International Valuation Standards 7
International Valuation Standards 7
International Valuation Standards 7
Types of property
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Index
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Content of International Valuation Standards
z Introduction
Î About the International Committee for Valuation Standards (history,
membership, functions, results)
Î About International Valuation Standards
• Goals and scope
• Organization
• Format (structure)
• Dates of adoption
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Content of International Valuation Standards
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Content of International Valuation Standards
z Code of Conduct
Î Scope
Î Definitions
Î Ethics
Î Competency
Î Disclosures (explanations and statements)
Î Reporting the value
z Types of property
Î Real property
Î Personal property
Î Business
Î Financial interest
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Content of International Valuation Standards
z Standards
Î Introduction: defining concepts of market and “non-market” values
Î IVS 1: Valuation based on market value concept
Î IVS 2: Valuation based on other (“non-market”) concepts
Î IVS 3: Appraisal Report
z Applications
Î IVA 1: Appraisal necessary for composing financial statements
Î IVA 2: Appraisal necessary for securing of debts
z White Paper
Î Appraisal of value in conditions of emerging markets
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Content of International Valuation Standards
z Guidance Notes
Î GN 1: Appraisal of real property
Î GN 2: Appraisal of leased property
Î GN 3: Appraisal of facilities and equipment
Î GN 4: Appraisal of intangible property
Î GN 5: Appraisal of personal property
Î GN 6: Appraisal of company’s value
Î GN 7: Appraisal of property exposed to hazardous and toxic
substances
Î GN 8: Depreciated replacement costs (DRC)
Î GN 9: Discounted cash flow (applied in market and “non-market”
valuation concepts)
Î GN 10: Appraisal of agricultural property
Î GN 11: Appraisal control
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Content of International Valuation Standards
z Guidance Notes added in seventh edition of IVS (February 2005)
Î GN 12: Appraisal of specialized trading property
Î GN 13: Group (large-scale) appraisal for property tax purposes
Î GN 14: Appraisal of property in extracting industries
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Content IVS 2003
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Introduction
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R General Concepts and Principles of Appraisals
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Code of Conduct
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Professional Codes
z IVS Code of Conduct z ASA Principles of Appraisal Practice
Î Scope and definitions and Code of Ethics
Î Ethics Î Scope and definitions
• Integrity Î Goals of appraisal work
• Conflict of interest
Î Primary duties and responsibilities of
• Confidentiality
appraiser
• Independence
Î Appraiser’s responsibilities to client
Î Competency
• Accepting instructions
Î Appraiser’s responsibilities to
• External cooperation
colleagues and to the Association
• Efficiency and diligence Î Appraisal methodologies and practice
Î Disclosure (explanations and Î Unethical and unprofessional appraisal
reports) procedures
Î Reporting values Î Appraisal report
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IVS Code of Conduct
z Scope
Î Appraisers accept the IVS willingly or in compliance with the laws
Î Code has no formal significance
Î Acceptability of appraisal
z Definitions
Î Assumptions
Î Limiting circumstances
Î Appraiser (internal and external)
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IVS Code of Conduct
z Ethics
Î Integrity
• Honesty, law compliance, and regulations
• Unacceptable ambiguity, frauds, inaccuracies, bias
• Unacceptable abuse or inappropriate interpretation of professional license
• Unacceptable advertising based on false statements
Î Conflict of interest
• Providing the same service to a number of clients
• Conflict of interest of different clients, valuation companies, personal...
Î Confidentiality
Î Independence and impartiality
• Objectivity, independence, impartiality
• Rejection of results or conclusions imposed in advance
• Unconditional fees
• Data check
• Hypothetical presumptions
• Objectivity in control of work of others
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IVS Code of Conduct
z Competency
Î Accepting instructions
• Before accepting an assignment, appraiser must be confident about
having necessary knowledge, experience, and knowledge of appropriate
market, law, and language
Î External cooperation
• Ensuring associates’ competency
• Clients concurrence and notice in report
Î Efficiency and thoroughness
• Efficiency in performance of tasks, keeping the clients permanently
informed
• Refusing “impossible missions”
• Defining engagement in writing
• Independence check of data and information
• Preparation and safekeeping of attached documentation (5 years) 12
IVS Code of Conduct
z Disclosure (explanations and statements)
Î Defining engagement, presumptions, scenarios, limiting
circumstances
Î explanations for any selections, calculations, and conclusions
Î Disclosing potential conflict of interest
Î Draw boundaries in relationship with client (internal/external
appraiser)
Î Limitations related to appraisal quality and external associates
Î Limited options for utilization of an appraisal
Î Disclosing departures for the Standard
z Reporting values
Î Defining engagement, description of work, presumptions, scenarios,
limiting circumstances
Î Statement asserting that the appraisal is in compliance with the IVS
(and possible departures)
Î Professional qualifications and signature of appraiser 13
Î Specific statements in compliance with local regulations
ASA PAP and Code of Ethics
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ASA PAP and Code of Ethics
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ASA PAP and Code of Ethics
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ASA PAP and Code of Ethics
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ASA PAP and Code of Ethics
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ASA PAP and Code of Ethics
z Appraisal report
Î Description of property which is subject of appraisal
Î Defining goals of appraisal
Î Stating unforeseen and limiting circumstances related to appraisal
Î Description and explanation of used appraisal methods
Î Statement of appraiser’s independence
Î Appraiser’s responsibility for clarity and unambiguousness of
analysis, opinions, and conclusions presented in the report
Î Statement on obligation to renew the license
Î Signing reports and including opposite opinions
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Content IVS 2003
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T Code of Conduct
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Structure of Standards and Applications
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T Introduction
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N Scope
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A Definitions
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D Ties to accounting standards
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Text of standard / application
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L Discussion
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C Report requirements
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T Dozvoljena odstupanja
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O Entering into the effect
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IVS 1: Appraisal of Market Value
z Scope
Î IVS 1 relates to MARKET value of property, primarily real property, as
well as connected elements
Î Appraised property is treated as subject of sale in the (open) market,
and not as part of going-concern
z Definitions
Î Market value is evaluated cash amount for which the property could
be traded on certain date , in transaction between interested buyer
and interested seller, under objective circumstances (“arm’s
length”), after appropriate marketing, where both parties possess
appropriate knowledge and information, and act with no coercion.
Î HABU - Highest and Best Use: most likely use physically possible,
legally allowed, financially feasible, and results in highest value of
property
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IVS 1: Appraisal of Market Value
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IVS 1: Appraisal of Market Value
z Standard
Î Compliance with IVS 1 means compliance with the Code
Î In appraisal of market value appraiser must:
• Perform and explain appraisal in unambiguous and clear manner
• Ensure that used data is market data
• Ensure use of appropriate methods and techniques
• Ensure sufficient information for analysis, conclusion, and results to be
completely comprehensible to report user
• Compose report in compliance with the IVS 3, i.e. include in the report:
Î Defining the assignment, presumptions, scenarios, limiting circumstances
Î Description and explanation of used appraisal methods
Î Explanations for all selections, calculations, and conclusions
Î Disclosing potential conflict of interest
Î Drawing boundaries in relationship with client (internal/external appraiser)
Î Limitations related to appraisal quality and outside associates
Î Limiting options for use of appraisal
Î Disclosing departures from the Standards
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IVS 1: Appraisal of Market Value
z Allowed departures
Î Only if in compliance with IVS 3
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IVS 2 : Appraisal of "Non-Market" Values
z Standard
Î Compliance with IVS 2 implies compliance with the Code
Î In appraisal of “non-market” value the appraiser must:
• Perform and explain the appraisal in unambiguous and clear manner
• Ensure that used data is task appropriate
• Ensure use of appropriate methods and techniques
• Ensure sufficient information for analysis, conclusion, and results to be
completely comprehensible to report user
• Compose report in compliance with the IVS 3, i.e. include in the report:
Î Defining the assignment, presumptions, scenarios, limiting circumstances,
and it should be indicated that the value is non-market
Î Description and explanation of used appraisal methods
Î Explanations for all selections, calculations, and conclusions
Î Disclosing potential conflict of interest
Î Drawing boundaries in relationship with client (internal/external appraiser)
Î Limitations related to appraisal quality and outside associates
Î Limiting options for use of appraisal
Î Disclosing departures from the Standards
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IVS 2 : Appraisal of "Non-Market" Values
z Requirements in terms of reporting
Î Mostly contained in the text of the standards
Î Mandatory to state definition of the value, with note that it is non-
market
Î Must state limiting and unforeseen circumstances
Î In accordance with IVS 3
z Allowed departures
Î Only if in compliance with IVS 3
z Scope
Î IVS 3 relates to all types of appraisal reports
Î It is mandatory both for internal and external appraisers
Î In special cases IVA 1 and IVA 2 are authorized
z Definitions
Î Appraisal report
Î Verbal report
Î Written report
Î Defining (specification) of appraisal assignment
Î Statements of compliance with the standards
Î Special, uncommon, or atypical presumptions
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IVS 3: Appraisal Report
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IVS 3: Appraisal Report
z Standard
Î Compliance with IVS 3 implies compliance with the Code
Î Elaborates in detail the content of report
• All definitions, assumptions, data, analysis, conclusions... Must be clearly
and unambiguously presented
• Any limitations regarding the use of the report
• All statements of independence, standards, confidentiality etc
• All necessary data about the appraiser
Î Defines use of electronic form of reporting
Î Obligation of creating and safekeeping of working documentation (5
years)
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IVS 3: Appraisal Report
z Reporting requirements
Î Contained in text of the standard
Î Appraiser must clearly indicate his/her role (internal, external,
consultant etc)
z Allowed departures
Î No departures are allowed in terms of clarity and accuracy of
conclusions, or basic assumptions and limiting circumstances
Î In special cases, only if they are clearly disclosed, and do not
jeopardize credibility of results
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Structure of Guidance Notes
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Introduction
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Ties to the Accounting Standards
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O Text of the Notes
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E Entering Into Effect
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GN 1: Appraisal of Real Property
z Scope
Î GN 1 refers to appraisal of real property
Î Basic elements of GN 1:
• Key terms
• Summary of appraisal procedure
• Explanation of significance of principles and concepts
• Discussion requires reporting
• Presentation of the notes
Î ITS PURPOSE IS NOT TO PRESCRIBE METHODOLOGY
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GN 1: Appraisal of Real Property
z Definitions
Î General concepts and principles
Î Comparable data
Î Comparison elements
Î Best use
Î Market
Î Market value
Î Ownership rights
Î Real estate / real property
Î Units of comparison
Î Cost approach
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GN 1: Appraisal of Real Property
z Instruction
Î Clearly distinguish whether the market value is being appraised or not,
and use appropriate standard
Î Differentiate appraisal process from appraisal report
Î Appraisal process
• Defining the assignment
• Gathering, selection, and analysis of data
Î General data (macroeconomic, regional etc)
Î Specifics of the appraised property (history, costs, prices, revenues, use)
Î Comparative (competition, similar transactions etc)
• Analysis of the best use (land as free)
• Assessment of land value
• Implementation of appraisal approach and method (cost, market, return)
• Making the conclusion on the value
• Writing the report
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GN 1: Appraisal of Real Property
Î Insist on client’s instructions and assignment definition in writing
Î When using (analyzing) comparative data, it is important to establish
elements of comparability, for example
• Physical characteristics
• Economic (financial) characteristics
• Utilization
• Ownership rights
• Location
• Financial and other terms of sale
• Market conditions
• Possible costs incurred immediately upon a sale
• Non real property transaction elements
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GN 1: Appraisal of Real Property
Î Three possible approaches in appraisal of real property
• Cost approach
• Comparison of sales prices
• Capitalization of return
Î When it is not possible to determine market value, “surrogate” is
used – Depreciated replacement costs (DRC), explained in GN 8
Î Three types of depreciation – decrease of value (obsolescence)
• Physical
• Functional/technological
• External (economic)
Î Mandatory analysis of life span and best use
• Legality, feasibility...
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GN 1: Appraisal of Real Property
Î Primary methods in appraisal of land
• Direct comparison of sales prices
• Division into profitable parts
• Allocation (land/infrastructure)
• Extraction (value of infrastructure)
• Residual method
• Rent capitalization
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GN 2: Appraisal of Leased Property
z Scope
Î GN 2 refers to appraisal of leased property
Î It is applied in accordance with the general concepts and principles,
as withIVS 1 and IVS 2 as well
Î Applicable only in countries where right of lessee of leased real
estate is treated as special type of property
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GN 2: Appraisal of Leased Property
z Definitions
Î Lease
Î Lessor
Î Lessee
Î Lease levels
Î Lease types
• Land lease
• Percentage lease
Î Types of rent
• Market rent
• Contractual rent
• Proportional rent
Î Operative lease
Î Financial lease
Î Value component (for owner and for lessee)
Î Sale and reversed lease
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GN 2: Appraisal of Leased Property
z Instruction
Î It is necessary to consider in detail specific contracts and resulting
rights
Î Pay special attention to possibility of multilevel lease
Î Each right over property must be appraised separately
Î If market value is being appraised, use market rent
Î If investments were made in leased property, it can be appraised
with or without improvements (in second case, improvements are
appraised separately and subtracted from “improved” value)
Î It is possible that leased property may have negative value
• If it is a liability for client
• If contractual rent is significantly higher than the market one
Î It is always necessary to use original contracts
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GN 3: Appraisal of Facilities and Equipment
z Scope
Î GN 3 refers to appraisal of facilities and equipment (overlaps partially
with the GN 1)
Î Implemented in accordance with the IVS 1 and 2, and IVA 1
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GN 3: Appraisal of Facilities and Equipment
z Definitions
Î Facilities
Î Machines
Î Equipment
Î Market value
Î Utilization value
Î Liquidation value
Î Salvage value
Î Insurance value
Î Auction value
Î Reproduction value
Î Value for compensation of damages
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GN 3: Appraisal of Facilities and Equipment
z Instruction
Î Mostly as GN 1
Î It is possible that same assignment may require appraisals for
several definitions of value – in that case they should be clearly
defined and separated
Î For common parts of several facilities or machines, make sure no
omissions or duplications are made (especially if they are related to
already appraised real estates)
Î Four basic categories
• Machines and equipment installed in strict relation to basic activity
• Ancillary equipment (furniture, vehicles, molds, tools...)
• Edifices of parts of edifices fused with equipment or process
• Installations and infrastructure (usually appraised within buildings)
Î In case of appraisal of liquidation value, keep in mind the period of
liquidation
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GN 4: Appraisal of Intangible Property
z Scope
Î GN 4 refers to appraisal of intangible property (assets)
Î Although specific, it is closely tied to all three IVS
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GN 4: Appraisal of Intangible Property
z Definitions
Î Book value
Î Company (business)
Î Capitalization (factor, rate)
Î Cash flow (gross, from own capital, from invested capital)
Î Discount rate
Î Economic life span
Î Going Concern
Î Goodwill
Î Legal life span
Î Return, market, and cost approach
Î Intangible investments (rights, relationships, intellectual property,
other)
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GN 4: Appraisal of Intangible Property
z Instruction
Î Appraisal is mostly based on clients data – quote
z Scope
Î GN 5 refers to appraisal of personal property not handled in GN 3
Î Facilities and equipment also represent personal (moveable)
property (GN 3)
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GN 5: Appraisal of Personal Property
z Definitions
Î Auction price
Î Agreed price
Î Collection
Î Cost, return, market approach
Î Furniture and office equipment
Î Inventory
Î Capitalization of profit
Î Essential value
Î Investments in rented property
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GN 5: Appraisal of Personal Property
z Instruction
Î Mostly as GN 3
Î Necessary to consider (and appraise) intangible part of value
(overlapping with GN 4)
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GN 6: Appraisal of Company Value
z Scope
Î GN 6 refers to appraisal of value of a company as a whole
Î Cannot be considered separately from the IVS
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GN 6: Appraisal of Company Value
z Definitions
Î Book value and corrected book value
Î Approach based on property (cost)
Î Return approach
Î Market approach
Î Company
Î Premiums and discounts
Î Cash flow, discount rate, residual value
Î Own and invested capital
Î Return rate
Î Permanent working capital
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GN 6: Appraisal of Company Value
z Instruction
Î Fully encompassed by the previous seminar
Î Appraisal steps
• Defining assignment
• Data gathering
• Data analysis
• Selection of appraisal method
• Implementation of appraisal method
• Making conclusion on the value
• Writing/presentation of the report
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GN 7: Hazardous and Toxic Substances
z Scope
Î GN 7 refers to appraisal of property in conditions of its exposure to
hazardous and toxic substances
Î Due to special regulations in some countries, modifications are
possible
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GN 7: Hazardous and Toxic Substances
z Definitions
Î Hazardous substances
Î Toxic substances
Î Environmental factors
z Instructions
Î Considering impact of presence of hazardous and toxic substances on
the value of property
Î It is necessary to assess own competency
Î Physical, legal, scientific, and technical aspects
Î Hiring experts for given area (and citing in the report)
Î If decrease of value exists, determine value as if removed
Î Clearly distinguish whether the danger exists or it is expected, and
whether it impacts the value of property
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GN 8: Depreciated Replacement Cost (DRC)
z Scope
Î GN 8 refers to appraisal of real and personal property, and it is in
direct relation to IVS 2 and IVA 1, as well as GN 1-5
Î DRC represents implementation of the cost approach and surrogate
for market value in conditions when market information is limited
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GN 8: Depreciated Replacement Cost (DRC)
z Definitions
Î Depreciated replacement costs
Î Special property (special purpose)
Î Improvements of property
Î Adequate profitability
Î Service potential
Î Modern equivalent
Î Decrease of value
Î Optimization
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GN 8: Depreciated Replacement Cost (DRC)
z Instruction
Î Must differentiate property traded in normal way from special
property
Î Value of land to be determined based on principle of market value,
with stating set limitations
Î Determine replacement costs, and then determine depreciation
Î Replacement costs can be determined through modern equivalent
Î Three types of depreciation – decrease of value (obsolescence)
• Physical
• Functional/technological
• External (economic)
Î Take into consideration possibility of alternative use
Î Testing the service potential / adequate profitability
Î Report in accordance with IVS 3
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GN 9: Discounted Cash Flow
z Scope
Î GN 9 refers to appraisal by DNT method, both for market and “non-
market” concepts of value (tied to GN 6)
Î Special attention given to presumptions (probable, reasonable, and
sustainable)
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GN 9: Discounted Cash Flow
z Definitions
Î Discounted cash flow
Î Financial modeling
Î Investment analysis
Î Discount rate
Î Internal return rate
Î Net present value
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GN 9: Discounted Cash Flow
z Instruction
Î Covered in detail by the last seminar
Î To the greatest extent, input should be market data
RESIDUAL PERIOD
PROJECTION PERIOD
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GN 9: Discounted Cash Flow
Present value of net income 254,572 208,588 205,826 194,745 69,601 71,341
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GN 10: Appraisal of Agricultural Property
z Scope
Î GN 10 refers to appraisal of agricultural property
Î Attention given to classification of property and specific of
agriculture
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GN 10: Appraisal of Agricultural Property
z Definitions
Î Agricultural farm
Î Irrigated land
Î Several year seedlings
Î Stock farm
Î Dairy farm
Î Forestry
Î Special purpose property
Î Integrated entities
Î Biological agents
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GN 10: Appraisal of Agricultural Property
z Instruction
Î Required specialized skills or experts
Î Classification of agricultural property
• Land
• Structural improvements
• Facilities and machines (physically tied to land)
• Facilities and machines (not physically tied to land)
• Biological agents (physically tied to land)
• Biological agents (not physically tied to land)
Î Within domain of “classical property” use appropriate GN
Î Consider carefully specifics related to agricultural utilization and
character
Î Different physical components ought to be appraised separately
Î Within domain of reporting, IVS 3 applies
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GN 11: Appraisal Control
z Scope
Î GN 11 refers to appraisal control performed by another appraiser
Î Internal vs. external control
Î Control procedure and reporting procedure
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GN 11: Appraisal Control
z Definitions
Î Appraisal control
Î Administrative control
Î Technical control
Î Office control
Î Field control
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GN 11: Appraisal Control
z Instruction
Î Control steps similar to appraisal steps
• Defining assignment
• Forming an opinion about completeness of controlled report
• Forming an opinion about adequacy and relevancy of presented data
• Forming an opinion about adequacy of selected methods
• Forming an opinion about quality of analysis, opinions, and conclusions
presented in controlled report
Î Differentiate defining appraisal assignment from control assignment
Î Report similar to appraisal report
Î As with the appraisals, it is not allowed to use information about
events that occur after appraisal date
Î Reasons to agree or disagree must be explained in detail
Î In case completely new appraisal is done, it must be in compliance
with IVS
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Useful Information
STANDARDS, METHODOLOGIES, DATA
ARTICLES
www.eurostat.com (org)
www.ivsc.org www.valuationresources.com
www.appraisers.org www.rmahq.org
www.bvappraisers.org www.valueline.com
www.damodaran.com www.ibbotson.com
www.bvresources.com www.damodaran.com
www.ppcnet.com www.bizcomps.com
www.BVMarketData.com
www.mergerstat.com
milenkovic_nina@yahoo.com
+381 63 254 204 73
Literature
z Poznanić, Leko, Vlahović: Procena vrednosti kapitala, Ekonomski institut Beograd,
1998. +381 11 2688-255
z Copeland, Thomas E., Tim Keller, and Jack Murrin. Valuation: Measuring and
Managing the Value of Companies. Colorado Springs, CO: John Wiley & Sons,
2000. (800) 825-8763. www.wiley.com.
z Damodaran, Aswath, Investment valuation: Tools and Techniques for
Determining the Value of Any Asset, 2nd edition. John Wiley & Sons, Inc., 2002.
(877) 762-2974. (888) BUS-VALU or www.bvresources.com.
z Fischman et al.: Guide to Business Valuation, PPC, 2003. www.ppcnet.com
z Pratt, Shannon R, Robert F. Reilly, and Robert R Schweihs. Valuing Small
Businesses and Professional Practices, 3rd edition. New York, NY: McGraw-Hill,
1998. (800) 722-4726. (888) BUS-VALU or www.bvresources.com.
z Pratt, Shannon P. Cost of Capital—Estimation and Applications, 2nd edition. New
York, NY: John Wiley & Sons, 2002. (800) 225-5945. www.wiley.com. (888) BUS-
VALU or www.bvresources.com.
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Literature Related to Appraisal of Property
z Richard M. Betts, ASA, and Silas J. Ely. Basic Real Estate Appraisal , (2004,
6th edition). www.appraisers.org/pubs
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