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International Valuation StandardsBy Ray Bower, AACI, P.App, Chair, International Valuation Standards Sub-CommitteePrimer onInternational Valuation Standards – Part 4In previous articles dealing with InternationalValuation Standards (IVS), a brief summary ofthe content and makeup of the 2007 Editionwas presented (Part 1). The next article provideda brief comparison between Canadian UniformStandards of Professional Appraisal Practice(CUSPAP) and IVS as each deals with market valuebasis for appraising (Part 2). The third installmentprovided a refresher course on generally acceptedvaluation principles (GAVP) and identified thevarious property types covered in IVS. (Part 3).This article will briefly summarize IVS 1 – MarketValue Basis of Valuation and IVS 2 – BasisOther Than Market Value.IVS 1 – MARKET VALUEBASIS OF VALUATIONThe introduction of this section of IVS providesthe following definition of market value as being“the estimated amount for which a propertyshould exchange on the date of valuation betweena willing buyer and a willing seller in an arm’slength transaction after proper marketing whereinthe parties had each acted knowledgably, prudentlyand without compulsion.” 1This very definition appears in CanadianUniform Standards of Appraisal Practice (CUSPAP)in the Practice Notes at 12.16.3. However, IVSgoes on to discuss in detail various words orphrases contained within this definition. Such as‘the estimated amount…,’ ‘a property shouldexchange…,’ ‘on the date of valuation…,’ ‘awilling buyer…,’ etc. This discussion clarifiesthese important concepts that form part of thedefinition. For example, the ‘willing buyer’ isreferred to as one who is motivated, but notcompelled to buy; one that is not over-eagernor determined to buy at any price; one whopurchases in accordance with the realities onthe current market and with current marketexpectations, rather than in relation to animaginary or hypothetical market that cannot bedemonstrated or anticipated to exist. While thisexplanation may be obvious to a professionalappraiser, similar discussions appear throughoutIVS and provide an excellent resource that canassist our members in understanding variousvaluation concepts. These discussions alsocontain verbiage an appraiser can use to assistthe reader of a report in understanding thesesame concepts.The Statement of Standard provides rulesthat an appraiser must adhere to when performinga market value appraisal. As previouslypointed out, these rules are not unfamiliar.CUSPAP Appraisal Standard Rules and IVS-1basically mirror each other. Indeed, in the IVS-1Statement of Standard, it appears that the onlymajor difference from CUSPAP is the certificationstatement. In IVS ‘certification’ is referred to as‘compliancy.’ In order to adhere to IVS-1 whenperforming an appraisal for financial accountingpurposes, an appraiser must include a certificationstatement, which includes the following:“My analyses, opinions, and conclusions weredeveloped, and this report has been prepared, inconformity with the Canadian Uniform Standardsof Professional Appraisal Practice and theInternational Valuation Standards;”IVS 2 – BASIS OTHERTHAN MARKET VALUEThe objective of IVS-2 is to identify, explainand distinguish bases of valuation other thanmarket value and establish standards for theirapplication. Alternative valuation basis may beappropriate in specific circumstances and IVS-2provides the distinctions between market valueand these various other valuation bases whichgenerally require different assumptions, which, ifnot clearly identified, may result in a misinterpretationof the valuation.These other valuation bases fall into threeprinciple categories.The first category reflects the benefits thatan entity enjoys from ownership of an asset. Thevalue is specific to that entity. Although, undersome circumstances, it may be the same as theamount that could be realized from the sale of theasset, this value essentially reflects the benefitsreceived by holding the asset, and, therefore, doesnot necessarily involve a hypothetical exchange.Investment value falls under this category. Differencesbetween the value of an asset to a particularentity and the market value provide the motivationfor buyers or sellers to enter the marketplace.The second category represents the price thatwould be reasonably agreed between two specificparties for the exchange of an asset. Although theparties may be unconnected and have negotiatedat arm’s length, the asset is not necessarilyexposed in the wider market and the price agreedmay be one that reflects the specific advantages(or disadvantages) of ownership to the partiesinvolved rather than the market at large. Thiscategory includes fair value, special value andsynergistic value.The third category is value determined inaccordance with a definition set out in a statuteor a contract. 2 It is worthwhile to expand on theseconcepts in order to be able to distinguish themfrom market value.Fair value: The amount for which an asset couldbe exchanged between knowledgeable, willingparties in an arm’s-length transaction.For most purposes, valuations under Interna-24Canadian Property Valuation Volume 53 | book 3 | 2009 Évaluation Immobilière au CanadaClick HERE to return to Table of Contents

tional Financial Reporting Standards (IFRS) requirethe use of fair value. This is a specific applicationof fair value that may require more restrictiveassumptions than are required in general use.A common application of Fair Value is forassessing the price that is fair for the shareholderin a business, where particular synergies betweentwo specific parties may mean that the price thatis fair between them is different from the pricethat might be obtainable in the wider market.Investment value: The value of a propertyto a particular investor, or class of investors, foridentified investment or operational objectives.This subjective concept relates a specific propertyto a specific investor, group of investors, orentity with identifiable investment objectivesand/or criteria.Special purchaser: A purchaser to whom aparticular asset has Special Value because ofadvantages arising from its ownership thatwould not be available to general purchasers inthe market.Special value: An amount above the MarketValue that reflects particular attributes of an assetthat are only of value to a Special Purchaser. Suchattributes can include the physical, geographical,economic or legal characteristics of an asset.Market Value requires the disregard of any elementof Special Value because at any given date itis only assumed that there is a willing buyer, not aparticular willing buyer.Synergistic value: An additional element of valuecreated by the combination of two or more interestswhere the value of the combined interest is worthmore than the sum of the original interests. 3Going concern: This describes a situationwhere an entire business is transferred as anoperational entity.Liquidation value: This describes a situationwhere a group of assets employed together in abusiness are offered for sale separately, usuallyfollowing the closure of the business.Salvage value: This describes the valueof an asset that has reached the end of itseconomic life for the purpose it was made.The asset may still have value for an alternativeuse for recycling.In today’s economic climate, appraisers are oftenfaced with providing appraisals for ‘power of sale’or ‘forced sale’ proceedings. IVS contains somevaluable insight which is worth repeating. Theterm ‘forced sale’ is often used in circumstanceswhere a seller is under compulsion to sell and/or a proper marketing period is not available. Theprices obtainable in these circumstances may notmeet the definition of market value. It will dependupon the nature of the pressure on the seller orthe reasons why proper marketing cannot beundertaken. It may also reflect the consequencesfor the seller of failing to sell within a specifiedperiod. Unless the nature of, and reason for, theconstraints on the vendor are known, the priceobtainable in a forced sale will reflect its particularcircumstances, rather than those of the hypotheticalwilling seller in the market value definition.The price obtainable in a forced sale will bear onlya coincidental relationship to market value, or anyof the other bases defined in IVS-2. ‘Forced sale’is not a basis of valuation. It is a description of thesituation under which a transfer takes place, not adistinct measurement objective. 4As with IVS-1, in addition to a ‘compliancy’ or‘certification’ statement that acknowledges conformityto IVS, there are certain disclosure requirementsthat are required over and above the requirementsof CUSPAP. For example, an in-house appraiser (orinternal valuer) must, within the report, disclose theexistence and nature of the relationship between theinternal valuer and the entity controlling the asset.It is important to recognize that CUSPAPAppraisal Standard Rule 6.2.3 requires that “anappraiser must identify the purpose of the assignment,including a relevant definition of value:” Thecomments go on to require that the appraiser mustidentify the source of the definition. In other words,CUSPAP does not require a definition of marketvalue, just value. So, depending on the assignment,IVS can be referenced for a valuation basis andrelated appropriate value definitions, other thanmarket value.End notes1 IVS, 8th Edition – Standard 12 International Valuation Standards (IVS) –8th Edition – IVS-2 Discussion3 International Valuation Standards (IVS) –8th Edition – IVS-24 International Valuation Standards (IVS) –8th Edition – IVS-2 6.11International Valuation StandardsSub CommitteeRaymond Bower, AACI, P. App – ChairLarry Dybvig, AACI, P. AppDavid Jenkins, AACI, P. AppLouis Poirier, AACI, P. AppBrad Wagar, AACI, P. AppPaul Olscamp, AACI, P. App, FellowGeorge Ward, AACI, P. AppTo contact this committee email:standards@aicanada.caClick HERE to return to Table of ContentsCanadian Property Valuation Volume 53 | book 3 | 2009 Évaluation Immobilière au Canada 25