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Professional Standards of Asset Valuation

Professional standards of Asset Valuation in this part consists of thirteen content of valuation standards to be used as a norm for appraisers to comply with when they professionally evaluate a subject property. In the third content, there are explanations for appraisers to use as a tool to help them understand the valuation standards correctly and accurately.

On one hand, Valuation Standards is a norm in working professionally that is determined by a good practice, which is accumulated through personal self conscious or regulations determined by professional association or law including rule of profession and professional capability, therefore, it rarely has a tendency to be changed. On the other hand, Valuation Methodology is considered a method or analyzing technique in valuation which is widely known and used, and tends to be vary on a frequent basis, appraisers, therefore, are required to thoroughly study as many as market transactions and properly apply it to their valuation works.
However, since professional norm of valuation in Thailand is yet to be clearly agreed by all professions, hence for some content in this valuation standards is necessarily to state about valuation methods or valuation techniques in order to constitute a consensus among professionals.
Valuation Methods

1. SALES COMPARISON APPROACH - A set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, applying appropriate units of comparison, and making adjustments to the sale prices of the comparables based on the elements of comparison. The sales comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant; it is the most common and preferred method of land valuation when comparable sales data are available.

2. LAND RESIDUAL APPROACH - A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the lands contribution to the total property.

3. COST APPROACH - A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of, or replacement for the existing structure; deducting accrued depreciation from the reproduction or replacement cost; and adding the estimated land value plus an entrepreneurial profit. Adjustments may then be made to the indicated fee simple value of the subject property interest being appraised.

4. INCOME CAPITALIZATION APPROACH - A set of procedures through which an appraiser derives a value indication for an income-producing property by converting its anticipated benefits (cash flows and reversion) into property value. This conversion can be accomplished in two ways. One years income expectancy can be capitalization at a market-derived capitalization rate or at a capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate.

5. DISCOUNTED CASH FLOW APPROACH - The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate. DCF analysis can be applied technique and may be performed on either a lease-by-lease or aggregate basis.

Basis of Valuation

Basis of Value. A statement of fundamental measurement principles of a valuation on a specified date. The principle may vary depending on the purpose of the valuation.

A Basis of Valuation is not the statement of the method used, nor a description of the state of an asset or assets when exchanged.
According to the International Valuation Standards (IVS), 8th edition, 2007, the basis of valuation is divided into two bases as follows:

I. Market Value Basis of Valuation (IVS 1)
Market Value is the most commonly required basis. The concept of Market Value reflects the collective perceptions and actions of a market and is the basis for valuing most resources in market-based economies.
Market Value - The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
Market Value of Real Estate is a representation of its market-recognised utility rather than its purely physical status. The Utility of assets to a given entity or individual may differ from that which would be recognized by the market or by a particular industry.

II. Bases Other Than Market Value (IVS 2)
Market Value is the most appropriate basis of value for a wide range of applications. However, alternative valuation bases may be appropriate in specific circumstances. It is essential that both the Valuer and users of valuations clearly understand the distinction between Market Value and these other bases of valuation and the effects (if any) that differences between bases may have on the applicability of the valuation.
1. Reproduction Cost is the cost to create a virtual replica of a property using identical or, if identical materials are not available, similar materials.

2. Replacement Cost estimates envision a modern equivalent of comparable utility, employing the design, technology and materials that are currently used in the market.

As above mentioned, a cost estimate for a property may be based on either an estimate of reproduction cost or replacement cost.

3. Forced Sale Value A circumstance where a seller is under compulsion to sell and/or a proper marketing period is not available. The price obtainable under these circumstances will not meet the definition of Market Value. Rather the price obtainable will depend on the nature of the pressure on the seller or the reasons why proper marketing cannot be undertaken. The price may also reflect the consequences for the seller of failing to sell within a specified period. The price obtainable in a forced sales typically cannot be predicted, but will reflect the particular circumstances of the forced sale rather than a hypothetical exchange where the seller is acting without compulsion and/or the transaction occurs after a proper marketing period.

4. Going Concern Value The entity is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.

An operating business.

Going concern also serves as a valuation premise, under which Valuers and accountants consider a business as an established entity that will continue in operation indefinitely. The premise of a going concern serves as an alternative to the premise of liquidation.

5. Investment Value or Worth The value of property to a particular investor, or a class of investment or operational objectives. This subjective concept relates specific property to a specific investor, group of investors, or entity with identifiable investment objectives and/or criteria.
The investment value, or worth, of a property asset may be higher or lower than the Market Value of the property asset. The term investment value, or worth, should not be confused with the Market Value of an investment property.

The term, investment value, is North American usage; worth is Commonwealth usage.

6. Value in Use
i) The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.
ii) The present value of the future cash flows expected to be derived from an asset or cash-generating unit.

It should be noted that the above definitions, which apply to financial reporting, consider the value of an asset at the end of its useful life. This meaning differs from the way the term is commonly used in valuation practice.

The Property Valuations are required by the Listed Companies for Financial Reporting Purposes. The Valuers who undertake work of the nature have to comply with the Accounting concepts and principles underlying the relevant International Accounting Standards (IAS).
Accounting Standards

1. Valuations under IAS 16 Property Plant and Equipment

as issued at 1 January 2011. Includes IFRSs with an effective after 1 January 2011 but not the IFRSs they will replace.

The objective of this Standards is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entitys investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognized in relation of them.

Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.

The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if;

(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.

Measurement at recognition; An item of property, plant and equipment that qualifies for recognitions as an asset shall be measured at its cost. The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit unless such interest is capitalized in accordance with IAS 23.

The cost of an item of property, plant and equipment comprises;

(a) it purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner by management.
(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during the period.

Measurement after recognition; An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.

Cost model; After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated impairment losses.

Revaluation model: After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.
2. Valuations under IAS 36 Impairment of Assets
as issued at 1 January 2011. Includes IFRSs with an effective date after 1 January 2011 but

not the IFRSs they will replace.

The objective of this standards is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognize an impairment loss. The standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.

Identifying an asset that may be impaired An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. Irrespective of whether there is any indication of impairment, an entity shall also;
(a) test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. Different intangible assets may be tested for impairment at different times. However, if such an intangible asset was initially recognized during the current annual period, that intangible asset shall be tested for impairment before the end of the current annual period.
(b) test goodwill acquired in a business combination for impairment annually in accordance with paragraphs 80-99.
If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs (the assets cash-generating unit).

A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Measuring recoverable amount
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell its value in use.
It is not always necessary to determine both an assets fair value less costs to sell and its value in use. If either of these amounts exceeds the assets carrying amount, the asset is not impaired and it is not necessary to estimate the other amount.
Fair value less costs to sell is the amount obtainable form the sale of an asset or cash-generating unit in an arms length transaction between knowledgeable, willing parties, less the costs of disposal.
Value in use is the present value of the future cash flows expected to be derived from an asset or cash generating unit.
The following elements shall be reflected in the calculation of an assets value in use:
(a) an estimate of the future cash flows the entity expects to derive from the asset;
(b) expectations about possible variations in the amount or timing of those future cash flows:
(c) the time value of money, represented by the current market risk-free rate of interest;
(d) the price of bearing the uncertainly inherent in the asset; and
(e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.

Reversing an impairment loss
An entity shall assess at the end of each reporting period whether there is any indication that an impairment loss recognized in prior for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset.
3. Valuation under IAS 40 Investment Property
as issued at 1 January 2011. Includes IFRSs with an effective after 1 January 2011 but not the IFRSs they will replace
The objective of this Standard is to prescribe the accounting treatment for investment property and related disclosure requirements.

Investment property is property (land or a building or part of building or both) held by the owner or by the lessee under a finance lease) to earn rental or for capital appreciation or both,
rather than for:
(a) use in the production or supply of goods or services or for administrative purpose; or
(b) sale in the ordinary course of business

A property interest that is held by a lessee under an operating lease may be classified an accounted for as investment property provided that:
(a) the rest of definition of investment property is met;
(b) the operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases; and
(c) the lessee uses the fair value model set out in this Standards for the asset recognized.

Investment property shall be recognized as an asset when, and only when;
(a) it is probable that the future economic benefits that are associated with the investment
property will flow to the entity; and he cost of the investment property can be measured reliably.
(b) the cost of the investment property can be measured reliably.

An investment property shall be measured initially at is cost. Transaction costs shall be included in the initial measurement.

The initial cost of a property interest held under a lease and classified as an investment property shall be as prescribed for a finance lease by paragraph 20 of IAS 17, ie the asset shall be recognized at the lower of the fair value of the property and present value of the minimum lease payments. An equivalent amount shall be recognized as a liability in accordance with that same paragraph.

The standard permits entities to choose either:
(a) a fair value model, under which an investment property is measured, after initial
measurement, at fair value with changes in fair value recognized in profit or loss;
(b) a cost model, the cost model is specified in IAS 16 and requires an investment
property to be measured after initial measurement at depreciated cost (less any accumulated impairment losses). An entity that chooses the cost model discloses the fair value of its investment property.

The fair value of investment property is the price at which the property could be exchanged between knowledgeable, willing parties in an arms length transaction.

An investment property shall be derecognized (eliminated from the balance sheet) on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected form its disposal.

Gains or losses arising from the retirement or disposal of investment property shall be determined as the difference between the net disposal proceeds and the carrying amount of the assets and shall be recognized in profit or loss (unless IAS 17 requires otherwise on a sale and leaseback) in the period of the retirement or disposal.
4. Valuations under (IFRS 3) Business Combination

as issued at 1 January 2011. Includes IFRSs with an effective date after 1 Jan 2011 but not IFRSs they will replace.

The objective of the IFRS is to enhance the relevance, reliability an comparability of the information that a reporting entity provides in its financial statements about a business combination an its effects. It does that by establishing principles and requirements for how an acquirer:

(a)recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquirer:
(b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Core principle
An acquirer of a business recognizes the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of acquisition.

Appling the acquisition method
A business combination must be accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree). Formations of a joint venture or the acquisition of an asset or a group of assets that does not constitute a business combinations.

The IFRS establishes principles for recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Any classification or designations made in recognizing these items must be made in accordance with the contractual terms, economic conditions, acquirers operating or accounting policies and other factors that exist at the acquisition date.
Each identifiable asset and liability is measured at its acquisition-date fair value. Any non-controlling interest in an acquiree is measured at fair value or as the non-controlling interests proportionate share of the acquirees net identifiable assets.

The IFRS requires the acquirer, having recognized the identifiable assets, the liabilities and any difference between;
the aggregate of the consideration transferred, any non-controlling interest in the acquiree and, in a business combination achieved in stages, the acquisition-date fair value of the acquirers previously held equity interest in the acquiree; and
the net identifiable assets acquired.

The difference will, generally, be recognized as goodwill. If the acquirer has made a gain from a bargain purchase that gain is recognized in profit or loss.
The consideration transferred in a business combination (including any contingent consideration is measures at fair value.

In general, an acquirer measures and accounts for assets acquired and liabilities assumed or incurred in a business combination after the business combination has been completed in accordance with other applicable IFRSs. However, the IFRS provides accounting requirements for reacquired right, contingent liabilities contingent consideration and indemnification assets.


The IFRS requires the acquirer to disclose information that enables users of its financial statement to evaluate the nature an financial effect of business combinations that occurred during the current reporting period or after the reporting date but before the financial statements are authorized for issue. After a business combination, the acquirer must disclose any adjustments recognized in the current reporting period that relate to business combinations that occurred in the current or previous reporting periods.

Source from ICAEW Library Information Service
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