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ILLUSTRATIVE EXAMPLES Chapter 1 – Bases of Value INTERNATIONAL VALUATION STANDARDS COUNCIL ILLUSTRATIVE EXAMPLES Chapter 1 – Bases of Value EXPOSURE DRAFT Comments on this Exposure Draft are invited before 31 March 2014. All replies may be put on public record unless confidentiality is requested by the respondent. Comments may be sent as email attachments to: [email protected] or by post to IVSC,1 King Street, LONDON, EC2V 8AU, United Kingdom. Copyright © 2013 International Valuation Standards Council. All rights reserved. Copies of this Exposure Draft may be made for the purpose of preparing comments to be submitted to the IVSC provided such copies are for personal or intra-organisational use only and are not sold or disseminated and provided each copy acknowledges IVSC’s copyright and sets out the IVSC’s address in full. Otherwise, no part of this Exposure Draft may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without permission in writing from the International Valuation Standards Council. Please address publication and copyright matters to: International Valuation Standards Council 1 King Street LONDON EC2V 8AU United Kingdom Email: [email protected] www.ivsc.org The International Valuation Standards Council, the authors and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise. i Introduction to Exposure Draft This draft represents the first chapter of a rolling project to provide Illustrative Examples for many of the valuation concepts and principles discussed in the IVS Framework. The purpose of the project is to assist practitioners to better understand the concepts by illustrating their application in various scenarios. The Illustrative Examples do not form part of the International Valuation Standards and do not alter or amend any of the standards. The intention is to develop further chapters on other topics including, but not limited to: Market Participants Market Proper Marketing Forced Sales Assumptions and Special Assumptions Aggregation and Unit of Account Highest and Best Use Transaction Costs Valuation Date Questions for Respondents The IVSC Professional Board invites responses to the following questions. Not all questions need to be answered but to assist in the analysis of responses received please use the question numbers in this paper to indicate to which question your comments relate. Further comments on any aspect of the Exposure Draft are also welcome. Notes for respondents: In order for us to analyse and give due weight to your comments please observe the following: 1. Responses should be made in letter format, where appropriate on the organisation’s letter heading. 2. Comments should not be submitted on an edited version of the Exposure Draft. 3. Unless anonymity is requested, all comments received may be displayed on the IVSC website. 4. Comments letters should be sent as an email attachment in either MS Word or an unlocked PDF format and no larger than 1mb. All documents will be converted to secured PDF files before being placed on the web site. Please include “Illustrative Examples – Chapter 1” in the subject line of the email. 5. The e mail should be sent to [email protected] ii Questions 1. Do you consider the differences among the IVS bases of value have been adequately illustrated? If not, what additional illustrations might be helpful? 2. Do you perceive any issues or unintended consequences arising from any of the illustrations? If you do, please explain what these are. 3. Do you consider that there are any other differences between Market Value and IFRS 13 Fair Value that should be discussed and illustrated? 4. Does the term “arm’s length” in the Market Value definition need explanation? 5. Do you find the graphics in the document helpful in understanding the relationships between the bases of value and other pertinent concepts? 6. Below are examples of other topics within the scope of the Illustrative Examples project which the Board is planning to cover in future chapters: Market Participants Market Proper Marketing Forced Sales Assumptions and Special Assumptions Aggregation and Unit of Account Highest and Best Use Transaction Costs Valuation Date Please indicate the perceived priorities from this list and if there are any additional concepts or issues within the IVS Framework that you believe it would be helpful to address. iii ILLUSTRATIVE EXAMPLES Chapter 1 – Bases of Value Contents Paras page Introduction 1-6 2 The IVS Bases of Value 7-11 3 Relationship Between Bases of Value 12-19 5 Special Value and Synergistic Value 20-25 8 Select Bases of Value in IFRS 26-31 10 Application Examples 32 13 Example 1: Hotel Operation 13 Example 2: Net Operating Loss 14 Economic Relationship between the IVS Bases of Value 33-34 15 Example 3: Investment Value v Market Value 15 Example 4: Market Value v Fair Value (IVS) 19 Price, Cost and Value 35-41 20 Example 5: Price, Cost and Value 20 1 Introduction 1. The role of the IVSC not only includes developing and maintaining the International Valuation Standards (IVSs) but also supporting their adoption and use. In accordance with this second objective the IVSC Professional Board is developing a series of “Illustrative Examples” to explain some of the concepts in the IVS Framework. This is the first chapter of that series. These Illustrative Examples do not form part of the IVSs. The references to the IVSs in this chapter refer to those in issue on 1 July 2013 but do not alter or amend any of those standards. 2. This chapter illustrates and compares different bases of value. The IVSs require the bases of value to be stated in both the scope of work and the report, see IVS 101 2(e) and IVS 103 5(e). The basis of value must be appropriate for the purpose for which the valuation is required and the source of the definition of the basis must be provided or the basis otherwise explained. 3. The IVS Framework includes definitions and explanations for several different bases of value which are discussed in this chapter. Paragraph 28 of the IVS Framework states that while the bases of value defined in the IVSs will cover most purposes for which valuations are required, bases with different titles or definitions may be required in practice. This is often the case where the valuation is governed by a statute, regulation or contract that stipulates a certain basis or definition of the type of value required. 4. It is impractical for the IVSC to identify all bases that may be required in different jurisdictions around the world and outside its remit and to discuss their application. Bases of value that are not defined in the IVS Framework are therefore generally excluded from this chapter. The exceptions are two bases defined by the International Accounting Standards Board: fair value as defined in IFRS 13 Fair Value Measurement and value in use as defined in IAS 36 Impairment of Assets. Because International Financial Reporting Standards are widely used and are discussed in IVS 300 Valuations for Financial Reporting, these are included in the discussion. 5. The discussion and examples in this chapter aim to provide high-level illustrations of the application of certain concepts, and more importantly, the thought process behind them. In practice, assumptions and judgments may vary in different situations, reflecting specific facts and circumstances, and the conclusions reached may differ from the ones in the illustrations. 6. The illustrative examples in this chapter are not intended to capture all possible nuances that are associated with the IVS bases of value or their interplay. Further, the focus of the illustrations is on the IVS bases of value applied to the entity as a whole (business enterprise) rather than interests in that entity, which could be controlling or non-controlling (minority) interests. Further, the examples in this chapter are focused on assets only, and references to asset and business (no debt assumed for simplicity) may be used interchangeably depending on the context. 2 The IVS Bases of Value 7. The IVS Framework defines a basis of value as “a statement of the fundamental measurement assumptions of a valuation”. A basis of value will normally have a title , eg “market value”, and an accompanying definition that sets out the hypothesis on which the value is to be determined, eg whether or not an exchange is involved and, if so, the nature of the parties involved and the relationship between them. The IVS Framework defines three principal bases of value: Market value is 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. Investment value is the value of the asset to the owner or a prospective owner for individual investment or operational objectives. Fair 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. 8. These three bases are discussed in the IVS Framework. Market Value is probably the most frequently used of these bases and as such is accompanied by a conceptual framework (see IVS Framework para 30) which is to be followed when applying the definition. The Framework provides an explanation of each component of the definition, eg the characteristics of a “willing buyer” or what is meant by an “arm’s length” transaction, and the need to reflect highest and best use when determining market value.
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