent of the valuer’s work and any limitations thereon:

General Standards: IVS 101 Scope of Work

Any limitations or restrictions on the inspection, enquiry and/or
analysis in the value must be identified. If relevant information is
not available because the conditions of the valuation restrict the
investigation, these restrictions and any necessary assumptions or
special assumptions (see IVS 102 Bases of Value, paras 50.01-50.04)
made as a result of the restriction must be identified.
(j) the nature and sources of information upon which the valuer relies:
The nature and source of significant information upon which the valuer
relies and significant verification or controls to ensure the accuracy of
that information.
(k) special assumptions: any agreed special assumptions that are known
prior to the valuation should be recorded in the scope of work.
(l) specialist: the use and role of a specialist.
(m) Environmental, Social and Governance factors: Any requirements in
relation to the consideration of significant environmental, social and
governance factors.
(n) the type of report or other documentation being prepared: A clear
description of how the valuation results will be reported or a sample of
the deliverable that will be supplied to the client. This should include a
description of the type and extent of supporting documentation that
will be supplied.
(o) restrictions on use, distribution and publication of the report: where
it is necessary or desirable to restrict the use of the valuation or
those relying on it, the intended users and restrictions must be clearly
communicated.
(p) IVS compliance: a statement that the valuation will be prepared in
compliance with IVS must be disclosed in the scope of work and that
the valuer will assess the appropriateness of all significant inputs. If,
during the course of a valuation, it becomes clear to the valuer that the
scope of work will not result in an IVS-compliant valuation, this must be
communicated to the client in writing.

17
 International Valuation Standards

20.02 The scope of work must be established and agreed between the client and
the valuer in writing prior to the completion of the valuation report. Any
changes to the scope of work prior to the completion of the valuation must
be communicated and agreed upon in writing.

20.03 If, during the course of a valuation engagement, it becomes clear that the
scope of work will not result in an IVS-compliant value, the valuation will
not comply with IVS.

30. Valuation Process Review and Value Review Requirements

30.01 A valuation review is not a valuation. The scope of work must state whether
the valuation review is a valuation process review or a value review or both.

(a) a valuation process review addresses compliance with IVS,

(b) a value review addresses the reasonableness of a value.

30.02 The scope of work of an engagement that is either a valuation process

review or a value review, or both, must include the following at a minimum:
General Standards: IVS 101 Scope of Work

(a) the type of review being conducted,

(b) the agreed scope as to whether the review is a valuation process review,
a value review or both,
(c) the asset(s) and/or liability(ies) being reviewed,
(d) the identity of the valuation reviewer,
(e) the identity of the client,
(f) the intended use,
(g) the intended users, if applicable,
(h) significant or special assumptions and/or limiting conditions pertaining
to the valuation to be reviewed,
(i) the use and role of a specialist or service provider, if used, as part of
the valuation review,
(j) procedures to be undertaken, and the documentation to be reviewed.

18
IVS 102 Bases of Value

IVS 100 IVS 101 IVS 102 IVS 103 IVS 104 IVS 105 IVS 106
Valuation Scope of Bases of Valuation Data and Valuation Documentation
Framework Work Value Approaches Inputs Models and Reporting

ContentsParagraphs
Introduction10
Bases of Value 20
Entity-Specific Factors 30
Synergies40
Assumptions  50
Special Assumptions 60

General Standards: IVS 102 Bases of Value

Transaction Costs 70
Allocation of Value 80

Appendix
IVS-Defined Bases of Value
Market Value A10
Market Rent A20
Equitable Value A30
Investment Value A40
Synergistic Value A50
Liquidation Value A60
Other Bases of Value
Fair Value (IFRS) A70
Fair Value (Legal/Statutory) A80
Premise of Value
Highest and Best Use A90
Current Use/Existing Use A100
Orderly Liquidation A110
Forced Sale A120

This section requires the valuer to select the appropriate basis (or bases) of
value and follow all applicable requirements associated with that basis (or
bases) of value, whether those requirements are included as part of this
standard (for IVS-defined bases of value) or not (for non-IVS-defined bases of
value).

10. Introduction
10.01 Bases of value describes the fundamental premises or requirements on
which the reported values will be based. It is critical that the basis (or bases)

19
 International Valuation Standards

of value be appropriate to the terms and intended use of the valuation, since
a basis of value may influence or dictate the valuer’s selection of methods,
inputs and assumptions, and the ultimate value.

10.02 There are different bases of value used in valuations. The valuer may be
required to use bases of value that are defined by statute, regulation,
private contract or another framework.

10.03 A premise of value or assumed use describes the circumstances of how

an asset and/or liability is used. Different bases of value may require a
particular premise of value or allow the consideration of multiple premises
of value. The most common premises of value used in IVS are (see IVS 102
Bases of Value, Appendix A90-A120 for further description);

(a) highest and best use,

(b) current use/existing use,
(c) orderly liquidation, and
General Standards: IVS 102 Bases of Value

(d) forced sale.

10.04 The valuation date will influence what information and data the valuer
considers in a valuation. The valuer should be aware that most bases of
value prohibit the consideration of information or market sentiment that
would not be known or knowable with reasonable due diligence on the
measurement/valuation date by participants.

10.05 Most bases of value reflect assumptions that may include but not be limited
to one or more of the following characteristics, such as;

(a) hypothetical buyer or seller,

(b) known or specific parties,
(c) members of an identified/described group or potential parties,
(d) whether the parties are subject to particular conditions or motivations
at the assumed date (eg, duress), and/or
(e) an assumed knowledge level.

20. Bases of Value

20.01 IVS-defined bases of value are listed at para 20.02. Other non-IVS-defined
bases of value are prescribed by individual jurisdictional law, local
regulators, applicable standards, or those recognised and adopted by
international agreement.

20.02 IVS-defined bases of value are (see IVS 102 Bases of Value, Appendix
A10-A60);

(a) Market value A10,

(b) Market rent A20,
(c) Equitable value A30,
(d) Investment value/worth A40,
(e) Synergistic value, A50, and

20
 General Standards

(f) Liquidation value A60.

20.03 Other bases of value may be required for financial reporting, tax reporting,
or in other legal or regulatory contexts. Depending on the promulgator of
the basis of value, the same words may be defined differently or require
different valuation approaches. Therefore, care should be taken to identify,
articulate and apply the appropriate basis of value for a given valuation. (A
non-exhaustive illustrative list of other bases of value is included at IVS 102
Bases of Value, Appendix A70-A80).

20.04 In accordance with IVS 101 Scope of Work, the basis of value must be
appropriate for the intended use and the source of the definition of any
basis of value used must be cited or the basis explained.

20.05 The valuer is responsible for understanding the regulation, case law and
other interpretive guidance related to all basis(es) of value used.

20.06 The bases of value illustrated in IVS 102 Bases of Value, Appendix A70-A80,

General Standards: IVS 102 Bases of Value

are defined by organisations other than the IVSC and the onus is on the
valuer to ensure they are using the relevant definition.

30. Entity-Specific Factors

30.01 For most bases of value, the factors that are specific to a particular buyer
or seller and not available to participants generally are excluded from the
inputs used in a market-based valuation. Entity-specific factors that may
not be available to participants include but are not limited to:

(a) additional value or reduction in value derived from the creation of a

portfolio of similar asset(s),
(b) unique synergies between the asset(s) and other asset(s) owned by the
entity,
(c) legal rights or restrictions applicable only to the entity,
(d) tax benefits or tax burdens unique to the entity, and
(e) an ability to exploit an asset that is unique to that entity.

30.02 Whether such factors are specific to the entity or would be available to
other participants in the market generally is determined on a case-by-case
basis. For example, an asset may not normally be transacted as a stand-
alone item but as part of a group of assets. In that case, any synergies with
related assets would transfer to participants along with the transfer of the
group and therefore are not entity specific.

30.03 If the objective of the basis of value used in a valuation is to determine

the value to a specific owner (such as investment value/worth discussed in
IVS 102 Bases of Value, Appendix A40) in entity-specific factors should be
reflected in the valuation of the asset(s) and/or liability(ies). Situations in
which the value to a specific owner may be required include but are not
limited to the following examples:

(a) supporting investment decisions, and

(b) reviewing the performance of an asset.

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 International Valuation Standards

40. Synergies
40.01 Synergies refer to the benefits associated with combining assets and/or
liabilities. When synergies are present, the value of a group of assets and/or
liabilities is greater than the sum-of-the-values of the individual assets and
liabilities on a stand-alone basis. Synergies typically relate to a reduction in
costs, and/or increase in revenue, and/or a reduction in risk.

40.02 Whether synergies should be considered in a valuation depends on the

basis(es) of value. For most bases of value, only those synergies available
to other participants generally will be considered (see discussion of Entity-
Specific Factors in paras 30.01-30.03) of this standard.

40.03 An assessment of whether synergies are available to other participants

may be based on the amount of the synergies rather than a specific way to
achieve that synergy.

50. Assumptions
General Standards: IVS 102 Bases of Value

50.01 In addition to stating the basis of value, it is often necessary to make one or
multiple assumptions to clarify either:

(a) the state of the asset in the hypothetical exchange, or

(b) the circumstances under which the asset and/or liability is assumed to
be exchanged.

50.02 Such assumptions can have a significant impact on value.

50.03 Assumptions related to facts that are consistent with, or could be

consistent with, those existing at the valuation date may be the result of a
limitation on the extent of the investigations or enquiries undertaken by
the valuer. Examples of such assumptions include but are not limited to:

(a) an assumption that an asset and/or liability employed in a business is

transferred as a complete operational entity,
(b) an assumption that an asset and/or liability employed in a business are
transferred without the business, either individually or as a group,
(c) an assumption that an individually valued asset and/or liability is
transferred together with other complementary asset(s) and/or
liability(ies), and
(d) an assumption that a holding of shares is transferred either as a block
or individually.

50.04 All significant assumptions must be reasonable under the circumstances,

be supported by evidence and be relevant having regard to the intended
use for which the valuation is required in order to provide an IVS-compliant
valuation.

60. Special Assumptions

60.01 Where assumed facts differ from those existing at the valuation date, it is
referred to as a “special assumption”. Special assumptions are often used
to illustrate the effect of possible changes on the value of an asset. They
are designated as “special” so as to highlight to a valuation user that the
valuation is contingent upon a change in the current circumstances or that

22
 General Standards

it reflects a view that would not be taken by participants generally on the

valuation date. Examples of such assumptions include but are not limited
to:

(a) an assumption that a property is freehold with vacant possession,

(b) an assumption that a proposed building had actually been completed
on the valuation date,
(c) an assumption that a specific contract was in existence on the valuation
date which had not actually been completed, and
(d) an assumption that a financial instrument is valued using a yield curve
that is different from that which would be used by a participant.

60.02 All significant special assumptions must be reasonable under the

circumstances, be supported by evidence and be relevant having regard to
the intended use for which the valuation is required in order to provide an
IVS-compliant valuation.

General Standards: IVS 102 Bases of Value

70. Transaction Costs
70.01 Most bases of value represent the estimated price of an asset without
adjustment for the seller’s costs of sale or the buyer’s costs of purchase and
any taxes payable by either party as a direct result of the transaction.

80. Allocation of Value

80.01 Allocation of value is the separate apportionment of value of an asset on an
individual or component basis.

80.02 When apportioning value, the allocation method must be consistent with
the overall valuation premise/basis and the valuer must:

(a) follow any applicable legal or regulatory requirements,

(b) set out a clear description of the intended use of the allocation,
(c) consider the facts and circumstances, such as the relevant
characteristic(s) of the item(s) being apportioned,
(d) adopt appropriate methodology(ies) in the circumstances.

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 International Valuation Standards

IVS 102 Bases of Value: Appendix

IVS-Defined Basis of Value

The bases of value appear in the Appendix. The Appendix must be followed when
using the stated basis of value as applicable.

A10. Market Value

A10.01 Market value is the estimated amount for which an asset and/or liability
should exchange on the valuation date between a willing buyer and a
willing seller in an arm’s-length transaction, after proper marketing and
where the parties had each acted knowledgeably, prudently and without
compulsion.
General Standards: IVS 102 Bases of Value Appendix

A10.02 The definition of market value must be applied in accordance with the
following conceptual framework:

(a) “The estimated amount” refers to a price expressed in terms of money

payable for the asset in an arm’s-length market transaction. Market
value is the most probable price reasonably obtainable in the market
on the valuation date 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 circumstances such as atypical financing, sale and leaseback
arrangements, special considerations or concessions granted by
anyone associated with the sale, or any element of value available only
to a specific owner or purchaser.
(b) An asset or liability should exchange “refers to the fact that the value
of an asset or liability is an estimated amount rather than a pre-
determined amount or actual sale price. It is the price in a transaction
that meets all the elements of the market value definition at the
valuation date.
(c) “On the valuation date” requires that the 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 market state and circumstances
as at the valuation date, not those at any other date.
(d) “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 owner is included among those who constitute “the
market”.
(e) “And 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

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 General Standards

motivated to sell the asset 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 owner are not part of this
consideration because the willing seller is a hypothetical owner.
(f) “In an arm’s-length transaction” is one between parties who do not
have a particular or special relationship, eg, parent and subsidiary
companies or landlord and tenant, that may make the price
level uncharacteristic of the market or inflated. The market value
transaction is presumed to be between unrelated parties, each acting
independently.
(g) “After proper marketing” means that the asset has been exposed to
the market in the most appropriate manner to affect its disposal at the
best price reasonably obtainable in accordance with the market value
definition. The method of sale is deemed to be that most appropriate
to obtain the best price in the market to which the seller has access.

General Standards: IVS 102 Bases of Value Appendix

The length of exposure time is not a fixed period but will vary according
to the type of asset and market conditions. The only criterion is that
there must have been sufficient time to allow the asset to be brought
to the attention of an adequate number of market participants. The
exposure period occurs prior to the valuation date.
(h) “Where the parties had each acted knowledgeably, prudently”
presumes that both the willing buyer and the willing seller are
reasonably informed about the nature and characteristics of the
asset, its actual and potential uses, and the state of the market as of
the valuation date. Each is further presumed to use that knowledge
prudently to seek the price that is most favourable for their respective
positions in the transaction. Prudence is assessed by referring to
the state of the market at the valuation date, not with the benefit
of hindsight at some later date. For example, it is not necessarily
imprudent for a seller to sell assets in a market with falling prices at
a price that is lower than previous market levels. In such cases, as is
true for other exchanges in markets with changing prices, the prudent
buyer or seller will act in accordance with the best market information
available at the time.
(i) “And without compulsion” establishes that each party is motivated to
undertake the transaction, but neither is forced or unduly coerced to
complete it.

A10.03 The concept of market value presumes a price negotiated in an open and
competitive market where the participants are acting freely. The market
for an asset could be an international market or a local market. The
market could consist of numerous buyers and sellers, or could be one
characterised by a limited number of market participants. The market in
which the asset is presumed exposed for sale is the one in which the asset
notionally being exchanged is normally exchanged.

A10.04 The market value of an asset will reflect its highest and best use (see IVS 102
Bases of Value, Appendix A90). The highest and best use is the use of an
asset that maximises its potential and that is possible, legally permissible
and financially feasible. The highest and best use may be for continuation
of an asset’s existing use or for some alternative use. This is determined by
the use that a market participant would have in mind for the asset when
formulating the price that it would be willing to bid.

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 International Valuation Standards

A10.05 The nature and source of the valuation inputs must be consistent with the
basis of value, which in turn must have regard to the valuation intended
use. For example, various valuation approaches and valuation methods
may be used to arrive at an opinion of value provided they use observable
data. The market approach will, by definition, use market-derived inputs.
To indicate market value, the income approach should be applied, using
inputs and assumptions that would be adopted by participants. To indicate
market value using the cost approach, the cost of an asset of equal utility
and the appropriate adjustments for physical, functional and economic
obsolescence should be determined by analysis of market-based costs and
depreciation.

A10.06 The data available and the circumstances relating to the market for the
asset being valued must determine which valuation method or methods
are most relevant and appropriate. If based on appropriately analysed
observable data, each valuation approach or valuation method used should
General Standards: IVS 102 Bases of Value Appendix

provide an indication of market value.

A10.07 Market value does not reflect attributes of an asset that are of value to a
specific owner or purchaser that are not available to other buyers in the
market. Such advantages may relate to the physical, geographic, economic
or legal characteristics of an asset. Market value requires the disregard of
any such element of value because, at any given date, it is only assumed
that there is a willing buyer, not a particular willing buyer.

A20. Market Rent

A20.01 Market rent is the estimated amount for which an interest in real property
should be leased on the valuation date between a willing lessor and a willing
lessee on appropriate lease terms in an arm’s-length transaction, after
proper marketing and where the parties had each acted knowledgeably,
prudently and without compulsion.

A20.02 Market rent may be used as a basis of value when valuing a lease or an
interest created by a lease. In such cases, it is necessary to consider the
contract rent and, where it is different, the market rent.

A20.03 The conceptual framework supporting the definition of market value (see
section A10) can be applied to assist in the interpretation of market rent.
In particular, the estimated amount excludes a rent inflated or deflated
by special terms, considerations or concessions. The “appropriate lease
terms” are terms that would typically be agreed in the market for the
type of property on the valuation date between market participants. An
indication of market rent should only be provided in conjunction with an
indication of the principal lease terms that have been assumed.

A20.04 Contract rent is the rent payable under the terms of an actual lease. It may
be fixed for the duration of the lease, or variable. The frequency and basis
of calculating variations in the rent will be set out in the lease and must be
identified and understood in order to establish the total benefits accruing
to the lessor and liability of the lessee.

A20.05 In some circumstances the market rent may have to be assessed based on
terms of an existing lease (eg, for rental determination purposes where
the lease terms are existing and therefore not to be assumed as part of a
notional lease).

26
 General Standards

A20.06 In calculating market rent, the valuer must consider the following:

(a) in regard to a market rent subject to a lease, the terms and conditions
of that lease are the appropriate lease terms unless those terms and
conditions are illegal or contrary to over-arching legislation, and
(b) in regard to a market rent that is not subject to a lease, the assumed
terms and conditions are the terms of a notional lease that would
typically be agreed in a market for the type of property on the valuation
date between market participants.

A30. Equitable Value

A30.01 Equitable value is the estimated price for the transfer of an asset or liability
between identified knowledgeable and willing parties that reflects the
respective interests of those parties.

General Standards: IVS 102 Bases of Value Appendix

A30.02 Equitable value requires the assessment of the price that is fair between
two specific, identified parties considering the respective advantages or
disadvantages that each will gain from the transaction. In contrast, market
value requires any advantages or disadvantages that would not be available
to, or incurred by, market participants generally to be disregarded.

A30.03 Equitable 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 market, there will be cases where the assessment of equitable value
will involve taking into account matters that have to be disregarded in the
assessment of market value, such as certain elements of synergistic value
arising because of the combination of the interests.

A30.04 Examples of the use of equitable value include:

(a) determination of a price that is equitable for a shareholding in a non-

quoted business, where the holdings of two specific parties may mean
that the price that is equitable between them is different from the price
that might be obtainable in the market, and
(b) determination of a price that would be equitable between a lessor and
a lessee for either the permanent transfer of the leased asset or the
cancellation of the lease liability.

A40. Investment Value/Worth

A40.01 Investment value is the value of an asset to a particular owner or prospective
owner for individual investment or operational objectives.

A40.02 Investment value is an entity-specific basis of value. Although the value of an

asset to the owner may be the same as the amount that could be realised
from its sale to another party, this basis of value reflects the benefits
received by an entity from holding the asset and therefore does not involve
a presumed exchange. Investment value reflects the circumstances and
financial objectives of the entity for which the valuation is being produced.
It is often used for measuring investment performance.

A50. Synergistic Value

A50.01 Synergistic value is the result of a combination of two or more assets or
interests where the combined value is more than the sum of the separate

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 International Valuation Standards

values. If the synergies are only available to one specific buyer then
synergistic value will differ from market value, as the synergistic value will
reflect particular attributes of an asset that are only of value to a specific
purchaser. The added value above the aggregate of the respective interests
is often referred to as “marriage value” in some jurisdictions.

A60. Liquidation Value

A60.01 Liquidation value is the amount that would be realised when an asset
or group of assets are sold from a liquidation sale, with the seller being
compelled to sell as of a specific date. Liquidation value can be determined
under two different premises of value:

(a) an orderly transaction with a typical marketing period, or

(b) a forced transaction with a shortened market period.
General Standards: IVS 102 Bases of Value Appendix

A60.02 The valuer must disclose which premise of value is assumed.

Other Bases of Value

A70. Fair Value (International Financial Reporting Standards) (IFRS)

A70.01 IFRS 13 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.

A70.02 For financial reporting purposes, over 130 countries require or permit the
use of International Accounting Standards published by the International
Accounting Standards Board. In addition, the Financial Accounting
Standards Board in the United States uses the same definition of fair value
in Topic 820.

A80. Fair Value (Legal/Statutory) in different jurisdictions

A80.01 Many national, state and local agencies use fair value as a basis of value as
defined by courts in prior cases.

IVS-defined Premise of Value

The premises of value appear in the Appendix. The Appendix must be followed
when using the stated premises of value as applicable.

A90. Highest and Best Use

A90.01 Highest and best use is the use, from a participant perspective, that would
produce the highest value for an asset.

A90.02 The concept of highest and best use is most frequently applied to non-
financial assets. As many financial assets do not have alternative uses,
there may be circumstances where the highest and best use of financial
assets needs to be considered.

28
 General Standards

A90.03 The highest and best use must be physically possible (where applicable),
financially feasible, legally allowed and result in the highest value. If
different from the current use, the costs to convert an asset to its highest
and best use would impact the value.

A90.04 The highest and best use for an asset may be its current or existing use
when it is being used optimally.

A90.05 The highest and best use of an asset valued on a stand-alone basis may be
different from its highest and best use as part of a group of assets, when
its contribution to the overall value of the group must be considered.

A90.06 The determination of the highest and best use involves consideration of
the following:

(a) To establish whether a use is physically possible, regard will be had to

General Standards: IVS 102 Bases of Value Appendix

what would be considered reasonable by participants.
(b) To reflect the requirement to be legally permissible, any legal
restrictions on the use of the asset, eg, town planning/zoning
designations, need to be taken into account as well as the likelihood
that these restrictions will change.
(c) The requirement that the use be financially feasible takes into account
whether an alternative use that is physically possible and legally
permissible will generate sufficient return to a typical participant, after
taking into account the costs of conversion to that use, over and above
the return on the existing use.

A100. Current Use/Existing Use

A100.01 Current use/existing use is the current way an asset, liability, or group
of assets and/or liabilities is used. The current use may be, but is not
necessarily, also the highest and best use.

A110. Orderly Liquidation

A110.01 An orderly liquidation describes the value of a group of assets that could
be realised in a liquidation sale, given a reasonable period of time to find
a purchaser (or purchasers), with the seller being compelled to sell on an
as-is, where-is basis.

A110.02 The reasonable period of time to find a purchaser (or purchasers) may
vary by asset type and market conditions.

A120. Forced Sale

A120.01 The term “forced sale” is often used in circumstances where a seller is
under compulsion to sell and that, as a consequence, a proper marketing
period is not possible and buyers may not be able to undertake adequate
due diligence. The price that could be obtained in these circumstances
will depend upon the nature of the pressure on the seller and the reasons
why proper marketing cannot be undertaken. It may also reflect the
consequences for the seller of failing to sell within the period available.
Unless the nature of, and the reason for, the constraints on the seller
are known, the price obtainable in a forced sale cannot be realistically
estimated. The price that a seller will accept in a forced sale will reflect

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 International Valuation Standards

its particular circumstances, rather than those of the hypothetical willing

seller in the market value definition. A “forced” sale is a description of the
situation under which the exchange takes place, not a distinct basis of
value.

A120.02 If an indication of the price obtainable under forced sale circumstances

is required, it will be necessary to clearly identify the reasons for the
constraint on the seller, including the consequences of failing to sell in
the specified period by setting out appropriate assumptions. If these
circumstances do not exist at the valuation date, these must be clearly
identified as special assumptions.

A120.03 A forced sale typically reflects the price that a specified property is likely to
bring under all of the following conditions:

(a) consummation of a sale within a short time period,

General Standards: IVS 102 Bases of Value Appendix

(b) the asset is subjected to market conditions prevailing as of the

valuation date or assumed timescale within which the transaction is to
be completed,
(c) both the buyer and the seller are acting prudently and knowledgeably,
(d) the seller is under compulsion to sell,
(e) the buyer would receive only benefits that are available to others and
would derive no material benefit(s) from the transaction not available
to other market participants,
(f) both parties are acting in what they consider their best interests, and
(g) a normal marketing effort is not possible due to the brief exposure
time.

A120.04 Sales in an inactive or falling market are not automatically “forced

sales” simply because a seller might hope for a better price if conditions
improved. Unless the seller is compelled to sell by a deadline that prevents
proper marketing, the seller will be a willing seller within the definition of
market value (see IVS 102 Bases of Value, Appendix A10).

A120.05 While confirmed “forced sale” transactions would generally be excluded

from consideration in a valuation where the basis of value is market value, it
can be difficult to verify that an arm’s-length transaction in a market was a
forced sale.

30
IVS 103 Valuation Approaches

IVS 100 IVS 101 IVS 102 IVS 103 IVS 104 IVS 105 IVS 106
Valuation Scope of Bases of Valuation Data and Valuation Documentation
Framework Work Value Approaches Inputs Models and Reporting

ContentsParagraphs
Introduction10
Market Approach 20
Income Approach 30
Cost Approach 40

General Standards: IVS 103 Valuation Approaches

Appendix
Market Approach Methods A10
Income Approach Methods A20
Cost Approach Methods A30

IVS 103 Valuation Approaches requires the valuer to consider and select the
most relevant and appropriate valuation approaches for the valuation of the
asset and/or liability based on its intended use(s).

10. Introduction
10.01 Consideration must be given to the relevant and appropriate valuation
approaches. One or more valuation approaches may be used in order
to arrive at the value in accordance with the basis of value. The three
approaches described and defined below are the principle valuation
approaches:

(a) market approach,

(b) income approach, and
(c) cost approach.

10.02 The selection of the approach should seek to maximise the use of
observable inputs, as appropriate.

10.03 Each of these valuation approaches includes different, detailed methods of

application (see IVS 103 Valuation Approaches, Appendix A10-A30).

10.04 The goal in selecting valuation approaches and methods for an asset and/
or liability is to find the most appropriate method under the particular
circumstances of the valuation. No single method is suitable in every
possible situation. In their selection process, the valuer should consider at
a minimum:

(a) the appropriate basis(es) of value and premise(s) of value, determined

by the terms and intended use of the valuation,

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 International Valuation Standards

(b) the respective strengths and weaknesses of the possible valuation

approaches and valuation methods,
(c) the appropriateness of each method in view of the nature of the
asset(s) and/or liability/ies, and the valuation approaches or valuation
methods used by participants in the relevant market,
(d) the availability of reliable information needed to apply the method(s),
and
(e) price information from an active market.

10.05 The valuer is not required to use more than one method for the valuation
of an asset and/or liability, particularly when the valuer has a high degree
of confidence in the accuracy and reliability of a single method, given the
facts and circumstances of the valuation.

10.06 The valuer should consider the use of multiple approaches and methods.
General Standards: IVS 103 Valuation Approaches

More than one valuation approach or valuation method should be considered

and may be used to arrive at an indication of value, particularly when there
are insufficient factual or observable inputs for a single method to produce
a reliable conclusion.

10.07 Where more than one valuation approach and valuation method is used,
or even multiple methods within a single approach, the value based on
those multiple approaches and/or methods should be reasonable and
the process of analysing and reconciling the differing values into a single
conclusion, without averaging, should be described by the valuer in the
report.

10.08 While this standard includes discussion of certain valuation methods

within the cost, market and income approaches, it does not provide
a comprehensive list of all possible valuation methods that may be
appropriate. It is the valuer’s responsibility to choose the appropriate
method(s) for each valuation engagement. Compliance with IVS may
require the valuer to use a method not defined or mentioned in IVS.

10.09 When different valuation approaches and/or valuation methods result

in widely divergent indications of value, the valuer should perform
procedures to understand why the value indications differ, as it is generally
not appropriate to simply weight two or more significantly divergent
indications of value. In such cases, the valuer should reconsider the
guidance in IVS 103 Valuation Approaches, para 10.04, to determine which
one of the valuation approaches and/or valuation methods provides a better
or more reliable indication of value.

10.10 The valuer should maximise the use of relevant observable market
information in all three approaches. Regardless of the source of the
inputs and assumptions used in a valuation, the valuer must perform
appropriate analysis to evaluate those inputs and assumptions and their
appropriateness for the intended use of the valuation.

10.11 The valuer should exercise professional judgement in determining the

valuation approaches, valuation methods, and procedures. If, in the valuer’s
professional judgment, the limitations placed on the valuer’s selection of the
valuation approaches, valuation methods, and procedures for the valuation

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 General Standards

are overly restrictive then this may not result in an IVS-compliant valuation.
(see IVS 101 Scope of Work, para 10.05).

10.12 No one approach or method is applicable in all circumstances, with price

information from an active market generally considered to be the strongest
evidence of value. Some bases of value may prohibit the valuer from making
subjective adjustments to price information from an active market. Price
information from an inactive market may still be good evidence of value,
but subjective adjustments may be needed.

10.13 A valuation may be limited or restricted where the valuer is not able to
employ the valuation approaches, valuation methods and procedures that a
reasonable and informed third party would perform, and it is reasonable
to expect that the effect of the limitation or restriction on the estimate of
value could be significant.

20. Market Approach

General Standards: IVS 103 Valuation Approaches

20.01 The market approach provides an indication of value by comparing the
asset and/or liability with identical or comparable (that is similar) asset and/
or liability for which price information is available.

20.02 The market approach should always take into account trading volume,
trading frequency, range of observed prices, and proximity to the valuation
date. The market approach should be applied and afforded significant
weight under the following circumstances:

(a) the subject asset has recently been sold in a transaction appropriate
for consideration under the basis of value,
(b) the subject asset or substantially similar assets are actively publicly
traded, and/or
(c) there are frequent and/or recent observable transactions in
substantially similar assets.

20.03 Although the above circumstances would indicate that the market
approach should be applied and afforded significant weight, when using
the market approach under the following circumstances, the valuer should
consider whether any other approaches can be applied and weighted to
corroborate the value indication from the market approach.

(a) transactions involving the subject asset or substantially similar assets

are not recent enough considering the levels of volatility and activity in
the market,
(b) the asset or substantially similar assets are publicly traded, but not
actively,
(c) information on market transactions is available, but the comparable
assets have significant differences to the subject asset, potentially
requiring subjective adjustments,
(d) information on recent transactions is not reliable (ie, hearsay, missing
information, synergistic purchaser, not arm’s length, distressed sale,
etc).

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 International Valuation Standards

20.04 The heterogeneous nature of many assets means that it is often not
possible to find market evidence of transactions involving identical or
similar assets. Even in circumstances where the market approach is not
used, the use of observable inputs should be maximised in the application
of other approaches (eg, market-based valuation metrics such as effective
yields and rates of return).

20.05 When comparable market information does not relate to the exact or
substantially the same asset, the valuer must perform a comparative
analysis of qualitative and quantitative similarities and differences between
comparable assets and the subject asset. It will often be necessary to make
adjustments based on this comparative analysis. Those adjustments
must be reasonable and the valuer must document the reasons for the
adjustments and how they were quantified.

20.06 The market approach often uses market multiples derived from a set
of comparables, each with different multiples. The selection of the
General Standards: IVS 103 Valuation Approaches

appropriate multiple within the range may require adjustment and

judgement, considering qualitative and quantitative factors.

30. Income Approach

30.01 The income approach provides an indication of value by converting
projected cash flows to a single current value. Under the income approach,
the value of an asset is determined by reference to the value of income,
cash flow or cost savings generated by the asset.

30.02 The income approach should be applied and afforded significant weight
under the following circumstances:

(a) the income-producing ability of the asset is the critical element

affecting value from a participant perspective, and/or
(b) reasonable projections of the amount and timing of future income are
available for the subject asset, but there are no relevant and reliable
market comparables.

30.03 Although the above circumstances would indicate that the income
approach should be applied and afforded significant weight, when using
the income approach under the following circumstances, the valuer should
consider whether any other approaches can be applied and weighted to
corroborate the indication of value from the income approach:

(a) the income-producing ability of the subject asset is only one of several
factors affecting value from a participant perspective,
(b) there is significant uncertainty regarding the amount and timing of
future income related to the subject asset,
(c) there is a lack of access to information related to the subject asset
(for example, a minority owner may have access to historical financial
statements but not forecasts/budgets), and/or
(d) the subject asset has not yet begun generating income, but is projected
to do so.

30.04 A fundamental basis for the income approach is that investors expect to
receive a return on their investments and that such a return should reflect
the perceived level of risk in the investment.

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30.05 Generally, investors can only expect to be compensated for systematic risk
(also known as “market risk” or “undiversifiable risk”).

40. Cost Approach

40.01 The cost approach provides an indication of value using the economic
principle that a buyer will pay no more for an asset than the cost to obtain
an asset of equal utility, whether by purchase or by construction, unless
undue time, inconvenience, risk or other factors are involved. The approach
provides an indication of value by calculating the current replacement or
reproduction cost of an asset and making deductions for all relevant forms
of obsolescence.

40.02 The cost approach should be applied and afforded significant weight under
the following circumstances:

(a) participants would be able to recreate an asset with substantially

General Standards: IVS 103 Valuation Approaches

the same utility as the subject asset, without regulatory or legal
restrictions, and the asset could be recreated quickly enough that a
participant would not be willing to pay a significant premium for the
ability to use the subject asset immediately,
(b) the asset is not directly income-generating and the unique nature
of the asset makes using an income approach or market approach
unfeasible,
(c) the basis of value being used is fundamentally based on replacement
cost, and/or
(d) the asset was recently created or issued and sold to market participants,
such that there is a high degree of reliability in the assumptions used
in the cost approach.

40.03 Although the circumstances in para 40.02 would indicate that the cost
approach should be applied and afforded significant weight, when using
the cost approach under the following circumstances, the valuer should
consider whether any other approaches can be applied and weighted to
corroborate the indication of value from the cost approach:

(a) participants might consider recreating an asset of similar utility, but

there are potential legal or regulatory hurdles or significant time
involved in recreating the asset,
(b) when the cost approach is being used as a reasonableness check to
other approaches (for example, using the cost approach to confirm
whether a business valued as a going concern might be more valuable
on a liquidation basis).

40.04 The value of a partially completed asset will generally reflect the costs
incurred to date in the creation of the asset (and whether those costs
contributed to value) and the expectations of participants regarding the
value of the asset when complete, but also consider the costs and time
required to complete the asset and appropriate adjustments for profit and
risk.

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IVS 103 Valuation Approaches: Appendix

The valuation methods provided in this appendix may not apply to all asset
classes or use cases. However, the appendix must be followed when using the
applicable valuation method.

A10. Market Approach Methods

Comparable Transactions Method
A10.01 The comparable transactions method, also known as the guideline
transactions method, utilises information about transactions involving
assets that are the same or similar to the subject asset to arrive at an
indication of value.
General Standards: IVS 103 Valuation Approaches Appendix

A10.02 When the comparable transactions considered involve the subject asset,
this method is sometimes referred to as the prior transactions method.

A10.03 If few recent transactions have occurred, the valuer may consider the prices
of identical or similar assets that are listed or offered for sale, provided
the relevance of this information is clearly established, critically analysed
and documented. This is sometimes referred to as the comparable listings
method and should not be used as the sole indication of value but can
be appropriate for consideration together with other methods. When
considering listings or offers to buy or sell, the weight afforded to the
listings/offer price should consider the level of commitment inherent in the
price and how long the listing/offer has been on the market. For example,
an offer that represents a binding commitment to purchase or sell an asset
at a given price may be given more weight than a quoted price without
such a binding commitment.

A10.04 The comparable transaction method can use a variety of different

comparable evidence, also known as units of comparison, which form the
basis of the comparison. For example, a few of the many common units
of comparison used for real property interests include price per square
foot (or per square metre), rent per square foot (or per square metre)
and capitalisation rates. A few of the many common units of comparison
used in business valuation include EBITDA (Earnings Before Interest, Tax,
Depreciation and Amortisation) multiples, earnings multiples, revenue
multiples and book value multiples. A few of the many common units of
comparison used in financial instrument valuation include metrics such
as yields and interest rate spreads. The units of comparison used by
participants can differ between asset classes and across industries and
geographies.

A10.05 A subset of the comparable transactions method is matrix pricing, which is

principally used to value some types of financial instruments, such as debt
securities, without relying exclusively on quoted prices for the specific
securities, but rather relying on the securities’ relationship to other
benchmark quoted securities and their attributes (ie, yield).

A10.06 The key steps in the comparable transactions’ method are:

(a) identify the units of comparison that are used by participants in the
relevant market,

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(b) identify the relevant comparable transactions and calculate the key
valuation metrics for those transactions,
(c) perform a consistent comparative analysis of qualitative and
quantitative similarities and differences between the comparable
assets and the subject asset,
(d) make necessary adjustments, if any, to the valuation metrics to reflect
differences between the subject asset and the comparable assets,
(e) apply the adjusted valuation metrics to the subject asset, and
(f) if multiple valuation metrics were used, reconcile the indications of
value.

A10.07 The valuer should choose comparable transactions within the following
context:

General Standards: IVS 103 Valuation Approaches Appendix

(a) evidence of several transactions is generally preferable to a single
transaction or event,
(b) evidence from transactions of very similar assets (ideally identical)
provides a better indication of value than assets where the transaction
prices require significant adjustments,
(c) transactions that happen closer to the valuation date are
more representative of the market at that date than older/
dated transactions, particularly in volatile markets,
(d) for most bases of value, the transactions should be arm’s length
between unrelated parties,
(e) sufficient information on the transaction should be available to allow
the valuer to develop a reasonable understanding of the comparable
asset and assess the valuation metrics/comparable evidence
(f) information on the comparable transactions should be from a reliable
and trusted source, and
(g) actual transactions provide better valuation evidence than intended
transactions.

A10.08 The valuer should analyse and make adjustments for any significant
differences between the comparable transactions and the subject asset.
Examples of common differences that could warrant adjustments may
include, but are not limited to:

(a) material characteristics (age, size, specifications, etc),

(b) size adjustments,
(c) size of the stake (partial or majority),
(d) relevant restrictions on either the subject asset or the comparable
assets,
(e) geographical location (location of the asset and/or location of where
the asset is likely to be transacted/used) and the related economic and
regulatory environments,
(f) profitability or profit-making capability of the assets,

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(g) historical and expected growth,

(h) yields/coupon rates,
(i) types of collateral,
(j) unusual terms in the comparable transactions,
(k) differences related to marketability and control characteristics of the
comparable and the subject asset,
(l) differences in ESG considerations, and
(m) ownership characteristics (eg, legal form of ownership, amount
percentage held).

Guideline publicly-traded comparable method

A10.09 The guideline publicly-traded method utilises information on publicly-
General Standards: IVS 103 Valuation Approaches Appendix

traded comparables that are similar to the subject asset to arrive at an

indication of value.

A10.10 This method is similar to the comparable transactions method. However,

there are several differences due to the comparables being publicly traded,
as follows:

(a) the valuation metrics/comparable evidence is available as of the

valuation date,
(b) detailed information on the comparables is readily available in public
filings,
(c) the information contained in public filings is prepared in accordance
with accounting, regulatory and legal standards.

A10.11 The method should be used only when the subject asset is sufficiently
similar to the publicly-traded comparables to allow for meaningful
comparison.

A10.12 The key steps in the guideline publicly-traded comparables method are as
follows:

(a) identify the valuation metrics/comparable evidence that are used by

participants in the relevant market,
(b) identify the relevant guideline publicly-traded comparables and
calculate the key valuation metrics for those transactions,
(c) perform a consistent comparative analysis of qualitative and
quantitative similarities and differences between the publicly-traded
comparables and the subject asset,
(d) make necessary adjustments, if any, to the valuation metrics to
reflect differences between the subject asset and the publicly-traded
comparables,
(e) apply the adjusted valuation metrics to the subject asset, and
(f) weight the indications of value if multiple valuation metrics were used.

A10.13 The valuer should choose publicly-traded comparables within the following
context:

(a) consideration of multiple publicly-traded comparables is preferred to

the use of a single comparable,

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(b) evidence from similar publicly-traded comparables (for example,

with similar market segment, geographic area, size in revenue
and/or assets, growth rates, profit margins, leverage, liquidity and
diversification) provides a better indication of value than comparables
that require significant adjustments, and
(c) securities that are actively traded provide more meaningful evidence
than thinly-traded securities.

A10.14 The valuer should analyse and make adjustments for any material
differences between the guideline publicly-traded comparables and
the subject asset. Examples of common differences that could warrant
adjustments may include, but are not limited to:

(a) material characteristics (age, size, specifications, etc),

General Standards: IVS 103 Valuation Approaches Appendix

(b) relevant discounts and premiums (see IVS 103 Valuation Approaches),
(c) relevant restrictions on either the subject asset or the comparable
assets,
(d) geographical location of the underlying company and the related
economic and regulatory environments,
(e) profitability or profit-making capability of the assets,
(f) historical and expected growth,
(g) differences related to marketability and control characteristics of the
comparable and the subject asset,
(h) differences in ESG considerations, and
(i) subordination.

Other Market-Approach Considerations

A10.15 The following paragraphs address a non-exhaustive list of certain special
considerations that may form part of a market approach valuation.

A10.16 Anecdotal or “rule-of-thumb” valuation benchmarks are sometimes

considered to be a market approach. However, indications of value 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.

A10.17 In the market approach, the fundamental basis for making adjustments
is to adjust for differences between the subject asset and the guideline
transactions or publicly-traded securities. Some of the most common
adjustments made in the market approach are known as discounts and
premiums.

(a) Discounts for Lack of Marketability (DLOM) should be applied when the
comparables are deemed to have superior marketability to the subject
asset. A DLOM reflects the concept that when comparing otherwise
identical assets, a readily marketable asset would have a higher value
than an asset with a long marketing period or restrictions on the ability
to sell the asset. For example, publicly-traded securities can be bought
and sold nearly instantaneously while shares in a private company may
require a significant amount of time to identify potential buyers and
complete a transaction. Many bases of value allow the consideration

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of restrictions on marketability that are inherent in the subject asset

but prohibit consideration of marketability restrictions that are
specific to a particular owner. DLOMs may be quantified using any
reasonable method, but are typically calculated using option pricing
models, studies that compare the value of publicly-traded shares and
restricted shares in the same company, or studies that compare the
value of shares in a company before and after an initial public offering.
(b) Control Premiums, sometimes referred to as Market Participant
Acquisition Premiums (MPAPs) and Discounts for Lack of Control
(DLOC), are applied to reflect differences between the comparables
and the subject asset with regard to the ability to make decisions and
the changes that can be made as a result of exercising control. All else
being equal, participants would generally prefer to have control over
a subject asset than not. However, participants’ willingness to pay a
General Standards: IVS 103 Valuation Approaches Appendix

Control Premium or DLOC will generally be a factor of whether the

ability to exercise control enhances the economic benefits available to
the owner of the subject asset. Control Premiums and DLOCs may be
quantified using any reasonable method, but are typically calculated
based on either an analysis of the specific cash flow enhancements or
reductions in risk associated with control or by comparing observed
prices paid for controlling interests in publicly-traded securities to
the publicly-traded price before such a transaction is announced.
Examples of circumstances where Control Premiums and DLOCs
should be considered include where:

(i) Shares of public companies generally do not have the ability to
make decisions related to the operations of the company (they lack
control). As such, when applying the guideline public comparable
method to value a subject asset that reflects a controlling interest,
a control premium may be appropriate, or

(ii) The guideline transactions in the guideline transaction method
often reflect transactions of controlling interests. When using that
method to value a subject asset that reflects a minority interest, a
DLOC may be appropriate.

(c) Blockage discounts are sometimes applied when the subject asset
represents a large block of shares in a publicly-traded security such
that an owner would not be able to quickly sell the block in the public
market without negatively influencing the publicly-traded price.
Blockage discounts may be quantified using any reasonable method
but typically a model is used that considers the length of time over
which a participant could sell the subject shares without negatively
impacting the publicly-traded price (ie, selling a relatively small portion
of the security’s typical daily trading volume each day). Under certain
bases of value, particularly fair value for financial reporting purposes,
blockage discounts are prohibited.

A20. Income Approach Methods

A20.01 Although there are many ways to implement the income approach,
methods under the income approach are effectively based on discounting
future amounts of cash flow to present value. They are variations of the
Discounted Cash Flow (DCF) method and the concepts in the following
paragraphs apply in part or in full to all income approach methods.

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Discounted Cash Flow (DCF) Method

A20.02 Under the DCF method the forecasted cash flow is discounted back to the
valuation date, resulting in a present value of the asset.

A20.03 In some circumstances for long-lived or indefinite-lived assets, DCF may

include a terminal value which represents the value of the asset at the
end of the explicit projection period. In other circumstances, the value of
an asset may be calculated solely using a terminal value with no explicit
projection period. This is sometimes referred to as an income capitalisation
method.

A20.04 The key steps in the DCF method are:

(a) choose the most appropriate type of cash flow for the nature of the

General Standards: IVS 103 Valuation Approaches Appendix

subject asset and the valuation (ie, pre-tax or post-tax, total cash flows
or cash flows to equity, real or nominal, etc),
(b) determine the most appropriate explicit period, if any, over which the
cash flow will be forecast,
(c) prepare cash flow forecasts for that period,
(d) determine whether a terminal value is appropriate for the subject asset
at the end of the explicit forecast period (if any) and then determine
the appropriate terminal value for the nature of the asset,
(e) determine the appropriate discount rate, and
(f) apply the discount rate to the forecasted future cash flow, including the
terminal value, if any.

Type of Cash Flow

A20.05 When selecting the appropriate type of cash flow for the nature of the asset
or valuation, the valuer must consider the following factors. In addition, the
discount rate and other inputs must be consistent with the type of cash flow
chosen.

(a) Cash flow to whole asset or partial interest: typically cash flow to the
whole asset is used. However, occasionally other levels of income may
be used as well, such as cash flow to equity (after payment of interest
and principal on debt) or dividends (only the cash flow distributed
to equity owners). Cash flow to the whole asset is most commonly
used because an asset should theoretically have a single value that
is independent of how it is financed or whether income is paid as
dividends or reinvested.
(b) The cash flow can be pre-tax or post-tax: the tax rate applied should
be consistent with the basis of value and in many instances would be a
participant tax rate rather than an owner-specific one.
(c) Nominal versus real: real cash flow does not consider inflation
whereas nominal cash flows include expectations regarding inflation.
If expected cash flow incorporates an expected inflation rate, the
discount rate has to include an adjustment for inflation as well,
(d) Currency: the choice of currency used may have an impact on
assumptions related to inflation and risk. This is particularly true in
emerging markets or in currencies with high inflation rates. The

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currency in which the forecast is prepared and related risks are

separate and distinct from risks associated with the country(ies) in
which the asset resides or operates.
(e) The type of cash flow contained in the forecast: for example,
probability-weighted scenarios, most likely cash flows, contractual cash
flows, etc.

A20.06 The type of cash flow chosen should be in accordance with the participant’s
viewpoints. For example, cash flows and discount rates for real property
are customarily developed on a pre-tax basis while cash flows and discount
rates for businesses are normally developed on a post-tax basis. Adjusting
between pre-tax and post-tax rates can be complex and prone to error and
should be approached with caution.
General Standards: IVS 103 Valuation Approaches Appendix

A20.07 When a valuation is being developed in a currency (“the valuation

currency”) that differs from the currency used in the cash flow projections
(“the functional currency”), the valuer should use one of the following two
currency translation methods:

(a) Discount the cash flows in the functional currency using a discount rate
appropriate for that functional currency. Convert the present value
of the cash flows to the valuation currency at the spot rate on the
valuation date.
(b) Use a currency exchange forward curve to translate the functional
currency projections into valuation currency projections and discount
the projections using a discount rate appropriate for the valuation
currency. When a reliable currency exchange forward curve is not
available (for example, due to lack of liquidity in the relevant currency
exchange markets), it may not be possible to use this method and only
the method described in para A20.07 (a) can be applied.

Explicit Forecast Period

A20.08 The selection criteria will depend upon the intended use of the valuation,
the nature of the asset, the information available and the required bases of
value. For an asset with a short life, it is more likely to be both possible and
relevant to project cash flow over its entire life.

A20.09 The valuer should consider the following factors when selecting the explicit
forecast period:

(a) the life of the asset,

(b) a reasonable period for which reliable data is available on which to
base the projections,
(c) the minimum explicit forecast period which should be sufficient for an
asset to achieve a stabilised level of growth and profits, after which a
terminal value can be used,
(d) in the valuation of cyclical assets, the explicit forecast period should
generally include an entire cycle, when possible, and
(e) for finite-lived assets such as most financial instruments, the cash
flows will typically be forecast over the full life of the asset.

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A20.10 In some instances, particularly when the asset is operating at a stabilised

level of growth and profits at the valuation date, it may not be necessary to
consider an explicit forecast period and a terminal value may form the only
basis of value (sometimes referred to as an income capitalisation method).

A20.11 The intended holding period for one investor should not be the only
consideration in selecting an explicit forecast period and should not impact
the value of an asset. However, the period over which an asset is intended
to be held may be considered in determining the explicit forecast period if
the objective of the valuation is to determine its investment value.

Cash Flow Forecasts

A20.12 Cash flow for the explicit forecast period is constructed using prospective
financial information (PFI) (projected income/inflows and expenditure/

General Standards: IVS 103 Valuation Approaches Appendix

outflows).

A20.13 As required by IVS 103 Valuation Approaches, regardless of the source of the
PFI (eg, management forecast), the valuer must perform analysis to evaluate
the PFI, the assumptions underlying the PFI and their appropriateness for
the intended use of the valuation. The suitability of the PFI and the underlying
assumptions will depend on the intended use and the required bases of value.
For example, cash flow used to determine market value should reflect PFI
that would be anticipated by participants; in contrast, investment value can
be measured using cash flow that is based on the reasonable forecasts from
the perspective of a particular investor.

A20.14 The cash flow is divided into suitable periodic intervals (eg, weekly,
monthly, quarterly or annually) with the choice of interval depending upon
the nature of the asset, the pattern of the cash flow, the data available, and
the length of the forecast period.

A20.15 The projected cash flow should capture the amount and timing of all future
cash inflows and outflows associated with the subject asset from the
perspective appropriate to the basis of value.

A20.16 Typically, the projected cash flow will reflect one of the following:

(a) contractual or promised cash flow,

(b) the single most likely set of cash flow,
(c) the probability-weighted expected cash flow, or
(d) multiple scenarios of possible future cash flow.

A20.17 Different types of cash flow often reflect different levels of risk and may
require different discount rates. For example, probability-weighted expected
cash flows incorporate expectations regarding all possible outcomes and
are not dependent on any particular conditions or events (note that when a
probability-weighted expected cash flow is used, it is not always necessary
for the valuer to take into account distributions of all possible cash flows
using complex models and techniques. Rather, the valuer may develop a
limited number of discrete scenarios and probabilities that capture the
array of possible cash flows). A single most likely set of cash flows may be
conditional on certain future events and therefore could reflect different
risk and warrant a different discount rate.

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A20.18 While the valuer often receives PFI that reflects accounting income
and expenses, it is generally preferable to use cash flow that would be
anticipated by participants as the basis for valuations. For example,
accounting non-cash expenses, such as depreciation and amortisation,
should be added back, and expected cash outflows relating to capital
expenditures or to changes in working capital should be deducted in
calculating cash flow.

A20.19 The valuer must ensure that seasonality and cyclicality in the subject has
been appropriately considered in the cash flow forecasts.

Terminal Value
A20.20 Where the asset is expected to continue beyond the explicit forecast
period, the valuer must estimate the value of the asset at the end of that
General Standards: IVS 103 Valuation Approaches Appendix

period. The terminal value is then discounted back to the valuation date,
normally using the same discount rate as applied to the forecast cash flow.

A20.21 The terminal value should consider:

(a) whether the asset is deteriorating/finite-lived in nature or indefinite-

lived, as this will influence the method used to calculate a terminal
value,
(b) whether there is future growth potential for the asset beyond the
explicit forecast period,
(c) whether there is a pre-determined fixed capital amount, capital
expenditure or return condition expected to be received at the end of
the explicit forecast period,
(d) the expected risk level of the asset at the time the terminal value is
calculated,
(e) for cyclical assets, the terminal value should consider the cyclical
nature of the asset and should not be performed in a way that assumes
“peak” or “trough” levels of cash flows in perpetuity,
(f) the tax attributes inherent in the asset at the end of the explicit forecast
period (if any) and whether those tax attributes would be expected to
continue into perpetuity, and
(g) risks and opportunities associated with environmental, social and
governance characteristics of the subject asset.

A20.22 The valuer may apply any reasonable method for calculating a terminal
value. While there are many different approaches to calculating a terminal
value, the three most commonly used are:

(a) Gordon growth model/constant growth model,

(b) market approach/exit value (appropriate for both deteriorating/finite-
lived assets and indefinite-lived assets), and
(c) salvage value/disposal cost (appropriate only for deteriorating/finite-
lived assets).

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Gordon Growth Model/Constant Growth Model

A20.23 The Gordon growth/constant growth model assumes that the cash flow
from the asset grows (or declines) at a constant rate into perpetuity.

Market Approach/Exit Value

A20.24 The market approach/exit value method can be performed in a number of
ways, but the ultimate goal is to calculate the value of the asset at the end
of the explicit cash flow forecast.

A20.25 Common ways to calculate the terminal value under this method include
application of a market-evidence based capitalisation factor or a market
multiple.

General Standards: IVS 103 Valuation Approaches Appendix

A20.26 When a market approach/exit value is used, the valuer should comply with
the requirements in the market approach and market approach methods
section of this standard (see IVS 103 Valuation Approaches, section 20 and
Appendix A10). However, the valuer should also consider the expected
market conditions at the end of the explicit forecast period and make
adjustments accordingly.

Salvage Value/Disposal Cost

A20.27 The terminal value of some assets may have little or no relationship to the
preceding cash flow. Examples of such assets include wasting assets such
as a mine or an oil well.

A20.28 In such cases, the terminal value is typically calculated as the salvage value
of the asset, less costs to dispose of the asset. In circumstances where the
costs exceed the salvage value, the terminal value is negative and referred
to as a disposal cost or an asset retirement obligation.

Discount Rate
A20.29 The rate at which the forecast cash flow is discounted should reflect not
only the time value of money, but also the risks associated with the type of
cash flow and the future operations of the asset.

A20.30 The discount rate must be consistent with the type of cash flow.

A20.31 The valuer may use any reasonable method for developing an appropriate
discount rate. While there are many methods for developing a discount rate
or determining the reasonableness of a discount rate, a non-exhaustive list
of common methods includes:

(a) a capital asset pricing model (CAPM),

(b) a weighted-average-cost-of-capital (WACC),
(c) observed or inferred rates/yields,
(d) a build-up method.

A20.32 The valuer should consider corroborative analyses when assessing the
appropriateness of a discount rate. A non-exhaustive list of common
analysis should include:

(a) an internal rate of return (IRR),

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(b) a weighted average return on assets (WARA),

(c) value indications from other approaches, such as market approach, or
comparing implied multiples from the income approach with guideline
company market multiples or transaction multiples.

A20.33 In developing a discount rate, the valuer should consider:

(a) the type of asset being valued. For example, discount rates used
in valuing debt would be different to those used when valuing real
property or a business,
(b) the rates implicit in comparable transactions in the market,
(c) the geographical location of the asset and/or the location of the
markets in which it would trade,
General Standards: IVS 103 Valuation Approaches Appendix

(d) the life/term and/or maturity of the asset and the consistency of
inputs. For example, the maturity of the risk-free rate applied will
depend on the circumstances, but a common approach is to match
the maturity of the risk-free rate to the time horizon of the cash flows
being considered.
(e) the bases of value being applied, and
(f) the currency denomination of the projected cash flows.

A20.34 In developing a discount rate, the valuer must:

(a) document the method used for developing the discount rate and
support its use,
(b) provide evidence for the derivation of the discount rate, including the
identification of the significant inputs and support for their derivation
or source.

A20.35 The valuer must consider the intended use for which the forecast was
prepared and whether the forecast assumptions are consistent with the
basis of value being applied. If the forecast assumptions are not consistent
with the basis of value, it could be necessary to adjust the forecast or
discount rate.

A20.36 The valuer must consider the risk of achieving the forecast cash flow of
the asset when developing the discount rate. Specifically, the valuer must
evaluate whether the risk underlying the forecast cash flow assumptions
are captured in the discount rate.

A20.37 While there are many ways to assess the risk of achieving the forecast cash
flow, a non-exhaustive list of common procedures includes:

(a) identify the key components of the forecast cash flow and compare
the forecast cash flow key components to:

(i) historical operating and financial performance of the asset,

(ii) historical and expected performance of comparable assets,


(iii) historical and expected performance for the industry, and

(iv) expected near-term and long-term growth rates of the country or
region in which the asset primarily operates,

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(b) confirm whether the forecast cash flow represents expected cash
flows (ie, probability-weighted scenarios), as opposed to most likely
cash flows (ie, most probable scenario) of the asset, or some other type
of cash flow,
(c) if utilising expected cash flows, consider the relative dispersion of
potential outcomes used to derive the expected cash flows (eg, higher
dispersion may indicate a need for an adjustment to the discount rate),
(d) compare prior forecasts of the asset to actual results to assess the
accuracy and reliability of managements’ estimates,
(e) consider qualitative factors,
(f) consider the value indications such as those resulting from the market
approach, and

General Standards: IVS 103 Valuation Approaches Appendix

(g) consider the risks associated with environmental, social and governance
characteristics of the subject asset.

A20.38 If the valuer determines that certain risks included in the forecast cash
flow for the asset have not been captured in the discount rate, the valuer
must:

(a) Adjust the forecast; when adjusting the cash flow forecast: The valuer
should provide the rationale for why the adjustments were necessary,
undertake quantitative procedures to support the adjustments, and
document the nature and amount of the adjustments.
(b) Adjust the discount rate to account for those risks not already captured:
When adjusting the discount rate, the valuer should document why
it was not appropriate or possible to adjust the cash flow forecast,
provide the rationale for why such risks are not otherwise captured in
the discount rate, undertake quantitative and qualitative procedures to
support the adjustments, and document the nature and amount of the
adjustment. The use of quantitative procedures does not necessarily
entail quantitative derivation of the adjustment to the discount rate.
The valuer need not conduct an exhaustive quantitative process
but should take into account all the information that is reasonably
available.

A20.39 In developing a discount rate, it may be appropriate to consider the impact

the asset’s unit of account has on unsystematic risks and the derivation of
the overall discount rate. For example, the valuer should consider whether
market participants would assess the discount rate for the asset on a
stand-alone basis, or whether market participants would assess the asset
in the context of a broader portfolio and therefore consider the potential
diversification of unsystematic risks.

A20.40 The valuer should consider the impact of inter-company arrangements and
transfer pricing on the discount rate. For example, it is not uncommon for
inter-company arrangements to specify fixed or guaranteed returns for
some businesses or entities within a larger enterprise, which would lower
the risk of the entity forecasted cash flows and reduce the appropriate
discount rate. However, other businesses or entities within the enterprise
are deemed to be residual earners in which both excess return and risk are
allocated, thereby increasing the risk of the entity forecasted cash flows
and the appropriate discount rate.

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 International Valuation Standards

A30. Cost Approach Methods

A30.01 Broadly, there are three cost approach methods:

(a) replacement cost method: a method that indicates value by calculating

the cost of a similar asset offering equivalent utility,
(b) reproduction cost method: a method under the cost that indicates
value by calculating the cost to recreating a replica of an asset, and
(c) summation method: a method that calculates the value of an asset by
the addition of the separate values of its component parts.

Replacement Cost Method

A30.02 Generally, replacement cost is the cost that is relevant to determining the
General Standards: IVS 103 Valuation Approaches Appendix

price that a participant would pay as it is based on replicating the utility of

the asset, not the exact physical properties of the asset.

A30.03 Usually replacement cost is adjusted for physical deterioration and all
relevant forms of obsolescence. After such adjustments, this can be
referred to as depreciated replacement cost.

A30.04 The key steps in the replacement cost method are:

(a) calculate all of the costs that would be incurred by a typical participant
seeking to create or obtain an asset providing equivalent utility,
(b) determine whether there is any depreciation related to physical,
functional and external obsolescence associated with the subject
asset, and
(c) deduct total depreciation from the total costs to arrive at a value for
the subject asset.

A30.05 The replacement cost is generally that of a modern equivalent asset, which
is one that provides similar function and equivalent utility to the asset
being valued, but which is of a current design and constructed or made
using current cost-effective materials and techniques.

Reproduction Cost Method

A30.06 Reproduction cost is appropriate in circumstances such as the following:

(a) the cost of a modern equivalent asset is greater than the cost of
recreating a replica of the subject asset, or
(b) the utility offered by the subject asset could only be provided by a
replica rather than a modern equivalent.

A30.07 The key steps in the reproduction cost method are:

(a) calculate all of the costs that would be incurred by a typical participant
seeking to create an exact replica of the subject asset,
(b) determine whether there is any depreciation related to physical,
functional and external obsolescence associated with the subject
asset, and
(c) deduct total depreciation from the total costs to arrive at a value for
the subject asset.

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 General Standards

Summation Method
A30.08 The summation method, also referred to as the underlying asset method,
is typically used for investment companies or other types of assets or
entities for which value is primarily a factor of the values of their holdings.

A30.09 The key steps in the summation method are:

(a) value each of the component assets that are part of the subject asset
using the appropriate valuation approaches, and
(b) add the value of the component assets together to reach the value of
the subject asset.

Cost Considerations

General Standards: IVS 103 Valuation Approaches Appendix

A30.10 The cost approach should capture all of the costs that would be incurred by
a typical participant.

A30.11 The cost elements may differ depending on the type of asset and should
include the direct and indirect costs that would be required to replace/
recreate the asset as of the valuation date. Some common items to consider
include, but are not limited to:

(a) direct costs:

(i) materials, and

(ii) labour

(b) indirect costs:

(i) transport costs

(ii) installation costs

(iii) professional fees (design, permit, architectural, legal, etc)

(iv) other fees (commissions, etc)

(v) overheads

(vi) taxes

(vii) finance costs (eg, interest on debt financing), and
(viii) profit margin/to the creator of the asset (eg, return to investors).

A30.12 An asset acquired from a third party would presumably reflect their costs
associated with creating the asset as well as some form of profit margin
to provide a return on their investment. As such, under bases of value
that assume a hypothetical transaction, it may be appropriate to include
an assumed profit margin on certain costs which can be expressed as a
target profit, either a lump sum or a percentage return on cost or value.
However, financing costs, if included, may already reflect participants’
required return on capital deployed, so the valuer should be cautious when
including both financing costs and profit margins.

A30.13 When costs are derived from actual, quoted or estimated prices by third
party suppliers or contractors, these costs will already include a third
parties’ desired level of profit.

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 International Valuation Standards

A30.14 The actual costs incurred in creating the subject asset (or a comparable
reference asset) may be available and provide a relevant indicator of the
cost of the asset. However, adjustments may need to be made to reflect the
following:

(a) cost fluctuations between the date on which this cost was incurred and
the valuation date, and
(b) any atypical or exceptional costs, or savings that are reflected in the
cost data but that would not arise in creating an equivalent.

Depreciation/Obsolescence
A30.15 In the context of the cost approach, “depreciation” refers to adjustments
made to the estimated cost of creating an asset of equal utility to reflect
General Standards: IVS 103 Valuation Approaches Appendix

the impact on value of any obsolescence affecting the subject asset. This
meaning is different from the use of the word in financial reporting or tax
law where it generally refers to a method for systematically expensing
capital expenditure over time.

A30.16 Depreciation adjustments are normally considered for the following types
of obsolescence, which may be further divided into sub-categories when
making adjustments:

(a) physical obsolescence: any loss of utility due to the physical

deterioration of the asset or its components resulting from its age and
usage,
(b) functional obsolescence: any loss of utility resulting from inefficiencies
in the subject asset compared with its replacement such as its design,
specification or technology being outdated,
(c) external or economic obsolescence: any loss of utility caused by
economic or locational factors external to the asset. This type of
obsolescence can be temporary or permanent.

A30.17 Depreciation/obsolescence should consider the physical and economic

lives of the asset:

(a) The physical life is how long the asset could be used before it would be
worn out or beyond economic repair, assuming routine maintenance
but disregarding any potential for refurbishment or reconstruction,
(b) The economic life is how long it is anticipated that the asset could
generate financial returns or provide a non-financial benefit in its
current use. It will be influenced by the degree of functional or
economic obsolescence to which the asset is exposed.

A30.18 Except for some types of economic or external obsolescence, most types of
obsolescence are measured by making comparisons between the subject
asset and the hypothetical asset on which the estimated replacement or
reproduction cost is based. However, when market evidence of the effect
of obsolescence on value is available, that evidence should be considered.

A30.19 Physical obsolescence can be measured in two different ways:

(a) curable physical obsolescence, ie, the cost to fix/cure the obsolescence,
or

50
 General Standards

(b) incurable physical obsolescence which considers the asset’s age,

expected total and remaining life where the adjustment for physical
obsolescence is equivalent to the proportion of the expected total life
consumed. Total expected life may be expressed in any reasonable
way, including expected life in years, mileage, units produced, etc.

A30.20 There are two forms of functional obsolescence:

(a) excess capital cost, which can be caused by changes in design,

materials of construction, technology or manufacturing techniques
resulting in the availability of modern equivalent assets with lower
capital costs than the subject asset, and
(b) excess operating cost, which can be caused by improvements in design
or excess capacity resulting in the availability of modern equivalent

General Standards: IVS 103 Valuation Approaches Appendix

assets with lower operating costs than the subject asset.

A30.21 Economic obsolescence may arise when external factors affect an

individual asset or all the assets employed in a business and should be
deducted after physical deterioration and functional obsolescence. For real
estate, examples of economic obsolescence include but are not limited to:

(a) adverse changes to demand for the products or services produced by

the asset,
(b) oversupply in the market for the asset,
(c) a disruption or loss of a supply of labour or raw material,
(d) the asset being used by a business that cannot afford to pay a market
rent for the assets and still generate a market rate of return, and
(e) adverse changes in the environmental, social and governance
characteristics of the subject asset.

A30.22 Cash or cash equivalents do not suffer obsolescence and are not adjusted.

51
 IVS 104 Data and Inputs

IVS 100 IVS 101 IVS 102 IVS 103 IVS 104 IVS 105 IVS 106
Valuation Scope of Bases of Valuation Data and Valuation Documentation
Framework Work Value Approaches Inputs Models and Reporting

ContentsParagraphs
Introduction10
Use of a Specialist or Service Organisation 20
Characteristics of Relevant Data 30
Input Selection 40
Data and Input Documentation 50
General Standards: IVS 104 Data and Inputs

Appendix
Environmental, Social and Governance (ESG) Considerations A10

IVS 104 Data and Inputs deals with the selection and use of data to be used
as inputs in the valuation. The aim of the valuation is to maximise the use of
relevant and observable data to the degree that it is possible.

10. Introduction
10.01 Data and inputs are used in developing values for all types of assets and
liabilities. Inputs are derived from data, along with assumptions and
adjustments and are used in the quantitative development of a value
conclusion.

10.02 Data and inputs should be based on factual information (such as

measurements or published prices), but often include reasoning and
analysis in order to arrive at an input to be used in the valuation.

10.03 The valuation should maximise the use of observable data. Observable data
is defined as information that is readily available to market participants
about actual events or transactions that are used in determining the value
for the asset or liability.

10.04 The valuer is responsible for assessing and selecting the data, assumptions
and adjustments to be used as inputs in the valuation based upon
professional judgement and professional scepticism.

20. Use of a Specialist or Service Organisation

20.01 If the valuer does not possess all of the necessary data to perform all
aspects of the valuation, it is acceptable for the valuer to engage a specialist
or service organisation.

20.02 Prior to using a specialist or service organisation, the valuer must ensure
their capabilities meet the requirements of the intended use and must
document their capabilities.

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 General Standards

30. Characteristics of Relevant Data

30.01 The valuer must determine the data that is relevant, which for the purposes
of IVS 104 Data and Inputs means “fitness for use” in terms of the asset and/
or liability being valued, the scope of work, the valuation method and the
valuation model.

30.02 The valuer must apply professional judgement to balance the characteristics of
relevant data listed below in order to choose the inputs used in the valuation.
The characteristics of relevant data are:

(a) accurate: data are free from error and bias and reflect the characteristics
that they are designed to measure,
(b) complete: set of data are sufficient to address attributes of the assets
or liabilities,
(c) timely: data reflect the market conditions as of the valuation date,
(d) transparent: the source of the data can be traced from their origin.

General Standards: IVS 104 Data and Inputs

30.03 In certain cases, the data may not incorporate all of these characteristics.
Therefore, the valuer must assess data and conclude, based on professional
judgement, that the data is relevant to value the assets and/or liabilities in
accordance with the scope of work and the valuation method.

40. Input Selection

40.01 Inputs must be selected from relevant data in the context of the asset or
liability being valued, the scope of work, the valuation method, and the
valuation model.

40.02 Inputs must be sufficient for the valuation models being used to value the
asset and/or liability based on the valuer using professional judgement.

40.03 When valuing portfolios or groups of similar assets or liabilities, inputs

should be selected appropriately across those portfolios or groups of
assets.

40.04 If significant inputs are inadequate or cannot be sufficiently justified, the

valuation would not comply with IVS.

50. Data and Input Documentation

50.01 The source, selection and use of significant data and inputs must be
explained, justified, and documented.

50.02 Documentation must be sufficient to enable the valuer applying professional

judgement to understand why specific data was determined to be relevant
and inputs were selected and were considered reasonable.

50.03 The form and location of documentation may vary based on the scope of
work.

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 International Valuation Standards

IVS 104 Data and Inputs: Appendix

The valuer should be aware of relevant legislation and frameworks in relation

to the environmental, social and governance factors impacting a valuation.

A10. Environmental, Social and Governance (ESG) Considerations

A10.01 The impact of significant ESG factors should be considered in determining
the value of a company, asset or liability.

A10.02 ESG factors may impact valuations both from a qualitative and quantitative
perspective and may pose risks or opportunities that should be considered.

A10.03 Examples of environmental factors may include but are not limited to the
following:
General Standards: IVS 104 Data and Inputs Appendix

(a) air and water pollution,

(b) biodiversity,
(c) climate change (current and future risks),
(d) clean water and sanitation,
(e) carbon and other gas emissions,
(f) deforestation,
(g) natural disaster,
(h) resource scarcity or efficiency (eg, energy, water and raw materials),
(i) waste management.

A10.04 Examples of social factors may include but are not limited to the following:

(a) community relations,

(b) conflict,
(c) customer satisfaction,
(d) data protection and privacy,
(e) development of human capital (health & education),
(f) employee engagement,
(g) gender equality and racial equality,
(h) good health and well-being,
(i) human rights,
(j) working conditions,
(k) working environment.

A10.05 Examples of governance factors may include but are not limited to the
following:

(a) audit committee structure,

(b) board diversity and structure,
(c) bribery and corruption,

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 General Standards

(d) corporate governance,

(e) donations,
(f) ESG reporting standards and regulatory costs,
(g) executive remuneration,
(h) institutional strength,
(i) management succession planning,
(j) partnerships,
(k) political lobbying,
(l) rule of law,
(m) transparency,
(n) whistle-blower schemes.

General Standards: IVS 104 Data and Inputs Appendix

A10.06 ESG factors and the ESG regulatory environment should be considered in
valuations to the extent that they are measurable and would be considered
reasonable by the valuer applying professional judgement.

55
 IVS 105 Valuation Models

IVS 100 IVS 101 IVS 102 IVS 103 IVS 104 IVS 105 IVS 106
Valuation Scope of Bases of Valuation Data and Valuation Documentation
Framework Work Value Approaches Inputs Models and Reporting

ContentsParagraphs
Introduction10
Use of a Specialist or Service Organisation 20
Characteristics of Appropriate Valuation Models 30
Valuation Model Selection and Use 40
Valuation Model Documentation 50
General Standards: IVS 105 Valuation Models

IVS 105 Valuation Models addresses the selection and use of valuation models
to be used in the valuation process.

No model without the valuer applying professional judgement, for example an

automated valuation model (AVM), can produce an IVS-compliant valuation.

10. Introduction
10.01 A valuation model is a tool used for the quantitative implementation of a
valuation method in whole or in part. A valuation model converts inputs into
outputs used in the development of a value, whereas a valuation method is
a specific technique to develop a value.

10.02 Valuation models must be suitable for the intended use of the valuation and
consistent with inputs.

10.03 Valuation models can be developed internally or sourced externally from a

specialist or service organisation.

10.04 Valuation models used must be tested to ensure accuracy of the output
is appropriate for the intended use, basis of value and the assets and/or
liabilities being valued.

10.05 In all cases the valuer must apply professional judgement and professional
scepticism in the selection and use of valuation models and the application
of inputs used in the valuation model.

20. Use of a Specialist or Service Organisation

20.01 If the valuer does not possess all of the necessary valuation models
to perform all aspects of the valuation, it is acceptable for the valuer to
engage a specialist or service organisation to provide a valuation model.

20.02 Prior to using a specialist or service organisation, the valuer must assess and
document their capabilities.

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 General Standards

30. Characteristics of Appropriate Valuation Models

30.01 The valuer must determine that the valuation model is appropriate, which
for the purposes of IVS 105 Valuation Models means “fit for purpose” in
terms of assets or liabilities being valued, the scope of work and the
valuation method. The valuer must apply professional judgement to balance
the characteristics of a valuation model in order to choose the most
appropriate valuation model. The characteristics of appropriate valuation
models are shown below:

(a) accuracy: the valuation model is free from error and functions in a
manner consistent with the objectives of the valuation,
(b) completeness: the valuation model addresses all the features of the
asset and/or liability to determine value,
(c) timeliness: the valuation model reflects the market conditions as of the
valuation date,
(d) transparency: all persons preparing and relying on the valuation model

General Standards: IVS 105 Valuation Models

must understand how the valuation model works and its inherent
limitations.

30.02 In certain cases, the valuation model may not incorporate all of these
characteristics. Therefore, the valuer must assess and conclude that the
valuation model is appropriate to value the assets and/or liabilities in
accordance with the scope of work and the valuation method.

40. Valuation Model Selection and Use

40.01 The valuation model should be selected in the context of the intended use,
basis of value and the asset and/or liability being valued.

40.02 Regardless of whether the valuation model is developed internally or

externally sourced the valuer must assess the valuation model in order to
determine that the valuation model is fit for its intended use.

40.03 The valuer must understand the way the valuation model operates.

40.04 The valuation model should be tested for functionality and outputs must
be analysed for accuracy. Any significant limitations should be identified,
along with any potentially significant adjustments.

40.05 Valuation models used over time should be maintained, monitored,

assessed, and adjusted to ensure that they remain appropriate, accurate
and complete.

40.06 If significant limitations have been identified or adjustments required then

these must be explained, justified, and documented.

40.07 If significant limitations or adjustments cannot be sufficiently justified, the

valuation would not comply with IVS.

50. Valuation Model Documentation

50.01 A suitable valuation model should have documentation that includes the
following information:

(a) support for the selection or creation of the valuation model,

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 International Valuation Standards

(b) description of the inputs and outputs,

(c) significant inputs,


(d) limitations, and

(e) quality control procedures and results.

50.02 Documentation should be sufficient to describe why the valuation

model(s) were selected and considered by the valuer applying professional
judgement.
General Standards: IVS 105 Valuation Models

58
IVS 106 Documentation and Reporting

IVS 100 IVS 101 IVS 102 IVS 103 IVS 104 IVS 105 IVS 106
Valuation Scope of Bases of Valuation Data and Valuation Documentation
Framework Work Value Approaches Inputs Models and Reporting

Contents Paragraphs
Introduction 10
Documentation 20
Valuation Reports 30

General Standards: IVS 106 Documentation and Reporting

Valuation Review Reports 40

Valuation reports and documentation are a critical and defining feature

of IVS, which collectively assist in creating consistency, professionalism,
transparency, comparability, and trust in valuation to serve the public interest.

10. Introduction
10.01 An IVS-compliant valuation must have sufficient documentation and
reporting to describe and provide transparency to the intended user on
the valuation approach(es), valuation methods, inputs, valuation models,
professional judgement, and resultant value(s).

10.02 The results of a valuation or valuation review must be documented and

reported in writing and may include paper, electronic files, or other forms
of recorded media.

10.03 Documentation and reporting requirements apply regardless of whether

the valuer is employed by the client or externally engaged by the client.

10.04 Documentation must be maintained throughout the valuation and must

describe the valuation and the basis of conclusions made. The level of
documentation must at a minimum meet the requirements contained in
IVS 106 Documentation and Reporting, section 20.

10.05 Reporting must be provided to the client in writing (see para 10.02 of this
standard). The level of reporting must at a minimum meet the requirements
contained in section 30 of this standard.

20. Documentation
20.01 Documentation is the written record of the valuation or valuation review
and may include communications with the client, working papers, or both,
used to support the conclusions reached and compliance with IVS.

20.02 Documentation must be maintained to describe the valuation or valuation

review and must be sufficient to describe the conclusion reached by the
valuer. Documentation must be adequate to allow the valuer applying
professional judgement to understand the scope of the valuation, the work
performed, and the conclusions reached.

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 International Valuation Standards

20.03 In some cases, all documentation is included in the valuation report or

valuation review report. In other cases, depending on the agreed scope
of work, additional documentation must be maintained. Documentation
should include but is not limited to communications with the client,
alternative methods explored, additional data and inputs considered,
risks and biases addressed, professional judgement used, and the valuation
quality control procedures followed.

20.04 In all cases, documentation should describe the valuation or valuation

review and how the valuer managed valuation risk. The valuer must keep a
copy of any report issued on the value and a record of the valuation work
performed for a period in accordance with legal, regulatory, authoritative
or contractual requirements relative to the intended use.

30. Valuation Reports

General Standards: IVS 106 Documentation and Reporting

30.01 Valuation reports must provide, in sufficient detail, a clear and well-
structured description of the basis for the conclusion of value.

30.02 Valuation reports may reference other documents. These documents

may include but are not limited to scope of work, internal policies, and
procedures.

30.03 Valuation reports should include all information necessary to provide the
client with a clear description of the scope of work, the work performed,
professional judgements made and the basis for conclusions reached.

30.04 The format of the valuation reports may range from comprehensive
narrative reports to abbreviated summary reports.

30.05 Standing engagements that require frequent or repeated valuations may

provide updates to an existing IVS-compliant report providing it is agreed
upon in the scope of work.

30.06 Valuation reports must convey the following, at a minimum:

(a) agreed scope of the work,

(b) assets and/or liabilities being valued,
(c) the identity of the valuer,
(d) client,
(e) intended use,
(f) intended users, if applicable,
(g) valuation currency(ies) used,
(h) valuation date(s),
(i) basis/es of value adopted,
(j) the valuation approach(es) adopted,
(k) valuation method(s) or valuation model(s) applied,
(l) sources and selection of significant data and inputs used,
(m) significant environmental, social and governance factors used and
considered,

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 General Standards

(n) significant or special assumptions, and/or limiting conditions,

(o) findings of a specialist or service organisation,
(p) value and rationale for valuation,
(q) IVS compliance statement,
(r) the date of the report (which may differ from the valuation date).

30.07 In all instances the valuation report must be sufficient to describe the
conclusion reached and be considered reasonable by the valuer applying
professional judgement.

30.08 If the valuer concludes that a limitation or restriction will impact compliance
with IVS, the valuer must not state that the report is compliant with IVS.

General Standards: IVS 106 Documentation and Reporting

40. Valuation Review Reports
40.01 A valuation review is not a valuation. A valuation review must state whether
the review is a valuation process review or a value review or both:

(a) a valuation process review addresses compliance with IVS,

(b) a value review addresses the reasonableness of a value.

40.02 If a value is provided as part of the value review, then this is a valuation (see
section 30 of this standard).

40.03 A valuation review must convey the following, at a minimum:

(a) agreed scope of the valuation review,

(b) assets and/or liabilities reviewed,
(c) the identity of the valuation reviewer,
(d) the identity of the client,
(e) intended use,
(f) intended users, if applicable,
(g) significant or special assumptions and/or limiting conditions pertaining
to the valuation reviewed,
(h) the use of a specialist or service organisation if used, as part of the
valuation review,
(i) procedures undertaken and the documentation reviewed,
(j) the valuation reviewer’s conclusions about the work under review,
including supporting reasons, and
(k) the subject of the review,
(l) the date of the valuation review report,
(m) the version of IVS that is applicable to the review.

40.04 In all instances the valuation review report must be sufficient to describe
the conclusion reached and be considered reasonable by the valuer
applying professional judgement.

61
 

Asset
Standards
IVS 200 Businesses and Business Interests

IVS 200 IVS 210 IVS 220 IVS 230 IVS 300 IVS 400 IVS 410 IVS 500
Businesses Intangible Non- Inventory Plant, Real Development Financial
and Assets Financial Equipment Property Property Instruments
Business Liabilities and Interests
Interests Infrastructure

ContentsParagraphs
Overview10

Asset Standards: IVS 200 Businesses and Business Interests

Introduction20
Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for Businesses and Business Interests 80
Ownership Rights 90
Business Information 100
Economic and Industry Considerations 110
Operating and Non-Operating Assets 120
Capital Structure Considerations 130

10. Overview
10.01 The principles contained in the General Standards apply to valuations
of businesses and business interests. This standard contains additional
requirements that apply to valuations of businesses and business interests.

20. Introduction
20.01 The definition of what constitutes a business may differ depending on
the intended use of a valuation, but generally involves an organisation or
integrated collection of assets and/or liabilities engaged in commercial,
industrial, service or investment activity. Generally, a business would
include more than one asset (or a single asset and/or liability in which
the value is dependent on employing additional assets and/or liabilities)
working together to generate economic activity that differs from the
outputs that would be generated by the individual assets and/or liabilities
on their own.

20.02 Individual intangible assets, or a group of intangible assets, might not

constitute a business but would nonetheless be within the scope of this
standard if such assets generate economic activity that differs from the
outputs that would be generated by the individual assets on their own.
If the assets do not meet this criterion the valuer should defer to IVS 210
Intangible Assets or IVS 220 Non-Financial Liabilities.

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 International Valuation Standards

20.03 The commercial, industrial, service or investment activity of the business

may result in greater economic activity (ie, value), than those assets and/
or liabilities would generate separately. The excess value is often referred
to as goodwill. The absence of goodwill does not automatically imply that
the asset or group of assets does not constitute a business. In addition,
substantially all the value of assets and/or liabilities within a business may
reside in a single asset.

20.04 Businesses can take many legal forms, including but not limited to
corporations, partnerships, joint ventures and sole proprietorships.
Businesses can also include subsets or specific business activities of an
entity, such as a division, a branch, or a segment.

20.05 Interests in a business (eg, securities) can take many forms. To determine
the value of a business interest, the valuer should apply these standards
Asset Standards: IVS 200 Businesses and Business Interests

to determine the value of the underlying business. In such instances,

business interests should fall within the scope of this standard. Depending
on the nature of the interest, certain other standards may be applicable.

20.06 The valuer must establish whether the valuation is performed for the entire
entity or business, shares, or a shareholding in the entity and whether it
is a controlling or non-controlling interest, or a specific business activity of
the entity.

20.07 The valuer must specify and define the business or business interest being
valued. This includes but is not limited to:

(a) enterprise value: often described as the total value of the equity in a
business plus the value of its debt or debt-related liabilities, minus any
cash or cash equivalents available to meet those liabilities,
(b) total invested capital value: often described as the total amount of
money currently invested in a business, regardless of the source, often
reflected as the value of total assets less current liabilities,
(c) operating value: often described as the total value of the operations
of the business, excluding the value of any non-operating assets and
liabilities, and
(d) equity value: often described as the value of a business to all its equity
shareholders.

20.08 The valuer must specify and define the proportion of the interest valued
and its related impact on the valuation.

20.09 Valuations of businesses are required for different intended uses including
but not limited to acquisitions, mergers and sales of businesses, taxation,
litigation, insolvency proceedings, and financial reporting. Business
valuations may also be needed as an input or step in other valuations such
as the valuation of stock options, particular class(es) of stock, or debt.

30. Bases of Value

30.01 In accordance with IVS 102 Bases of Value, the valuer must select the
appropriate basis(es) of value when valuing a business or business interest.

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 Asset Standards

30.02 Often, business valuations are performed using bases of value defined by
entities/organisations other than the IVSC. Some examples of these bases
of value are mentioned in IVS 102 Bases of Value.

30.03 It is the valuer’s responsibility to understand and follow the legislation,

regulation, case law and/or other interpretive guidance related to those
bases of value effective at the valuation date.

40. Valuation Approaches and Methods

40.01 The three principal valuation approaches described in IVS 103 Valuation
Approaches may be applied to the valuation of businesses and business
interests.

40.02 When selecting a valuation approach and valuation method, in addition to

Asset Standards: IVS 200 Businesses and Business Interests

the requirements of this standard, the valuer must follow the requirements
of IVS 103 Valuation Approaches, including para 10.04.

50. Market Approach

50.01 The market approach is frequently applied in the valuation of businesses
and business interests as these assets and/or liabilities often meet the
criteria in IVS 103 Valuation Approaches, paras 20.02 and 20.03. When
valuing businesses and business interests under the market approach,
the valuer should follow the requirements of IVS 103 Valuation Approaches,
including but not limited to sections 20 and Appendix A10.

50.02 The three most common sources of data used as inputs to value businesses
and business interests using the market approach are:

(a) public markets in which ownership interests of similar businesses are

traded,
(b) the acquisition market in which entire businesses or controlling
interests in businesses are bought and sold, and
(c) prior transactions or offers for the ownership of the subject business.

50.03 There must be a reasonable basis for comparison with, and reliance upon,
similar businesses in the market approach. These similar businesses
should be in the same industry as the subject business or in an industry
that responds to the same economic variables.

Factors that should be considered in assessing whether a reasonable

basis for comparison between the subject company and the comparable
companies exists include but are not limited to:

(a) similarity to the subject business in terms of qualitative and

quantitative business characteristics,
(b) amount and verifiability of data on the similar business, and
(c) whether the price of the similar business represents a transaction
consistent with the applicable basis of value.

50.04 When applying a market multiple, adjustments such as those specified

in IVS 103 Valuation Approaches, Appendix A10.14 may be appropriate to
both the subject company and the comparable companies.

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50.05 The valuer should follow the requirements of IVS 103 Valuation Approaches
Appendix A10.06–A10.08 when selecting and adjusting comparable
transactions.

50.06 The valuer should follow the requirements of IVS 103 Valuation Approaches,
Appendix A10.12–A10.14 when selecting and adjusting comparable public
company information.

60. Income Approach

60.01 The income approach is frequently applied in the valuation of businesses
and business interests as these assets and/or liabilities often meet the
criteria in IVS 103 Valuation Approaches, paras 30.02 and 30.03.

60.02 When the income approach is applied, the valuer should follow the
Asset Standards: IVS 200 Businesses and Business Interests

requirements of IVS 103 Valuation Approaches, section 30 and Appendix

A20.

60.03 Income and cash flow related to a business or business interest can be
measured in a variety of ways and may be determined on a pre-tax or post-
tax basis. The capitalisation or discount rate applied must be consistent
with the type of income or cash flow used.

60.04 The type of income or cash flow used must be consistent with the type of
interest being valued. Examples of this requirement include but are not
limited to:

(a) enterprise value: usually derived using cash flows before debt servicing
costs and an appropriate discount rate applicable to enterprise-level
cash flows, such as a weighted-average cost of capital, and
(b) equity value: usually derived using cash flows to equity after debt
servicing costs, and an appropriate discount rate applicable to equity-
level cash flows, such as a cost of equity.

60.05 The income approach requires the estimation of:

(a) a capitalisation rate when capitalising income, or

(b) cash flow and a discount rate when discounting cash flows.

60.06 In estimating the appropriate capitalisation rate, the valuer should consider
factors including but not limited to the level of interest rates, rates of return
expected by participants for similar investments and the risk inherent in
the anticipated benefit stream (see IVS 103 Valuation Approaches, Appendix
A20).

60.07 In methods that employ discounting, expected growth may be explicitly

considered in the forecasted income or cash flow. In methods that employ
capitalisation, expected growth is usually reflected in the capitalisation
rate.

60.08 If a forecasted cash flow is expressed in nominal terms, a discount rate

consistent with the expectation of future price changes due to inflation
or deflation should be used. If a forecasted cash flow is expressed in real
terms, a discount rate that takes no account of expected price changes due
to inflation or deflation should be used.

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60.09 Under the income approach, historical financial statements of a business

entity are often used as a basis to estimate the future income or cash flow
of the business. Determining the historical trends over time through ratio
analysis may help provide the necessary information to assess the risks
inherent in the business operations.

60.10 When historical financial results are used as a basis for determining
future income or cash flows, adjustments may be appropriate to reflect
differences between the actual historic cash flows and those that would be
experienced prospectively at the valuation date. The adjustments should be
consistent with the applicable basis of value.

Examples of such adjustments include but are not limited to:

(a) adjusting revenues and expenses to levels that are reasonably

Asset Standards: IVS 200 Businesses and Business Interests

representative of expected continuing operations,
(b) presenting financial data of the subject business and comparison
businesses on a consistent basis,
(c) adjusting non-arm’s length transactions (such as contracts with
customers or suppliers) to market rates,
(d) adjusting the cost of labour or of items leased or otherwise contracted
from related parties to reflect market prices or rates,
(e) reflecting the impact of non-recurring events from historic revenue
and expense items. Examples of non-recurring events include losses
caused by strikes, new plant start-up and weather phenomena.
Forecast cash flows should reflect any non-recurring revenues or
expenses that can be reasonably anticipated Past occurrences may be
indicative of similar events in the future, and
(f) adjusting the accounting of inventory to accurately reflect economic
reality or to allow a comparison with similar businesses whose
accounts may be kept on a different basis from the subject business.

60.11 When using an income approach, it may also be necessary to adjust the
valuation to reflect other matters that are not captured in either the cash
flow forecasts or the discount rate adopted.

Examples of such adjustments include but are not limited to adjustments

for the marketability of the interest being valued or adjustments reflecting
whether the interest being valued is a controlling or non-controlling
interest in the business.

60.12 The valuer should ensure that adjustments to the valuation do not reflect
factors that were already reflected previously included in the cash flows or
discount rate.

For example, forecast cash flows may already reflect that the interest
being valued is a controlling or non-controlling interest in the business.

60.13 While many businesses may be valued using a single cash flow scenario,
the valuer may also apply multi-scenario or simulation models, particularly
when there is significant uncertainty as to the amount and/or timing of
future cash flows.

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70. Cost Approach

70.01 The cost approach is rarely applicable in the valuation of businesses and
business interests as these assets and/or liabilities seldom meet the criteria
in IVS 103 Valuation Approaches, paras 40.02 or 40.03.

The cost approach is sometimes applied in the valuation of businesses,

particularly when:

(a) the business is an early stage or start-up business where profits and/or
cash flow cannot be reliably determined and comparisons with other
businesses under the market approach are impractical or unreliable,
(b) the business is an investment or holding business, in which case
the summation method described in IVS 103 Valuation Approaches,
Appendix A30.8–A30.9 is applicable, and/or
Asset Standards: IVS 200 Businesses and Business Interests

(c) the business does not represent a going concern and/or the value of
its assets and/or liabilities in a liquidation may exceed the business’
value as a going concern.

70.02 In the circumstances where a business or business interest is valued

using a cost approach, the valuer must follow the requirements of IVS 103
Valuation Approaches, section 40 and Appendix A30.

80. Special Considerations for Businesses and Business Interests

80.01 The following sections address a non-exhaustive list of topics relevant to
the valuation of businesses and business interests:

(a) Ownership Rights (section 90),

(b) Business Information (section 100),
(c) Economic and Industry Considerations (section 110),
(d) Operating and Non-Operating Assets (section 120),
(e) Capital Structure Considerations (section 130).

90. Ownership Rights

90.01 The rights, privileges or conditions that attach to the ownership interest,
whether held in proprietorship, corporate or partnership form, require
consideration in the valuation. Ownership rights are usually defined within
a jurisdiction by legal documents such as articles of association, clauses
in the memorandum of the business, articles of incorporation, bylaws,
partnership agreements and shareholder agreements. These documents
are collectively known as “corporate documents”.

90.02 In some situations, the valuer may be required to distinguish between

legal and beneficial ownership of a business interest.

90.03 Corporate documents may contain restrictions on the transfer of an

interest and/or other provisions relevant to value. For example, corporate
documents may stipulate that the interest should be valued as a pro rata
fraction of the entire issued share capital regardless of whether it is a
controlling or non-controlling interest. In each case, the rights of the

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interest being valued and the rights attendant to other classes of interest
should be considered.

90.04 The valuer should distinguish between rights and obligations inherent to
the subject interest and those that may be applicable only to a particular
shareholder For example, an agreement between current shareholders
may not apply to a potential buyer of the ownership interest. Depending
on the basis(es) of value used, the valuer may be required to consider only
the rights and obligations inherent to the subject interest or both those
rights and considerations inherent to the subject interest and those that
apply to a specific owner.

90.05 All rights and preferences associated with a subject business or business
interest should be considered in a valuation, including but not limited to:

Asset Standards: IVS 200 Businesses and Business Interests

(a) Where multiple classes of equity and/or hybrid securities exist, the
valuation should consider the rights of each different class, including,
but not limited to:

(i) liquidation preferences,

(ii) voting rights,

(iii) redemption, conversion and participation provisions, and

(iv) put and/or call rights.

(b) Where a controlling interest in a business may have a higher value

than a non-controlling interest. Control premiums or discounts for lack
of control may be appropriate depending on the valuation method(s)
applied (see IVS 103 Valuation Approaches, Appendix A10.17 (b)) and/
or the intended use of the valuation. When evaluating premiums paid
in completed transactions, the valuer should consider whether the
synergies and other factors that caused the acquirer to pay those
premiums are applicable to the subject asset to a comparable degree.

100. Business Information

100.01 The valuation of a business entity or interest frequently requires reliance
upon information received from management, representatives of the
management or other experts.

As required by IVS 103 Valuation Approaches, Appendix A20.13 the valuer

must assess the reasonableness of information received from management,
representatives of management or other experts and evaluate whether it
is appropriate to rely on that information for the valuation.

For example, prospective financial information provided by management

may reflect specific synergies that may not be consistent with the
requirements of the valuation.

100.02 Although the value on a given valuation date reflects the anticipated
benefits of future ownership, the history of a business may provide useful
guidance to set expectations for the future. The valuer should therefore
consider the business’ historical financial statements as an input to a
valuation.

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Where the future performance of the business is expected to deviate

significantly from historical experience, the valuer must understand why
historical performance is not representative of the future expectations of
the business.

110. Economic and Industry Considerations

110.01 Awareness of relevant economic developments and specific industry
trends is essential for all valuations. Matters including but not limited to
political outlook, government policy, exchange rates, inflation, interest
rates and market activity may affect assets and/or liabilities in different
locations and/or sectors of the economy quite differently.

These factors can be important in the valuation of businesses and business

interests, since businesses may have complex structures involving multiple
Asset Standards: IVS 200 Businesses and Business Interests

locations and types of operations.

For example, a business may be impacted by economic and industry-

specific factors related to:

(a) the registered location of the business headquarters and legal form of
the business,
(b) the nature of the business operations and where each aspect of the
business is conducted (ie, manufacturing may be done in a different
location to where research and development is conducted),
(c) where the business sells its goods and/or services,
(d) the currency(ies) the business uses,
(e) where the suppliers of the business are located, and
(f) the tax and legal jurisdictions the business operates in.

120. Operating and Non-Operating Assets

120.01 The valuation of an ownership interest in a business is only relevant in the
context of the financial position of the business at a point in time. The
valuer should determine which items are required for use in the operations
of the business and which ones are redundant or “excess” to the business
at the valuation date.

120.02 Most valuation methods do not capture the value of assets and/or liabilities
that are not required for the operation of the business.

For example, the valuation of a business using a multiple of EBITDA

would only capture the value the assets utilised in generating that level
of EBITDA. If the business has non-operating assets or liabilities, such as
an idle manufacturing plant, the value of that non-operating plant would
not be captured in the value. Depending on the scope of the valuation
engagement (see para 120.03 of this standard), the value of non-operating
assets and/or liabilities may need to be separately determined and added
to the value of the operating assets to determine the value.

120.03 When separately considering non-operating assets and liabilities, the valuer
should ensure that the income and expenses associated with non-operating

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assets and/or liabilities are excluded from the cash flow measurements and
projections used in the valuation of the operating business.

For example, if a business has a significant liability associated with an

underfunded pension and that liability is valued separately, the cash
flows used in the valuation of the business should exclude any “catch-up”
payments related to that liability.

120.04 Businesses may have unrecorded assets and/or liabilities that are not
reflected on the balance sheet. Such assets and/or liabilities could include
intangible assets, machinery and equipment that is fully depreciated, and
legal liabilities/lawsuits. The valuer should consider whether these assets
and/or liabilities form part of the operating business or are non-operating
assets and/or liabilities.

Asset Standards: IVS 200 Businesses and Business Interests

120.05 If the valuation includes information from publicly-traded businesses,
the publicly traded stock prices usually implicitly include the value of
non-operating assets and/or liabilities, where they exist. The valuer should
consider adjusting information from publicly traded businesses to exclude
the value, income and expenses associated with non-operating assets and/
or liabilities.

130. Capital Structure Considerations

130.01 Businesses are often financed through a combination of debt and equity.
The valuer could be asked to value only equity, or a specific class of equity,
or some other form of ownership interest.

Equity, or a specific class of equity can occasionally be valued directly.

However, it is more usual for the enterprise value of the business to be
determined before allocating value between the various classes of debt
and equity.

130.02 While there are many ownership interests in an asset which the valuer
could be mandated to value, the list of such interests includes but is not
limited to:

(a) bonds,
(b) convertible debt,
(c) partnership interest,
(d) non-controlling interest,
(e) common equity,
(f) preferred equity,
(g) options,
(h) warrants.

130.03 When the valuer is mandated to value only equity, or to determine how
the business value is distributed among the various debt and equity
classes, the valuer must determine and consider the different rights and
preferences associated with each class of debt and equity.

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130.04 Rights and preferences can broadly be categorised as economic rights or

control rights.

Such rights and preferences include but are not limited to:

(a) dividend or preferred dividend rights,

(b) liquidation preferences,
(c) voting rights,
(d) redemption rights,
(e) conversion rights,
(f) participation rights,
(g) anti-dilution rights,
Asset Standards: IVS 200 Businesses and Business Interests

(h) registration rights, and

(i) put and/or call rights.

130.05 For simple capital structures that include only common stock and simple
debt structures (such as bonds, loans and overdrafts), it may be possible
to estimate the value of all of the common stock within the enterprise
by directly estimating the value of debt, subtracting that value from the
enterprise value, then allocating the residual equity value pro rata to all of
the common stock.

This method is not appropriate for all companies with simple capital
structures. For example it may not be appropriate for distressed or highly
leveraged companies.

130.06 For complex capital structures that include a form of equity other than just
common stock, the valuer may use any reasonable method to determine
the value of equity or a particular class of equity.

In such cases, the enterprise value of the business is usually determined

first and then that value is allocated between the various classes of debt
and equity.

Three methods that the valuer may utilise in such instances are discussed
in this section, including:

(a) current value method (CVM),

(b) option pricing method (OPM), and
(c) probability-weighted expected return method (PWERM).

130.07 While the CVM is not forward looking, both the OPM and PWERM
estimate values assuming various future outcomes. The PWERM relies
on discrete assumptions for future events and the OPM estimates the
future distribution of outcomes using a lognormal distribution around the
current value.

130.08 The valuer should consider any potential differences between a “pre-
money” and “post-money” valuation, particularly for early stage companies
with complex capital structures. For example, an infusion of cash (ie, “post-
money valuation”) for such companies may impact the overall risk profile

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of the business as well as the relative value allocation between share

classes.

130.09 The valuer should consider recent transactions in the subject equity or a
specific class of equity, and ensure the assumptions used in the subject
valuation are updated as necessary to reflect changes in the investment
structure and changes in market conditions.

Current Value Method (CVM)

130.10 The current value method (CVM) allocates the enterprise value to the
various debt and equity securities assuming an immediate sale of the
enterprise. Under the CVM, the obligations to debt holders, or debt
equivalent securities, is first deducted from the enterprise value to
calculate residual equity value. The valuer should consider if the enterprise

Asset Standards: IVS 200 Businesses and Business Interests

value includes or excludes cash, and the resulting use of gross or net debt
for allocation purposes. Next, value is allocated to the various series of
preferred stock based on the series’ liquidation preferences or conversion
values, whichever are greater. Finally, any residual value is allocated to any
common equity, options, and warrants.

130.11 A limitation of the CVM is that it is not forward looking and fails to consider
the option-like payoffs of many share classes.

130.12 The CVM should only be used when:

(a) a liquidity event of the enterprise is imminent, or

(b) when an enterprise is at such an early stage of its development that
no significant common equity value above the liquidation preference
on any preferred equity has been created, or
(c) no material progress has been made on the company’s business plan,
or
(d) no reasonable basis exists for estimating the amount and timing of
any such value above the liquidation preference that might be created
in the future.

130.13 The valuer should not assume that the value of debt, or debt-like securities,
and its book value are equal without a rationale for the determination.

Option Pricing Method (OPM)

130.14 The OPM values the different share classes by treating each share class as
an option on the cash flows from the enterprise. The OPM is often applied
to capital structures in which the payout to different share classes changes
at different levels of total equity value. These share classes include but
are not limited to convertible preferred shares, management incentive
units, options, or other classes of shares that have certain liquidation
preferences.

130.15 The OPM may be performed on the enterprise value, thereby including
any debt in the OPM, or on an equity basis after separate consideration of
the debt.

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130.16 The OPM considers the various terms of the stockholder agreements that
would affect the distributions to each class of equity upon a liquidity event,
including the level of seniority among the securities, dividend policy,
conversion ratios and cash allocations.

130.17 The starting point for the OPM is the value of total equity for the business.
The OPM is then applied to allocate the total equity value among equity
securities.

130.18 The OPM (or a related hybrid method) is suited to circumstances where
specific future liquidity events are difficult to forecast or the business is in
an early stage of development.

130.19 The OPM most frequently relies on the Black-Scholes option pricing model
to determine the value associated with distributions above certain value
Asset Standards: IVS 200 Businesses and Business Interests

thresholds. However, in more complex capital structures, alternative

techniques, such as the Monte Carlo simulation, may be justified.

130.20 When applying the OPM, the list of steps the valuer should perform includes
but is not limited to:

(a) determine the total equity value of the business,

(b) identify the liquidation preferences, preferred dividend accruals,
conversion prices, and other features attached to the relevant
securities that influence the cash distribution,
(c) determine the different total equity value points (breakpoints) in which
the liquidation preferences and conversion prices become effective,
(d) determine the inputs to the Black-Scholes or other option models:

(i) determine a reasonable time horizon for the OPM,

(ii) select a risk-free rate corresponding to the time horizon,
(iii) determine the appropriate volatility factor for the equity, and
(iv) determine the expected dividend yield.

(e) calculate a value for the various call options and determine the value
allocated to each interval between the breakpoints,
(f) determine the relative allocation to each class of shares in each
interval between the calculated breakpoints,
(g) allocate the value between the breakpoints (calculated as the call
options) among the share classes based on the allocation determined
in step (f) and the value determined in step (e),
(h) consider additional adjustments to the share classes as necessary,
consistent with the basis of value. For example, it may be appropriate
to apply discounts or premiums.

130.21 When determining the appropriate volatility assumption the valuer should
consider:

(a) the development stage of the asset and the relative impact to the
volatility when compared with that observed by the comparable
companies, and

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 Asset Standards

(b) the relative financial leverage of the asset.

130.22 In addition to the method discussed above, the OPM can be used to back
solve for the value of total equity value when there is a known price for
an individual security. The inputs to a back solve analysis are the same as
above. The valuer will then solve for the price of the known security by
changing the value of total equity. The back solve method also provides a
value for all other equity securities.

Probability-Weighted Expected Return Method (PWERM)

130.23 Under a PWERM, the value of the various equity securities are estimated
based upon an analysis of future values for the business, assuming various
future outcomes. Share value is based upon the probability-weighted
present value of expected future investment returns, considering each of

Asset Standards: IVS 200 Businesses and Business Interests

the possible future outcomes available to the asset, as well as the rights
and preferences of the share classes.

130.24 Typically, the PWERM is used when the business is close to an exit event
and does not plan to raise additional capital.

130.25 When applying the PWERM, the list of steps the valuer should perform
includes but is not limited to:

(a) determine the possible future outcomes available to the asset,

(b) estimate the future value of the asset under each outcome,
(c) allocate the estimated future value of the asset to each class of debt
and equity under each possible outcome,
(d) discount the expected value allocated to each class of debt and equity
to present value using a risk-adjusted discount rate,
(e) weight each possible outcome by its respective probability to estimate
the expected future probability-weighted cash flows to each class of
debt and equity, and
(f) consider additional adjustments to the share classes as necessary,
consistent with the basis of value. For example, it may be appropriate
to apply discounts or premiums.

130.26 The valuer should reconcile the probability-weighted present values of the
future exit values to ensure that the overall valuation of the business is
reasonable.

130.27 The valuer can combine elements of the OPM with the PWERM to create a
hybrid methodology by using the OPM to estimate the allocation of value
within one or more of the probability-weighted scenarios.

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 IVS 210 Intangible Assets

IVS 200 IVS 210 IVS 220 IVS 230 IVS 300 IVS 400 IVS 410 IVS 500
Businesses Intangible Non- Inventory Plant, Real Development Financial
and Assets Financial Equipment Property Property Instruments
Business Liabilities and Interests
Interests Infrastructure

ContentsParagraphs
Overview10
Introduction20
Bases of Value 30
Asset Standards: IVS 210 Intangible Assets

Valuation Approaches and Methods 40

Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for Intangible Assets 80
Discount Rates/Rates of Return for Intangible Assets 90
Intangible Asset Economic Lives 100
Tax Amortisation Benefit (TAB) 110

10. Overview
10.01 The principles contained in the General Standards apply to valuations of
intangible assets and valuations with an intangible asset component. This
standard contains additional requirements that apply to valuations of
intangible assets.

20. Introduction
20.01 An intangible asset is a non-monetary asset that manifests itself by its
economic properties. It does not have physical substance but grants rights
and/or economic benefits to its owner.

20.02 Specific intangible assets are defined and described by characteristics such
as their ownership, function, market position, image, and legal protection.
These characteristics differentiate intangible assets from one another.

20.03 There are many types of intangible assets, but they are often considered to
fall into one or more of the following categories, or into goodwill:

(a) marketing-related intangible assets are used primarily in the marketing

or promotion of products or services. Examples include trademarks,
trade names, unique trade design and internet domain names,
(b) customer-related intangible assets include customer lists, backlog,
customer contracts, and contractual and non-contractual customer
relationships,

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(c) artistic-related intangible assets arise from the right to benefits from
artistic works such as plays, books, films and music, and from non-
contractual copyright protection,
(d) contract-related intangible assets represent the value of rights that
arise from contractual agreements. Examples include licensing and
royalty agreements, service or supply contracts, lease agreements,
permits, broadcast rights, servicing contracts, employment contracts
and non-competition agreements and natural resource rights,
(e) technology-related intangible assets arise from contractual or non-
contractual rights to use patented technology, unpatented technology,
databases, formulae, designs, software, processes or recipes.

20.04 Although similar intangible assets within the same class will share some
characteristics with one another, they will also have differentiating
characteristics that will vary according to the type of intangible asset.

20.05 In addition, certain intangible assets, such as brands, may represent a

Asset Standards: IVS 210 Intangible Assets

combination of several categories listed in para 20.03.

20.06 When valuing an intangible asset, the valuer must understand specifically
what needs to be valued and the intended use of the valuation. For example,
customer data (names, addresses, etc) typically have very different values
from customer contracts (those contracts in place on the valuation date)
and from customer relationships (the value of the ongoing customer
relationship including existing and future contracts). Which intangible
assets need to be valued and the definition of those intangible assets may
differ depending on the intended use of the valuation. Differences in how
intangible assets are defined can lead to significant differences in value.

20.07 Generally, goodwill is any future economic benefit arising from a business,
an interest in a business or from the use of a group of assets which has
not been separately recognised in another asset. The value of goodwill is
typically measured as the residual amount remaining after the values of all
identifiable tangible, intangible and monetary assets, adjusted for actual or
contingent liabilities, have been deducted from the value of a business.

For some intended uses, goodwill may need to be further divided into
transferable goodwill (that can be transferred to third parties) and non-
transferable or “personal” goodwill.

20.08 Since the amount of goodwill depends on which other tangible and
intangible assets are recognised, its value can be different when calculated
for different intended uses. For example, in a business combination
accounted for under IFRS or US GAAP, an intangible asset is only recognised
if it:

(a) is separable, ie, capable of being separated or divided from the

entity and sold, transferred, licensed, rented or exchanged, either
individually or together with a related contract, identifiable asset or
liability, regardless of whether the entity intends to do so; or
(b) arises from contractual or other legal rights, regardless of whether
those rights are transferable or separable from the entity or from
other rights and obligations.

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20.09 While the aspects of goodwill can vary depending on the intended use of
the valuation, goodwill frequently includes elements such as:

(a) specific synergies arising from a combination of two or more

businesses (eg, reductions in operating costs, economies of scale or
product mix dynamics),
(b) opportunities to expand the business into new and different markets,
(c) the benefit of an assembled workforce (but generally not any
intellectual property developed by members of that workforce),
(d) the benefit to be derived from future assets, such as new customers
and future technologies, and
(e) assemblage and parts of going concern value.

20.10 Determining the value of one or several individual intangible asset(s) can
be the intended use of a valuation. However, when valuing businesses,
business interests, real property, and machinery and equipment, the
valuer should consider whether there are intangible assets associated with
Asset Standards: IVS 210 Intangible Assets

those assets and whether those directly or indirectly impact the asset being
valued. For example, when using an income approach to value a hotel, the
contribution to value of the hotel’s brand may already be reflected in the
profit generated by the hotel.

20.11 Intangible asset valuations are performed for a variety of intended uses. It
is the valuer’s responsibility to understand the intended use of a valuation.
It is also the valuer’s responsibility to understand whether intangible assets
should be valued separately or grouped with other assets.

Circumstances requiring an intangible asset valuation include but are not

limited to:

(a) financial reporting purposes, such as accounting for business

combinations, asset acquisitions and sales, and impairment analysis,
(b) tax reporting purposes, such as transfer pricing analyses, estate and
gift tax planning and reporting, and ad valorem taxation analyses,
(c) litigation in instances such as shareholder disputes, damage
calculations and marital dissolutions (divorce),
(d) other statutory or legal events such as compulsory purchases/eminent
domain proceedings,
(e) general consulting, collateral lending, transactional support
engagements and insolvency.

30. Bases of Value

30.01 In accordance with IVS 102 Bases of Value, the valuer must select the
appropriate basis(es) of value when valuing intangible assets.

30.02 Often, intangible asset valuations are performed using bases of value defined
by entities/organisations other than the IVSC (some examples of which
are mentioned in IVS 102 Bases of Value). The valuer must understand and
follow the legislation, regulation, case law and other interpretive guidance
related to those bases of value effective at the valuation date.

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40. Valuation Approaches and Methods

40.01 The three valuation approaches described in IVS 103 Valuation Approaches
may be applied to the valuation of intangible assets.

40.02 When selecting an approach and method, in addition to the requirements

of this standard, the valuer must follow the requirements of IVS 103
Valuation Approaches, including para 10.04.

50. Market Approach

50.01 Under the market approach, the value of an intangible asset is determined
by reference to market activity (for example, transactions involving
identical or similar assets).

50.02 Transactions involving intangible assets frequently also include other

assets, such as a business combination that includes intangible assets.

50.03 The valuer must comply with paras 20.02 and 20.03 of IVS 103 Valuation

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Approaches when determining whether to apply the market approach to
the valuation of intangible assets.

In addition, the valuer should only apply the market approach to value
intangible assets if both of the following criteria are met:

(a) information is available on arm’s-length transactions involving

identical or similar intangible assets on or near the valuation date, and
(b) sufficient information is available to allow the valuer to adjust for all
significant differences between the subject intangible asset and those
involved in the transactions.

50.04 The heterogeneous nature of intangible assets and the fact that intangible
assets are seldom transacted separately from other assets limit the
availability of market evidence of transactions involving identical assets.
Where market evidence is available, it usually comprises assets that are
similar, but not identical to the subject asset.

50.05 Where evidence of either prices or valuation multiples is available, the

valuer should adjust these to reflect differences between the subject asset
and the assets involved in the transactions. These adjustments reflect the
differentiating characteristics of the subject intangible asset and the assets
involved in the transactions. Such adjustments may only be determinable
at a qualitative, rather than quantitative, level. However, the need for
significant qualitative adjustments may indicate that another approach
would be more appropriate for the valuation.

50.06 Examples of intangible assets for which the market approach is sometimes
used include:

(a) broadcast spectrum,

(b) internet domain names, and
(c) taxi licenses (“medallions”).

50.07 The guideline transactions method is generally the only market approach
method that can be applied to intangible assets.

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50.08 In rare circumstances, a security sufficiently similar to a subject intangible

asset may be publicly traded, allowing the use of the guideline public
company method. For example, contingent value rights (CVRs) are tied to
the performance of a particular product or technology.

60. Income Approach

60.01 Under the income approach, the value of an intangible asset is determined
by reference to the present value of income, cash flows or cost savings
attributable to the intangible asset over its economic life.

60.02 The valuer must comply with paras 30.02 and 30.03 of IVS 103 Valuation
Approaches when determining whether to apply the income approach to
the valuation of intangible assets.

60.03 Income related to intangible assets is frequently included in the price paid
for goods or a service. It may be challenging to separate income related
to the intangible asset from income related to other tangible and intangible
assets. Many of the methods under the income approach separate the
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economic benefits associated with a subject intangible asset.

60.04 The income approach is the most common method applied to the
valuation of intangible assets and is frequently used to value intangible
assets including the following:

(a) technology,
(b) customer-related intangibles (eg, backlog, contracts, relationships),
(c) tradenames/trademarks/brands,
(d) operating licenses (eg, franchise agreements, gaming licenses,
broadcast spectrum), and
(e) non-competition agreements.

Income Approach Methods

60.05 The income approach includes several methods. The following methods
are discussed in this standard in more detail:

(a) excess earnings method,

(b) relief-from-royalty method,
(c) premium profit method or with-and-without method,
(d) greenfield method,
(e) distributor method, and
(f) cost savings method.

Excess Earnings Method

60.06 The excess earnings method estimates the value of an intangible asset as
the present value of the cash flows attributable to the subject intangible
asset after excluding the proportion of the cash flows that are attributable
to other assets required to generate the cash flows (“contributory assets”).
It is often used for valuations where there is a requirement for the acquirer
to allocate the overall price paid for a business between tangible assets,
identifiable intangible assets, and goodwill.

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60.07 Contributory assets are assets that are used in conjunction with the subject
intangible asset in the realisation of prospective cash flows associated with
the subject intangible asset. Assets that do not contribute to the prospective
cash flows associated with the subject intangible asset are not contributory
assets.

60.08 The excess earnings method can be applied by using:

(a) several periods of forecasted cash flows (“multi-period excess earnings

method” or “MPEEM”),
(b) a single period of forecasted cash flows (“single-period excess earnings
method”), or
(c) by capitalising a single period of forecasted cash flows (“capitalised
excess earnings method” or the “formula method”).

60.09 The capitalised excess earnings method or formula method is generally

only appropriate if the intangible asset is operating in a steady state
with stable growth/decay rates, constant profit margins and consistent

Asset Standards: IVS 210 Intangible Assets

contributory asset levels/charges.

60.10 Most intangible assets have economic lives exceeding one period,
frequently follow non-linear growth/decay patterns and may require
different levels of contributory assets over time. Therefore, the MPEEM is
the most commonly used excess earnings method as it offers the most
flexibility and allows the valuer to explicitly forecast changes in such inputs.

60.11 Whether applied in a single-period, multi-period or capitalised manner,

the list of steps the valuer should perform in applying an excess earnings
method includes but is not limited to:

(a) forecast the amount and timing of future revenues driven by the
subject intangible asset and related contributory assets,
(b) forecast the amount and timing of expenses that are required to
generate the revenue from the subject intangible asset and related
contributory assets,
(c) adjust the expenses to exclude those related to creation of new
intangible assets that are not required to generate the forecasted
revenue and expenses. Profit margins in the excess earnings method
may be higher than profit margins for the overall business because the
excess earnings method excludes investment in certain new intangible
assets. For example:

(i) research and development expenditures related to development

of new technology would not be required when valuing only
existing technology, and
(ii) marketing expenses related to obtaining new customers would
not be required when valuing existing customer-related intangible
assets.

(d) identify and value the contributory assets that are needed to achieve
the forecasted revenue and expenses. Contributory assets often
include working capital, fixed assets, assembled workforce and
identified intangible assets other than the subject intangible asset,

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(e) determine the appropriate rate of return on each contributory

asset based on an assessment of the risk associated with that asset.
For example, low risk assets like working capital will typically have a
relatively lower required return. Contributory intangible assets and
highly specialised machinery and equipment often require relatively
higher rates of return,
(f) in each forecast period, deduct the required returns on contributory
assets from the forecast profit to arrive at the excess earnings
attributable to only the subject intangible asset,
(g) determine the appropriate discount rate for the subject intangible asset
and present value or capitalise the excess earnings, and
(h) if appropriate for the intended use of the valuation (see paras 110.01–
110.04), calculate and add the tax amortisation benefit (TAB) for the
subject intangible asset.

60.12 Contributory asset charges (CACs) should be made included for all current
and future tangible assets, intangible assets and financial assets that
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contribute to the generation of the cash flow. If an asset for which a CAC
is required is involved in more than one line of business, its CAC should be
allocated to the different lines of business involved.

60.13 The determination of whether a CAC for elements of goodwill is

appropriate should be based on an assessment of the relevant facts
and circumstances of the situation. The valuer should not mechanically
apply CACs or alternative adjustments for elements of goodwill if the
circumstances do not warrant such a charge. Assembled workforce, as it is
quantifiable, is usually the only element of goodwill for which a CAC should
be taken. Accordingly, the valuer must ensure that there is a strong basis
for applying CACs for any elements of goodwill other than assembled
workforce.

60.14 CACs are generally computed on an after-tax basis as a fair return

on the value of the contributory asset, and in some cases a return of
the contributory asset is also deducted. The appropriate return on a
contributory asset is the investment return a typical participant would
require on the asset. The return of a contributory asset is a recovery of
the initial investment in the asset. There should be no difference in value
regardless of whether CACs are computed on a pre-tax or after-tax basis.

60.15 If the contributory asset is not wasting in nature, as in the case of working
capital, only a fair return on the asset is required.

60.16 For contributory intangible assets that were valued under a relief-from-
royalty method, the CAC should be equal to the royalty either on a pre-tax
or after-tax basis.

60.17 The excess earnings method should be applied only to a single intangible
asset for a given stream of revenue and income. The excess earnings
method is generally applied to the primary or most important intangible
asset. For example, in valuing the intangible assets of a business utilising
both technology and a tradename in delivering a product or service (ie,
the revenue associated with the technology and the tradename is the
same), the excess earnings method should only be used to value one of the

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intangible assets and an alternative method should be used for the other
asset. However, if the business has multiple product lines, each using a
different technology and each generating distinct revenue and profit, the
excess earnings method may be applied in the valuation of the multiple
different technologies.

Relief-from-Royalty Method
60.18 Under the relief-from-royalty method, the value of an intangible asset is
determined by the value of the hypothetical royalty payments that would
be saved by owning the asset compared with licensing the intangible asset
from a third party. Conceptually, the method may also be viewed as a
discounted cash flow method applied to the cash flow that the owner of
the intangible asset could receive through licensing the intangible asset to
third parties.

60.19 The list of steps the valuer should perform in applying a relief from royalty
method includes but is not limited to:

Asset Standards: IVS 210 Intangible Assets

(a) develop projections associated with the intangible asset being valued
for the life of the subject intangible asset. The most common metric
projected is revenue, as most royalties are paid as a percentage of
revenue. However, other metrics such as a per-unit royalty may be
appropriate in certain valuations,
(b) develop a royalty rate for the subject intangible asset. Two methods
can be used to derive a hypothetical royalty rate,

(i) The first is based on market royalty rates for comparable or similar
transactions. A prerequisite for this method is the existence of
comparable intangible assets that are licensed at arm’s-length on
a regular basis,
(ii) The second method is based on a split of profits that would
hypothetically be paid in an arm’s-length transaction by a willing
licensee to a willing licensor for the rights to use the subject
intangible asset,

(c) apply the selected royalty rate to the projections to calculate the
royalty payments avoided by owning the intangible asset,
(d) estimate any additional expenses for which a licensee of the subject
asset would be responsible. This can include upfront payments
required by some licensors. A royalty rate should be analysed to
determine whether it assumes expenses (such as maintenance,
marketing and advertising) are the responsibility of the licensor or the
licensee. A royalty rate that is “gross” would consider all responsibilities
and expenses associated with ownership of a licensed asset to reside
with the licensor, while a royalty that is “net” would consider some or
all responsibilities and expenses associated with the licensed asset to
reside with the licensee. Depending on whether the royalty is “gross” or
“net”, the valuation should include or exclude, respectively, a deduction
for expenses such as maintenance, marketing or advertising expenses
related to the hypothetically licensed asset,
(e) if the hypothetical costs and royalty payments are tax deductible, it may
be appropriate to apply the relevant tax rate to determine the after-

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tax savings associated with ownership of the intangible asset. However,

for certain intended uses (such as transfer pricing), the effects of taxes
are generally not considered in the valuation and this step should be
skipped,
(f) determine the appropriate discount rate for the subject intangible asset
and present value or capitalise the savings associated with ownership
of the intangible asset, and
(g) if appropriate for the intended use of the valuation (see section 110
of this standard), calculate and add the TAB for the subject intangible
asset.

60.20 Whether a royalty rate is based on market transactions or a profit split

method (or both), its selection should consider the characteristics of the
subject intangible asset and the environment in which it is utilised. The
consideration of those characteristics forms the basis for the selection of
a royalty rate within a range of observed transactions and/or the range of
profit available to the subject intangible asset in a profit split.
Asset Standards: IVS 210 Intangible Assets

Factors that should be considered include but are not limited to the
following:

(a) competitive environment: the size of the market for the intangible asset,
the availability of realistic alternatives, the number of competitors,
barriers to entry and presence (or absence) of switching costs,
(b) importance of the subject intangible asset to the owner: whether the
subject asset is a key factor of differentiation from competitors, the
importance it plays in the owner’s marketing strategy, its relative
importance compared with other tangible and intangible assets, and
the amount the owner spends on creation, upkeep and improvement
of the subject asset,
(c) life cycle of the subject intangible: the expected economic life of the
subject asset and any risks of the subject intangible becoming obsolete.

60.21 When selecting a royalty rate, the valuer should also consider the following:

(a) when entering a licence arrangement, the royalty rate participants

would be willing to pay depends on their profit levels and the relative
contribution of the licensed intangible asset to that profit. For example,
a manufacturer of consumer products would not license a tradename
at a royalty rate that leads to the manufacturer realising a lower profit
selling branded products compared with selling generic products,
(b) when considering observed royalty transactions, the valuer should
understand the specific rights transferred to the licensee and any
limitations. For example, royalty agreements may include significant
restrictions on the use of a licensed intangible asset. These restrictions
may include but are not limited to specific geographic areas or for
certain products. The valuer should also understand how payments
under the licensing agreement are structured. These characteristics
include but are not limited to upfront payments, milestone payments,
and options to acquire or to dispose of the licensed property.

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With-and-Without Method
60.22 The with-and-without method indicates the value of an intangible asset
by comparing two scenarios: one in which the subject intangible asset is
deployed and one in which the subject intangible asset is not deployed, but
where all other factors are kept constant.

60.23 The comparison of the two scenarios can be done in two ways:

(a) calculating the value of the business under each scenario with
the difference in the business values being the value of the subject
intangible asset, and
(b) calculating, for each future period, the difference between the profits
in the two scenarios. The present value of those amounts is then used
to reach the value of the subject intangible asset.

60.24 In theory, either method should reach a similar value for the intangible
asset, provided the valuer considers not only the impact on the entity’s

Asset Standards: IVS 210 Intangible Assets

profit, but also additional factors such as differences between the two
scenarios in working capital needs and capital expenditures.

60.25 The with-and-without method is frequently used in the valuation of non-

competition agreements but may be appropriate in the valuation of other
intangible assets in certain circumstances.

60.26 The list of steps the valuer should perform in applying the with and without
method includes but is not limited to:

(a) prepare projections of revenue, expenses, capital expenditures and

working capital needs for the business assuming the use of the assets
of the business including the subject intangible asset. These are the
cash flows in the “with” scenario,
(b) use an appropriate discount rate to present value the future cash flows
in the “with” scenario, and/or calculate the value of the business in the
“with” scenario,
(c) prepare projections of revenue, expenses, capital expenditures and
working capital needs for the business assuming the use of the assets
of the business except the subject intangible asset. These are the cash
flows in the “without” scenario,
(d) use an appropriate discount rate for the business, estimate the present
value of the future cash flows and/or calculate the value of the business
in the “without” scenario,
(e) deduct the present value of cash flows or the value of the business in
the “without” scenario from the present value of cash flows or value of
the business in the “with” scenario, and
(f) if appropriate for the intended use of the valuation (see paras 110.01–
110.04), calculate and add the Tax Amortisation Benefit (TAB) for the
subject intangible asset.

60.27 As an additional step, the difference between the two scenarios may need
to be probability-weighted. For example, when valuing a non-competition
agreement, the individual or business subject to the agreement may
choose not to compete, even if the agreement were not in place.

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60.28 The differences in value between the two scenarios should be reflected
solely in the cash flow projections rather than by using different discount
rates in the two scenarios.

Greenfield Method
60.29 Under the greenfield method, the value of the subject intangible is
determined using cash flow projections that assume the only asset of
the business at the valuation date is the subject intangible asset. All other
tangible and intangible assets must be bought, built or rented.

60.30 The greenfield method is conceptually similar to the excess earnings

method. However, instead of subtracting contributory asset charges
from the cash flow to reflect the contribution of contributory assets, the
greenfield method assumes that the owner of the subject asset would
have to build, buy or rent the contributory assets. When building or buying
the contributory assets, the cost of a replacement asset of equivalent utility
is used rather than a reproduction cost.
Asset Standards: IVS 210 Intangible Assets

60.31 The greenfield method is often used to estimate the value of ”enabling”
intangible assets such as franchise agreements and broadcast spectrum.

60.32 The list of steps the valuer should perform in applying the greenfield
method includes but is not limited to:

(a) prepare projections of revenue, expenses, capital expenditures and

working capital needs for the business, assuming the subject intangible
asset is the only asset owned by the subject business at the valuation
date, and including the time period required to “ramp up” to stabilised
levels,
(b) estimate the timing and amount of expenditures related to the
acquisition, creation or rental of all other assets needed to operate the
subject business,
(c) using an appropriate discount rate for the business, calculate the
present value of the future cash flows to determine the value of the
subject business with only the subject intangible asset in place, and
(d) if appropriate for the intended use of the valuation (see section 110
of this standard), calculate and add the TAB for the subject intangible
asset.

Distributor Method
60.33 The distributor method, sometimes referred to as the disaggregated
method, is a variation of the multi-period excess earnings method
sometimes used to value customer-related intangible assets. The underlying
theory of the distributor method is that businesses that are comprised of
various functions are expected to generate profits associated with each
function. Since distributors generally only perform functions related to
distribution of products to customers rather than the development of
intellectual property or manufacturing, information on profit margins
earned by distributors is used to estimate the excess earnings attributable
to customer-related intangible assets.

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60.34 The distributor method is appropriate to value customer-related intangible

assets when another intangible asset (for example, technology or a brand)
is deemed to be the primary or most significant intangible asset and is
valued under a multi-period excess earnings method.

60.35 The list of steps the valuer should perform in applying the distributor
method includes but is not limited to:

(a) prepare projections of revenue associated with existing customer

relationships. This should reflect expected growth in revenue from
existing customers as well as the effects of customer attrition,
(b) identify comparable distributors that have customer relationships
similar to the subject business and calculate the profit margins
achieved by those distributors,
(c) apply the distributor profit margin to the projected revenue,
(d) identify the contributory assets related to performing a distribution
function required to achieve the forecast revenue and expenses.

Asset Standards: IVS 210 Intangible Assets

Generally, distributor contributory assets include working capital,
fixed assets and workforce. However, distributors seldom require
other assets such as trademarks or technology. The level of required
contributory assets should be consistent with participants performing
only a distribution function,
(e) determine the appropriate rate of return on each contributory asset
based on an assessment of the risk associated with that asset,
(f) in each forecast period, deduct the required returns on contributory
assets from the forecast distributor profit to arrive at the excess
earnings attributable to only the subject intangible asset,
(g) determine the appropriate discount rate for the subject intangible asset
and present value the excess earnings, and
(h) if appropriate for the intended use of the valuation (see section 110
of this standard), calculate and add the TAB for the subject intangible
asset.

70. Cost Approach

70.01 Under the cost approach, the value of an intangible asset is determined
based on the replacement cost of a similar asset or an asset providing
similar service potential or utility.

70.02 The valuer must comply with paras 40.02 and 40.03 of IVS 103 Valuation
Approaches when determining whether to apply the cost approach to the
valuation of intangible assets.

70.03 The cost approach is commonly used for intangible assets such as the
following:

(a) acquired third-party software,

(b) internally-developed and internally-used, non-marketable software,
and
(c) assembled workforce.

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70.04 The cost approach should be used when no other approach can be applied
satisfactorily. However, the valuer should attempt to identify an alternative
method before applying the cost approach in situations where the subject
asset does not meet the criteria in paras 40.02 and 40.03 of IVS 103
Valuation Approaches.

70.05 Two main methods fall under the cost approach: replacement cost and
reproduction cost. However, many intangible assets do not have physical
form that can be reproduced and assets such as software, which can be
reproduced, generally derive value from their function/utility rather than
their exact lines of code. As such, the replacement cost is most commonly
applied to the valuation of intangible assets.

70.06 The replacement cost method assumes that a participant would pay no
more for the asset than the cost that would be incurred to replace the asset
with a substitute of comparable utility or functionality.

70.07 The valuer should consider the following when applying the replacement
Asset Standards: IVS 210 Intangible Assets

cost method:

(a) the direct and indirect costs of replacing the utility of the asset,
including labour, materials and overheads,
(b) whether the subject intangible asset is subject to obsolescence. While
intangible assets do not become physically obsolete, they can be
subject to economic obsolescence,
(c) whether it is appropriate to include a profit mark-up on the included
costs. The consideration paid for an asset acquired from a third party
would presumably reflect their costs associated with creating the asset
as well as some form of profit to provide a return on investment. As
such, under bases of value (see IVS 102 Bases of Value) that assume a
hypothetical transaction, it may be appropriate to include an assumed
profit mark-up on costs. As noted in IVS 103 Valuation Approaches, costs
developed based on estimates from third parties would be presumed
to already reflect a profit mark-up, and
(d) opportunity costs may also be included. These reflect costs associated
with not having the subject intangible asset in place for some time
during its creation.

80. Special Considerations for Intangible Assets

80.01 The following sections address a non-exhaustive list of topics relevant to
the valuation of intangible assets.

(a) Discount rates/Rates of Return for Intangible Assets (section 90),

(b) Intangible Asset Economic Lives (section 100),
(c) Tax Amortisation Benefit (section 110).

90. Discount Rates/Rates of Return for Intangible Assets

90.01 Selecting discount rates for intangible assets can be challenging, as
observable market evidence of discount rates for intangible assets is rare.
The selection of a discount rate for an intangible asset generally requires
significant professional judgement.

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90.02 In selecting a discount rate for an intangible asset, the valuer should perform
an assessment of the risks associated with the subject intangible asset and
consider observable discount rate benchmarks.

90.03 When assessing the risks associated with an intangible asset, the valuer
should consider factors including the following:

(a) intangible assets often have higher risk than tangible assets,
(b) if an intangible asset is highly specialised to its current use, it may have
higher risk than assets with multiple potential uses,
(c) single intangible assets may have more risk than groups of assets (or
businesses),
(d) intangible assets used in risky (sometimes referred to as non-routine)
functions may have higher risk than intangible assets used in more
low-risk or routine activities. For example, intangible assets used in
research and development activities may be higher risk than those
used in delivering existing products or services,

Asset Standards: IVS 210 Intangible Assets

(e) the life of the asset. Similar to other investments, intangible assets with
longer lives are often considered to have higher risk, all else being
equal,
(f) intangible assets with more readily estimable cash flow streams, such
as backlog, may have lower risk than similar intangible assets with less
estimable cash flows, such as customer relationships.

90.04 Discount rate benchmarks are rates that are observable based on market
evidence or observed transactions. The following are some of the
benchmark rates that the valuer should consider:

(a) risk-free rates with similar maturities to the life of the subject intangible
asset,
(b) cost of debt or borrowing rates with maturities similar to the life of the
subject intangible asset,
(c) cost of equity or equity rates or return for participants for the subject
intangible asset, or of the entity owning/using the subject intangible
asset,
(d) weighted-average-cost-of-capital (WACC) of participants for the subject
intangible asset or of the company owning/using the subject intangible
asset,
(e) in contexts involving a recent business acquisition including the
subject intangible asset, the internal rate-of-return for the transaction
should be considered, and
(f) in contexts involving a valuation of all assets of a business, the valuer
should perform a weighted-average-return-on-assets (WARA) analysis
to confirm the reasonableness of selected discount rates.

100. Intangible Asset Economic Lives

100.01 An important consideration in the valuation of an intangible asset,
particularly under the income approach, is the economic life of the asset.
This may be a finite period limited by legal, technological, functional, or

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economic factors. Other assets may have an indefinite life. The economic
life of an intangible asset in the context of a valuation is a different concept
than the remaining useful life for accounting or tax purposes.

100.02 Legal, technological, functional and economic factors must be considered

individually and together in making an assessment of the economic life.

100.03 In estimating the economic life of an intangible asset, the valuer should also
consider the pattern of use or its likely replacement. Certain intangible
assets may be abruptly replaced when a new, better or cheaper alternative
becomes available, while others may only be replaced slowly over time, .

100.04 For customer-related intangible assets, attrition is a key factor in estimating

both economic life and attributable cash flows. Attrition applied in the
valuation of intangible assets is a quantification of expectations regarding
future losses of customers. While it is a forward-looking estimate, attrition
is often based on historical observations of attrition.
Asset Standards: IVS 210 Intangible Assets

100.05 There are several ways to measure and apply historical attrition:

(a) a constant rate of loss (as a percentage of prior year balance) over
the life of the customer relationships may be assumed if customer
loss does not appear to be dependent on the age of the customer
relationship,
(b) a variable rate of loss may be used over the life of the customer
relationships if customer loss is dependent on the age of the customer
relationship,
(c) attrition may be measured based on either revenue or number of
customers/customer count as appropriate, based on the characteristics
of the customer group,
(d) customers may need to be segregated into different groups.
Customers may be segregated based on factors including but not
limited to geography, size of customer and type of product or service
purchased, and
(e) the period used to measure attrition may vary depending on
circumstances. The choice of period should reflect the characteristics
of the usage of the intangible asset.

100.06 The computation of revenue including attrition should reflect the expected
profile of the attrition throughout the period being measured.

100.07 Revenue-based attrition may include growth in revenue from existing

customers. It is helpful, where possible, to separate growth and attrition in
measurement and application.

100.08 It is helpful, where possible, for the valuer to input historical revenue into
the model being used and check how closely it predicts actual revenue from
existing customers in subsequent years. If attrition has been measured
and applied appropriately, the model should be reasonably accurate. For
example, if estimates of future attrition were developed based on historical
attrition observed from 20X0 through 20X5, the valuer should input the
20X0 customer revenue into the model and check whether it accurately
predicts the revenue achieved from existing customers in 20X1, 20X2, etc.

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110. Tax Amortisation Benefit (TAB)

110.01 In many tax jurisdictions, intangible assets and in some cases, goodwill
can be amortised for tax purposes. Depending on the intended use of a
valuation and the valuation method used, it may be appropriate to include
the value of the TAB in the value of the intangible asset and/or goodwill.

110.02 If the market or cost approach is used to value an intangible asset, the price
paid to create or purchase the asset would already reflect the ability to
amortise the asset. However, in the income approach, a TAB needs to be
explicitly calculated and included, if appropriate.

110.03 For some valuation intended uses, such as financial reporting, the
appropriate basis of value assumes a hypothetical sale of the subject
intangible asset. Generally, for those intended uses, a TAB should be included
when the income approach is used because a typical participant would
be able to amortise an intangible asset acquired in such a hypothetical
transaction regardless of whether the hypothetical transaction is taxable

Asset Standards: IVS 210 Intangible Assets

or non-taxable). For other valuation intended uses, the assumed transaction
might be of a business or group of assets. For those bases of value, it may
be appropriate to include a TAB if the transaction would result in a step-up
in basis for the intangible assets and/or goodwill.

110.04 In calculating a TAB the valuer may use either of the following discount
rates:

(a) a discount rate appropriate for a business utilising the subject asset,
such as a weighted-average-cost-of-capital (WACC). In this view, since
amortisation can be used to offset the taxes on any income produced
by the business, a discount rate appropriate for the business as a whole
should be used, or
(b) a discount rate appropriate for the subject asset (ie, the one used in the
valuation of the asset). In this view the valuer should not assume that the
owner of the subject asset has operations and income separate from
the subject asset and that the discount rate used in the TAB calculation
should be the same as that used in the valuation of the subject asset.

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 IVS 220 Non-Financial Liabilities

IVS 200 IVS 210 IVS 220 IVS 230 IVS 300 IVS 400 IVS 410 IVS 500
Businesses Intangible Non- Inventory Plant, Real Development Financial
and Assets Financial Equipment Property Property Instruments
Business Liabilities and Interests
Interests Infrastructure

ContentsParagraphs
Overview10
Introduction20
Asset Standards: IVS 220 Non-Financial Liabilities

Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Income Approach 60
Cost Approach 70
Special Considerations for Non-Financial Liabilities 80
Discount Rates for Non-Financial Liabilities 90
Estimating Cash Flows and Risk Margins 100
Restrictions on Transfer 110
Taxes120

10. Overview
10.01 The principles contained in the General Standards apply to valuations
of non-financial liabilities and valuations with a non-financial liability
component. This standard contains additional requirements that apply to
valuations of non-financial liabilities.

10.02 With regard to the determination of discount rates and risk margins, in
circumstances in which IVS 103 Valuation Approaches (Appendix A20.29–
A20.40) conflicts with IVS 220 Non-Financial Liabilities, the valuer must apply
the principles in sections 90 and 100 of this standard in valuations of non-
financial liabilities.

20. Introduction
20.01 For purposes of IVS 220 Non-Financial Liabilities, non-financial liabilities are
defined as those liabilities requiring a non-cash performance obligation to
provide goods or services.

20.02 Liabilities that may in part or in full require a non-cash fulfilment and be
subject to IVS 220 Non-Financial Liabilities include but are not limited to:

(a) deferred revenue or contract liabilities,

(b) warranties,

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(c) environmental liabilities,

(d) asset retirement obligations,
(e) certain contingent consideration obligations,
(f) loyalty programmes,
(g) certain litigation reserves and contingencies, and
(h) certain indemnifications and guarantees.

20.03 Although certain contingent consideration liabilities may require a non-

cash performance obligation, such liabilities are not included in the scope
of IVS 220 Non-Financial Liabilities.

20.04 The party assuming a non-financial liability typically requires a profit

margin on the fulfilment effort to compensate for the effort incurred and
risk borne for the delivery of goods or services.

Asset Standards: IVS 220 Non-Financial Liabilities

20.05 For financial liabilities, cash fulfilment is typically the only performance
obligation and no additional compensation is needed for the fulfilment
effort. Since cash fulfilment is the only performance obligation for financial
liabilities, asset-liability symmetry most often enables the valuer to assess
the subject liability using an asset framework.

20.06 Asset-liability symmetry typically does not exist for non-financial liabilities
due to the performance obligation to provide goods and services to satisfy
the liability and additional compensation for such effort. As such, non-
financial liabilities will most often be valued using a liability framework
that does not require a corresponding asset to be recognised or valued by
another party.

20.07 In instances in which a corresponding asset is recognised by the

counterparty, the valuer must assess if the values would reflect asset-
liability symmetry under circumstances consistent with the basis of value.
Certain bases of value issued by entities/organisations other than the IVSC
require specific consideration and reconciliation to a corresponding asset
under certain circumstances. The valuer must understand and follow the
legislation, regulation, case law, and other interpretive guidance related to
those bases of value effective at the valuation date (see IVS 200 Businesses
and Business Interests, para 30.02).

Instances in which the valuer should reconcile to a corresponding asset

value are rare, and include but are not limited to:

(a) non-financial liabilities often do not have a recorded corresponding

asset recognised by the counterparty (eg, environmental liability),
or can only be transferred in conjunction with another asset (eg, an
automobile and related warranty are only transferred together),
(b) the corresponding asset of a non-financial liability may be held by
numerous parties for which it is impractical to identify and reconcile
the asset values,
(c) the market for the non-financial asset and liability is often highly illiquid,
thus resulting in asymmetric information, high bid-ask spreads, and
asset-liability asymmetry.

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20.08 Participants that most often transact in the subject non-financial liability
may not be the comparable companies and competitors of the entity
holding the subject non-financial liability. Examples of such participants
include insurance companies, third party warranty issuers, and more. The
valuer should consider if a market, or market participants, exist outside the
immediate industry in which the entity holding the subject non-financial
liability operates.

20.09 Non-financial liability valuations are performed for a variety of intended

uses. It is the valuer’s responsibility to understand the intended use of a
valuation. It is the valuer’s responsibility to understand whether the non-
financial liabilities should be valued separately or grouped with other
assets.

Circumstances that include a non-financial liability valuation component

include but are not limited to:
Asset Standards: IVS 220 Non-Financial Liabilities

(a) for financial reporting purposes, valuations of non-financial liabilities

are often required in connection with accounting for business
combinations, asset acquisitions and sales, and impairment analysis,
(b) for tax reporting purposes, non-financial liability valuations are often
needed for transfer pricing analyses, estate and gift tax planning and
reporting, and ad valorem taxation analyses,
(c) non-financial liabilities may be the subject of litigation, requiring
valuation analysis in certain circumstances,
(d) valuation of non-financial liabilities as part of general consulting,
collateral lending and transactional support engagements.

30. Bases of Value

30.01 In accordance with IVS 102 Bases of Value, the valuer must select the
appropriate basis(es) of value when valuing non-financial liabilities.

30.02 Often, non-financial liability valuations are performed using bases of value
defined by entities/organisations other than the IVSC (some examples of
which are mentioned in IVS 102 Bases of Value). The valuer must understand
and follow the legislation, regulation, case law and other interpretive
guidance related to those bases of value effective at the valuation date (see
IVS 200 Businesses and Business Interests, para 30.02).

40. Valuation Approaches and Methods

40.01 Elements of the three valuation approaches described in IVS 103 Valuation
Approaches (market, income and cost approach) can all be applied to the
valuation of non-financial liabilities. The methods described in sections
50‑70 of this standard may exhibit elements of more than one approach.
If it is necessary for the valuer to classify a method under one of the three
approaches, the valuer should use judgement in making the determination
and not necessarily rely on the classification below.

40.02 When selecting an approach and method, in addition to the requirements

of this standard, the valuer must follow the requirements of IVS 103
Valuation Approaches, including para 10.04.

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 Asset Standards

50. Market Approach

50.01 Under the market approach, the value of a non-financial liability is
determined by reference to market activity (for example, transactions
involving identical or similar non-financial liabilities).

50.02 Transactions involving non-financial liabilities frequently also include other

assets, such as business combinations that include tangible and intangible
assets.

50.03 While stand-alone transactions of non-financial liabilities are infrequent,

the valuer should consider relevant market-based indications of value.
Although such market-based indications may not provide sufficient
information with which to apply the market approach, the use of market-
based inputs should be maximised in the application of other approaches.

50.04 Market indications of value include but are not limited to:

Asset Standards: IVS 220 Non-Financial Liabilities

(a) pricing from third parties to provide identical or similar products as
the subject non-financial liability (eg, deferred revenue),
(b) pricing for warranty policies issued by third parties for identical or
similar obligations,
(c) the prescribed monetary conversion amount as published by
participants for certain loyalty reward obligations,
(d) the traded price for contingent value rights (CVRs) with similarities to
the subject non-financial liability (eg, contingent consideration),
(e) observed rates of return for investment funds that invest in non-
financial liabilities (eg, litigation finance).

50.05 The valuer must comply with paras 20.02 and 20.03 of IVS 103 Valuation
Approaches when determining whether to apply the market approach to
the valuation of non-financial liabilities.

50.06 The diverse nature of many non-financial liabilities and the fact that non-
financial liabilities seldom transact separately from other assets imply
that it is rarely possible to find market evidence of transactions involving
similar non-financial liabilities.

50.07 Where evidence of market prices is available, the valuer should consider
adjustments to these to reflect differences between the subject non-
financial liability and those involved in the transactions. These adjustments
are necessary to reflect the differentiating characteristics of the subject
non-financial liability and those involved in the transactions.

Such adjustments may only be determinable at a qualitative, rather than

quantitative, level. However, the need for significant qualitative adjustments
could indicate that another approach would be more appropriate for the
valuation.

50.08 In certain instances, the valuer may rely on market prices or evidence
for an asset corresponding to the subject non-financial liability. In such
instances, the valuer should consider an entity’s ability to transfer the
subject non-financial liability, whether the asset and related price of
the asset reflect those same restrictions, and whether adjustments to

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reflect the restrictions should be included. The valuer should take care to
determine if the transfer restrictions are characteristics of the subject non-
financial liability (for example, an illiquid market) or restrictions that are
characteristics of the entity.

50.09 The comparable transaction method, also known as the guideline

transactions method, is generally the only market approach method that
can be applied to value non-financial liabilities.

50.10 In rare circumstances, a security sufficiently similar to a subject non-

financial liability could be publicly traded, allowing the use of the guideline
public company method. One example of such securities is contingent
value rights that are tied to the performance of a particular product or
technology.

Market Approach Methods

Asset Standards: IVS 220 Non-Financial Liabilities

50.11 A method to value non-financial liabilities under the Market Approach is

often referred to as the Top-Down Method.

Top-Down Method
50.12 Under the Top-Down Method, valuing non-financial liabilities is based on
the premise that reliable market-based indications of pricing are available
for the performance obligation.

50.13 A participant fulfilling the obligation to deliver the product or services

associated with the non-financial liability could theoretically price the
liability by deducting costs already incurred toward the fulfilment obligation,
plus a markup on those costs, from the market price of services.

50.14 When market information is used to determine the value of the subject
non-financial liability, discounting is typically not necessary because the
effects of discounting are incorporated into observed market prices.

50.15 The list of steps the valuer should perform in applying the Top-Down
Method includes but is not limited to:

(a) determine the market price of the non-cash fulfilment,

(b) determine the costs already incurred and assets utilised by the
transferor. The nature of such costs will differ depending on the subject
non-financial liability. For example, for deferred revenue the costs will
primarily consist of sales and marketing costs that have already been
incurred in generating the non-financial liability,
(c) determine a reasonable profit margin on the costs already incurred,
(d) subtract costs incurred and profit from the market price.

60. Income Approach

60.01 Under the income approach, the value of a non-financial liability is often
determined by reference to the present value of the costs to fulfil the
obligation plus a profit margin that would be required to assume the
liability.

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 Asset Standards

60.02 The valuer must comply with paras 30.02 and 30.03 of IVS 103 Valuation
Approaches when determining whether to apply the income approach to
the valuation of non-financial liabilities.

Income Approach Methods

60.03 The primary method to value non-financial liabilities under the Income
Approach is often referred to as the Bottom-Up Method.

Bottom-Up Method
60.04 Under the Bottom-Up Method, the non-financial liability is measured as
the costs required to fulfil the performance obligation, plus a reasonable
mark-up on those costs, discounted to present value. These costs may or
may not include certain overhead items.

60.05 The list of steps the valuer should perform in applying the Bottom-Up
method includes but is not limited to:

Asset Standards: IVS 220 Non-Financial Liabilities

(a) determine the costs required to fulfil the performance obligation. Such
costs will include the direct costs to fulfil the performance obligation
but may also include indirect costs such as charges for the use of
contributory assets. Fulfilment costs represent those costs that are
related to fulfilling the performance obligation that generates the non-
financial liability. Costs incurred as part of the selling activities before
the acquisition date should be excluded from the fulfilment effort;

(i) contributory asset charges should be included in the fulfilment

costs when such assets would be required to fulfil the obligation
and the related cost is not otherwise captured in the income
statement,
(ii) in limited instances, in addition to direct and indirect costs, it
may be appropriate to include opportunity costs. For example,
in the licensing of symbolic intellectual property, the direct and
indirect costs of fulfilment may be nominal. However, if the
obligation reduces the ability to monetise the underlying asset (in
an exclusive licensing arrangement for example), then the valuer
should consider how participants would account for the potential
opportunity costs associated with the non-financial liability,

(b) determine a reasonable mark-up on the fulfilment effort. In most

cases it may be appropriate to include an assumed profit margin on
certain costs which can be expressed as a target profit, derived either
as a lump sum or as a percentage return on cost or value.

(i) an initial starting point may be to utilise the operating profit of
the entity holding the subject non-financial liability,

(ii) however, this methodology assumes the profit margin would be
proportional to the costs incurred,

(iii) in many circumstances there is rationale to assume that profit
margins are not proportional to costs. In such cases the risks
assumed, the value added, or intangibles contributed to the
fulfilment effort are not the same as those contributed pre-
measurement date,

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(iv) when costs are derived from actual, quoted or estimated prices

by third party suppliers or contractors, these costs will already
include a third party’s desired level of profit;
(v) In conducting this step, the valuer should not double count profits

or mark-ups that have already been included in the computation
of costs or contributory asset charges.

(c) determine timing of fulfilment and discount to present value. The

discount rate should account for the time value of money and for
non-performance risk. It is usually preferable to reflect the impact
of uncertainty, such as changes in anticipated fulfilment costs and
fulfilment margin, through the cash flows rather than in the discount
rate,
(d) when fulfilment costs are derived through a percent of revenue, the
valuer should consider whether the fulfilment costs already implicitly
include the impact of discounting. For example, prepayment for
Asset Standards: IVS 220 Non-Financial Liabilities

services may include a discount when compared with paying

throughout the duration of the contract. As a result, the derived costs
have already been discounted and further discounting may not be
necessary.

70. Cost Approach

70.01 The cost approach has limited application for non-financial liabilities as
participants typically expect a return on the fulfilment effort.

70.02 The valuer must comply with 40.02 and 40.03 of IVS 103 Valuation
Approaches when determining whether to apply the cost approach to the
valuation of non-financial liabilities.

80. Special Considerations for Non-Financial Liabilities

80.01 The following sections address a non-exhaustive list of topics relevant to
the valuation of non-financial liabilities.

(a) Discount Rates for Non-Financial Liabilities (section 90),

(b) Estimating Cash Flows and Risk Margins (section 100),
(c) Restrictions on Transfer (section 110),
(d) Taxes (section 120).

90. Discount Rates for Non-Financial Liabilities

90.01 A fundamental basis for the income approach is that investors expect to
receive a return on their investments and that such a return should reflect
the perceived level of risk in the investment.

90.02 The discount rate should account for the time value of money and
non-performance risk. Non-performance risk is typically a function
counterparty risk (ie, credit risk of the entity obligated to fulfil the liability)
(see para 60.05 (c) of this standard).

90.03 Certain bases of value issued by entities/organisations other than the IVSC
may require the discount rate to specifically account for liability-specific
risks. The valuer must understand and follow the legislation, regulation,

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case law, and other interpretive guidance related to those bases of value
effective at the valuation date (see IVS 200 Businesses and Business Interests,
para 30.02).

90.04 The valuer should consider the terms of the subject non-financial liability
when determining the appropriate inputs for the time value of money and
non-performance risk.

90.05 In certain circumstances, the valuer may explicitly adjust the cash flows for
non-performance risk.

90.06 The terms imposed on a party undertaking to satisfy the obligation may
provide insights to help quantify the non-performance risk.

90.07 Given the long-term nature of certain non-financial liabilities, the valuer
should consider if inflation has been incorporated into the estimated cash
flows, and must ensure that the discount rate and cash flow estimates are

Asset Standards: IVS 220 Non-Financial Liabilities

prepared on a consistent basis.

100. Estimating Cash Flows and Risk Margins

100.01 The principles contained in IVS 103 Valuation Approaches may not apply
to valuations of non-financial liabilities and valuations with a non-financial
liability component 103 Valuation Approaches, Appendix A20.12–A20.19).
The valuer must apply the principles in sections 90 and 100 of this standard
in valuations of non-financial liabilities.

100.02 Non-financial liability cash flow forecasts often involve the explicit
modelling of multiple scenarios of possible future cash flows to derive
a probability-weighted expected cash flow forecast. This method is often
referred to as the Scenario Based Method (SBM). The SBM includes
certain simulation techniques such as Monte Carlo simulation. The SBM is
commonly used when future payments are not contractually defined but
rather vary depending upon future events. When the non-financial liability
cash flows are a function of systematic risk factors, the valuer should
consider the appropriateness of the SBM, and may need to utilise other
methods based on option pricing formulas (OPM).

100.03 Considerations in estimating cash flows include developing and

incorporating explicit assumptions. A list of such assumptions includes but
is not limited to:

(a) the costs that a third party would incur in performing the tasks
necessary to fulfil the obligation,
(b) other amounts that a third party would include in determining the price
of the transfer, including, for example, inflation, overhead, equipment
charges, profit margin, and advances in technology,
(c) the extent to which the amount of a third party’s costs or the timing of
its costs would vary under different future scenarios and the relative
probabilities of those scenarios, and
(d) the price that a third party would demand and could expect to receive
for bearing the uncertainties and unforeseeable circumstances
inherent in the obligation.

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100.04 While expected cash flows (ie, the probability-weighted average of possible
future cash flows) incorporate the variable expected outcomes of the asset’s
cash flows, they do not account for the compensation that participants
demand for bearing the uncertainty of the cash flows. For non-financial
liabilities, forecast risk may include uncertainty such as changes in
anticipated fulfilment costs and fulfilment margin. The compensation for
bearing such risk should be incorporated into the expected payoff through
a cash flow risk margin or the discount rate.

100.05 Given the inverse relationship between the discount rate and value, the
discount rate should be decreased to reflect the impact of forecast risk.
The compensation for bearing risk should be commensurate with the
uncertainty about the amount and the timing of cash flows.

100.06 It is possible to account for forecast risk by varying the discount rate.
However, given the limited practical application of doing so, the valuer
must either:
Asset Standards: IVS 220 Non-Financial Liabilities

(a) explain the rationale for reducing the discount rate rather than
incorporating a risk margin, or
(b) specifically note the legislation, regulation, case law, or other
interpretive guidance that requires the accounting for forecast risk
of non-financial liabilities through the discount rate rather than a risk
margin (see IVS 200 Businesses and Business Interests, para 30.02).

100.07 In developing a risk margin, the valuer must:

(a) document the method used for developing the risk margin, including
support for its use, and
(b) provide evidence for the computation of the risk margin, including the
identification of the significant inputs and support for their derivation
or source.

100.08 In developing a cash flow risk margin, the valuer must consider:

(a) the life/term and/or maturity of the non-financial liability and the
consistency of inputs,
(b) the geographic location of the non-financial liability and/or the location
of the markets in which it would trade,
(c) the currency denomination of the projected cash flows, and
(d) the type of cash flow contained in the forecast. For example, a cash
flow forecast may represent expected cash flows (eg, probability-
weighted scenarios) or the most likely cash flows or contractual cash
flows, etc.

100.09 In developing a cash flow risk margin, the valuer should consider:

(a) the less certainty there is in the anticipated fulfilment costs and
fulfilment margin, the higher the risk margin should be,
(b) given the finite term of most non-financial liabilities, as opposed
to indefinite for many business and asset valuations, to the extent
that emerging experience reduces uncertainty, risk margins should
decrease, and vice versa,

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 Asset Standards

(c) the expected distribution of outcomes, and the potential for certain
non-financial liabilities to have high ‘tail risk’ or severity. Non-financial
liabilities with wide distributions and high severity should have higher
risk margins,
(d) the respective rights and preferences of the non-financial liability, and/
or of any related asset in the event of a liquidation.

100.10 The cash flow risk margin should be the compensation that would be
required for a party to be indifferent between fulfilling a liability that
has a range of possible outcomes, and one that will generate fixed cash
outflows.

100.11 In estimating cash flows and risk margins, the valuer should consider all
the information that is reasonably available.

110. Restrictions on Transfer

Asset Standards: IVS 220 Non-Financial Liabilities

110.01 Non-financial liabilities often include restrictions on the ability to transfer.
Such restrictions are either contractual in nature, or a function of an illiquid
market for the subject non-financial liability.

110.02 When relying on market evidence, the valuer should consider an entity’s
ability to transfer such non-financial liabilities and whether adjustments
to reflect the restrictions should be included. The valuer may need to
determine if the transfer restrictions are characteristics of the non-
financial liability or restrictions that are characteristics of an entity, as
certain basis of value may specify one or the other be considered (see IVS
220 Non-Financial Liabilities, para 50.09).

110.03 When relying on an income approach in which the non-financial liability

value is estimated through a fulfilment approach, the valuer should
determine if a party willing to take on the liability would require an
additional risk margin to account for the limitations on transfer.

120. Taxes
120.01 The valuer should use pre-tax cash flows and a pre-tax discount rate for the
valuation of non-financial liabilities.

120.02 In certain circumstances, it may be appropriate to perform the analysis

with after tax cash flows and after tax discount rates. In such instances, the
valuer must explain the rationale for use of after-tax inputs, or specifically
note the legislation, regulation, case law, or other interpretive guidance
that requires the use of after-tax inputs (see IVS 200 Businesses and
Business Interests, para 30.02).

120.03 If after-tax inputs are used, it may be appropriate to include the tax benefit
created by the projected cash outflow associated with the non-financial
liability.

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 IVS 230 Inventory

IVS 200 IVS 210 IVS 220 IVS 230 IVS 300 IVS 400 IVS 410 IVS 500
Businesses Intangible Non- Inventory Plant, Real Development Financial
and Assets Financial Equipment Property Property Instruments
Business Liabilities and Interests
Interests Infrastructure

ContentsParagraphs
Overview10
Introduction20
Bases of Value 30
Valuation Approaches and Methods 40
Market Approach 50
Asset Standards: IVS 230 Inventory

Income Approach 60
Cost Approach 70
Special Considerations for Inventory 80
Identification of Value-Added Processes and Returns on
Intangible Assets 90
Relationship to Other Acquired Assets 100
Obsolete Inventory Reserves 110
Unit of Account 120

10. Overview
10.01 The principles contained in the General Standards apply to valuations of
inventory and valuations with an inventory component. This standard
contains additional requirements for valuations of inventory.

20. Introduction
20.01 Inventory broadly includes goods which will be used in future production
processes (ie, raw materials, parts, supplies), goods used in the production
process (ie, work-in-process), and goods awaiting sale (ie, finished goods).

20.02 This standard focuses on valuation of inventory of physical goods that are
not real property.

20.03 While the book value of inventory only includes historical costs, the profits
earned in the production process, which reflect returns on the assets
utilised in manufacturing (including working capital, property, plant, and
equipment, and intangible assets), are not capitalised into book value. As
a result, the market value of inventory typically differs from, and is usually
higher than, the book value of inventory.

20.04 As inventory is seldom transacted at an interim stage (eg, work-in-process)

or may not be frequently sold to a third party to conduct the selling effort

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 Asset Standards

(eg, finished goods sold via distributor networks), the valuation techniques
and considerations for inventory frequently vary from those of other.

20.05 Valuations of inventory are performed for a variety of intended uses. It is

the valuer’s responsibility to understand the intended use of a valuation. It is
also the valuer’s responsibility to understand whether the inventory should
be valued separately or grouped with other assets.

20.06 Circumstances requiring the valuation of inventory includes but is not

limited to:

(a) financial reporting purposes, such as accounting for business

combinations, asset acquisitions and sales, and impairment analysis,
(b) tax reporting purposes, such as transfer pricing analyses, estate and
gift tax planning and reporting, and ad valorem taxation analyses,
(c) litigation, in instances such as shareholder disputes, damage
calculations and marital dissolutions (divorce),
(d) general consulting, collateral lending, transactional support
engagements and insolvency.

Asset Standards: IVS 230 Inventory

30. Bases of Value
30.01 In accordance with IVS 102 Bases of Value, the valuer must select the
appropriate basis(es) of value when valuing inventory.

30.02 Often, valuations of inventory are performed using bases of value defined
by entities/organisations other than the IVSC (some examples of which are
mentioned in IVS 102 Bases of Value) and the valuer must understand and
follow the legislation, regulation, case law, and other interpretive guidance
related to those bases of value effective at the valuation date.

40. Valuation Approaches and Methods

40.01 The three valuation approaches described in IVS 103 Valuation Approaches
can be applied to the valuation of inventory. The methods described in this
standard simultaneously include elements of the cost approach, market
approach, and income approach. If required to classify a method under
one of the three approaches, the valuer should use judgement in making
the determination and not necessarily rely on the classification in the
following sections 50–70.

40.02 When selecting an approach and method, in addition to the requirements

of this standard, the valuer must follow the requirements of IVS 103
Valuation Approaches, including para 10.04.

50. Market Approach

50.01 The market approach, ie, reference to market activity involving identical
or similar goods, has only narrow direct application for the valuation of
inventory. Such applications typically include:

(a) inventory of commoditised products, or

(b) inventory in which a market exists for the inventory at an interim
stage in the production process. For non-commodity traded products
or products that a market exists at an interim production stage, such

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selling prices must be adjusted to account for the disposal effort and
related profit.

50.02 While the market approach is not directly applicable in most instances, the
valuer should consider market-based indications to determine the selling
price as an input for other methods.

50.03 Other observable markets may provide insights on the returns

attributable to the manufacturing and disposition of assets that can also
be leveraged for inputs into other methods. Such returns are typically
considered to exclude returns attributable to intellectual property. For
example:

(a) distributor profit margins represent a meaningful market proxy

for returns on the disposition process, if an appropriate base of
comparable companies is identified,
(b) contract manufacturers, to the extent available, may provide a proxy
for margins earned through the manufacturing process.

50.04 The valuer must comply with paras 20.02 and 20.03 of IVS 103 Valuation
Asset Standards: IVS 230 Inventory

Approaches when determining whether to apply the market approach to

the valuation of inventory. In addition, the valuer should only apply the
market approach to value inventory if both of the following criteria are
met:

(a) information is available on arm’s-length transactions involving

identical or similar inventory on or near the valuation date, and
(b) sufficient information is available to allow the valuer to adjust for
all significant differences between the subject inventory and those
involved in the transactions.

50.05 Where evidence of market prices is available, the valuer should adjust
for differences between the subject inventory and those involved in the
transactions. Such adjustments may be determinable at a qualitative,
rather than quantitative, level. However, the need for significant qualitative
adjustments may indicate that another approach would be more
appropriate for the valuation (see IVS 103 Valuation Approaches, section
10).

60. Income Approach

60.01 The valuation of inventory using the income approach requires the
allocation of profit (value) contributed before the valuation date versus the
profit (value) expected to be contributed after the valuation date.

60.02 The valuer must comply with paras 30.02 and 30.03 of IVS 103 Valuation
Approaches when determining whether to apply the income approach to
the valuation of inventory.

Top-Down Method
60.03 The top-down method is a residual method that begins with the estimated
selling price and deducts remaining costs and estimated profit.

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60.04 The top-down method attempts to bifurcate the efforts, and related value,
that were completed before the measurement date versus those efforts
that are to be completed after the measurement date.

60.05 The list of steps the valuer should perform in applying the top-down
method for the valuation of inventory includes but is not limited to:

(a) estimate the selling price:

(i) The valuer should rely on direct observations of selling prices

when the information is available.

(ii) However, such data is often not available and the selling price is
often estimated by applying an appropriate gross profit margin
to the net book value of finished goods at the product level or the
aggregate level.

(iii) Typically, the projected gross profit margin in the period the
inventory will be sold is used;

(b) estimate the costs to complete (for work-in-process only):

Asset Standards: IVS 230 Inventory

(i) Completion costs should include all the expenditures directly
or indirectly remaining to be incurred after the valuation date in
bringing the work in progress inventory to its finished condition.
(ii) Costs to complete should be adjusted to remove expenses

benefitting future periods;

(c) subtract the costs of disposal:

(i) Costs of disposal represent costs that would be incurred after the

valuation date to deliver the finished goods to the end customer.
(ii) Costs of disposal should be adjusted to remove expenses

benefitting future periods.

(iii) Costs of disposal generally include selling and marketing
expenses, whereas procurement and manufacturing expenses
have typically already been incurred for finished goods inventory.
(iv) To accurately determine costs of disposal, each expense in

the inventory cycle (including indirect overheads) should be
categorised either as having been incurred and, therefore, have
contributed to the value of the finished goods inventory, or as
remaining to be incurred during the disposal process.

(d) subtract the profit allowance on the completion effort (for work-in-
process only) and the disposal process:

(i) An initial starting point may be to utilise the operating profit of
the business.

(ii) However, this methodology assumes the profit margin on the
inventory is proportional to the costs incurred.

(iii) In most circumstances, there is rationale to assume profit margins
which are not proportional to costs (see section 90);

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(e) consider any necessary holding costs:

(i) Holding costs may need to be estimated to account for the
opportunity cost associated with the time required to sell the
inventory.
(ii) Additionally, the valuer should consider the risk borne during the

holding period when determining the required rate of return.

(iii) Risks may be a function of the length of inventory life cycle
and the contractual arrangements with end customers (eg, the
manufacturer bears the risk of fluctuation in costs of completion
and disposal).

(iv) Holding costs may be immaterial if the inventory turnover is high
and/or the borrowing rate is low.

60.06 When determining the cost to complete, costs of disposal and profit
allowance, the valuer should identify and exclude any expenses that are
intended to provide future economic benefit and are not necessary to
generate the current period revenue.
Asset Standards: IVS 230 Inventory

Examples of future-benefit expenses may include research and

development (R&D) related to new product development, marketing for
a new product, recruiting to increase the size of the workforce, expansion
into a new territory, depreciation of an R&D facility dedicated to future
research, or restructuring costs.

60.07 Internally developed intangible assets should either be modelled either as:

(a) a cost as if they were hypothetically licensed, and therefore included in

either the cost of production or disposal, or
(b) considered as part of a functional apportionment when determining
the appropriate profit allowance.

60.08 When utilising the top-down method, the valuer should consider whether
sufficient data are available to appropriately apply the necessary steps.
If sufficient data are not available, it may be appropriate to apply other
methods or techniques.

60.09 The application of the top-down and of the bottom-up method should
yield the same result for the valuation of inventory. The valuer may use the
bottom-up method (see para 60.10 of this standard) to corroborate the
value derived from the top-down method.

Bottom-Up Method
60.10 The list of steps the valuer should perform in applying the Bottom-up
method for the valuation of inventory includes but is not limited to:

(a) determine the book value of the subject inventory. The book value
may need to be adjusted for multiple considerations (see para 70.04
and section 110 of this standard),
(b) add any cost of buying and holding already incurred,
(c) add any cost toward completion already incurred. Such costs typically
include procurement and manufacturing expenses,

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 Asset Standards

(d) add profit on total costs already incurred.

(i) An initial starting point may be to use the operating profit of
the business as an input. However, this methodology assumes
the profit margin on the inventory is proportional to the costs
incurred.

(ii) In most circumstances, there is rationale to assume profit margins
which are not proportional to costs (see section 90).

60.11 When determining the costs already incurred, the valuer should consider
internally developed intangible assets that have contributed toward the
completion effort.

70. Cost Approach

70.01 The replacement cost method is the primary method for the valuation of
raw materials inventory.

70.02 The valuer must comply with paras 40.02 and 40.03 of IVS 103 Valuation
Approaches when determining whether to apply the cost approach to the

Asset Standards: IVS 230 Inventory

valuation of inventory.

Current Replacement Cost Method (CRCM)

70.03 The current replacement cost method (CRCM) may provide a good
indication of market value if inventory is readily replaceable in a wholesale
or retail business (eg, raw materials inventory).

70.04 The market value of raw materials and other inventory may be similar to
the net book value at the valuation date. The adjustments that should be
considered include but are not limited to:

(a) the book value may need to be adjusted to FIFO basis,

(b) if raw material prices fluctuate and/or the inventory turnover is slow,
the book value may need to be adjusted for changes in market prices,
(c) the book value of raw materials may also be decreased to account for
obsolete and defective goods,
(d) the book value may also need to be decreased for shrinkage, which
is the difference between inventory listed in the accounting records
and the actual inventory due to theft, damage, miscounting, incorrect
units of measure, evaporation, etc,
(e) the book value may need to be increased for any costs incurred in
connection with raw material preparation (eg, purchasing, storage
and handling).

80. Special Considerations for Inventory

80.01 The following sections address a non-exhaustive list of topics relevant to
the valuation of inventory.

(a) identification of value-added processes and returns on intangible

assets (section 90),
(b) relationship to other acquired assets (section 100),

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(c) obsolete inventory reserves (section 110),

(d) unit of account (section 120).

90. Identification of Value-Added Processes and Returns on Intangible

Assets
90.01 The valuation of inventory involves an allocation of profit between
the profit earned pre-measurement date and the profit earned post-
measurement date. In practice, profit earned may not be proportional to
expenses. In most cases the risks assumed, value added, or intangibles
contributed to the inventory pre-measurement date are not the same as
those contributed post-measurement date.

90.02 The valuer should not simply allocate profit in proportion to disposition
and manufacturing costs. This assumption can misallocate profit, as it
presupposes that a business’ production process earns profit on a pro-rata
basis based on costs incurred.

(a) For manufacturers, this method is inappropriate if the costs of

materials represent an initial outflow without significant efforts.
Asset Standards: IVS 230 Inventory

(b) Such an assumption also fails to recognise the contribution of

internally-generated intangible assets with minimal associated costs.

90.03 The valuer should distinguish between value-added costs and those that
are not value-added. The materials portion of Cost-of-Goods-Sold (COGS)
may not be a value-added cost because it does not contribute any of the
profit to the inventory.

90.04 For a business that owns internally developed intangible assets contributing
to an increase in the level of profitability, both the return on and the return
of those intangible assets would be included in the total profit margin of
the business. However, whether intangible assets are owned or licensed,
the market value of the inventory should be the same.

90.05 The valuer should determine the extent to which the technology, trademarks
and customer relationships support the manufacturing and distribution
processes and whether the returns are applicable to the entire base of
revenue. If the intangible asset has been utilised to create the inventory
(eg, a manufacturing process intangible), then the value of the inventory
would be increased. Conversely, if the intangible asset is expected to be
utilised in the future, at the time of disposal, the value of the inventory
would be decreased.

90.06 For marketing-related intangible assets, the determination of whether the

intangible asset is an attribute of the inventory may be difficult. To assist
in that determination, the valuer may consider how the inventory would
be marketed by a market participant to its customers in a push vs a pull
model.

(a) A push model requires significant disposal efforts for inventory and is
less reliant on marketing intangibles, while
(b) A pull model depends on strong brand development and recognition
to pull customers to the product.

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 Asset Standards

90.07 A non-exhaustive list of other considerations for evaluating when intangible

assets are contributed may include the amount of marketing spend,
whether products are sold through a distributor, the level of attrition for
customer relationships and any legal rights associated with the intangible
assets.

90.08 In some cases, the intangible asset may consist of several elements
that contribute to various aspects of the value creation, such as a
pharmaceutical product intangible asset that is comprised of technology
and tradename. This requires an assessment of how the overall profit
related to each element of the intangible asset should be apportioned to
manufacturing the inventory versus in the disposal effort.

90.09 Similarly, although a single intangible asset may only contribute to either
the manufacturing or disposal effort, it is also possible for a portion of
the intangible asset to be contributed before the-measurement date and a
portion to be contributed after the measurement date.

90.10 For example, when assessing the contribution of symbolic Intellectual

Property (IP) for finished goods, and although the product bears the

Asset Standards: IVS 230 Inventory

respective branding associated with the symbolic IP, the related right
to sell the branded product may not be conveyed with the transfer of
inventory. As such, it may be appropriate to consider such rights in the
costs of disposal.

100. Relationship to Other Acquired Assets

100.01 The valuer should maintain appropriate consistency between the
assumptions used in the valuation of inventory and the assumptions used
in the valuation of other assets and/or liabilities.

110. Obsolete Inventory Reserves

110.01 The valuer should account for obsolete inventory reserve balances. The
inventory reserve balances should be applied to the inventory in which the
reserve applies, rather than netted against the entire inventory balance.

110.02 Typically, the obsolete inventory adjusted for the inventory reserve would
not be valued since it has been adjusted to its net realisable value. However,
the valuer may need to consider further write-downs if the market value of
the inventory is lower than net realisable value.

120. Unit of Account

120.01 For the purposes of inventory valuation, it is often appropriate to assume
that inventory is one homogenous set of assets. However, it is possible
for the profit margins, risk, and intangible asset contributions to vary by
product or product group.

120.02 If the profit margins, risk and intangible asset contributions vary by product
or product group, and the relative mix of inventory being valued does
not match the assumed sales mix used to develop the assumptions for
the valuation, the valuer should assess the different groups of inventory
separately.

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 IVS 300 Plant, Equipment and Infrastructure

IVS 200 IVS 210 IVS 220 IVS 230 IVS 300 IVS 400 IVS 410 IVS 500
Businesses Intangible Non- Inventory Plant, Real Development Financial
and Assets Financial Equipment Property Property Instruments
Business Liabilities and Interests
Interests Infrastructure

ContentsParagraphs
Asset Standards: IVS 300 Plant, Equipment and Infrastructure

Overview10
Introduction20
Valuation Framework 30
Scope of Work 40
Bases of Value 50
Valuation Approaches 60
Market Approach 70
Income Approach 80
Cost Approach 90
Data and Inputs 100
Valuation Models 110
Documentation and Reporting 120
Special Considerations for Plant and Equipment 130

10. Overview
10.01 The principles contained in the General Standards apply to valuations
of plant, equipment and infrastructure (PEI). This standard includes
modifications, additional requirements or specific examples of how the
General Standards apply to valuations to which this standard applies.
Valuations of PEI must also follow the applicable standards for that type
of asset and/or liability (see IVS 400 Real Property Interests and IVS 410
Development Property, where applicable).

20. Introduction
20.01 Items of PEI (which may sometimes be categorised as a type of personal
property) are tangible assets that are usually held by an entity for use in
the manufacturing/production or supply of goods or services, for rental
by others or for administrative purposes and that are expected to be used
over a period of time. PEI may also include infrastructure assets, which are
typically part of a specialised system, network or group of complementary
assets. Where applicable, valuations relating to infrastructure should
also have consideration to IVS 400 Real Property Interests and IVS 410
Development Property.

20.02 The right to use an item of machinery and equipment (such as a right

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arising from a lease) would also follow the guidance of this standard. It
must also be noted that the “right to use” an asset could have a different
life span than the service life (that takes into consideration both preventive
and predictive maintenance) of the underlying asset itself and, in such
circumstances, the difference must be stated.

20.03 Consistent with the highest and best use premise, a group of assets may
have greater value individually than when considered as part of group of
assets, or vice versa. PEI for which the highest and best use is “in use” as
part of a group of assets must be valued using consistent assumptions.

20.04 Intangible assets typically fall outside the classification of PEI assets.
However, an intangible asset may have an impact on the value of PEI
assets. Operating software, technical data, production records and patents

Asset Standards: IVS 300 Plant, Equipment and Infrastructure

are examples of intangible assets that can have an impact on the value of
PEI assets. If the valuation of discrete or embedded intangible assets is
necessary to value PEI assets, they should be included in the valuation.

20.05 A valuation of PEI will normally require consideration of a range of factors

relating to the asset itself, its environment and physical, functional and
economic potential. Examples of factors that may need to be considered
under each of these headings include the following:

(a) asset-related factors:

(i) the asset’s technical specification,

(ii) the remaining useful, economic or effective life, considering both
preventive and predictive maintenance,
(iii) the asset’s condition, including maintenance history and historical
capital expenditure,
(iv) any functional, physical and technological obsolescence,
(v) if the asset is not valued in its current location, the costs of
decommissioning and removal, and any costs associated with
the asset’s existing in-place location, such as installation and re-
commissioning of assets to its optimum status,
(vi) for an asset that is used in a leasing context, the lease renewal
options and other end-of-lease possibilities (often referred to as
terminal value),
(vii) any potential loss of a complementary asset, eg, the operational
life of an asset may be curtailed by the length of lease on the
building in which it is located,
(viii) additional costs associated with additional equipment, transport,
installation and commissioning, etc, and
(ix) in cases where the historical costs are not available for the asset
that may reside within a plant during a construction, the valuer
may take references from the engineering, procurement, and/or
construction contract(s) (if available).

(b) environmental or external related factors:

(i) the location in relation to the source of raw material and market

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for the products produced by the asset or group of assets. The

suitability of a location may also have a limited life, eg, where raw
materials are finite or where demand is transitory,
(ii) the impact of any legislation or external related factors that
either restricts utilisation or imposes additional operating or
decommissioning costs on the PEI or reduces demand for a
product produced by the asset or group of assets,

(iii) toxic wastes which may be chemical in the form of a solid, liquid
or gaseous state must be professionally stored or disposed of.
This is critical for all industrial manufacturing, and
(iv) licences to operate certain assets in certain jurisdictions may be

restricted, or may have a limited life,
Asset Standards: IVS 300 Plant, Equipment and Infrastructure

(c) economic-related factors:

(i) the actual or potential profitability of the asset, which might

be based on comparison of operating costs with earnings or
potential earnings of the business within which the asset operates
(see IVS 200 Businesses and Business Interests),
(ii) the demand for the product manufactured by the asset with
regard to both macro- and micro-economic factors could impact
on demand, and
(iii) the potential for the asset to be put to a more valuable use than
the current use (ie, highest and best use).

20.06 Valuations of plant and equipment should reflect the impact of all forms of
obsolescence on value.

30. Valuation Framework

30.01 In accordance with IVS 100 Valuation Framework, the valuer must comply
with the valuer principles (see IVS 100 Valuation Framework, section 10).

40. Scope of Work

40.01 To comply with the requirement to identify the asset and/or liability to
be valued in IVS 101 Scope of Work, section 20, to the extent it impacts
on value, consideration must be given to the degree to which the asset is
attached to, or integrated with, other assets. For example:

(a) assets may be permanently attached to the land and could not be
removed without substantial demolition of either the asset or any
surrounding structure or building,
(b) an individual machine may be part of an integrated production line
where its functionality is dependent upon other assets,
(c) an asset may be considered to be classified as a component of the
real property (eg, a Heating, Ventilation and Air Conditioning System
(HVAC)).

In such cases, it will be necessary to clearly define what is to be included

or excluded from the valuation. Any special assumptions relating to the
availability of any complementary assets must also be stated.

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40.02 PEI connected with the supply or provision of services to a building are
often integrated within the building and, once installed, are often difficult
to separate from it. These items will normally form part of the real property
interest and therefore the requirements contained within IVS 400 Real
Property Interests and IVS 410 Development Property must also be considered,
where appropriate. Examples include assets with the primary function of
supplying electricity, gas, heating, cooling or ventilation to a building and
equipment such as elevators. If the purpose of the valuation requires these
items to be valued separately, the scope of work must include a statement
to the effect that the value of these items would normally be included in
the real property interest and may not be separately realisable.

40.03 Because of the diverse nature and transportability of many items of PEI,
additional assumptions will normally be required to describe the situation

Asset Standards: IVS 300 Plant, Equipment and Infrastructure

and circumstances in which the assets are valued. In order to comply with
IVS 101 Scope of Work, para 20.01 (k) these must be considered and included
in the scope of work. Examples of assumptions that may be appropriate in
different circumstances include:

(a) that the assets are valued as a group, in place and as part of an
operating business,
(b) that the assets are valued as a group, in place but on the assumption
that the business is not yet in production,
(c) that the assets are valued as a group, in place but on the assumption
that the business is closed,
(d) that the assets are valued as a group, in place but on the assumption
that it is a forced sale (see IVS 102 Bases of Value, Appendix A120),
(e) that the assets are valued as individual items for removal from their
current location.

40.04 In some circumstances, it may be appropriate to report on more than one

set of assumptions, eg, in order to illustrate the effect of business closure
or cessation of operations on the value of assets.

40.05 In addition to the requirements contained within IVS 101 Scope of Work,
sections 20 and 30, investigations made during the course of a valuation
engagement must be appropriate for the intended use of the valuation
engagement and the basis(es) of value.

40.06 Sufficient investigations and evidence must be assembled by means

such as inspection, inquiry, research, computation or analysis to ensure
that the valuation is properly supported. When determining the extent of
investigations and evidence necessary, professional judgement is required
to ensure it is fit for the purpose of the valuation.

40.07 When a valuation engagement involves reliance on information supplied

by a party other than the valuer, consideration should be given as to
whether the information is credible or that the information may otherwise
be relied upon without adversely affecting the credibility of the valuation.
Significant inputs provided to the valuer (eg, by management/owners)
should be considered, investigated and/or corroborated. In cases where
credibility or reliability of information supplied cannot be supported,

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consideration should be given as to whether or how such information is

used (see IVS 101 Scope of Work, para 20.01 (j)).

40.08 In considering the credibility and reliability of information provided, the

valuer should consider matters such as:

(a) the intended use of the valuation,

(b) the significance of the information to the valuation conclusion,
(c) the expertise of the source in relation to the subject matter, and
(d) whether the source is independent of either the subject asset and/ or
the intended user of the valuation (see IVS 101 Scope of Work, para 20.01
(a)).
Asset Standards: IVS 300 Plant, Equipment and Infrastructure

40.09 The intended use of the valuation, the basis of value, the extent and limits
on the investigations and any sources of information that may be relied
upon are part of the valuation engagement’s scope of work that must be
communicated to all parties to the valuation engagement (see IVS 101
Scope of Work).

40.10 If, during the course of a valuation assignment, it becomes clear that the
investigations or limitations included in the scope of work will not result
in a credible valuation, or information to be provided by third parties is
either unavailable or inadequate, or limitations on investigations such as
inspection are so substantial that it will not result in a valuation outcome
that is adequate for the purpose of the valuation, the valuation must
explicitly state that the valuation is not in compliance with IVS (see IVS 100
Valuation Framework, section 40 and IVS 101 Scope of Work, para 20.03).

50. Bases of Value

50.01 In accordance with IVS 102 Bases of Value, the valuer must select the
appropriate basis(es) of value when valuing PEI.

50.02 Using the appropriate basis(es) of value and associated premise of value
(see IVS 102 Bases of Value, Appendix A90–A120) is particularly crucial
in the valuation of PEI because differences in value can be significant,
depending on whether an item of plant and equipment is valued under
an “in use” premise, orderly liquidation or forced liquidation (see IVS 102
Bases of Value, Appendix A60). The value of most PEI is particularly sensitive
to different premises of value.

Liquidation value
50.03 In determining any premise of liquidation value, it should be made clear
as to whether the premise is required to be on an in-place (in-situ) or
removed (ex-situ) basis. The characteristics associated with the asset’s or
group of assets’ location, and underlying land tenure or lease term, will
often impact on the in-place or removed consideration.

50.04 Regardless of whether the asset or group of assets is being considered

on an in-place (in-situ) or removed (ex-situ) basis, typically the premise
should consider a scenario that would maximise the gross amount that
would be realised having consideration to the premise of value under
consideration. This may be achieved by selling the assets on a piecemeal

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basis, or alternatively may be achieved by selling the assets as a group,

depending upon the market.

50.05 It should be noted that for plant and equipment, selling an asset on
a removed (ex-situ) or piecemeal basis may be quite common. For
infrastructure, selling an asset on a removed (ex-situ) or piecemeal
basis may or may not be possible and will vary depending upon the
characteristics of the asset.

50.06 The proposition of a removed (ex-situ) basis raises the possibility that
there will be certain asset components (or originally incurred indirect costs)
that are not recoverable once the asset is removed (either physically or
economically). Such items might include (but not be limited to) foundations,
electrical and process piping, transportation costs, installation and

Asset Standards: IVS 300 Plant, Equipment and Infrastructure

commissioning costs, fixed buildings, safety and protection equipment,
etc.

50.07 In the event that a scope of work specifically requires the determination of
a net amount (as opposed to gross amount) that would be realised from
a liquidation sale, the nature and quantum of the costs that will likely be
incurred by the seller to get from the gross to the net amount should be
made clear.

60. Valuation Approaches

60.01 The three principal valuation approaches described in IVS 103 Valuation
Approaches may all be applied to the valuation of PEI assets and/or liabilities
depending on the nature of the assets, the information available, and the
facts and circumstances surrounding the valuation.

70. Market Approach

70.01 For classes of plant and equipment that are homogenous, eg, cranes,
construction equipment, motor vehicles (light and heavy) and earthmoving
equipment, the market approach is commonly used as there may be
sufficient data of recent sales of similar assets. However, many types of
plant and equipment are specialised and in these instances care must be
exercised in offering valuation using a market approach when available
market data is poor or non-existent. In such circumstances it may be
appropriate to adopt either the income approach or the cost approach to
the valuation (see IVS 103 Valuation Approaches, para 20.03).

70.02 When using the market approach, types of evidence will include (see
section 100, para 100.02 of this standard):

(a) actual sales of identical assets,

(b) actual sales of similar assets,
(c) asking prices for identical assets,
(d) asking prices for similar assets.

70.03 Depending upon the asset(s) being valued, market evidence may be
considered in a variety of ways including:

(a) piecemeal (ie, individual asset basis),

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(b) production line (ie, a group of assets together forming an operating

unit),
(c) whole of plant/facility (ie, a production facility producing X units per
day),
(d) portfolio (ie, a group of assets operating across a region).

70.04 Highest and best use considerations should always be a primary

consideration for the valuer when considering the above types of evidence.
Specifically, a portfolio of assets may have greater value if considered
individually as opposed to as part of a portfolio, and vice versa. Where this
is the case, the valuer must explicitly state that this is the case and provide
reasoning as to the difference in forming their conclusion.
Asset Standards: IVS 300 Plant, Equipment and Infrastructure

70.05 Actual sales must take preference over asking prices and evidence available
just prior to the valuation date should be preferred to that further from the
valuation date.

70.06 The reliability of the evidence should be weighted according to its source.
Depending upon the asset class considered as part of the valuation,
evidence may be considered at a local, national or international level.

70.07 The market approach for actual sales of identical assets includes all forms
of depreciation and obsolescence relating to an asset and no adjustment
will be required (although such evidence is rare).

70.08 When considering actual sales or asking prices of similar assets (and asking
prices for identical assets), various adjustments may need to be considered
to bring the evidence in line with the subject asset, and may include but
not limited to adjustments for:

(a) technical factors (size, capacity, rating, units of production,

specification, etc),
(b) deterioration and obsolescence factors (condition, intensity of use,
age, maintenance, overhaul status, operating costs),
(c) market-related factors (location, currency, quantities, asking price
versus actual sales, environmental/licensing/compliance status, etc),
(d) time or basis of value factors (date of sale versus valuation date, market
sale versus liquidation sale, installed as-is/where-is versus removed,
etc).

70.09 In making adjustments to bring the evidence in line with the subject asset,
the valuer may use various methods including:

(a) direct adjustment (ie, a currency or amount adjustment),

(b) indirect adjustment (ie, to adjust the evidence by a percentage).

70.10 Evidence in an active and transparent market should always be preferred

to an inactive and opaque market. Similarly, evidence will be more
comparable when fewer adjustments are required to bring it in line with
the subject asset. In all instances, professional judgement must be used
to ensure that the evidence being considered is appropriate having

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consideration to the nature of the valuation being performed.

80. Income Approach

80.01 The income approach to the valuation of PEI can be used where specific
cash flows can be identified for the asset or a group of complementary
assets, eg, where a group of assets forming a process plant is operating to
produce a marketable product/service or generating income from a lease.

80.02 When PEI is valued on an income approach, elements of value that may
be attributable to intangible assets and other contributory assets should
typically be excluded (see section 20.04 of this standard, IVS 101 Scope of
Work and IVS 210 Intangible Assets).

80.03 The income approach can also be utilised, in conjunction with other

Asset Standards: IVS 300 Plant, Equipment and Infrastructure

approaches, in assessing the existence and quantum of economic
obsolescence and/or goodwill for an asset or group of complementary
assets. Care should be taken when using the income approach because it
may be challenging to apportion aggregated cash flows relating to a group
of complementary assets down into individual assets (where necessary).

80.04 When an income approach is used to value PEI, the valuation must consider
the cash flows expected to be generated over the explicit forecast period
of the asset(s) as well as the value of the asset(s) at the end of the explicit
forecast period, often referred to as terminal value (see IVS 103 Valuation
Approaches, Appendix A20.02–A20.22).

80.05 In accordance with IVS 103 Valuation Approaches, the income approach
for an asset or group of complementary assets may be used where the
main driver of value is largely driven by its income producing ability and
afforded significant weight under the following circumstances such as:

(a) the asset or group of complementary assets have a high barrier to

entry for market participants,
(b) there is significant time involved to create an asset or group of
complementary assets of equal utility, whether by purchase or
construction,
(c) there are potential legal or regulatory hurdles to create an asset or
group of complementary assets of equal utility,
(d) a purchaser would be willing to pay a significant premium for the
ability to use the asset or group of complementary assets immediately,
due to favourable market economics and/or more immediate cashflow
certainty,
(e) there is undue inconvenience, risk or other factors involved in
obtaining an asset or group of complementary assets of equal utility,
whether by purchase or construction.

80.06 In addition, the income approach should also be afforded significant

weight for an asset or group of complementary assets under the following
circumstances:

(a) the use of the market approach is either not practicable or

inconclusive to value the asset or group of complementary assets,
(b) the valuation only needs to consider the asset or group of

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complementary assets as a whole, and not the value of individual

component assets,
(c) the income-producing ability of the asset or group of complementary
assets is set by market rates, or via contracts that are frequently
marked-to-market,
(d) the cash flow generated for an asset or group of complementary assets
is discrete and clearly distinguishable from other parts of the business,
(e) the value of other contributory assets that are inherently included
within the income generated can be readily valued in isolation from
the asset or group of complementary assets using other valuation
methodologies.

90. Cost Approach

Asset Standards: IVS 300 Plant, Equipment and Infrastructure

90.01 The cost approach is commonly adopted for PEI, particularly in the case
of individual assets that are specialised or special-use facilities. The first
step is to estimate the cost to a market participant of replacing the subject
asset by reference to the lower of either reproduction or replacement
cost. The replacement cost is the cost of obtaining an alternative asset of
equivalent utility; this can either be a modern equivalent providing the
same functionality or the cost of reproducing an exact replica of the subject
asset. After concluding on a replacement cost, the value should be adjusted
to reflect the impact on value of physical, functional, technological and
economic obsolescence on value. In any event, adjustments made to any
particular replacement cost should be designed to produce the same cost
as the modern equivalent asset from an output and utility point of view.

90.02 An entity’s actual costs incurred in the acquisition or construction of an

asset may be appropriate for use as the replacement cost of an asset
under certain circumstances. However, prior to using such historical cost
information, the valuer should consider the following:

(a) timing of the historical expenditures: an entity’s actual costs may not
be relevant, or may need to be adjusted for inflation/indexation to an
equivalent as of the valuation date, if they were not incurred recently
due to changes in market prices, inflation/deflation or other factors,
(b) the basis of value: care must be taken when adopting a particular
market participant’s own costings or profit margins, as they may
not represent what typical market participants might have paid. The
valuer must also consider the possibility that the entity’s costs incurred
may not be historical in nature due to prior purchase accounting or
the purchase of used PEI assets. In any case, historical costs must be
trended using appropriate indices,
(c) specific costs included: the valuer must consider all significant costs that
have been included and whether those costs contribute to the value of
the asset and for some bases of value, some amount of profit margin
on costs incurred may be appropriate,
(d) non-market components: any costs, discounts or rebates that would
not be incurred by, or available to, typical market participants should
be excluded.

90.03 Having established the replacement cost, deductions must be made to

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reflect the physical, functional, technological and economic obsolescence

as applicable (see IVS 103 Valuation Approaches, Appendix A30.15–A30.22).

Cost-to-Capacity Method
90.04 Under the cost-to-capacity method, the replacement cost of an asset with
an actual or required capacity can be determined by reference to the cost
of a similar asset with a different capacity.

90.05 The cost-to-capacity method is generally used in one of two ways:

(a) to estimate the replacement cost for an asset or assets with one
capacity where the replacement costs of an asset or assets with a
different capacity are known (such as when the capacity of two subject
assets could be replaced by a single asset with a known cost, or

Asset Standards: IVS 300 Plant, Equipment and Infrastructure

(b) to estimate the replacement cost for a modern equivalent asset with
capacity that matches foreseeable demand where the subject asset has
excess capacity (as a means of measuring the penalty for the lack of
utility to be applied as part of an economic obsolescence adjustment).

90.06 This method could be used as a primary method for determining

replacement cost on a top-down basis, or could be used as a check method
to the replacement cost determined on a bottom-up basis. However, the
existence of an exact comparison plant with the same designed capacity
that resides within the same geographical area would always take
preference over a cost-to-capacity method.

90.07 It is noted that the relationship between cost and capacity is often not
linear, so some form of exponential adjustment may also be required.
However, the valuer should exercise caution in performing this adjustment
when large differences in capacity are being used as evidence relative to
the subject asset as this may not lead to credible outcomes.

Trending Method
90.08 Trending is a method of estimating an asset’s reproduction cost by
applying an index (trend factor) to the asset’s historical cost which reflects
the price inflation/deflation of the asset over time.

90.09 Historical cost comprises the expenditure that was involved in acquiring
the asset when it was first placed into service by its first owner. This is to
be distinguished from original cost, which is the actual cost of a property
when acquired by its present owner, who may not be the first owner and
who may have purchased the asset at a price greater or less than the
historical cost.

90.10 Indices may be obtained from statistical offices or similar government

agencies, institutions or research organisations. Selection of the most
appropriate indices is crucial when using the trending method.

90.11 Whilst the application of a trending method (often termed an indirect

method which involves the application of indexing) can be an appropriate
way to determine replacement cost when using the cost approach, care
should be taken in relation to the following:

(a) trending should not be applied to anything other than a previously

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determined direct replacement cost or the historical cost (the cost of

an asset when it was first placed into service by its first owner),
(b) historical costs represent a range of direct and indirect costs (ie,
equipment, labour, delivery, electrical, foundations, buildings, IT, etc)
that might not correlate to a certain index,
(c) trending long-dated historical costs can create erroneous and
anomalous outcomes because of the various factors that impact
indices over time,
(d) using an index/trend that is derived in different jurisdictions to the
subject asset can create erroneous and anomalous outcomes because
of the various factors that impact indices in differing jurisdictions,
(e) trending historical costs using a local index/trend for assets that were
Asset Standards: IVS 300 Plant, Equipment and Infrastructure

sourced in a foreign jurisdiction where there have been exchange rate

movements over time.

90.12 In all instances, professional judgement is required to ensure the trending

method to determine replacement cost as part of a cost approach is
appropriate having consideration to the nature of the valuation being
performed. If it is likely to lead to erroneous or anomalous valuation
outcomes, the application of alternate approaches to determine
replacement cost must be utilised (ie, a direct approach to estimating
replacement cost).

100. Data and Inputs

100.01 In accordance with IVS 104 Data and Inputs, the valuer must maximise
the characteristics of relevant and observable data to the degree that it is
possible.

100.02 In addition to the requirements contained within IVS 104 Data and Inputs
there is the following hierarchy of comparable evidence, which should be
followed for PEI valuations:

(a) direct comparable evidence,

(b) indirect comparable evidence,
(c) general market data,
(d) other sources.

100.03 When applying the hierarchy of comparable evidence, the valuer must
ensure that the characteristics of suitable data and inputs contained within
IVS 104 Data and Inputs are fully applied.

100.04 The inputs selected must be consistent with the models being used to value
the asset (see IVS 104 Data and Inputs, para 40.01).

100.05 The selection, source and use of the inputs must be explained, justified,
and documented.

100.06 Significant ESG factors associated with the value of an asset should be
considered as part of the data and input selection process.

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110. Valuation Models

110.01 In accordance with IVS 105 Valuation Models, the valuer must maximise as
many of the characteristics of suitable valuation models, as possible.

110.02 Valuation models must be suitable for the intended use of the valuation and
consistent with suitable inputs.

120. Documentation and Reporting

120.01 In addition to the requirements in IVS 106 Documentation and Reporting,
a valuation report must be issued for a valuation and must include
appropriate references to all matters addressed in the agreed scope of
work (see IVS 101 Scope of Work). The report must also include comment
on the effect on the reported value of any associated tangible or intangible

Asset Standards: IVS 300 Plant, Equipment and Infrastructure

assets excluded from the actual or assumed transaction scenario.

120.02 Moreover, in addition to the requirements contained within IVS 106

Documentation and Reporting, paras 40.01-40.03 a valuation review report
must be issued for a valuation review and the valuation review report must
state whether the review is a valuation process review or a value review.

130. Special Considerations for Plant and Equipment

130.01 The following section addresses a non-exhaustive list of topics relevant to
the valuation of PEI.

Allocation of value
130.02 Further to IVS 102 Bases of Value, section 70 and this standard, where a
group of assets have been valued as part of a portfolio, but allocated on
an individual basis, the valuer must explicitly state that this is the case and
provide rationale as to their allocation methodology.

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 IVS 400 Real Property Interests

IVS 200 IVS 210 IVS 220 IVS 230 IVS 300 IVS 400 IVS 410 IVS 500
Businesses Intangible Non- Inventory Plant, Real Development Financial
and Assets Financial Equipment Property Property Instruments
Business Liabilities and Interests
Interests Infrastructure

ContentsParagraphs
Overview10
Introduction20
Asset Standards: IVS 400 Real Property Interests

Valuation Framework 30
Scope of Work 40
Bases of Value 50
Valuation Approaches  60
Market Approach 70
Income Approach 80
Cost Approach 90
Data and Inputs 100
Valuation Models 110
Documentation and Reporting 120
Special Considerations for Real Property Interests 130
Hierarchy of Interests 140
Rent150

10. Overview
10.01 The principles contained in the General Standards apply to valuations of
real property interests. This standard includes modifications, additional
requirements or specific examples of how the General Standards apply
to valuations to which this standard applies. Valuations of real property
interests must also follow the applicable standard for that type of asset
and/or liability (see IVS 300 Plant, Equipment and Infrastructure and IVS 410
Development Property, where applicable).

20. Introduction
20.01 Property interests are normally defined by state or the law of individual
jurisdictions and are often regulated by national or local legislation. In
some instances, legitimate individual, communal/community and/or
collective rights over land and buildings are held in an informal, traditional,
undocumented and unregistered manner. Before undertaking a valuation
of a real property interest, the valuer must understand the relevant legal
framework that affects the interest being valued.

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20.02 A real property interest is a right of ownership, control, use or occupation

of land and buildings. A real property interest includes informal tenure
rights for communal/community and/or collective or tribal land and
urban/rural informal settlements or transition economies, which can take
the form of possession, occupation and rights to use.

20.03 There are three main types of interest:

(a) the superior interest in any defined area of land. The owner of this
interest has an absolute right of possession and control of the land
and any buildings upon it in perpetuity, subject only to any subordinate
interests and any statutory or other legally enforceable constraints,
(b) a subordinate interest that normally gives the holder rights of
exclusive possession and control of a defined area of land or buildings
for a defined period, eg, under the terms of a lease contract, and/or
(c) a right to use land or buildings but without a right of exclusive

Asset Standards: IVS 400 Real Property Interests

possession or control, eg, a right to pass over land or to use it only for
a specified activity.

20.04 Intangible assets fall outside the classification of real property assets and/
or liabilities. However, an intangible asset may be associated with, and have
a material impact on, the cash flows associated with real property assets.
It is therefore essential to be clear in the scope of work precisely what
the intended use of the valuation is to include or exclude. When there is an
intangible asset component, the valuer should also follow IVS 210 Intangible
Assets.

20.05 Although different words and terms are used to describe these types of
real property interest in different jurisdictions, the concepts of an unlimited
absolute right of ownership, an exclusive interest for a limited period or
a non-exclusive right for a specified intended use are common to most.
The immovability of land and buildings means that it is the right that a
party holds that is transferred in an exchange, not the physical land and
buildings. The value, therefore, attaches to the legal interest rather than to
the physical land and buildings.

20.06 Valuations of real property interests are often required for different
intended uses including secured lending, sales and purchases, taxation,
litigation, compensation, insolvency proceedings and financial reporting.

30. Valuation Framework

30.01 In accordance with IVS 100 Valuation Framework, the valuer must comply
with the valuer principles (see IVS 100 Valuation Framework, section 10).

40. Scope of Work

40.01 To comply with the requirement to identify the asset and/or liability to be
valued in IVS 101 Scope of Work, para 20.03 (a) the following matters must
be included:

(a) a description of the real property interest to be valued, and

(b) identification of any superior or subordinate interests or right to use
that affect the interest to be valued.

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40.02 In accordance with requirements contained within IVS 101 Scope of Work,
sections 20 and 30, investigations made during the course of a valuation
engagement must be appropriate for the intended use of the valuation
engagement and the basis(es) of value. In the case of a valuation review the
scope of work must state whether the review is a valuation process review or
a value review.

40.03 Sufficient investigations and evidence must be assembled by means

such as inspection, inquiry, research, computation or analysis to ensure
that the valuation is properly supported. When determining the extent of
investigations and evidence necessary, professional judgement is required
to ensure it is fit for the purpose of the valuation.

40.04 When a valuation engagement involves reliance on information supplied

by a party other than the valuer, consideration should be given as to
whether the information is credible or that the information may otherwise
be relied upon without adversely affecting the credibility of the valuation.
Asset Standards: IVS 400 Real Property Interests

Significant inputs provided to the valuer (eg, by management/owners)

should be considered, investigated and/or corroborated. In cases where
credibility or reliability of information supplied cannot be supported,
consideration should be given as to whether or how such information is
used (see IVS 101 Scope of Work, para 20.01 (j)).

40.05 In considering the credibility and reliability of information provided, the

valuer should consider matters such as:

(a) the intended use of the valuation,

(b) the significance of the information to the valuation conclusion,
(c) the expertise of the source in relation to the subject matter, and
(d) whether the source is independent of either the subject asset and/or
the recipient of the valuation (see IVS 101 Scope of Work, para 20.01
(a)).

40.06 The intended use of the valuation, the basis of value, the extent and limits
on the investigations and any sources of information that may be relied
upon, are part of the valuation engagement’s scope of work that must be
communicated to all parties to the valuation engagement (see IVS 101
Scope of Work).

40.07 If, during the course of an engagement, it becomes clear that the
investigations or limitations included in the scope of work will not result
in a credible valuation, or information to be provided by third parties is
either unavailable or inadequate, or limitations on investigations such as
inspections are so substantial that, it will not result in a valuation outcome
that is adequate for the purpose of the valuation, the valuation must
explicitly state that the valuation is not in compliance with IVS (see IVS 100
Valuation Framework, section 40 and IVS 101 Scope of Work, para 20.03).

40.08 In addition to the requirements to state the extent of the investigation

and the nature and source of the information to be relied upon in IVS 101
Scope of Work, the following matters should be considered:

(a) the evidence, if available, required to verify the real property interest
and any relevant related interests,

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(b) the extent of any inspection,

(c) responsibility for information on the site area, site characteristics (eg,
ground condition), building characteristics or building floor areas,
(d) responsibility for information on the area, characteristics (eg, soil
conditions) and productivity generating attributes of land (eg, fertility
of the soil, plantation area),
(e) responsibility for confirming the specification and condition of
any building,
(f) responsibility for confirming the specification and condition of the
plantation, vegetation, forest or crop,
(g) responsibility for confirming the quantity and quality of reserves and
any extraction and remedial measures post extraction,
(h) the extent of investigation into the nature, specification and adequacy
of services and facilities,

Asset Standards: IVS 400 Real Property Interests

(g) responsibility for the identification of actual or potential environmental
factors, and
(h) legal permissions or restrictions on the use of the property and
any buildings, as well as any expected or potential changes to legal
permissions and restrictions.

40.09 Typical examples of special assumptions that need to be agreed and

confirmed in order to comply with IVS 101 Scope of Work, para 20.03 (k) and
IVS 102 Bases of Value, para 50.04 include but are not limited to:

(a) that a defined physical change had occurred, eg, a proposed building
is valued as if complete at the valuation date,
(b) that there had been a change in the status of the property, eg, a vacant
building had been leased or a leased building had become vacant at
the valuation date,
(c) that the interest is being valued without taking into account other
existing interests,
(d) that the property is free from contamination or other environmental
risks,
(e) that the economic activity will continue into perpetuity, and
(f) that planning permission will be granted for the proposed change of
use.

50. Bases of Value

50.01 In accordance with IVS 102 Bases of Value, the valuer must select the
appropriate basis(es) of value for the intended use when valuing real
property interests.

50.02 Under most bases of value, the valuer must consider the highest and best
use of the real property, which may differ from its current use (see IVS
102 Bases of Value, Appendix A90–A120). This assessment is particularly
important to real property interests which can be changed from one use to
another or that have development potential.

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50.03 In addition to the requirements contained within IVS 102 Bases of Value,
section 70, on allocation of value, if the sum-of-the-value of the individual
allocated components differs from the value of the assets and/or liabilities
on an aggregate basis, then the valuer should expressly state the primary
reason(s) for the difference.

60. Valuation Approaches

60.01 The three valuation approaches described in IVS 103 Valuation Approaches
can all be applicable for the valuation of a real property interest.

60.02 When selecting an approach and method, in addition to the requirements

of this standard, the valuer must follow the requirements of IVS 103
Valuation Approaches, including paras 10.03 and 10.04.

70. Market Approach

70.01 Property interests are generally heterogeneous (ie, with different
Asset Standards: IVS 400 Real Property Interests

characteristics). Even if the land and buildings have identical physical

characteristics to others being exchanged in the market, the location will
be different. Notwithstanding these dissimilarities, the market approach is
commonly applied for the valuation of real property interests.

70.02 In order to compare the subject of the valuation with the price of other
real property interests, the valuer should adopt generally accepted and
appropriate units of comparison that are considered by participants,
dependent upon the type of asset and/or liability being valued. Units of
comparison that are commonly used might include:

(a) price per square metre (or per square foot) of a building or per hectare
(or per acre) for land,
(b) price per room, and
(c) price per unit of output (eg, megawatt, crop yields).

70.03 A unit of comparison is only useful when it is consistently selected and

applied to the subject property and the comparable properties in each
analysis. To the extent possible, any unit of comparison used should be
one commonly used by participants in the appropriate market.

70.04 The reliance that can be applied to any comparable price data in the
valuation is determined by comparing various characteristics of the
property and transaction from which the data was derived with the
property being valued. Differences between the following should be
considered in accordance with IVS 103 Valuation Approaches, Appendix
A10.01-10.08. Specific differences that should be considered in valuing real
property interests include, but are not limited to:

(a) the type of interest providing the price evidence and the type of
interest being valued,
(b) the respective locations,
(c) the respective quality of the land,
(d) the age and specification of the improvements,
(e) the permitted use or zoning at each property,

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(f) the circumstances under which the price was determined and the basis
of value required,
(g) the effective date of the price evidence and the valuation date, and
(h) market conditions at the time of the relevant transactions and how
they differ from conditions at the valuation date.

80. Income Approach

80.01 Various methods are used to indicate value under the general heading
of the income approach, all of which share the common characteristic
that the value is based upon an actual or estimated income that either
is, or could be, generated by an owner of the interest. In the case of an
investment property, that income could be in the form of rent (see IVS
104 Data and Inputs and IVS 105 Valuation Models); in an owner-occupied
building, it could be an assumed rent (or rent saved) based on what it
would cost the owner to lease equivalent space.

Asset Standards: IVS 400 Real Property Interests

80.02 For some real property interests, the income-generating ability of the
property is closely tied to a particular use or business/trading activity (for
example, cinemas, retirement or care homes, clinics, hotels, etc). Where a
building is suitable for only a particular type of trading activity, the income
is often related to the actual or potential cash flows that would accrue to
the owner of that building from the trading activity. The use of a property’s
trading potential to indicate its value is often referred to as the “profits
method” (see following para 80.03).

80.03 When the potential income used in the income approach represents cash
flow from a business/trading activity (rather than cash flow related to rent,
maintenance and other real property-specific costs), and includes intangible
assets then this is no longer solely a real property interest valuation and the
valuer should also comply as appropriate with the requirements of IVS 200
Businesses and Business Interests and, where applicable, IVS 210 Intangible
Assets.

80.04 For real property interests, various forms of discounted cash flow models
may be used. These vary in detail but share the basic characteristic that
the cash flow for a defined future period is adjusted to a present value
using a discount rate. The sum of the present day values for the individual
periods represents an estimate of the capital value. The discount rate in a
discounted cash flow model will be based on the time cost of money and
the risks and rewards of the income stream in question.

80.05 Further information on the derivation of discount rates is included in IVS

103 Valuation Approaches, Appendix A20.29-A20.40. The development of a
yield or discount rate should be influenced by the objective of the valuation.
For example:

(a) if the objective of the valuation is to establish the market value, the
discount rate may be derived from observation of the returns implicit
in the price paid for real property interests traded in the market
between participants or from hypothetical participants’ required rate
of return. When a discount rate is based on an analysis of market
transactions, the valuer should also follow the guidance contained in
IVS 103 Valuation Approaches, Appendix A10.07 and A10.08, and

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(b) if the objective of the valuation is to establish the market value to a

particular owner or potential owner based on their own investment
criteria, the rate used may reflect their required rate of return or their
weighted-average-cost-of-capital.

80.06 An appropriate discount rate may also be built up from a typical “risk-free”
return adjusted for the additional risks and opportunities specific to the
particular real property interest.

90. Cost Approach

90.01 In applying the cost approach, the valuer must follow the guidance
contained in IVS 103 Valuation Approaches, Appendix A30.

90.02 This approach is generally applied to the valuation of real property interests
through the depreciated replacement cost method (see IVS 103 Valuation
Approaches, Appendix A30).
Asset Standards: IVS 400 Real Property Interests

90.03 It may be used as the primary approach when there is either no evidence of
transaction prices for similar property or no identifiable actual or notional
income stream that would accrue to the owner of the relevant interest.

90.04 In some cases, even when evidence of market transaction prices or an

identifiable income stream is available, the cost approach may be used as
a secondary or corroborating approach.

90.05 The first step requires a replacement cost to be calculated. This is normally
the cost of replacing the property with a modern equivalent at the relevant
valuation date. An exception is where an equivalent property would need
to be a replica of the subject property in order to provide a participant
with the same utility, in which case the replacement cost would be that
of reproducing or replicating the subject building rather than replacing it
with a modern equivalent. The replacement cost must reflect all incidental
costs, as appropriate, such as the value of the land, infrastructure, design
fees, finance costs and developer profit that would be incurred by a
participant in creating an equivalent asset.

90.06 The cost of the modern equivalent must then, as appropriate, be subject
to adjustment for physical, functional, technological and economic
obsolescence (see IVS 103 Valuation Approaches Appendix A30). The
objective of an adjustment for obsolescence is to estimate how much less
valuable the subject property might, or would be, to a potential buyer than
the modern equivalent. Obsolescence considers the physical condition,
functionality and economic utility of the subject property compared with
the modern equivalent.

100. Data and Inputs

100.01 In accordance with IVS 104 Data and Inputs, the valuer must maximise the
use of relevant and observable data to the degree that it is possible.

100.02 In addition to the requirements contained within IVS 104 Data and Inputs
there is the following hierarchy of comparable evidence, which should be
followed for real property interest valuations:

(a) direct comparable evidence,

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(b) indirect comparable evidence,

(c) general market data,
(d) other sources.

100.03 When applying the hierarchy of comparable evidence, the valuer must
ensure that the characteristics of suitable data and inputs contained within
IVS 104 Data and Inputs are fully applied.

100.04 The inputs selected must be consistent with the models being used to value
the asset and/or liability (see IVS 104 Data and Inputs, section 40).

100.05 The selection, source and use of the inputs must be explained, justified,
and documented.

100.06 Significant ESG factors associated with the value of an asset should be
considered as part of the data and input selection process.

Asset Standards: IVS 400 Real Property Interests

110. Valuation Models
110.01 In accordance with IVS 105 Valuation Models, the valuer must maximise as
many of the characteristics of suitable valuation models, as possible.

110.02 Valuation models must be suitable for the intended use of the valuation and
consistent with suitable inputs.

120. Documentation and Reporting

120.01 In addition to the requirements contained within IVS 106 Documentation
and Reporting, section 30, a valuation report must be issued for a valuation
and must include appropriate references to all matters addressed in the
agreed scope of work (see IVS 101 Scope of Work). The report must also
include comment on the effect on the reported value of any associated
tangible or intangible assets excluded from the actual or assumed
transaction scenario.

120.02 Moreover, in addition to the requirements contained within IVS 106

Documentation and Reporting, section 40, a valuation review report must
be issued for a valuation review and the valuation review report must state
whether the review is a valuation process review or a value review.

130. Special Considerations for Real Property Interests

130.01 The following sections address a non-exhaustive list of topics relevant to
the valuation of real property interests.

(a) Hierarchy of Interests (section 140),

(b) Rent (section 150).

140. Hierarchy of Interests

140.01 The different types of real property interests are not mutually exclusive. For
example, a superior interest may be subject to one or more subordinate
interests. The owner of the absolute interest may grant a lease interest in
respect of part or all of his interest. Lease interests granted directly by the
owner of the absolute interest are “head lease” interests. Unless prohibited
by the terms of the lease contract, the holder of a head lease interest can

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grant a lease of part or all of that interest to a third party, which is known
as a sub-lease interest. A sub-lease interest will always be shorter than, or
coterminous with, the head lease out of which it is created.

140.02 These property interests will have their own characteristics, as illustrated
in the following examples:

(a) Although an absolute interest provides outright ownership in

perpetuity, it may be subject to the effect of subordinate interests.
These subordinate interests could include leases, restrictions imposed
by a previous owner or restrictions imposed by statute.
(b) A lease interest will be for a defined period, at the end of which the
property reverts to the holder of the superior interest out of which it
was created. The lease contract will normally impose obligations on
the lessee, eg, the payment of rent and other expenses. It may also
impose conditions or restrictions, such as in the way the property may
Asset Standards: IVS 400 Real Property Interests

be used or on any transfer of the interest to a third party.

(c) A right of use may be held in perpetuity or may be for a defined
period. The right may be dependent on the holder making payments
or complying with certain other conditions.

140.03 When valuing a real property interest it is therefore necessary to identify

the nature of the rights accruing to the holder of that interest and reflect
any constraints or encumbrances imposed by the existence of other
interests in the same property. The sum of the individual values of various
different interests in the same property will frequently differ from the
value of the unencumbered superior interest.

150. Rent
150.01 Market rent is addressed as a basis of value in IVS 102 Bases of Value.

150.02 When valuing either a superior interest that is subject to a lease or an

interest created by a lease, the valuer must consider the contract rent and,
in cases where it is different, the market rent.

150.03 The contract rent is the rent payable under the terms of an actual lease. It
may be fixed for the duration of the lease or variable. The frequency and
basis of calculating variations in the rent will be set out in the lease and
must be identified and understood in order to establish the total benefits
accruing to the lessor and the liability of the lessee.

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IVS 410 Development Property

IVS 200 IVS 210 IVS 220 IVS 230 IVS 300 IVS 400 IVS 410 IVS 500
Businesses Intangible Non- Inventory Plant, Real Development Financial
and Assets Financial Equipment Property Property Instruments
Business Liabilities and Interests
Interests Infrastructure

ContentsParagraphs
Overview10
Introduction20
Valuation Framework 30

Asset Standards: IVS 410 Development Property

Scope of Work 40
Bases of Value 50
Valuation Approaches and Methods 60
Market Approach 70
Income Approach 80
Cost Approach 90
Residual Method 100
Existing Assets 110
Data and Inputs 120
Valuation Models 130
Documentation and Reporting 140
Special Considerations for Secured Lending 150

10. Overview
10.01 The principles contained in the General Standards apply to valuations of
development property. This standard includes modifications, additional
requirements or specific examples of how the General Standards apply
to valuations to which this standard applies. Valuations of development
property must also follow the applicable standard for that type of asset and/
or liability (see IVS 400 Real Property Interests and IVS 300 Plant, Equipment,
and Infrastructure, where applicable.)

20. Introduction
20.01 In the context of this standard, development properties are defined as
interests where development is required to achieve the highest and best
use, or where improvements are either being contemplated or are in
progress at the valuation date and include:

(a) the construction of buildings,

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(b) previously undeveloped land which is being provided with

infrastructure (see IVS 300 Plant, Equipment and Infrastructure),
(c) the redevelopment of previously developed land,
(d) the improvement or alteration of existing buildings or structures,
(e) land allocated for development in a statutory plan or by the permission
of the relevant authorities, and
(f) land allocated for higher value uses or higher density in a statutory
plan or by the permission of the relevant authorities.

20.02 Valuations of development property may be required for different intended

uses. It is the valuer’s responsibility to understand the intended use. A
non-exhaustive list of examples of circumstances that should require a
development valuation includes but is not limited to:

(a) when establishing whether proposed projects are financially feasible,

Asset Standards: IVS 410 Development Property

(b) as part of general consulting and transactional support engagements

for acquisition and loan security,
(c) for tax reporting purposes, development valuations are frequently
needed for ad valorem taxation analyses,
(d) for litigation requiring valuation analysis in circumstances such as
shareholder disputes and damage calculations,
(e) for financial reporting purposes, valuation of a development property
is often required in connection with accounting for business
combinations, asset acquisitions and sales, and impairment analysis,
and
(f) for other statutory or legal events that may require the valuation of
development property such as compulsory purchases.

20.03 When valuing development property, the valuer must follow the applicable
standard for that type of asset and/or liability (see IVS 400 Real Property
Interests and IVS 300 Plant, Equipment and Infrastructure).

20.04 The residual value or land value of a development property can be

very sensitive to changes in assumptions or projections concerning the
income or revenue to be derived from the completed project or any of the
development costs that will be incurred. This remains the case regardless
of the method or methods used or however diligently the various inputs
are researched in relation to the valuation date (see IVS 104 Data and
Inputs).

20.05 This sensitivity also applies to the impact of significant changes in either the
costs of the project or the value on completion. If the valuation is required
for an intended use where significant changes in value over the duration
of a construction project may be of concern to the user (eg, where the
valuation is for loan security or to establish a project’s viability), the valuer
must highlight the potentially disproportionate effect of possible changes
in either the construction costs or end value on the profitability of the
project and the value of the partially completed property. A sensitivity
analysis may be useful for this intended use provided it is accompanied by
a suitable explanation.

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30. Valuation Framework

30.01 In accordance with IVS 100 Valuation Framework, the valuer must comply
with the valuer principles.

40. Scope of Work

40.01 In addition to the requirements contained within IVS 101 Scope of Work,
sections 20 and 30, investigations made during the course of a valuation
must be appropriate for the intended use of the valuation and the basis(es)
of value. In the case of a valuation review the scope of work must state
whether the review is a valuation process review or a value review.

40.02 Sufficient investigations and evidence must be assembled by means

such as inspection, inquiry, research, computation or analysis to ensure
that the valuation is properly supported. When determining the extent of
investigations and evidence necessary, professional judgement is required
to ensure it is fit for the purpose of the valuation.

Asset Standards: IVS 410 Development Property

40.03 When a valuation engagement involves reliance on information supplied
by a party other than the valuer, consideration should be given as to
whether the information is credible or that the information may otherwise
be relied upon without adversely affecting the credibility of the valuation.
Significant inputs provided to the valuer (eg, by management/owners)
should be considered, investigated and/or corroborated. In cases where
credibility or reliability of information supplied cannot be supported,
consideration should be given as to whether or how such information is
used (see IVS 101 Scope of Work, para 20.01 (j)).

40.04 In considering the credibility and reliability of information provided, the

valuer should consider matters such as:

(a) the intended use of the valuation,

(b) the significance of the information to the valuation conclusion,
(c) the expertise of the source in relation to the subject matter, and
(d) whether the source is independent of either the subject asset and/or
subject liability and/or the recipient of the valuation (see IVS 101 Scope
of Work, para 20.01 (a)).

40.05 The intended use of the valuation, the basis of value, the extent and limits on
the investigations and any sources of information that may be relied upon
are part of the valuation’s scope of work that must be communicated to all
parties to the valuation (see IVS 101 Scope of Work).

40.06 If, during the course of a valuation, it becomes clear that the investigations
included in the scope of work will not result in a credible valuation,
or information to be provided by third parties is either unavailable or
inadequate, or limitations on investigations are so substantial that
the valuer cannot sufficiently evaluate the inputs and assumptions, the
valuation will not comply with IVS (see IVS 101 Scope of Work, para 20.01).

50. Bases of Value

50.01 In accordance with IVS 102 Bases of Value, the valuer must select
the appropriate basis(es) of value for the intended use when valuing
development property.

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50.02 However, in considering the value of a development property, regard

should be given to the probability that any contracts in place, eg, for
construction or for the sale or leasing of the completed project, may
become void or voidable in the event of one of the parties being the subject
of formal insolvency proceedings. Further regard should be given to any
contractual obligations that may have a material impact on market value.
Therefore, it may be appropriate to highlight the risk to a lender caused
by a prospective buyer of the property not having the benefit of existing
building contracts and/or pre-leases, and pre-sales and any associated
warrantees and guarantees in the event of a default by the borrower.

50.03 The valuation of development property often includes a significant number

of assumptions and special assumptions regarding the condition or status
of the project when complete. For example, special assumptions may be
made that the development has been completed or that the property is
fully leased. As required by IVS 101 Scope of Work, significant assumptions
and special assumptions used in a valuation must be communicated to all
Asset Standards: IVS 410 Development Property

parties to the valuation and must be agreed and confirmed in the scope of
work. Particular care may also be required where reliance may be placed
by third parties on the valuation outcome.

50.04 Frequently it will be either impracticable or impossible to verify every

feature of a development property which could have an impact on
potential future development, such as where ground conditions have yet
to be investigated. When this is the case, it may be appropriate to make
assumptions (eg, that there are no abnormal ground conditions that
would result in significantly increased costs). If this was an assumption that
a participant would not make, it would need to be presented as a special
assumption.

50.05 In situations where there has been a change in the market since a project
was originally conceived, a project under construction may no longer
represent the highest and best use of the land. In such cases, the costs
to complete the project originally proposed may be irrelevant as a buyer
in the market would either demolish any partially completed structures
or adapt them for an alternative project. The value of the development
property under construction would need to reflect the current value of the
alternative project and the costs and risks associated with completing that
project.

50.06 For some development properties, the property is closely tied to a particular
use or business/trading activity or a special assumption is made that the
completed property will trade at specified and sustainable levels. In such
cases, the valuer must, as appropriate, also comply with the requirements
of IVS 200 Businesses and Business Interests and, where applicable, IVS 210
Intangible Assets.

50.07 Special assumptions used for valuation of a development property must

follow IVS 102 Bases of Value, section 60.

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60. Valuation Approaches and Methods

60.01 There are three main valuation approaches and one main valuation method
in relation to the valuation of development property. These are:

(a) the market approach (see section 70),

(b) the income approach (see section 80),
(c) the cost approach (see section 90), and
(d) the residual method, which is a hybrid of the market approach, the
income approach and the cost approach (see section 100).

60.02 When selecting a valuation approach and valuation method, in addition to

the requirements of this standard, the valuer must follow the requirements
of IVS (see 103 Valuation Approaches including para 10.04).

60.03 The valuation approach to be used will depend on the required basis of

Asset Standards: IVS 410 Development Property

value as well as specific facts and circumstances, eg, the level of recent
transactions, the stage of development of the project and movements
in property markets since the project started, and should always be that
which is most appropriate to those circumstances. Therefore, the exercise
of judgement in the selection of the most suitable approach is critical.

70. Market Approach

70.01 Some types of development property can be sufficiently homogenous
and frequently exchanged in a market for there to be sufficient data from
recent sales to use as a direct comparison where a valuation is required
(see para 100.09-100.16 of this standard).

70.02 In most markets, the market approach may have limitations for larger or
more complex development property, or smaller properties where the
proposed improvements are heterogeneous. This is because the number
and extent of the variables between different properties make direct
comparisons of all variables inapplicable, although correctly adjusted
market evidence (see IVS 103 Valuation Approaches, section 20) may be
used as the basis for a number of variables within the valuation.

70.03 For development property where work on the improvements has

commenced but is incomplete, the application of the market approach is
even more problematic. Such properties are rarely transferred between
participants in their partially-completed state, except as either part of
a transfer of the owning entity or where the seller is either insolvent or
facing insolvency and therefore unable to complete the project. Even in
the unlikely event of there being evidence of a transfer of another partially-
completed development property close to the valuation date, the degree to
which work has been completed would almost certainly differ, even if the
properties were otherwise similar.

70.04 The market approach may also be appropriate for establishing the value
of a completed property as one of the inputs required under the residual
method, which is explained more fully in the section on the residual
method (section 100 of this standard).

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80. Income Approach

80.01 Establishing the residual value of a development property may involve the
use of a cash flow model in some markets (see paras 100.09-100.16 of this
standard).

80.02 The income approach may also be appropriate for establishing the value
of a completed property as one of the inputs required under the residual
method, which is explained more fully in the section on the residual
method (see section 100 of this standard).

90. Cost Approach

90.01 Establishing development costs is a key component of the residual
approach (see section 100 of this standard).

90.02 The cost approach may also exclusively be used as a means of indicating
the value of development property such as a proposed development of a
Asset Standards: IVS 410 Development Property

building or other structure and infrastructure for which there is no active

market on completion.

90.03 The cost approach is based on the economic principle that a buyer will pay
no more for an asset than the amount to create an asset of equal utility.
To apply this principle to development property, the valuer must consider
the cost that a prospective buyer would incur in acquiring a similar asset
with the potential to earn a similar profit from development as could be
obtained from development of the subject property. However, unless there
are unusual circumstances affecting the subject development property,
the process of analysing a proposed development and determining the
anticipated costs for a hypothetical alternative would effectively replicate
either the market approach or the residual method as described above,
which can be applied directly to the subject property.

90.04 Another difficulty in applying the cost approach to development property

is in determining the profit level, which is its “utility” to a prospective buyer.
Although a developer may have a target profit at the commencement of a
project, the actual profit is normally determined by the value of the property
at completion. Moreover, as the property approaches completion, some
of the risks associated with development are likely to reduce, which may
impact on the required return of a buyer. Unless a fixed price has been
agreed, profit is not determined by the costs incurred in acquiring the land
and undertaking the improvements.

100. Residual Method

100.01 The residual method is normally a combination of market approach,
income approach and cost approach.

100.02 The market approach and/or the income approach may be appropriate for
estimating the gross development value of a property as one of the inputs
required under the residual method.

100.03 The residual method is so called because it indicates the residual amount
after deducting all known or anticipated costs required to complete the
development from the anticipated value of the project when completed
after consideration of the risks associated with completion of the project.
This is known as the residual value.

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100.04 The residual value can be highly sensitive to relatively small changes in the
forecast cash flows and the practitioner should provide separate sensitivity
analyses for each significant factor.

100.05 Caution is required in the use of this method because of the sensitivity of
the result to changes in many of the inputs, which may not be precisely
known on the valuation date, and therefore have to be estimated with the
use of assumptions.

100.06 The models used to apply the residual method vary considerably in
complexity and sophistication, with the more complex models allowing
for greater granularity of inputs, multiple development phases and
sophisticated analytical tools. The most suitable model will depend on the
size, duration and complexity of the proposed development.

100.07 In applying the residual method, the valuer should consider and evaluate
the reasonableness and reliability of the following:

Asset Standards: IVS 410 Development Property

(a) the source of information on any proposed building or structure, eg,
any plans and specification that are to be relied on in the valuation,
(b) any source of information on the construction and other costs that will
be incurred in completing the project and which will be used in the
valuation, and
(c) any source of information on the estimation of yield/discount rate that
will be used in the valuation.

100.08 The following basic elements should be considered in the application of

the residual method (see IVS 104 Data and Inputs):

(a) completed property value,

(b) construction costs,
(c) consultants’ fees,
(d) statutory fees,
(e) marketing costs,
(f) timetable,
(g) finance costs,
(h) development profit (on both land and building),
(i) contingency,
(j) discount rate.

Value of Completed Property

100.09 The first step requires an estimate of the value of the relevant interest
in the real property following notional completion of the development
project, which should be developed in accordance with IVS 103 Valuation
Approaches.

100.10 Regardless of the methods adopted under either the market or income

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approach, the valuer must adopt one of the two basic underlying
assumptions:

(a) the estimated value on completion is based on values that are current
on the valuation date on the special assumption the project had
already been completed in accordance with the defined plans and
specification, or
(b) the estimated value on completion is based on the special assumption
that the project will be completed in accordance with the defined
plans as of the valuation date and specification on the anticipated date
of completion.

100.11 Market practice and availability of relevant data and inputs should
determine which of these assumptions is more appropriate. However, it
is important that there is clarity as to whether current or projected values
are being used.
Asset Standards: IVS 410 Development Property

100.12 If estimated gross development value is used, it should be made clear that
these are based on special assumptions that a participant would make
based on information available on the valuation date.

100.13 It is also important that care is taken to ensure that consistent assumptions
are used throughout the residual value calculation, ie, if current values are
used then the costs should also be current and discount rates derived from
analysis of current prices.

100.14 If there is a pre-sale or pre-lease agreement in place that is conditional on

the project, or a relevant part, being completed, this will be reflected in
the valuation of the completed property. Care should be taken to establish
whether the price in a pre-sale agreement or the rent and other terms
in a pre-lease agreement reflect those that would be agreed between
participants on the valuation date.

100.15 If the terms are not reflective of the market, adjustments may need to be
made to the valuation.

100.16 It would also be appropriate to establish if these agreements would be

assignable to a purchaser of the relevant interest in the development
property prior to the completion of the project.

Construction Costs
100.17 The costs of all work required at the valuation date to complete the project
to the defined specification need to be identified. Where no work has
started, this will include any preparatory work required prior to the main
building contract, such as the costs of obtaining statutory permissions,
demolition or off-site enabling work.

100.18 Where work has commenced, or is about to commence, there will normally
be a contract or contracts in place that can provide the independent
confirmation of cost. However, if there are no contracts in place, or if the
actual contract costs are not typical of those that would be agreed in the
market on the valuation date, then it may be necessary to estimate these
costs reflecting the reasonable expectation of participants on the valuation
date of the probable costs.

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100.19 The benefit of any work carried out prior to the valuation date will be
reflected in the value but will not determine that value. Similarly, previous
payments under the actual building contract for work completed prior to
the valuation date are not relevant to current value.

100.20 In contrast, if payments under a building contract are geared to the work
completed, the sums remaining to be paid for work not yet undertaken
at the valuation date may be the best evidence of the construction costs
required to complete the work.

100.21 However, contractual costs may include special requirements of a specific

end user and therefore may not reflect the general requirements of
participants.

100.22 Moreover, if there is a material risk that the contract may not be fulfilled
(eg, due to a dispute or insolvency of one of the parties), it may be more
appropriate to reflect the cost of engaging a new contractor to complete

Asset Standards: IVS 410 Development Property

the outstanding work.

100.23 When valuing a partly completed development property, it is not

appropriate to rely solely on projected costs and income contained in any
project plan or feasibility study produced at the commencement of the
project.

100.24 Once the project has commenced, this is not a reliable tool for measuring
value as the inputs will be historic. Likewise, an approach based on
estimating the percentage of the project that has been completed prior
to the valuation date is unlikely to be relevant in determining the current
market value.

Consultants’ Fees
100.25 These include legal and professional costs that would be reasonably
incurred by a participant at various stages through the completion of the
project.

Statutory fees
100.26 These are the fees associated with getting necessary permissions and
approvals, which include but are not limited to building approvals,
environmental clearance and fire safety.

Marketing Costs
100.27 If there is no identified buyer or lessee for the completed project, it will
normally be appropriate to allow for the costs associated with appropriate
marketing, and for any leasing commissions and consultants’ fees incurred
for marketing not included under para 100.25 of this standard.

Timetable
100.28 The duration of the project from the valuation date to the expected date
of completion of the project needs to be considered, together with the
phasing of all cash outflows for construction costs, consultants’ fees, etc.

100.29 If there is no sale agreement in place for the relevant interest in the

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development property following practical completion, an estimate should

be made of the marketing period that might typically be required following
completion of construction until a sale is achieved.

100.30 If the property is to be held for investment after completion and if there
are no pre-leasing agreements, the time required to reach stabilised
occupancy needs to be considered (ie, the period required to reach a
realistic long-term occupancy level). For a project where there will be
individual letting units, the stabilised occupancy levels may be less than
100 percent if market experience indicates that a number of units may be
expected to always be vacant, and allowance should be considered for costs
incurred by the owner during this period such as additional marketing
costs, incentives, maintenance and/or unrecoverable service charges.

Finance Costs
100.31 These represent the cost of finance for the project from the valuation date
Asset Standards: IVS 410 Development Property

through to the completion of the project, including any period required

after physical completion to either sell the interest or achieve stabilised
occupancy. As a lender may perceive the risks during construction to differ
substantially from the risks following completion of construction, the
finance cost during each period may also need to be considered separately.
Even if an entity is intending to self-fund the project, an allowance should
be made for interest at a rate which would be obtainable by a participant
for borrowing to fund the completion of the project on the valuation date.

Development Profit
100.32 Allowance should be made for development profit, or the return that
would be required by a buyer of the development property in the market
place for taking on the risks associated with completion of the project
on the valuation date. This will include the risks involved in achieving the
anticipated income or capital value following physical completion of the
project. Development profit should be considered for both land as well as
building(s).

100.33 This target profit can be expressed as a lump sum, a percentage return
on the costs incurred on purchase of land as well as construction of the
building/structure or a percentage of the anticipated value of the project
on completion or a rate of return. Market practice for the type of property
in question will normally indicate the most appropriate option. The
amount of profit that would be required will reflect the level of risk that
would be perceived by a prospective buyer on the valuation date and will
vary according to factors such as:

(a) the stage which the project has reached on the valuation date. A project
which is nearing completion will normally be viewed as being less risky
than one at an early stage, with the exception of situations where a
party to the development is insolvent,
(b) whether a buyer or lessee has been secured for the completed
project, and
(c) the size and anticipated remaining duration of the project. The longer
the project, the greater the risk caused by exposure to fluctuations in
future costs and receipts and changing economic conditions generally.

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100.34 The following are examples of factors that should typically need to be
considered in an assessment of the relative risks associated with the
completion of a development project:

(a) unforeseen complications that increase construction costs,

(b) potential for contract delays caused by adverse weather or other
matters outside of the developer’s control,
(c) delays in obtaining statutory approvals,
(d) supplier failures,
(e) entitlement risk and changes in entitlements over the development
period,
(f) changes in environmental, social and governance requirements in
relation to the proposed development,
(g) regulatory changes,

Asset Standards: IVS 410 Development Property

(h) delays in finding a buyer or lessee
(i) delays in obtaining funding for the project, and
(j) discovery of irregularities in documentation such as deed or land
titling during or post project commencement.

100.35 Whilst all of the above factors will impact the perceived risk of a project
and the profit that a buyer or the development property would require,
care must be taken to avoid double counting, either where contingencies
are already reflected in the residual valuation model or risks in the discount
rate used to bring future cash flows to present value.

100.36 The risk of the estimated value of the completed development project
changing due to changed market conditions over the duration of the
project will normally be reflected in the discount rate or capitalisation rate
used to value the completed project.

100.37 The profit anticipated by the owner of an interest in development property

at the commencement of a development project will vary according to the
valuation of its interest in the project once construction has commenced.
The valuation should reflect those risks remaining at the valuation date
and the discount or return that a buyer of the partially completed project
would require for bringing it to a successful conclusion.

Discount Rate
100.38 In order to arrive at an indication of the value of the development property
on the valuation date, the residual method requires the application of a
discount rate to all future cash flows in order to arrive at a net present
value. This discount rate may be derived using a variety of methods (see
IVS 103 Valuation Approaches, Appendix A20.29–A20.40).

100.39 If the cash flows are based on values and costs that are current on the
valuation date, the risk of these changing between the valuation date and
the anticipated completion date should be considered and reflected in
the discount rate used to determine the present value. If the cash flows
are based on prospective values and costs, the risk of those projections

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proving to be inaccurate should be considered and reflected in the discount

rate.

110. Existing Asset

110.01 In the valuation of development property, it is necessary to establish the
suitability of the real property in question for the proposed development.
Some matters may be within the valuer’s knowledge and experience but
some may require information or reports from other specialists. Matters
that typically need to be considered for specific investigation when
undertaking a valuation of a development property before a project
commences include:

(a) whether or not there is a market for the proposed development,

(b) whether the proposed development of the highest and best use of the
property in the current market,
(c) whether there are other non-financial obligations that need to be
Asset Standards: IVS 410 Development Property

considered (political, environmental or social criteria),

(d) legal permissions or zoning, including any conditions or constraints
on permitted development,
(e) limitations, encumbrances or conditions imposed on the relevant
interest by private contract,
(f) rights of access to public roads or other public areas,
(g) geotechnical conditions, including potential for contamination or
other environmental risks,
(h) the availability of, and requirements to, provide or improve necessary
services, eg, water, drainage, sewerage and power,
(i) the need for any off-site infrastructure improvements and the rights
required to undertake this work,
(j) any archaeological constraints or the need for archaeological
investigations,
(k) sustainability and any client requirements in relation to green
buildings,
(l) economic conditions and trends and their potential impact on costs
and receipts during the development period,
(m) current and projected supply and demand for the proposed future
uses,
(n) the availability and cost of funding,
(o) the expected time required to deal with preparatory matters prior to
starting work, for the completion of the work and, if appropriate, to
rent or sell the completed property, and
(p) any other risks associated with the proposed development.

110.02 Where a project is in progress, additional enquires or investigations will

typically be needed into the contracts in place for the design of the project,
for its construction and for supervision of the construction.

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120. Data and Inputs

120.01 In accordance with IVS 104 Data and Inputs, the valuer must maximise the
characteristics of relevant and observable data to the degree that it is
possible.

120.02 In addition to the requirements contained within IVS 104 Data and Inputs,
the following hierarchy of comparable evidence should be followed for
development property valuations:

(a) direct comparable evidence,

(b) indirect comparable evidence,
(c) general market data,
(d) other sources.

120.03 When applying the hierarchy of comparable evidence the valuer must

Asset Standards: IVS 410 Development Property

ensure that the characteristics of suitable data and inputs contained within
IVS 104 Data and Inputs are fully applied.

120.04 The inputs selected must be consistent with the valuation models being
used to value the asset and/or liability (see IVS 104 Data and Inputs).

120.05 The selection, source and use of the inputs must be explained, justified,
and documented.

120.06 Significant ESG factors associated with the value of an asset should be
considered as part of the data and input selection process.

130. Valuation Models

130.01 In accordance with IVS 105 Valuation Models, the valuer must maximise as
many of the characteristics of suitable valuation models, as possible.

130.02 Valuation models must be suitable for the intended use of the valuation and
consistent with suitable inputs.

140. Documentation and Reporting

140.01 In addition to the minimum requirements in IVS 106 Documentation and
Reporting, section 30, a valuation report on development property must
include appropriate references to all matters addressed in the agreed
scope of work (see IVS 101 Scope of Work). The report must also include
comment on the effect on the reported value of any associated tangible
or intangible assets excluded from the actual or assumed transaction
scenario.

140.02 Moreover, in addition to the requirements contained within IVS 106

Documentation and Reporting, section 40, a valuation review report must
be issued for a valuation review and the valuation review report must state
whether the review is a valuation process review or a value review.

150. Special Considerations for Secured Lending

150.01 The appropriate basis of value for secured lending is normally market
value. However, in considering the value of a development property,

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regard should be given to the probability that any contracts in place, eg,
for construction or for the sale or leasing of the completed project may
become void or voidable in the event of one of the parties being the subject
of formal insolvency proceedings. Further regard should be given to any
contractual obligations that may have a material impact on market value.
Therefore, it may be appropriate to highlight the risk to a lender caused
by a prospective buyer of the property not having the benefit of existing
building contracts and/or pre-leases, and pre-sales and any associated
warrantees and guarantees in the event of a default by the borrower.

150.02 To demonstrate an appreciation of the risks involved in valuing development

property for secured lending or other intended uses, the valuer should
apply a minimum of two appropriate and recognised methods to valuing
development property for each valuation project, as this is an area where
there is often “insufficient factual or observable inputs for a single method
to produce a reliable conclusion” (see IVS 103 Valuation Approaches para
10.05).
Asset Standards: IVS 410 Development Property

150.03 The valuer must be able to justify the selection of the valuation approach(es)
reported and should provide an “as is” (existing stage of development) and
an “as proposed” (completed development) value (see IVS 400 Real Property
Interests) for the development property and record the process undertaken
and a rationale for the reported value (see IVS 106 Documentation and
Reporting, section 30).

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IVS 200 IVS 210 IVS 220 IVS 230 IVS 300 IVS 400 IVS 410 IVS 500
Businesses Intangible Non- Inventory Plant, Real Development Financial
and Assets Financial Equipment Property Property Instruments
Business Liabilities and Interests
Interests Infrastructure

ContentsParagraphs
Objective10
Scope20
Valuations of Financial Instruments 30

Asset Standards: IVS 500 Financial Instruments

Data and Inputs Overview 40
Characteristics of Data and Inputs for Financial Instruments 50
Selecting Inputs 60
Using Data and Inputs 70
Documentation for Data and Inputs 80
Valuation Models Overview 90
Characteristics of Appropriate Valuation Model 100
Valuation Model Selection 110
Testing a Valuation Model 120
Documentation for Valuation Models 130
Quality Control Overview 140
Characteristics of Appropriate Quality Control 150
Application of Quality Control 160
Review and Challenge 170
Valuation Control Framework 180
Valuation Model Use 190
Documentation200

10. Objective
10.01 The principles contained in the General Standards apply to valuations of
financial instruments. This standard contains additional requirements or
specific examples of how the General Standards may apply for valuations
of financial instruments in the areas of data and inputs, valuation methods
and valuation models, and quality control.

20. Scope
20.01 This asset standard must be applied in all valuations of financial instruments
used for, but not limited to, financial, tax, or regulatory reporting.

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30. Valuation of Financial Instruments

30.01 There are a number of approaches to valuing financial instruments. In
certain cases, values for financial instruments are observable and readily
available based on published trades in the exact security. In other cases,
values are developed using industry-standard models based on inputs and
adjustments with varying degrees of observability. For more complex or
less liquid products, values may require bespoke models or be developed
using internally-developed inputs or assumptions. In determining values,
professional judgements may be required in the areas of data and inputs,
valuation models, and quality controls. Depending on the nature of the
financial instrument being valued, as well as the frequency and the
complexity of the valuation, the valuer may implement a range of processes
which are highly automated using systematic mappings and data feeds, to
others that are highly manual and subjective.

30.02 The valuer must use professional judgement to determine the nature and
Asset Standards: IVS 500 Financial Instruments

extent of effort that is performed to develop a value that is consistent with

the scope of work and intended use. The valuer must design, implement,
and execute processes in the valuation, including quality controls,
that appropriately address features of the financial instrument being
valued, data, valuation models and other infrastructure required to value
the financial instrument. In applying this, the valuer must understand
the contractual, structural, and performance features of the financial
instrument to be valued, as well as its liquidity and other information in
the market and economic environment as of the valuation date, such as
legal or regulatory factors, potentially impacting the value.

30.03 Valuation risk exists in the valuation of financial instruments. As such,

throughout the valuation, procedures and controls must be put in place
that enable valuation risk to be assessed and managed to help ensure
that the value is appropriate for its intended use. Any significant valuation
risk identified during the design, implementation, or execution of the
valuation must have quality controls to address that risk and should have
an appropriate level of review and challenge.

30.04 If the valuer does not possess the necessary technical skills, experience,
data, models, or knowledge to perform all aspects of a valuation, the valuer
should seek the assistance of a specialist or a service organisation providing
this is agreed by the client and disclosed.

30.05 The valuer may consider delegating aspects of a valuation to specialists or

service organisations either within or outside of the valuer’s organisation.
To perform a valuation in these circumstances, the valuer must inform
these parties of the nature of the work to be performed. In order to assert
compliance with IVS on the value, the valuer must determine that these
parties have performed their specific procedures in a manner that is
consistent with IVS or perform incremental procedures to comply with IVS.

30.06 As part of a valuation, quality controls must be in place. Quality controls

should include a degree of review and challenge. Review and challenge
should assess the process implemented and judgements made during the
valuation and in determining the value, including review of work performed
by specialist or service organisations. In those circumstances in which review

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and challenge is performed, the processes should be performed by an

individual or function that has appropriate skills and experience in valuing
financial instruments.

40. Data and Inputs Overview

40.01 This section supplements IVS 104 Data and Inputs, adding greater detail as
it relates to financial instruments.

40.02 A broad range of data, assumptions, and adjustments are used in

developing inputs used in valuations for financial instruments. Inputs are
derived from data, along with assumptions and adjustments, to develop a
value.

40.03 Data, assumptions, and adjustments should be based on factual

information, when available. Valuations should use observable data, such
as published prices and yields, but may also require the use of assumptions
and adjustments.

Asset Standards: IVS 500 Financial Instruments

40.04 The characteristics of the data, assumptions, and adjustments used in
developing inputs must be understood by the valuer.

40.05 The valuer is responsible for assessing and selecting relevant data,
assumptions, and adjustments to be used as inputs in the valuation based
upon professional judgement and professional scepticism. The valuer must
determine the data that is relevant, which for the purposes of IVS 500
Financial Instruments means “fit for use” in terms of the asset and/or liability
being valued, the scope of work, the valuation method, and the intended
use.

40.06 In circumstances where directly relevant data is not available and therefore
proxy data is used, the valuer must assess that the various instruments to
be used as proxies are sufficiently comparable to the asset and/or liability
being valued based on professional judgement.

40.07 A specialist or a service organisation may be used to obtain either data,

assumptions, or adjustments to develop inputs. The valuer, however,
remains ultimately responsible for selecting inputs appropriate for the
valuation.

40.08 Processes and controls must be implemented to ensure that the selection
of data, assumptions, and adjustments in the valuation, along with the
inputs ultimately used, is relevant to value the assets and/or liabilities in
accordance with the scope of work, the valuation method and the intended
use. Such processes and controls should be documented.

40.09 Individuals with the appropriate experience must be responsible for

identifying and ensuring that appropriate data, assumptions and
adjustments are incorporated in the design, implementation and execution
of the valuation.

40.10 For a valuation to produce a value consistent with the intended use, a
valuation must use inputs that are relevant for the valuation approach for
the financial instrument.

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40.11 The use of data, assumptions, adjustments and inputs inherently presents
valuation risk. Valuation risk may arise due to:

(a) the use of inappropriate data, assumption, adjustments or inputs, or

(b) the misapplication of data, assumptions, and adjustments or inputs.

There are two types of valuation risk for data, assumptions, adjustments
and inputs. Those that are transparent and operational, and those that are
generally related to assumptions made by the valuer. In developing inputs,
any significant valuation risk should be mitigated.

50. Characteristics of Data and Inputs for Financial Instruments

50.01 The identification and selection of relevant data and inputs and applying
them appropriately is an important part of the valuation to produce values
consistent with the scope of work and intended use.

50.02 The valuer must apply professional judgement to balance the characteristics
Asset Standards: IVS 500 Financial Instruments

of relevant data listed below in order to choose the inputs used in the
valuation. The characteristics of relevant data are shown below.

(a) accurate: data are free from error and bias and reflect the characteristics
that they are designed to measure,
(b) complete: the set of data is sufficient to address the attributes of the
assets and/or liabilities,
(c) timely: data reflect the market conditions as of the valuation date,
(d) transparent: the source of the data can be traced from their origin.

50.03 In certain cases, the data may not incorporate all of these characteristics.
Therefore, the valuer must assess data and conclude, based on professional
judgement, that the data, including any assumptions or adjustments, is
relevant to value the asset and/or liability in accordance with the scope of
work, valuation method, valuation model and intended use.

60. Selecting Inputs

60.01 It is the valuer who is responsible for evaluating the data, assumptions,
and adjustments used to develop inputs used to execute the valuation
and to develop the resulting value. The valuer must be aware of market
conventions to be able to determine the appropriateness of data,
assumptions and adjustments that are used to develop inputs as of a
valuation date. Conventions, such as quoted prices, spread or yield, ticks
or basis points, and cash flow assumptions, must be understood and
appropriately incorporated into the valuation.

60.02 The valuer must identify and assess the source of data, assumptions, and
adjustments to develop inputs to determine any limitations or bias. This
includes data and inputs that are internally sourced and acquired externally
from service organisations and specialists.

60.03 Inputs must be selected from relevant data, assumptions, and adjustments
in the context of the asset and/or liability being valued, the scope of work,
the valuation method, the valuation model and intended use.

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60.04 Inputs must be sufficient for the valuation models being used to value the
asset and/or liability based on the valuer using professional judgement.

60.05 The valuer must consider whether data, assumptions, adjustments or inputs
are significant to the valuation and the resulting value when determining
the efforts to obtain such information, including the relevancy of any
proxy data used.

60.06 To the extent the valuer is unable to develop significant inputs that are “fit
for use”, the valuer should pursue other methodologies to perform the
valuation or consider its ability to perform the valuation appropriate for the
intended use.

60.07 When valuing portfolios or groups of similar assets and/or liabilities, the
valuer should assess whether the inputs are appropriately consistent across
those portfolios or group.

60.08 If a valuation is recurring over time and certain data, assumptions,

Asset Standards: IVS 500 Financial Instruments

adjustments and inputs may be collected and used over time, they must
be reassessed as of any valuation date to determine if they continue to be
suitable.

60.09 If significant inputs are inadequate or cannot be sufficiently justified, the

valuation would not comply with IVS.

70. Using Data and Inputs

70.01 The valuer must determine that data, assumptions, adjustments, and inputs
are appropriate for the intended use as of the valuation date. As such, the
valuer must perform quality control procedures over the data assumptions,
adjustments, and inputs used for the valuation. Such procedures must
address any significant valuation risks associated with the data and controls.
A set of procedures may include but not be limited to quantitative testing
by comparing with authoritative sources, qualitative or quantitative testing
of sources of data or inputs, gaps, identifying outliers or performing factor
attribution which correlates changes in data with changes in valuation
results.

70.02 The valuer must consider whether data, assumptions, adjustments,

or inputs are significant to the valuation and the resulting value when
determining the efforts to perform quality controls.

70.03 The valuer must ensure that quality controls over data, assumptions,
adjustments, and inputs exist throughout the valuation. This includes
data, assumptions, adjustments and inputs that are internally sourced and
acquired externally from service organisations and specialists.

70.04 The valuer should use data and inputs that are as contemporaneous
as possible to the valuation date. As such, the valuer must design and
implement quality controls to assess the timeliness of data and eliminate
stale data:

(a) In the absence of timely data, the valuer should consider data that can
be reasonably believed to approximate the data that would have been
timely. For example, the valuer’s judgement determines which is the
best proxy of the valuation date.

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(b) If data, assumptions, adjustments, or inputs are not as of the valuation

date, the valuer must assess if these are suitable, as well as the need
for the additional quality controls. For example, historical data may be
appropriate to develop inputs for a specific financial instrument. The
valuer should assess that such data is relevant for the intended use.
(c) For recurring valuations, the valuer must reassess data, assumptions,
adjustments, or inputs as of any valuation date to determine if they
continue to be suitable. There is no consistent timeframe at which
data, assumptions, adjustments or inputs might not be suitable since
it will depend on the data being used and the market conditions at
the time of their derivation and their use in the valuation. For proxies,
whether the degree of similarity remains valid should be assessed.

70.05 Since data, assumptions, adjustments and inputs can be provided or

used by various parties across a valuation process, individuals with the
appropriate experience must be responsible for identifying and ensuring
that these data elements are reflected appropriately in the valuation.
Asset Standards: IVS 500 Financial Instruments

Once data, assumptions, adjustments and inputs have been determined

to be appropriate, they should not be altered or amended unless they go
through a rigorous quality control process. If the valuer uses a data set
that is altered, the original data, assumptions, adjustments and inputs set
should remain available for comparison.

80. Documentation for Data and Inputs

80.01 The valuer must document the basis for conclusion on the overall quality
of the significant data, assumptions, adjustments and inputs used in the
valuation. Such documentation must include sources, steps and why the
valuer decided to use such data, assumptions, adjustments and inputs. In
addition, the documentation should include a description of any quality
controls implemented.

80.02 The documentation must be adequate to allow another valuer, applying

professional judgement, to understand the scope of the valuation, the work
performed, and the conclusions reached.

80.03 The procedures of the review and challenge function should be documented
to allow another valuer to assess the degree of work performed and the
basis for conclusions drawn.

80.04 For recurring valuations, the valuer must explain and document the basis for
the significant data, assumptions, adjustments and inputs used, including
significant changes that occurred and why they were appropriate.

90. Valuation Models Overview

90.01 This section supplements IVS 105 Valuation Models, adding greater detail
as it relates to financial instruments.

90.02 The objective of this section of this standard is to set out the requirements
pertaining to the appropriate selection and use of models in a valuation.

90.03 A valuation model is a quantitative implementation of a method in whole

or in part that converts inputs into outputs used in the development of a
value.

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90.04 A valuation model may rely on other valuation models to derive its inputs or
adjust its outputs.

90.05 A valuation model may be developed internally or sourced externally from

a specialist or a service organisation.

90.06 Individuals with the appropriate experience must be responsible for

developing implementing, testing and using valuation models.

100. Characteristics of Appropriate Valuation Models

100.01 For a valuation to produce values consistent with the intended use, a
valuation must use valuation models that are suitable for the valuation
approach for the financial instrument.

100.02 The valuer must determine that the valuation model is appropriate, which
for the purposes of IVS 500 Financial Instruments means “fit for use” in
terms of assets and/or liabilities being valued, the scope of work, and the

Asset Standards: IVS 500 Financial Instruments

valuation method.

100.03 The valuer must apply professional judgement to balance the characteristics
of a valuation model shown below:

(a) accuracy: the valuation model is free from error and functions in a
manner consistent with the objectives of the valuation,
(b) completeness: the valuation model addresses all the features of the
asset and/or liability to determine value,
(c) timeliness: the valuation model reflects the market conditions as of the
valuation date,
(d) transparency: all persons preparing and relying on the valuation model
must understand how the valuation model works and its inherent
limitations.

100.04 In certain cases, the valuation model may not incorporate all of these
characteristics. Therefore, the valuer must assess and conclude whether
the valuation model is appropriate to value the assets and/or liabilities in
accordance with the scope of work, the valuation method and intended use.

110. Valuation Model Selection

110.01 The process of selecting a valuation model that is for the intended use
involves professional judgement. The potential for error in valuation models
necessitates the importance of sound and comprehensive processes
around valuation model development (see IVS 105 Valuation Models, section
40):

(a) the selection of an appropriate valuation model should include the

following processes:

(i) design, develop, and implement: determining the appropriate
valuation approaches and techniques,

(ii) test and calibrate to the market (ie, recent transactions or
quotes): ensure that the implementation is consistent with the
intended use,

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(iii) document: documenting the policies and procedures undertaken
around the entire model development process and consistent with
the valuation’s intended use and any limitations or adjustments.

(b) processes should be in place when relying on valuation models

developed by a specialist or a service organisation to assess such
models to a similar level as an internally developed model.

120. Testing a Valuation Model

120.01 Valuation models must be tested prior to use. Testing a valuation model is
integral in determining whether the various components and its overall
function are performing as intended, and must include:

(a) appropriateness for its intended use,

(b) the suitability of the inputs used by the valuation model,
(c) mathematical accuracy,
Asset Standards: IVS 500 Financial Instruments

(d) operational accuracy (ie, data links, etc),

(e) robustness (ie, the model outputs respond appropriately over a range
of inputs and if there are any limitations).

120.02 The nature of testing and analysis will depend on the type of valuation
model and underlying financial instrument being valued. A variety of
tests will likely be required to develop an appropriate valuation model. If
valuation model testing reveals the valuation model is not suitable for its
intended use, the valuation model must be remediated or rejected.

120.03 The valuer must understand a valuation model’s capabilities and

limitations given its simplifications and assumptions. Limitations come
in part from weaknesses in the valuation model due to its shortcomings,
approximations, and uncertainties. Limitations are also a consequence of
assumptions underlying a valuation model that may restrict the scope to a
limited set of specific circumstances and situations.

120.04 Testing should be conducted to assess the potential limitations of a

valuation model and to evaluate its behaviour over a range of inputs.
Testing must also assess the impact of assumptions and identify situations
where a valuation model is not fit for its intended use or becomes unreliable.
Testing must be applied under a variety of market conditions, including
scenarios that are outside the range of ordinary expectations. Extreme
scenarios must be evaluated to identify any boundaries of valuation model
effectiveness.

120.05 An appropriate valuation model must have documented evidence supporting

significant modelling choices, including the valuation methodology,
valuation modelling assumptions, inputs, and specific mathematical
calculations. As part of this process, significant inputs to the valuation model
should be subjected to analysis by both evaluating the quality and extent
of the valuation model and conducting additional analysis and testing as
necessary. The following are core validation processes around evaluating
conceptual soundness:

(a) assessing whether the valuation model is consistent with the scope of
work and intended use,

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(b) comparison of valuation methodologies adopted to alternative theories

and approaches,
(c) modelling assumptions must be assessed, with analysis of their impact
on valuation model outputs and limitations,
(d) the relevance and reliability of data, assumptions, adjustments and
inputs used by the valuation model must be evaluated.

120.06 If testing indicates that a valuation model may be inaccurate or unstable,

there must be policies in place that call for the valuation model to be either
modified, have limitations placed on its use, replaced, or abandoned.

120.07 Qualitative information and professional judgement used in a valuation

model must be evaluated, including the logic, modelling assumptions, and
types of inputs used, to establish the conceptual soundness of the valuation
model and set appropriate conditions for its use. The validation process
must ensure that qualitative and professional judgement assessments are

Asset Standards: IVS 500 Financial Instruments

conducted in an appropriate and systematic manner, are supported, and
are documented.

120.08 Maintaining a suitable valuation model requires a monitoring process that

involves periodic reviews, undertaken by qualified and objective reviewers,
to an extent that is appropriate for the level of valuation risk associated
with the continued use of the valuation model.

120.09 There should be procedures for responding to any deficiencies that are
discovered during the monitoring process.

120.10 For valuation models that are relied upon on an ongoing basis or in the case
of multi-use models, regular monitoring must be performed to evaluate
whether they continue to be fit for their intended use.

120.11 Ongoing monitoring must be performed periodically, with a frequency

appropriate to the nature of the model usage, the availability of new data
or modelling approaches, changes in the market environment, and the
magnitude of the valuation risk involved.

120.12 A process must be in place to monitor the maintenance of an appropriate

valuation model’s core characteristics, including:

(a) ongoing review of appropriateness,

(b) ongoing review of accuracy,
(c) ongoing review of transparency.

120.13 Any ongoing monitoring should include many of the tests employed as
part of the initial valuation model development process:

(a) operational accuracy: there must be process verification checks that all
valuation model components are functioning as designed and continue
to be operationally accurate. Tests must also be conducted to assess
ongoing model robustness and stability,
(b) input verification: there must be a process to verify that all valuation
model inputs remain complete, reasonable, and accurate, and continue
to represent the highest quality available,

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(c) model control: valuation models must be subject to change control

procedures to ensure that the model logic is correct. Change control
procedures should address approval requirements, documenting
changes and subsequent validation. Model overrides (impacting
valuation model inputs or outputs) should be monitored and assessed
to determine whether they are valid and have been appropriately
documented. Model overrides need to be tracked and analysed to
assess their impact on model performance. Some model overrides
may indicate that a valuation model is not performing as intended or
has limitations.

120.14 An ongoing monitoring process evaluates the impact of change relative to

the original valuation model development parameters and environment.
Valuation models must be evaluated to determine whether changes in
the financial instrument itself, intended use of the valuation, or market
conditions necessitate adjustment, redevelopment, or replacement of the
valuation model.
Asset Standards: IVS 500 Financial Instruments

120.15 An ongoing monitoring process should also consider new information

as it becomes available, particularly if it was not available during the
original valuation model development process. New empirical evidence
or theoretical research may suggest the need to modify or even replace
original methods.

120.16 Any valuation model limitations and sensitivities identified in the

development process must be regularly assessed as part of the ongoing
monitoring. If valuation models are known to only work for certain ranges
of input values, market conditions, or other factors, they must be monitored
to identify situations where these constraints are approached or exceeded.
As part of the ongoing monitoring process, depending on the availability
of benchmarking information, it may be appropriate to compare a given
valuation model’s outputs relative to estimates from alternative internal
or external models. Discrepancies between the outputs from a valuation
model to benchmarks should trigger investigation into the sources and
degree of the differences, and examination of whether they are within
an expected or appropriate reasonable range given the nature of the
comparison. The results of a benchmark analysis may suggest revisions to
a valuation model; however, differences do not necessarily indicate that a
valuation model is in error. A benchmark itself is an alternative prediction,
and the differences may be due to differences in the data or method used.
Rather, if a valuation model and benchmark match well, that is evidence in
favour of the valuation model.

120.17 If significant deficiencies are identified in the valuation model as part of

quality control processes, including review and challenge, the resulting
value is not IVS compliant.

130. Documentation for Valuation Models

130.01 Documentation should be sufficient to provide a record of the valuation
and include sufficient information to describe the valuation conclusion
reached, such that the valuer applying professional judgement is able to
understand and review the valuation (see IVS 105 Valuation Models, section
50).

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130.02 There should be documentation of significant inputs to the valuation model

including details of model design, development, implementation, and
testing.

130.03 The valuer must document all relevant valuation information based upon
the intended use, including accounting, legal, and regulatory requirements,
recognising that there is professional judgement as to the evidence that
should be included.

130.04 Documentation should be sufficiently detailed so that parties unfamiliar

with a valuation model, such as valuation model users, can understand how
the valuation model operates, its limitations, and its key assumptions.

130.05 An appropriate valuation model must have documentation that includes

the following information:

(a) valuation methodology selection process, including theoretical

Asset Standards: IVS 500 Financial Instruments

approach and supporting research and alternatives assessed,
(b) valuation model design and formulae,
(c) limiting assumptions and conditions inherent in the valuation model,
(d) input selection process,
(e) nature and rational for judgmental assumptions,
(f) valuation model testing procedures and results,
(g) validation procedures and results (if applicable) and when it should be
re-validated,
(h) valuation model limitations and mitigation of limitations, if they exist,
(i) conclusion and any qualifications if applicable.

140. Quality Control Overview

140.01 This quality control section supplements IVS 100 Valuation Framework,
section 30, adding greater detail as it relates to financial instruments.

140.02 Quality controls are procedures that ensure the valuation is performed
consistent with IVS. The nature and extent of the quality control process
depends on the intended use, intended user, the characteristics of the asset
and/or liability being valued and the complexity of the valuation.

140.03 Quality controls may be automated and/or manual and may include but
are not limited to data reviews, valuation model validations, independent
recalculation, back testing, and fact checking.

140.04 Quality controls must be appropriately designed and executed in a manner

that affirms the completeness and integrity of the valuation process and
the appropriateness for the intended use of the conclusion of value.

140.05 Quality controls must be appropriately documented. Documentation

must be adequate to allow the valuer applying professional judgement to
understand the scope of the quality control, the work performed, and the
conclusions reached.

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140.06 For recurring valuations, quality controls must be periodically assessed

to ensure that integrity and completeness of the control environment
is appropriate as of the valuation date. The review process must be
documented.

140.07 The valuer may delegate the performance of the quality control process
(eg, engage a service organisation or a specialist) but cannot discharge their
own accountability for the valuation and the value.

140.08 Quality controls should include a degree of review and challenge.

150. Characteristics of Appropriate Quality Control

150.01 In selecting and implementing quality controls, such controls must address
the following:

(a) complete: valuations produce values that are sufficient to address

attributes of the assets and/or liabilities,
Asset Standards: IVS 500 Financial Instruments

(b) effective: successful in producing an IVS-compliant value,

(c) transparent: provide a record of the valuation and include sufficient
information to describe the valuation conclusion reached, such that
the valuer applying professional judgement is able to understand and
review the valuation.

160. Application of Quality Control

160.01 Quality controls must be designed and implemented to help ensure that
valuations are performed in compliance with IVS.

160.02 To achieve this, quality controls should confirm as of the valuation date that
quality control processes have ensured the following:

(a) completeness of the population of instruments to be valued,

(b) accuracy of the financial instruments to be valued with sufficient
descriptive details to perform the valuation,
(c) Quality control processes have been executed over:

(i) data, assumptions, adjustments and inputs,

(ii) the selection of models to determine value,


(iii) manual or other interventions over the established process,
(iv) communication and documentation of the valuation process and

the resultant value.

160.03 For valuations that include the delegation to other specialists or service
organisations, the valuer must understand and assess the roles and
responsibilities, the work performed, and the results reached.

160.04 Quality controls should be reassessed as of any valuation date since

financial instruments and the environment in which they are valued can
change over time.

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170. Review and Challenge

170.01 Review and challenge is an assessment of the valuation or the value
independent of the valuer. In performing a valuation, review and challenge
should be performed to assess the reasonableness of the decisions made
by the valuer throughout the valuation and compliance with IVS.

170.02 With respect to models, an independent validation should be performed

to assess the appropriateness of the selected valuation model in line with
design objectives and intended use, to determine if it is performing as
designed, and whether valuation model limitations have been identified
and the impact of limitations on value are understood.

170.03 A validation process should be performed by one or more individuals

with sufficient knowledge, skills, and expertise relative to the financial
instrument being valued. In addition, they should have the authority to
effectively challenge the valuation model.

Asset Standards: IVS 500 Financial Instruments

170.04 The extent and rigor of validation procedures should be commensurate
with the intended use of the valuation model. The specific tests performed
and their frequency are matters that depend on the circumstances and
must be defined and appropriately set as part of the overall valuation.

170.05 For valuation models that are intended to be used on an ongoing basis, the
validation process should continue periodically while the valuation model
remains in use.

170.06 Validation procedures and the results of the validation must be documented
and transparent to the valuer and users of the model in a timely manner.

170.07 Validation procedures and the results of the validation of third-party

valuation models must be documented and transparent to the valuer and
users of the valuation model in a timely manner.

180. Valuation Control Framework

180.01 For valuations with more complexity or involving multiple individuals or
processes, the assignment of responsibilities must be documented to
ensure that accountability for the execution of all components is clear by
developing a valuation control framework.

180.02 The valuation control framework should address:

(a) clear definition of the roles and responsibilities of each party in the
valuation,
(b) identification of responsible parties, including quality control and
review and challenge, and confirmation that responsible parties
have correct and sufficient capabilities and resources to fulfil their
responsibilities,
(c) valuation assessment, escalation, and remediation procedures,
(d) the types and extent of valuation risk associated with the valuation,

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(e) for each instrument type either directly identify or define attributes for
each of the following:

(i) data and inputs,

(ii) valuation models,

(iii) requirements for documentation across the valuation,

(iv) timeline and frequency of valuations.

180.03 The valuer may delegate the performance of the process (eg, engage a
service organisation or a specialist). The impact of such should be considered
in the valuation control framework.

180.04 For recurring valuations, the valuation control framework should be

reviewed and updated to help ensure the valuation control framework
continues to be relevant.
Asset Standards: IVS 500 Financial Instruments

190. Valuation Execution

190.01 There must be a process in place to ensure the proper usage of inputs and
valuation models to develop a value in accordance with the intended use.
Proper usage should include an understanding of process to develop and
use inputs and valuation models, along with any limitations, uncertainties,
or inaccuracies.

190.02 There must be a process in place to assess the valuation for compliance
with the scope of work and the value for its intended use.

190.03 Limitations, uncertainties, or inaccuracies must be assessed to determine

whether the value has been developed appropriately for the intended use.

190.04 Calibration must be performed during a valuation. Calibration is a

comparison of outputs from a valuation model with actual observed and
or expected outcomes. Actual outcomes could include prices observed
in secondary market trading or prices observed in originations. Expected
outcomes may consist of established expected reasonable ranges of values
as compared with implied valuation metrics or values from alternative
valuation models. Expected outcomes may also consist of professional
judgement to confirm whether the resultant values make sense.

190.05 A variety of quantitative and qualitative testing and analytical techniques

should be used in the assessment of the calibration analysis. Tests
should be based on a valuation model’s methodology, its complexity, data
availability, and the valuation risk relating to the valuation. Tests should be
designed for each situation, as not all tests will be effective or feasible in
every circumstance.

190.06 If the analysis produces evidence of inappropriate inputs or valuation model

performance, action must be taken to address the nature of the issue and
understand the causes and remediation of the variance.

200. Documentation
200.01 Documentation must be sufficient to describe the quality controls
implemented, including review and challenge (if any). The documentation
must contain sufficient detail to be considered reasonable by the valuer
applying professional judgement.

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200.02 To the extent there are issues identified during the quality control process,
including review and challenge, the issue(s) identified, along with the bias
for decisions made and the resulting actions, should be documented.

200.03 For recurring valuations, documentation must be reviewed and updated at

regular intervals to help ensure they continue to meet their objectives. In
addition, a review must be conducted in the event of significant changes to
the financial instruments or their environment.

Asset Standards: IVS 500 Financial Instruments

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International Valuation Standards Council,

20 St Dunstan’s Hill, London EC3R 8HL,
United Kingdom

Email contact@ivsc.org
Web www.ivsc.org

INTERNATIONAL VALUATION
STANDARDS COUNCIL