GlobalGlobal ValuationValuation IssuesIssues

September 2004

Fair Value is the accepted model

Simultaneously, FASB is making its own IVSC News investigation into and has Fair Value accounting is favoured by the recently issued an exposure draft.The In this edition IASB defines Fair Value as "The amount International Accounting Standards IVSC News 1 Board (IASB) as the preferred basis for for which an could be exchanged, measuring .With the introduction or a liability settled, between knowledge- International Financial of International Financial Reporting able, willing parties in an arm's-length Reporting Standards 5 transaction". It has been tentatively pro- Standards (IFRS) in many parts of the Public Sector 6 world, including for all publicly listed posed that there is a four-level measure- Global Investment companies in the European Union in ment hierarchy in establishing Fair Value. Performance Standards 7 2005, the correct application of Fair Value on a consistent and transparent Level 1 is determinable by direct Banking Industry 8 basis is vitally important. reference to an observable market . Failing that, Level 2 requires an accepted Dependencies for Financial Intermediation 9 However, nothing can be truly global model for estimating market price. Level unless the world's biggest economy is 3 has regard to the price actually paid included.The USA has not adopted (assuming no persuasive evidence that it IFRS but instead has its own accounting was unrepresentative). Level 4 allows tech- However, the deprival value lobby will rule book as set down by the Financial niques using entity-specific data that can not go away. There is support in some Accounting Standards Board (FASB). be estimated reliably and which is not quarters for a “rational management FASB does not recognise the Fair Value inconsistent with market expectations. measurement” approach which proposes convention.Assets are recorded at their that a property can have more than one Depreciated Historic . International Standards (IVS) value depending on whether the owner define Market Value as: "The estimated wishes to retain the property as opera- Nonetheless, IASB and FASB are work- amount for which a property should tional within the business or to treat it ing together to attempt to harmonise exchange on the date of valuation as surplus. One variation on this theme their respective accounting standards. between a willing buyer and a willing proposes that a property can have an The question of how assets should be seller in an arm's-length transaction after “entry price” and an “exit price”, which recognised on the is one proper marketing wherein the parties may differ. Continued page 1/... of the key issues to be resolved.To this had each acted knowledgeably, prudently, end, both IASB and FASB are making a and without compulsion". thorough examination of Fair Value, This Newsletter is produced on behalf of The what it means and how it should be Fair Value has a broader, more generic International Valuation Standards Committee applied.The IASB has commissioned a meaning than Market Value. In most (IVSC). report by the Canadian Institute of circumstances, however, Fair Value will and it is anticipated that a be best represented by Market Value. The views expressed are not necessarily those draft report and consultation paper will However, where no evidenced market of the IVSC Board or of the members of be issued later this year. exists, then Fair Value can be represented IVSC. instead by an income approach or depreciated replacement cost approach. Further information from the Executive Director, 12 Great George Street, Historically, in some parts of the world London SW1P 3AD (eg. in the UK and Commonwealth Tel/Fax: +44 (0)1442 879306 countries), for owner occupied properties, e-mail: [email protected] an existing use or deprival value model was favoured. In 1998, the IASB abandoned Market Value for the Existing Use, requiring all real estate assets to be valued at Market Value where an identifiable market existed. IVSC

1 During 2003, the IVSC issued a Consultation Paper on the valuation Seventh edition of Deloitte IFRS approach to owner occupied property, IVS (2005) Model Financial with particular examination of DRC methodology. The Editorial Group of The seventh edition of the International Statements the IVSC Standards Board subsequently Valuation Standards will be available issued a Position Paper which proposed early 2005.This new edition will Support consideration of the adoption of a second include: valuation basis (the other being International Market Value), called Continuing Use • Revised IVA 1,Valuation for Financial Value (CUV). A number of responses Reporting. Revisions are being incor- Valuation were received, some critical, and the porated to ensure that the IVA reflects Standards IVSC Standards Board concluded at its the requirements of the 2004 edition of meeting in Vancouver in March 2004, International Financial Reporting Deloitte has published model financial that CUV was not appropriate under Standards. statements to illustrate the typical existing accounting requirements. The disclosures of a UK listed company Position Paper is effectively "parked" • Revised Guidance Note 2,Valuation reporting under International Financial pending the outcome of the IASB of Lease Interests.The revisions will Reporting Standards (IFRSs) for 2005. measurement project. incorporate the requirements of IAS The notes to the accounts for Property, 17, Leases and IAS 40, Investment Plant and Equipment and for A second issue of continuing concern - Property, published December 2003. Investment Property carry the statement: the assumption to be made when valuing 'The valuation conforms to International owner occupied property - should also • Revised Guidance Note 8, Valuation Standards.' be resolved once the accounting concepts Depreciated Replacement Cost. are clarified. One school of thought is Material that has been included to meet that these should be valued on the basis • New Guidance Note - Valuation of specific UK requirements has been of their exit price (ie. as if vacant). The Properties in the Extractive Industries highlighted in the model financial state- other school holds that owner occupied ments. Otherwise, Deloitte considers properties should be valued to reflect • New Guidance Note - Mass Appraisal that the model statements are appropriate the benefit of occupation. How the for Property Taxation for entities following IFRSs in any latter is measured is open to debate. country. Globally, thousands of compa- Some consider that a capitalised rental New or revised guidance notes are also nies will be moving to IFRS as their value, without discount for void period, being developed in the following areas: primary basis of financial reporting as leasing up , etc, is an appropriate from 2005.The use of IFRSs becomes methodology. • Valuation of Public Sector Assets mandatory for listed companies in the • Valuation of Specialised Trading 25 European Union member states in It is hoped that the IASB will be in a Properties 2005.About 70 other countries will also position to confirm the accounting • Valuation of Plant and Equipment be using IFRSs directly or aligning concept to be applied to owner occu- national standards with IFRSs. pied property - under IAS 16 "Property, Plant and Equipment" and under IAS A new expert group has begun work to John Edge, IVSC Chairman welcomed 36 "Impairment of Assets" - in time for develop guidance on the Valuation of the publication, "The IVSC has long 2005 and the European Union's adoption Historic Property.The Canadian gov- maintained that use of International of these standards. IVS reflect, where ernment has provided financial resource Valuation Standards can help in the appropriate, IAS/IFRS. to the IVSC for this project. rigorous and consistent application of International Financial Reporting John Edge Standards (IFRS).Valuers who are called IVSC Chairman upon to prepare a valuation for IFRS accounts should be aware that the auditing profession may require the valuation under International rather Opinion expressed by the UN Economic Commission than national valuation standards." for Europe,Ad Hoc Group of Experts on Reserves/ The Model Financial Statements can be Resources on IVSC Exposure Draft on Proposed viewed on www.iasplus.com International Valuation Guidance Note - Extractive Industries

"The IVSC has developed an excellent exposure draft. It is clear, concise and makes reference to the recognised techniques for valuing extractive industries."

2 EPRA Best This valuation report must: IVS in emerging Practices Policy 1 - be prepared by an independent economies expert; Recommendations Romania 2 - give the date or dates of inspection George Badescu represents Romania on the In January 2004, the European Public of the property; IVSC Management Board. He is also a Real Estate Association (EPRA) member of the IVSC Standards Board. published its Best Practices Policy 3 - provide all the relevant details in George has played a key role in the develop- Recommendations. EPRA's recom- respect of each property necessary for ment of the Romanian national association mendations provide specific guidance the purposes of the valuation; of valuers - ANEVAR.In this article, he for real estate companies within the reflects on the recent decision by ANEVAR IFRS framework and encourage uniform 4 - be dated and state the effective date to adopt the IVS.A Romanian translation performance reporting and presentation of valuation for each property, which of the IVS was launched in Budapest last between real estate companies. must not be more than 60 days prior October. to the date of publication of the EPRA recommends that the valuation prospectus; The countries with emerging markets of investments property held by real need more than others professional stan- estate companies should be at market 5 - include a summary showing separately dards and code of ethics for all the new value, assessed in accordance with the number of freehold and leasehold and old professions. In Central and International Valuation Standards (IVS), properties together with the aggregate Eastern Europe the new professional as set out by the IVSC. of their valuations (negative values associations emerged and they have must be shown separately and not adopted various models of organization To view the Best Practices aggregated with the other valuations; (accountants, lawyers, auditors, valuers, Recommendations visit www.epra.com separate totals should be given for real estate agents, securities brokers, properties valued on different bases); insurance brokers, etc.) The economic relations on a regional and international Valuation for 6 - include a statement reconciling the scale require an uniform understanding valuation figure with the equivalent of professionals activities and the Stock Exchange figure included in the issuer's latest response is regional and international published individual annual accounts standards. Prospectuses - EU or consolidated accounts, if applicable. In Europe there is European Union leg- Proposals If the company holds more than 60 islation adopted by all EU members and In April the European Commission has properties, only a report in a suitably by countries seeking EU membership. adopted legislation governing the content condensed format needs to be included At the same time there is a tendency in of the prospectus to be published when in the prospectus but the full report EU to endorse/adopt internationally securities are offered to the public or must be made available as a document accepted laws and norms.An example is admitted to trading (Prospectus on display. the adoption of International Financial Directive).The intention is that a Reporting Standards in 2005. prospectus issued for one Stock The IVSC is in discussion with the Exchange will be acceptable for any CESR as to the role that the IVS can Romania as a country seeking EU other throughout the EU. play in ensuring consistent implementa- membership has adopted officially the tion of the European legislation. IAS/IFRS and is working to adjust the The Committee of European Securities national legislation to European legislation. Regulators (CESR) is now moving to provide recommendations to ensure ANEVAR's decision to adopt IVS as consistent implementation of the legisla- the base for its standards has been very tion and to avoid any kind of ambiguity well received by the different Romanian that could lead to different interpreta- authorities. In May, the new bankruptcy tions of the rules.The CESR has issued law requires application of IVS on proposed recommendations for consul- company reorganization and bankruptcy. tation. Of particular interest to the This is a very important step because IVSC are the recommended requirements from now all other legislation should be to be imposed on specialist issuers such consistent regarding the valuation stan- as property companies. dards and the application of IVS will grow. The CESR is proposing that property companies include in their prospectus ANEVAR reached its decision having (and preferably in the securities note) a considered the fact that as the country valuation report. George Badescu with an emerging market it was not IVSC Management Board - Romania wise to prepare and adopt a separate national standard while other countries (for example UK,Australia, etc.) were

3 moving to adopt IVS.The main reason is that we are trying to attract the foreign Toronto valuation investments and the investors are asking accord for a known and transparent measure- ment of value. During their June 25, 2004,meeting in Toronto, Ontario, the Toronto Valuation Why IVS and not the European Accord organizations reaffirmed their Valuation Standards issued by The commitment to support ongoing European Group of Valuers? Because changes in financial reporting standards IVS are more related to IAS/IFRS and in North America and the international the auditors are considering this. On the harmonization of accounting standards. other hand there are no signals that EU Based on financial reporting standards will issue and adopt European Standards activities over the past year, the group and we foresee more likely that EU will emphasized the importance of regulatory, follow the same approach as for corporate, and public understanding of accounting standard. their earlier statement that "the move toward market value in financial reporting As I know the situation in former is in the best interest of the public, European socialist countries IVS could investors, government, and business have a major role in standard setting decision makers." there but for this IVSC must promote the IVS more vigorously. One way is to According to Brad Wagar, chair of the improved understanding of the opera- have a closer contact with the valuers Toronto Valuation Accord,“Greater public tions and financial conditions of reporting associations. Promotion of the IVS via knowledge and support for the work of companies through reforms in financial the large accounting and real estate the U.S. Standards reporting, investors and the public at firms working in the region is also very Board is particularly important.The large have greater assurance that the important. FASB will hopefully follow the full headline-grabbing abuses of corporate international harmonization of governance and financial reporting can accounting standards in other countries be controlled, markets improved, and Development of the by no more than two years, and is economies better protected.” Valuation Profession in currently emphasizing the crucial role of current value reporting of assets and At an international level, the Toronto Egypt liabilities in corporate financial state- Valuation Accord group continues to In response to a request from the ments.While the Toronto Valuation support the International Valuation Ministry of Finance of Egypt, USAID Accord continues to seek an already Standards Committee (IVSC) in its has instigated a five-year project to internationally accepted concept of work to ensure valuation standards are establish effective primary and secondary market value, which has been used in consistent with and complementary to markets for real estate finance in Egypt. other parts of the world for many years, the financial reporting standards being we applaud the FASB's progress in developed and promulgated by the The overall project objective is to build incorporating market value concepts International Accounting Standards the market infrastructure required for into its financial reporting framework." Board.The Toronto Valuation Accord real estate financing and other forms of coalition intends to encourage the use secured lending. “North American financial statements, of market value concepts and to aid in with notable but limited exceptions, expediting the simplification and con- One of the activities to be undertaken is have traditionally applied a depreciated vergence of financial reporting standards the establishment of a professional real convention in financial in North America and internationally. estate appraisal industry in Egypt that is reporting,”Wagar continued.“New accepted by lenders, including a real assets are commonly booked at their To this end, the members of the estate appraisal association with linkages cost (presumably their market value at Toronto Valuation Accord and their to sister institutions in other countries that date), but as various forms of representatives to the IVSC seek greater and the International Valuation are applied over the years, public involvement and assistance to Standards Committee (IVSC) in assets can grow in market value while ensure that the FASB's recently released London and the Appraisal Institute in decreasing significantly in value as Proposal on Fair Value Measurements Chicago, and introduction of IVSC reflected in financial statements.This (www.fasb.org) has wide public response standards and practices. difference creates potential for misrepre- before it's finalized. sentation and misunderstanding in The importance of valuation standards financial reporting. The Toronto Valuation Accord group and a valuation profession to financial also continues to urge FASB to work sector development is well recognised When the value of an asset is reported more closely with The Appraisal by USAID. A chart produced by at its current value in the marketplace, Foundation, and in Canada for the USAID is reproduced on page 9. as contrasted with an historical cost- Canadian Accounting Standards Board based number, greater public reliance to work more closely with the Appraisal can be placed upon financial statements. Institute of Canada, as well as continue With greater public protections and to build their interaction with the

4 International Accounting Standards and for and intangible assets. IFRS 5, Non-Current Assets Board and IVSC, to harmonize termi- The project has a number of phases. Held for Sale and nology and concepts applied in the IFRS 3, together with the revised ver- multidisciplinary requirements of sions of IAS 36 and IAS 38, was issued Discontinued Operations professionals who will be crucial to as part of the first phase. Under IFRS 3, IFRS 5 is the first standard to arise from implementing new standards. many more intangible assets will be the IASB's joint project with the FASB recognised at the date of acquisition and and results from the IASB's review of During the North American Valuation then be subject to subsequent amortisa- the FASB standard SFAS 144 Accounting Summit on Financial Reporting, held tion.This represents a significant change. for the Impairment or Disposal of June 24, 2004, in Toronto, members of Long-Lived Assets, which was issued in Toronto Valuation Accord coalition There is a perception that measuring 2001. organizations and representatives from intangible assets and predicting their industry and regulatory agencies, future value is difficult and inherently IFRS 5 requires assets that are expected including FASB, the Public Company uncertain. However, the presumption to be sold and meet specific criteria to Accounting Oversight Board, and the under ED 3 is that most intangible be measured at the lower of carrying Canadian Accounting Standards Board, assets can be reliably measured, so com- amount and fair value less costs to sell. held an open public forum on various panies will have no option but to recog- Such assets should not be depreciated issues regarding the move to a current nise them on the balance sheet. and should be presented separately in value reporting standard. It is the intent the balance sheet. It also requires opera- of the Toronto Valuation Accord organi- The main features of the new tions that form a major line of business zations to seek and support changes that Standard are: or area of geographical operations to be improve the global flow of capital and classified as discontinued when the protection of investors. • all business combinations within the assets in the operations are classified as scope of IFRS 3 must be accounted held for sale. for using the purchase method. Toronto Valuation Accord The pooling of interests method is IFRS 5 requires: Coalition prohibited. Representing over 30,000 valuation • a classification for non-current assets professionals in the United States • costs expected to be incurred to 'held for sale' and Canada, the American restructure an acquired entity's (or the Society of Appraisers,Appraisal acquirer's) activities must be treated as • assets sold in a single transaction to be Institute,Appraisal Institute of post-combination , unless the accounted for as a disposal group Canada, RICS-USA, RICS- acquired entity has a pre-existing Canada, and American Society of liability for restructuring its activities. • that assets or disposal groups that are Farm Managers and Rural classified as held for sale are carried at Appraisers provide the voice for the • intangible items acquired in a business the lower of carrying amount and fair valuation profession in North combination must be recognised as value less costs to sell America. assets separately from goodwill if they meet the definition of an asset, are • that an asset classified as held for sale, either separable or arise from contrac or included within a disposal group tual or other legal rights, and their fair that is classified as held for sale, is not depreciated International value can be measured reliably. • identifiable assets acquired, and liabilities • that an asset classified as held for sale, and contingent liabilities incurred or and the assets and liabilities included Financial assumed, must be initially measured at within a disposal group classified as fair value. held for sale, are presented separately Reporting on the face of the balance sheet. • amortisation of goodwill and intangible Standards assets with indefinite useful lives is Two new International Financial prohibited. Instead they must be tested Reporting Standards of particular interest for impairment annually, or more to the IVSC have been released by the frequently if events or changes in IASB: circumstances indicate a possible impairment. IFRS 3 Business Combinations The IASB announced in July 2001 that it would undertake a project on Business Combinations as part of its initial agenda.The project's objective is to improve the quality of, and seek international convergence on, the accounting for business combinations

5 Valuation techniques consistent with a The Board decided that for those Level Fair value market approach, an income approach, 3 estimates, valuation techniques that measurement and, where applicable, a cost approach rely on an entity's own assumptions should be considered for all fair value (entity inputs) may be used as a practical US Financial Accounting Standards estimates, especially Level 3 estimates. expedient, provided that there are no issued by the Financial Accounting Valuation techniques used to estimate data indicating that marketplace partici- Standards Board (FASB) have in recent fair value should maximize market pants would use different assumptions, years, been requiring fair value measure- inputs. except as otherwise specified by other ments with ever increasing frequency applicable pronouncements. (e.g., financial instruments, business Market inputs refer to the assumptions combinations, asset impairments, etc.). that marketplace participants would use The proposed Standard would be effec- While the standards clearly indicate in their estimates of fair value. Market tive for financial statements issued for what is to be measured at fair value, inputs are determined based on infor- fiscal years beginning after June 15, they provide limited guidance on how mation (market data) that is timely, 2005, with earlier application encouraged. to measure it.The result has been piece- originated from sources independent of The exposure draft is available on meal and inconsistent guidance dispersed the entity, and used in making pricing FASB's web site - www.fasb.org among different standards. decisions.Valuation techniques used to estimate fair value should emphasize In its Exposure Draft, Fair Value market inputs in active or other markets Measurements, issued June 2004, FASB whether using the market approach, Public sector proposes to standardise fair value guid- income approach, or cost approach. ance by creating a comprehensive The 4th Annual OECD Public framework for measuring the fair value Fair Value Hierarchy Sector Symposium of most financial and nonfinancial assets The fair value hierarchy prioritized the John Edge, IVSC chairman, was invited and liabilities.The ED does not broaden inputs that should be used in valuation to speak at the 4th Annual OECD or expand the use of fair value measure- techniques used to estimate fair value in Public Sector Accruals Symposium. Over ments in financial statements. Its purpose three broad levels. 110 delegates attended the Symposium, is to unify conceptually fair value which was chaired by Mr. Ian McPhee, requirements as they currently exist (and Level 1 Estimates Deputy Secretary, Department of will exist) within other standards. Level 1 estimates should be determined Finance and Administration,Australia. using quoted for identical assets As in previous years, a large part of the Definition of Fair Value or liabilities in active reference markets, meeting was devoted to the FASB has revised the definition of fair if available. treatment of specific transactions, assets value in many existing pronouncements and liabilities that are unique to the to refer to "the price at which an asset Level 2 Estimates public sector. or liability could be exchanged in a cur- Level 2 estimates should be determined rent transaction between knowledge- using quoted prices for similar assets or These included non-exchange able, unrelated willing parties." liabilities in active markets, adjusted as (taxes), social policy obligations, military appropriate for differences. For Level 2 equipment, heritage assets, credit FASB has clarified that: estimates, the price effect of the differ- programmes (loan and guarantees), • A fair value measurement presumes ences must be objectively determinable. provisions and commitments.The IFAC that an entity is a going concern Otherwise, the estimates are Level 3 Public Sector Committee presented their without intention or need to liquidate. estimates, requiring corroboration work on the first two items as well as In that context, the objective of a fair through the results of other valuation providing a general update on their value measurement is to estimate the techniques. work.The various facets of valuation in single agreed-upon exchange price a public sector context were discussed, between willing parties in a transaction Level 3 Estimates including a presentation by the IVSC. other than in a forced liquidation Level 3 estimates should be determined transaction or distress sale. based on the results of multiple valuation The International Accounting Standards techniques whenever the information Board provided an update on develop- • Willing parties are all marketplace necessary to apply those techniques is ments with private sector GAAP and the participants (buyers and sellers) with available. Level 3 estimates vary to the potential implications for public sector access to the same markets that are extent of market inputs used. accounting standards.The International willing and able to transact in those Task Force on the Harmonisation of markets. Some Level 3 estimates may consider Public Accounts also presented its work. significant market inputs, including • A hypothetical exchange transaction observable prices generated by actual notion is essential as a basis for repli market transactions, adjusted as appro- cating an exchange price in the priate. For other Level 3 estimates, absence of an actual (observable) market inputs may not be available transaction. without undue cost and effort.

6 IFAC Statements of Membership Obligations Global The Board of the International Federation of Accountants (IFAC) Investment recently approved seven Statements of Membership Obligations (SMOs) Performance designed to assist and direct IFAC's 158 member organizations and potential Standards members in ensuring high quality performance by professional accountants. (GIPS) Property fund managers will have a new The SMOs, released after an extensive set of regulations to deal with when the comment period, cover a member real estate provisions of the Global body's obligations to support the work Investment Performance Standards of IFAC, the work of the International (GIPS) become effective in January Accounting Standards Board, and obli- 2006. The financial markets and the gations regarding quality assurance and investment management industry are investigation and discipline. becoming increasingly global in nature. Given the variety of financial entities The specific SMOs, which may be and countries involved, this globalization downloaded from the IFAC website at of the investment process and the expo- www.ifac.org, cover the following nential growth of assets under manage- areas: ment led to the need to standardize the calculation and presentation of investment Licensed Valuer/Appraisers are not avail- • Quality Assurance performance. able and valuers or appraisers from other countries bearing such credentials do • International Education Standards for GIPS are developed under the leadership not commonly operate, then the party Professional Accountants and Other of the Chartered Financial Analysts responsible for engaging such services EDCOM Guidance Institute (previously called the locally shall take necessary steps to ensure Association for Investment Management that only well-qualified property valuers • IFAC Code of Ethics for Professional and Research. Standards are already in are utilized. Accountants place for equities and bonds and national standards for reporting and bond While welcoming the GIPS Real Estate • International Standards Related portfolio returns have rapidly fallen into Provisions, the IVSC is disappointed Practice Statements and Other Papers line and adopted and/or refined GIPS. that, despite representations from itself issued by the International Auditing and other national valuation institutes, and Assurance Standards Board The Standards require that real estate the GIPS does not encourage the use of investments must be valued at Market the International Valuation Standards. It • International Public Sector Accounting Value at least once every twelve months. is also disappointed that rather than Standards and other PSC Guidance For periods beginning January 1, 2008, adopt the IVSC definition of Market real estate investments must be valued at Value, that has been adopted by many • Investigation and Discipline least quarterly. Real estate investments countries throughout the world, GIPS must be Externally Valued by a has chosen the definition of Market • International Financial Reporting Professionally Designated, Certified, or Value from the Financial Institutions Standards.This SMO requires IFAC's Licensed Valuer/Appraiser at least once Reform, Recovery and Enforcement Act member organisations to support the every thirty-six months, although the (FIRREA) passed by the US Congress work of the IASB by notifying their Standards recommend that investments in 1989. members of every IFRS; Encourage be externally valued at least once every their members to comment on IASB twelve months. Speaking at a seminar in London on the proposals; use their best endeavours GIPS Real Estate provisions, Simon to incorporate the requirements of The first External Valuation must be Latham, ING REIM director said that IFRSs in their national accounting completed no later than December 31, he believed the standards would not be requirements, or where the responsi- 2007 although firms are encouraged to hard to apply, but that client require- bility for the development of national complete an External Valuation sooner ments were already more sophisticated. accounting standards lies with third than 2007. External Valuations must be He pointed out that the standardisation parties, to persuade those responsible completed pursuant to the valuation of valuations was an important part of for developing those requirements standards of the local governing appraisal GIPS, but that valuation standards and that general purpose financial state- body. methodology varied across the world. ments should comply with IFRSs, or Further representations have been made with local accounting standards that In markets where there are no valuation to the Institute by valuation and appraisal are converged with IFRS, and disclose standards or where there are no institutes in North America to consider the fact of such compliance; and Assist Professionally Designated, Certified, or amending the GIPS requirements. with the implementation of IFRSs, or national accounting standards that incorporate IFRSs. 7 European Commission Forthcoming Banking adopt IVSC definition of industry Market Value meetings and The Basel Committee on Banking Europe has moved quickly to adopt seminars Supervision published in June the text Basel II. In July, the European of a new framework, 'International Commission presented a proposal - a 2 - 3 October 2004 Convergence of Capital Measurement draft directive on Capital Adequacy - to IVSC Standards Board and Capital Standards', widely known ensure the coherent application as Basel II.This text will serve as the throughout the EU of Basel II.All EU 4 October 2003 basis for national rule-making and member states will have to apply the IVSC Management Board meeting approval processes to continue and for terms of the directive to all banks and banking organisations to complete their investment firms within their border. 5 October 2004 preparations for Basel II's implementa- This is in contrast to the US, where IVSC Annual General Meeting and sem- tion due either year-end 2006 or 2007 banking regulators expect that in total inar depending on the approach adopted by some 20 of the country's largest banks banks. will operate under Basel II rules. IVSC October meetings are being held in The Hague, The Netherlands “Basel II introduces a far more compre- Of particular significance to the IVSC is hensive framework for regulatory capital that the European Commission has 19 - 21 March 2005 and risk management than we have ever responded to discussions with the IVSC IVSC Standards Board and Management known," said Jaime Caruana, Chairman and national valuation institutes and has Board meetings, Sydney, Australia of the Basel Committee and Governor adopted the IVSC definition of Market of the Bank of Spain. "The Committee Value in the draft directive.The EU has owes this accomplishment to the chosen the IVSC definition in prefer- tremendous commitment and technical ence to that proposed in Basel II.As the support that banks, central banks, super- Basel II definition itself was drawn from Financial visory authorities and academics from earlier EU legislation, it is hoped that contributions around the world offered us. Now that Basel will move to amend its definition level of collaboration will be invaluable to adopt the internationally accepted The IVSC acknowledges the financial to the prudent implementation of the definition. contributions received from the following new framework.” organisations:

Basel II represents a major revision of American Appraisal Associates the international standard on bank American Society of Appraisers capital adequacy that was introduced in Appraisal Institute of Canada 1988. It aligns the capital measurement Appraisal Institute, US framework with sound contemporary Association of Valuers and Property practices in banking, promotes improve- Consultants in Private Practice, Malaysia ments in risk management, and is ATIS REAL Weatheralls intended to enhance financial stability. Australian Property Institute Board of Valuers,Appraisers Basel calls for valuation and Estate Agents, Malaysia standards China Appraisal Society In July, the Basel Committee on Banking Cushman & Wakefield Healey & Baker Supervision published guidance for Drivers Jonas national supervisors and banks planning DTZ Debenham Tie Leung Ltd the transition to Basel II. GeraldEve Among the key requirements are "the GVA Grimley adoption of internationally accepted Hong Kong Institute of Surveyors accounting standards, asset valuation Institution of Surveyors, Malaysia rules which are consistent, realistic and Jones Lang LaSalle prudent, and loan loss provisions that King Sturge & Co reflect realistic repayment expectations". Knight Frank “All necessary," says the Committee, "to Thai Valuers Association ensure that capital ratios - computed National Assoc. of Romanian Valuers under the 1988 or new Framework - will reflect meaningfully the capital Royal Institution of Chartered Surveyors adequacy of the bank.” Verband deutscher Hypothekenbanken e.V

8 Regime Services Accounting Predictable and Fair Tax and Fair Supplies Business Office and Legal Services Services Affordable Accessible/ Professional Bus. Servs. Transport Insurance Asset Climate Appraisal Valuation/ Investment Absence of Impediments Administrative Effective Judgement Enforcement Enforcement Field/Fair Competition Level Playing Court System Efficient Dispute Rational Resolution Legal Codes & Framework Contract Law Court Credit Funds System Rating Efficient Bureau Agency Reliable Effective Users of Corporate Governance Rights Property Legal This chart is reproduced with the kind permission of the United States Agency for International Development, This chart is reproduced with the kind permission of United States Trade. Agriculture and of Economic Growth the Bureau for Growth, Office Asset Appraisal Valuation/ Framework Financial Transparency Accounting Infrastructure Effective Judgement Absence of Intervention Government Enforcement Enforcement Act Food Security Rationally Freedom to Freedom Court System Dispute Rational Efficient Resolution Rights Housing Affordable Shareholder Clean Water Legal Effective Effective Financial Corporate Framework Governance Functioning Intermediation Intermediaries and Waste Stable Macro- Climate Disposal Economic Regulation Supervision Sanitation & Power Political Reliable Stability Financial Low- Infrastructure Transparency Dependencies for Financial Intermediation Comms. Services Financial Low-Cost Accessible Freedom of Freedom Association Movement & Value-Added and Willing System Savings Investors Educated Transport Workforce Depositors Sources of Sources Confidence in Financial Competitive Quality Privacy Privacy Healthcare Accessible Reasonable Reasonable Protection of Protection Protection of Protection Indirect Components of the Investment Climate

9 Notes

10 IVSC