International Valuation Standards International Valuation Standards A Guide to the Valuation of Real Property Assets David Parker This edition first published 2016 © 2016 by John Wiley & Sons, Ltd Registered Office John Wiley & Sons, Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom Editorial Offices 9600 Garsington Road, Oxford, OX4 2DQ, United Kingdom The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/wiley‐blackwell. The right of the author to be identified as the author of this work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988. All rights reserved. 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Contents Foreword xv About the Author xvii Preface xix Acknowledgements xxi Introduction 1 1 Market Value 3 1.0 Introduction 3 1.1 Globalisation and valuation 4 1.1.1 Globalisation 5 1.1.2 International Financial Reporting Standards 6 1.1.3 Valuation 8 1.2 Evolution of valuation standard setting 10 1.2.1 Principal phases 10 1.2.2 Role of IVSC 12 1.2.3 Role of IVSs 13 1.2.3.1 Structure of IVSs 13 1.2.3.2 International, Regional and National Valuation Standards 16 1.3 Market value 17 1.3.1 Spencer concept of market value 18 1.3.2 IVS definition of market value 20 1.3.2.1 Estimated amount 22 1.3.2.2 An asset should exchange 23 1.3.2.3 On the valuation date 23 1.3.2.4 Between a willing buyer 23 1.3.2.5 And a willing seller 24 1.3.2.6 In an arm’s length transaction 25 1.3.2.7 After proper marketing 25 1.3.2.8 Where the parties had each acted knowledgably, prudently 26 1.3.2.9 And without compulsion 27 1.3.3 Highest and best use assumption 28 1.3.4 Transaction costs assumption 29 1.3.5 Market value in practice 30 1.4 Businesses and business interests, intangible assets and financial instruments 31 1.4.1 Businesses and business interests 31 viii Contents 1.4.2 Intangible assets 32 1.4.3 Financial instruments 32 1.5 Summary and conclusions 33 References 35 2 Concepts 37 2.0 Introduction 37 2.1 Conceptual framework 38 2.1.1 Approaching IVSs through economic theory 40 2.1.2 Concept of exchange 43 2.1.3 Conceptual framework – summary 46 2.2 Reconciliation with capital market theory 48 2.3 Definition of the market 50 2.3.1 What is a market? 50 2.3.2 Who are the participants in a market? 53 2.3.3 What is the role of market activity? 54 2.3.4 What is an asset? 56 2.3.5 Definition of the market – summary 57 2.4 Value vs. cost vs. price 58 2.4.1 Price 58 2.4.2 Cost 58 2.4.3 Value 59 2.4.3.1 Market value 60 2.4.3.2 Investment value 62 2.4.3.3 Synergistic value 65 2.4.3.4 Fair value 67 2.4.3.5 Special value 70 2.4.3.6 Relative contribution to value 72 2.4.4 Reconciliation to the conceptual framework for valuation 73 2.5 Summary and conclusions 74 References 77 3 Definitions 79 3.0 Introduction 79 3.1 Definition of valuation 80 3.1.1 What is valuation? 81 3.1.2 What is value? 82 3.1.3 What is a basis of value? 82 3.1.4 What is a valuation input? 86 3.1.5 What is an assumption? 89 3.1.6 What is a special assumption? 90 3.1.7 Definition of valuation – summary 92