the hong kong institute of surveyors - 冰匠吉吉兆同划冰 … · 2017. 11. 23. · 111...

總辦事處 Head Office

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VALUATION Standards 2017

HKISFOR RATIFICATION PURPOSE

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FOR RATIFICATION PURPOSE

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1HKIS Valuation Standards 2017

PART A: INTRODUCTION

PART B: GLOSSARY OF TERMS USED IN THE STANDARDS

PART C: GENERAL VALUATION STANDARDS

15 VS1–CompliancewithInternationalValuationStandardsandHKISValuationStandards

20 VS2–QualificationsofaValuer/ValuationReviewer

22 VS3–Ethics,ProfessionalismandConflictofInterests

32 VS4–TermsofEngagement

41 VS5–BasesofValue

52 VS6–ValuationApproachesandMethods

66 VS7–ValuationProcessesandRecords

69 VS8–AssumptionsandSpecialAssumptions

72 VS9–Reporting

83 VS10–RealPropertyInterests

Part D: GUIDANCE NOTE

93 VGN1–BusinessInterestsandBusinessEnterprises

99 VGN2–IntangibleAssets

110 VGN3–ValuationforFinancialStatementsandAccountsReportingPurposes

113 VGN4–ValuationsofRealPropertiesforSecuredLending

Annex–InternationalValuationStandards(IVS)2017

TABLE OF CONTENTS


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PART A:INTRODUCTION


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1. Background of the HKIS Valuation Standards (“the Standards”)

1.1 ‘The HKISValuationStandardsonTrade-relatedBusinessAssetsandBusinessEnterprises’wasfirstpublishedin2004(the“HKISBVS”)tocaterfor thegrowingneedofthegeneralpublic forbusinessvaluation reportsduetotheprosperousdevelopment of the merger and acquisitionactivities inHongKong since late-1990s.ThefirstissueoftheHKISBVS,whichisamandatorystandardtoourmembers,comprised5practicestatementsand2guidancenotes.

1.2 ‘The HKIS Valuation Standards on Properties’wasfirstpublishedin2005(the“HKISPVS”)tocaterforthegrowingneedofthegeneralpublicforaprofessionalrealpropertyvaluationserviceduetothedevelopmentofamoresophisticatedreal property market in both Hong Kong andneighbouring regions when entering the 21st century.ThefirstissueoftheHKISPVS,whichis a mandatory standard to our members,comprised8valuationstandardsand1guidancenote.ThereexistsaseparateGuidanceNotesonValuationsofPropertiesforMortgagePurpose,Second Edition, 2005,which is referred to bythe HKISPVSVS8.

1.3 ‘The HKISValuationStandards–2012Edition’was first published to cater for the drasticchanges over in the capital market and thefinancialreportingstandardsinHongKongandagreaterdemandforvarioustypesofvaluation services on different types of property. HKIS GPD believed that a unified and concise setof valuation standards, which was mandatoryin nature, should be issued to cope with thechanges.

1.4 Since the 2012 Edition of the Standards,there have been significant developmentsin International Valuation Standards (“IVS”)published by the International ValuationStandardsCouncil(“IVSC”),ofwhichtheHKISisaValuationOrganisationMember.AstheHKISiscommittedtoachievingtheobjectiveofsecuringasetofcommonvaluationstandardsacceptableworldwide,theHKISwouldtherefore,whereverpossible,adoptthestandardssetbytheIVSCinthe Standards.Inthelightofsuchdevelopment,the Valuation Standards Panel of the HKIS General PracticeDivision (“GPD”) Council hasdecided to conduct a comprehensive review

of the Standards with a view to continuingto maintain the best professional standard inpreparingvaluation reports.

1.5 In preparing the Standards, the HKIS hastaken into account opinions and advice givenby members of the Securities and FuturesCommissionofHongKong(“SFC”),HongKongInstitute of Certified Public Accountants andTheHongKongAssociationofBankswhereverappropriate, and intends that the Standards shallbeusedbythememberswhodealwiththevaluationofproperties.

1.6 The HKIS should endeavor to ensure thatall information contained in the Standards isaccurate,updatedandcomplieswiththe laws,rulesandregulationsofHongKong.TheHKIS reservestherightstomakeanychangestothe Standards fromtimetotimeasa resultofanychanges in law, rules and regulations, marketpractices,governmentpolicies,requirementsoftheHongKongExchangesandClearingLimited(“HKEx”)orSFCandforanyotherreasonsastheHKISdeemsappropriatewithoutfurthernotice.The HKISwillpublishanupdatedversionofthe Standardsfromtimetotimeandmembersshallobtainanupdatedversionofthe Standardsfromthe HKISwebsiteatwww.HKIS.org.hk. The HKIS acceptsnoresponsibilityandshallnotbeheldresponsibleorliableforanylossesordamagesthat maybesufferedorincurredbyanypersonorentityasaresultofhisoritsrelyingonanyinformation provided in the Standards. In theevent that anymember has queries or doubtsarisingoutoforconcerningtheinterpretation,applicationorimplementationofthe Standards,the member should write to the HKIS, inordertoseekitsviewonsuchqueriesordoubts.The StandardsshallbegovernedbyandconstruedinaccordancewiththelawsofHongKong.Intheevent that there isany inconsistencybetweenthe lawsofHongKongand the Standards, thelawsofHongKongshallprevailtotheextentofsuchinconsistency.

2. Principal objectives of the Standards

2.1 Theprincipalobjectivesofthe Standards are to provide appropriate directions or guidance tomemberssothatthevaluations/reportspreparedby themcan achieve thehighest standardsofprofessionalism,integrity,clarity,reliabilityand


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4 HKIS Valuation Standards 2017

impartiality,andthatthevaluations/reports are prepared in accordance with the recognisedbasesthatareappropriateforthepurposesoftheirpreparations.

2.2 The Standardsdefine:

(a) Criteriausedtoestablishwhetheramember isappropriatelyqualifiedtoactasavaluer (asdefinedinthe Standards)andthestepssuggested to assist them in dealing withanyactualorperceivedthreatagainsttheiracting independently and impartially inpreparingavaluation/report;

(b) Matters to be considered by a member whenagreeingtothetermsandconditionsofanengagementforavaluation;

(c) Bases of value, assumptions and material considerations that must be taken intoaccountwhenpreparingavaluation/report;

(d) Minimumcontentsrequiredofareport;and

(e) Matters to be disclosed if the valuations/reports mayberelieduponbythird parties.

2.3 The Standardsdonot:

(a) instruct members on how to value inindividualcases;

(b) prescribe a particular format for reports: provided the mandatory requirements inthe Standardsaremet,reports shouldalwaysbe appropriate and proportionate to thetask;and

(c) override standards specific to, andmandatorywithin,individualjurisdictions.

2.4 Itisemphasisedthatalthoughthe Standardssetsout theminimum standards that themembers shall comply with in valuations, it remainsthe responsibility of an individual member to exercise his reasonable and professionaljudgement in a valuation, including but notlimitedtoincorporatingallrelevantinformationinto the valuation reports.

2.5 The Standards adopts in full and applies theInternational Valuation Standards (“IVS”)published by the International ValuationStandardsCouncil (“IVSC”), includedaspartofthe Standards.

2.6 The aim of the Standards is to engenderconfidence,andtoprovideassurancetoclients and recognised users alike, that a valuation providedbyaqualifiedvaluerwillbeundertakentothehighestprofessionalstandardsoverall.

2.7 The Standardsisrequiredtobeusedandcompliedwith by members who deal with a valuation.However,intheeventthatthereisanyconflictbetween the Standards and the standards oflocal practice overseas, the Standards should notbeinterpretedasimposingalowerstandardthan the standards adopted overseas and themembersshallfollowthe Standards to the extent asmuchasispracticable.

2.8It is the duty of all members carrying outvaluationwork to have knowledge of and befullyaware of thecontentsand requirementsofthe Standards,andtoapplythem.

3. Arrangement of the Standards

3.1 The Standards comprises General ValuationStandards (VS) and Valuation Guidance Note(VGN).

3.2 The General Valuation Standards (VS) aremandatory (unless otherwise stated) for allmembers providing valuations in writing. TheydefinetheparametersforcompliancewiththeStandardsandcontainthespecificrequirementsandrelated implementationguidance,directedto the provision of a valuation that is IVS-compliant.

3.3 TheValuation Guidance Notes (VGN) providefurtherimplementationguidanceinthespecificinstances listed. Thus, among the topicscovered, they include valuations for specificpurposes, and valuations of certain specificasset types, where particular issues and/orpractical considerations expressly need to betakenintoaccount.TheseVGNsembody ‘bestpractice’–thatisproceduresthatintheopinionofHKIS meet a high standard of professionalcompetence.Whilenotthemselvesmandatory,theVGNsdoincludelinksandcrossreferencesto the material in the VS that is mandatory.Thisisintendedtoassistmembers inidentifyingmaterials relevant to the particular valuation assignmenttheyareundertaking.

3.4 The Standards contains a Glossary Section atPartBtoenhanceandmaintaintheprofessional


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PublishedbyTheHongKongInstituteofSurveyorsRoom1205-07,12thFloorWingOnCentreNo.111ConnaughtRoadCentral,HongKong

Tel : 2526 3679 Facsimile :28684612E-mail :[email protected] :www.HKIS.org.hk

© HKIS December 2017. Unless otherwise stated,copyright in all or any part of the Standards restswiththeHKIS,andsavewiththepriorwrittenconsentoftheHKIS (whichconsentmaybegrantedorrejectedatthesole discretion of the HKIS), no part of the Standardsshall be reproduced by anymeans,whether electronic,mechanical, photocopying or otherwise, now knownortobedevised.Allrightsarereserved.

standard of the members in preparing thevaluations/reports in accordance with therequirementssetoutinthe Standards.

4. Relationship to the financial reporting standards

4.1 The Instituteconsidersthatitisnotappropriatetoprovideadirect linkbetween the Standards and the financial reporting standards inHongKong. However, the Institute notes that insomeinstancesmembersneedtofollowasetofproceduresasrequiredbythefinancialreportingstandardstoarriveatavalueotherthanamarket value to aid the auditors in the establishmentor restatementoffinancial statements, suchas‘value inuse’or ‘purchasepriceallocation inabusinesscombination’.Inthiscontext,members need to disclose the set of procedures in thereportandtofollowthe Standardswheneverandwhereverpossibleinpreparingthereport.

5. Effective date, amendments and additions

5.1 This HKIS Valuation Standards 2017 comesintoeffecton [30December2017] to replacethe previous HKIS Valuation Standards 2012Edition.The Standardsshallapplytoallvaluationswhere the valuation dateisonorafterthatdate.Early adoption of these standards, after finalapproval,isencouraged.

5.2 Thecontentsofthe Standardsareunderregularreview and any amendments and additionswill be issued by theHKIS from time to timeasrequired.Wheneverthe Standardshasbeenamended, the effective date of the amendedStandardswillbeupdated.

6. Other information

6.1 In the Standards:(a)referencestothemasculineinclude, where appropriate, the feminine;and (b) words in the singular number includetheplural andviceversa; and (c)headingsareinsertedforconvenientreferenceonlyandhavenoeffect in limitingorextendingthelanguageoftheprovisionstowhichtheyrefer.

6.2 The Standardshasbeenapprovedandpublishedby theHKIS General Council as the guidancenotesunderBye-Law6.1ofPartVIProfessionalConductofBye-LawsoftheHKIS.

6.3 TheIVS2017arereproducedinfullattheendofthisStandards.TheyareadoptedandappliedthroughthisStandards,withaneffectivedateof[30December2017].

6.4 Members are reminded that IVSC reserves therights tomake further amendments to IVS atany time. Any consequential amendments tothis Standards, ifnecessary inconnectionwithany further amendments of IVS,will bemadeas soon as possible, butmaynot be reflectedinhardcopyversionsofthe Standards.Members are reminded to check, fromtime totime, forthe most updated version of the Standards at the HKISwebsitewww.HKIS.org.hk

6.5 If members or any other persons wish tocommentorgivetheirviewsonthe Standards,theyarewelcomed tocontact theHongKongInstitute of Surveyors by writing to Room1205-07, 12th Floor, Wing On Centre, No.111ConnaughtRoadCentral,[email protected].


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PART B:GLOSSARY OF TERMS USED IN THE STANDARDS


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1. Thisglossarydefinestermsusedinthe Standards thathaveaspecialorrestrictedmeaning.Whereatermdefinedbelowisusedinthe Standards,itis identified inthetextof italic font.Wordsorphrasesnotinthisglossaryornotin italic fontfollowtheircommondictionarymeanings.

2. HKIS believes that members who prepare a report shall possess specialised skills,experiences, expertise and knowledge. Also,members shall communicate the proceduresto value and conclusions, in a manner that isclearandnotmisleading,totheirclients,unlessotherwiseinstructed.Assuch,itisadvisableforthevaluationprofessiontousecommonlyusedterms,whichdefinitionshavebeenestablishedclearly and consistently andhavebeenwidelyappliedintheprofessiontoenhanceconsistencyandtodevelopbettercommunications.

3. In order to enhance and maintain theprofessionalstandard,HKIShasadoptedcertaindefinitions published by various institutions,including but not limited to IVSC, in the Standards.Membersarehighlyrecommendedtoadoptsuchdefinitionsinthereports whenevernecessary.

4. If anymemberwishes to adopt any definitionthat ismaterially different from the definitionsetoutinthe Standards,themember shouldsetoutsuchdefinitionandtheauthoritativesourceofsuchdefinitionclearlyinthereport and,wherepossible, terms of engagement inordertoavoidmisunderstandings, confusion and potentialdisputes.

appraisal See valuation.

asset Itemsthatmightbesubjecttoavaluationengagement.Unlessotherwisespecifiedinthestandard,thistermcanbeconsideredtomeanasset,groupofassets,liability,groupofliabilities,orgroupofassetsandliabilities.

assumption Asuppositiontakentobetrue.Itinvolvesfacts,conditionsorsituationsaffectingthesubjectof,orapproachto,avaluation that,byagreement,donotneedtobeverifiedbythememberaspartofthevaluationprocess.Typically,assumptions are madewherespecificinvestigationbythevaluerisnotrequiredinordertoprovethatsomethingistrue.

basisofvalue Astatementofthefundamentalmeasurementassumptionsofavaluation.

client Theperson,persons,orentityforwhomthevaluationisperformed,thatagreestheterms of engagement or to which the reportisaddressed.Thismayincludeexternalclients(i.e.whenavaluerisengagedbyathird-party client)aswellasinternalclients (i.e.valuationsperformedforanemployer).

costapproach Anapproachthatprovidesanindicationofvalueusingtheeconomicprinciplethatabuyerwillpaynomoreforanassetthanthecosttoobtainanassetofequalutility,whetherbypurchaseorconstruction.


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dateofthereport Thedateonwhichthevaluersignsthereport.

dateofvaluation See valuation date.

departure Special circumstanceswhere themandatory applicationof the Standards may beinappropriateorimpractical.

depreciatedreplacementcost(DRC)

The current cost of replacing an asset with its modern equivalent asset lessdeductions forphysicaldeteriorationandall relevant formsofobsolescenceandoptimisation.

directors Theindividual(s)responsibleforthemanagementofacompany,firmorentity.Thisalso includes, where the context so admits, the corresponding officers chargedwith similar duties (for example, trustees) of an undertaking, enterprise or otherorganisation,whichdoesnothavedirectors.

equitablevalue The estimated price for the transfer of an asset or liability between identifiedknowledgeable andwilling parties that reflects the respective interests of thoseparties.

fairvalue Thepricethatwouldbereceivedtosellanasset,orpaidtotransferaliability,inanorderly transactionbetweenmarket participants at themeasurement date. (ThisdefinitionderivesfromInternationalFinancialReportingStandardIFRS13.)

financialstatements

Writtenstatementsofthefinancialpositionofapersonoracorporateentityandformal financial records of prescribed content and form.These are published toprovide information to awide variety of unspecified third-party users. Financialstatements carry a measure of public accountability that is developed within aregulatoryframeworkoffinancialreportingstandardsandthelaw.

firm Thefirmororganisationforwhichthememberworks,orthroughwhichthemember trades.Closelyconnectedcompanieswithinagroupshouldnormallyberegardedasasinglefirmunless:(i) Thecompaniesareseparatelegalentities(ii) There are no directors, partners or employees in common between the

companies(iii) Thereisnodirectorindirectfeesharingbetweenthecompaniesand(iv) Thereisnoaccesstoinformationorcommoninternaldatasharingarrangements

relatingtotheareaofconflict.

income approach Anapproachthatprovidesanindicationofvaluebyconvertingfuturecashflowstoasinglecurrentcapitalvalue.


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inspection Avisit toapropertyor inspectionofanasset, toexamine it andobtain relevantinformation,inordertoexpressaprofessionalopinionofitsvalue.However,physicalexaminationofanon-real estate asset,e.g.aworkofartoranantique,wouldnotbedescribedas‘inspection’assuch.

investmentproperty

Propertythatislandorabuilding,orpartofabuilding,orboth,heldbytheownertoearnrentalsorforcapitalappreciation,orboth,ratherthanfor:

(a) useinproductionorsupplyofgoodsorservices,orforadministrativepurposes,or

(b) saleintheordinarycourseofbusiness.

(the)Institute/HKIS TheHongKongInstituteofSurveyorsincorporatedundertheHongKongInstituteofSurveyorsOrdinance(Chapter1148–LawsofHongKong).

investmentvalue,or worth

Thevalueofanassettotheowneroraprospectiveownerforindividualinvestmentoroperationalobjectives.

jurisdiction Thelegalandregulatoryenvironmentinwhichavaluationengagementisperformed.Thisgenerallyincludeslawsandregulationssetbygovernments(e.g.country,stateandmunicipal)and,dependingonthepurpose,rulessetbycertainregulators(e.g.bankingauthoritiesandsecuritiesregulators).

market approach Anapproach thatprovidesan indicationofvaluebycomparing thesubjectasset withidenticalorsimilarassetsforwhichpriceinformationisavailable.

marketrent(MR) Theestimatedamountforwhichaninterest inrealpropertyshouldbeleasedonthe valuation datebetweenawillinglessorandwillinglesseeonappropriateleasetermsinanarm’slengthtransaction,afterpropermarketingandwherethepartieshadeachactedknowledgeably,prudentlyandwithoutcompulsion.

marketvalue(MV) Theestimatedamountforwhichanassetorliabilityshouldexchangeonthevaluation datebetweenawillingbuyerandawillingsellerinanarm’slengthtransaction,afterpropermarketingandwherethepartieshadeachactedknowledgeably,prudentlyandwithoutcompulsion.

marriagevalue Anadditionalelementofvaluecreatedbythecombinationoftwoormoreassets orinterestswherethecombinedvalueismorethanthesumoftheseparatevalues.

may Theword“may”describesactionsandproceduresthatvaluershavearesponsibilityto consider.Matters described in this fashion require the valuer’s attention andunderstanding. How and whether the valuer implements these matters in thevaluationengagementwilldependontheexerciseofprofessionaljudgementinthecircumstancesconsistentwiththeobjectivesofthe Standards.


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member AnymemberunderthemembershipofHonoraryGrade,ProfessionalandTechnicalGradeoranyaffiliateasreferredtointheConstitutionoftheHongKongInstituteofSurveyorsfromtimetotime.

methodofvaluation

A method of valuationisaprocedure,orseriesofsteps,toarriveatthevaluespecifiedin the basis of valuation. Example of such methods include market comparisonmethod,theinvestmentmethod,theresidualmethod,discountedcashflowmethodandtheprofitsmethod.

must Thework “must” indicates anunconditional responsibility.Thevaluermust fulfillresponsibilitiesofthistypeinallcasesinwhichthecircumstancesconsistentwiththeobjectivesofthe Standards.

realestate Landandallthingsthatareanaturalpartoftheland(e.g.trees,minerals)andthingsthathavebeenattachedtotheland(e.g.buildingsandsiteimprovements)andallpermanent building attachments (e.g. mechanical and electrical plant providingservicestoabuilding),thatarebothbelowandabovetheground.

report Unlessotherwisespecifiedinthe Standards,thistermcanbeconsideredtomean“valuation report”,“valuationreviewreport”orboth.

should Theword“should”indicatesresponsibilitiesthatarepresumptivelymandatory,Thevaluer must complywithrequirementsofthistypeunlessthevaluer demonstratesthat alternative actions which were followed under the circumstances weresufficienttoachievetheobjectivesofthe Standards.

Intherarecircumstancesinwhichthevaluerbelievestheobjectivesofthe Standards canbemetbyalternativemeans,thevaluer mustdocumentwhytheindicatedactionwasnotdeemedtobenecessaryand/orappropriate.

If a standard provides that the valuer “should” consider an action or procedure,consideration of the action or procedure is presumptivelymandatory,while theactionorprocedureisnot.

significantand/ormaterial

Assessing significance and materiality require professional judgement. However,thatjudgementshouldbemadeinthefollowingcontext:

• Aspectsofavaluation(includinginputs,assumptions,special assumptions,andmethodsandapproachesapplied)areconsideredtobesignificant/materialiftheirapplicationand/orimpactonthevaluationcouldreasonablybeexpectedto influence the economic or other decisions of users of thevaluation, andjudgements about materiality are made in light of the overall valuationengagementandareaffectedbythesizeornatureofthesubjectasset.

• Asusedinthesestandards,“material/materiality”referstomaterialitytothevaluationengagement,whichmaybedifferentfrommaterialityconsiderationsforotherpurposes,suchasfinancial statementsandtheiraudits.


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specialassumption An assumptionthateitherassumefactsthatdifferfromtheactualfactsexistingatthe valuation dateorthatwouldnotbemadebyatypicalmarketparticipant inatransactiononthevaluation date.

specialpurchaser A particular buyer for whom a particular asset has a special value because ofadvantagesarisingfromitsownershipthatwouldnotbeavailabletootherbuyersinamarket.

specialvalue Anamountthatreflectsparticularattributesofanassetthatareonlyofvaluetoaspecial purchaser.

specialisedproperty

A property that is rarely, if ever, sold in themarket, except byway of a sale ofthebusinessor entityofwhich it is part, due to theuniqueness arising from itsspecialisednatureanddesign,itsconfiguration,size,locationorotherwise.Examplesincluderefineries,powerstations,docks,specialisedmanufacturingfacilities,publicfacilities,churches,museums,soonandsoforth.

(the)Standards TheHKISValuationStandards.

sustainability Sustainabilityis,forthepurposeofthisStandards,takentomeantheconsiderationofmatterssuchas(butnotrestrictedto)environmentandclimatechange,healthandwell-beingandcorporateresponsibilitythatcanordoimpactonthevaluation ofanasset. Inbroad terms it isadesire tocarryoutactivitieswithoutdepletingresourcesorhavingharmfulimpacts.[Note:Thereis,asyet,nouniversallyrecognisedandgloballyadopteddefinitionof‘sustainability’,andthereforemembers shouldexercisecautionovertheuseofthetermwithoutadditionalexplanation.]

synergisticvalue theresultofacombinationoftwoormoreassetsorinterestswherethecombinedvalueismorethanthesumoftheseparatevalues.

termsofengagement

Confirmationinwritingoftheconditionsthateitherthememberproposes,orthatthe memberandclienthaveagreedshallapplytotheundertakingandreportingofthe valuation/valuationreview.

thirdparty Anyparty,other than theclient,whomayhavean interest in thevaluationor itsoutcome.

tradingstock Stockheldforsale in theordinarycourseofbusiness, forexample, in relationtoproperty,landandbuildingsheldforsalebybuildersanddevelopmentcompanies.


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valuation Anopinionofthevalueofanassetorliability,ataspecifieddate,giveninwriting.Unlesslimitationsareagreedintheterms of engagement,thiswillbeprovidedafteran inspection, and any further investigations and enquiries that are appropriate,havingregardtothenatureoftheassetandthepurposeofthevaluation.

Thewording “估價” and “估值” in Chinese bears the samemeaning of valuation throughoutthisStandards.

valuationdate The date onwhich the opinion of value applies. The valuation date should alsoinclude thetimeatwhich it applies if thevalueof the typeofasset can changemateriallyinthecourseofasingleday.

valuationmethod See method of valuation.

valuationreport Themeansinwritingofprovidingtheclientwiththefinalconclusionofavaluation or appraisal.

valuationreviewer Aprofessionalvaluerengaged to reviewtheworkofanothervaluer.Aspartofavaluationreview,thatprofessionalmayperformcertainvaluationproceduresand/orprovideanopinionofvalue.

valuer The memberwhoisundertaking/undertookavaluation.

Unlessprovenotherwisebyevidence,thevaluerofavaluationisidentifiedas:(a) thememberwhoappearsasthesignatoryofthereport; or(b) incasecondition(a)abovedoesnotapply;themember whohastheVicariousLiabilityundertheRulesofConductofHKIS.

For the valuerwhoisqualifiedtoundertakeavaluation,seeVS2 – Qualifications of a Valuer.

weight The amount of reliance placed on a particular indication of value in reaching aconclusionofvalue(e.g.whenasinglemethodisused,itisafforded100%weight).

weighting The process of analysing and reconciling differing indications ofvalues, typicallyfrom different methods and/or approaches. This process does not include theaveragingofvaluationswithoutreasons,whichisnotacceptable.

worth See investment value


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PART C:GENERAL VALUATION STANDARDS


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VS 1Compliance with International Valuation Standards and HKIS Valuation Standards

All members, whether practicing individually or working on behalf of his firm, who provide a valuation in writing are required to comply with the International Valuation Standards and HKIS Valuation Standards.

1.1.0 Mandatory Application

1.1.1 All members, wherever practising, must complywiththegeneralvaluationstandards(designatedbyprefixesVS) inPartCofthe Standards. For practical convenience, theterm“members”includeboth“member”and“affiliate” as defined in the Constitution ofHKISfromtimetotime.

1.1.2 The Standardsisofmandatoryapplicationtoany member ofHKISinvolvedinundertakingor supervising valuation services by theprovisionofvaluationadviceinwriting.

1.1.3 The phrase ‘undertaking or supervisingvaluationservices’includesanypersonwhois responsible for, or accepts responsibilityfor, analysing and communicating anopinionofvalueinwriting.Thismayincludeindividuals who produce but do not signvaluation reports within their organization,and conversely individuals who sign byway of supervision or assurance but donot produce valuation reports within their organisation.

1.1.4 For the avoidance of doubt, where –exceptionally–valuationadviceisprovidedwholly orally, the principles set out in thisvolumeshouldstillbeobservedtothefullestextentpossible.Membersareremindedthatthemerefactthatadvice isprovidedorallydoesnotmeanthatitisthereforeprovidedwithoutliability–thevaluer’sresponsibilitiesand obligationswill always depend on thefacts and circumstances of the individualcase.

1.1.5 Except as otherwise stated, valuations ofreal property for secured lending should be prepared in accordance with VGN 4 - Valuations of Real Properties for Secured Lending publishedbytheHKISfromtimetotime

1.2.0 Compliance with International Valuation Standards

1.2.1 HKISrecognisesthatInternationalValuationStandards Council (IVSC) as the setter ofInternational Valuation Standards (IVS),which comprise internationally acceptedvaluation principles and definitions. The StandardsadoptsandappliestheIVS,settingout specific requirements for, togetherwith additional guidance on their practicalimplementation. The IVS effective from 1July2017aresetoutinfullasPartEattheendofthe Standards.

1.2.2 Where there is an express requirementin relation to an individual valuationassignmentthatthevaluationcomplieswiththe IVS, and this needs to be made clearboth in the terms of engagement and in thereport,thentheformofendorsementinVS 4 Terms of Engagement paragraph 4.3.2(n) andVS 9 Reporting paragraph 9.2.3(k) may beadopted.Orotherwise,thegeneralformofendorsementthatthevaluationwillbe/hasbeenundertakeninaccordancewiththeHKISValuationStandardsmaybeused.

1.2.3 Members are reminded that where astatementismadethatavaluationwillbeorhasbeenundertakeninaccordancewiththeIVS, it is implicit thatall relevant individualIVS standards are compliedwith.Where adeparturefromIVSisnecessary,thisshould beclearlyexplained.

1.3.0 Compliance with other valuation standards

1.3.1 It is recognised that a member may berequestedtoprovideareportthatcomplieswithstandardsotherthanthe Standards.Thiswillnormallyariseinrelationtotheparticularrequirements that apply within individualjurisdictions. It is perfectly proper formemberstocomplywithsuchrequirements,whichmayincludeabasis of value notlistedin VS 5below,provideditisabsolutelyclearwhichstandardsarebeingadopted.

1.3.2 In these cases, a statement must beincluded in the terms of engagement and inthe report that the named standards havebeen complied with. If the compliance ismandatory in the jurisdiction concerned,


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i.e. because of statutory, regulatory orother authoritative requirements, then thisdoes not preclude the valuation still beingdeclared as performed in accordance withthe Standardsand–ifappropriate–withtheIVS.

1.3.3 Wherethecompliancewithothervaluationstandardsisvoluntary,i.e.notfallingwithinparagraph 1.3.2 above, this will involve adeparture – see section 1.5.0 below. NotethatcompliancewithsuchstandardscannotoverridethemandatoryrequirementsofVS 1, 2 and 3,whichmembersmustatalltimesobserve.

1.3.4 Where thevaluation involvesassets in two or more countries or states with differentvaluationstandards,themember mustagreewith the client whichstandardswillapplytotheinstruction.

1.4.0 VS 4 - 10 Exceptions

1.4.1 All valuation advice in writing given bymembers is subject to at least someof therequirements of the Standards - there areno exemptions. Similarly, where valuationadvice is givenwholly orally, theprinciplesset out in the Standards should still beobservedtothefullestextentpossible.ThusVS 1, 2 and 3 are mandatory in all cases.In other words, they apply to allmembers whatevertypeofvaluationactivitytheyareengagedin.

1.4.2 However, given the sheer diversity ofactivity undertaken by members, andthe diversity of jurisdictional contexts inwhich valuations and valuation advice aredelivered,thereisaneedfordifferentiationbetween particular types of assignmentwherethemandatoryapplicationoftheVS 4 – 10maybeunsuitableor inappropriate.Even though not mandatory in certaincircumstances,theadoptionoftherelevantstandardsisneverthelessencouragedwherenot precluded by the specific requirementor context. These exceptions regardingVS 4 – 10aresetoutatgreater lengthbelow.However,itisnotpracticaltosetouteverypossiblescenario–thusincasesofdoubt,itissafertoregardVS 4 – 10asmandatory.

1.4.3 Valuers shouldbeawarethatexceptionsarenot usually specific to individual cases but

cover particular categories or aspects ofvaluationactivity.Insuchcasesmembers are remindedthat theymustnotstatethat thevaluation wasperformedinaccordancewiththeIVS.

1.4.4 TheareasofexceptioninrelationtoVS 4 – 10 are where a member is:

1.4.4.1 Providinganagencyorbrokerageserviceinrespectoftheacquisitionordisposalofoneor more assets

Thisexceptioncoverstheprovisionofadviceintheexpectationof,orinthecourseof,anagency instruction toacquireordisposeofaninterestinanasset.Italsocoversadviceonwhetheragivenoffershouldbemadeoraccepted. It isrecognizedthatanymember,whomaynotbeaCorporateMemberfromtheGeneral PracticeDivision,may provideagencyorbrokerageservicestohisclient.Itisperfectlyproperforallmemberstoprovidetheiropinionsonthevaluesofsubjectassets in the course of agency services,provided that the term “valuation” must not be used in any communications with the client.However, the exception does not cover apurchasereportthatincludesavaluation.

1.4.4.2Actingor preparing to act as an arbitrator,

independent valuer, expert witness ormediator

Whenmembersactinacapacityofarbitrators,independent valuers, expert witnesses andmediatorsforresolutionofcertaindisputessuchasrentreview,exceptionsofVS 4 – 10 willapplysincetheymayhavetocomplywithcertain statutory and/or other mandatoryrequirements imposed as a result of theirappointment.However,whenamemberactsasanindependentvaluerorexpertwitness,the member shall, wherever practicableand with no conflict with their terms ofappointment, follow the requirements setout in the Standards. The exception settingout in this paragraph does not apply incircumstances where the value is not yetin dispute, for example, when a report isrequired as part of the process of settlinga different matter, such as a matrimonialseparationdispute.

InHong Kong, members are reminded thatthey must follow the Code of Conduct forExpertWitnessesassetout inAppendixD


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ofTheRulesofTheHighCourt(Chapter4A–LawsofHongKong)whenamemberactsasanexpertwitness.

1.4.4.3Performingstatutoryfunctions

This exception applies where the relevantstatutory provisions will define the taskand also frequently govern the manner inwhich it is tobecarriedout.Theemphasisin this exception is on the word function,i.e. the performance of a statutory role orduty involving theexerciseorenforcementof powers that are expressly defined orrecognisedin legislation,normally involvingthe formal appointment of an individualto that specific role. The mere fact that avaluation is being provided in accordanceor compliance with, or consequence of,legislation is not the point. For example,theprovisionof avaluation for inclusion inastatutoryreturntoataxauthority,whichinvolvescompliancewiththelawbutnottheexerciseorenforcementof it,doesnot fallwithinthisexception.

1.4.4.4 Providing valuations to a client purely forinternal purposes, without liability, andwithoutcommunicationtoathird party

Theinternalpurposesexceptionisdesignedtorecognisethatthereareoccasionswhereadvice issought fromavaluerbyaclient – oftenby a regular portfoliovaluationclient – thatwill bewithout liability, andwill notbe released to third parties (forexample, inconnectionwithproposedassetmanagementinitiativesorproposedacquisitions).Wheremembers undertake such work, it is vitalthat the terms of engagementandtheadviceitself in writing are quite explicit aboutthe prohibition on disclosure to any otherpartyand/oruseforanyotherpurposeandabouttheexclusionof liability.Suchadviceoftendoesnotattractanadditionalfeeandthis element of the valuation service mayor may not be explicitly referred to in theterms of engagement for a regular portfoliovaluation. The mere fact that the providerof the valuation is an internal valuer doesnot bring the valuation assignment withinthe exception – the focus here is on the‘internalonly’purposeof thevaluation andnot theprocessormeansof itsdelivery. Itis therefore possible for an external valuer toprovidean ‘ internalpurposes’valuation,thoughwherethatisdone,theneedfortheterms of engagement and advice in writing

tobeabsolutelyclearaboutnon-disclosureto third parties, and about the exclusion ofliability,becomesevenmorecrucial.

1.4.4.5 Providing valuation advice expressly inpreparation for, or during the course of,negotiations or litigation, including wherethe valuerisactingasadvocate.

Thenegotiationexceptioncoversvaluationadviceontheprobableoutcomeofcurrentor impending negotiations, or requests forfigurestobequotedinconnectionwithsuchnegotiations.Itthereforerecognisesthat:• Although there may not yet be anunresolved dispute, the advice is beingprovided expressly in preparation for,or during the course of, negotiationsthat may lead either to agreement orthe creation of an unresolved dispute,triggering (where the context allowsit) a formal process of resolution (e.g.reference to the courts, to arbitration,etc.).

• The negotiation advice may, and oftenwill,extendtoadviceonmatterssuchastactics and/or probable outcomes and/oroptionstoachieveresolutionwithoutrecourse either to litigation or to otherformalprocedures.

Thelitigationexceptionrecognisesthat:• There is a formal dispute in existence,however it arises, and the proceedingswillthereforebesubjecttoanyrelevantlegislation, regulation, rules or courtdirectionsthatmaybeinplaceorissued,whichwill always takeprecedenceoverthe Standards.

• Advice given to a client may extendto various matter going beyond theprovisionofadviceonvalue,forexampleadvice on tactics and/or the probableoutcome of litigation and/or optionsregarding settlement of the dispute ormitigationofcosts.

1.4.5 Forallexceptions,thefactthatVS 4 – 10 are notmandatorydoesnotmeanthattheyaresimplytobe ignored–asamatterofgoodpracticetheyshouldbefollowedwherenotprecluded by the specific requirement orcontext.

1.4.6 The exceptions shall not apply if a client specificallyrequiresareporttobepreparedinaccordancewiththerequirementssetoutin the Standards.Further,evenifareportis


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prepared under the condition that it shallcomply with certain statutory or othermandatory requirements, the Standards will also apply, subject to such amendmentsas may be necessary to meet with thosestatutoryorothermandatoryrequirements.

1.5.0 Departures

1.5.1 No departureispermittedfromVS 1,wherea valuationinwritingisprovided,orVS 2 and 3 in the Standards,whicharemandatoryinallcircumstances.

1.5.2 Ifseparatelyandindependentlyfromeitherthe specific exceptions set out above orany assignment falling within the scopeof section 1.3.0 above, there are specialcircumstances where it is consideredinappropriatetocomply,inwholeorinpart,with VS 4 – 10,thenthesemustbeconfirmedandagreedwiththeclientasadepartureanda clear statement to that effect includedin the terms of engagement, report and anypublishedreferencetoit.

1.5.3 Aclearstatementinwritingofanydepartures,ifany,togetherwithdetailsof,andreasonsfor them, and the client’s agreement,must begivenintheterms of engagementandthereport.

1.5.3 Fortheavoidanceofdoubt:

• If the valuation falls to be provided incompliancewithprescribedstatutoryorlegal procedures or other authoritativerequirements, then provided thoserequirements are mandatory in theparticular context or jurisdiction,compliancedoesnotby itselfconstitutea departure–thoughtherequirementtodosomustbemadeclear.

• For most valuation purposes, one ofthe bases of value specified inVS 5 will be appropriate.Where another basis isused, this must be clearly defined andstated in the report. If adoption of thatbasis is mandatory in the particularcontext or jurisdiction, then adoptiondoesnotbyitselfconstituteadeparture,though the mandatory requirement todosomustbemadeclear.HKISdoesnot

encouragethevoluntaryuseofabasis of valuenotdefinedinVS 5,andwillalwaysregardssuchvoluntaryuseasinvolvingadeparturefromthe Standards.

1.5.4 When statutory, legal, regulatory, or otherauthoritativerequirementsmustbefollowedthat differ from some of the requirementswithin the Standards, a member must follow the statutory, legal, regulatory, orother authoritative requirements. Such avaluationhasstillbeenperformedinoverallcompliance with the Standards. (Also seesection 1.3.0above)

1.5.5 The requirement to depart from the Standardspursuanttolegislative,regulatoryor other authoritative requirements takesprecedenceoverallotherrequirementsfromthe Standards.

1.5.6 Most other professional bodies, or firms’internalpoliciesandprocedureswillimposeadditional requirements on the member ratherthancontradicttothe Standards.Suchrequirementsmay be followed in additionto the Standards without being seen asdeparturesorexceptionsaslongasalloftherequirementsinthe Standardsarefulfilled.

1.5.7 Ifamemberisaskedtoperformanassignmentthatdeparts from the Standards orcalls forsomething less than, or different from, thework normally performed in compliancewith the Standards, the member should acceptandperformsuchservicesonlywhenthefollowingconditionsaresatisfied:

• The member determines that theinstructions will not mislead all theintendedusers;

• The memberdeterminesthatthevaluation is not so limited to the extent that theresultsarenolongerreliableandcrediblefortheintendedpurposeanduseofthevaluation;and

• The member advises the client that the instructions for the assignment whichinvolve a departure from the Standards mustbedisclosedinfullinthereport.

1.5.8 A member who makes a departure will berequired to justify the reasons for thisdeparture to the HKIS (or the disciplinarybodies of the Institute set up on its behalfor the GPD Council who has commenced


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investigation for such purpose) should the departurebecalledintoquestion.IftheHKIS is not satisfiedwith the reason(s) providedand/or the manner in which the departure is declared or made, it is entitled to takeappropriatedisciplinaryactionsunderRulesofConduct.

1.5.9 Each valuation to which the Standardsappliesmustbepreparedby,orunderthesupervisionof, an appropriately qualified valuer, whois also a Corporate Member of the GPDCouncilof HKIS.Otherthancomplyingwiththerequirementssetoutinthe Standards,ineachandeverycaseofpreparingareport,itistheultimateresponsibilityofthemember,andnottheclientorotherintendedusers,todeterminewhetheranydeparturesfromthe Standardsarereasonableandjustifiable

1.6.0 Regulation: monitoring compliance with the Standards

1.6.1 As a self-regulatory body, HKIS has aresponsibilitytomonitorandseekassuranceof compliance by its members with the Standards. It has the right under its bye-lawstoseekinformationfrommembers.Theproceduresunderwhichsuchpowerswillbeexercisedinrelationtovaluationsaresetoutat www.HKIS.org.hk/en/HKIS_constitution.php.


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VS 2Qualifications of a Valuer / Valuation Reviewer

2.1.0 As it is fundamental to the integrityof thevaluation process, all members practisingas valuers / valuation reviewers must havethe appropriate experiences, skills andjudgements for the task in question andmustalwaysactinaprofessionalandethicalmannerfreefromanyundueinfluence,biasorconflictofinterest.

2.2.0 Testing on Qualification Requirement The testing of whether a member

is appropriately qualified to accept responsibility for, or supervise the input into a valuation / valuation review involves satisfying the following criteria:

• a Corporate Member from the General Practice Division of the HKIS;

• sufficient current local, national and international (as appropriate) knowledge of the asset type and its particular market, and the skills and understanding necessary, to undertake the valuation/valuation review competently;

• compliance with any country or state legal regulations governing the rights to undertake the valuation/valuation review; and

• compliance with the requirements on qualified valuer imposed by the General Practice Division of the HKIS from time to time.

2.2.1 A qualified valuer must be a CorporateMember from the General PracticeDivision of the HKIS, but the ProfessionalMembership from the General PracticeDivisionoftheHKISdoesnotofitselfimplythataCorporateMemberhas thepracticalexperienceofvaluationinaparticularsectoror market: thismust always be verified byappropriateconfirmation.

2.2.2 If themember does not have the requiredlevelofexpertisetodealwithsomeaspectof the valuation assignment properly, thenhe or she should decidewhat assistance isneeded. With the express agreement ofthe client where appropriate, the member should then commission, assemble andinterpret relevant information from otherprofessionals, such as specialist valuers,accountantsandlawyers.

2.2.3 The personal knowledge and skillsrequirements may be met in aggregateby more than one member within a firm, provided that each meets all the otherrequirementsofthe Standards.

2.3.0 In conducting real property valuations forincorporation or reference in prospectusesand circulars and valuations in connectionwith takeoversormergersandacquisitionsinHongKong,aqualifiedvaluer mustbeonthe HKISListofthePropertyValuersforsuchpurposesaspublishedbytheHKISfromtimetotime.

2.4.0 The client’sapprovalmustbeobtainedifthemember proposes another firm to providesomeorallthevaluationsthatarethesubjectoftheinstruction.

2.5.0 Wheremorethanonevaluerhasundertakenorcontributedtothevaluation,alistofthosevaluers must be retainedwith theworkingpapers, together with a confirmation thateach named valuer has complied with therequirementsofVS 1.

2.6.0 A member responsible for supervision (SeeVS 1 paragraph 1.1.3) must be able todemonstrate:• an appropriate level of supervisionthroughout all stages of the valuationinstruction, suitably evidenced andcapable of standing up to scrutiny andchallenge at a later date, particularlywherethevaluationassignmentinvolvesremote locations and/ormore thanonejurisdiction

• an acceptance of responsibility andaccountabilityforthevaluation reportanditscontent,andtheabilitytoexplainanddefenditifchallenged–itisessentialthattheprocessisnotseenasonesimplyofapproving automatically without properconsideration.

2.7.0 The attention of members is drawn tothe definitions of types of valuers givenbelow. Members must exercise reasonablejudgement to make sure that they meetthe requirements laid down below whenacceptinginstructionsforpreparingvaluation reportsforvariouspurposesasreferredtointhe Standards.

2.7.1 InternalValuer An ‘Internal Valuer’ is a valuer who is in


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the employ of either the enterprise thatowns the assets, or the accounting firm responsible for preparing the enterprise’sfinancial recordsand/or reports andhasnosignificantfinancialinterestinthecompanyororganisationthatheworksat.Asignificantfinancial interest refers to a person, hisfamily members or associates entitling(individually or collectively) to exercise, orcontrol the exercise of, 5%ormore of thevotingpoweratanygeneralmeetingoftheclient’scompanyorgroup.

2.7.2 ExternalValuer An‘ExternalValuer’isavaluerwho,together

with any associates, has no material linkswith the client,anagentactingonbehalfofthe client orthesubjectoftheassignment

2.7.3 IndependentValuer An‘IndependentValuer’isanExternalValuer

andwhocanfulfillall therequirementssetoutinsection 3.2.0 of VS 3ofthe Standards.

2.7.4 JointValuers Theterm‘JointValuers’shouldonlybeused

on those occasions where two (or more)valuers are jointly (and severally) appointedtoprovideavaluation.Insuchcasesasinglevaluation report may be provided carryingthesignaturesoftheJointValuerstogetherwiththeirnamesandaddresses.


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VS 3Ethics, Professionalism and Conflict of Interests

As it is fundamental to the integrity of the valuation process, all members practising as valuers must always act in a professional and ethical manner from any undue influence, bias or conflict of interest.

3.1.0 Professional and ethical standards

3.1.1 HKIS members operate to the highestprofessional and ethical standards. Thusthe criteria for HKIS membership and forqualification and practice as a valuer meet or exceed the standards for the conductand competency of professional valuers promotedbytheIVSC.

3.1.2 Aswellasbeingrequiredtoconformtothesehigh-level principles and requirements, allHKIS membersaresubjecttoadditional–andinmanycasesmorestringent–requirementsassetoutbelow.Observance ismonitoredand enforced through HKIS Bye-laws andRulesofConduct.

3.1.3 The requirements set out in this Standards are expressly focused on members undertaking valuation work, i.e. opinionsof value prepared by amember having theappropriate technical skills, experience andknowledge of the subject of valuation, themarketandthepurposeofthevaluation.

3.1.4 Members mustatalltimesactwithintegrityand avoid any actions or situations thatare inconsistent with their professionalobligations.Members mustnotallowconflictsof interest tooverride theirprofessionalorbusiness judgement and obligations, andmust not divulge confidential information.All membersareboundbytheHKISRulesofConduct. More detail is available at www.HKIS.org.hk/en/HKIS_rules.php.

3.2.0 Independence, objectivity, confidentiality and the identification and management of conflicts of interests

3.2.1 Members must use reasonable care andjudgements to achieve and maintainindependence and objectivity in avaluation.Amember must not offer, solicit,or accept any gift, benefit, compensation,

or consideration that reasonably couldbe expected to compromise their own oranother’sindependenceandobjectivity.

3.2.2 Independence and objectivity areinextricablylinkedtotheproperobservanceof the confidentiality of information andto thewider issueof the identificationandmanagementofconflictsofinterest.

3.2.3 Valuers should recognise two fundamentalrequirementsonconflictsofinterest:

a) Nomember shall advise or represent aclient where doing so would involve aconflictofinterestorasignificantriskofaconflictofinterest,otherthanwhereallofthosewhoareormaybeaffectedhaveprovided their prior Informed Consentdefined in paragraph 3.2.8 below. (Theaffected party can only give InformedConsent if the person explaining theposition to them isentirely transparent,and also that the person explaining theposition is sure that the party affectedunderstands what they are doing –including the risks involved and anyalternative options available- and isdoing it willingly). Informed Consentmay be sought onlywhere themember is satisfied that proceeding despite aconflictofinterestisintheinterestsofallthethosewhoareormaybeaffected.

b) Members should keep records of thedecisionsmadeinrelationtowhethertoaccept(andwhererelevant,tocontinue)individual professional assignments, theobtainingof InformedConsent,andanymeasures taken to avoid conflicts ofinterestarising.

3.2.4 Bringingtherequiredlevelsofindependenceand objectivity to bear on individualassignments, respecting and maintainingconfidentiality, and identifying andmanaging potential or actual conflicts ofinterestareofcrucialimportance.Valuationwork often has a particular complexity orsensitivity concerning such matters and itis a requirement thatmembers act strictlyin accordance with the following generalvaluation standards and valuation-specificcriteria.

3.2.5 For some purposes, statutes, regulations,rulesof regulatorybodiesorclient’s specialrequirements may set out specific criteria


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that the member must meet (i.e. they areadditional to the general requirementsbelow)inordertoachieveadefinedstateofindependence. Frequently such additionalcriteriaprovideadefinitionoftheacceptablelevel of independence and may use termssuchas‘independentexpert’,‘expertvaluer’,‘independentvaluer’, ‘standing independentvaluer’or‘appropriatevaluer’.Itisimportantthat the member confirms compliancewith these criteria both when confirmingacceptance of the instruction and in thereport,sothattheclientandanythird party relyingonthereportcanbeassuredthattheadditionalcriteriahavebeensatisfied.

3.2.6 Threecommontypesofconflictofinterestswhichmayariseinavaluationareidentifiedasfollows:a)Party Conflict – a situation in whichthe duty of amember or hisfirm to act intheinterestsofaclient or other party in a professional assignment conflictswith a duty owed to another client or partyinrelationtothesameorarelatedprofessionalassignment.

b)Own Interest Conflict – a situation inwhich the duty of amember or hisfirm to act in the interests of a client in a professional assignment conflicts withtheinterestsofthatsamememberorhisfirm.

c)Confidential Information Conflict – a conflict between the duty of a member to provide material information to oneclient,andthedutyofthat memberorhisfirm to another client tokeepthatsameinformationconfidential.

Theaboveisonlythreecommontypesandit is notpossible to setout everypossiblescenario.Membersare remindedtheyhavetheir absolutedutyof care to identify andavoid any actual or potential conflicts ofinterests.Members should always considerwhether the proposed course of actionmight:• Reasonablybeperceivedtoimplya lackofintegrity;

• Causeembarrassmenttotheprofession;or

• Meanthatyouareunabletoadviseandrepresent each client objectively andindependently.

If there is a material risk of the proposedcourseofactionhavingsuchaneffect,themember mustnotproceed.Amember must disclosetohisfirmonanyactualorpotentialconflictofinterests.

3.2.7 Whereaconflictof interestorasignificantrisk of one exists, a member should only considerproceedingwiththework(andseekInformed Consent defined in 3.2.8 belowfrom all relevant affected party in orderto proceed) if the member are reasonablysatisfied that all of the relevant clients’ (orother parties’) interests will be served bythe member or his firm doing thework (asopposedtoanotherfirmdoingit).Amember should not seek InformedConsent inorderto proceed because his firm’s interest areserved by doing so. Obtaining InformedConsent is a process that requires properconsiderations, professional judgements,and careful executionswith every affectedparty.

3.2.8 AnInformedConsentmeansaconsentgivenwillingly by a party who may be affectedby a conflict of interest, that party havingdemonstratedtothemember that the party understands:a) that there is a conflict of interest or asignificantriskofaconflictofinterest;

b) the facts known by themember or hisfirm that arematerial to the conflict of interest;

c) whatthatconflictofinterestisormaybe;and

d) thataconflictofinterestmayaffecttheabilityofthememberorhisfirmtoadviseoractfullyintheinterestsofaclient.

3.2.8.1GivingInformedConsentisthewayinwhicha party who might be affected adverselyby a conflict of interests acknowledgesthe existence for that risk, but instructsthe member to proceed despite that risk.The affected party can only give InformedConsentifthepersonexplainingthepositionto them:• isentirelytransparentaboutanymaterialfactors;and

• issurethatthepartyaffectedunderstandswhat theyaredoing (including the risksinvolved and any alternative optionsavailable)andisdoingitwillingly.

3.2.8.2 The fact that the affected parties arewilling to give Informed Consent does notmean that the member or his firm has toproceed. Themember or his firm must stillexerciseprofessionaljudgementanddecidewhetheritisthecorrectthingtodoandbesure that they will not cause professionalembarrassment to themember, his firm or


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theprofessionbyproceedingwherethereisaconflictofinterest.

3.2.8.3 InobtainingInformedConsenttoaconflictof interest (or a significant risk of one) themember shouldconsideranddiscusswiththeaffectedparties:i) allofthematterssetoutinthedefinitionofInformedConsent;and

ii) whatprecautionsshouldbetakenintheconductofthevaluationtoprotectthem.

3.2.8.4 Inseekingtoobtain InformedConsent,theeffect is that the degree of sophisticationand nature of the party concerned must be reflected in the information providedin order to be satisfied that the party hasunderstoodwhattheyaredoingandisgivingInformedConsentwillingly.Alargecorporateentityislikelytoappreciatemorereadilytherisks involved in giving Informed Consent,whereas a small business or individualperson who rarely employs professionalsmayrequiregreaterdetailtounderstandtheposition.

3.2.8.5There may be reasons to believe that theparty affected does not have sufficientunderstanding of the issues to make aninformeddecisionontheimplicationsofwhatis required. In such a case, the instructionshould be declined, unless the prospectiveclienthastakenadvicefromanindependentand suitably qualified professional (forexample, a lawyeror an accountant) aboutthesituationbeforeinstructingthemember or hisfirm to proceeddespite a conflict ofinterests.

3.2.8.6 A decision to proceed with a valuation byobtaining Informed Consent should berecordedintheterms of engagementandthereport.

3.2.8.7Communications with the affected partiesfromwhom Informed Consent is obtainedshould alsobeauditable.This isbecause intheeventofacomplaint,aninvestigation,oracivilclaim,theonuswillbeonthemember or the firm toshowthat InformedConsentwas obtained. If such communications arenotmade inwriting, itmay be difficult forInformedConsenttobeproved,particularlyaftersometimehaspassed,oriftheaccountof thosecommunications fromthemember orhisfirmiscontested.ThereforeifInformedConsent is obtained in a meeting or by

telephone,communicationinwritingshould besentassoonaspossibleafterwards,notingthecontentandconclusionofthediscussion.To avoid risk of criticism, this proof should notbethatconsentwasobtained,butthatInformedConsentwasobtained,asdefinedabove.

3.2.8.8 It is for themember or his firm to decidewhat type of document to use in eachcontext in order to achieve InformedConsentasdefinedabove.Theexplanationgiven about the conflict of interests (orsignificant risk of it) needs to be fair andaccurate,andappropriategiventhedegreeof sophistication of the person signing it,and the party signing it needs to do sofreely, demonstrating an understanding ofthesituation.

3.2.8.9 To comply with the requirements forobtainingInformedConsent,theprospectiveclient must be told, and understand, thenatureofthecompetinginterest.Ifitisnotpossibletoachievethatwithoutbreachingadutyofconfidentialityowedtoanotherclient orparty,itwillmeanthatthemember orhisfirmcannotproceedwiththenewvaluation.

3.2.8.10Partieswhomaybeaffectedbyaconflictofinterest include the instructing party and,if practical toobtain an InformedConsent,other third partieswhomay rely upon thevaluation.Incaseitisnotpracticaltoobtainan Informed Consent from third partieswhomay rely upon the valuation,members should only consider proceeding with theworkifsatisfiedthatalltherelevantparties’interests will be served as opposed toanotherfirmdoingit.

3.2.9 One of the greatest challenges in actingwithaconflictofinterestispredictingwithcertaintywhat the effect of the conflict ofinterest, even if managed carefully, mighthaveon themember’s ability toadviseandrepresent each client. This uncertaintyreinforces the importance of consideringcarefully whether it is prudent to declinethe valuationinquestionratherthanseekingInformedConsenttoproceed.

3.2.10 Even where a conflict of interest (or asignificantriskofaconflictofinterests)doesnotexistattheoutsetofavaluation, itcanarise during the lifetime of the valuation.Thismeansthatconflictofinterestmustbe


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considered and applied – and appropriaterecords made – not only when newvaluationsarebeingconsidered,butalsoasthe valuationsprogress.

3.2.11 A member or his firm who obtained theInformed Consent may still be required tojustifytoHKISthereasonstoproceedwiththe valuation.

3.2.12 Any information in a valuation should betakenasconfidential,unless:a) such information comes from a reliablesourceinthepublicdomain;

b) such information has been publicizedand such information was intended tobepublicizedbyalltherelevantaffectedparties;or

c) all the relevant affected parties havegiven their prior Informed Consents tothedisclosureofsuchinformation.

Thereisageneraldutytotreatinformationrelatingtoaclientasconfidentialwherethatinformationbecomesknownas a result ofthe professional relationship and is not inthepublicdomain.Informationgatheredinthecourseofvaluationworkmaybemarketsensitiveandthisdutyisthereforeofspecialimportance.

3.2.13 In particular, great caremust be exercisednottobreachconfidentialitywhenreportingto clients in regard to compliancewithVS 9 concerning reference to the ‘key inputsused’.Thedutyofconfidentialitywillalwaystakeprecedenceoverthedutyofdisclosure,subjecttolegaloverride.

3.2.14 The risk of disclosure of confidentialinformationisalsoamaterialfactorthatthevaluer shouldconsiderinidentifyingwhetherornotthereisapotentialconflictofinterest,or the Confidential Information Conflictabove.Itissometimesnecessarytodisclosesome details of the valuer’s involvement inthesubjectof thevaluation. Ifanadequatedisclosure cannot be made withoutbreaching the duty of confidentiality, thentheinstructionshouldbedeclined.

3.2.15 Thedutyofconfidentialityiscontinuousandongoing,andincludescurrent,pastandevenpotentialclients.

3.2.16 Whileitisnotpossibletoprovideadefinitivelistofsituationsinavaluation context where a threat to a member’s independence or

objectivitymay arise, the following should alwaysberegardedaspresentingapotentialor actual threat and therefore requiringactionasspecifiedinparagraph3.2.7above:• Acting for thebuyer and the sellerof a

property or assetinthesametransaction;• Actingfortwoormorepartiescompetingforanopportunity;

• Valuingforalenderwhereadviceisalsobeing provided to the borrower or thebroker;

• Valuing a property or asset previouslyvalued for another client of the samevaluer or firm;

• Undertaking a valuation for third-party consumptionwherethevaluer’s firmhasother fee-earning relationshipswith theclient;and

• Valuing both parties’ interests in aleaseholdtransaction.

Membersarealsoremindedthattheinterestofanythird parties in the valuation,andthereliance they mayplaceonit,willalsobearelevantconsideration.

3.2.17 A threat to the member’s objectivity canarise where the outcome of a valuation isdiscussedbefore itscompletionwitheitherthe clientoranotherpartywithaninterestinthe valuation.Whilesuchdiscussionsarenotimproper, and indeedmay be beneficial toboththememberandtheclient,themember mustbealerttothepotentialinfluencethatsuch discussions may have on his or herfundamental duty to provide an objectiveopinion. Where such conversations takeplace, themember must make a record inwritingofanymeetingsordiscussions,andwhenever the member decides to alter aprovisionalvaluationasaresult,thegroundsfordoingsomustalsobecarefullynoted.

3.2.18 The member may need to discuss variousmatters, such as the verification of factsandotherrelevantinformation(forexample,confirming theoutcomeof rent reviewsorclarifying the boundaries of a property),beforeformingapreliminaryopinionofvalue.At any stage in thevaluationprocess suchdiscussions give the client an opportunityto understand themember’s viewpoint andevidence.Itisexpectedthattheclientwoulddisclose facts or information, includinginformation about transactions in theproperty or asset, relevant to thevaluationtask.


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3.2.19 Inprovidingaclientwithpreliminaryadvice,oradraftreport or valuationinadvanceofitscompletion,themember muststatethat:1) Theopinionisprovisionalandsubjecttocompletionofthefinalreport;

2) Theadviceisprovidedforclient’s internal purposesonly;and

3) Anydraftisonnoaccounttobepublishedordisclosed.

If any matters of fundamental importanceare not reflected, their omission must bedeclared.

3.2.20 Wherediscussionswithaclientoccurafterthe provision of preliminary material oropinions,itisimportantthatsuchdiscussionsdonot,andcanbeshownnotto,leadtoanyperception that the member’s opinion hasbeen influence by those discussions, otherthan to correct inaccuracies or incorporateanyfurtherinformationprovided.

3.2.21 Todemonstratethatthediscussionshavenotcompromised the member’s independencethefilenotesofdiscussionswith theclient ondraftreports or valuations shouldinclude:

• The information provided, or thesuggestions made, in relation to thevaluation;

• How that information was used toconsiderachangeinmaterialmattersoropinions;and

• Thereasonswhythevaluationhasorhasnotbeenchanged.

3.2.22 If requested, this record should be madeavailabletoauditorsoranyotherpartywitha legitimate and material interest in thevaluation.

3.3.0 Maintaining strict separation between advisers

3.3.1 In case an Informed Consent has beenobtainedfor‘PartyConflict’or‘ConfidentialInformation Conflict’, amember or his firm must make arrangements to separate theadvisors of the firm. Any arrangement(colloquially known in some jurisdictions asa ‘Chinese wall’) that is established must be robust enough to offer no chance ofinformation or data passing from one setof advisers to another.This is avery stricttest;taking‘reasonablesteps’tooperateaneffectiveseparationisnotsufficient.

3.3.2 Accordingly, any arrangement set upand agreed to by affected clients must be overseen by a ‘compliance officer’ asdescribedbelow,andmustsatisfyallofthefollowingrequirements:a) the individual(s) acting for conflicting

clients mustbedifferent–notethatthisextendstosecretarialandothersupportstaff;

b) such individuals or teams must bephysicallyseparated,atleasttotheextentofbeingindifferentpartsofabuilding,ifnotindifferentbuildingsaltogether;

c) any information or data, however held,must not be accessible to ‘the otherside’atanytimeand, if inwriting,must be kept secure in separate, lockedaccommodation to the satisfaction ofthecomplianceofficer,oranotherseniorindependentperson,withinthefirm;

d) The compliance officer or other seniorindependentperson:i) should oversee the setting up andmaintenance of the arrangementwhile it is in operation, adoptingappropriatemeasures and checks toensureitiseffective

ii) musthavenoinvolvementineitheroftheinstructionsand

iii) should be of sufficient status withintheorganisationtobeabletooperatewithouthindrance.

e) There should be appropriate educationand training within the firm on the principles and practices relating to themanagementofconflictsofinterest.

3.3.3 Effectivearrangementsareunlikelytoworkwithout considerable planning, as theirmanagementneedstobeanestablishedpartofafirm’sculture. Itwillthereforebemoredifficult, and often impossible, for smallerfirmsorofficestooperatethem.

3.4.0 Professionalism

3.4.1 Competence

3.4.1.1 Valuations mustbepreparedbyanindividualor firmhavingtheappropriatetechnicalskills,experienceandknowledgeofthesubjectofthe valuation,themarket(s)inwhichittradesandthepurposeofthevaluation.


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3.4.1.2 If a member does not possess all of thenecessary technical skills, experience andknowledge to perform all aspects of avaluation, it is acceptable for the valuer to seek assistance from specialists in certainaspectsoftheoverallassignment,providingthis isdisclosed in the terms of engagement andthereport.

3.4.1.3 A member must have the technical skills,experience and knowledge to understand,interpret and utilize the work of anyspecialists.

3.4.1.4Details of the qualification requirementsof amember in preforming a valuation are discussedinVS 2.

3.4.2 Suitability

3.4.2.1Consistent with the various requirementssetout intheStandardsandtoensurethatall relevant matters have been, or will be,adequatelycovered,itisfundamentalthatbythetimeanyvaluationinwritingisconcluded,but prior to the issue of the report, all thematters material to the report have beenfully brought to the client’s attention andappropriatelydocumented.Thisistoensurethat the reportdoesnotcontainanyrevisionof the initial terms of engagement ofwhichthe clientisunaware.

3.4.2.2 Members should take care that they understand their clients’ needs andrequirementsfully,andappreciatethattherewill be occasions when theymay need toguideclientstochoosethemostappropriateadviceforthegivencircumstances.

3.4.2.3The standards for minimum terms of engagement are setout inVS 4.WhereVS 4 is not mandatory, appropriate terms of engagement shouldneverthelessbepreparedtosuitthespecificcase.Itisacknowledged,giventhesheerdiversityofvaluationactivityundertakenbymembers,andthediversityofjurisdictional contexts in which valuations andvaluationadvicearedelivered,thatterms of engagement willbecommensuratetotheclient’sneeds–butinallcasesmembers must ensurethatallmattersmaterial to the report havebeenbroughttotheclient’sattention.

3.4.2.4Asdisputesmayarisemanyyearsafterthecompletionofavaluation,itisessentialthattheagreementoftheterms of engagement is

containedin,orevidencedby,comprehensivedocumentationmaintained in a recognisedandacceptablebusinessformat.

3.4.2.5 Ifamemberisaskedtoperformanassignmentthatdeparts from the Standards orcalls forsomething less than, or different from, thework normally performed in compliancewith the Standards, the member should acceptandperformsuchservicesonlywhenthefollowingconditionsaresatisfied:

• The member determines that theinstructions will not mislead all theintendedusers;

• The memberdeterminesthatthevaluation is not so limited to the extent that theresultsarenolongerreliableandcrediblefortheintendedpurposeanduseofthevaluation;and

• The member advises the client that the instructions for the assignment whichinvolve a departure from the Standards mustbedisclosedinfullinthereport.

3.5.0 Disclosures where the public has an interest or upon which third parties may rely

3.5.1 Disclosurerequirements

3.5.1.1 Certaintypesofvaluation maybereliedonby parties other than the client that either commissioned the report or to whom it isaddressed.Examplesofthistypeofvaluation wouldincludethosefor:• apublishedfinancialstatement• astockexchange,orsimilarbody• publication,prospectusorcircular• investment schemes, which may take anumberofformsinindividualjurisdictions

• takeoversormergers. Where thevaluation isofanasset thathas

previouslybeenvaluedbythevaluer,orthevaluer’s firm for any purpose, the followingdisclosures must be made in the terms of engagement, in the report, and in anypublishedreferencetothevaluation,asthecasemaybe,assetoutlaterbelow:• the relationship with the client andpreviousinvolvement

• rotationpolicy• timeassignatory• proportionoffees.


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3.5.2 Reliancebythirdparties

3.5.2.1Wherereliancemaybeplacedonavaluation byathird party whoorwhichisidentifiablefromtheoutset,thedisclosuresinaccordancewiththissectionmustbemadepromptlytothatpartybeforethevaluationisundertaken.Inaddition to thosedisclosures theremust also be disclosure of any circumstanceswhere the valuer or the firm will gain fromthe appointment beyond a normal fee orcommission. This gives third parties the opportunity to object to the appointmentiftheyfeelthatthemember’s independenceandobjectivitymaybecompromised.

3.5.2.2However, in many cases the third parties will be a class of individuals, for example,the shareholders of a company, wheredisclosure at the outset to all interestedthird parties wouldclearlybeimpractical. Insuchcasestheearliestpracticalopportunityfor disclosure will be in the report or any published reference to it. A greater onusthusliesonthemember toconsider,beforeaccepting the instruction, whether thosethird parties relying on the valuation will accept that any involvement requiringdisclosuredoesnotundulycompromisethemember’s objectivityandindependence.Seesection 3.7.0 belowforfurtherdetailaboutdisclosuresinrelationtospecificcategoriesofvaluation.

3.5.2.3 Valuationsinthepublicdomain,orwhichwillbe reliedonby third parties, are frequentlysubject to statute or regulation. There areoften specific stipulations that themember mustmeetinordertobedeemedsuitabletoprovide a truly objective and independentview.Where that isnot thecase, theonusisonthemember toensurethatthereisanawareness of potential conflicts and otherthreatstoindependenceandobjectivity.

3.5.2.4 Members are reminded to notice theapplicablelawontherelianceofavaluation bythird partiesindifferentjurisdiction.

3.5.3 Therelationshipwiththeclientandpreviousinvolvement

3.5.3.1Although the requirement for themember to act with independence, integrity andobjectivity as described above is clear, itdoes not necessarily require disclosure ofall the working relationships between the

member andtheclient.Incasesofdoubtitisrecommendedthatadisclosureismade.

3.5.3.2 Toexposeanypotentialconflictof interestwhere the member, or the member’s firm,has been involved with the purchase ofone or more assets fortheclient within the periodof12monthsprecedingthedateofinstructionordateofagreementoftheterms of engagement (whichever is earlier) or aspecificlongerperiodprescribedoradoptedinaparticular jurisdiction, themember must discloseinrelationtothoseassets: • receiptofanintroductoryfeeor• negotiationofthatpurchaseonbehalfof

the client.

3.5.3.3 Inconsideringthedisclosuresrequired, it isnecessarytoidentifythe‘client’and‘firm’.

3.5.3.4 There are many different relationshipsthat may be considered to fall within theidentification of the client and firm. Tobe consistent with the minimum terms of engagement (see VS 4) and reporting (seeVS 9),theclientistheentitythatagreestheterms of engagement or to which the reportisaddressedwhilethefirm istheentitythatisidentifiedintheconfirmationoftheterms of engagement andthereport.

3.5.3.5 Closelyconnectedcompanieswithinagroupshouldproperlyberegardedasasingleclient or firm.However,duetotheoftencomplexnature of modern business it is frequentlythe case that the other entities have onlya remote legal or commercial connectionwith the client for which the member’s firm also acts. Theremay also be practicaldifficulties in identifyingsuchrelationships,forexample,betweentheassociatesofthemember’s firm in other countries or statesandtheclient.Sometimesitisthemember’s commercial relationshipwith a party otherthan the clientthatcouldcreateaperceivedthreattoindependence.

3.5.3.6 The member is expected to makereasonable enquiries proportionate tothe circumstances: it is not necessary toestablish every potential relationship thatthere maybe,providedthemember adherestotheprinciplesofthe Standards.

3.5.3.7The following are examples of where thedisclosure requirements will relate to andincludepartiesother than theentitygivingthevaluationinstruction:• subsidiaries of an instructing holding

company • whereinstructionsarefromasubsidiarycompany, those other companies


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connectedbythesameholdingcompanyor

• a third party issuingvaluationinstructionsas agent for different legal entities, forexample, the managers of a propertyfund.

3.5.3.8 Similar considerations apply in identifyingtheextentofthemember’s firm fordisclosurepurposes, where there may be separatelegal entities in different locations and/orundertakingdifferenttypesofwork. Itmay notbe relevant to includeall organisationsconnected with the firm undertaking thevaluation where the activities are remoteor immaterial – for example, they do notinvolve the provision of asset valuation orsimilar advice. Members should note thedefinitionoffirminGlossaryofTermsUsedintheStandards.

3.5.4 Rotationpolicy

3.5.4.1 Theobligationtodisclosethefirm’s rotationpolicy will arise only where the member has provided a series of valuations over aperiodoftime.Whereitisafirstorone-offinstruction, it isnotnecessary tocommentonanygeneralrotationpolicy.

3.5.4.2 Where the member responsible for thevaluation in accordance with this standardholds that responsibility for many years,familiaritywitheithertheclient or the asset valuedcouldleadtotheperceptionthatthemember’s independenceandobjectivityhasbeencompromised.Thismaybeaddressedbyarrangingfortherotationofthemember whoacceptsresponsibilityforthevaluation.

3.5.4.3Themethodbywhichafirm arrangesforanyrotationof those responsible forvaluations is for the firm to decide, after discussionwith the clientifappropriate.However,HKIS recommendsthattheindividualresponsiblefor signing the report, no matter thestandingofthatmember in the firm,hasthatresponsibilityforalimitednumberofyears.Theexactperiodwilldependon:• thefrequencyofvaluation • any control and review procedures inplace such as ‘valuation panels’, whichassistboththeaccuracyandobjectivityofthevaluationprocessandgoodbusinesspractice.

• HKISconsidersitgoodpractice,albeitnotmandatory, to rotatevaluers at intervalsnotexceedingsevenyears.

3.5.4.4 If afirm is of insufficient size to rotate thesignatory, or to have in place ‘valuation

panels’,otherarrangements couldbemadetocomplywiththeprinciplesofthisstandard.For example, where the same valuationinstructionisundertakenonaregularbasis,an arrangement for the valuation to beperiodicallyreviewedatintervalsnotgreaterthansevenyearsbyanothermember wouldassist in demonstrating that the member is taking steps to ensure that objectivityis maintained and thus may retain theconfidenceofthoserelyingonthevaluation.

3.5.5 Timeassignatory

3.5.5.1 Thepurposeofthisrequirementistoprovideany third party withinformationonthelengthoftimethatamember hascontinuouslybeenthe signatory to valuations for the samepurpose.Italsorequiresasimilardisclosureastothelengthoftimethemember’s firm hasbeencarryingoutvaluationsofthatassetforthesameclient,andtheextentanddurationoftheirrelationship.

3.5.5.2 In relation to the member, the disclosureshould relate to the continuous period ofresponsibilityforthevaluationuptothedate of the report. It ispossible that themember wasthesignatorytopreviousreportsforthesamepurpose,butduetothefirm’s rotationpolicy(assetoutearlier)therewasaperiodoftimewhenthemember didnothavethatresponsibility. There is no requirement toincludethatearlierperiodinthedisclosure.

3.5.5.3 The member is not required to provide acomprehensive account of all work everundertaken by the member’s firm for theclient. A simple, concise statement thatdisclosesthenatureofotherworkdoneandthedurationoftherelationshipisallthatisrequired.

3.5.5.4 If there is no relationship other than thevaluationinstructioninquestion,astatementtothateffectshouldbemade.

3.5.6 Previousinvolvement

3.5.6.1Thepurposeofthisrequirementistoexposeanypotentialconflictof interestwhere themember, or the member’s firm, has valuedthe assetforthesamepurpose,orhasbeeninvolved with the purchase of the sameasset for theclient eitherwithin theperiodof12monthsprecedingthevaluation date or withinsuchotherperiodandcriteriaasmaybeprescribedoradoptedinaparticularstateorcountry.


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3.5.6.2 Wherethevaluationisprovidedforinclusioninapublisheddocumentinwhichthepublichasan interest,oruponwhich third parties may rely, the member should make the followingdisclosures:a) whereavaluation isofanassetthathaspreviouslybeenvaluedbythemember or the member’s firm,forthesamepurpose:• in the terms of engagement, astatement about the firm’s policy on therotationofthevaluerresponsibleforthevaluationand

• in the report,andpublishedreferencetoit,astatementofthelengthoftimethe valuerhascontinuouslybeenthesignatory to valuations provided tothe clientforthesamepurposeasthereport and, in addition, the lengthoftimethevaluer’s firm hascontinuouslybeen carrying out the valuationinstructionfortheclient

b) theextentanddurationoftherelationshipofthevaluer’s firm with the clientforanypurpose

c) where the report, and any publishedreference to it, includes one or moreassets acquired by the client within the period applicable under paragraph 3.5.6.1 immediately above, and themember or member’s firm,has inrelationtothoseassets: • receivedanintroductoryfeeor• negotiatedthatpurchaseonbehalfof

the client a statement should be made to sucheffect including, wherever relevant,endorsementofthereportinaccordancewith paragraph 3.5.7 immediatelybelow.

3.5.7 Proportionoffees

3.5.7.1 A statement should be made that theproportionof the total feespayablebytheclient during the preceding year relativeto the total fee income of the member’s firm during theprecedingyearareminimal,significantorsubstantial.

3.5.7.2 A proportion of fees less than 5%may beconsideredtobe‘minimal’.Between5%and25% may be considered to be significant,andabove25%issubstantial.

3.5.8 Otherdisclosures

3.5.8.1 Care should be taken to make sure that, in addition to the various disclosures required under VS 4 to VS 10, all other disclosures required for a particular valuation or purpose are made. Disclosure requirements that may require more specific information related to the

purpose of the valuation include: • materialinvolvement• thestatusofthemember • specificrequirementsastoindependence• knowledgeandskillsofthemember • extentofinvestigations• managementofanyconflictsofinterest• thevaluationapproach• disclosures required by any regulatorybody governing the purpose of thevaluation.

3.6.0 Reviewing another valuer’s valuation

3.6.1 A valuer may quite properly be requestedtoreviewallorpartofavaluationpreparedby another valuer in circumstances thatincludethefollowing,thoughthe list isnotexhaustive:• assisting the consideration of riskassessment

• providing comment on a publishedvaluation, for instance in a takeoversituation

• commenting on valuations produced foruseinlegalproceedings

• assistinganauditenquiry.

3.6.2 It is important to make a clear distinctionbetweenacriticalreviewofavaluationandan audit of a valuation or an independentvaluation of apropertyorasset included inanother valuer’s report.

3.6.3 In carrying out any review the member isexpected,byreferencetothevaluation date andtothefactsandcircumstancesrelevantto the assetatthetime,to:• formopinionsastowhethertheanalysisintheworkunderreviewisappropriate

• consider whether the opinions andconclusionsarecredibleand

• considerwhetherthereportisappropriateandnotmisleading.

3.6.4 The review must be undertaken in thecontext of the requirements applicable tothe work under review, and the member must develop and report opinions andconclusions together with the reasons foranydisagreement.

3.6.5 A member mustnotundertakeacriticalreviewof a valuation prepared by another valuer thatisintendedfordisclosureorpublication,unlessthemember isinpossessionofallthefacts and information uponwhich the firstvaluerrelied.ThisparagraphdoesnotapplytoanylegalproceedingsoranyinvestigationcarriedoutbyHKIS,regulatoryauthoritiesorotheraffectedparties.


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3.7.0 Responsibility for the valuation

3.7.1 For the avoidance of doubt, once thevariouspreliminaryissuesabovehavebeenadequately addressed, each assignment towhichthesevaluationstandardsapplymust bepreparedby,orunderthesupervisionof,anappropriatelyqualified,andnamed,valuer whoacceptsresponsibilityforit.

3.7.2 Where the valuation has been preparedwith input from othermembers or valuers,or a separate valuation report on somespecificaspectisincorporated,theresultantvaluation remains the responsibility ofthe named valuer under paragraph 3.7.1 above, but the others involved may beacknowledgedensuringthatanystatementsexpressly required underVS 9 - Reporting aremade.

3.7.3 HKISdoesnotallowavaluationtobepreparedbya‘firm’(eventhoughthisispermittedbythe IVS). However, the use of ‘for and onbehalf of’ under the responsible valuer’s signatureisanacceptablesubstitution.

3.7.4 Members are discouraged from referring toany valuation or report as either ‘formal’ or‘informal’, as these terms may give rise tomisunderstanding,particularlyregardingtheextent of investigation and/or assumptions that the member may or may not haveundertakenormade.

3.7.5 Members must exercise great cautionbeforepermittingvaluations tobeused forpurposesotherthanthoseoriginallyagreed.It is possible that a recipient or readerwillnotfullyappreciatetherestrictedcharacterofthevaluationandofanyqualifications inthe report,andthatitmaybemisquotedoutofcontext.Furthermoreaconflictofinterestmay potentially arise that would not havebeen relevant to the original assignment.It is essential therefore that the terms of engagementandthereportingappropriatelyaddressthisrisk.


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VS 4Terms of Engagement

4.1.0 General principles

4.1.1 Normally the terms of engagement will be settled between the client and thevaluer when instructions are first receivedand accepted (the initial confirmation ofinstructions).However,itisrecognisedthata valuation assignment may range from asingle asset to a substantial portfolio, thustheextenttowhichalltheminimumterms of engagement canbeconfirmedattheoutsetcouldalsovary.

4.1.2 Valuers should take care to ensure thatthey understand their clients’ needs andrequirementsfully,andappreciatethattherewill be occasions when theymay need toguideclientstochoosethemostappropriateadviceforthegivencircumstances.

4.1.3 In brief, the terms of engagement should convey a clear understanding of thevaluation requirements and process andshouldbecouchedintermsthatcanbereadand understood by someonewith no priorknowledge of the subjectasset, nor of thevaluationprocess.

4.1.4 Theformatanddetailoftheproposedvaluation reportisamattertobeagreedbetweenthevaluerandtheclientandrecordedinwritingin the terms of engagement.Itshouldalwaysbeproportionatetothetaskand–asforthevaluationitself–beprofessionallyadequatefor the purpose. For clarity, the standardsexpresslytobemetwhenissuingavaluation report are set out inVS 9.These generallymirror the requirements set out here, butwithsomeadditionaldetail.

4.1.5 Wheneverthevaluer or clientidentifiesthata valuationmayneedtoreflectanactualoranticipatedmarketing constraint, details ofthatconstraintmustbeagreedandsetoutin the terms of engagement. Theterm‘forcedsalevalue’mustnotbeused.

4.1.6 Bythetimethevaluation isconcluded,butprior to the issueof the report, all relevantmatters must have been fully brought tothe client’s attention and appropriatelydocumented.Thisistoensurethatthereport does not contain any revision of the initial

terms of engagement of which the client isunaware.

4.2.0 Terms of engagement format

4.2.1 Firms mayhaveastandardformofterms of engagement orstandingterms of engagement in place that may include several of theminimum terms required by the Standards.The valuer mayneedtoamendsuchaformtorefertothosemattersthatwillbeclarifiedatalaterdate.

4.2.2 Althoughthepreciseformatoftheterms of engagement may vary – for example, some‘in-house’ valuations may have standinginstructions or other internal policies orprocedures – valuers must prepare terms of engagement in writing for all valuationwork. The risks that can potentially ariseif queries are subsequently raised and theparametersforthevaluationassignmentareinsufficiently documented cannot be over-emphasised.

4.3.0 Terms of engagement (scope of work)

4.3.1 Terms of engagement must address thefollowingmatters.a) Identification and status of the valuer b) Identification of the client(s) c) Identification of any other intended

users d) Identification of the asset(s) being valued e) Valuation (financial) currency f) Purpose of the valuation g) Basis(es) of value adopted h) Valuation date i) Nature and extent of the valuer’s work

– including investigations – and any limitations thereon

j) Nature and source(s) of information upon which the valuer will rely

k) All assumptions and special assumptions to be made

l) Format of the report m) Restrictions on use, distribution and

publication of the report n) Confirmation that the valuation will be

undertaken in accordance with the IVS and/or HKIS Valuation Standards

o) The basis on which the fee will be calculated

p) A statement setting out any limiting conditions have been agreed.


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4.3.2 Each heading is considered in more detailbelow. The text in bold specifies the keyprinciples.Theaccompanyingtextspecifieshowtheprinciplesaretobeinterpretedandimplementedinindividualcases.

a) Identification and status of the valuer

Include a statement confirming:• that the valuation will be the

responsibility of a named individual valuer. HKIS does not allow a valuation to be prepared by a ‘firm’.

• that the valuer is in a position to provide an objective and unbiased valuation.

• whether or not the valuer has any material connection or involvement with the subject asset or the other parties to the valuation assignment. If there are any other factors that could limit the valuer’s ability to provide an impartial and independent valuation, such factors must be disclosed.

• that the valuer is competent to undertake the valuation assignment. If the valuer needs to seek material assistance from others in relation to any aspect of the assignment, the nature of such assistance and the extent of reliance must be clear, agreed and recorded.

(i) The use of ‘for and on behalf of’ afirm is an acceptable substitutionby an identified signatory whenissuing a report. If the valuation hasbeenundertakenbyamember underthe supervision of an appropriatelyqualified valuer, the valuer fulfillingthesupervisoryfunctionmustensure,and be satisfied, that the workundertakenmeetsthesameminimumstandards as if he or she had beensolelyresponsibleforthetask.

(ii) For some purposes the valuer may be required to state if he or she isacting as an internal or external valuer.Wherethevaluerisobligedtocomplywith additional requirementsregardingindependence,VS 3 section 3.2.0willapply.

(iii)In considering the extent of anymaterial involvement, whetherpast, current or possible future

involvement, the valuer must statesuch involvement in the terms of engagement.Wheretherehasnotbeenany previous material involvement,a statement to that effect must bemadeintheterms of engagement andvaluation report (seeVS 9 paragraph 9.2.3 (a)).Moreextensiveguidanceonindependenceandobjectivityisgivenin VS 3 section 3.2.0.

(iv)With regard to the competence ofthe valuer, the statement may belimitedtoconfirmationthatthevaluer has sufficient current local, nationaland international (as appropriate)knowledge of the particular market,and sufficiently developed skillsand understanding to undertakethe valuation competently. It is notnecessary to provide any details.Where the provisos inVS 3 section 3.2.0apply,anappropriatedisclosureistobemade.

b) Identification of the client(s)

Confirmation of those for whom the valuation assignment is being produced is important when determining the form and content of the report to ensure that it contains information relevant to their needs. Any restriction on those who may rely upon the valuation assignment must be agreed with the client and recorded.

(i) Requestsforvaluations willfrequentlybe received from representativesof the client, in which event thevaluer shouldensurethattheclient iscorrectlyidentified.Thisisparticularlyrelevantwhere:• therequestismadebythedirectors of a company, but theclient is thecompany and the directors have aseparatelegalstandingor

• the valuation is required forloan purposes and, althoughcommissioned by the borrower oran entity acting for the lender (forexample, a service managementcompany),thereportmaybeforthelender,itssubsidiaries,ormembersofasyndicate,forexample,soit isimperativetoidentifythetrueclient or

• the valuation is required for estate


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management or estate-relatedrevenue filings and, althoughcommissionedbyafinancialadviseroranattorney,thereportmaybefortheestate,thetrueclient.

c) Identification of other intended users

It is important to understand whether there are any other intended users of the valuation report, their identity, and their needs, in order to ensure that the report content and format meets those users’ needs.

(i) Thevaluer muststatewhetherornotanypartiesotherthantheclient may relyuponthevaluation.

(ii) In many cases, it will only be thevaluer’s clientwho isseekingrelianceupon the valuation. Agreeing toextend reliance to third parties may significantly increase the risks to thevaluer.

(iii)As a default position, valuers should confirmthattheydonotpermitthird party reliance on the valuation report in their terms of engagement. Anypermitted reliance on the valuation by a third party should be carefullyconsidered and the terms on whichreliance is permitted should bedocumented. Particular care needstobetakentoensurethatthevaluer doesnotunwittinglybecomeexposedtotheriskofthird parties claimingthatadutyofcarehasbeenextendedtothem, and that any relevant termsof business (such as limitations onliability) apply to third parties who are permitted to rely on a valuation.Valuers should consider taking legaladviceinthisregard.

(iv)Valuers should exercise care inconsidering whether assignment ofthevaluationengagementcontract(asdistinct from permitting third parties to rely upon it) is to be permitted,as doing so may expose valuers to additionalrisks.Valuers shouldensurethat the terms of their professionalindemnity insurance provides therequisite cover where assignment ispermitted.

d) Identification of the asset(s) being valued:

The subject asset in the valuation assignment must be clearly identified, taking care to distinguish between an asset or liability and an interest in or rights to use that asset or liability as the case may be. If the valuation is of an asset that is used in conjunction with other assets, it will be necessary to clarify whether those assets are: • included in the valuation assignment• excluded but assumed to be available

or• excluded and assumed not to be

available.

If the valuation is of a fractional interest held in an asset, it will be necessary to clarify the relationship of the fractional interest being valued relative to all other fractional interests and the obligations of the fractional interest ownership, if any, to other fractional interest owners.

Particular regard must be had to the identification of portfolios, collections and groups of properties. It is essential to consider ‘lotting’ or ‘grouping’; the identification of different property or asset categories; and any assumptions or special assumptions relating to the circumstances under which the properties, assets, liabilities or collections may be brought to the market.

(i) The legal interest in each asset must be stated. Clarification isessential to distinguish betweenthe characteristics of theasset in itsentirety and the particular right orinterestthatisbeingvalued.

(ii)When valuing an interest in realpropertythatissubjecttoatenancy,it may be necessary to identify anyimprovementsundertakenbytenantsand to clarify whether or not theseimprovements are to be disregardedon renewal, or review, of the lease,or even if they may give rise to acompensation claim by the tenantwhenvacatingthereal estate.

(iii)Whenvaluingafractional(percentageofthewhole)ownershipinterestinareal property, the valuer also needs


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to identify the degree of controlrepresented by the percentageinterest being valued and anyrights held by the other fractionalinterest ownerships that encumberthe marketability of the interestbeingvalued (such as a first right ofpurchase intheeventtheownershipbeingvaluedistobesold).

(iv)Where there is doubt about whatconstitutesasinglepropertyorasset,the valuer must ‘lot’, or group, thepropertiesforvaluation in the manner mostlikelytobeadoptedinthecaseof an actual sale of the interest(s)being valued. However, the valuer must always discuss the optionswith the client andmust confirm theapproach adopted in the terms of engagement and subsequently in thevaluation report.

e) Valuation (financial) currency

The currency in which the valuation of the asset is to be expressed must be established.

This requirement is particularly important for valuation assignments involving assets in more than one jurisdiction and/or cash flows in multiple currencies.

(i) If a valuation has to be translatedintoacurrencyotherthanthatofthecountryinwhichtheasset islocated,thebasisoftheexchangeratemustbeagreed.

f) Purpose of the valuation

The purpose for which the valuation assignment is being prepared must be clearly identified and stated as it is important that valuation advice is not used out of context or for purposes for which it is not intended.

The purpose of the valuation will also typically influence or determine the basis(es) of value to be used.

(i) If the client declines to reveal thepurpose of the valuation, valuers should be aware that it may be

difficulttocomplywithallaspectsofthe Standards.Ifthevalueriswillingtoproceedwiththevaluation,theclient must be advised in writing that thisomission will be referred to in thereport. In this case the report must notbepublishedordisclosedtothird parties.

(ii) Ifanunusuallyqualifiedvaluation istobeprovided,theterms of engagement muststatethatitisnottobeusedforanypurposeotherthanthatoriginallyagreedwiththeclient.

g) Basis(es) of value adopted

The valuation basis must be appropriate for the purpose of the valuation. The source of the definition of any basis of value used must be cited or the basis explained. This requirement does not apply to a valuation review where no opinion of value is to be provided and the reviewer is not required to comment on the basis of value used.

(i) Where a valuation basis is expresslydefined in the Standards (includingIVS-defined bases), that definitionmust be reproduced in full. Wherethe definition is supplemented bya detailed conceptual frameworkor other explanatory material, it isnot necessary to reproduce thatframework or explanation.However,there is discretion to reproduce itshould the valuer consider that itassiststheclient tounderstandmorefullythereasoningbehindthebasis of value adopted.

(ii) For certain specific purposes, suchas financial reporting under theInternational Financial ReportingStandards, or in consequence ofindividualjurisdictionalrequirements,theadoptionofaspecificbasis of value may be stipulated. In all other casestheappropriatebasis(es)isessentiallyamatter for thevaluer’s professionaljudgment.

(iii)Itisrecognisedthatforsomepurposesaprojectedvaluemayberequired inaddition to a current valuation. Any


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such projection should comply with the applicable jurisdictional and/ornationalstandards.SeeVS 8 section 8.4.0.

h) Valuation date

The valuation date may be different from the date on which the valuation report is to be issued or the date on which investigations are to be undertaken or completed. Where appropriate, these dates should be clearly distinguished.

(i) The specific valuation date will needto be agreed with the client – an assumption that the valuation date isthe date of the reportisnotacceptable.

(ii)Where, exceptionally, the advicebeing provided relates to a futuredate, seeVS 8 section 8.4.0 and VS 9 paragraph 9.2.3(f), regarding thereportingrequirements.

i) Nature and extent of the valuer’s work – including investigations – and any limitations thereon

Any limitations or restrictions on the inspection, inquiry and/or analysis for the purpose of the valuation assignment must be identified and recorded in the terms of engagement.

If relevant information is not available because the conditions of the assignment restrict the investigation, then if the assignment is accepted, these restrictions and any necessary assumptions or special assumptions made as a result of the restriction must be identified and recorded in the terms of engagement.

(i) A client may require a restrictedservice;forexample,ashorttimescalefor reportingmaymake it impossibletoestablishfactsthatwouldnormallybeverifiedbyinspection,orbymakingnormalenquiries.Arestrictedservicewill also include any limitations onassumptions made in accordancewith VS 8. It isacceptedthataclient may sometimes require this level ofservice,butitisthedutyofthevaluer to discuss the requirements and

needsoftheclientpriortoreporting.Such instructions, when related toreal estate, are often referred to as‘drive-by’, ‘desk-top’ or ‘pavement’valuations.

(ii) The valuer should consider if therestriction is reasonable,with regardtothepurposeforwhichthevaluation is required. The valuer may consideraccepting the instruction subject tocertain conditions, for example thatthe valuation isnottobepublishedordisclosedtothird parties.

(iii)If the valuer considers that it is notpossible to provide avaluation, evenon a restricted basis, the instructionshouldbedeclined.

(iv)The valuer must make it clear when confirming acceptance of suchinstructions that the nature ofthe restrictions and any resultingassumptions, and the impact on theaccuracy of the valuation, will bereferredtointhereport.(SeealsoVS 9)

(v)VS 7 contains general requirementswithregardtoinspections.

j) Nature and source(s) of information upon which the valuer will rely

The nature and source of any relevant information that is to be relied upon and the extent of any verification to be undertaken during the valuation process must be identified, agreed and recorded.

For this purpose, ‘information’ is to be interpreted as including data and other such inputs.

(i) Where the client will provideinformation that is to be relied on,the valuerhasaresponsibilitytostatethatinformationclearlyintheterms of engagement and, where appropriate,its source. In each case the valuer must judge the extent to which theinformationtobeprovidedislikelytobereliable,beingmindfultorecogniseand not to exceed the limitations oftheir qualification and expertise inthisrespect.


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(ii) The client may expect the valuer to express anopinion (and, in turn, thevaluer maywishtoexpressanopinion)on social, environmental and legalissues that affect the valuation. Thevaluer must therefore make clear inthe report any information thatmust be verified by the client’s or other interested parties’ legal advisersbeforethevaluation canbereliedonorpublished.

k) All assumptions and special assumptions to be made

All assumptions and special assumptions that are to be made in the conduct and reporting of the valuation assignment must be identified and recorded:

• Assumptions are matters that are reasonable to accept as fact in the context of the valuation assignment without specific investigation or verification. They are matters that, once stated, are to be accepted in understanding the valuation or other advice provided.

• A special assumption is an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.

Only assumptions and special assumptions that are reasonable and relevant having regard to the purpose for which the valuation assignment is required should be made.

(i) Special assumptions are often usedto illustrate the effect of changedcircumstancesonvalue.Examplesofspecial assumptions include:

• that a proposed building hadactually been completed on thevaluation date

• that a specific contract was inexistence on the valuation date which had not actually beencompleted

• thatafinancialinstrumentisvaluedusingayieldcurvethat isdifferentfromthatwhichwouldbeusedbyamarketparticipant.

(ii) Furtherguidanceonassumptions andspecial assumptions,includingthecaseofprojectedvalues(i.e.futurestateofthe assetorofanyfactorsrelevanttoitsvaluation)canbefoundinVS 8.

(iii)HKIS recognises the ‘Value for Saleunder Repossession’ (VSR) as avaluation under special assumptions on actual or potential marketingconstraints,butnotasabasis of value.

l) Format of the report

The valuer must establish the format of the report and how the valuation will be communicated.

(i) VS 9setsoutthemandatoryreportingrequirements.Where–exceptionally–itisagreedthatanyoftheminimumreportingcontentsaretobeexcludedthey may be treated as departures,providedtheyareagreedintheterms of engagement, are appropriately referred to in the valuation report,and do not result in a report that ismisleading and/or professionallyinadequateforitspurpose.

(ii) AreportpreparedinaccordancewiththisstandardandwithVS 9 must not itselfbedescribedasacertificateorstatement, the use of such languageimplyingeitheraguaranteeoralevelofcertaintythatisofteninappropriate.However, a valuer may use the term‘certified’,orsimilarwords,withinthebody of a report where it is knownthat the valuation is tobe submittedfor a purpose that requires formalcertificationofavaluationopinion.

(iii)Valuers should be aware that theterms ‘certificate ofvalue’, ‘valuationcertificate’ and ‘statement of value’have specific meanings in certaincountries or states in designatingstatutory documents. One commonfactor is that these documentsrequireasimpleconfirmationofpriceorvalue,withoutanyrequirementtounderstandthecontext,fundamentalassumptions or analytical processesbehind the figure provided. A valuer who has previously provided avaluation oradvisedona transaction


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involvingtheasset maypreparesuchadocumentwheretheclientisrequiredtoprovideitbystatute.

(iv)Where necessary for the purposeof brevity, members may providea separate summary of values,providedthat it ispartofavaluation report prepared for the requiredsame purpose and complying fullywith the Standards, and clearly crossreferencedandstatedassuch.

m) Restrictions on use, distribution and publication of the report

Where it is necessary or desirable to restrict the use of the valuation advice or those relying upon it, the restrictions must be clearly communicated.

(i) The valuer must state the permitteduse, distribution and publication ofthe valuation report.

(ii) Restrictions are only effective ifnotifiedtotheclientinadvance.

(iii)The valuer should keep in mindthat any insurance that protectsagainst claims for negligence underprofessional indemnity insurance(PII) policies may require the valuer to have particular qualifications, andto include certain limiting clauses inevery report and valuation. If this isthecasetherelevantwordsshouldberepeated,unlesstheinsurersagreetoeither a modification or a completewaiver. If in doubt, valuers should refertotheir insurancepolicybeforeacceptinginstructions.

(iv)Somevaluations will be forpurposeswhere the exclusion of third party liabilityiseitherforbiddenbylaworbyanexternal regulator. Inothercases,itwill beamatter for clarificationoragreement with the client, havingregard also to the judgment of thevaluer.

(v) Particular care should be taken inrelation to valuation assignments inconnection with secured lending toaddressthird party liabilityissues.

n) Confirmation that the valuation will be undertaken in accordance with the IVS and/or HKIS Valuation Standards

The valuer should provide:

confirmation that the valuation will be undertaken in accordance with the International Valuation Standards (IVS) and that the valuer will assess the appropriateness of all significant inputs

or (depending on clients’ particular requirements)

confirmation that the valuation will be undertaken in accordance with the HKIS Valuation Standards, which incorporate the IVS.

In both cases an accompanying note and explanation of any departures from the IVS or the Standards must be included. Any such departure must be identified, together with justification for that departure. A departure would not be justified if it results in a valuation that is misleading.

(i) There is no material difference inoutcome between the respectiveforms of endorsement above,which may be used according tothe particular requirements of thevaluationassignment.Someclients will expressly wish to have confirmationthat the valuation hasbeenundertakenin accordancewith the IVS, and it isnaturallyinorderforthistobegiven.In all other cases confirmation thatthe valuation hasbeenundertakeninaccordance with the HKIS ValuationStandards carries with it the dualassuranceofcompliancewiththeIVStechnicalstandardsandwiththeHKIS ValuationStandardsoverall.

(ii) References to the HKIS ValuationStandards without reference to theyear of issue will be taken to meanthe version of the HKIS standardsoperative at the valuation date,provided that it is on or before thedate of the report.Wherea‘projectedvalue’istobeprovided(i.e.relatingtoadateafterthedate of the report)thedate of the report willbethedeciding


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factorastotheversionthatapplies.

(iii)The statement of compliance should drawattentiontoanydepartures (seeVS 1 section 1.5.0).Whereadeparture ismadethat isnotmandatory, itwillnotbepossibletoconfirmcompliancewiththeIVS.

(iv)Where other valuation standards –specific to a particular jurisdiction – will be followed, this should beconfirmed as a part of agreement inthe terms of engagement.

o) The basis on which the fee will be calculated

The level of the fee is a matter to besettledwith the client, unless there is afeebasisprescribedbyanexternalbodythat binds both parties.HKIS does notpublishanyscaleofrecommendedfees.

p) A statement setting out any limiting conditions that have been agreed

Theissuesofrisk,liabilityandinsurancearecloselylinked.Thevaluer should keep inmindthatanyinsurancethatprotectsagainst claims for negligence underprofessional indemnity insurance (PII)policies may require the valuer to haveparticular qualifications, and to includecertainlimitingclausesineveryreportandvaluation. If this is thecasetherelevantwords should be repeated, unless theinsurers agree to either a modificationoracompletewaiver.Ifindoubt,valuers should refer to their insurance policybeforeacceptinginstructions.

4.4.0 Valuation to reflect marketing constraints

4.4.1 Both the clientandthevaluershallagreetotheactualoranticipatedmarketingconstraintas set out in the terms of engagement (seeparagraph4.3.2(k)above).

4.4.2 Theterm‘forcedsalevalue’mustnotbeusedasitisnotarecognisedbasis of value; rather ‘forcedsale’isadescriptionofthesituationunderwhichthetransfertakesplace.

4.4.3 The Institute recognises the ‘Value for SaleunderRepossession’isavaluationtoreflect

marketingconstraintsbutnotabasis of value.

4.5.0 Valuation to be carried out with restricted information

Prior tothe issueofa report,avaluer shallconfirm inwritingwith theclient thebasisofrestricted information, itsnatureand itspossible implications upon the valuation report.

4.6.0 Valuation engagement to conduct a critical review of another valuer’s valuation

4.6.1 A member mustnotundertakeacriticalreviewof a valuation prepared by another valuer thatisintendedfordisclosureorpublication,unlessthemember isinpossessionofallthefacts and information uponwhich the firstvaluerrelied.

4.6.2 Subject to the following requirements, avaluation reviewer may, on the instructionoftheclient,conduct thecritical reviewonthebasisofagreed-uponproceduresfortheclient’sinternalreference:-

(a) The client in the terms of engagement agreesthatthenatureandscopeoftheproceduresareadequateforhispurpose.

(b) The valuation reviewer in the terms of engagement and his valuation reviewreportdiscloses the limitationhehas inconductinghisvaluationreview.

(c) The valuation reviewer in the terms of engagement and his valuation reviewreport states that should additionaldocumentsandfactsbeavailabletohimatalaterdate,hemayreservestherighttoamendhisfindingsandconclusionsinhisvaluationreviewreport.

(d) The valuation reviewer in the terms of engagement and his valuation reviewreport states that the valuation reviewreport shall not be disclosed to a thirdpartyorpublishedtothepublic.

4.6.3 This section does not apply to reports preparedforanylegalproceedingswhereamembermaybe required tocommentonareport preparedbyavaluer representingoracting on behalf of the opposing party inlegalproceedings.

4.6.4 This section does not apply to situationswhere the GPD Council commences aninvestigationtoa valuer.


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4.6.5 This section does not apply to situationswhere complaints from the public hasbeen received by theHKIS or come to itsattention,ortheHKIS has,forsomereasons,commenced a disciplinary investigationto determine whether a valuation/report prepared by a member complies with therequirementssetoutinthe Standards.

4.7.0 Valuation engagement for finanncial and accounts reporting and valuation to be included or disclosed in the financial statements

4.7.1 A valuer is required to reach an agreementwith the client in the terms of engagement ontheworkingrelationshipwiththeclient’sauditor.Thismayincludesuchdetailsastheway and the extent of releasing workingpapers and data to the client’s auditor, toavoid unnecessary disputeswith the client andtheclient’sauditorthereafter.

4.7.2 Itisagoodpracticetohaveameetingwiththe client and their auditor to understandandtoagreeonthescopeofworkpriortoproposingandenteringanengagementwiththe client.


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VS 5Bases of Value

5.1.0 General principles

5.1.1 The valuer must ensure that the basis of value adopted is appropriate for, and consistent with, the purpose of the valuation.

5.1.2 If one of the bases of value defined in the Standards (including IVS-defined bases) is used, then it should be applied in accordance with the relevant definition and guidance, including the adoption of any assumptions or special assumptions (see VS 8) that are appropriate.

5.1.3 If a basis of value not defined in the Standards (including IVS-defined bases) is used, it must be clearly defined and stated in the report, which must also draw attention to the fact that it is a departure if use of the basis in the particular valuation assignment is voluntary and not mandatory. Where a departure is made that is not mandatory, compliance with IVS is not possible.

5.1.4 A basis of value is a statement of thefundamental measurement assumptions ofa valuation. It describes the fundamentalpremisesonwhich the reportedvalueswillbebased.Itiscriticalthatthebasis of value beappropriatetothetermsandpurposeofthevaluationassignment,asabasis of value mayinfluenceordictateavaluer’sselectionofmethods,inputsandassumptions,andtheultimateopinionofvalue.

5.1.5 Forsomevaluationassignments,particularlyin relation to specific jurisdictions within whichtheremaybemandatoryrequirements,another basis of value may be specified(for example, in legislation) or appropriate(members should note that IVS 104 givessomeillustrativeexamplesatparagraph20.1(b)).Wherethisisso,thevaluer mustdefineclearly the basis adopted and, in any casewhere adoption of the basis is other thanmandatory,explaininthereportwhyuseofabasisreproducedinthe Standards(includingany jurisdiction-specificsupplementtothesestandards) is considered inappropriate (seeVS 1 section 1.3.0)..

5.1.6 As markets continue to develop andadvance, and as clients’ needs continue to

grow in terms of sophistication, additionaldemands are being placed on valuers to provide advice involving some elementof prediction or forecast. Great care isneeded to ensure that such advice is notmisunderstood or misrepresented, andthat any sensitivity analysis is carefullypresentedsoasnottounderminethebasis of valueadopted.

5.1.7 Valuers are cautioned that the use of anunrecognised or bespoke basis of value withoutgoodreasoncouldresultinbreachoftherequirementthatthevaluation report shouldnotbeambiguousormisleading.

5.2.0 Bases of Value

5.2.1 The following bases are defined in theInternational Valuation Standards andInternationalFinancialReportingStandards(see IVS104paragraph20.1(a)) andmostare in common use, albeit that theymaynotbeuniversallyadoptedinallmarkets:

a) IVS-definedbasesofvalue:1. MarketValue(section5.3.0)2. MarketRent(section5.4.0)3. EquitableValue(section5.5.0)4. Investment Value/Worth (section5.6.0)

5. SynergisticValue(section5.7.0)6. LiquidationValue(section5.8.0)and

b) IFRS-definedbasesofvalue:1. FairValue(section5.9.0)

Particular care is necessary to ensurethat,where used, synergistic value is fullyunderstoodbytheclient.

5.2.2 While there are many different bases of valueusedinvaluations,mosthavecertaincommonelements:anassumedtransaction,anassumeddateofthetransactionandtheassumedpartiestothetransaction.

5.2.3 Depending on the basis of value, theassumedtransactioncouldtakeanumberofforms:

a) ahypotheticaltransaction,b) anactualtransaction,c) apurchase(orentry)transaction,d) asale(orexit)transaction,and/ore) a transaction in a particular orhypothetical market with specifiedcharacteristics.


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5.2.4 The assumed date of a transaction willinfluencewhatinformationanddataavaluer consider inavaluation.Mostbases of value prohibittheconsiderationofinformationormarketsentimentthatwouldnotbeknownor knowablewith reasonableduediligenceon the measurement/valuation date byparticipants.

5.2.5 Most bases of value reflect assumptions concerningthepartiestoatransactionandprovideacertainlevelofdescriptionoftheparties. In respect to these parties, theycouldincludeoneormoreactualorassumedcharacteristics,suchas:

a) hypothetical,b) knownorspecificparties,c) members of an identified/describedgroupofpotentialparties,

d) whether the parties are subject toparticular conditions ormotivations attheassumeddate(e.g.duress),and/or

e) anassumedknowledgelevel.

5.2.6 The valuer hasresponsibilityforensuringthatthe basis of valueadoptedisconsistentwiththepurposeofthevaluationandappropriatetothecircumstances–thisresponsibility issubject to compliancewith anymandatoryrequirements, such as those imposed bystatute. It is important that thebasis tobeadoptedisdiscussedandconfirmedwiththeclient andany intendedusers, if applicable,attheoutsetinanycasewherethepositionisnot straightforward.However, regardlessof instructions and input provided to thevaluer, the valuer should not use a basis of value that is inappropriate for the intendedpurpose of the valuation (for example, ifinstructedtouseaIVS-definedbasis of value forfinancialreportingpurposesunderIFRS,compliance with the Standardsmay requirethe valuer touseabasis of valuethat isnotdefinedormentionedinthe Standards).

5.2.7 Valuers areresponsibleforunderstandingtheregulation, case law and other interpretiveguidancerelatedtoallbases of valueused.

5.2.8 It is important to note that bases of value are not necessarily mutually exclusive. Forexample,theworthofapropertyorasset to a specific party, or the equitable value of aproperty or asset inexchangebetweentwospecificparties,maymatchthemarket value even though different assessment criteriaareused.

5.2.9 Becausebasesotherthanmarket value may produceavaluethatcouldnotbeobtainedonanactualsale,whetherornotinthegeneralmarket, the valuer must clearly distinguishthe assumptions or special assumptions that are different from, or additional to, thosethat would be appropriate in an estimateof market value. Typical examples of suchassumptions and special assumptions are discussedinVS 8.

5.2.10 Valuers mustensureinallcasesthatthebasis of value is reproduced or clearly identifiedinboththereportand,ifpossible,theterms of engagement (scope of work). If, afterengagement, the valuer considers that abasis of value agreed in advance with theclientislikelytobeinappropriate,therevisedbasis of value mustbediscussedandagreedwith the client and, as far as possible, theintended users, prior to the conclusion ofthevaluationassignmentanddeliveryofthereport.

5.2.11 A valuer may be legitimately instructedto provide valuation advice based onother criteria, and therefore other bases of valuemay be appropriate. In such casesthe definition adopted must be set outin full and explained. Where such a basisdiffers significantly frommarket value it isrecommendedthatabriefcommentismadeindicatingthedifferences.

5.3.0 Market Value

5.3.1 Market valueisdefinedinIVS104paragraph30.1as:

‘the estimated amount forwhich an assetorliabilityshouldexchangeonthevaluation date betweenawillingbuyer andawillingseller in an arm’s length transaction, afterpropermarketingandwherethepartieshadeach acted knowledgeably, prudently andwithoutcompulsion.’

5.3.2 The definition of market value must beapplied in accordance with the followingconceptualframework:

a) “Theestimatedamount”referstoapriceexpressed in terms of money payablefor the asset in an arm’s length markettransaction. Market value is the mostprobable price reasonably obtainable


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in the market on the valuation date in keepingwiththemarket valuedefinition.Itisthebestpricereasonablyobtainablebythesellerandthemostadvantageouspricereasonablyobtainablebythebuyer.This estimate specifically excludes anestimated price inflated or deflated byspecial terms or circumstances such asatypical financing, sale and leasebackarrangements, special considerationsor concessions granted by anyoneassociatedwiththesale,oranyelementofvalueavailableonlytoaspecificownerorpurchaser.

b) “An asset or liability should exchange”referstothefactthatthevalueofanassetorliabilityisanestimatedamountratherthan a predetermined amount or actualsaleprice.Itisthepriceinatransactionthatmeetsalltheelementsofthemarket valuedefinitionatthevaluation date.

c) “Onthevaluation date”requiresthatthevalueistime-specificasofagivendate.Becausemarketsandmarketconditionsmay change, the estimated value maybe incorrector inappropriateatanothertime. The valuation amount will reflectthemarketstateandcircumstancesasatthe valuation date,notthoseatanyotherdate.

d) “Betweenawillingbuyer” refers toonewho ismotivated,butnotcompelled tobuy.Thisbuyerisneitherovereagernordeterminedtobuyatanyprice.Thisbuyerisalsoonewhopurchasesinaccordancewith the realities of the currentmarketand with current market expectations,rather than in relation to an imaginaryor hypothetical market that cannot bedemonstratedoranticipatedtoexist.Theassumed buyerwould not pay a higherprice than the market requires. Thepresent owner is included among thosewhoconstitute“themarket”.

e) “And awilling seller” is neither an overeagernoraforcedsellerpreparedtosellat any price, nor one prepared to holdoutforapricenotconsideredreasonablein the currentmarket.Thewilling sellerismotivated to sell the asset at market terms for the best price attainable intheopenmarketafterpropermarketing,whateverthatpricemaybe.Thefactual

circumstances of the actual owner arenotapartofthisconsiderationbecausethewillingsellerisahypotheticalowner.

f) “In an arm’s length transaction” is onebetween parties who do not have aparticular or special relationship, e.g.parent and subsidiary companies orlandlordand tenant, thatmay make the priceleveluncharacteristicofthemarketor inflated.Themarket value transactionis presumed to be between unrelatedparties,eachactingindependently.

g) “Afterpropermarketing”meansthattheassethasbeenexposedtothemarketinthe most appropriate manner to effectitsdisposalat thebestprice reasonablyobtainableinaccordancewiththemarket value definition. The method of sale isdeemed to be thatmost appropriate toobtain the best price in the market towhichthesellerhasaccess.Thelengthofexposuretime is not a fixed period butwill vary according to the type of asset andmarketconditions.Theonlycriterionis that there must have been sufficienttimetoallowtheassettobebroughttotheattentionofanadequatenumberofmarketparticipants.Theexposureperiodoccurspriortothevaluation date.

h) “Where the parties had each actedknowledgeably, prudently” presumesthatboththewillingbuyerandthewillingsellerarereasonablyinformedaboutthenatureandcharacteristicsoftheasset,itsactualandpotentialuses,andthestateofthemarketasofthevaluation date.Eachisfurtherpresumedtousethatknowledgeprudentlytoseekthepricethat ismostfavourable for their respectivepositionsinthetransaction.Prudence isassessedbyreferringtothestateofthemarketatthe valuation date, notwith the benefitof hindsight at some later date. Forexample, it isnotnecessarily imprudentforasellertosellassets in a market with fallingpricesatapricethatislowerthanpreviousmarketlevels.Insuchcases,asis true for other exchanges in marketswithchangingprices,theprudentbuyeror sellerwill act in accordancewith thebestmarket informationavailableatthetime.


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i) “And without compulsion” establishesthateachpartyismotivatedtoundertakethe transaction,butneither is forcedorundulycoercedtocompleteit.

5.3.4 Market value is a basis of value that isinternationally recognised and has along-established definition. It describesan exchange between parties that areunconnectedandareoperatingfreelyinthemarketplace and represents the figure thatwould appear in ahypothetical contractofsale, or equivalent legal document, at thevaluation date, reflecting all those factorsthatwouldbetakenintoaccountinframingtheir bids by market participants at largeand reflecting the highest and best use ofthe asset. The highest and best use of anasset is theuseof anasset thatmaximisesits productivity and that is possible, legallypermissibleandfinanciallyfeasible.

5.3.5 Market value is understood as thevalue ofanassetorliabilityestimatedwithoutregardtocostsofsaleorpurchase(ortransaction)andwithoutoffsetforanyassociatedtaxesorpotential taxes.Thedefinition,however,doesnotprecludetheconsiderationoftaxesand transaction costs in the calculations.Valuers always have to exercise reasonablejudgementsontheimpactofrelevanttaxesand transaction costs in their valuationmodels.

5.3.6 The concept of market value presumes apricenegotiatedinanopenandcompetitivemarket where the participants are actingfreely.Themarket foranassetcouldbeaninternationalmarketor a localmarket.Themarket could consist of numerous buyersand sellers, or could be one characterisedbya limitednumberofmarketparticipants.The market in which the asset ispresumedexposed for sale is the one in which theassetnotionallybeingexchangedisnormallyexchanged.

5.3.7 The market value of anassetwill reflect itshighest and best use (see section 5.12.0).The highest and best use is the use of anassetthatmaximisesitspotentialandthatispossible, legally permissible and financiallyfeasible.Thehighestandbestusemaybeforcontinuationofanasset’sexistinguseorforsomealternativeuse.Thisisdeterminedbytheusethatamarketparticipantwouldhaveinmindfor theassetwhenformulatingthepricethatitwouldbewillingtobid.

5.3.8 The nature and source of the valuationinputs must be consistent with the basis of value,which in turnmusthave regard tothevaluationpurpose.Forexample,variousapproaches and methods may be usedto arrive at an opinion of value providingthey use market-derived data. Themarket approach will, by definition, use market-derived inputs. To indicate market value,the income approach should be applied,usinginputsandassumptionsthatwouldbeadoptedbyparticipants.To indicatemarket value using the cost approach, the cost ofan assetofequalutilityandtheappropriatedepreciation should be determined byanalysis of market-based costs anddepreciation.

5.3.9 The data available and the circumstancesrelating to the market for the asset beingvalued must determine which valuation method or methods are most relevant andappropriate. If based on appropriatelyanalysed market-derived data, eachapproachormethodusedshouldprovideanindicationofmarket value.

5.3.10 The valuation process requiresmembers to conductadequateandrelevantresearch,toperform competent analyses, and to drawinformedandsupportablejudgements.Inthisprocess,valuersdonotacceptdatawithoutquestions but should consider pertinentmarket evidence, trends, comparabletransactions,andother information.Wheremarket data is limited, or essentially non-existent, the valuer must make proper disclosure of the situation andmust statewhether theestimate is in anyway limitedbytheinadequacyofdata.

5.3.11 Market value does not reflect attributesof an asset that are of value to a specificowner or purchaser that are not availableto other buyers in the market (special value). Such advantages may relate to thephysical, geographic, economic or legalcharacteristics of an asset. Market value requires thedisregardofany suchelementofvaluebecause,atanygivendate,itisonlyassumedthatthereisawillingbuyer,notaparticularwillingbuyer.

5.3.12 Notwithstanding the disregard of special value,wherethepriceofferedbyprospectivebuyers generally in the market wouldreflect an expectation of a change in thecircumstances of the asset in the future,


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the impact of that expectation is reflectedin market value. Examples of where theexpectationofadditionalvaluebeingcreatedorobtainedinthefuturemayhaveanimpacton the market valueinclude:• the prospect of development wherethere is no current permission for thatdevelopmentand

• the prospect of marriage value arisingfrom merger with another propertyor asset, or interests within the sameproperty or asset,atafuturedate.

5.3.13 The impact on value arising by use of anassumption or special assumption should not be confusedwith the additionalvalue thatmightbeattributedtoanassetbyaspecial purchaser.

5.3.14 Aschangingconditionsarecharacteristicsofmarkets,valuers mustconsiderwhethertheavailabledatareflectsandmeetsthecriteriafor market value. However, if the interestbeingvaluedisincapableofbeingdisposedofinthemarket,market value maynotbeanappropriatebasistouse.

(a) Periods of rapid changes in marketcondition are typified by rapidlychanging prices, a condition commonlyreferredtoasdisequilibrium.Aperiodofdisequilibriummaycontinueoveraperiodof years and can constitute the currentand expected future market condition.In other circumstances, rapid economicchange may give rise to erratic marketdata. If some sales are out of linewiththemarket,thevaluerwillgenerallygivethemlessweight. Itmaystillbepossibleforthevaluertojudgefromavailabledatawhere the realistic level of the marketis. Individual transactionpricesmaynotbeevidenceofmarket value,butanalysisofsuchmarketdatashouldbetakenintoconsiderationinthevaluationprocess.

(b) In poor or fallingmarkets theremay ormay not be a large number of “willingsellers.” Some, but not necessarily all,transactions may involve elements offinancial (or other) duress or conditionsthat reduce or eliminate the practicalwillingness of certain owners to sell.Valuers musttakeintoaccount,asfaraspossible,relevantfactorsinsuchmarketconditions and attach such weight to individual transactions that theybelievepropertoreflectthemarket.Liquidators

andreceiversarenormallyunderadutyto obtain the best price in propertydisposals.Sales,however,maytakeplacewithoutpropermarketingorareasonablemarketingperiod.Valuers mustjudgesuchtransactionstodeterminethedegreetowhichtheymeettherequirementsofthemarket value definition and the weight thatsuchdatashouldbegiven.

5.3.15 When assessing the market value of aproperty, any encumbrances such asmortgage, debenture or other chargesagainstitshouldbedisregarded.

5.3.16 A clientmaywishtoincludethe‘hopevalue’ofapropertyinitsmarket valueandthe‘hopevalue’referstothesituationthatthemarkethas an expectation that the circumstancesaffecting the propertymay have a positivechangeinthefuture.Examplesofthe‘hopevalue’include:

(a) The prospect of having re-developmentopportunity where in fact there is nocurrent permission of re-developmentgrantedforthatrealproperty.

(b)Therealisationof ‘marriage value’arisingfrommergerwith another real propertyorinterestswithinthesamerealproperty.

(c) The prospect of positive cash flows ofa business enterprise which though atpresentrecordsanegativeequity inthebalancesheet.

However, the amount of hope valuemust be limited to the extent that it would bereflected in offers made by prospectivepurchasers in a general market under arational environment which means withmarket-evidence. Should the valuer beinstructed to report a marriage value or synergistic valuewhichisabasisotherthanmarket value,forexample,heisrequiredtodistinguishclearlyfrommarket value.

5.3.17 Valuers should not mix up the concept of‘highest and best use’ with ‘hope value’.‘Hope value’ not only includes a particularsynergyinapurchasesolongasitisreflectedintheopenmarket,butalsotheprospectofobtainingapprovalor leasemodificationasthe case may be. The proposed use fromwhich the ‘hopevalue’ isderivedconformswiththe‘highestandbestuse’inthesensethat the proposed use is legally allowablewhen there is a reasonable prospect (asreflected in the market of at least 50%


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chance) that the regulation, zoning, deedrestriction, etc. can be changed to permittheproposeduse.

5.4.0 IVS-Defined Basis of Value – Market Rent

5.4.1 Market rentisdefinedinIVS104paragraph40.1as:‘theestimatedamountforwhichaninterestin real property should be leased on thevaluation date between a willing lessorand a willing lessee on appropriate leaseterms in an arm’s length transaction, afterpropermarketingandwherethepartieshadeach acted knowledgeably, prudently andwithoutcompulsion.’

5.4.2 Market rent maybeusedasabasis of value whenvaluinga leaseoran interestcreatedbya lease. Insuchcases, it isnecessary toconsider the contract rent and,where it isdifferent,themarket rent.

5.4.3 ContractRentistherentpayableunderthetermsofanactuallease.Itmaybefixedforthe duration of the lease, or variable. Thefrequencyandbasisofcalculatingvariationsin the rentwill be setout in the leaseandmustbe identifiedandunderstood inordertoestablishthetotalbenefitsaccruingtothelessorandtheliabilityofthelessee.

5.4.4 The conceptual framework supporting thedefinitionofmarket valueshownabovecanbeappliedtoassist inthe interpretationofmarket rent.

5.4.5 Market rentwillvary significantly accordingtothetermsoftheassumedleasecontract.The appropriate lease terms will normallyreflect current practice in the market inwhichthepropertyissituated,althoughforcertainpurposesunusualtermsmayneedtobestipulated.Matterssuchasthedurationof the lease, the frequencyof rent reviewsand the responsibilities of the parties formaintenanceandoutgoingswillallaffectthemarket rent. In certain countries or states,statutory factors may either restrict thetermsthatmaybeagreed,or influencetheimpactoftermsinthecontract.Theseneedtobetakenintoaccountwhereappropriate.

5.4.6 In calculatingmarket rent, the valuer must considerthefollowing:a) inregardtoamarket rentsubjectto

alease,thetermsandconditionsofthat leasemay be the appropriateleasetermsunlessthosetermsandconditionsareillegalorcontrarytooverarchinglegislation,and

b) in regard to a market rent that isnotsubjecttoalease,theassumedtermsandconditionsarethetermsof a notional lease that wouldtypicallybeagreed inamarket forthetypeofpropertyonthevaluation datebetweenmarketparticipants.

5.4.7 Insomecircumstancesthemarket rent may have to be assessed basedon terms of anexisting lease (e.g. for rental determinationpurposeswheretheleasetermsareexistingandthereforenottobeassumedaspartofanotionallease).Theexistingleasetermorthereferencetotheexistingleasetermmust bestatedinthereport.

5.4.8 If the lease term is not specified, theestimated amount excludes a rent inflatedordeflatedbyspecialterms,considerationsor concessions and the “appropriate leaseterms” are terms that would typically beagreedinthemarketforthetypeofpropertyon the valuation date between marketparticipants. An indication of market rent shouldonlybeprovidedinconjunctionwithan indication of the principal lease termsthathavebeenassumed.

5.4.9 Market rentwillnormallybeusedtoindicatetheamountforwhichavacantpropertymaybelet,orforwhichaletpropertymayre-letwhentheexistingleaseterminates.

5.4.10 Valuers must therefore take care to setout clearly the principal lease terms thatare assumed when providing an opinionofmarket rent. If it is themarket norm forlettingstoincludeapaymentorconcessionby one party to the other as an incentivetoenterintoalease,andthisisreflectedinthegenerallevelofrentsagreed,themarket rent should be considered to be expressedon this basis. The nature of the incentiveassumedmustbestatedbythevaluer,alongwith the assumed lease terms. In a rentaldeterminationwhereanexisting lease is inplace, valuers may have to determine andagreewiththeclientandtheintendeduserswhether any incentiveswill be provided intheassumedleaseterm,andtheestimatedamountmayhavetobeadjustedaccordingly.


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5.5.0 IVS-Defined Basis of Value – Equitable Value

5.5.1 Equitable value is defined in IVS 104paragraph50.1as:

‘the estimated price for the transfer ofan asset or liability between identifiedknowledgeable and willing parties thatreflects the respective interests of thoseparties.’

5.5.2 Equitable value requires the assessment oftheprice that is fair between two specific,identifiedpartiesconsideringtherespectiveadvantages or disadvantages that eachwill gain from the transaction. In contrast,market value requires any advantages ordisadvantagesthatwouldnotbeavailableto,orincurredby,marketparticipantsgenerallytobedisregarded.

5.5.3 Equitable value is a broader concept thanmarket value. Although in many cases theprice that is fair between two parties willequate to that obtainable in the market,there will be cases where the assessmentof equitable value will involve taking intoaccountmattersthathavetobedisregardedin the assessment ofmarket value, such ascertain elements of synergistic value arisingbecauseofthecombinationoftheinterests.

5.5.4 Examples of the use of equitable value include:

a) determination of a price that isequitable for a shareholding in anon-quoted business, where theholdingsoftwospecificpartiesmaymeanthatthepricethatisequitablebetweenthemisdifferentfromtheprice that might be obtainable inthemarket,and

b) determinationofapricethatwouldbeequitablebetweena lessoranda lessee for either the permanenttransfer of the leased asset or the cancellationoftheleaseliability.

5.6.0 IVS-Defined Basis of Value – Investment Value/Worth

5.6.1 Investment value (Worth) is defined in IVS104paragraph60.1as:

‘thevalueofanassettoaparticularownerorprospectiveownerforindividualinvestmentoroperationalobjectives.’

5.6.2 Investment valueisanentity-specificbasis of valuethatmeasuresthevalueofthebenefitsof ownership to the current owneror to aprospective owner, recognizing that thesemay differ from those of a typical marketparticipant.Althoughthevalueofanasset to theownermaybethesameastheamountthatcouldberealisedfromitssaletoanotherparty,thisbasis of valuereflectsthebenefitsreceivedbyanentityfromholdingtheasset and,therefore,doesnotinvolveapresumedexchange. Investment value reflects thecircumstances and financial objectives ofthe entity forwhich the valuation is beingproduced. It is often used for measuringinvestmentperformance.

5.6.3 In some instances, the owner of the asset may instructthevaluer touseatargetrateof return to test or analyse the financialperformanceoftheassettotheowner,andthat target rate of return is not market-derived. Such instructions should bedisclosedbythevaluer in the valuation report.

5.7.0 IVS-Defined Basis of Value – Synergistic Value

5.7.1 Synergistic Value is is defined in IVS 104paragraph70.1as:

‘theresultofacombinationoftwoormoreassets or interests where the combinedvalueismorethanthesumoftheseparatevalues.’

5.7.2 If the synergies are only available to onespecificbuyerthensynergistic valuewilldifferfrommarket value,asthesynergistic value will reflectparticularattributesofanasset that are only of value to a specific purchaser.Theaddedvalueabovetheaggregateoftherespective interests is often referred to as“marriage value.”


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5.8.0 IVS-Defined Basis of Value – Liquidation Value

5.8.1 Liquidation Value is defined in IVS 104paragraph60.1as:

‘the amount that would be realised whenan asset or group of assets are sold on apiecemealbasis.’

5.8.2 LiquidationValue should take into accountthecostsofgettingtheassets intosaleablecondition as well as those of the disposalactivity.LiquidationValuecanbedeterminedundertwodifferentpremisesofvalue:

a) an orderly transaction with a typicalmarketingperiod(seesection5.14.0),or

b) a forced transaction with a shortenedmarketingperiod(seesection5.15.0).

5.8.3 A valuer must disclose which premise ofvalueisassumed.

5.9.0 Fair Value (IFRS)

5.9.1 Fair value (the definition adopted by theInternational Accounting Standards Board(IASB)inIFRS13)is :

‘the price that would be received to sellan asset or paid to transfer a liability inan orderly transaction between marketparticipantsatthemeasurementdate.’

5.9.2 TheguidanceinIFRS13includesanoverviewofthefair valuemeasurementapproach.

5.9.3 The objective of a fair value measurementistoestimatethepriceatwhichanorderlytransactiontoselltheassetortotransfertheliability would take place between marketparticipants at the measurement dateunder currentmarket conditions. It is thussometimesdescribedasa ‘mark tomarket’approach. Indeed the references in IFRS13 tomarket participants and a salemakeitclearthatformostpracticalpurposestheconceptoffair valueisconsistentwiththatofmarket value, and so therewouldordinarilybenodifferencebetweenthemintermsofthevaluationfigurereported.

5.9.4 A fair valuemeasurementrequiresanentitytodetermineallofthefollowing:

• theparticularassetorliabilitythatisthesubjectofthemeasurement(consistentlywithitsunitofaccount)

• for a non-financial asset, the valuationpremise that is appropriate for themeasurement (consistently with itshighestandbestuse)

• the principal (or most advantageous)marketfortheassetorliability

• the valuation technique(s) appropriatefor the measurement, considering theavailabilityofdatawithwhichtodevelopinputs that represent the assumptions thatmarketparticipantswouldusewhenpricingtheassetorliabilityandthelevelof the fair value hierarchy within which theinputsarecategorised.

5.9.5 Valuers undertaking valuations for inclusionin financial statements should familiarisethemselveswiththerelevantrequirements.

5.10.0 Value for Sale Under Repossession (VSR)

5.10.1 Value for sale under repossession (the word repossession means the action of regaining possession especially the seizure of collateral securing a loan that is in default) refers to the price that might reasonably be expected to realise within a defined period of time (the period shall be agreed upon between Lender and valuer) from the sale of a real property in the market under repossession by the lender or receiver, on an “as is” basis, taking into account the unique quality of the real property and the existence of any specific demand as well as factors which might adversely affect the marketability of the real property due to market perception of increased risk or stigma, justified or otherwise.

5.10.2 The underlying basis of value of VSR is market value, but subject to special assumptions on actual or hypothetical marketing constraints which cause the perception of increased risk of stigma. The marketing constraint must be agreed with the lender prior to reporting. An example of the marketing constraint includes the anticipated time frame for completion of a transaction which strikes a balance between the Lender’s liquidity need and the reasonable care to the mortgagor, but which may be considered as inadequate for the real property to be presented in the market.

5.10.3 A special assumption that simply refers to a time limit for disposal without stating the reasons for that limit would not be a reasonable assumption to make. Without a clear understanding of the


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reasons for the constraint, the valuer would be unable to determine the impact that it may have on marketability, sale negotiations and the price achievable, or to provide meaningful advice.

5.10.4 A marketing constraint should not be confused with a forced sale. A constraint may result in a forced sale, but it can also exist without compelling the owner to sell.

5.10.5 While a valuer can assist a lender in determining a price that should be accepted in marketing constraints, this is a commercial judgement of the lender whether a discounted price to the market value will be accepted. A valuer should make a qualification in the report on the reliance of VSR.

5.10.6 To provide an estimate of the VSR, the valuer should:

(1)agree with the lender or receiver onthe details of the actual or anticipatedmarketing constraints that might haveimpact on the market valuewhilsttakinginto account the unique quality of thereal property and the existence of anyspecificdemand;

(2)ascertain whether the constraint arisesfromaninherentfeatureoftheasset,oroftheinterestbeingvalued,orfromtheparticularcircumstancesoftheclient,orsomecombinationofallofthese;

(3)estimate the market value of the realproperty;

(4)analyse and apply adjustment(s) to themarket value of the real property bytakingintoaccountthenegativeimpactsandtoarriveatthevalueforsaleunderrepossessionindependently;and

(5)makeaqualificationinthereport on the relianceoftheVSR.

5.10.7 When value for sale under repossessionis reported, it should always be clearlydistinguished from market value. Should aspecial assumption be adopted in arrivingat the value for sale under repossession,the valuer is required to comply with therequirementsetoutinthe Standards.

5.11.0 Premise of Value/Assumed Use

5.11.1 APremiseofValueorAssumedUsedescribesthecircumstancesofhowanassetorliabilityisused.Differentbases of valuemayrequirea particular Premise of Value or allow theconsiderationofmultiplePremisesofValue.

SomecommonPremisesofValueare:a) highestandbestuse,b) currentuse/existinguse,c) orderlyliquidation,andd) forcedsale.

5.12.0 Premise of Value – Highest and Best Use

5.12.1 Highest and best use is the use, from aparticipantperspective,thatwouldproducethe highest value for an asset. Althoughthe concept is most frequently appliedto non-financial assets as many financialassets do not have alternative uses, theremay be circumstances where the highestandbestuseoffinancialassetsneedstobeconsidered.

5.12.2 Thehighestandbestusemustbephysicallypossible, (where applicable), financiallyfeasible, legally allowed and result in thehighest value. If different from the currentuse, the costs to convert an asset to itshighestandbestusewouldimpactthevalue.

5.12.3 Thehighest andbest use for anasset may beitscurrentorexistingusewhenitisbeingused optimally. However, highest and bestusemaydifferfromcurrentuseorevenbeanorderlyliquidation.

5.12.4 Thehighestandbestuseofanassetvaluedonastand-alonebasismaybedifferentfromitshighestandbestuseaspartofagroupofassets,when its contribution to the overallvalueofthegroupmustbeconsidered.

5.12.5 The determinationof the highest and bestuseinvolvesconsiderationofthefollowing:a) To establishwhether a use is physicallypossible,regardwillbehadtowhatwouldbeconsideredreasonablebyparticipants.

b) To reflect the requirement to be legallypermissible, any legal restrictions ontheuseoftheasset,e.g.townplanning/zoning designations, need to be takenintoaccountaswellasthelikelihoodthattheserestrictionswillchange.

c) Therequirementthattheusebefinanciallyfeasible takes into account whether analternativeusethatisphysicallypossibleand legally permissible will generatesufficient return to a typical marketparticipant,aftertakingintoaccountthecostsofconversiontothatuse,overandabovethereturnontheexistinguse.


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5.13.0 Premise of Value – Current Use/Existing Use

5.13.1 Currentuse/existinguseisthecurrentwayanasset, liability,orgroupofassetsand/orliabilities is used. The current usemay be,but isnotnecessarily, also thehighest andbestuse.

5.14.0 Premise of Value – Orderly Liquidation

5.14.1 Anorderlyliquidationdescribesthevalueofagroupofassetsthatcouldberealisedinaliquidationsale,givenareasonableperiodoftimetofindapurchaser(orpurchasers),withthesellerbeingcompelledtosellonanas-is,where-isbasis.

5.14.2 The reasonable period of time to find apurchaser(orpurchasers)mayvarybyasset typeandmarketconditions.

5.15.0 Premise of Value – Forced Sale

5.15.1 The term “forced sale” is often used incircumstances where a seller is undercompulsiontosellandthat,asaconsequence,a proper marketing period is not possibleand buyers may not be able to undertakeadequate due diligence. The price thatcould be obtained in these circumstanceswilldependuponthenatureofthepressureon the seller and the reasons why propermarketing cannot be undertaken. It mayalsoreflecttheconsequencesfortheselleroffailingtosellwithintheperiodavailable.Unless the nature of, and the reason for,the constraints on the seller are known,thepriceobtainableinaforcedsalecannotbe realistically estimated. The price that asellerwillacceptinaforcedsalewillreflectits particular circumstances, rather thanthoseofthehypotheticalwillingsellerinthemarket value definition.A “forced sale” is adescriptionofthesituationunderwhichtheexchangetakesplace,notadistinctbasis of value.(SeeVS 8 Section 8.3.0).

5.15.2 A forced sale typically reflects the mostprobable price that a specified propertyis likely to bring under all of the followingconditions:a) consummation of a sale within a shorttimeperiod,

b) the asset is subjected to market

conditions prevailing as of the date of valuation or assumed timescale withinwhichthetransactionistobecompleted,

c) boththebuyerandthesellerareactingprudentlyandknowledgeably,

d) thesellerisundercompulsiontosell,e) thebuyeristypicallymotivated,f) both parties are acting in what theyconsidertheirbestinterests,

g) anormalmarketingeffortisnotpossibleduetothebriefexposuretime,and

h) paymentwillbemadeincash.

5.16.0 Entity-Specific Factors

5.16.1 For most bases of value, the factors thatare specific to a particular buyer or sellerand not available to participants generallyare excluded from the inputs used in amarket-basedvaluation.Examplesofentity-specificfactorsthatmaynotbeavailabletoparticipantsinclude:a) additional value or reduction in valuederived from the creationof aportfolioofsimilarassets,

b) uniquesynergiesbetweentheassetandother assetsownedbytheentity,

c) legalrightsorrestrictionsapplicableonlytotheentity,

d) taxbenefitsortaxburdensuniquetotheentity,and

e) anabilitytoexploitanassetthatisuniquetothatentity.

5.16.2 Whether such factors are specific to theentity,orwouldbeavailabletoothersinthemarket generally, is determined on a case-by-case basis. For example, an asset may notnormallybetransactedasastandaloneitem but as part of a group of assets. Anysynergieswithrelatedassetswouldtransfertoparticipantsalongwiththetransferofthegroupandthereforearenotentity-specific.

5.16.3 If the objective of the basis of value usedin a valuation is to determine the value toa specificowner (suchas Investment value/Worth discussed in paras 5.6.1 and 5.6.2),entity-specific factors are reflected in thevaluationoftheasset.Situationsinwhichthevalue to a specific ownermay be requiredincludethefollowingexamples:a) supportinginvestmentdecisions,andb) reviewingtheperformanceofanasset.


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5.17.0 Synergies

5.17.1 “Synergies” refer tothebenefitsassociatedwith combining assets. When synergiesarepresent, thevalueof a groupof assetsandliabilitiesisgreaterthanthesumofthevaluesoftheindividualassetsandliabilitieson a stand-alone basis. Synergies typicallyrelate to a reduction in costs, and/or anincrease in revenue, and/or a reduction inrisk.

5.17.2 Whether synergiesshouldbeconsidered ina valuation depends on the basis of value.Formostbases of value,onlythosesynergiesavailabletootherparticipantsgenerallywillbe considered (see discussion of Entity-Specific Factors in paragraphs 5.16.1 –5.16.3).

5.17.3 An assessment of whether synergies areavailabletootherparticipantsmaybebasedontheamountofthesynergiesratherthanaspecificwaytoachievethatsynergy.

5.18.0 Transaction Costs

5.18.1 Mostbases of valuerepresenttheestimatedexchangepriceofanassetwithoutregardtotheseller’scostsofsaleorthebuyer’scostsof purchaser and without adjustment foranytaxespayablebyeitherpartyasadirectresultofthetransaction.

5.18.2 Thedefinitions,however,doesnotprecludethe consideration of taxes and transactioncosts in the calculations. Valuers alwayshavetoexercisereasonable judgementsontheimpactofrelevanttaxesandtransactioncostsintheirvaluationmodels.


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VS 6Valuation Approaches and Methods

6.1.0 General Principles

6.1.1 Valuers are responsible for adopting, andas necessary justifying, the valuationapproachesandthevaluationmethodologiesused to fulfil individual valuationassignments.Thesemustalwayshaveregardto:• thenatureoftheasset(orliability)• thepurpose,intendeduseandcontextoftheparticularassignmentand

• any statutory or other mandatoryrequirementsapplicableinthejurisdiction concerned.

6.1.2 Valuers shouldalsohaveregardtorecognisedbestpracticewithinthevaluationdisciplineor specialist area in which they practice,althoughthisshouldnotconstraintheproperexercise of their judgment in individualvaluation assignments in order to arrive atan opinion of valuewhich is professionallyadequateforitspurpose.

6.1.3 Unless expressly required by statute orby other mandatory requirements, no onevaluation approach or single valuation method necessarily takes precedence overanother. In some jurisdictions and/or forcertain purposes more than one approachmay be expected or required in order toarriveatabalancedjudgment.Inthisregard,the valuer mustalwaysbepreparedtoexplaintheapproach(es)andmethod(s)adopted.

6.1.4 Although no formal, universally recogniseddefinitionofvaluation approach exists, theterm is generally used tomean the overallmanner in which the valuation task isundertakeninordertodeterminethevalueof theparticularassetor liability.The termvaluation methodisgenerallyusedtorefertotheparticularprocedure,ortechnique,usedtoassessorcalculatetheresult.

6.1.5 Valuationsarerequiredofdifferentinterestsin different types of assets for a range ofdifferentpurposes.Giventhisdiversity,theapproachto theestimationofvalue inonecasemaywell be inappropriate in another,letalonetheactualmethod(s)ortechnique(s)used. Using the working definition in

paragraph6.1.4above,theoverallvaluationapproach is usually classified into one ofthreemaincategories:

• The market approach is based oncomparing the subject asset with identical or similar assets for whichprice information is available, such as acomparisonwithmarket transactions inthesame,orcloselysimilar,typeofasset withinanappropriatetimehorizon.

• the income approach is based oncapitalisation or conversion of presentandpredictedincome(cashflows),whichmaytakeanumberofdifferentforms,toproduce a single current capital value.Among the forms taken, capitalisationof a conventionalmarket-based incomeor discounting of a specific incomeprojection can both be consideredappropriate depending on the type ofasset and whether such an approachwouldbeadoptedbymarketparticipants.

• the cost approach is based on theeconomicprinciple thatapurchaserwillpay nomore for anasset than the costtoobtainoneofequalutilitywhetherbypurchaseorconstruction.

The threeapproachesareallbasedon theeconomic principles of price equilibrium,anticipationofbenefitsorsubstitution.

6.1.6 Underlying each valuation approach andvaluation method is theneed tomake suchcomparisonsasarepracticallypossible,sincethisistheessentialingredientinarrivingatamarketview.Itmaywellbepossibletoarriveatavaluationopinionbyadoptingmorethanoneapproachandonemethodortechnique,unless statute or some other mandatoryauthority imposesaparticular requirement.Great care must be exercisedwhen relyingon the cost approachastheprimaryoronlyapproach,as therelationshipbetweencostandvalueisrarelydirect.

6.1.7 Valuation methods may include a range ofanalytical tools or techniques as well asdifferentformsofmodelling,manyofwhichinvolve advanced numerical and statisticalpractices.Ingeneral,themoreadvancedthemethod,thegreaterthedegreeofvigilanceneeded to ensure there is no internalinconsistency,forexample,inrelationtotheassumptionsadopted.


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6.1.8 It must be emphasised that the valuer isultimately responsible for selection of theapproach(es) and method(s) to be used inindividual valuation assignments, unlessstatute or other mandatory authorityimposesaparticularrequirement.

6.1.9 The goal in selectingvaluation approachesandmethodsforanassetistofindthemostappropriate method under the particularcircumstances. No one method is suitablein every possible situation. The selectionprocessshouldconsider,ataminimum:a) the appropriate basis(es) of value andpremise(s) of value, determined by theterms and purpose of the valuationassignment,

b) therespectivestrengthsandweaknessesofthepossiblevaluationapproachesandmethods,

c) the appropriateness of each methodin view of the nature of the asset, andthe approaches or methods used byparticipantsintherelevantmarket,and

d) the availability of reliable informationneededtoapplythemethod(s).

6.1.10 Valuers are not required to use more thanone method for the valuation of an asset,particularlywhenthevaluerhasahighdegreeofconfidenceintheaccuracyandreliabilityof a single method, given the facts andcircumstancesofthevaluationengagement.However,valuers shouldconsidertheuseofmultipleapproachesandmethodsandmorethan one valuation approach or methodshould be considered andmay be used toarriveatan indicationofvalue,particularlywhen there are insufficient factual orobservable inputs for a single method toproducea reliableconclusion.Wheremorethan one approach and method is used,or even multiple methods within a singleapproach,theconclusionofvaluebasedonthosemultipleapproachesand/ormethodsshould be reasonable and the process ofanalysingandreconcilingthedifferingvaluesintoasingleconclusion,withoutaveraging,should be described by the valuer in the report.

6.1.11 While this standard includes discussion ofcertain methods within the Cost, Market and Income approaches, itdoesnotprovideacomprehensivelistofallpossiblemethodsthat may be appropriate. Members may

use a method not defined or mentionedin the Standards or IVS but can still claimcompliance with the Standards.

6.1.12 Whendifferentapproachesand/ormethodsresult in widely divergent indications ofvalue,avaluer shouldperformprocedurestounderstandwhythevalueindicationsdiffer,as it is generally not appropriate to simplyweight two or more divergent indicationsof value. In such cases, valuers should reconsider the guidance in para 6.1.9 todeterminewhetheroneoftheapproaches/methodsprovidesabetterormore reliableindicationofvalue.

6.1.13 Valuers shouldmaximizetheuseofrelevantobservable market information in all threeapproaches.Regardlessofthesourceoftheinputs andassumptions used in avaluation,a valuer must perform appropriate analysisto evaluate those inputs and assumptions and their appropriateness for thevaluationpurpose.

6.1.14 Although no one approach or methodis applicable in all circumstances, priceinformation from an active market isgenerally considered to be the strongestevidenceofvalue.Somebases of value may prohibit a valuer from making subjectiveadjustments to price information from anactive market. Price information from aninactivemarketmay stillbegoodevidenceofvalue,butsubjectiveadjustmentsmaybeneeded.

6.2.0 Market Approach

6.2.1 The market approachprovidesanindicationof value by comparing the asset with identicalorcomparable(thatissimilar)assets forwhichpriceinformationisavailable.

6.2.2 The market approach should be appliedand afforded significant weight under thefollowingcircumstances:a) the subject asset has recently beensold in a transaction appropriate forconsiderationunderthebasis of value,

b) the subjectasset or substantially similarassetsareactivelypubliclytraded,and/or

c) there are frequent and/or recentobservable transactions in substantiallysimilarassets.


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6.2.3 Although the above circumstances wouldindicatethatthemarket approach shouldbeappliedandaffordedsignificant weight,whentheabovecriteriaarenotmet,thefollowingare additional circumstances where themarket approach maybeappliedandaffordedsignificant weight. When using the market approachunderthefollowingcircumstances,a valuer should considerwhetheranyotherapproachescanbeappliedandweightedtocorroborate the value indication from themarket approach:a) Transactions involving the subject asset or substantially similar assets are not recent enough considering the levels ofvolatilityandactivityinthemarket.

b) The asset or substantially similar assets arepubliclytraded,butnotactively.

c) Information on market transactions isavailable, but the comparable assets havesignificantdifferencestothesubjectasset, potentially requiring subjectiveadjustments.

d) Informationonrecenttransactionsisnotreliable(i.e.,hearsay,missinginformation,synergistic purchaser, not arm’s-length,distressedsale,etc.).

e) The critical element affecting the valueoftheassetisthepriceitwouldachievein the market rather than the cost ofreproduction or its income-producingability.

6.2.4 The heterogeneous nature of manyassets means that it is often not possibleto find market evidence of transactionsinvolving identicalorsimilarassets.Even incircumstances where the market approach isnotused,theuseofmarket-basedinputsshould be maximised in the applicationof other approaches (e.g. market-basedvaluation metrics such as effective yieldsandratesofreturn).

6.2.5 When comparable market informationdoesnotrelatetotheexactorsubstantiallythe same asset, the valuer must performa comparative analysis of qualitative andquantitative similarities and differencesbetween the comparable assets and thesubject asset. Itwill often be necessary tomakeadjustmentsbasedonthiscomparativeanalysis. Those adjustments must bereasonable and valuers must document thereasons for the adjustments and how theywerequantified.

6.2.6 The market approach often uses marketmultiplesderivedfromasetofcomparables,eachwithdifferentmultiples.Theselectionoftheappropriatemultiplewithintherangerequires judgement, considering qualitativeandquantitativefactors.

6.3.0 Market Approach Methods Comparable Transactions Method

6.3.1 The comparable transactions method,also known as the guideline transactionsmethod,utilisesinformationontransactionsinvolvingassetsthatarethesameorsimilartothesubjectassettoarriveatanindicationofvalue.

6.3.2 When the comparable transactionsconsidered involve the subject asset, thismethodissometimesreferredtoasthepriortransactionsmethod.

6.3.3 If few recent transactions have occurred,the valuer may consider the prices ofidentical or similar assets that are listed oroffered for sale, provided the relevanceof this information is clearly established,critically analysed and documented.This issometimes referred to as the comparablelistings method and should not be usedas the sole indication of value but can beappropriateforconsiderationtogetherwithother methods. When considering listingsorofferstobuyorsell, theweightaffordedto the listings/offer price should considerthe level of commitment inherent in theprice and how long the listing/offer hasbeenon themarket. For example, an offerthat represents a binding commitment topurchaseorsellanassetatagivenpricemay be givenmoreweight than a quoted pricewithoutsuchabindingcommitment.

6.3.4 Thecomparabletransactionmethodcanuseavarietyofdifferent comparableevidence,also known as units of comparison, whichform the basis of the comparison. Forexample, a few of the many commonunits of comparison used for real propertyincludepricepersquarefoot(orpersquaremetre), rent per square foot (or per squaremetre) and capitalisation rates. A few ofthe many common units of comparisonused in businessvaluation include EBITDA(EarningsBeforeInterest,Tax,Depreciationand Amortisation) multiples, earnings


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multiples,revenuemultiplesandbookvaluemultiples.Afewofthemanycommonunitsof comparison used in financial instrumentvaluation include metrics such as yieldsand interest rate spreads. The units ofcomparison used by participants can differbetweenassetclassesandacrossindustriesandgeographies.

6.3.5 A subset of the comparable transactionsmethodismatrixpricing,whichisprincipallyused to value some types of financialinstruments,suchasdebtsecurities,withoutrelyingexclusivelyonquotedpricesforthespecificsecurities,butratherrelyingonthesecurities’ relationship to other benchmarkquoted securities and their attributes (i.e.yield).

6.3.6 Thekeystepsinthecomparabletransactionsmethodare:

a) identify the units of comparison thatare used by participants in the relevantmarket,

b) identify the relevant comparabletransactions and calculate the keyvaluationmetricsforthosetransactions,

c) perform a consistent comparativeanalysis of qualitative and quantitativesimilaritiesanddifferencesbetweenthecomparableassetsandthesubjectasset,

d) makenecessaryadjustments,ifany,tothevaluation metrics to reflect differencesbetween the subject asset and thecomparableassets(seepara6.3.12(d)),

e) apply the adjusted valuationmetrics tothesubjectasset,and

f) ifmultiplevaluationmetricswere used,reconciletheindicationsofvalue.

6.3.7 A valuer should choose comparabletransactionswithinthefollowingcontext:a) evidence of several transactionsis generally preferable to a singletransactionorevent,

b) evidencefromtransactionsofverysimilarassets(ideallyidentical)providesabetterindication of value than assets where the transactionprices require significant adjustments,

c) transactions that happen closer to thevaluation date are more representativeof the market at that date than older/datedtransactions,particularlyinvolatilemarkets,

d) formostbases of value, thetransactions

should be “arm’s length” betweenunrelatedparties,

e) sufficientinformationonthetransactionshould be available to allow the valuer to develop a reasonable understandingof the comparable asset and assess thevaluationmetrics/comparableevidence,

f) information on the comparabletransactions should be from a reliableandtrustedsource,and

g) actual transactions provide bettervaluation evidence than intendedtransactions.

6.3.8 A valuer shouldanalyseandmakeadjustmentsfor any material differences between thecomparable transactions and the subjectasset.Examplesofcommondifferencesthatcouldwarrantadjustmentsmayinclude,butarenotlimitedto:a) material characteristics (age, size,specifications,etc.),

b) relevantrestrictionsoneitherthesubjectassetorthecomparableassets,

c) geographical location (location of theassetand/or locationofwheretheasset is likely to be transacted/used) andthe related economic and regulatoryenvironments,

d) profitabilityorprofit-makingcapabilityofthe assets,

e) historicalandexpectedgrowth,f) yields/couponrates,g) typesofcollateral,h) unusual terms in the comparabletransactions,

i) differences related to marketability andcontrolcharacteristicsofthecomparableandthesubjectasset,and

j) ownershipcharacteristics(e.g.legalformofownership,amount/percentageheld).

6.3.9 Guideline publicly-traded comparable methodThe guideline publicly-traded methodutilises information on publicly-tradedcomparablesthatarethesameorsimilartothe subjectasset to arrive at an indicationofvalue.

6.3.10 This method is similar to the comparabletransactions method. However, there areseveraldifferencesdueto thecomparablesbeingpubliclytraded,asfollows:a) the valuation metrics/comparableevidenceareavailableasofthevaluation date,


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b) detailedinformationonthecomparablesarereadilyavailableinpublicfilings,and

c) the information contained in publicfilingsispreparedunderwell-understoodaccountingstandards.

6.3.11 Themethodshouldbeusedonlywhen thesubject asset is sufficiently similar to thepublicly-traded comparables to allow formeaningfulcomparison.

6.3.12 The key steps in the guideline publicly-tradedcomparablemethodareto:a) identify the valuation metrics/comparable evidence that are used byparticipantsintherelevantmarket,

b) identify the relevant guideline publicly-tradedcomparablesandcalculatethekeyvaluationmetricsforthosetransactions,

c) perform a consistent comparativeanalysis of qualitative and quantitativesimilaritiesanddifferencesbetweenthepublicly-traded comparables and thesubjectasset,

d) make necessary adjustments, if any,to the valuation metrics to reflectdifferences between the subject asset andthepublicly-tradedcomparables,

e) apply the adjusted valuationmetrics tothesubjectasset,and

f) ifmultiplevaluationmetricswere used,weighttheindicationsofvalue.

6.3.13 A valuer should choose publicly-tradedcomparableswithinthefollowingcontext:a) considerationofmultiplepublicly-tradedcomparablesispreferredtotheuseofasinglecomparable,

b) evidence from similar publicly-tradedcomparables (for example, with similarmarket segment, geographic area,size in revenue and/or assets, growthrates, profit margins, leverage, liquidityand diversification) provides a betterindicationofvaluethancomparablesthatrequiresignificantadjustments,and

c) securitiesthatareactivelytradedprovidemore meaningful evidence than thinly-tradedsecurities.

6.3.14 A valuer shouldanalyseandmakeadjustmentsfor any material differences between theguideline publicly-traded comparables andthe subject asset. Examples of commondifferences that couldwarrant adjustmentsmayinclude,butarenotlimitedto:a) material characteristics (age, size,specifications,etc.),

b) relevant discounts and premiums (seepara6.3.17),

c) relevantrestrictionsoneitherthesubjectassetorthecomparableassets,

d) geographical location of the underlyingcompany and the relatedeconomic andregulatoryenvironments,

e) profitabilityorprofit-makingcapabilityofthe assets,

f) historicalandexpectedgrowth,g) differences related to marketability andcontrolcharacteristicsofthecomparableandthesubjectasset,and

h) typeofownership.

6.3.15 Other Market Approach ConsiderationsThe following paragraphs address anon-exhaustive list of certain specialconsiderations that may form part of amarket approach valuation.

6.3.16 Anecdotal or “rule-of-thumb” valuationbenchmarks are sometimes consideredto be a market approach. However, valueindications derived from the use of suchrulesshouldnotbegivensubstantialweight unless it can be shown that buyers andsellersplacesignificantrelianceonthem.

6.3.17 In the market approach, the fundamentalbasisformakingadjustmentsistoadjustfordifferences between the subject asset andtheguidelinetransactionsorpublicly-tradedsecurities. Some of the most commonadjustments made in the market approach areknownasdiscountsandpremiums.a) Discounts for Lack of Marketability(DLOM) should be applied when thecomparables are deemed to havesuperior marketability to the subjectasset.ADLOMreflectstheconceptthatwhen comparing otherwise identicalassets, a readilymarketableassetwouldhaveahighervaluethananasset with a longmarketingperiodor restrictionsontheabilitytoselltheasset.Forexample,publicly-traded securities can bebought and sold nearly instantaneouslywhile shares in a private companymayrequire a significant amount of time toidentify potential buyers and completea transaction.Manybases of value allow the consideration of restrictions onmarketability that are inherent in thesubject asset but prohibit considerationof marketability restrictions that arespecific to a particular owner. DLOMs


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may bequantifiedusing any reasonablemethod, but are typically calculatedusingoptionpricingmodels,studiesthatcompare the value of publicly-tradedsharesandrestrictedsharesinthesamecompany, or studies that compare thevalueofsharesinacompanybeforeandafteraninitialpublicoffering.

b) Control Premiums (sometimes referredto as Market Participant AcquisitionPremiums or MPAPs) and Discountsfor Lack of Control (DLOC) are appliedto reflect differences between thecomparables and the subject asset with regard to the ability to make decisionsand thechanges thatcanbemadeasaresultofexercisingcontrol.Allelsebeingequal,participantswouldgenerallyprefertohavecontroloverasubjectasset than not. However, participants’ willingnesstopayaControlPremiumorDLOCwillgenerally be a factor of whether theability to exercise control enhances theeconomicbenefitsavailabletotheownerof the subject asset. Control PremiumsandDLOCsmaybequantifiedusinganyreasonable method, but are typicallycalculatedbasedoneitherananalysisofthe specific cashflowenhancementsorreductionsinriskassociatedwithcontrolorbycomparingobservedpricespaidforcontrolling interests in publicly-tradedsecurities to the publicly-traded pricebeforesuchatransaction isannounced.Examples of circumstances whereControl Premiums andDLOC should beconsideredincludewhere:

1) sharesofpubliccompaniesgenerallydonot have the ability to make decisionsrelatedtotheoperationsofthecompany(theylackcontrol).Assuch,whenapplyingtheguidelinepubliccomparablemethodto value a subject asset that reflects acontrolling interest, a control premiummaybeappropriate,or

2) theguidelinetransactionsintheguidelinetransaction method often reflecttransactions of controlling interests.When using that method to value asubject asset that reflects a minorityinterest,aDLOCmaybeappropriate.

c) Blockage discounts are sometimesappliedwhenthesubjectassetrepresentsalargeblockofsharesinapublicly-tradedsecuritysuchthatanownerwouldnotbeabletoquicklyselltheblockinthepublic

marketwithoutnegativelyinfluencingthepublicly-tradedprice.Blockagediscountsmay bequantifiedusing any reasonablemethod but typically a model is usedthat considers the length of time overwhichaparticipantcouldsellthesubjectshares without negatively impactingthe publicly-traded price (i.e. selling arelatively small portionof the security’stypical daily trading volume each day).Undercertainbases of value,particularlyfair valueforfinancialreportingpurposes,blockagediscountsareprohibited.

6.4.0 Income Approach

6.4.1 The income approachprovidesanindicationof value by converting future cash flow toa single current value. Under the income approach,thevalueofanassetisdeterminedby reference to the value of income, cashfloworcostsavingsgeneratedbytheasset.

6.4.2 The income approach should be appliedand afforded significant weight under thefollowingcircumstances:

a) theincome-producingabilityoftheasset is the critical element affecting valuefromaparticipantperspective,and/or

b) reasonable projections of the amountandtimingoffutureincomeareavailableforthesubjectasset,buttherearefew,ifany,relevantmarketcomparables.

6.4.3 Although the above circumstances wouldindicate that the income approach should be applied and afforded significant weight,the following are additional circumstanceswhere the income approach maybeappliedandaffordedsignificant weight.Whenusingthe income approach under the followingcircumstances, a valuer should considerwhether any other approaches can beapplied and weighted to corroborate thevalueindicationfromtheincome approach:

a) the income-producing ability of thesubject asset is only one of severalfactorsaffectingvaluefromaparticipantperspective,

b) there is significant uncertainty regardingtheamountandtimingoffutureincome-relatedtothesubjectasset,

c) there is a lack of access to informationrelatedtothesubjectasset(forexample,


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a minority owner may have access tohistorical financial statements but notforecasts/budgets),and/or

d) the subject asset has not yet begungeneratingincome,butisprojectedtodoso.

6.4.4 Afundamentalbasisfortheincome approach is that investorsexpect to receivea returnontheirinvestmentsandthatsuchareturnshould reflect theperceived level of risk intheinvestment.

6.4.5 Generally, investors can only expect to becompensated for systemic risk (alsoknownas“marketrisk”or“undiversifiablerisk).

6.5.0 Income Approach Methods

6.5.1 Althoughtherearemanywaystoimplementthe income approach, methods under theincome approach are effectively based ondiscounting future amounts of cash flowtopresentvalue.TheyarevariationsoftheDiscounted Cash Flow (DCF) method andtheconceptsbelowapplyinpartorinfulltoall income approachmethods.

Discounted Cash Flow (DCF) Method

6.5.2 UndertheDCFmethodtheforecastedcashflowisdiscountedbacktothevaluation date,resultinginapresentvalueoftheasset.

6.5.3 In some circumstances for long-lived orindefinite-lived assets, DCF may include aterminalvaluewhichrepresentsthevalueofthe assetattheendoftheexplicitprojectionperiod. In other circumstances, the valueof an asset may be calculated solely usinga terminalvaluewithnoexplicitprojectionperiod.This is sometimes referred toasanincomecapitalisationmethod.

6.5.4 ThekeystepsintheDCFmethodare:

a) choose the most appropriate type ofcash flow for the nature of the subjectassetandtheassignment (i.e.pre-taxorpost-tax,totalcashflowsorcashflowstoequity,realornominal,etc.),

b) determine themost appropriate explicitperiod, if any,overwhich thecashflowwillbeforecast,

c) prepare cash flow forecasts for thatperiod,

d) determine whether a terminal value isappropriate for the subject asset at the end of the explicit forecast period (ifany)andthendeterminetheappropriateterminalvalueforthenatureoftheasset,

e) determinetheappropriatediscountrate,and

f) applythediscountratetotheforecastedfuture cash flow, including the terminalvalue,ifany.

Type of Cash Flow

6.5.5 Whenselectingtheappropriatetypeofcashflow for thenatureofasset or assignment,valuers must consider the factors below. Inaddition,thediscountrateandotherinputsmust be consistent with the type of cashflowchosen.

a) Cash flow to whole asset or partialinterest:Typicallycashflowtothewholeasset is used. However, occasionallyother levels of incomemay be used aswell, such as cash flow to equity (afterpayment of interest and principle ondebt) or dividends (only the cash flowdistributedtoequityowners).Cashflowto the whole assetismostcommonlyusedbecause an asset should theoreticallyhaveasinglevaluethatisindependentofhow it isfinancedorwhether income ispaidasdividendsorreinvested.

b) The cash flow can be pre-tax or post-tax: If a post-tax basis is used, the taxrate applied should be consistent withthe basis of valueand inmany instanceswould be a participant tax rate ratherthananowner-specificone.

c) Nominal versus real: Real cash flowdoes not consider inflation whereasnominalcashflowsincludeexpectationsregardinginflation.Ifexpectedcashflowincorporates an expected inflation rate,thediscountratehastoincludethesameinflationrate.

d) Currency: The choice of currency usedmay have an impact on assumptions related to inflation and risk. This isparticularly true inemergingmarketsorincurrencieswithhighinflationrates.

6.5.6 The typeof cashflowchosen should be inaccordance with participant’s viewpoints.Forexample,cashflowsanddiscountratesforrealpropertyarecustomarilydevelopedon a pre-tax basis, while cash flows and


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discount rates for businesses are normallydeveloped on a post-tax basis. Adjustingbetweenpre-taxandpost-tax ratescanbecomplex and prone to error and should beapproachedwithcaution.

6.5.7 When a valuation is being developed in acurrency (“the valuation currency”) thatdiffers from the currency used in the cashflowprojections(“thefunctionalcurrency”),a valuer shoulduseoneofthefollowingtwocurrencytranslationmethods:

a) Discountthecashflowsinthefunctionalcurrencyusingadiscountrateappropriateforthatfunctionalcurrency.Convertthepresent value of the cash flows to thevaluationcurrencyatthespotrateonthevaluation date.

b) Useacurrencyexchange forwardcurveto translate the functional currencyprojections into valuation currencyprojectionsanddiscounttheprojectionsusing a discount rate appropriate forthevaluation currency.When a reliablecurrency exchange forward curve isnot available (for example, due to lackof liquidity in the relevant currencyexchangemarkets),itmaynotbepossibletousethismethodandonlythemethoddescribedinpara6.5.7(a)canbeapplied.

Explicit Forecast Period

6.5.8 Theselectioncriteriawilldependuponthepurposeof thevaluation, thenatureof theasset, the information available and therequiredbases of value. For anasset with a shortlife,itismorelikelytobebothpossibleand relevant to project cash flow over itsentirelife.

6.5.9 Valuers shouldconsiderthefollowingfactorswhenselectingtheexplicitforecastperiod:

a) thelifeoftheasset,b) a reasonable period for which reliabledata is available on which to base theprojections,

c) the minimum explicit forecast periodwhich shouldbesufficientforanasset to achievea stabilised levelof growthandprofits,afterwhicha terminalvaluecanbeused,

d) in the valuation of cyclical assets, theexplicit forecast period should generally

include an entire cycle, when possible,and

e) for finite-lived assets such as mostfinancialinstruments,thecashflowswilltypicallybe forecastover the full lifeofthe asset.

6.5.10 Insomeinstances,particularlywhentheasset is operating at a stabilised level of growthandprofitsatthevaluation date, itmay not benecessarytoconsideranexplicitforecastperiod and a terminal valuemay form theonlybasis forvalue (sometimes referred toasanincomecapitalisationmethod).

6.5.11 Theintendedholdingperiodforoneinvestorshould not be the only consideration inselecting an explicit forecast period andshould not impact the value of an asset.However,theperiodoverwhichanasset isintended to be heldmay be considered indetermining the explicit forecast period iftheobjectiveofthevaluationistodetermineitsinvestment value.

Cash flow Forecasts

6.5.12 Cash flow for the explicit forecast periodis constructed using prospective financialinformation(PFI)(projectedincome/inflowsandexpenditure/outflows).

6.5.13 As required by para 6.5.12, regardless ofthe source of the PFI (e.g. managementforecast), avaluer mustperformanalysis toevaluatethePFI,theassumptionsunderlyingthe PFI and their appropriateness for thevaluationpurpose.ThesuitabilityofthePFIandtheunderlyingassumptionswilldependupon thepurposeof thevaluationand therequired bases of value. For example, cashflowusedtodeterminemarket value should reflect PFI that would be anticipated byparticipants; in contrast, investment value can be measured using cash flow that isbasedonthereasonableforecastsfromtheperspectiveofaparticularinvestor.

6.5.14 Thecashflowisdividedintosuitableperiodicintervals (e.g. weekly, monthly, quarterlyor annually) with the choice of intervaldependinguponthenatureoftheasset,thepatternofthecashflow,thedataavailable,andthelengthoftheforecastperiod.


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6.5.15 Theprojectedcashflowshouldcapturetheamountandtimingofallfuturecashinflowsand outflows associated with the subjectasset from the perspective appropriate tothe basis of value.

6.5.16 Typically,theprojectedcashflowwillreflectoneofthefollowing:

a) contractualorpromisedcashflow,b) thesinglemostlikelysetofcashflow,c) the probability-weighted expected cashflow,or

d) multiplescenariosofpossiblefuturecashflow.

6.5.17 Different types of cash flow often reflectdifferent levels of risk and may requiredifferent discount rates. For example,probability-weighted expected cash flowsincorporate expectations regarding allpossible outcomes and are not dependentonanyparticularconditionsorevents.(notethatwhenaprobability-weightedexpectedcashflowisused,itisnotalwaysnecessaryforvaluerstotakeintoaccountdistributionsof all possible cash flows using complexmodels and techniques. Rather, valuers may develop a limited number of discretescenariosandprobabilitiesthatcapturethearrayofpossiblecashflows).Asinglemostlikely set of cashflowsmaybe conditionaloncertainfutureeventsandthereforecouldreflectdifferentrisksandwarrantadifferentdiscountrate.

6.5.18 WhilevaluersoftenreceivePFIthatreflectsaccounting income and expenses, it isgenerally preferable to use cash flow thatwouldbeanticipatedbyparticipantsasthebasisforvaluations.Forexample,accountingnon-cash expenses, such as depreciationandamortisation,shouldbeaddedback,andexpected cash outflows relating to capitalexpenditures or to changes in workingcapital should be deducted in calculatingcashflow.

6.5.19 Valuers must ensure that seasonalityand cyclicality in the subject has beenappropriately considered in the cash flowforecasts.

Terminal Value

6.5.20 Where the asset is expected to continuebeyond theexplicit forecastperiod,valuers

mustestimatethevalueof theasset at the end of that period. The terminal value isthendiscountedbacktothevaluation date,normally using the same discount rate asappliedtotheforecastcashflow.

6.5.21 Theterminalvalueshouldconsider:

a) whethertheassetisdeteriorating/finite-lived in nature or indefinite-lived asthis will influence the method used tocalculateaterminalvalue,

b) whetherthereisfuturegrowthpotentialfortheassetbeyondtheexplicitforecastperiod,

c) whether there is a predetermined fixedcapital amountexpected tobe receivedattheendoftheexplicitforecastperiod,

d) theexpectedriskleveloftheasset at the timetheterminalvalueiscalculated,

e) for cyclical assets, the terminal valueshould consider the cyclical nature ofthe asset and should not be performedinawaythatassumes“peak”or“trough”levelsofcashflowsinperpetuityand

f) the tax attributes inherent in the asset attheendoftheexplicitforecastperiod(ifany)andwhetherthosetaxattributeswould be expected to continue intoperpetuity.

6.5.22 Valuers may apply any reasonable methodforcalculatingaterminalvalue.Whiletherearemanydifferentapproachestocalculatinga terminalvalue, thethreemostcommonlyused methods for calculating a terminalvalueare:

a) Gordon growth model/constant growthmodel (appropriate only for indefinite-livedassets),

b) market approach/exit value (appropriatefor both deteriorating/finite-livedassets andindefinite-livedassets),and

c) salvage value/disposal cost (appropriateonlyfordeteriorating/finite-livedassets).

Gordon Growth Model/Constant Growth Model

6.5.23 The constant growth model assumes thatthe asset grows (or declines) at a constantrateintoperpetuity.

Market Approach/Exit Value

6.5.24 The market approach/exitvaluemethodcan


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beperformedinanumberofways,buttheultimategoalistocalculatethevalueoftheasset at the end of the explicit cash flowforecast.

6.5.25 Common ways to calculate the terminalvalueunderthismethodincludeapplicationof a market-evidence based capitalisationfactororamarketmultiple.

6.5.26 Whenamarket approach/exitvalueisused,valuers shouldcomplywiththerequirementsinthemarketapproachandmarketapproachmethods section of this standard (sections6.2.0and6.3.0).However,valuers shouldalsoconsidertheexpectedmarketconditionsatthe endof the explicit forecast period andmakeadjustmentsaccordingly.

Salvage Value/ Disposal Cost

6.5.27 Theterminalvalueofsomeassetsmayhavelittle or no relationship to the precedingcashflow. Examples of suchassets includewastingassetssuchasamineoranoilwell.

6.5.28 Insuchcases,theterminalvalueistypicallycalculated as the salvage value of theasset, less costs to dispose of theasset. Incircumstanceswhere the costs exceed thesalvagevalue,theterminalvalueisnegativeandreferredtoasadisposalcostoranasset retirementobligation.

Discount Rate

6.5.29 Therateatwhichtheforecastcashflow isdiscountedshould reflectnotonlythetimevalueofmoney,butalsotherisksassociatedwith the type of cash flow and the futureoperationsoftheasset.

6.5.30 Valuers mayuseanyreasonablemethodfordevelopingadiscountrate.Whiletherearemanymethodsfordevelopingordeterminingthereasonablenessofadiscountrateanon-exhaustivelistofcommonmethodsincludes:

a) thecapitalassetpricingmodel(CAPM),b) the weighted average cost of capital(WACC),

c) theobservedorinferredrates/yields,d) theinternalrateofreturn(IRR),e) the weighted average return on assets (WARA),and

f) thebuild-upmethod(generallyusedonlyintheabsenceofmarketinputs).

6.5.31 Indevelopingadiscountrate,avaluer should consider:

a) the risk associatedwith the projectionsmadeinthecashflowused,

b) the type of asset being valued. Forexample, discount rates used in valuingdebtwouldbedifferentthanthoseusedwhenvaluingrealpropertyorabusiness,

c) the rates implicit in transactions in themarket,

d) thegeographiclocationoftheassetand/orthelocationofthemarketsinwhichitwouldtrade,

e) the life/term of the asset and theconsistency of inputs. For example, therisk-freerateconsideredwoulddifferforan asset with a three-year life versus a30-yearlife,

f) thetypeofcashflowbeingused,andg) thebases of valuebeingapplied.Formost

bases of value, the discount rate should bedevelopedfromtheperspectiveofaparticipant.

6.6.0 Cost Approach

6.6.1 The cost approach provides an indicationof value using the economic principle thatabuyerwill paynomore for anasset than the cost toobtain anasset of equal utility,whether by purchase or by construction,unless undue time, inconvenience, risk orother factors are involved. The approachprovidesanindicationofvaluebycalculatingthe current replacement or reproductioncostofanassetandmakingdeductionsforphysicaldeteriorationandallotherrelevantformsofobsolescence.

6.6.2 The cost approach should be applied andafforded significant weight under thefollowingcircumstances:

a) participantswouldbeabletorecreateanassetwith substantially the same utilityas the subject asset,without regulatoryor legal restrictions,andtheasset couldbe recreated quickly enough that aparticipantwouldnotbewillingtopayasignificantpremiumfortheabilitytousethesubjectassetimmediately,

b) the asset is not directly income-generatingandtheuniquenatureoftheassetmakesusinganincome approach or market approachunfeasible,and/or


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c) the basis of value being used isfundamentally based on replacementcost,suchasreplacementvalue.

6.6.3 Although the circumstances in paragraph6.6.2would indicatethatthecost approach should be applied and afforded significant weight, the following are additionalcircumstanceswherethecost approach may be applied and afforded significant weight.When using the cost approach under thefollowing circumstances, a valuer should considerwhetheranyotherapproachescanbeappliedandweightedtocorroboratethevalueindicationfromthecost approach:

a) participants might consider recreatingan asset of similar utility, but there arepotential legal or regulatory hurdles orsignificanttimeinvolvedinrecreatingtheasset,

b) when the cost approach is being usedas a reasonableness check to otherapproaches (for example, using the cost approach toconfirmwhetherabusinessvaluedasagoing-concernmightbemorevaluableonaliquidationbasis),and/or

c) theassetwasrecentlycreated,suchthatthereisahighdegreeofreliabilityintheassumptionsusedinthecost approach.

6.6.4 Thevalueofapartiallycompletedasset will generally reflect the costs incurred todatein the creation of the asset (and whetherthose costs contributed to value) and theexpectations of participants regardingthe value of the property when complete,but consider the costs and time requiredto complete the asset and appropriateadjustmentsforprofitandrisk.

6.7.0 Cost Approach Methods

6.7.1 Broadly, there are three cost approach methods:

a) replacementcostmethod:amethodthatindicatesvaluebycalculatingthecostofasimilarassetofferingequivalentutility,

b) depreciated replacement cost (“DRC”) isa method in the absence of sufficientmarketdatatoarriveatthemarket value ofrealpropertyandplantandequipmentbymeansofmarket-basedevidence,

c) reproduction cost method: a methodunder the cost that indicates value by

calculatingthecosttorecreatingareplicaofanasset,and

d) summation method: a method thatcalculates the value of an asset by theaddition of the separate values of itscomponentparts.

Replacement Cost Method

6.7.2 Generally,replacementcostisthecostthatis relevant to determining the price thata participant would pay as it is based onreplicating the utility of the asset, not theexactphysicalpropertiesoftheasset.

6.7.3 Usually replacement cost is adjusted forphysicaldeteriorationandallrelevantformsofobsolescence.Aftersuchadjustments,thiscanbereferredtoasdepreciated replacement cost.

6.7.4 The key steps in the replacement costmethodare:

a) calculate all of the costs thatwould beincurredbyatypicalparticipantseekingto create or obtain an asset providingequivalentutility,

b) determine whether there is anydepreciation related to physical,functional and external obsolescenceassociatedwiththesubjectasset,and

c) deduct totaldepreciationfromthetotalcoststoarriveatavalueforthesubjectasset.

6.7.5 Thereplacementcost isgenerally thatofamodernequivalentasset,which isone thatprovides similar function and equivalentutilitytotheassetbeingvalued,butwhichisofacurrentdesignandconstructedormadeusing current cost-effective materials andtechniques.

Depreciated Replacement Cost

6.7.6 Depreciated replacement cost (“DRC”) isan application (method) in the absenceof sufficient market data to arrive at themarket value of real property and plantand equipment by means of market-basedevidence. The application of DRC methodin real property valuation is based on anestimate of the market value of the landin its existing use, plus the current costof replacement of the improvements lessallowance for physical deterioration and


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all relevant forms of obsolescence andoptimization.

(1) Theapplicationof theDRCmethod inreal property valuations isbasedonanestimateofthemarket valueofthelandinitsexistinguse,plusthecurrentcostof replacement of the improvementslessallowanceforphysicaldeteriorationandall relevant formsofobsolescenceandoptimisation.

(2) Whentheclient instructs thevaluer to estimatethemarket valueofthelandonalternativeusebasiswhich isdifferentfrom the existing use of the land, thevaluer should take reasonable steps toverify the rationale and soundness ofthe instruction.Where the alternativeuse is not an assumption but a special assumption,VS2.2applies.

(3) WhenusingtheDRCmethod,thevaluer shouldincludeastatementinthereport tojustifyhisuseoftheDRCmethodandtheeffortshemade inconsideringtheDRCmethod as the most appropriateapproachtovalue.

(4) Should the subject real propertycomprise various buildings andstructuresofacomplexordevelopment,the valuer should include a statementin the report that the reportedmarket value only applies to thewhole of thecomplex or development as a uniqueinterest, and no piecemeal transactionof the complex or development isassumed.

(5) The DRC method when used in theprivatesectormustalwaysbeexpressedby the valuer as subject to adequatepotentialprofitabilityofthebusiness(orto service potential of the entity fromtheuseofassetsasawhole)payingdueregardtothetotalassetsemployed.

(6) The DRC method when used in thepublicsectormustalwaysbeexpressedbythevaluerassubjecttotheprospectandviabilityofthecontinuedoperationanduseinsteadofsubjecttoadequatepotentialprofitabilityofthebusiness(orto service potential of the entity fromtheuseofassetsasawhole).

Reproduction Cost Method

6.7.7 Reproduction cost is appropriate incircumstancessuchasthefollowing:

a) the cost of a modern equivalent asset is greater than the cost of recreating areplicaofthesubjectasset,or

b) the utility offered by the subject asset couldonlybeprovidedbyareplicaratherthanamodernequivalent.

6.7.8 The key steps in the reproduction costmethodare:

a) calculate all of the costs thatwould beincurredbyatypicalparticipantseekingtocreateanexactreplicaofthesubjectasset,

b) determine whether there is anydeprecation related to physical,functional and external obsolescenceassociatedwiththesubjectasset,and

c) deduct total deprecation from the totalcoststoarriveatavalueforthesubjectasset.

Summation Method

6.7.9 Thesummationmethod,alsoreferredtoastheunderlyingassetmethod,istypicallyusedforinvestmentcompaniesorothertypesofassetsorentitiesforwhichvalueisprimarilyafactorofthevaluesoftheirholdings.

6.7.10 Thekeystepsinthesummationmethodare:

a) valueeachofthecomponentassets that are part of the subject asset using theappropriate valuation approaches andmethods,and

b) add the value of the component assets togethertoreachthevalueofthesubjectasset.

Cost Considerations

6.7.11 The cost approach should captureallof thecosts that would be incurred by a typicalparticipant.

6.7.12 The cost elements may differ dependingonthetypeoftheassetandshould includethedirectand indirectcosts thatwouldberequiredtoreplace/recreatetheassetasofthe valuation date. Some common items toconsiderinclude:

a) directcosts:1. materialsand2. labour.


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b) indirectcosts:1. transportcosts,2. installationcosts,3. professional fees (design, permit,architectural,legal,etc),

4. otherfees(commissions,etc),5. overheads,6. taxes,7. finance costs (e.g. interest on debtfinancing),and

8. profitmargin/entrepreneurialprofittothecreatoroftheasset(e.g.returntoinvestors).

6.7.13 An assetacquiredfroma thirdpartywouldpresumably reflect their costs associatedwithcreatingtheassetaswellassomeformofprofitmargintoprovideareturnontheirinvestment. As such, under bases of value that assume a hypothetical transaction, itmaybe appropriate to include an assumedprofitmarginoncertaincostswhichcanbeexpressed as a target profit, either a lumpsumorapercentagereturnoncostorvalue.However, financing costs, if included, mayalready reflect participants’ required returnon capital deployed, so valuers should becautious when including both financingcostsandprofitmargins.

6.7.14 Whencostsarederivedfromactual,quotedorestimatedpricesbythirdpartysuppliersor contractors, these costs will alreadyincludeathirdparties’desiredlevelofprofit.

6.7.15 The actual costs incurred in creating thesubject asset (or a comparable referenceasset)maybeavailableandprovidearelevantindicatorofthecostoftheasset.However,adjustmentsmayneedtobemadetoreflectthefollowing:

a) cost fluctuations between the date onwhich this cost was incurred and thevaluation date,and

b) any atypical or exceptional costs, orsavings, that are reflected in the costdatabutthatwouldnotariseincreatinganequivalent.

6.8.0 Depreciation/ Obsolescence

6.8.1 In the context of the cost approach,“depreciation” refers to adjustments madetotheestimatedcostofcreatinganassetofequal utility to reflect the impact onvalue

of any obsolescence affecting the subjectasset.Thismeaningisdifferentfromtheuseofthewordinfinancialreportingortaxlawwhere it generally refers to a method forsystematicallyexpensingcapitalexpenditureovertime.

6.8.2 Depreciation adjustments are normallyconsidered for the following types ofobsolescence, which may be furtherdivided into subcategories when makingadjustments:

a) Physicalobsolescence:Anylossofutilitydue to thephysicaldeteriorationof theassetoritscomponentsresultingfromitsageandusage.

b) Functional obsolescence: Any loss ofutilityresultingfrominefficienciesinthesubjectassetcomparedtoitsreplacementsuch as its design, specification ortechnologybeingoutdated.

c) External or economic obsolescence:Any loss of utility caused by economicor locational factors external to theasset.This typeof obsolescence canbetemporaryorpermanent.

6.8.3 Depreciation/obsolescence should considerthephysicalandeconomiclivesoftheasset:

a) The physical life is how long the asset could be used before itwould bewornoutorbeyondeconomicrepair,assumingroutine maintenance but disregardingany potential for refurbishment orreconstruction.

b) The economic life is how long it isanticipatedthattheassetcouldgeneratefinancial returns or provide a non-financialbenefitinitscurrentuse.Itwillbeinfluencedbythedegreeoffunctionaloreconomicobsolescence towhich theassetisexposed.

6.8.4 Except for some types of economic orexternal obsolescence, most types ofobsolescence are measured by makingcomparisons between the subject asset and the hypothetical asset on which the estimated replacement or reproductioncost is based. However, when marketevidence of the effect of obsolescence onvalue is available, that evidence should beconsidered.


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6.8.5 Physical obsolescence can be measured intwodifferentways:

a) curable physical obsolescence, i.e. thecosttofix/curetheobsolescence,or

b) incurable physical obsolescence whichconsiderstheasset’sage,expectedtotalandremaininglifewheretheadjustmentfor physical obsolescence is equivalentto the proportion of the expected totallife consumed. Total expected life may be expressed in any reasonable way,includingexpectedlifeinyears,mileage,unitsproduced,etc.

6.8.6 There are two forms of functionalobsolescence:

a) excess capital cost, which can becaused by changes in design, materialsof construction, technology ormanufacturing techniques resulting inthe availability of modern equivalentassetswith lower capital costs than thesubjectasset,and

b) excess operating cost, which can becaused by improvements in design orexcesscapacityresultingintheavailabilityofmodern equivalent assets with lower operatingcoststhanthesubjectasset.

6.8.7 Economic obsolescence may arise whenexternal factors affect an individual asset or all the assets employed in a businessand should be deducted after physicaldeterioration and functional obsolescence.For real estate, examples of economicobsolescenceinclude:

a) adverse changes to demand for theproducts or services produced by theasset,

b) oversupplyinthemarketfortheasset,c) adisruptionorlossofasupplyoflabourorrawmaterial,or

d) theasset beingusedby a business thatcannotaffordtopayamarket rentfortheassetsandstillgenerateamarketrateofreturn.

6.8.8 Cash or cash equivalents do not sufferobsolescence and are not adjusted.Marketable assets are not adjusted belowtheir market value determined using themarket approach.


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VS 7Valuation Processes and Records

The process of a valuation, including inspection, investigation, analysis and computation, etc., must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose. The valuer must take reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be relied on.

These general principles are supplemented by thefollowingadditionalrequirementsembodiedinVS 4 and VS 9:

• Any limitations or restrictions on the inspection, inquiry and analysis for the purpose of the valuation assignment must be identified and recorded in the terms of engagement and also in the report.

• If the relevant information is not available because the conditions of the assignment restrict the investigation, then if the assignment is accepted, these restrictions and any necessary assumptions or special assumptions made as a result of the restriction must be identified and recorded in the terms of engagement and in the report.

7.1.0 General Requirements

7.1.1 Sufficient evidencemust be assembled bymeans, such as inspection, examination,inquiry, research, comparison, analysisand computation, etc., to ensure that thevaluationisproperlysupported.

7.1.2 When settling the terms of engagement, the valuer must agree the extent towhichthe subject asset is to be inspected andany investigationistobemade–seeVS 4 paragraph 4.3.2(i).

7.1.3 When determining the extent of evidencenecessary,professionaljudgmentisrequiredtoensuretheinformationtobeobtainedandtheanalysistobecarriedoutareadequateforthepurposeofthevaluationandconsistentwith the basis of valueadopted.Ineachcasethe valuer must judge the extent towhichthe information to be provided is likely tobe reliable and be mindful to recognise

and not to exceed the limitations of theirqualificationandexpertisewhenmakingthisjudgment.

7.1.4 When a property or other physical asset is inspected or examined the degree ofinvestigation that is appropriate will vary,depending on the nature of the asset andthepurposeof thevaluation.Except in thecircumstances described in the section‘Revaluation without re-inspection of real property previously valued’ below, valuers are reminded that to dispense voluntarilywith an inspectionorexaminationofphysicalassets mayintroduceanunacceptabledegreeofriskinthevaluationadvicetobeprovided– they must therefore carefully assess thatriskbeforeproceeding.

7.1.5 Where it is agreed that inspections andinvestigationsmaybelimited,itislikelythatthe valuationwillbeonthebasisofrestrictedinformationandVS 4 section 4.5.0willapply.

7.1.6 The valuer,havingconsideredtheknowledge,experience,reliabilityandabilityofhisstaffmember, could designate suitably trainedstaff member(s) under his supervision toconduct the inspection in order to complywith themandatory inspection requirementunder the Standards. However, the valuer shall still be liable for the accuracy of theentire contents of the valuation report andhence is fully accountable for the input ofhisdesignatedstaffmember(s).

7.1.7 Subject toVS 2 paragraph 2.2.2 andVS 4 paragraph 4.3.2(j), the valuer must take reasonable steps to verify the informationreliedoninthepreparationofthevaluation and, if not already agreed, clarifywith theclient any necessary assumptions that will be made. While a client may request, orconsent to, an assumption being relied on,nevertheless if – following an inspection or examination – the valuer considers thatsuch an assumption is at variancewith theobservedfacts,thenitscontinuedadoptioncould, providing that it is realistic, relevantandvalidfortheparticularcircumstancesofthe valuationbecomeaspecial assumption.

7.1.8 If relevant information is not availablebecause the conditions of the instructionprevent inspection, or where it is agreedthat inspections and investigations may belimited, then if the instruction is accepted,


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the valuationwillbeonthebasisofrestrictedinformationandVS 4 paragraph 4.3.2 (j) and section 4.5.0will apply.Any restriction oninspection orexaminationorlackofrelevantinformationshouldbesetoutintheterms of engagement andvaluation report.Ifthevaluer considers that it is not possible to providea valuation even on a restricted basis, theinstructionshouldbedeclined.

7.1.9 When a valuation assignment involvesrelianceon informationsuppliedbyapartyother than the valuer, the valuer should considerwhethertheinformationiscredibleand may be relied on without adverselyaffecting the credibility of the valuationopinion. In that event, the assignmentmay proceed. Significant inputs providedto the valuer (e.g. by management orowners) thatmateriallyaffect thevaluationoutcome but about which the valuer considers some element of doubt ariseswill require assessment, investigation and/or corroboration, as the case may be. Incases where the credibility or reliability ofinformation supplied cannot be supported,suchinformationshouldnotbeused.

7.1.10 While the valuer should take reasonablecare to verify any information provided orobtained aswell as to conduct analysis tosuch information, any limitations on thisrequirementmust be clearly stated.Whenpreparingavaluationforfinancial statements the valuer shouldbepreparedtodiscusstheappropriateness of any assumptions that were made with the client’s auditor, otherprofessionaladviserorregulator.

7.1.11 A valuermeetingthecriteriainVS 2,willbefamiliarwith, ifnotexperton,manyof thematters affecting either the type of asset,including where applicable the locality.Whereanissue,orpotentialissue,thatcouldaffectvalueiswithinthevaluer’sknowledgeorevidentfromaninspection orexaminationof the asset, including where applicablethe immediate locality, or from routineenquiries, it should bedrawn to theclient’s attention no later than when the report isissued,andideallyinadvanceofthereport in caseswheretheimpactissignificant.

7.2.0 Revaluation without re-inspection of real property previously valued

7.2.1 Arevaluationwithoutare-inspection ofaninterestinrealproperty previouslyvaluedbythe valuerorhisfirm mustnotbeundertakenunlessthevaluerissatisfiedthattherehavebeen no material changes to the physicalattributesof theproperty,or thenatureofitslocation,sincethelastassignment.

7.2.2 Itisrecognisedthattheclientmayneedthevaluationof itspropertyupdatedat regularintervals and that re-inspection on everyoccasion may be unnecessary. Providedthat the valuerhaspreviouslyinspectedtheproperty, and theclient hasconfirmed thatno materialchangestothephysicalattributesof the property and the area in which itis situated have occurred, a revaluationwithout re-inspection may be undertaken.The terms of engagement muststatethatthisassumption hasbeenmade.

7.2.3 The valuer must obtain from the client information of current or anticipatedchanges in rental income from investment properties and anymaterial changes to thenon-physical attributes of each property,suchasotherleaseterms,planningconsents,statutorynoticesandsoon.Thevaluer must also consider whether any sustainability factorsthataffectthevaluation are likely to havealtered.

7.2.4 Wheretheclientadvisesthattherehavebeenmaterialchanges,orifthevaluerisotherwiseaware or has good reason to believe thatsuch changes have taken place, the valuer mustinspecttheproperty.Inallothercases,theintervalbetween inspections isamatterfor theprofessional judgmentof thevaluer whowill,amongotherconsiderations,haveregardtoitstypeandlocation.

7.2.5 Ifthevaluerbelievesthatitisinappropriateto undertake a revaluation without re-inspection becauseofmaterialchanges,thepassageoftimeorotherreasons,thevaluer may nevertheless accept an instructionto proceed without inspection providingthe client confirms in writing, prior to thedelivery of the report, that it is requiredsolely for internal management purposes,that no publication or disclosure will be


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made to third parties and that the client acceptsresponsibilityfortheassociatedrisk.Astatementdeclaringthispositionandthatthe reportmustnotbepublishedmustbesetoutunequivocallyinthereport.

7.3.0 Valuation records

A proper record must be kept of inspections and investigations, and of other key inputs, analyses and computations, in an appropriate business format.

7.3.1 Details of the inspection and anyinvestigationsmustbeclearlyandaccuratelyrecorded in a manner that is neitherambiguous nor misleading and does notcreateafalseimpression.

7.3.2 Tomaintainaproperaudittrailandbe inaposition to respond effectively to a futureenquiry, legible notes (which may includephotographsorotherimages)ofthefindingsand,particularly,thelimitsofinspection andthe circumstances in which it was carriedout must be made. The notes should alsoinclude a record of the key inputs and allcalculations, investigations and analysesconsideredwhenarrivingatthevaluation.

7.3.3 All notes and records should be retained in an appropriate business format. Theappropriateperiodforretentionwilldependon the purpose of the valuation and thecircumstances of the case but must haveregard to any relevant statutory, legal orregulatoryrequirements.

7.3.4 For all reports wherethegoverningjurisdiction isHongKonglaw,suchrecordsmustbeheldforatleastsix(6)yearsaftercompletionofthe engagement or two (2) years after thefinaldispositionofanyjudicialproceedinginwhichatestimonywasgiven.

7.3.5 Therecordsmustinclude:a. the nameof the client and the identity,bynameor type,of anyother intendedusers;

b. true copies of any written reports,documentedonanyformsofmedia;

c. summariesofanyoralreportsortestimony,ora transcriptof testimony, thevaluer’s signedanddatedcertification;and,

d. all other data, information, anddocumentation, which are necessary

to support the valuer’s opinions andconclusions and to prove compliancewith the Standards, or reference to thelocation(s)ofsuchotherdocumentation.

7.3.6 Ifavaluer isunable to retainacopyof thereport and its working papers, whether byreasonofanemployer’sinternalrulesorbychange of employers, all reasonable stepsmust be taken by the valuer to ensure theavailability of such data upon request. Inthisregard,thevaluer shouldobtainwrittencommitment from his employer that suchdatawill bemade availablewhen requiredbyregulatoryauthorities, including,butnotlimited to, the Committee of Investigation/Disciplinary Board of the Institute. If theemployer refuses to provide such writtencommitment, thevaluershallkeeparecordof such refusal and provide it to theHKIS,uponreceiptofrequestfromtheHKIS.


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VS 8Assumptions and Special Assumptions

8.1.0 Assumptions

8.1.1 An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification. Any such assumption must be reasonable and relevant having regard to the purpose for which the valuation is required.

8.1.2 The full definition from the glossary is asfollows:

‘Asuppositiontakentobetrue. It involvesfacts,conditionsorsituationsaffectingthesubjectof,orapproachto,avaluationthat,byagreement,donotneedtobeverifiedbythe memberaspartofthevaluationprocess.Typically, assumptions are made wherespecific investigation by the valuer is notrequiredinordertoprovethatsomethingistrue.’

8.1.3 In addition to stating the basis of value, itis often necessary to make an assumption or multiple assumptions to clarify eitherthe state of the asset in the hypotheticalexchangeorthecircumstancesunderwhichthe assetisassumedtobeexchanged.Suchassumptionscanhaveasignificant impact on value.

8.1.4 These types of assumptions generally fallintooneoftwocategories:

a) assumedfactsthatareconsistentwith,orcouldbeconsistentwith, thoseexistingat the valuation date,and

b) assumed facts that differ from thoseexistingatthevaluation date.

The assumptions under category a) aboveis taken as General Assumptions which iscoveredintheparagraphsbelowandthoseunder category b) is special assumptions whichiscoveredinsection8.2.0.

8.1.5 General Assumptionsrelatedtofactsthatareconsistentwith,orcouldbeconsistentwith,those existing at the date of valuation may betheresultofalimitationontheextentofthe investigations or enquiries undertakenbythevaluer.Examplesofsuchassumptions include,withoutlimitation:

a) an assumption that a business istransferred as a complete operationalentity,

b) an assumption that assets employed ina business are transferred without thebusiness,eitherindividuallyorasagroup,

c) anassumptionthatanindividuallyvaluedasset is transferred togetherwith othercomplementary assets,and

d) an assumption that a holding of sharesis transferred either as a block orindividually.

8.1.6 AsaGeneralAssumptionisoftenlinkedtoalimitationontheextentoftheinvestigationsorenquiriesthatcouldbeundertakenbythevaluer,allGeneralAssumptions that are likely tobeincludedinthereportareatbestpracticeto beagreedwiththeclientandincludedinthe terms of engagement. In any cases, theGeneral Assumptions should be agreed inwritingwith the client before the valuation reportisissued.Client’sconfirmationonthecontents of the draft reports containing allthe General Assumptionswillbetakenasoneformofagreementinwriting.

8.1.7 If, after inspection or investigation, thevaluer considers that an assumption agreedin advance with the client is likely to beinappropriate, or should become a special assumption, the revised assumptions andapproach mustbediscussedwith theclient prior to the conclusion of the valuationassignmentanddeliveryofthereport.

8.2.0 Special Assumptions

8.2.1 A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date.

8.2.2 Where special assumptions are necessary in order to provide the client with the valuation required, these must be expressly agreed and confirmed in writing to the client and intended users before the report is issued.

8.2.3 Special assumptions may only be made if they can reasonably be regarded as realistic, relevant and valid for the particular circumstances of the valuation.

8.2.4 Special assumptions are often used toillustrate the effect of possible changeson


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the value of an asset. They are designatedas“special”soastohighlighttoavaluation userthatthevaluationiscontingentuponachangeinthecurrentcircumstancesorthatitreflectsaviewthatwouldnotbetakenbyparticipantsgenerallyonthevaluation date.

8.2.5 The valuer may include in the report somecomment or assessment of the likelihoodof the special assumption being fulfilled.For example, a special assumption that permission had been granted to developlandmayhavetoreflecttheimpactonvalueofanyconditionsthatmightbeimposed.

8.2.6 A typical special assumptionmightbethataproperty or assethasbeenaltered insomedefinedway, forexample, ‘themarket value on the special assumptionthattheworkshadbeencompleted’.Inotherwords,itassumesfacts that differ from those existing at thevaluation date.

8.2.7 Ifaclient requestsavaluation onthebasisofa special assumption that the valuerconsidersto be unrealistic, the instruction should bedeclined.

8.2.8 Circumstanceswhereitmaybeappropriateto make special assumptions include, forexample:• a situation where a bid from a special

purchaser has been made, or can bereasonablyanticipated;

• a situation where the interest beingvalued cannot be offered freely andopenly in the market;

• apastchange inthephysicalaspectsofthe property or asset where the valuer has to assume those changes have nottaken place;

• an impending change in the physicalaspects of the property, such as a newbuildingtobeconstructedoranexistingbuildingtoberefurbishedordemolished;

• an anticipated change in the mode ofoccupationortradeattheproperty;

• the treatment of alterations andimprovements carried out under thetermsofalease;and

• the property may be affected byenvironmental factors, including natural(such as flooding), non-natural (such ascontamination) or existing use issues(suchasanon-conforminguser).

8.2.9 Some illustrations of special assumptions in relationtorealpropertyarethat:

• planning(zoning)consenthasbeen,orwillbe,grantedfordevelopment(includingachangeofuse)attheproperty

• abuildingorotherproposeddevelopmenthasbeencompletedinaccordancewithadefinedplanandspecification

• the property has been changed in adefined way (for example, removal ofprocessequipment)

• thepropertyisvacantwhen,inreality,atthe valuation dateitisoccupied

• the property is let on defined termswhen,inreality,atthevaluation dateitisvacantor

• theexchangetakesplacebetweenpartieswhereoneormorehasaspecialinterestand that additional value, or marriage value,iscreatedasaresultofthemergeroftheinterests.

8.2.10 Wherea real estate hasbeendamaged thespecial assumptions mayinclude:• treating the property as having beenreinstated (reflecting any insuranceclaims)

• valuingasaclearedsitewithdevelopmentpermissionassumedfortheexistinguse

• refurbishment or redevelopment for adifferentuse reflectingtheprospectsofobtaining the necessary developmentpermissions.

8.2.11 All the special assumptions mustbeexpressly agreed and confirmed in writing to the client and the intended users before thereport is issued.Members must, in writing,communicate with the clients and the intended users, as far as applicable, onany special assumptions and confirm withthe clients and the intendedusers on theiragreements on the valuations under suchspecial assumptions. The confirmationmust bemade expressly, andmere confirmationon the contents of the report may not betakenassufficient.

8.2.12 All the special assumptions must be clearlywritten in the prominent positions in thereport.

8.2.13 The adoption of some of these specialassumptions may qualify the applicationofmarket value.They are oftenparticularlyappropriate where the clientisalenderandspecial assumptionsareusedtoillustratethepotential effect of changed circumstancesonthevalueofapropertyasasecurity.


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8.2.14 Wherevaluations are prepared forfinancial statements or public announcements,the normal basis of value will exclude anyadditional value attributable to special assumptions. However, if (exceptionally) a special assumption is made, this must be referred to in any published reference.

8.3.0 Valuation reflecting an actual or anticipated market constraint, and forced sales

8.3.1 Wherever the valuer, or client, identifies that a valuation may need to reflect an actual or anticipated marketing constraint, details of that constraint must be agreed and set out in the terms of engagement.

8.3.2 The valuermaybeinstructedtoundertakeavaluation reflectinganactualoranticipatedmarket constraint, which may take one ofmanydifferentforms.

8.3.3 If a property or asset cannot be freely oradequately presented to the market, theprice is likely to be adversely affected.Before accepting instructions to advise onthe likely effect of a constraint, the valuer should ascertain whether this arises froman inherent feature of the asset, or of theinterestbeingvalued,orfromtheparticularcircumstances of the client, or somecombinationofallofthese.

8.3.4 If an inherent constraint exists at thevaluation date,itisnormallypossibletoassessitsimpactonvalue.Theconstraintshouldbeidentified in the terms of engagement, andit should be made clear that the valuation will be provided on this basis. Itmay alsobe appropriate to provide an alternativevaluation on the special assumption that the constraintdidnotexistatthevaluation date inordertodemonstrateitsimpact.

8.3.5 Greater care is needed if an inherentconstraint does not exist at the valuation date, but is a foreseeable consequence ofa particular event or sequence of events.Alternatively, the client may request avaluation to be on the basis of a specifiedmarketing restriction. In either case thevaluationwould be providedon the special assumption that the constraint had arisenat the valuation date.Theprecisenatureoftheconstraintmustbeincludedintheterms

of engagement. Itmay also be appropriateto provide a valuation without the special assumption in order to demonstrate theimpact that the constraintwould have if itarose.

8.3.6 A special assumption that simply refers toa time limit for disposal without statingthe reasons for that limit would not be areasonable assumption tomake.Without aclear understanding of the reasons for theconstraint, the valuer would be unable todetermine the impact that it may have onmarketability,salenegotiationsandthepriceachievable,ortoprovidemeaningfuladvice.

8.3.7 A marketing constraint should not beconfused with a forced sale. A constraintmay result in a forced sale, but it can alsoexistwithoutcompellingtheownertosell.

8.3.8 The term ‘forced sale value’ must not beused.A ‘forced sale’ is adescriptionof thesituation under which the exchange takesplace, not a distinct basis of value. Forcedsales arise where there is pressure on aparticular vendor to sell at a specific time–forexample,becauseoftheneedtoraisemoneyortoextinguishaliabilitybyagivendate.The fact that a sale is ‘forced’meansthatthevendorissubjecttoexternallegalorpersonal commercial factors, and thereforethetimeconstraintisnotmerelyapreferenceofthevendor.Thenatureoftheseexternalfactors and the consequences of failingto conclude a sale are just as important indeterminingthepricethatcanbeachievedwithinthelengthoftimeavailable.

8.3.9 While a valuer can assist a vendor indeterminingapricethatshouldbeacceptedin forced sale circumstances, this is acommercial judgment. Any relationshipbetween the price achievable by a forcedsaleand themarket value is coincidental; itisnotavaluationthatcanbedeterminedinadvance,butafigurethatmightbeseenasareflectionofworthtothatparticularvendorattheparticularpointintimehavingregardto the specific context. As emphasised inparagraph8.3.8above,althoughadvicemay be given on the likely realisation in forcedsalecircumstances,thetermisadescriptionof thesituationunderwhichthesale takesplace, and so itmust not be described orusedasabasis of value.


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8.3.10 Itisacommonmisconceptionthatinapoororfallingmarketthereareautomaticallyfew‘willing sellers’ and that, asa consequence,mosttransactionsinthemarketaretheresultof‘forcedsales’.Accordingly,thevaluer may beaskedtoprovideforcedsaleadviceonthisbasis.Thisargumenthaslittlemeritbecauseit suggests that the valuer should ignorethe evidence of what is happening in themarket.Thedefinitionofmarket valuemakesit clear that awilling seller ismotivated tosellatthebesttermsavailableinthemarketafterpropermarketing,whateverthatpricemay be. The valuer should be careful notto accept instructions on the basis of amisconceptionandshould explain to clients that, intheabsenceofadefinedconstraintaffecting either the asset or the vendor,the appropriate basis ismarket value. In adepressed market, a significant proportionof salesmay bemade by vendors that areobliged to sell, such as administrators,liquidators and receivers. However, suchvendorsarenormallyunderadutytoobtainthebestprice in thecurrentcircumstancesandcannotimposeunreasonablemarketingconditions or constraints of their ownvolition. These sales will normally complywiththedefinitionofmarket value.

8.4.0 Assumptions and special assumptions related to projected values

8.4.1 Any assumptions, special or otherwise,relatingtoprojectedvaluesmustbeagreedwith the clientpriortoreportinganopinionofvalue.

8.4.2 The valuation report mustmakereferencetothehigherdegreeofuncertaintythatislikelytobeimplicitwithaprojectedvalue,wherebydefinition,comparableevidencewillnotbeavailable.

8.4.3 Bytheirnature,projectedvaluesrelywhollyon assumptions, which may include somesignificant special assumptions.Forexample,the valuer may make various assumptions aboutthestateofthemarket inthefuture– yields, rental growth, interest rates, etc.which mustbesupportedbycrediblestudiesoreconomicoutlook-basedforecasts.

8.4.4 Great care is required to ensure that allassumptionsmadeare:• in accordance with any applicablenationalorjurisdictionalstandard

• realisticandcredible• clearly and comprehensively set out in

the report.

8.4.5 When making special assumptions, greatcare mustalsobeexercisedconcerningthereliability and precision of any methods,tools or data used for forecasting orextrapolation.

8.4.6 Ifaclient requestsaprojectedvalues on the basisofacashflowprojectionthatthevaluer considers to be unrealistic, the instructionshouldbedeclined.


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VS 9Reporting

The report must:

• clearly and accurately set out the conclusions of the valuation in a manner that is neither ambiguous nor misleading, and which does not create a false impression. If appropriate, the valuer should draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation under paragraph 9.2.2(o) below.

• deal with all the matters agreed between the client and the valuer in the terms of engagement (see VS 4 Terms of Engagement).

9.1.0 General Requirements

9.1.1 It is essential that the valuation report communicates the information necessaryforproperunderstandingofthevaluation or valuationreview.Areport mustprovidetheintended users with a clear understandingof the valuation and should be couched interms that canbe read andunderstoodbysomeone with no prior knowledge of thesubjectassetorliability.

9.1.2 Toprovideusefulinformation,thereport must set out a clear and accurate descriptionofthescopeoftheassignment,itspurposeandintended use (including any limitations onthatuse)anddisclosureofanyassumptions,special assumptions (VS8 Assumptions andSpecialAssumptions),significantuncertaintyorlimitingconditionsthatdirectlyaffectthevaluation.

9.1.3 This standard applies to allvaluation report ontheoutcomeofavaluationreviewwhichmay range from comprehensive narrativereportstoabbreviatedsummaryreports.

9.1.4 Theformatanddetailofthereportisamatterto be agreed between the valuer and theclient in the terms of engagement. It should alwaysbeproportionate to the task,and–as for the valuation itself – professionallyadequateforthepurpose.Wherethereport istobeprovidedonaform,or inaformat,specifiedby theclient thatomits referencetooneormoreoftheheadingsbelow,theneither the initial service agreement or the

terms of engagement – or an appropriate combination of the two – must clearly addressthesematters.FailuretodosowouldresultinthevaluationnotbeingundertakeninaccordancewiththisStandards.

9.1.5 Thepurposeofthevaluation,thecomplexityof the asset being valued and the users’requirements will determine the level ofdetailappropriatetothevaluation report.Theformatof the report should be agreedwithallpartiesaspartofestablishingascopeofwork(seeVS4TermsofEngagement).

9.1.6 Compliance with this standard does notrequireaparticularformorformatofreport (pleaserefertosection9.2.0);however,thereport must be sufficient to communicateto the intended users the scope of thevaluation assignment, thework performed,andtheconclusionsreached.

9.1.7 The report should also be sufficient foran appropriately experienced valuationprofessionalwithnopriorinvolvementwiththe valuation engagement to review thereportandunderstandtheitemsinsections9.2.0and9.3.0,asapplicable.

9.1.8 Where multiple reports are to be made toa single client over a period of time, withidentical terms of engagement, it must bemade clear to the client and to any otherswho may rely on the valuation adviceprovided, that the terms of engagementandformofreport mustalwaysbereadtogether.

9.1.9 A valuer may provide the client with preliminary valuation advice, or a draftreport or draft valuation, in advance of thecompletionofthefinalreport.However,itisessentialthatthepreliminaryorprovisionalstatus is made clear, pending issue of theformalandfinalreport.

9.1.10 Inprovidingaclientwithpreliminaryadvice,oradraftreport or valuationinadvanceofitscompletion,themember muststatethat:

1) Theopinionisprovisionalandsubjecttocompletionofthefinalreport;

2) Theadviceisprovidedforclient’s internal purposesonly;and

3) Anydraftisonnoaccounttobepublishedordisclosed.


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If any matters of fundamental importanceare not reflected, their omission must bedeclared.

9.1.11 Members are reminded that any valuationadviceprovided,inwhateverformat,createsa potential liability to the client, or undercertaincircumstances,tooneormorethirdparties.Greatcareshouldthereforebetakento identify and understandwhen and howsuch liabilities do, or may, arise, and theirlikelyextent.Seeparagraph9.2.3(p)below.

9.1.12 The terms ‘certificate of value’, ‘valuationcertificate’, and ‘statement of value’ should notbeusedinconnectionwiththeprovisionof valuation advice. However a valuer may use the term ‘certified’, or similarwords inthe body of the report where it is knownthat the valuation is to be submitted for apurposethatrequiresformalcertificationofavaluationopinion.

9.1.13 Wherenecessaryforthepurposeofbrevity,members may provide a separate summaryof values, provided that it is part of avaluation report prepared for the requiredsamepurposeandcomplyingfullywiththe Standards, andclearlycross referencedandstatedassuch.

9.1.14 In some instances, the client may requestthe valuer to prepare a report ina languageotherthanEnglish.Duecaremustbetakento ensure that the requirements set out inthe Standardshavebeenfullycompliedwithand reflected in sucha report and that theapproved text of the Standards is correctlyinterpreted.

9.2.0 Valuation Reports

9.2.1 Where the report is the result of anassignment involving the valuation of anasset,thereport mustconveythefollowing,ataminimum:

a) Identificationandstatusofthevaluerb) Identificationoftheclientandanyotherintendedusers

c) Purposeofthevaluationd) Identificationoftheasset(s)valuede) Basis(es) of valueadoptedf) Valuation dateg) Extentofinvestigationh) Nature and source(s) of the informationreliedupon

i) All assumptionsandspecial assumptionsj) Restrictions on use, distribution andpublicationofthereport

k) Confirmation that the assignment hasbeenundertakeninaccordancewiththeIVSand/orHKISValuationStandards

l) Valuationapproachandreasoningm) Amountofthevaluation or valuationsn) Date of the reporto) Commentary on any materialuncertaintyin relation to the valuation where it isessentialtoensureclarityonthepartofthevaluationuser

p) A statement on whether or not anylimitingconditionshavebeenagreed.

9.2.2 Some of the above requirements may beexplicitlyincludedinareportorincorporatedinto a report through reference to otherdocuments (engagement letters, scopeof work documents, internal policies andprocedures,etc.).

9.2.3 Each report heading is considered in moredetailbelow.The text inbold specifies thekeyprinciples.The accompanying text thatfollowsspecifieshowtheprinciplesaretobeinterpreted and implemented in individualcases.

a) Identification and status of the valuer

The valuer can be an individual or a member of a firm. The report must include:• the signature of the individual

responsible for the valuation assignment

• a statement confirming that the valuer is in a position to provide an objective and unbiased valuation and is competent to undertake the valuation assignment.

If the valuer has obtained material assistance from others in relation to any aspect of the assignment, the nature of such assistance and the extent of reliance must be referenced in the report.

i. A valuation is the responsibility ofan individualmember.HKISdoesnotallow a valuation to be prepared bya ‘firm’ although the use of ‘for andon behalf of’ under the responsiblevaluer’s signature is an acceptablesubstitution.


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ii. Inallcasesthesignatory’sprofessionaldesignation (for example, MHKIS)or other relevant professionalqualification,mustbemadeclear.

iii. Where it isaspecificrequirementtodo so, the valuer must state if he orsheisactingasaninternalorexternalvaluer as defined inVS 2. However,for certain purposes in individualjurisdictionsotherdefinitionsoftheseterms may apply, which must berecognisedintheterms of engagement (assuming the valuer meets thecriteriaspecifiedinthedefinition)andmade explicit in the report. Whereothercriteriaconcerningthestatusofa valuerhavebeenadoptedtheymust again be confirmed, togetherwith astatementthatthevaluermeetsthem.

iv. In considering the extent of anymaterial previous involvement,whether past, current or possiblefuture,thevaluer musthaveregardtotherequirementsofVS 3 Section 3.5.0.Any disclosures or statements madein accordance with VS4 paragraph 4.3.2 (a) (iii), must be repeated inthe valuation report. Where therehas not been any previous materialinvolvement, a statement to thateffectmustbemade in thevaluation report.

v. A statement should be made thatthe valuer has sufficient currentlocal, national and international(as appropriate) knowledge of theparticular market, and the skills andunderstanding to undertake thevaluation competently. Where morethan one valuer within a firm hascontributed, confirmation that VS 2 hasbeensatisfied isneeded, thoughit is not necessary to provide anydetails.

vi.Where the valuer incorporates intothe report a valuation prepared byanother valuer or firm – whether in the capacity of a subcontractor or thirdpartyexpertinoneormoreaspects–see(j)subparagraphsiv–vbelow.

vii.In some countries or states therelevant valuation standards specificto that jurisdiction may requireadditional disclosures to be madewithregardtothestatusofthevaluer.

b) Identification of the client and any other intended users

The party commissioning the valuation assignment must be identified together with any other parties whom it is intended may rely on the results of the assignment (see also (j) Restrictions on use, distribution or publication of the report, below).

i. The report must be addressed tothe client or its representatives. Thesource of the instructions and theidentity of the client must be stated,ifdifferentfromtheaddressee.Otherknown users of the report are to benamed.

ii. For some purposes valuers may be unable to exclude liability tothird parties (see VS 3 Ethics, Professionalism and Conflict of Interests section 3.5.0).Anylimitationondisclosureofavaluationbasedonrestricted information or instructionshouldbeincluded(seeVS4TermsofEngagement4.3.2(j)).

c) Purpose of the valuation

The purpose of the valuation assignment must be clearly stated.

i. The report must be unambiguous.Wherethepurposeofthevaluationisnotdisclosedbytheclient,thevaluer shouldseekclarificationwhythisisso.The valuation report must include anappropriate statement to clarify thecircumstances.

d) Identification of the asset(s) valued

The asset or liability to which the valuation assignment relates must be clearly identified. Clarification may be needed to distinguish between an asset and an interest in or right of use of that asset. If the valuation is of an asset that is used in conjunction with other assets, it will be necessary to clarify whether those assets are:• included in the valuation assignment• excluded but assumed to be available

or• excluded and assumed not to be

available.


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If the valuation is of a fractional interest held in an asset or liability, the relationship of the fractional interest being valued relative to all other fractional interests and the obligations of the fractional interest ownership, if any, to other fractional interest owners, must be made clear.

Particular regard must be had to the identification of portfolios, collections and groups of properties. It is essential to consider ‘lotting’ or ‘grouping’; the identification of different property or asset categories; and any assumptions or special assumptions relating to the circumstances under which the properties, assets, liabilities or collections may be brought to the market.

i. The legal interest in each asset orliability should be stated. Clarificationis essential to distinguish between thecharacteristicsoftheassetinitsentiretyand the particular right or interest thatisbeingvalued.Wheretheassetisarealproperty, the extent to which vacantpossession is, or may be available (ifrequired),shouldalsobenoted.

ii. Where the assets are located in morethan one country or state, the report must list theassetswithin each countryor state separately and should normally bearrangedsothatalltheassets in one country or state are grouped together.Thelegalinterestineachassetorliabilityshouldbestated.

iii. Where the terms of engagement haverequiredseparateidentificationofassets bytheiruse,categoryorclass,thereport shouldbestructuredaccordingly.

iv. Where there is doubt about whatconstitutesasinglepropertyorasset,thevaluer shouldgenerally‘lot’,orgroup,theproperties for valuation in the manner mostlikelytobeadoptedinthecaseofanactualsaleoftheinterest(s)beingvalued.However, the valuer should discuss theoptionswiththeclientandmustconfirmtheapproachadoptedinboththeterms of engagementandthereport.

e) Basis(es) of value adopted

The basis of value must be appropriate for the purpose. The source of the definition of any basis of value used must be cited or the basis explained.

This requirement does not apply to a valuation review where no opinion of value is to be provided or no comment is required on the basis of value used.

i. The basis of value, together withits definition (but not supportingconceptual framework or otherexplanatory material regarding thatdefinition),mustbestatedinfullinthereport.

ii. Unless agreed otherwise in theterms of engagement the valuer isnotrequiredtoprovideavaluation on an alternative basis of value. However,where the basis of value is not amarket-basedfigureandthevaluation is materially different from market value, an explanatory statementto that effect may be appropriate,where necessary to ensure that theuserofthevaluationisalertedtothepossibility that,althoughrelevant forthe specified purpose, the valuation may not bear a relation to the pricethatcouldbeobtainediftheassetorliabilitywereplacedonthemarketfordisposal.

iii. Where, exceptionally, a valuation isprovidedrelatingtoafuturedatethismustbemadeexplicit(seeparagraph(f) below). It should always beseparatelyreportedwithconfirmationthat it complies as appropriate withany applicable jurisdictional and/ornational standards.A projectionmay take one of a number of forms anddoesnotnormallyconstituteadistinctbasis of value in itself.But,as it restssubstantially on special assumptions,whichmayormaynotbeborneoutby actual events, it is of a differentcharacter from advice relating to acurrentorpastdateandmustnotberepresentedasif itwereonanequalfooting.Inparticularitmustneverbedescribed or represented simply as‘market value’.

f) Valuation date

The valuation date may be different from the date on which the valuation report is issued or the date on which investigations are to be undertaken or completed. Where appropriate, these


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dates must be clearly distinguished in the report.

This requirement does not apply to a valuation review unless the reviewer is required to comment on the valuation date used in the valuation under review.

i. Thevaluation date mustbestated(seeVS4TermsofEngagement4.3.2(h)).

ii. If there has been amaterial changein market conditions, or in thecircumstancesofaproperty,asset or portfolio,betweenthevaluation date (where this is earlier than the date of the report) and the date of report,the valuer should draw attentionto this. It may also be prudent inappropriate instances for the valuer to draw the client’s attention to thefactthatvalueschangeovertimeanda valuationgivenonaparticulardatemaynotbevalidonanearlierorlaterdate.

iii. Additional care is needed whenproviding a projection of value,in order to ensure that the client understands that the actual value atthe future date, on whatever basisis adopted, may diverge from thatbeing reported and almost certainlywill if the then state of the asset or conditions of themarket differ fromthe special assumptions statementsmade at the time of the projection.Seealsoparagraph(e)(iii)above.

g) Extent of investigation

The extent of the investigations undertaken, including the limitations on those investigations set out in the terms of engagement (scope of work), must be disclosed in the report.

i. Where the asset is a real propertyinterest, the report must record thedate and extent of any inspection,including reference to any part ofthe property to which access wasnot possible. Equivalent steps,appropriate to the class of asset concerned,shouldbetakeninrelationtotangiblepersonalproperty.

ii. The valuer must make it clear if thevaluation has beenmadewithout anopportunitytocarryoutanadequate

inspection(seeVS 7 paragraphs 7.1.3 and 7.1.8)orequivalentcheck.

iii. Inthecaseofarevaluation,thereport should also refer to any agreementin respect of the requirement for,or frequency of, an inspection of theproperty(SeeVS 7).

iv. Where a substantial number ofproperties are being valued, ageneralized statement of theseaspects (i.e. regarding inspection) isacceptable, provided that it is notmisleading.

v. Wheretheassetisnotrealortangiblepersonal property, particular careshouldbetaken inthereport to note the extent to which investigationswerepossible.

vi.Wherethevaluationisundertakenonthebasisofrestrictedinformation,orisarevaluationwithoutaninspection,the report mustincludefullparticularsof the restriction (see also VS 4 paragraph 4.3.2(i)).

h) Nature and source(s) of the information relied upon

The nature and source of any relevant information relied upon in the valuation process and the extent of any steps taken to verify that information must be disclosed.

To the extent that information provided by the commissioning party or another party has not been verified by the valuer, this should be clearly stated with reference, as appropriate, to any representation from that party.

For this purpose, ‘information’ is to be interpreted as including data and other such inputs.

i. Where the client has providedinformation that is to be relied on,the valuerhasaresponsibilitytostateclearlythattheinformationiscoveredby, or in, the terms of engagement and, where appropriate, to specifyits source. In each case the valuer must judge the extent to which theinformationtobeprovidedislikelytobe reliable andwhether any further,reasonablestepsarerequiredtoverifyit.


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ii. The valuer must make it clear if thevaluationhasbeencarriedoutwithoutinformation that would normally be,orbemade,available.Thevaluer must alsoindicateinthereportifverification(where practicable) is needed ofany information or assumptions on which the valuationisbased,orifanyinformation considered material hasnotbeenprovided.

iii. Ifanysuchinformationorassumption requiringverificationismaterial to the amount of the valuation, the valuer must make clear that the valuation should not be relied onwithout thatverification (see VS 4 paragraph 4.3.2(j)). In thecaseofa revaluation,a statement of anymaterial changesadvised by the client or a statedassumption that there have been nomaterialchanges,shouldbeincluded.

iv. The client may expect the valuer to express an opinion, and in turnthe valuer may wish to express anopinion, on legal issues that affectthe valuation. In thesecircumstancesthe valuer must thereforemakeclearin the report any information thatmust be verified by the client’s orotherinterestedparties’legaladvisersbeforethevaluationcanbereliedonorpublished.

v. Thereport shouldstateanyadditionalinformation that has been availableto, or establishedby, thevaluer, andisbelievedtobecrucialtotheclient’sability to understand and benefitfrom the valuation, with regard tothe purpose for which it has beenprepared.

i) All assumptions and special assumptions

All assumptions and any special assumptions made must be clearly stated.

i. All assumptions and any special assumptions must be set out in thereport in full, together with anyreservations that may be requiredand a statement that they havebeen agreed with the client. Boththe valuation conclusion and theexecutive summary (if provided)should explicitly set out all special

assumptions thathavebeenmade toarrive at the reported figure.Wherethe assumptions vary in differentcountries or states the report must makethisclear.

j) Restrictions on use, distribution and publication of the report

Where it is necessary or desirable to restrict the use of the valuation or those relying upon it, this must be stated.

i. The valuer must state the permitteduse, distribution and publication ofthe valuation.

ii. Where the purpose of the report requiresapublishedreferencetoit,thevaluer mustprovideadraftstatementfor inclusion in the publication.Thismay be provided as a separatedocumentannexedtothereport or a partofthereport,wheretherulesorregulationsunderdifferentjurisdiction mayrequiretodoso.

iii. Areportmaybepublished infull, forinstance in the annual accounts ofa company, but it is more commonfor only a reference to be made toit. In thiscase it isessential that thevaluerhasacloseinvolvementinthepublicationstatement toensure thatallthereferencesareaccurateandthatthe reader is not misled, unless thevaluerisnotprovidedwithorisbarredfrom amendments on the referenceof such publication statement. Thisis particularly important if thevaluer isaskedtotakeresponsibilityforanypublishedstatementoranypartofapublishedstatement.

iv. If the whole report is not to bepublished,itiscommonforthevaluer toprepareastatementorsummaryasa separatedocument and toprovideto the clientat thesametimeasthereport.Thecontentof the statementorsummarymaybegovernedbyrulesissued by local regulatory bodies,valuers must check and ensure hisreport containing all the minimumcontents as required under theprevailing rules of the regulatorybodies. In case the contents inthe statement or summary are not


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specified, the statementor summary shouldcontainthefollowingminimuminformation:• the name and qualification of the

valuer,orthevaluer’s firm•anindicationofwhetherthevaluer isaninternalorexternalvaluer,andwhere required, that the specificcriteria relating to this status havebeenmet

• the valuation dateandbasis (or bases) of value, together with any special assumptions

•comment on the extent to which thevaluesweredetermineddirectlyby reference to market evidenceor were estimated using othervaluationtechniques

•confirmation that the valuation hasbeenmade inaccordancewiththese standards, or the extent ofand reason(s) for departure fromthemand

•a statement indicating any partsof the report prepared by anothervaluerorspecialist.

v. Forvaluationsinwhichthepublichasan interest or which may be reliedon by parties other than the client commissioningthereport or to which it isaddressed,thevaluer must make additionaldisclosuresinthevaluation reportandanypublishedreferencetoit.Theseare setout inVS 3 section 3.5.0.

vi. ‘Publication’doesnotincludemakingthe report or the valuation figureavailable to a mortgage (lending)applicantorborrower.

vii.Thevaluer shouldchecktheaccuracyofanyotherrelevantmaterialreferringto the properties or to the valuation thatistobepublished.

viii. Thevaluerisalsoadvisedtoreadthewholedocumentinwhichthereport or referenceistobepublishedtoensurethat there isnomisstatementofanyothermatteroropinionofwhichthevaluermayhaveknowledge.

ix. The valuer should insist that a copyofthefinalproofofthedocumentorthereferenceissuppliedbeforeissue,andattachthatprooftotheletterofconsent.Anypressurebyotherpartiesor persuasion to delegate power tosignshouldberesisted.

x. The valuer is permitted to excludeinformation of a commerciallysensitivenature froma report that ispublished in full, subject toany legalrequirements that may apply in aparticularcountryorstate.

xi. Anopinionmaybeexpressedwhich,if included in a public document,might have some effect on amatterthat is in dispute, under negotiationor subject to certain rights betweenthe owner and a third party (forexample, an opinion of the rental orcapital value of a property with animminent rent review). The report may also include information abouta company’s trading that would notusuallybeinthepublicdomain.Suchinformation iscommerciallysensitiveandtheclientmustdecide,subjecttotheapprovalof theauditorsandanyregulatorybody,whetheritshouldbeincludedinthepublication.

xii.Inthepublishedreferencethevaluer mustrefertotheomission(s)andstatethatthishasbeendoneontheexpressinstructionsoftheclientandwiththeapprovaloftheregulatorybodyand/or auditors. Without this note thevaluermaybeinadvertentlyplacedinasituationwherethereisunjustifiablecriticism.

xiii.Wherethefullreportisnotpublished,thepublication statementmust referto any special assumption made andany additional valuation provided.Similarly, sufficient reference to anydepartures should be made in anypublisheddocument.

xiv.Ineachcasetheonusisonthevaluer to determine what constitutes a‘sufficient reference’. A referencewouldnotberegardedas‘sufficient’ifitfailedtoalertthereadertomattersoffundamental importanceastothebasis or amount of the valuation, orif therewas any risk that the readermightbemisled.

xv.Itisexpectedthatavaluerwouldnotnormally consent to the publicationof a projected value. Where, inexceptional cases, consent is given,greatcareshouldbe taken toensurethat any associated provisos ordisclaimersareaccuratelyreproduced.


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k) Confirmation that the assignment has been undertaken in accordance with the IVS and /or HKIS Valuation Standards

The valuer should provide:

confirmation that the valuation has been undertaken in accordance with the International Valuation Standards (IVS) and that all significant inputs have been assessed by the valuer and found to be appropriate for the valuation provided

or (depending on clients’ particular requirements)

confirmation that the valuation has been undertaken in accordance with the HKIS Valuation Standards, which incorporate the IVS, and (where applicable) the relevant HKIS or jurisdictional supplement.

In both cases an accompanying note and explanation of any departures from the IVS or the HKIS Valuation Standards must be included. A departure would not be justified if it resulted in a valuation that is misleading.

i. There is no material difference inoutcome between the respectiveforms of endorsement above,which may be used according tothe particular requirements of thevaluationassignment.Someclients will expressly wish to have confirmationthat the valuationhasbeenundertakenin accordancewith the IVS, and it isnaturallyinorderforthistobegiven.In all other cases confirmation thatthe valuationhasbeenundertakeninaccordancewith the HKISValuationStandards carries with it the dualassuranceofcompliancewiththeIVStechnicalstandardsandwiththeHKISValuationStandardsoverall.

ii. References to the HKIS ValuationStandards without reference to theyear of issue will be taken to meanthe version of the HKIS standardsoperative at the valuation date,provided that it is on or before thedateofsignatureofthereport.

iii. The statement of compliance should

drawattentiontoanydepartures(seeVS 1 section 1.5.0).Whereadeparture ismadethat isnotmandatory, itwillnotbepossibletoconfirmcompliancewiththeIVS.

iv. Where valuation standards specificto a particular jurisdiction have beenfollowed,aformalstatementregardingcompliance with those jurisdictionalstandardsmaybeadded.

v. Where the valuer incorporates intothe report a valuation prepared byanother valuer or firm – whether asa subcontractor or as a third partyexpert – it must be confirmed thatsuch valuations have been preparedin accordancewith the Standards, orotherstandardsthatmayapplyintheparticularcircumstances.

vi. The valuer may be requested toincorporate a valuationcommissioneddirectly by the client. In such casesthe valuer must be satisfied that anysuch report has been prepared inaccordancewiththe Standards.

l) Valuation approach and reasoning

To understand the valuation figure in context, the report must make reference to the approach or approaches adopted, the key inputs used and the principal reasons for the conclusions reached.

Where the report is of the results of a valuation review it must state the reviewer’s conclusions about the work under review, including supporting reasons.

This requirement does not apply if it has been specifically agreed and recorded in the terms of engagement (scope of work) that a report shall be provided without reasons or other supporting information.

i. Wheredifferentvaluationapproachesand assumptions are required fordifferent assets it is important thatthey are separately identified andreported.

m) Amount of the valuation or valuations

This must be expressed in the applicable currency.


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This requirement does not apply to a valuation review if the valuer is not required to provide his or her own valuation opinion.

i. In the main body of the report the opinionofvalueisrequiredinwords,aswellasinfigures.

ii. Where the valuation instructionincludes a number of assets fallinginto different use categories orgeographic location, whether thevaluationisreportedassetbyassetorotherwisewilldependonthepurposeforwhichthevaluationisrequired,thecircumstancesandclientpreferences.Where a portfolio includes assets ofdiffering tenures, the value of thetenure groups may be subtotalled,together with a statement of theoverallvalue.

iii. An entity will usually require assetor liability values to be expressed inthecurrencyofthecountry inwhichit is based. For financial statementpurposes, this is known as the‘reporting currency’. Irrespective ofthe location of the client, valuations mustbemade inthecurrencyofthecountryinwhichtheassetorliabilityislocated.

iv. Where the client requires thevaluation to be translated into adifferent currency (for example,into the reporting currency), unlessagreed otherwise the exchange rateto be adopted is the closing rate(alsoknownasthe‘spotrate’)onthevaluation date.

v. Where the valuation instructionrequires the opinion of value to bereported inmore than one currency(such as with cross-border portfoliovaluations),theopinionofvaluemust indicate the currencies adopted andtheamountshouldbeshowninwordsand figures in themain body of thereport. In addition theexchange rateadoptedshouldbeasatthevaluation date and thismust be stated in thevaluation report.

vi. If the identification of individualassetsandtheirvaluesisconsignedtoaschedule(s)appendedtothereport,asummaryofvaluesmustbeincludedwithinthebodyofthereport.

vii.If there has been amaterial change

in market conditions, or in thecircumstancesofanassetorportfolio,between the valuation date (wherethis is earlier than the date of the report)andthedate of the report,thevaluer should draw attention to this.It mayalsobeprudentinappropriateinstances for the valuer to draw theclient’sattentiontothefactthatvalueschange over time and a valuation givenonaparticulardatemaynotbevalidonanearlierorlaterdate.

viii.‘Negative values’ and liabilities mayarise and must always be statedseparately.Theyshouldnotbeoffset.It is not correct in such cases to report a ‘nil’ figure of value.

n) Date of the report

The date on which the report is issued must be included. This may be different from the valuation date (see (f) above).

o) Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user

i. This requirement is mandatory onlywhere the uncertainty is material.For this purpose, ‘material’ meanswherethedegreeofuncertainty inavaluationfallsoutsideanyparametersthatmightnormallybeexpectedandaccepted.

ii. Allvaluationsareprofessionalopinionson a stated basis of value, coupledwith any appropriate assumptions or special assumptions, whichmust alsobe stated (seeVS 8) – a valuation isnotafact.Likeallopinions,thedegreeofsubjectivityinvolvedwillinevitablyvary from case to case, as will thedegreeof ‘certainty’– forexample,theprobabilitythatthevaluer’s opinion ofmarket valuewouldexactlycoincidewiththepriceachievedwerethereanactualsaleatthevaluation date,evenifall thecircumstancesenvisagedbythe market value definition and thevaluation assumptions were identicalto the circumstances of an actualsale. Most valuations will be subjectto a degree of variation (that is, adifference in professional opinion),a principle well-recognised by the


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courtsinavarietyofjurisdictions.iii. Ensuring user understanding andconfidence in valuations requiresclarity and transparency, hencethe general requirement undersubsection (l)aboveforthereport to make reference to the approach orapproaches adopted, the key inputsused and the principal reasons forthe conclusions reached, therebyenabling the user to understand thevaluationfigureincontext.Howmuchexplanation and detail is necessaryconcerning the supporting evidence,the valuation approach and theparticularmarketcontext is amatterofjudgmentinindividualcases.

iv. Normally, valuations will not requireadditionalexplanationorclarificationbeyond the general requirementreferred to in paragraph iii. above.However, in some cases there maybe a greater degree of uncertaintyconcerning the valuation figurereported than usual, and wherethat uncertainty is material furtherproportionate commentary must be added in order to ensure thatthe report does not create a falseimpression. Valuers should not treat such a statement expressing lessconfidenceinavaluationthanusualasanadmissionofweakness–itisnotareflectionontheirprofessionalskillorjudgment,butamatterentirelyproperfor disclosure. Indeed, if a failure todrawattentiontomaterialuncertaintygave a client the impression thatgreaterweight could be attached totheopinion thanwaswarranted, thereportwouldbemisleading.

p) A statement on whether or not any limiting conditions have been agreed.

The statement on whether or not anylimitingconditions,suchaslimitationsonliability,etc.,mustbeincluded.

9.3.0 Valuation Review Reports

9.3.1 Wherethereportistheresultofavaluationreview,thereport mustconveythefollowing,ataminimum:

a. the scope of the review performed,including the elements noted in VS4 Terms of Engagement to the extent each isapplicabletotheassignment,

b. the valuation report being reviewed andthe inputs and assumptions uponwhichthat valuationwasbased,

c. the reviewer’s conclusions about theworkunderreview,includingsupportingreasons,and

d. the date of the report (whichmay differfromthevaluation date).

9.3.2 Some of the above requirements may beexplicitlyincludedinareportorincorporatedinto a report through reference to otherdocuments (e.g. engagement letters, scopeof work documents, internal policies andprocedures,etc.).


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VS 10Real property

10.1.0 Overview

10.1.1 This standard contains additionalrequirements for valuations of realproperty.

10.2.0 Introduction

10.2.1 Propertyinterestsarenormallydefinedbystateorthelawofindividualjurisdictions and are often regulated by national orlocal legislation. Before undertaking avaluationofarealproperty,avaluer must understandtherelevantlegalframeworkthataffectstheinterestbeingvalued.

10.2.2 A real property is a right of ownership,control, use or occupation of land andbuildings.Therearethreemaintypesofinterest:

(a) the superior interest in any definedareaofland.Theownerofthisinteresthasanabsoluterightofpossessionandcontrolofthe landandanybuildingsupon it inperpetuity,subjectonlytoany subordinate interests and anystatutoryorotherlegallyenforceableconstraints,

(b)a subordinate interest that normallygives the holder rights of exclusivepossession and control of a definedareaoflandorbuildingsforadefinedperiod,e.g.underthetermsofaleasecontract,and/or

(c) a right to use land or buildings butwithoutarightofexclusivepossessionor control, e.g. a right to pass overlandor touse it only for a specifiedactivity.

10.2.3 Intangible assets fall outside theclassification of real property assets.However, an intangible asset may beassociated with, and have a material impact on, the value of real propertyassets.Itisthereforeessentialtobeclearinthescopeofworkpreciselywhatthevaluation assignment is to include orexclude. For example, the valuation ofahotelcanbe inextricably linkedtothehotelbrand.Insuchcases,thevaluation

process will involve consideration ofthe inclusion of intangible assets andtheir impact on the valuation of thereal property and plant and equipmentassets.Whenthereisanintangibleassetcomponent, valuer should also followVGN2IntangibleAssets.

10.2.4 Although different words and termsareusedtodescribethesetypesofrealproperty in different jurisdictions, theconcepts of an unlimited absolute rightofownership,anexclusiveinterestforalimitedperiodoranon-exclusiverightforaspecifiedpurposearecommontomost.The immovability of land and buildingsmeans that it is the right that a partyholdsthatistransferredinanexchange,not thephysical landandbuildings.Thevalue, therefore, attaches to the legalinterest rather thanto thephysical landandbuildings.

10.2.5 To comply with the requirement toidentifytheassettobevaluedinVS 4 the followingmattersmustbeincluded:

(a) a description of the real property tobevalued,and

(b) identification of any superior orsubordinate interests that affect theinteresttobevalued.

10.2.6 Tocomplywiththerequirementstostatethe extent of the investigation and thenature and source of the informationto be relied upon inVS4, the followingmattersmustbeconsidered:

(a) the evidence required to verify therealpropertyandanyrelevantrelatedinterests,

(b) theextentofanyinspection,(c) responsibility for information on thesiteareaandanybuildingfloorareas,

(d) responsibility for confirming thespecification and condition of anybuilding,

(e) the extent of investigation into thenature,specificationandadequacyofservices,

(f) the existence of any information ongroundandfoundationconditions,

(g) responsibility for the identificationof actual or potential environmentalrisks,

(h) legal permissions or restrictions


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on the use of the property and anybuildings,aswellasanyexpectedorpotentialchangestolegalpermissionsandrestrictions.

10.2.7 Typical examples of special assumptions that mayneedtobeagreedandconfirmedinordertocomplywithVS4include:

(a) that a defined physical change hadoccurred, e.g. a proposed building isvaluedasifcompleteatthevaluation date,

(b)that therehadbeena change in thestatus of the property, e.g. a vacantbuildinghadbeen leasedora leasedbuilding had become vacant at thevaluation date,

(c) that the interest is being valuedwithout taking into account otherexistinginterests,and

(d)that the property is free fromcontaminationorotherenvironmentalrisks.

10.2.8 Valuations of real property are oftenrequiredfordifferentpurposesincludingsecuredlending,sales,taxation,litigation,compensation, insolvency proceedingsandfinancialreporting.

10.3.0 Bases of Value

10.3.1 In accordancewithVS 5, a valuer must select the appropriate basis(es) of value whenvaluingrealproperty.

10.3.2 Undermostbases of value,avaluer must considerthehighestandbestuseofthereal property,whichmay differ from itscurrent use (see VS5 paragraph 5.3.6).Thisassessmentisparticularlyimportantto real propertywhich can be changedfrom one use to another or that havedevelopmentpotential.

10.3.3 Therearecertaintypesofreal properties thathavebeendesignedtobesoldinanopenmarketasfullyoperationalbusinessunitsforastrictlylimiteduseandatpricesbased upon trading potential. Examplesof these are hotels, bars, restaurants,movie theatres or cinemas, gasoline orpetrol stations.The prices of these realproperties will include trade fixtures,fittings, furniture, furnishings and

equipment.Avaluerwill need to collectadditionalinformationapartfrommarket value, clarifying whether the valuation assumes that the real property is to besold as a fully-equipped real property,partofagoingconcerntradingentity,oronsomeotherassumptions.

10.4.0 Valuation Approaches and Methods

10.4.1 Thethreevaluationapproachesdescribedin the VS6 – Valuation Approaches and Methods can all be applicable for thevaluationofarealproperty.

10.4.2 When selecting an approach andmethod,inadditiontotherequirementsof this standard, a valuer must followthe requirements of VS6 – Valuation Approaches and Methods.

10.5.0 Market Approach

10.5.1 Property interests are generallyheterogeneous (i.e. with differentcharacteristics). Even if the land andbuildings have identical physicalcharacteristics to others beingexchanged in the market, the locationwill bedifferent.Notwithstanding thesedissimilarities, the market approach iscommonly applied for the valuation ofrealproperty.

10.5.2 In order to compare the subject of thevaluation with the price of other realproperty, valuers should adopt generallyaccepted and appropriate units ofcomparison that are considered byparticipants,dependentuponthetypeofasset beingvalued.Unitsof comparisonthatarecommonlyusedinclude:

(a) pricepersquaremetre(orpersquarefoot)ofabuildingorperhectare forland,

(b)priceperroom,and(c) price per unit of output, e.g. cropyields.

10.5.3 Aunitofcomparisonisonlyusefulwhenitisconsistentlyselectedandappliedtothesubjectpropertyandthecomparableproperties in each analysis. To theextent possible, any unit of comparison


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used should be one commonly used byparticipantsintherelevantmarket.

10.5.4 The reliance that canbe applied to anycomparable price data in the valuationprocess is determined by comparingvarious characteristics of the propertyandtransactionfromwhichthedatawasderivedwith thepropertybeingvalued.Differences between the followingshould be considered in accordancewith VS6 – Valuation Approaches and Methods.Specificdifferencesthatshould be considered in valuing real propertyinclude,butarenotlimitedto:

(a) the type of interest providing thepriceevidenceandthetypeofinterestbeingvalued,

(b)therespectivelocations,(c) the respective quality of the landor the age and specification of thebuildings,

(d)the permitted use or zoning at eachproperty,

(e) the circumstances under which thepricewasdeterminedandthebasis of valuerequired,

(f) the effective date of the priceevidenceandthevaluation date,and

(g)marketconditionsat thetimeof therelevant transactions and how theydifferfromconditionsatthevaluation date.

10.6.0 Income Approach

10.6.1 Various methods are used to indicatevalue under the general heading of theincome approach, all ofwhich share thecommon characteristic that thevalue isbaseduponanactualorestimatedincomethateither is,orcouldbe,generatedbyanownerof the interest. In thecaseofan investment property,thatincomecouldbeintheformofrent(seeparas10.9.1–10.9.3);inanowner-occupiedbuilding,itcouldbeanassumedrent(orrentsaved)basedonwhatitwouldcosttheownertoleaseequivalentspace.

10.6.2 For some real property, the income-generatingabilityofthepropertyiscloselytiedtoaparticularuseorbusiness/tradingactivity(forexample,hotels,golfcourses,etc.).Whereabuildingissuitableforonly

a particular type of trading activity, theincome is often related to the actual orpotential cash flows that would accrueto the owner of that building from thetrading activity.Theuse of a property’strading potential to indicate its value isoftenreferredtoasthe“profitsmethod”.

10.6.3 When the income used in the income approach represents cash flow from abusiness/trading activity (rather thancash flow related to rent, maintenanceand other real property-specific costs),the valuer mayalsocomplyasappropriatewith the requirements of VGN 1 –Business Interests and BusinessesEnterprises and,where applicable,VGN2–IntangibleAssets.

10.6.4 For real property, various forms ofdiscounted cash flow models may beused.Thesevary indetailbut share thebasiccharacteristicthatthecashflowforadefined futureperiod is adjusted to apresentvalueusingadiscountrate.Thesum of the present day values for theindividualperiodsrepresentsanestimateof the capital value. The discount rateinadiscountedcashflowmodelwillbebasedonthetimecostofmoneyandtherisksandrewardsoftheincomestreaminquestion.

10.6.5 Furtherinformationonthederivationofdiscount rates is included inVS 6. Thedevelopmentof ayieldordiscount ratewillbeinfluencedbytheobjectiveofthevaluation.Forexample:

if the objective of the valuation is to establish the value to a particular owner or potential owner based on their own investment criteria, the rate used may reflect their required rate of return or their weighted average cost of capital, and i f the objective of the valuation is to establish the market value, the discount rate may be derived from observation of the returns implicit in the price paid for real property traded in the market between participants or from hypothetical participants’ required rates or return. When a discount rate is based on an analysis of market transactions, valuers should also follow the guidance contained in VS 6.

10.6.6 Anappropriatediscountratemayalsobebuiltup froma typical “risk free” return


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adjusted for the additional risks andopportunities specific to the particularrealproperty.

10.7.0 Cost Approach

10.7.1 Inapplyingthecost approach,valuers must followtheguidancecontainedinVS 6.

10.7.2 Thisapproachisgenerallyappliedtothevaluation of real property through thedepreciatedreplacementcostmethod.

10.7.3 It maybeusedastheprimaryapproachwhen there is either no evidence oftransactionpricesforsimilarpropertyornoidentifiableactualornotionalincomestreamthatwouldaccruetotheowneroftherelevantinterest.

10.7.4 In some cases, even when evidenceof market transaction prices or anidentifiable income stream is available,the cost approach may be used as asecondaryorcorroboratingapproach.

10.7.5 Thefirststeprequiresareplacementcosttobecalculated.Thisisnormallythecostofreplacingthepropertywithamodernequivalentattherelevantvaluation date.An exception is where an equivalentpropertywould need to be a replica ofthesubjectpropertyinordertoprovideaparticipantwiththesameutility,inwhichcasethereplacementcostwouldbethatofreproducingorreplicatingthesubjectbuilding rather than replacing it with amodern equivalent. The replacementcostmust reflect all incidental costs, asappropriate, such as the value of theland, infrastructure,design fees,financecostsanddeveloperprofitthatwouldbeincurred by a participant in creating anequivalentasset.

10.7.6 The cost of the modern equivalentmust then, as appropriate, besubject to adjustment for physical,functional, technological and economicobsolescence (seeVS 6). The objectiveof anadjustment forobsolescence is toestimate how much less valuable thesubject property might, or would beto a potential buyer than the modernequivalent. Obsolescence considers thephysical condition, functionality and

economicutilityof thesubjectpropertycomparedtothemodernequivalent.

10.8.0 Special Considerations for Real property

10.8.1 The following sections address a non-exhaustive list of topics relevant to thevaluationofrealproperty.

(a) HierarchyofInterests(section10.9.0).(b)Rent(section10.10.0).

10.9.0 Hierarchy of Interests

10.9.1 The different types of real property arenot mutually exclusive. For example, asuperior interestmaybe subject tooneormoresubordinateinterests.Theowneroftheabsoluteinterestmaygrantaleaseinterest in respect of part or all of hisinterest.Lease interestsgranteddirectlybytheowneroftheabsoluteinterestare“headlease”interests.Unlessprohibitedby the terms of the lease contract, theholderofaheadleaseinterestcangrantaleaseofpartorallofthatinteresttoathirdparty,whichisknownasasub-leaseinterest.Asub-lease interestwillalwaysbeshorterthan,orcoterminouswith,theheadleaseoutofwhichitiscreated.

10.9.2 These property interestswill have theirowncharacteristics, as illustrated in thefollowingexamples:

(a) Although an absolute interestprovides outright ownership inperpetuity, it may be subject tothe effect of subordinate interests.These subordinate interests couldinclude leases, restrictions imposedby a previous owner or restrictionsimposedbystatute.

(b)A lease interestwillbe foradefinedperiod, at the end of which theproperty reverts to the holder ofthe superior interest out ofwhich itwas created. The lease contract willnormally impose obligations on thelessee, e.g. the payment of rent andother expenses. It may also imposeconditions or restrictions, such as inthe way the property may be usedoronanytransferoftheinteresttoa


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thirdparty.(c) Arightofusemaybeheldinperpetuityormay be for a defined period.Therightmaybedependentontheholdermaking payments or complyingwithcertainotherconditions.

10.9.3 When valuing a real property it istherefore necessary to identify thenature of the rights accruing to theholder of that interest and reflect anyconstraints or encumbrances imposedbytheexistenceofotherinterestsinthesameproperty.Thesumoftheindividualvaluesofvariousdifferentinterestsinthesamepropertywillfrequentlydifferfromthevalueoftheunencumberedsuperiorinterest.

10.10.0 Rent

10.10.1 Market rentisaddressedasabasis of value in VS 5.

10.10.2 When valuing either a superior interestthat is subject to a lease or an interestcreatedbyalease,valuers mustconsiderthecontractrentand,incaseswhereitisdifferent,themarket rent.

10.10.3 The contract rent is the rent payableunder the terms of an actual lease. Itmaybefixedforthedurationoftheleaseor variable. The frequency and basis ofcalculatingvariations in the rentwill besetoutintheleaseandmustbeidentifiedandunderstoodinordertoestablishthetotalbenefitsaccruingtothe lessorandtheliabilityofthelessee.

10.11.0 Inspection

10.11.1 Valuers must carry out inspections andinvestigations into the real propertyto the extent necessary to produce avaluation report which is professionallyadequateforitspurpose.

10.11.2 Inspection is mandatory save for avaluation for secured lending instructedby the lenders otherwise. The valuer should state the extent and date of theinspectioninhisreport.

10.11.3 Manymattersmayorwillhaveanimpacton themarket’sperceptionof thevalueoftherelevantinterest,aspectsofwhichmay only become fully apparent duringan inspectionoftheproperty.Thesecaninclude:a) characteristics of the locality andsurroundingarea,andtheavailabilityof communications, services andfacilitiesthataffectvalue

b) characteristicsofthepropertyanditsuse(i) dimensions, areas and use(s) ofconstituentelements

(ii) age, construction and nature ofbuildingsorstructures

(iii) accessibility both for occupiersandforvisitors

(iv) installations, amenities andservices

(v)fixtures,fittingsandimprovements(vi) plant and equipment thatwouldnormally form an integral part ofthebuilding

(vii) apparent state of repair andcondition

(viii)hazardousmaterialskeptontheproperty, suchas (butnot limitedto) regulated items includingchemicals,radioactivesubstances,explosive materials, asbestos,ozone depleting substances,oils, etc. or regulated activitiesbeing conducted such as wastemanagementactivity.

c) characteristicsofthesite(i) natural hazards such as groundinstability, mining or mineralextraction,riskoffloodingfromallmechanisms, includingpluvialandfluvialsources

(ii)non-naturalhazardssuchasgroundcontamination where there aresubstances in, on or under theground resulting from historic orcurrentuses(seealso(b)above)

d)potential for development orredevelopment,includinganyphysicalrestrictions on further development,ifappropriate.

10.11.4 Other matters on which relevantinformationmay be acquired during, orfurtherenquiriesmadepromptedby,aninspection,mayinclude:(a)improvementstoleaseholdproperties:when valuing leases and reversions,


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where the property included in theoriginallettingmaysubsequentlyhavebeenalteredorimproved,careneedstobetakentoascertainwhatistobevalued as it may not exactly equatewithwhatisseenand(asappropriate)measuredontheground.Ifthevaluer is unable to inspect the lease, ordue to the absence of documentedlicences the extent of alterations orimprovements cannot be confirmed,the valuer shouldproceedonthebasisofstatedassumptions

(b)planning (zoning) controls: controlsand the need for licences orpermissions for increased or altereduse, includingdevelopment,willvarybetween countries or states and theextentoftheparticularenquiriesthatareappropriateandneedtobemadeinindividualcaseswillbeinformedbythe valuer’sknowledgeoftherelevantmarket, by the nature and extent ofthe property, and by the purpose ofthe valuation

(c)where relevant, information on anysubstantial outgoings and runningcosts,andthe levelofrecoveryfromtheoccupier–energyefficiencymaybeoneofanumberoffactorsrelevantwhenconsideringsustainabilityissues.

10.11.5 In a valuation for secured lending andwhere the lender has instructed thevaluer not to carry out any inspection (internal or external or both), thevaluer mustconsidertheriskbeforeproceeding.In case any valuationwithout inspection is taken, the valuer should state suchinstruction in the report and a caveator assumption is required to reflect theabsenceofinspection.

10.11.6 If any valuation without adequateinspection may undermine the reliabilityof such valuation, such instructionmust notbetaken.

10.11.7 Theprimaryreasonforinspectionofareal estate is to enable the valuer to have abetterunderstandingoftherealpropertyand its characteristics that are relevanttoitsvalue.Thevaluer shouldagreewiththe clientontheextentanddepthoftheinspectionand investigationand identifythe minimum level of inspection andinvestigationprocedurestobeconducted

prior to commencing the engagement,and document such agreed scope ofinspectionandinvestigationinhisreport.

10.11.8 For the avoidance of doubt, theinspection required in the Standards isnottheequivalentofaninspectiontobeconductedbyaprofessional(forinstance,BuildingSurveyor,StructuralEngineerorElectricalEngineer)otherthanaGeneralPracticeSurveyortothesubjectproperty.In other words, the inspection requiredunder this Standard is not a buildingsurveyorthelike.

10.11.9 The inspection of comparables is alsoexpected under normal circumstanceswhereandwhenpossible.

10.11.10 The valuer, having considered theknowledge, experience, reliabilityand ability of his staff member, coulddesignatesuitablytrainedstaffmember(s)under his supervision to conduct theinspection in order to comply with themandatory inspectionrequirementunderthe Standards. However, the valuer signingoff thevaluation report shall stillbe liable for the accuracy of the entirecontentofthevaluation reportandhenceis fully accountable for the input of hisdesignatedstaffmember.

10.11.11 Where the valuer does not inspect therealpropertydirectly,thevaluation report mustdisclosethefactthattheinspection wasundertakenby thedesignated staffmember under the supervision of thevaluer.The identityandqualificationsofthestaffmemberassignedtoundertakethe inspection must be disclosed in thereport.

10.11.10 Where measurement needs to beundertaken or checked, members must have regard to the Code of MeasuringPracticewhereverapplicable.

10.11.12 Should the valuer, at the time of hisinspection, suspect that theremay havea possible alterations or additions orimprovements made in the real estate being inspected and such alterations oradditionsorimprovementsdonotappearonanyapprovedbuildingplan,hehasaduty to disclose the same in his report and to advise the client to consult a


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professional,suchasbuildingsurveyorora firmofprofessionalbuildingsurveyorsinHongKongorotherprofessionalinotherjurisdictions,inrespectofthesepotentialunauthorized building works. And that,the valuer shouldmakeahighlight inhisreportontheextentofsuchunauthorizedbuilding works may affect his reportedvalue.

10.12.0 Investigation and assumptions

10.12.1 The following aspects are common tomany valuations involving real estate,and often raise issues about the extentof investigation that is appropriate oraboutthenatureoftheassumptions that might validly be made. The guidancebelow cannot cover all circumstances– a valuer’s knowledge, experience andjudgmentwillalwaysneedtobebroughttobearonindividualassignments,andinsome cases appropriate limitations willhavebeenspecifiedby,ordiscussedandagreedwith,theclientaspartoftheterms of engagement. Similarly, the relevanceand appropriateness of assumptions can only be judged on a ‘case by case’basis – what follows is not in anywayprescriptive.

10.12.2 Title

The valuer musthaveinformationontheessential details of the interest beingvalued.Thismay take one of a numberof forms, such as a synopsis obtainedfrom the client or a third party; copiesof the relevantdocuments;or a currentdetailed report on title by the client’slawyers–thislistisnotexhaustive.Thevaluer must state what information hasbeenreliedonand–whereappropriate– what assumptionshavebeenmade.Forexample, if a lease documentwere notavailablethevaluermightneedtomakean assumption that the terms advisedand stated were those in the actuallease.However, ifanassuranceofgoodtitlehadbeenprovided,thevaluermightreasonablyrelyonthecorrectnessofthisinformation – but thiswould ultimatelybe a matter for lawyers, and whereappropriate the valuermight specificallynote that thepositionmustbecheckedby the client’s legal advisers. A valuer

wouldnotexpecttotakeresponsibilityorliabilityforthetrueinterpretationoftheclient’slegaltitleinthepropertyorasset.

10.12.3 Condition of buildings

Even if competent to do so, a valuer wouldnotnormallyundertakeabuildingsurvey to establish the details of anybuilding defects or disrepair. However,itwouldalsobewrongforthevaluer to ignoreobviousdefects thatwouldhavean impacton thevalue,unless a special assumptiontothateffecthasbeenagreed.The valuer should thereforeclearlystatethat the inspectionwillnotamounttoafullbuildingsurvey.Inadditionthelimitsthatwill apply to the valuer’sresponsibilitytoinvestigateandcommentonthestructureoranydefectsmustbedefined.Itshould alsobestated–whereverappropriate–that an assumptionwillbemadethatthebuilding(s) is(are) in good repair, exceptforany(minor)defectsspecificallynoted.

10.12.4 Services

The presence and efficiency of buildingservices and any associated plant andequipment will often have a significant impact on value: however, detailedinvestigation will normally be outsidethe scope of the valuation. The valuer will need to establish what sourcesof information are available, and theextent towhich these canbe reliedon,inundertakingthevaluation.Itisusualtoagreeonanassumptionthattheservicesandanyassociatedcontrolsor softwareareinworkingorderorfreefromdefect.

10.12.5 Planning (zoning)

Wherethereisanelementofdoubt,thevaluer may need to establish whetherthepropertyhasthenecessarystatutoryconsents for the current buildings anduse,oradvisethatverificationshouldbesought,andwhetherthereareanypoliciesor proposals by statutory authoritiesthatcouldimpactthevaluepositivelyoradversely.This informationwilloftenbereadilyavailable,butdelaysorexpensesmay be incurred in obtaining definitiveinformation. The valuer should, amongother things, state what investigationsare proposed, or what assumptions


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will be made, where verification of theinformation is impractical within thecontextofthevaluation.

10.12.6 Environmental matters

Potential or actual constraints on theenjoyment and use of property causedbyenvironmentalfactorsmayresultfromnaturalcauses(suchasflooding),fromnon-natural causes (such as contamination)or sometimes from a combination ofthe two (such as subsidence resultingfrom historic minerals extraction).Despite the considerable diversity ofcircumstances, the key question isalways the extent towhich the factorsidentified affect value. Particular careshould be taken when assessing orcommenting on environmental factors,as valuers may not have the specialistknowledgeandexperience that isoftenrequired.Inappropriatecasesthevaluer may recommend the making of furtherenquiriesand/ortheobtainingoffurtherspecialist or expert advice in respect ofenvironmental matters. The followingparagraphs consider thematter inmoredetail.

a) Natural environmental constraints (i) Some property will be affectedby environmental factors that arean inherent feature either of theproperty itself or of the surroundingarea, and which have an impact onthe value of the property interest.Examples include ground instabilityissues(suchasswellingandshrinkingclay, subsidence consequent onhistoricorcurrentmineralextraction,etc.)andtheriskoffloodingfromanymechanism.

(ii)Although detailed commentary onboth the risks and the effects maybe outside the realm of the valuer’s direct knowledge and expertise, thepresence, or potential presence, ofthese factors is something that canoftenbeestablishedinthecourseofavaluationinspectionthroughnormalenquiries or by local knowledge. Itis not just the risk of a particularevent occurring that needs to beconsidered, but also the various

consequences. For example, if thepropertyhassuffereda recenteventsuch as flooding thismay affect theavailabilityofinsurancecover,which,ifmaterial,shouldbe reflected in thevaluation.

(iii)Thevaluer should be careful to statethe limits that will apply to theextent of the investigations and theassumptions that will be made inrelation to environmental matters,and should state any sources ofinformationreliedupon.

b) Non-natural constraints (contamination and hazardous substances)

(i) A valuer will not normally becompetenttoadviseonthenatureorrisks of contamination or hazardoussubstances,oronanycosts involvedwiththeirremoval,exceptinthemorestraightforward cases. However avaluer who has prior knowledge ofthe locality and experience of thetype of property being valued, canreasonablybe expected to commenton the potential that may exist forcontaminationandtheimpactthatthiscouldhaveonvalueandmarketability.

(ii)The nature and risks may of coursebe directly attributable to the useof the property itself. For example,a number of businesses depend onactivities that involve the use ofhazardous substances or operatewaste management activities thatmay be regarded as a nuisance bythird parties. Although detailedcommentary on such effects willnormallybeoutsidetherealmofthevaluer’s expertise, their presence,or potential presence, is somethingthat can often be established inthe course of a valuation inspection throughnormal enquiries or by localknowledge.

(iii) The valuer should state the limitson the investigations that will beundertakenand stateany sourcesofinformation or assumptions that will bereliedon.


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c) Sustainability – assessing the implications for value

(i)While not a term that yet has auniversally recognised definition,in a valuation context sustainability encompassesawiderangeofphysical,social, environmental and economicfactors that can affect value and ofwhich valuers shouldbeaware.

(ii)Therangeofissuesincludes,butisnotlimited to, key environmental risks,such as flooding, energy efficiencyand climate, as well as matters ofdesign, configuration, accessibility,legislation, management and fiscalconsiderations. As commercialmarkets in particular become moresensitised to sustainability matters,so they may begin to complementtraditionalvaluedrivers,bothintermsofoccupierpreferencesandintermsofpurchaserbehaviour.

(iii)The pace at which sustainability isfeedingdirectlyorindirectlyintovalueis showing some wide jurisdictionalvariations. In order to respondappropriately as markets change,valuers should continuously seek toenhancetheirknowledge.Theroleofvaluersistoassessvalueinthelightofevidence normally obtained throughanalysis of comparable transactions.While valuers should reflectmarkets,not lead them, they shouldbeawareof sustainability features and theimplications these could have onpropertyvaluesintheshort,mediumand longer term. The issues may extendto:•environmental matters (see above)including,whereapplicable,climatechange

• configuration and design includinguse of materials and conceptsincreasinglyassociatedwith‘wellness’

•accessibility and adaptability,including access and use by thosewithdisabilities

•energy efficiency, building‘intelligence’andother‘costsinuse’

•fiscalconsiderations.

(iv) Notwithstandingitscurrentbearingonvalue,within the context of theirinstructions valuers are actively

encouraged to identify and collectsustainability related data, as andwhenitbecomesavailable,forfuturecomparability.

(v)Only where market evidence wouldsupport this, should sustainability characteristics be built into a report onvalue.

(vi) Valuers are often asked to provideadditional comment and strategicadvice. In these cases it may beappropriatetoconsultwiththeclient as to the use and applicability ofsustainabilitymetricsandbenchmarksthat are applicable in each case. Forexample, when preparing valuations on the basis of Investment value or worth, sustainability factors thatcould influence investment decision-makingmayproperlybeincorporated,even though they are not directlyevidencedthroughtransactions.

(vii)Whereappropriate,inordertocomplywithbestpracticeinreporting,valuers arerecommendedto:•assess the extent to which thesubject property currently meetssustainability criteria typically expectedwithin the context of itsmarket standing and arrive at aninformedviewon the likelihoodofthese impacting on value, i.e. howa well-informed purchaser wouldtake account of them in making adecisionastoofferprice

•provide a description of thesustainability-related propertycharacteristics and attributes thathave been collected, which may,where appropriate, include itemsnot directly reflected in the finaladviceastovalue

•provideastatementoftheiropinionon the relationship betweensustainability factors and theresultant valuation, including acomment on the current benefits/risksthatareassociatedwiththesesustainability characteristics, or thelackofrisksand

•provideanopiniononthepotentialimpact of these benefits and/orrisks to relative property valuesovertime.


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PART D:GUIDANCE NOTE


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VGN 1Business Interests and Business Enterprises

1.0 This guidance note contains additionalrequirements that apply to valuations ofbusinessesandbusinessinterests.

2.0 Introduction

2.1 Thedefinitionofwhatconstitutesabusinessmay differ depending on the purpose of avaluation. However, generally a businessconductsacommercial,industrial,serviceorinvestmentactivity.Businessescantakemanyforms, such as corporations, partnerships,jointventuresandsoleproprietorships.Thevalueofabusinessmaydifferfromthesumof the values of the individual assets that make up that business. When a businessvalueisgreaterthanthesumoftherecordedandunrecordednettangibleandidentifiableintangibleassetsofthebusiness,theexcessvalue isoften referred toasgoingconcernvalueorgoodwill.

2.2 When valuing individual assets ownedby a business, valuers should follow theapplicablestandardforthattypeofassetorliability(VGN2IntangibleAssets,VS10Realproperty,etc.).

2.3 Valuers mustestablishwhetherthevaluation isoftheentireentity,sharesorashareholdingintheentity (whetheracontrollingornon-controlling interest), or a specific businessactivityoftheentity.Thetypeofvaluebeingprovidedmustbeappropriatetothepurposeofthevaluationandcommunicatedaspartofthescopeoftheengagement.Itisespeciallycritical to clearly define the business orbusinessinterestbeingvaluedas,evenwhena valuationisperformedonanentireentity,there may bedifferent levels atwhich thatvaluecouldbeexpressed.Forexample:(a) Enterprisevalue:Oftendescribedasthetotal value of the equity in a businessplus the value of its debt or debt-related liabilities, minus any cash orcashequivalentsavailabletomeetthoseliabilities.

(b)Total invested capital value: The totalamountofmoneycurrentlyinvestedinabusiness,regardlessofthesource,oftenreflectedasthevalueoftotalassetslesscurrentliabilitiesandcash.

(c) OperatingValue:The total value of theoperationsofthebusiness,excludingthevalue of any non-operating assets andliabilities.

(d)Equityvalue:Thevalueofabusiness toallofitsequityshareholders.

2.4 Valuations of businesses are required fordifferent purposes including acquisitions,mergers and sales of businesses, taxation,litigation, insolvency proceedings andfinancialreporting.Businessvaluationsmayalsobeneededasaninputorstepinothervaluations such as the valuation of stockoptions,particularclass(es)ofstock,ordebt.

3.0 Bases of Value

3.1 In accordance with VS 5, a valuer must selecttheappropriatebasis(es) of value when valuingabusinessorbusinessinterest.

3.2 Often, business valuations are performedusing bases of value defined by entities/organisations other than the HKIS (someexamplesofwhicharementionedinVS 5)anditisthevaluer’sresponsibilitytounderstandand follow the regulation, case law and/orotherinterpretiveguidancerelatedtothosebases of valueasofthevaluation date.

4.0 Valuation Approaches and Methods

4.1 The three principal valuation approachesdescribed in VS 6 may be applied to thevaluation of businesses and businessinterests.

4.2 Whenselectinganapproachandmethod,inadditiontotherequirementsofthisguidancenote,avaluer mustfollowtherequirementsofVS 6,includingparagraph6.1.3.

5.0 Market Approach

5.1 The market approach is frequently appliedin the valuationofbusinessesandbusinessinterests as these assets often meet thecriteria in VS 6 paragraph 6.2.2 or 6.2.3.When valuing businesses and businessinterestsunderthemarket approach,valuers shouldfollowtherequirementsofVS 6.

5.2 The three most common sources of dataused to value businesses and business


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interestsusingthemarket approach are:(a) publicstockmarketsinwhichownershipinterestsofsimilarbusinessesaretraded,

(b)the acquisition market in which entirebusinesses or controlling interests inbusinessesareboughtandsold,and

(c) prior transactions insharesoroffersfortheownershipofthesubjectbusiness.

5.3 There must be a reasonable basis forcomparisonwith,andrelianceupon,similarbusinesses in the market approach. Thesesimilar businesses should be in the sameindustry as the subject business or in anindustrythatrespondstothesameeconomicvariables.Factorsthatshouldbeconsideredinassessingwhetherareasonablebasisforcomparisonexistsinclude:(a) similaritytothesubjectbusinessintermsof qualitative and quantitative businesscharacteristics,

(b)amount and verifiability of data on thesimilarbusiness,and

(c) whetherthepriceofthesimilarbusinessrepresents an arm’s length and orderlytransaction.

5.4 When applying a market multiple,adjustmentssuchasthoseinparagraph6.8belowmaybeappropriatetoboththesubjectcompanyandthecomparablecompanies.

5.5 When selecting and adjusting comparabletransactions, a valuer should choosecomparabletransactionswithinthefollowingcontext:(a) evidence of several transactionsis generally preferable to a singletransactionorevent,

(b)evidencefromtransactionsofverysimilarassets(ideallyidentical)providesabetterindication of value than assets where the transactionprices require significant adjustments,

(c) transactions that happen closer to thevaluation date are more representativeof the market at that date than older/datedtransactions,particularlyinvolatilemarkets,

(d)formostbases of value, thetransactionsshould be “arm’s length” betweenunrelatedparties,

(e) sufficientinformationonthetransactionshould be available to allow the valuer to develop a reasonable understandingof the comparable asset and assess thevaluationmetrics/comparableevidence,

(f) information on the comparabletransactions should be from a reliableandtrustedsource,and

(g)actual transactions provide bettervaluation evidence than intendedtransactions.

5.6 A valuer shouldanalyseandmakeadjustmentsfor any material differences between thecomparable transactions and the subjectasset.Examplesofcommondifferencesthatcouldwarrantadjustmentsmayinclude,butarenotlimitedto:(a)material characteristics (age, size,specifications,etc.),

(b)relevantrestrictionsoneitherthesubjectassetorthecomparableassets,

(c) geographical location (location of theassetand/or locationofwheretheasset is likely to be transacted/used) andthe related economic and regulatoryenvironments,

(d)profitabilityorprofit-makingcapabilityofthe assets,

(e) historicalandexpectedgrowth,(f) yields/couponrates,(g) typesofcollateral,(h)unusual terms in the comparabletransactions,

(i) differences related to marketability andcontrolcharacteristicsofthecomparableandthesubjectasset,and

(j) ownershipcharacteristics(eg, legalformofownership,amountpercentageheld).

5.7 When selecting and adjusting comparablepubliccompanyinformation,avaluer should choosecomparable transactionswithin thefollowingcontext:(a) considerationofmultiplepublicly-tradedcomparablesispreferredtotheuseofasinglecomparable,

(b)evidence from similar publicly-tradedcomparables (for example, with similarmarket segment, geographic area,size in revenue and/or assets, growthrates, profit margins, leverage, liquidityand diversification) provides a betterindicationofvaluethancomparablesthatrequiresignificantadjustments,and

(c) securitiesthatareactivelytradedprovidemore meaningful evidence than thinly-tradedsecurities.

5.8 A valuer shouldanalyseandmakeadjustmentsfor any material differences between theguideline publicly-traded comparables and


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the subject asset. Examples of commondifferences that couldwarrant adjustmentsmayinclude,butarenotlimitedto:(a)material characteristics (age, size,specifications,etc.),

(b)relevantdiscountsandpremiums(seeVS 6 paragraph 6.3.17),

(c) relevantrestrictionsoneitherthesubjectassetorthecomparableassets,

(d)geographical location of the underlyingcompany and the relatedeconomic andregulatoryenvironments,

(e) profitabilityorprofit-makingcapabilityofthe assets,

(f) historicalandexpectedgrowth,(g)differences related to marketability andcontrolcharacteristicsofthecomparableandthesubjectasset,and

(h)typeofownership.

6.0 Income Approach

6.1 The income approach is frequently appliedin the valuationofbusinessesandbusinessinterests as these assets often meet thecriteria in VS 6 paragraph 6.4.2 or 6.4.3.

6.2 Whentheincome approachisapplied,valuers should follow the requirements of VS 6 sections 6.4.0 and 6.5.0.

6.3 Incomeandcashflowrelatedtoabusinessor business interest can be measured in avarietyofwaysandmaybeonapre-taxorpost-taxbasis.Thecapitalisationordiscountrate applied must be consistent with thetypeofincomeorcashflowused.

6.4 Thetypeofincomeorcashflowusedshould beconsistentwiththetypeofinterestbeingvalued.Forexample:(a) enterprisevalueistypicallyderivedusingcashflowsbeforedebtservicingcostsandan appropriate discount rate applicabletoenterprise levelcashflows,suchasaweighted-averagecostofcapital,and

(b)equity value may be derived usingcash flows to equity, that is, after debtservicing costs and an appropriatediscount rate applicable to equity levelcashflows,suchasacostofequity.

6.5 The income approachrequirestheestimationof a capitalisation rate when capitalisingincome or cash flow and a discount ratewhen discounting cash flow. In estimating

theappropriaterate,factorssuchasthelevelof interest rates, rates of return expectedby participants for similar investments andthe risk inherent in the anticipated benefitstreamareconsidered(seeVS 6 paragraphs 6.5.29-6.5.31).

6.6 In methods that employ discounting,expectedgrowthmaybeexplicitlyconsideredin the forecasted income or cash flow. Incapitalisation methods, expected growthis normally reflected in the capitalisationrate. If a forecastedcashflow isexpressedinnominalterms,adiscountratethattakesinto account the expectation of futureprice changes due to inflation or deflationshouldbeused. Ifa forecastedcashflowisexpressedinrealterms,adiscountratethattakesnoaccountofexpectedpricechangesduetoinflationordeflationshouldbeused.

6.7 Under the income approach, the historicalfinancial statements of a business entityare often used as guide to estimate thefutureincomeorcashflowofthebusiness.Determiningthehistoricaltrendsovertimethroughratioanalysismayhelpprovidethenecessary information to assess the risksinherent in the business operations in thecontextoftheindustryandtheprospectsforfutureperformance.

6.8 Adjustmentsmay be appropriate to reflectdifferencesbetweentheactualhistoriccashflowsandthosethatwouldbeexperiencedby a buyer of the business interest on thevaluation date.Examplesinclude:(a) adjusting revenues and expenses tolevelsthatarereasonablyrepresentativeofexpectedcontinuingoperations,

(b)presenting financial data of the subjectbusiness and comparison businesses onaconsistentbasis,

(c) adjusting non-arm’s length transactions(such as contracts with customers orsuppliers)tomarketrates,

(d)adjusting the cost of labour or of itemsleased or otherwise contracted fromrelatedpartiestoreflectmarketpricesorrates,

(e) reflecting the impact of non-recurringeventsfromhistoricrevenueandexpenseitems.Examplesofnon-recurringeventsinclude losses caused by strikes, newplant start-up andweatherphenomena.However,theforecastcashflowsshould reflect any non-recurring revenues


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or expenses that can be reasonablyanticipatedandpastoccurrencesmaybeindicativeofsimilareventsinthefuture,and

(f) adjusting the inventory accounting tocomparewith similar businesses,whoseaccountsmaybekeptonadifferentbasisfrom the subject business, or to moreaccuratelyreflecteconomicreality.

6.9 Whenusinganincome approach it mayalsobe necessary to make adjustments to thevaluation to reflect matters that are notcaptured in either the cash flow forecastsorthediscountrateadopted.Examplesmayinclude adjustments for the marketabilityoftheinterestbeingvaluedorwhethertheinterestbeingvaluedisacontrollingornon-controllinginterestinthebusiness.However,valuers should ensure that adjustments tothe valuation do not reflect factors thatwerealreadyreflected in thecashflowsordiscount rate. For example, whether theinterestbeingvaluedisacontrollingornon-controllinginterestisoftenalreadyreflectedintheforecastedcashflows.

6.10 While many businesses may be valuedusing a single cash flow scenario, valuers mayalsoapplymulti-scenarioorsimulationmodels,particularlywhenthereissignificant uncertaintyastotheamountand/ortimingoffuturecashflows.

7.0 Cost Approach

7.1 The cost approachcannotnormallybeappliedin the valuationofbusinessesandbusinessinterests as these assets seldom meet thecriteria in VS 6 paragraphs 6.6.2 or 6.6.3.However, the cost approach is sometimesapplied in the valuation of businesses,particularlywhen:(a) the business is an early stage or start-up businesswhere profits and/ or cashflow cannot be reliably determined andcomparisonswithotherbusinessesunderthe market approach is impractical orunreliable,

(b)thebusinessisaninvestmentorholdingbusiness, in which case the summationmethodisasdescribedinVS 6 paragraphs 6.7.9 and 6.7.10,and/or

(c) thebusinessdoesnotrepresentagoingconcernand/orthevalueof itsassets in a liquidation may exceed the business’valueasagoingconcern.

7.2 In the circumstances where a businessor business interest is valued using acost approach, valuers should follow therequirements of VS 6 sections 6.7.0 and 6.8.0.

8.0 Special Considerations for Businesses and Business Interests

8.1 The following sections address a non-exhaustive list of topics relevant to thevaluation of businesses and businessinterests:(a) OwnershipRights.(b)BusinessInformation.(c) EconomicandIndustryConsiderations.(d)OperatingandNon-OperatingAssets.(e) CapitalStructureConsiderations.

9.0 Ownership Rights

9.1 The rights, privileges or conditions thatattach to the ownership interest, whetherheld in proprietorship, corporate orpartnership form, require consideration inthevaluationprocess.Ownershiprightsareusuallydefinedwithina jurisdictionby legaldocuments such as articles of association,clausesinthememorandumofthebusiness,articlesofincorporation,bylaws,partnershipagreements and shareholder agreements(collectively “corporate documents”). Insome situations, itmay also be necessaryto distinguish between legal andbeneficialownership.

9.2 Corporate documents may containrestrictions on the transfer of the interestor other provisions relevant to value.For example, corporate documents maystipulate that the interest shouldbevaluedas a pro rata fraction of the entire issuedshare capital regardless of whether it is acontrolling or non-controlling interest. Ineach case, the rights of the interest beingvaluedandtherightsattachingtoanyotherclassofinterestneedtobeconsideredattheoutset.

9.3 Care shouldbetakentodistinguishbetweenrights and obligations inherent to theinterest and those that may be applicableonly to a particular shareholder (i.e., thosecontainedinanagreementbetweencurrent


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shareholders which may not apply to apotential buyer of the ownership interest).Depending on the basis(es) of value used,the valuer may be required to consideronly the rights and obligations inherent tothe subject interest or both those rightsand considerations inherent to the subjectinterestandthosethatapplytoaparticularowner.

9.4 All the rights and preferences associatedwithasubjectbusinessorbusinessinterestshouldbeconsideredinavaluation,including:(a) iftherearemultipleclassesofstock,the

valuation should consider the rights ofeach different class, including, but notlimitedto:1. liquidationpreferences,2. votingrights,3. redemption, conversion andparticipationprovisions,and

4. putand/orcallrights.(b)Whenacontrollinginterestinabusinessmay have a higher value than a non-controlling interest. Control premiumsor discounts for lack of controlmay beappropriate depending on the valuation method(s) applied (see VS 6 paragraph 6.3.17 (b)).Inrespectofactualpremiumspaidincompletedtransactions,thevaluer should consider whether the synergiesandotherfactorsthatcausedtheacquirertopaythosepremiumsareapplicabletothesubjectassettoacomparabledegree.

10.0 Business Information

10.1 The valuation of a business entity orinterest frequently requires reliance uponinformation received from management,representativesofthemanagementorotherexperts.AsrequiredbyVS 6,valuers should maximise the use of relevant observablemarket information inall threeapproaches.Regardlessof the sourceof the inputs andassumptionsusedinavaluation,avaluer must perform appropriate analysis to evaluatethose inputs and assumptions and theirappropriatenessforthevaluationpurpose.

A valuer mustassessthereasonablenessofinformation received from management,representatives of management orother experts and evaluate whether it isappropriate to rely on that information

for the valuation purpose. For example,prospective financial information providedbymanagementmayreflectowner-specificsynergies that may not be appropriatewhenusingabasis of value that requiresaparticipantperspective.

10.2 Althoughthevalueonagivendatereflectstheanticipatedbenefitsoffutureownership,thehistoryofabusiness isuseful inthat itmaygiveguidanceastotheexpectationsforthefuture.Valuers shouldthereforeconsiderthe business’ historical financial statements as part of a valuation engagement. Tothe extent the future performance of thebusinessisexpectedtodeviatesignificantlyfrom historical experience, a valuer must understand why historical performance isnotrepresentativeofthefutureexpectationsofthebusiness.

11.0 Economic and Industry Considerations

11.1 Awareness of relevant economicdevelopments and specific industry trendsis essential for all valuations. Matters suchas political outlook, government policy,exchange rates, inflation, interest ratesand market activity may affect assets in different locations and/or sectors of theeconomyquitedifferently.Thesefactorscanbe particularly important in the valuation of businesses and business interests, asbusinesses may have complex structuresinvolving multiple locations and types ofoperations.Forexample,abusinessmaybeimpactedbyeconomicandindustryfactorsspecificrelatedto:(a) the registered location of the businessheadquarters and legal form of thebusiness,

(b)the nature of the business operationsandwhere each aspect of the businessis conducted (i.e., manufacturing maybedoneinadifferentlocationtowhereresearchanddevelopmentisconducted),

(c) wherethebusinesssellsitsgoodsand/orservices,

(d)thecurrency(ies)thebusinessuses,(e)where the suppliersof thebusiness arelocated,and

(f) what tax and legal jurisdictions the businessissubjectto.


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12.0 Operating and Non-Operating Assets

12.1 The valuationofanownership interest inabusiness is only relevant in the context ofthe financial position of the business at apoint intime. It is importanttounderstandthe nature of assets and liabilities of thebusinessandtodeterminewhich itemsarerequired for use in the income-producingoperationsof thebusinessandwhichonesareredundantor“excess”tothebusinessatthe valuation date.

12.2 Mostvaluation methodsdonotcapture thevalueofassetsthatarenotrequiredfortheoperation of the business. For example, abusinessvaluedusingamultipleofEBITDAwould only capture the value the assets utilized ingeneratingthat levelofEBITDA.If the business had non-operating assetsor liabilities such as an idle manufacturingplant, the value of that non-operatingplant would not be captured in the value.Dependingonthelevelofvalueappropriateforthevaluationengagement(seeparagraph2.3above),thevalueofnon-operatingassets mayneedtobeseparatelydeterminedandaddedtotheoperatingvalueofthebusiness.

12.3 Businesses may have unrecorded assets thatarenotreflectedonthebalancesheet.Suchassets could include intangibleassets,machinery and equipment that is fullydepreciatedandlegalliabilities/lawsuits.

12.4 Whenseparatelyconsideringnon-operatingassets, a valuer should ensure that theincomeandexpensesassociatedwithnon-operatingassetsareexcludedfromthecashflow measurements and projections usedin the valuation. For example, if a businesshas a significant liability associatedwith anunderfunded pension and that liability isvaluedseparately,thecashflowsusedinthevaluationofthebusinessshouldexcludeany“catch-up”paymentsrelatedtothatliability.

12.5 If the valuation considers information frompublicly-traded businesses, the publicly-traded stock prices implicitly include thevalueofnon-operatingassets,ifany.Assuch,valuers must consideradjusting informationfrompublicly-tradedbusinesses to excludethevalue, incomeandexpensesassociatedwithnon-operatingassets.

13.0 Capital Structure Considerations

13.1 Businesses are often financed through acombinationofdebtandequity.However,inmany cases, valuers may be asked tovalueonlyequityoraparticularclassofequityinabusiness.Whileequityoraparticularclassofequitycanoccasionallybevalueddirectly,more often the enterprise value of thebusiness isdeterminedandthenthatvalueisallocatedbetweendebtandanytypesofequity.

13.2 Whenthevalueofdebtisequaltoitscarryingvalue/book value, allocations of valuemay be straightforward. For example, in suchcases itmay be appropriate to deduct thebookvalueofdebtfromenterprisevaluetocalculateequityvalue(sometimesreferredtoasa“waterfall”methodofvalueallocation).However, valuers should not necessarilyassumethatthevalueofdebtanditsbookvalueareequal.

13.3 In circumstances where the value of debtmay differ from its book value, valuers shouldeithervalue thedebtdirectlyoruseamethodthatappropriatelyallocatesvalueto debt and any equity securities such asa probability-weighted expected returnmethodoranoption-pricingmodel.


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VGN 2Intangible Assets

1.0 This guidance note contains additionalrequirements that apply to valuations ofintangibleassets.

2.0 Introduction

2.1 An intangible asset is a non-monetaryasset that manifests itself by its economicproperties. It does not have physicalsubstancebutgrantsrightsand/oreconomicbenefitstoitsowner.

2.2 Specific intangible assets are defined anddescribed by characteristics such as theirownership, function, market position andimage. These characteristics differentiateintangibleassetsfromoneanother.

2.3 There aremany types of intangible assets,but they are often considered to fall intooneormoreofthefollowingcategories (orgoodwill):(a)Marketing-related: Marketing-relatedintangibleassetsareusedprimarilyinthemarketing or promotion of products orservices. Examples include trademarks,trade names, unique trade design andinternetdomainnames.

(b)Customer-related: Customer-relatedintangible assets include customerlists, backlog, customer contracts,and contractual and non-contractualcustomerrelationships.

(c) Artistic-related: Artistic-relatedintangible assets arise from the rightto benefits from artistic works such asplays, books, films andmusic, and fromnon-contractualcopyrightprotection.

(d)Contract-related: Contract-relatedintangible assets represent the valueof rights that arise from contractualagreements. Examples include licensingand royalty agreements, service orsupply contracts, lease agreements,permits, broadcast rights, servicingcontracts, employment contracts andnon-competitionagreementsandnaturalresourcerights.

(e) Technology-based: Technology-relatedintangible assets arise from contractualornon-contractualrightstousepatentedtechnology, unpatented technology,

databases, formulae, designs, software,processesorrecipes.

2.4 Althoughsimilarintangibleassetswithinthesame class will share some characteristicswith one another, they will also havedifferentiating characteristics thatwill varyaccording to the type of intangible asset.In addition, certain intangible assets, suchas brands,may represent a combinationofcategoriesinparagraph2.3.

2.5 Particularly in valuing an intangible asset,valuers must understand specifically whatneeds to be valued and the purpose ofthe valuation. For example, customer data(names, addresses, etc) typically has averydifferent value from customer contracts(those contracts in place on the valuation date) and customer relationships (thevalueof theongoingcustomer relationshipincluding existing and future contracts).What intangible assets need to be valuedandhowthoseintangibleassetsaredefinedmay differ depending on the purpose ofthe valuation, and the differences in howintangible assets are defined can lead tosignificantdifferencesinvalue.

2.6 Generally, goodwill is any future economicbenefitarisingfromabusiness,aninterestinabusinessorfromtheuseofagroupofassets which has not been separately recognisedin another asset. The value of goodwill istypically measured as the residual amountremainingafterthevaluesofall identifiabletangible, intangible and monetary assets,adjusted for actual or potential liabilities,have been deducted from the value of abusiness.Itisoftenrepresentedastheexcessof the price paid in a real or hypotheticalacquisitionofacompanyover thevalueofthe company’s other identified assets andliabilities.Forsomepurposes,goodwillmay needtobefurtherdividedintotransferablegoodwill (that which can be transferredto third parties) and non-transferable or“personal”goodwill.

2.7 Astheamountofgoodwillisdependentonwhich other tangible and intangible assets are recognised, its value can be differentwhen calculated for different purposes.For example, in a business combinationaccounted for under IFRS orUSGAAP, anintangible asset is only recognised to theextent that it:


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(a) is separable, i.e., capable of beingseparated or divided from the entityandsold,transferred,licensed,rentedorexchanged,eitherindividuallyortogetherwitharelatedcontract,identifiableassetor liability, regardless of whether theentityintendstodoso,or

(b)arises from contractual or other legalrights, regardless of whether thoserights are transferable or separablefromtheentityorfromotherrightsandobligations.

2.8 While the aspects of goodwill can varydependingonthepurposeofthevaluation,goodwill frequently includeselementssuchas:(a) company-specific synergies arisingfrom a combination of two or morebusinesses (eg, reductions in operatingcosts,economiesofscaleorproductmixdynamics),

(b)opportunities to expand the businessintonewanddifferentmarkets,

(c) the benefit of an assembled workforce(but generally not any intellectualpropertydevelopedbymembersofthatworkforce),

(d)the benefit to be derived from futureassets,suchasnewcustomersandfuturetechnologies,and

(e) assemblageandgoingconcernvalue.

2.9 Valuers may perform direct valuations of intangible assets where the value ofthe intangible assets is the purpose ofthe analysis or one part of the analysis.However,whenvaluingbusinesses,businessinterests, realproperty, andmachineryandequipment,valuers shouldconsiderwhetherthere are intangible assets associatedwiththoseassets andwhether those directly orindirectlyimpacttheassetbeingvalued.Forexample,whenvaluingahotelbasedonanincome approach, the contribution to valueofthehotel’sbrandmayalreadybereflectedintheprofitgeneratedbythehotel.

2.10 Intangible asset valuations are performedfor a variety of purposes. It is the valuer’s responsibilitytounderstandthepurposeofa valuation and whether intangible assetsshould be valued, whether separately orgroupedwithotherassets.Anon-exhaustivelist of examples of circumstances that

commonly include an intangible assetvaluationcomponentisprovidedbelow:(a) For financial reporting purposes,

valuations of intangible assets are oftenrequired in connectionwith accountingfor business combinations, asset acquisitions and sales, and impairmentanalysis.

(b)For tax reporting purposes, intangibleasset valuations are frequently neededfor transfer pricing analyses, estate andgift tax planning and reporting, and advaloremtaxationanalyses.

(c) Intangible assetsmay be the subject oflitigation, requiring valuation analysisin circumstances such as shareholderdisputes,damagecalculationsandmaritaldissolutions(divorce).

(d)Other statutory or legal events mayrequirethevaluationofintangibleassetssuch as compulsory purchases/eminentdomainproceedings.

(e)Valuersareoftenaskedtovalueintangibleassets as part of general consulting,collateral lending and transactionalsupportengagements.

3.0 Bases of Value

3.1 In accordance with VS 5, a valuer must selecttheappropriatebasis(es) of value when valuingintangibleassets.

3.2 Often, intangible asset valuations are performed using bases of value defined byentities/organisations other than the HKIS(someexamplesofwhicharementioned inVS 5) and the valuer must understand andfollow the regulation, case law, and otherinterpretiveguidancerelatedtothosebases of valueasofthevaluation date.

4.0 Valuation Approaches and Methods

4.1 ThethreevaluationapproachesdescribedinVS 6 can all be applied to the valuation ofintangibleassets.

4.2 Whenselectinganapproachandmethod,inadditiontotherequirementsofthisguidancenote,avaluer mustfollowtherequirementsofVS 6,includingparagraph6.1.3.


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5.0 Market Approach

5.1 Underthemarket approach,thevalueofanintangibleasset isdeterminedbyreferencetomarketactivity(forexample,transactionsinvolvingidenticalorsimilarassets).

5.2 Transactions involving intangible assetsfrequently also include other assets, suchas a business combination that includesintangibleassets.

5.3 Valuers must comply with VS 6 paragraphs 6.2.2 and 6.2.3whendeterminingwhetherto apply the market approach to the valuation of intangible assets. In addition, valuers should only apply the market approach to value intangible assets if both of thefollowingcriteriaaremet:(a) information is available on arm’s lengthtransactionsinvolvingidenticalorsimilarintangibleassetsonornearthevaluation date,and

(b)sufficient information is available toallow the valuertoadjustforallsignificant differences between the subjectintangibleassetandthoseinvolvedinthetransactions.

5.4 The heterogeneous nature of intangibleassets and the fact that intangible assetsseldomtransactseparatelyfromotherassets meansthatitisrarelypossibletofindmarketevidenceof transactions involving identicalassets.Ifthereismarketevidenceatall,itisusually inrespectofassetsthataresimilar,butnotidentical.

5.5 Where evidence of either prices orvaluation multiples is available, valuers shouldmakeadjustmentstothesetoreflectdifferences between the subject asset andthose involved in the transactions. Theseadjustments are necessary to reflect thedifferentiatingcharacteristicsofthesubjectintangible asset and the assets involved inthe transactions. Such adjustments may onlybedeterminableataqualitative,ratherthanquantitative, level.However,theneedfor significant qualitative adjustments mayindicate that another approach would bemoreappropriateforthevaluation.

5.6 Consistent with the above, examples ofintangible assets for which the market approachissometimesusedinclude:

(a) broadcastspectrum,(b) internetdomainnames,and(c) taximedallions.

5.7 The guideline transactions method isgenerallytheonlymarketapproachmethodthatcanbeappliedtointangibleassets.

5.8 Inrarecircumstances,asecuritysufficientlysimilar to a subject intangible asset maybe publicly traded, allowing the use of theguideline public company method. Oneexample of such securities is contingentvalue rights (CVRs) that are tied to theperformance of a particular product ortechnology.

6.0 Income Approach

6.1 Underthe income approach,thevalueofanintangibleasset isdeterminedbyreferenceto thepresentvalueof income, cashflowsorcostsavingsattributabletotheintangibleassetoveritseconomiclife.

6.2 Valuers must comply with VS 6 paragraphs 6.4.2 and 6.4.3whendeterminingwhetherto apply the income approachtothevaluationofintangibleassets.

6.3 Income related to intangible assets isfrequently included in the price paid forgoodsoraservice.Itmaybechallengingtoseparatetheincomerelatedtotheintangibleassetfromincomerelatedtoothertangibleand intangible assets. Many of the income approachmethodsaredesignedtoseparatethe economic benefits associated with asubjectintangibleasset.

6.4 The income approach is the most commonmethodappliedtothevaluationofintangibleassets and is frequently used to valueintangibleassetsincludingthefollowing:(a) technology,(b)customer-relatedintangibles(eg,backlog,contracts,relationships),

(c) tradenames/trademarks/brands,(d)operating licenses (eg, franchiseagreements, gaming licenses, broadcastspectrum),and

(e) non-competitionagreements.


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6.5 There are many income approach methods.Thefollowingmethodsarediscussedinthisstandardinmoredetail:(a) excessearningsmethod,(b)relief-from-royaltymethod,(c) premium profit method or with-and-withoutmethod,

(d)greenfieldmethod,and(e) distributormethod.

Excess Earnings Method

6.6 The excess earningsmethod estimates thevalue of an intangible asset as the presentvalue of the cash flows attributable to thesubject intangible asset after excludingthe proportion of the cash flows that areattributable to other assets required togenerate the cash flows (“contributoryassets”).Itisoftenusedforvaluations where there is a requirement for the acquirer toallocatetheoverallpricepaidforabusinessbetween tangible assets, identifiableintangibleassetsandgoodwill.

6.7 Contributoryassetsareassetsthatareusedin conjunction with the subject intangibleasset in the realisationofprospectivecashflowsassociatedwiththesubjectintangibleasset.Assets that do not contribute to theprospectivecashflowsassociatedwith thesubjectintangibleassetarenotcontributoryassets.

6.8 The excess earnings method can beappliedusing several periodsof forecastedcash flows (“multi-period excess earningsmethod” or “MPEEM”), a single period offorecastedcashflows(“single-periodexcessearningsmethod”)orbycapitalisingasingleperiodofforecastedcashflows(“capitalisedexcess earnings method” or the “formulamethod”).

6.9 The capitalised excess earningsmethod orformulamethodisgenerallyonlyappropriateif the intangible asset is operating in asteadystatewithstablegrowth/decayrates,constant profit margins and consistentcontributoryassetlevels/charges.

6.10 As most intangible assets have economiclives exceeding one period, frequentlyfollownon-lineargrowth/decaypatternsandmayrequiredifferent levelsofcontributoryassets over time, theMPEEM is the mostcommonly used excess earnings method

as it offers the most flexibility and allowsvaluerstoexplicitlyforecastchangesinsuchinputs.

6.11 Whether applied in a single-period, multi-periodorcapitalisedmanner, thekeystepsin applying an excess earningsmethod areto: (a) forecasttheamountandtimingoffuturerevenuesdrivenbythesubjectintangibleassetandrelatedcontributoryassets,

(b)forecast the amount and timing ofexpenses that are required to generatethe revenue from the subject intangibleassetandrelatedcontributoryassets,

(c) adjust the expenses to exclude thoserelated to creation of new intangibleassetsthatarenotrequiredtogeneratethe forecasted revenue and expenses.Profit margins in the excess earningsmethod may be higher than profitmarginsfortheoverallbusinessbecausethe excess earnings method excludesinvestment in certain new intangibleassets.Forexample:1. research and developmentexpendituresrelatedtodevelopmentof new technology would not berequired when valuing only existingtechnology,and

2.marketing expenses related toobtaining new customers would notbe required when valuing existingcustomer-relatedintangibleassets.

(d) identify the contributory assets thatare needed to achieve the forecastedrevenue and expenses. Contributoryassets often include working capital,fixed assets, assembled workforce andidentified intangible assets other thanthesubjectintangibleasset,

(e) determinetheappropriaterateofreturnon each contributory asset based onan assessment of the risk associatedwith that asset. For example, low-riskassets likeworking capital will typicallyhave a relatively lower required return.Contributoryintangibleassetsandhighlyspecialised machinery and equipmentoften require relatively higher rates ofreturn,

(f) in each forecast period, deduct therequired returns on contributory assetsfrom the forecastprofit toarriveat theexcess earnings attributable to only thesubjectintangibleasset,

(g)determine the appropriate discount


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rateforthesubject intangibleassetandpresent value or capitalise the excessearnings,and

(h) if appropriate for the purpose of thevaluation (see paragraphs 11.1-11.4below), calculate and add the taxamortisationbenefit(TAB)forthesubjectintangibleasset.

6.12 Contributoryassetcharges(CACs)shouldbemadeforallthecurrentandfuturetangible,intangibleandfinancialassetsthatcontributetothegenerationofthecashflow,andifanassetforwhichaCACisrequiredisinvolvedinmore thanone lineof business, itsCACshouldbeallocatedtothedifferent linesofbusinessinvolved.

6.13 The determination of whether a CAC forelementsofgoodwillisappropriateshouldbebasedonanassessmentoftherelevantfactsandcircumstancesofthesituation,andthevaluer should notmechanically apply CACsor alternative adjustments for elements ofgoodwillifthecircumstancesdonotwarrantsuchacharge.Assembledworkforce,asitisquantifiable,istypicallytheonlyelementofgoodwill forwhich aCAC should be taken.Accordingly,valuers must ensure they havea strong basis for applying CACs for anyelementsofgoodwillotherthanassembledworkforce.

6.14 CACs are generally computed on an after-tax basis as a fair return on the value ofthe contributory asset, and in some casesa return of the contributory asset is alsodeducted. The appropriate return on acontributoryasset is the investment returna typical participant would require on theasset.The returnof a contributory asset isa recovery of the initial investment in theasset.Thereshouldbenodifferenceinvalueregardless ofwhether CACs are computedonapre-taxorafter-taxbasis.

6.15 If the contributory asset is not wasting innature,likeworkingcapital,onlyafairreturnontheassetisrequired.

6.16 Forcontributoryintangibleassetsthatwerevalued under a relief-from-royaltymethod,the CAC should be equal to the royalty(generally adjusted to an after-tax royaltyrate).

6.17 Theexcessearningsmethodshouldbeappliedonlytoasingleintangibleassetforanygivenstreamofrevenueandincome(generallytheprimaryormostimportantintangibleasset).Forexample,invaluingtheintangibleassetsof a company utilising both technologyanda tradename indeliveringaproductorservice(i.e.,therevenueassociatedwiththetechnologyandthetradenameisthesame),theexcessearningsmethodshouldonlybeusedtovalueoneoftheintangibleassetsandanalternativemethodshouldbeusedfortheother asset. However, if the company hadmultipleproductlines,eachusingadifferenttechnology and each generating distinctrevenue and profit, the excess earningsmethodmay be applied in the valuation ofthemultipledifferenttechnologies.

Relief-from-Royalty Method

6.18 Under the relief-from-royalty method, thevalue of an intangible asset is determinedbyreferencetothevalueofthehypotheticalroyalty payments that would be savedthroughowningtheasset,ascomparedwithlicensing the intangible asset from a third party.Conceptually,themethodmayalsobeviewed as a discounted cash flowmethodapplied to thecashflowthat theownerofthe intangible asset could receive throughlicensingtheintangibleassettothirdparties.

6.19 The key steps in applying a relief-from-royaltymethodareto:(a) developprojections associatedwith theintangibleassetbeingvaluedforthelifeofthesubjectintangibleasset.Themostcommonmetricprojectedisrevenue,asmostroyaltiesarepaidasapercentageofrevenue.However,othermetricssuchasaper-unitroyaltymaybeappropriate incertain valuations,

(b)develop a royalty rate for the subjectintangible asset. Two methods can beusedtoderiveahypotheticalroyaltyrate.Thefirstisbasedonmarketroyaltyratesfor comparable or similar transactions.A prerequisite for this method is theexistence of comparable intangibleassets that are licensed at arm’s lengthon a regular basis. The second methodisbasedona splitofprofits thatwouldhypotheticallybepaidinanarm’slengthtransaction by a willing licensee to awilling licensor for the rights touse thesubjectintangibleasset,


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(c) apply the selected royalty rate to theprojections to calculate the royaltypayments avoided by owning theintangibleasset,

(d)estimate any additional expenses forwhichalicenseeofthesubjectassetwouldberesponsible.Thiscan includeupfrontpayments required by some licensors.A royalty rate should be analysed todeterminewhether itassumesexpenses(such as maintenance, marketing andadvertising) are the responsibility ofthe licensor or the licensee. A royaltyrate that is “gross” would consider allresponsibilitiesandexpensesassociatedwith ownership of a licensed asset toresidewith the licensor,while a royaltythat is “net”wouldconsider someorallresponsibilitiesandexpensesassociatedwith the licensed asset to reside withthelicensee.Dependingonwhethertheroyalty is “gross” or “net”, the valuation should exclude or include, respectively,a deduction for expenses such asmaintenance, marketing or advertisingexpenses related to the hypotheticallylicensedasset.

(e) if the hypothetical costs and royaltypaymentswouldbetaxdeductible,itmay beappropriate to apply theappropriatetax rate to determine the after-taxsavings associated with ownership oftheintangibleasset.However,forcertainpurposes (such as transfer pricing),the effects of taxes are generally notconsideredinthevaluationandthisstepshouldbeskipped,

(f) determine the appropriate discountrateforthesubject intangibleassetandpresent value or capitalise the savingsassociated with ownership of theintangibleasset,and

(g) if appropriate for the purpose of thevaluation (see paragraphs 11.1-11.4),calculateandaddtheTABforthesubjectintangibleasset.

6.20 Whether a royalty rate is basedonmarkettransactions or a profit split method (orboth), its selection should consider thecharacteristicsofthesubjectintangibleassetand theenvironment inwhich it isutilised.The consideration of those characteristicsformthebasisforselectionofaroyaltyratewithinarangeofobservedtransactionsand/ortherangeofprofitavailabletothesubjectintangibleassetinaprofitsplit.Factorsthat

shouldbeconsideredincludethefollowing:(a) Competitive environment: The size ofthemarket for the intangible asset, theavailability of realistic alternatives, thenumberofcompetitors,barrierstoentryand presence (or absence) of switchingcosts.

(b) Importance of the subject intangible tothe owner: Whether the subject assetis a key factor of differentiation fromcompetitors, the importance it playsin the owner’s marketing strategy, itsrelativeimportancecomparedwithothertangible and intangible assets, and theamount the owner spends on creation,upkeepandimprovementofthesubjectasset.

(c) Life cycle of the subject intangible:Theexpected economic life of the subjectasset and any risks of the subjectintangiblebecomingobsolete.

6.21 Whenselectingaroyaltyrate,avaluer should alsoconsiderthefollowing:(a)When entering a licence arrangement,the royalty rate participants would bewilling to pay depends on their profitlevels and the relative contribution ofthe licensed intangible asset to thatprofit. For example, a manufacturer ofconsumer productswould not license atradenameataroyaltyratethatleadstothemanufacturerrealisingalowerprofitsellingbrandedproductscomparedwithsellinggenericproducts.

(b)When considering observed royaltytransactions, avaluer should understandthe specific rights transferred to thelicenseeandanylimitations.Forexample,royaltyagreementsmayincludesignificant restrictions on the use of a licensedintangible asset such as a restrictionto a particular geographic area or for aproduct. In addition, the valuer should understand how the payments underthe licensing agreement are structured,including whether there are upfrontpayments, milestone payments, puts/calls to acquire the licensed propertyoutright,etc.

With-and-Without Method

6.22 Thewith-and-withoutmethodindicatesthevalue of an intangible asset by comparingtwo scenarios: one in which the businessusesthesubjectintangibleassetandonein


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whichthebusinessdoesnotusethesubjectintangible asset (but all other factors arekeptconstant).

6.23 Thecomparisonofthetwoscenarioscanbedoneintwoways:(a) calculating the value of the businessundereachscenariowith thedifferenceinthebusinessvaluesbeingthevalueofthesubjectintangibleasset,and

(b)calculating, for each future period, thedifferencebetweentheprofitsinthetwoscenarios. The present value of thoseamountsisthenusedtoreachthevalueofthesubjectintangibleasset.

6.24 In theory, either method should reach a similar value for the intangible assetprovided the valuer considers not only theimpactontheentity’sprofit,butadditionalfactors such as differences between thetwoscenarios inworkingcapitalneedsandcapitalexpenditures.

6.25 Thewith-and-withoutmethodisfrequentlyused in the valuation of non-competitionagreements butmay be appropriate in thevaluationofotherintangibleassetsincertaincircumstances.

6.26 The key steps in applying the with-and-withoutmethodareto:(a) prepareprojectionsofrevenue,expenses,capitalexpendituresandworkingcapitalneeds for the business assuming theuse of all of the assets of the businessincluding the subject intangible asset.These are the cash flows in the “with”scenario,

(b)use an appropriate discount rate topresent value the future cash flows inthe “with” scenario, and/or calculatethe value of the business in the “with”scenario,

(c) prepareprojectionsofrevenue,expenses,capitalexpendituresandworkingcapitalneedsforthebusinessassumingtheuseofalloftheassetsofthebusinessexceptthe subject intangible asset. These arethecashflowsinthe“without”scenario,

(d)use an appropriate discount rate forthe business, present value the futurecashflowsinthe“with”scenarioand/orcalculatethevalueofthebusinessinthe“with”scenario,

(e) deductthepresentvalueofcashflowsorthevalueofthebusinessinthe“without”

scenario fromthepresentvalueofcashflows or value of the business in the“with”scenario,and

(f) if appropriate for the purpose of thevaluation (see paragraphs 11.1-11.4),calculateandaddtheTABforthesubjectintangibleasset.

6.27 As an additional step, the differencebetweenthetwoscenariosmayneedtobeprobability-weighted. For example, whenvaluing a non-competition agreement,the individual or business subject to theagreement may choose not to compete,eveniftheagreementwerenotinplace.

6.28 The differences in value between the twoscenarios should be reflected solely in thecash flow projections rather than by usingdifferentdiscountratesinthetwoscenarios.

Greenfield Method 6.29 Under the greenfieldmethod, the value of

the subject intangible is determined usingcashflowprojectionsthatassumetheonlyassetofthebusinessatthevaluation dateisthesubjectintangible.Allothertangibleandintangible assets must be bought, built orrented.

6.30 Thegreenfieldmethodisconceptuallysimilarto the excess earnings method. However,instead of subtracting contributory assetcharges from the cash flow to reflect thecontribution of contributory assets, thegreenfieldmethodassumesthat theownerof the subject asset would have to build,buy or rent the contributory assets.Whenbuilding or buying the contributory assets,thecostofareplacementassetofequivalentutility is used rather than a reproductioncost.

6.31 The greenfield method is often used to

estimate the value of ”enabling” intangibleassets such as franchise agreements andbroadcastspectrum.

6.32 The key steps in applying the greenfieldmethodareto:(a) prepareprojectionsofrevenue,expenses,capitalexpendituresandworkingcapitalneeds for the business assuming thesubjectintangibleassetistheonlyassetowned by the subject business at thevaluation date, includingthetimeperiod


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neededto“rampup”tostabilisedlevels,(b)estimate the timing and amount ofexpenditures related to the acquisition,creation or rental of all other assets neededtooperatethesubjectbusiness,

(c) using an appropriate discount rate forthe business, present value the futurecashflowstodeterminethevalueofthesubject business with only the subjectintangibleinplace,and

(d) if appropriate for the purpose of thevaluation (see paragraphs 11.1-11.4below),calculateandaddtheTABforthesubjectintangibleasset.

Distributor Method

6.33 Thedistributormethod,sometimesreferredtoasthedisaggregatedmethod,isavariationofthemulti-periodexcessearningsmethodsometimes used to value customer-relatedintangible assets.The underlying theory ofthe distributor method is that businessesthatarecomprisedofvariousfunctionsareexpected to generate profits associatedwith each function. As distributorsgenerallyonlyperformfunctions related todistributionofproductstocustomersratherthan development of intellectual propertyor manufacturing, information on profitmargins earned by distributors is used toestimatetheexcessearningsattributabletocustomer-relatedintangibleassets.

6.34 The distributor method is appropriate tovalue customer-related intangible assetswhenanotherintangibleasset(forexample,technologyorabrand)isdeemedtobetheprimary ormost significant intangible assetand is valued under a multi-period excessearningsmethod.

6.35 The key steps in applying the distributormethodareto:(a) prepareprojectionsofrevenueassociatedwith existing customer relationships.This should reflect expected growth inrevenuefromexistingcustomersaswellastheeffectsofcustomerattrition,

(b) identify comparable distributors thathavecustomerrelationshipssimilartothesubjectbusinessandcalculatetheprofitmarginsachievedbythosedistributors,

(c) applythedistributorprofitmargintotheprojectedrevenue,

(d) identify the contributory assets relatedto performing a distribution function

thatareneeded toachieve the forecastrevenue and expenses. Generallydistributor contributory assets includeworking capital, fixed assets andworkforce.However,distributorsseldomrequire otherassets such as trademarksor technology. The level of requiredcontributory assets should also beconsistent with participants performingonlyadistributionfunction,

(e) determinetheappropriaterateofreturnoneachcontributoryassetbasedonanassessment of the risk associated withthatasset,

(f) in each forecast period, deduct therequired returns on contributory assetsfrom the forecast distributor profit toarriveattheexcessearningsattributabletoonlythesubjectintangibleasset,

(g)determine the appropriate discountrateforthesubject intangibleassetandpresentvaluetheexcessearnings,and

(h) if appropriate for the purpose of thevaluation (see paragraphs 11.1-11.4below),calculateandaddtheTABforthesubjectintangibleasset.

7.0 Cost Approach

7.1 Under the cost approach, the value of anintangibleassetisdeterminedbasedonthereplacement cost of a similar asset or anasset providing similar service potential orutility.

7.2 Valuers must comply with VS 6 paragraphs 6.6.2 and 6.6.3whendeterminingwhetherto apply the cost approach to the valuationofintangibleassets.

7.3 Consistent with these criteria, the cost approach is commonly used for intangibleassetssuchasthefollowing:(a) acquiredthird-partysoftware,(b) internally-developedandinternally-used,non-marketablesoftware,and

(c) assembledworkforce.

7.4 The cost approach may be used whenno other approach is able to be applied;however,avaluer shouldattempttoidentifyan alternativemethod before applying thecost approachinsituationswherethesubjectasset does not meet the criteria in VS 6 paragraphs 6.6.2 and 6.6.3.


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7.5 There are broadly two main methods thatfall under the cost approach: replacement costandreproductioncost.However,manyintangibleassetsdonothavephysicalformthatcanbe reproducedandassets suchassoftware,whichcanbereproduced,generallyderivevaluefromtheirfunction/utilityratherthantheirexact linesofcode.Assuch, thereplacementcostismostcommonlyappliedto the valuationofintangibleassets.

7.6 Thereplacementcostmethodassumesthat

a participant would pay no more for theasset than thecost thatwouldbe incurredto replace the asset with a substitute ofcomparableutilityorfunctionality.

7.7 Valuers should consider the followingwhenapplyingthereplacementcostmethod:(a) thedirectandindirectcostsofreplacingtheutilityof theasset, including labour,materialsandoverhead,

(b)whether the subject intangible asset issubjecttoobsolescence.Whileintangibleassets do not become functionally orphysicallyobsolete, they canbe subjecttoeconomicobsolescence,

(c) whether it is appropriate to include aprofitmark-upontheincludedcosts.Anassetacquired froma thirdpartywouldpresumablyreflecttheircostsassociatedwith creating the asset aswell as someform of profit to provide a return oninvestment.Assuch,underbases of value (see VS 5) that assume a hypotheticaltransaction, it may be appropriate toinclude an assumed profit mark-up oncosts.AsnotedinVS 6,costsdevelopedbased on estimates from third partieswouldbepresumed to already reflect aprofitmark-up,and

(d)opportunitycostsmay alsobe included,which reflect costs associatedwith nothaving the subject intangible asset inplaceforsomeperiodoftimeduring itscreation.

8.0 Special Considerations for Intangible Assets

8.1 The following sections address a non-exhaustive list of topics relevant to thevaluationofintangibleassets.(a) Discount Rates/Rates of Return forIntangibleAssets(section1.9.0).

(b) IntangibleAssetEconomicLives(section1.10.0).

(c) TaxAmortisationBenefit(section1.11.0).

9.0 Discount Rates/Rates of Return for Intangible Assets

9.1 Selectingdiscountratesforintangibleassetscan be challenging as observable marketevidence of discount rates for intangibleassets is rare. The selection of a discountrateforanintangibleassetgenerallyrequiressignificantprofessionaljudgment.

9.2 Inselectingadiscountrateforanintangibleasset,valuers shouldperformanassessmentof the risks associated with the subjectintangible asset and consider observablediscountratebenchmarks.

9.3 When assessing the risks associated withanintangibleasset,avaluer shouldconsiderfactorsincludingthefollowing:(a) intangible assets often have higher riskthantangibleassets,

(b) ifanintangibleassetishighlyspecialisedtoitscurrentuse,itmayhavehigherriskthanassetswithmultiplepotentialuses,

(c) single intangible assets may have moreriskthangroupsofassets(orbusinesses),

(d) intangibleassetsusedinrisky(sometimesreferredtoasnon-routine)functionsmayhave higher risk than intangible assetsusedinmorelowriskorroutineactivities.For example, intangible assets used inresearch and development activitiesmay be higher risk than those used indeliveringexistingproductsorservices,

(e) the life of the asset. Similar to otherinvestments, intangible assets withlongerlivesareoftenconsideredtohavehigherrisk,allelsebeingequal,

(f) intangible assets with more readilyestimable cash flow streams, such asbacklog,mayhavelowerriskthansimilarintangibleassetswithlessestimablecashflows,suchascustomerrelationships.

9.4 Discount rate benchmarks are rates thatare observable based on market evidenceorobservedtransactions.Thefollowingaresomeof thebenchmark rates that avaluer shouldconsider:(a) risk-free rateswith similarmaturities tothelifeofthesubjectintangibleasset,

(b)cost of debt or borrowing rates withmaturitiessimilartothelifeofthesubjectintangibleasset,

(c) cost of equity or equity rates or returnforparticipantsforthesubjectintangibleasset,


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(d)weightedaveragecostofcapital(WACC)ofparticipantsforthesubjectintangibleasset or of the company owning/usingthesubjectintangibleasset,

(e) in contexts involving a recent businessacquisition including the subjectintangible asset, the Internal Rate ofReturn(IRR)forthetransactionshouldbeconsidered,and

(f) in contexts involving a valuation of allassets of a business, the valuer should perform a weighted average returnon assets (WARA) analysis to confirmreasonableness of selected discountrates.

10.0 Intangible Asset Economic Lives

10.1 Animportantconsiderationinthevaluation ofanintangibleasset,particularlyundertheincome approach,istheeconomiclifeoftheasset.Thismaybeafiniteperiodlimitedbylegal, technological, functionaloreconomicfactors;otherassetsmayhaveanindefinitelife.Theeconomiclifeofanintangibleassetis a different concept than the remainingusefullifeforaccountingortaxpurposes.

10.2 Legal,technological,functionalandeconomicfactorsmustbeconsideredindividuallyandtogether in making an assessment of theeconomiclife.Forexample,apharmaceuticaltechnologyprotectedbyapatentmayhavea remaining legal life of five years beforeexpiryofthepatent,butacompetitordrugwithimprovedefficacymaybeexpectedtoreachthemarket inthreeyears.Thismightcausetheeconomiclifeofthepatenttobeassessedasonlythreeyears.Incontrast,theexpected economic life of the technologycouldextendbeyond the lifeof thepatentif the knowhow associated with thetechnologywouldhavevalue inproductionof agenericdrugbeyond theexpirationofthepatent.

10.3 In estimating the economic life of anintangibleasset,avaluer shouldalsoconsiderthe pattern of use or replacement. Certainintangible assetsmay be abruptly replacedwhen a new, better or cheaper alternativebecomes available, while others may bereplaced slowly over time, such aswhen asoftware developer releases a newversionof software every year but only replaces aportionoftheexistingcodewitheachnewrelease.

10.4 For customer-related intangibles, attritionis a key factor in estimating an economiclifeaswellas thecashflowsusedtovaluethe customer related intangibles. Attritionapplied inthevaluationof intangibleassetsisaquantificationofexpectationsregardingfuture losses of customers. While it is aforward-looking estimate, attrition is oftenbasedonhistoricalobservationsofattrition.

10.5 Thereareanumberofwaystomeasureandapplyhistoricalattrition:(a) a constant rateof loss (as apercentageofprioryearbalance)overthelifeofthecustomer relationshipsmay beassumedif customer loss does not appear tobe dependent on age of the customerrelationship,

(b)avariablerateof lossmaybeusedoverthe life of the customer relationshipsif customer loss is dependent on ageof the customer relationship. In suchcircumstances, generally younger/newcustomers are lost at ahigher ratethan older, more established customerrelationships,

(c) attrition may be measured based oneitherrevenueornumberofcustomers/customer count as appropriate, basedon the characteristics of the customergroup,

(d)customers may need to be segregatedinto different groups. For example,a company that sells products todistributorsandretailersmayexperiencedifferent attrition rates for each group.Customersmayalsobesegregatedbasedon other factors such as geography,sizeofcustomerandtypeofproductorservicepurchased,and

(e) theperiodusedtomeasureattritionmay vary depending on circumstances. Forexample, for a business with monthlysubscribers,onemonthwithoutrevenuefrom a particular customer wouldindicate a loss of that customer. Incontrast,for largerindustrialproducts,acustomermightnotbeconsidered“lost”unless therehavebeennosales to thatcustomerforayearormore.

10.6 Theapplicationofanyattritionfactorshould be consistent with the way attrition wasmeasured. Correct application of attritionfactorinfirstprojectionyear(andthereforeall subsequent years) must be consistentwithformofmeasurement.


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(a) If attrition is measured based on thenumber of customers at the beginning-of-periodversusend-of-period(typicallya year), the attrition factor should beappliedusinga“mid-period”conventionfor the first projection year (as it isusually assumed that customers werelost throughout the year). For example,ifattritionismeasuredbylookingatthenumber of customers at the beginningof the year (100) versus the numberremainingattheendoftheyear(90),onaveragethecompanyhad95customersduringthatyear,assumingtheywerelostevenlythroughouttheyear.Althoughtheattritionratecouldbedescribedas10%,onlyhalfofthatshouldbeappliedinthefirstyear.

(b) Ifattritionismeasuredbyanalysingyear-over-year revenue or customer count,the resulting attrition factor should generallybeappliedwithoutamid-periodadjustment. For example, if attrition ismeasured by looking at the number ofcustomers that generated revenue inYear1(100)versusthenumberofthosesamecustomersthathadrevenueinYear2 (90), application would be differenteventhoughtheattritionratecouldagainbedescribedas10%.

10.7 Revenue-basedattritionmayincludegrowthin revenue from existing customers unlessadjustmentsaremade.Itisgenerallyabestpractice to make adjustments to separategrowth and attrition in measurement andapplication.

10.8 It is a best practice for valuers to inputhistorical revenue into the model beingused and check how closely it predictsactual revenue from existing customersin subsequent years. If attrition has beenmeasured and applied appropriately, themodel should be reasonably accurate. Forexample, if estimates of future attritionweredevelopedbasedonhistoricalattritionobservedfrom20X0through20X5,avaluer shouldinputthe20X0customerrevenueintothemodelandcheckwhether it accuratelypredictstherevenueachievedfromexistingcustomersin20X1,20X2,etc.

11.0 Tax Amortisation Benefit (TAB)

11.1 In many tax jurisdictions, intangible assetscanbeamortisedfortaxpurposes,reducing

a taxpayer’s tax burden and effectivelyincreasing cash flows. Depending on thepurpose of a valuation and the valuation method used, it may be appropriate toincludethevalueofTABinthevalueoftheintangible.

11.2 Ifthemarketorcost approachisusedtovalueanintangibleasset,thepricepaidtocreateorpurchasetheassetwouldalreadyreflecttheabilitytoamortisetheasset.However,intheincome approach,aTABneedstobeexplicitlycalculatedandincluded,ifappropriate.

11.3 For some valuation purposes, such asfinancial reporting, the appropriate basis of value assumes a hypothetical sale ofthe subject intangible asset. Generally, forthose purposes, a TAB should be includedwhen the income approach isusedbecausea typical participant would be able toamortise an intangible asset acquired insuch a hypothetical transaction. For othervaluationpurposes,theassumedtransactionmightbeofabusinessorgroupofassets.Forthosebases of value,itmaybeappropriatetoincludeaTABonlyifthetransactionwouldresultinastep-upinbasisfortheintangibleassets.

11.4 ThereissomediversityinpracticerelatedtotheappropriatediscountratetobeusedincalculatingaTAB.Valuers mayuseeitherofthefollowing:(a) a discount rate appropriate for abusinessutilisingthesubjectasset,suchas a weighted average cost of capital.Proponents of this view believe that,sinceamortisationcanbeusedtooffsetthetaxesonanyincomeproducedbythebusiness,adiscountrateappropriateforthebusinessasawholeshouldbeused,or

(b)a discount rate appropriate for thesubject asset (i.e., the one used in thevaluationoftheasset).Proponentsofthisviewbelievethatthevaluation should not assume the owner of the subject assethasoperationsandincomeseparatefromthe subject asset and that the discountrateusedintheTABcalculationshouldbethesameasthatusedinthevaluationofthesubjectasset.


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VGN 3Valuation for Financial Statements and Accounts Reporting Purposes

1. General Requirements

1.1 This VGN provides additional guidanceon the valuation of property, assets andliabilitiesforinclusioninfinancial statements.

1.2 Valuationsforinclusioninfinancial statements requireparticularcareastheymust comply strictlywiththeapplicablefinancialreportingstandards adopted by the entity. Valuers arestronglyadvisedtoclarifyattheoutsetwhichstandardstheirclientshaveadopted.

1.3 Although the International FinancialReporting Standards (IFRS) are nowadayswidely adopted, other financial reportingstandards may still apply in individualjurisdictions. Valuer should agree withthe client and the auditor on the use ofappropriate basis of value in the terms of engagement and disclose the same in hisreport.

1.4 Inall cases,valuers are reminded thatbothIFRS and non-IFRS financial reportingstandardscontinuetoevolve–theyshould alwaysrefertothestandardscurrentatthedatetowhichthefinancial statementsrelate.

1.5 Thedefinitionoffair valueisdenotedinVS 5 Section 5.9.0.

1.6 The objective of a fair value measurementistoestimatethepriceatwhichanorderlytransactiontoselltheassetortotransfertheliability would take place between marketparticipants at the measurement dateunder currentmarket conditions. It is thussometimesdescribedasa ‘mark tomarket’approach. Indeed the references in IFRS13 tomarket participants and a salemakeitclearthatformostpracticalpurposestheconceptoffair valueisconsistentwiththatofmarket value, and so therewouldordinarilybenodifferencebetweenthemintermsofthevaluationfigurereported.

1.7 Legislative, regulatory, accounting orjurisdictional requirementsmay require themodification of this application in somecountries/statesorundercertainconditions.

1.8 While different professions have differentinterpretations for the term “Plant andEquipment”, the Institute has adopted theinterpretation set out in the IVS, that is,“Itemsofplantandequipmentare tangibleassetsthatareheldbyanentityforuseintheproductionorsupplyofgoodsandservices,for rental by others or for administrativepurpose and that are expected to be usedoveraperiodoftime”.

1.9 Itisageneralpracticetohavethevaluation date being set asof theendingdate of the reporting period of the financial statements (or referred to as the ‘cut-off date’). Thereare cases that the valuation date may beset at a date earlier than the ending dingperiod of the financial statements, such asthetransactiondate.Valuersarerequiredtodiscusswith theclients and theauditorsofthe clientstoconfirmthevaluation date prior totakinguptheengagement.

2. Valuations under International Financial Reporting Standards (IFRS)

2.1 WheretheentityhasadoptedIFRSthebasis of valuewillbefair value(seealsoVPS4section7)andIFRS13FairValueMeasurementwillapply.Itisessentialthatthevaluerisfamiliarwith IFRS 13 requirements, especially thedisclosurerequirements.

3. Valuations under Hong Kong Financial Reporting Standards (HKFRS)

3.1 The Institutenoticesthatinsomeinstancesvaluers need to follow a set of proceduresas requiredby theHKFRSor toarriveatavalue other than amarket value for aidingthe accountant in the establishment orrestatementoffinancial statements, suchas‘fair value less costs to sell’, ‘value in use’or ‘purchase price allocation in a businesscombination’.Inthiscontext,membersneedtodisclosethesetofproceduresinthereport and to follow the Standards whenever andwhereverpossibleinpreparingthereport.

3.2 Members are encouraged to obtain copiesof relevant HKFRS from the HKICPA inordertohaveabetterunderstandingbeforeperforming valuation engagements forfinancial statements and accounts reportingpurposes


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4. Notional Apportionment of Land and Building Elements

4.1 In the circumstances that a valuer, at theinstruction from the client, is requiredunder any financial reporting standards tonotionallybreakdownthevalueconclusionof a real property into land and buildingelements.Theapportionmentmaybedonebyusingoneoffollowingmethods:(a)By deducting from the valuation of thewholerealproperty,thevalueofthelandfor its existing use as of the valuation date. In many instances there will beample evidence of land values uponwhich a notional apportionment canbemade.However,where there is little orno evidence of the land values, greaterreliancewillhavetobeplacedonmethod(b)below.

(b)By making an assessment of the netreplacement cost of the improvementsas of the valuation date and deductingthisfromthevaluationofthewholerealproperty.Thefigurefortheimprovementswill be derived from gross replacementcostwhichwill then be reduced to thewritten-down value or net replacementcostassetoutbelow,inordertoreflectthecurrentvalueoftherealpropertytothebusiness.

The valuer should consult the clients and/or auditors acting for the clients as to thebasisofcalculatingthedepreciableamountof the improvements, in order tomaintainconsistencyofpracticeinthefuture.

4.2 Valuer should make a qualification in thereport that the apportioned values should not be used other than financial reportingpurpose.

5. Events after the reporting period

5.1 The valuer should refer to material events after the reporting period in the financial statements of which he becomes aware and which would likely affect his valuation in the report, and, at the advice sought from the client and its auditors to distinguish those events between adjusting or non-adjusting events in the report.

5.2 In referring to thosematerial events in thereport,theValuer isrequiredtodiscussandobtain consent from the directors of theclient todisclose suchevents in the report.The valuer is also required, at the advicefromthedirectorsoftheclienttodistinguishbetween commercially confidential eventsornon-commercially confidentialevents, inparticularwhenthematerialeventsarepricesensitivetoapubliccompany.

5.3 HKAS10“EventsaftertheReportingPeriod”refers to eventswhich occur between theendofthereportingperiodandthedateonwhich the financial statementsareapprovedby the directors of the clients and imposesupon the directors certain obligationsregarding the disclosure of the events.Sucheventsmaybeclassifiedas“adjustingevents” or “non-adjusting events”. Valuers areadvisedtorefertotheHKAS10fortheexamplesofdifferentevents.

6. Connected Leasing Arrangement

Any real property occupied by a company under an inter-company leasing arrangement within a group account should be valued as owner-occupied real property.

7. Relationship with Auditor

7.1 Accordingtovariousstandardsonauditing,theauditorhasaresponsibility,whenusingtheworkperformedbyanauditor’s expert(individual or organisation), to obtainsufficient appropriate audit evidence thatsuch work is adequate for the purposesof the audit. The Institute noted that theterm“Expert” isdefinedbytheHongKongStandardonAuditing620“UsingtheWorkof anAuditor’s Expert” as “an individual ororganisationpossessingexpertise in afieldother than accounting or auditing, whosework in thatfield isusedby theauditor toassist the auditor in obtaining sufficientappropriate audit evidence”. An auditor’sexpert may be either an auditor’s internalexpert or an auditor’s external expert.TheHKIS considers that a member who is aqualifiedvaluerasdefinedinthe Standards in performingvaluationsforfinancial statements and accounts reporting are an auditor’sexpert.


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7.2 Theauditorinperforminghisevaluationonwhether theworkof an auditor’s expert isappropriate for the auditor’s purposes,willconsider the relevance and reasonablenessof:Øthesourcedataused;Øthe assumptionsandmethodsused;andØthe result of the auditor’s expert workin the lightof the resultsofotherauditevidence.

7.3 Inthecourseoftheauditor’sduediligenceto theworkwith the auditor’s expert, theauditorwillfollowtherelevantstandardonauditing by making inquiries regarding anyprocedures undertaken by the auditor’sexpert and reviewing or testing the dataused by the auditor’s expert. In somecircumstances, even working papers arerequiredtobesubmittedtotheauditorforhisreviewortesting.

7.4 The valuer is reminded that prior tosubmittinghisworkingpapersordatatotheauditor, careful thought is required on thefollowing:Øthescopeofworkasagreedintheterms

of engagement with the client;Øthe nature of the working papers anddata,suchasintellectualpropertyrights;and,

Øanyconsent,eitherexpresslyorimplicitly,fromtheclientforreleaseofsuchworks.

Under normal circumstances, the report should provide reasoning to all intendedusers on how the value conclusion isarrived.Valuers are presumed to have theresponsibilities to assist all the intendedusers to understand the valuation andcommunications with the auditors on thekey inputs are part of this responsibilities,providedthattherequestsfromtheauditorarenotunreasonable.

7.5 The valuerisremindedtoreachanagreementwith the client in the terms of engagement on the working relationship with the client’sauditor.Thiscouldincludethewayandtheextentofreleasingworkingpapersanddatato the client’sauditor,toavoidunnecessarydisputes with the client and the client’sauditorthereafterandanypotentiallitigationinthefuture.

7.6 Itisagoodpracticetohaveameetingwiththe client and their auditor to understandand to agree on the scope of work priorto proposing and signing off the terms of engagement to the client.


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VGN 4Valuations of Real Properties for Secured Lending

TheobjectiveofthisguidancenotesonValuationsofRealPropertiesforSecuredLendingistoprovideguidance to valuers upon preparation of valuation reports of real properties on behalf of banks orlendinginstitutionsorlendersforsecuredlending.

1. THE QUALIFIED VALUER’S ROLES

1.1 Therolesofthequalifiedvaluer are:

1.1.1 toadvisethebankor lending institutionorlender(hereinaftercollectivelyreferredtoas“the Lender”) as to themarket value of therealproperty(ies)atthevaluation date;and

1.1.2 toadvisetheLenderastothenatureoftherealproperty(seeSection5below)andanyfactors likely tomaterially affect itsmarket value.

1.2 Itwouldbeusualforthevaluertobeaskedto express an opinion as to the suitabilityof the real property as security for a loan.It is, however, a matter for the Lender toassess the risk involved and express theirassessment infixing the termsof the loan,such as the percentage of value to beadvanced, and provision for repayment ofthecapitalandtheinterestrate.Thevaluer shouldreferinhisreportwhereoneistobeprovided,toallmatterswhicharewithinhisknowledgeandwhichmayassisttheLenderin his assessment of the risk. The valuer shouldnotmakearecommendationastotheamountorpercentageofmortgageadvanceorastothelengthoftheloanterm.Norisit the valuer’s responsibility to give adviceastothesuitabilityoftherealproperty‘forsecondmortgagepurposes’.

1.3 When a real property isvalued as securityforaloan,bywayofmortgage,debentureorotherwise,thevaluationshallnormallybeonthebasisofmarket value.

1.4 Itisnotnormallyappropriatetovaluearealpropertytobeusedassecurityforaloanonabasisother thanmarket value.Where theLenderrequiresthevaluer toadviseonthevalues of certain real properties, either inaddition toor inplaceofmarket value, e.g.valuationofflatssubject to the restrictions

upon assignment under Home OwnershipSchemeorSandwichClassHousingScheme,‘surrender value’ of industrial propertieslocated in Industrial Estates in Hong Kongsubject to restrictions on assignment andunderletting,HongKongresidenceforHongKong People, etc., the valuer should stateclearly the basis of value adopted in thereport.

2. TAKING INSTRUCTION

2.1 ItisrecognizedasacommonpracticethattheLendermayhaveamasterserviceagreementwith the firm of the valuers on the overallvaluationservicesforsecuredlending,whiletheformalengagementwillbecontainedinfurthercorrespondencesinanyappropriatebusiness form.A valuer should ensure thattheformalengagement instructionandthemasterserviceagreementtogethercontainsalltheminimumcontentsasstipulatedinVS 4 oftheStandards.

2.2 In case the valuation is not covered in anymaster service agreement, the valuer must make sure the terms of engagement in compliance with the Standards.

2.3 In some circumstances, a valuationmay becommissioned by a party that is not theintendedLender,forexample,aprospectiveborroweroranagent.Ifthepartydoesnotknow,orisunwillingtodisclose,theidentityoftheintendedLender,itmustbestatedinthe terms of engagement that the valuation maynotbeacceptabletoaLender.ThismaybebecausesomeLendersdonotacceptthata valuation procured by a borrower or anagentissufficientlyindependent,orbecausethatparticularLenderhasspecificreportingrequirements.

2.4 It is common practice for the valuer to provideapreliminary indicationofvaluetotheLenderbeforeformalinstruction.Fortheguidanceonprovidingpreliminaryindicationofvalue,seeAppendixtothisguidancenote.

3. THE VALUATION PROCESS

3.1 Inspection Arrangement Inspections mustalwaysbecarriedouttothe

extentnecessarytoproduceavaluation that is professionally adequate for its purpose,


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unless expressly agreed with the Lender.A visual and physical inspection shall beundertaken to the exterior and interiorof the real estate as long as the same isaccessible to the valuer (or designatedqualified staff) without undue difficulty.Withregardtothescopeofinspectiontobeperformedbythevaluer,itisabestpracticefor the valuer to agree with the Lenderprior to commencement of his valuation and to document such agreement in theterms of engagement.Whilethescopeoftheinspectionistobeagreedbetweenthevaluer and the Lender, the valuer is required toobservetheVS 7ofthe StandardsandinnowayshoulditgiverisetoaresultthatwouldmisleadtheLenderwhoreadsthereport.Toavoid doubt, inspection required under the Standards is not in any form of a buildingsurveytothesubjectreal estate.

3.2 Valuation without Inspection WheretheLenderhasinstructedthevaluer

not to carry out any inspection (internal orexternal or both), the valuer must considerthe riskbeforeproceeding. If anyvaluation without inspection may undermine thereliabilityofsuchvaluation,suchinstructionmust not be taken. In case any valuation withoutinspectionistaken,thevaluer should state such instruction in the report and acaveat or assumption is required to reflecttheabsenceofinspection.

3.3 Cases not Appropriate without Inspection The valuer should alert the Lender and advise

an internal inspection to be carried out when the characteristics of real estate are not typical in the market. Examples include, but not limited to, tenement buildings, properties subject to Building Order(s) being registered by the government, domestic buildings or non-typical developments over 30 years in age, properties with flat roof, roof and/or appurtenant open space, villas, village-type houses, all non-domestic properties, etc. If the Lender is not able to arrange an internal inspection, an external inspection should still be carried out.

3.4 Revaluation without re-inspection of real property previously valued

A revaluation without a re-inspection of real property previously valued by the valuer or his firm must not be undertaken unless the valuer is satisfied that there have been no material changes to the physical attributes of the real estate, or the nature of its location, since the last assignment.

3.5 The valuer should ensure the entire valuation

process in compliance with VS 7 of the Standards.

4. THE REPORT

4.1 SubjecttothemattersreferredtoinSections1and3above,thereport shouldbeconfinedstrictlytoansweringquestionsraisedbytheLender.

4.2 If it is suspected that there exists hiddendefects that could havematerial effect onthe value of the real property, the valuer should so advise and recommend to theLender that amore extensive investigationshouldbecarriedout.Itmaybeappropriateinexceptionalcircumstancestodefermakinga valuation until the resultsof such furtherinvestigationsaremadeknowntothevaluer.

4.3 Ifitisnotpossibletocarryoutinspection on any substantial part of the real estate, thisshouldbestatedinthereport.

4.4 If there is obvious evidence of any seriousdisrepair, potential hazard or any othermatters which may materially affect thevalue of the real property, this should bestatedinthereport.

4.5 Where the valuer relies on informationprovidedbyothers,thisshouldbeindicatedin the report, so should the source of thatinformation.Withregardtotheverificationwork tobeconductedby thevaluer, it is agood practice for the valuer to agreewiththe Lender prior to commencement of hisvaluationandtodocumentsuchagreementin the terms of engagement.Whilethescopeof the verification work is to be agreedbetween the valuer and the Lender, thevaluerisrequiredtoobservetheVS 7ofthe StandardsandinnowayshoulditgiverisetoaresultthatwouldmisleadtheLenderwhoreadsthereport.

4.6 The Lender should be informed of theexistence of any apparent and significant additions, alterations and extensions soas to alert the Lender’s legal adviser forany enquiries to be made. In particular,the Lender’s attention should be drawn toany unauthorised structure or addition oralterationmadeinthesubjectreal estate or anyotherapparentunauthorisedstructureswhich are or could be subject to action


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underSection24oftheBuildingsOrdinance(Chapter123–LawsofHongKong)orunderapplicableregulationsinotherjurisdictions.

4.7 The valuer should consider the subject realproperty in accordance with its originalapproved state anddisregard anypremiumattachedtotheunauthorisedadditionsand/or alterations. Unless otherwise agreedbetween the valuer and the Lender andwithassistancefromaregisteredcontractorin the government, the valuer would notconsider any costs required to restore thereal property to its original approved stateifrequestedbythegovernmentauthorities.The valuer should statesuchassumptions in the report. IfasinstructedbytheLendertomake any assumptions which are differentfromtheabove, thevaluer must state suchassumptions in the report.

4.8 IfthereareanyadditionalrequirementsfromaLenderinconductingvaluations,subjecttothe agreement made between the Lenderandvaluerbeforehand,extrainformationorfindingscanbeincludedinthereport.

4.9 The format and extent of the detail of thereportareamatterofthevaluer’sdiscretionexcept where the report is to be providedon a form supplied by the client. Thepresentation of the valuation report should take into account the need for any specialformat and should contain the followingminimumrequiredinformation:

(a) the status of the valuer and where appropriate and applicable, the disclosure of any material involvement, previously or current;

(b) the identification of the client and any other intended users;

(c) the purpose of the valuation;(d) the identification of the asset(s) being

valued;(e) the basis or bases of value;(f) the valuation date;(g) the extent of the Valuer’s inspections and

investigations;(h) the nature and source of information to

be relied on by the valuer;(i) any assumptions, special assumptions,

reservations, any special instructions or departures;

(j) any restrictions on use, distribution and publication;

(k) confirmation that the assignment has

been undertakne in accordance with the IVS and/or HKIS Valuation Standards;

(l) the valuation method adopted and the key inputs, subject to the instructions of the Lender;

(m) the opinions of value in figures and words;

(n) the date of the report.(o) commentary on any material uncertainty

in relation to the valuation where it is essential to ensure clarity on the part of the valuation user; and

(p) any limits or exclusion of liability to parties other than the client

5. THE VALUATION

5.1 Unless the facts clearly shown to thecontraryorsubjecttoparagraphs4.6and4.7above,thevaluer shouldstatethefollowingassumptions in the report andwillbeundernodutytoverifytheseassumptions:

5.1.1 thatallnecessarystatutoryapprovalsforthesubject real estate or thebuildingofwhichthesubjectreal estateformspartoftheusehavebeenobtained;

5.1.2 that no deleterious or hazardousmaterialsor techniques have been used in theconstructionofthesubjectreal estate;

5.1.3 thatthesubjectrealpropertyisnotsubjectto any unusual or especially onerousrestrictions,encumbrancesoroutgoingsandthatgoodtitlecanbeshown;

5.1.4 that those parts of the subject real estate which could not be inspected would notrevealmaterialdefectsorcausethevaluer to alterhisvaluation;

5.1.5 that the subject real estate is connected tomainservicesandsewerswhichareavailableonnormalterms;

5.1.6 that in the case of a real estate which isunder construction, the real estate will besatisfactorily completed to the standard indue course and details as described in thelatest development schedules as containedinthesalesbrochure;

5.1.7 that in valuation of a strata-titled realproperty,unlessinstructedbytheLenderorotherwiseawareoftothecontrary,thecostof repairs andmaintenance to thebuilding


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ofwhich the subject real estate forms partof theuse are sharedamongall ownersofthebuilding,andthattherearenoonerousliabilitiesoutstanding.

5.2 Suggestedfactorstobetakenintoaccountin the valuation are:

5.2.1 thetenureoftherealproperty- If therealproperty is subject to tenancy(ies), detailsincluding lease period(s), rental amount(s),option to renew and other relevantconditionsshouldbeincluded;

5.2.2 the age, type, accommodation, location,amenities, fixtures and features of the real estate and other significant environmentalfactorswithinthelocality;

5.2.3 thegeneralstateofrepair,theconstructionandapparentmajordefects;and

5.2.4 the overall quality of management of thebuildingofwhichthe real estate formspartof.

5.3 Inassessmentofthemarket values ofstrata-titledunits,unlessotherwiseinstructed,anyredevelopmentpotentialattachedtothesiteistobeexcluded.Thevaluerwouldalsonottoincludeanyelementofvalueattributabletofurnishingsandremovablefittingsofanydescriptionwhen arriving at an opinion ofvalue. Portable and temporary structuresarealsotobeexcluded.

5.4 ‘Market value’shallbeadoptedinaccordancewith the Standards.

5.5 The valuationshallbemadeontheassumption thattheownersellsthesubjectrealpropertyonthemarketwithoutthebenefitorburdenof cash rebate, unusual payment terms,specialincentiveoranysimilararrangementwhichcouldaffect thevalueof thesubjectrealproperty.

5.6 Valueforsaleunderrepossession(VSR)

Value for sale under repossession (the word repossession means the action of regaining possession especially the seizure of collateral securing a loan that is in default) refers to the price that might reasonably be expected to realise within a defined period of time (the period shall be agreed upon between Lender and valuer) from the sale of a real property in the market under repossession by the Lender

or receiver, on an “as is” basis, taking into account the unique quality of the real property and the existence of any specific demand as well as factors which might adversely affect the marketability of the real property due to market perception of increased risk or stigma, justified or otherwise.

The underlying basis of value of VSR is market value, but subject to special assumptions on actual or hypothetical marketing constraints which cause the perception of increased risk of stigma. The marketing constraint must be agreed with the Lender prior to reporting. An example of the marketing constraint includes the anticipated time frame for completion of a transaction which strikes a balance between the Lender’s liquidity need and the reasonable care to the mortgagor, but which may be considered as inadequate for the real property to be presented in the market.

A special assumption that simply refers to a time limit for disposal without stating the reasons for that limit would not be a reasonable assumption to make. Without a clear understanding of the reasons for the constraint, the valuer would be unable to determine the impact that it may have on marketability, sale negotiations and the price achievable, or to provide meaningful advice.

A marketing constraint should not be confused with a forced sale. A constraint may result in a forced sale, but it can also exist without compelling the owner to sell.

The term ‘forced sale value’ must not be used. A ‘forced sale’ is a description of the situation under which the exchange takes place, not a distinct basis of value. Forced sales arise where there is pressure on a particular vendor to sell at a specific time – for example, because of the need to raise money or to extinguish a liability by a given date. The fact that a sale is ‘forced’ means that the vendor is subject to external legal or personal commercial factors, and therefore the time constraint is not merely a preference of the vendor. The nature of these external factors and the consequences of failing to conclude a sale are just as important in determining the price that can be achieved within the length of time available. Unless in certain extreme cases the facts show otherwise, it may be remote and inappropriate to foresee a bank will be ‘forced’ to sell a real property under repossession.

While a valuer can assist a Lender in determining a price that should be accepted in marketing constraints, this is a commercial judgement of the Lender whether a discounted price to the market value will be accepted. A valuer should make a qualification in the report on the reliance of VSR.


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To provide an estimate of the VSR, the valuer should:

(1) agree with the Lender or receiver onthe details of the actual or anticipatedmarketing constraints that might haveimpact on the market valuewhilsttakinginto account the unique quality of thereal property and the existence of anyspecificdemand;

(2) ascertain whether the constraint arisesfromaninherentfeatureoftheasset,oroftheinterestbeingvalued,orfromtheparticularcircumstancesoftheclient,orsomecombinationofallofthese;

(3) estimate the market value of the realproperty;

(4) analyse and apply adjustment(s) to themarket value of the real property bytakingintoaccountthenegativeimpactsandtoarriveatthevalueforsaleunderrepossessionindependently;and

(5) makeaqualificationinthereport on the relianceoftheVSR.

6. BUILDING INSURANCE REPLACEMENT COST

In some cases, valuers are required to givethe building insurance replacement cost ofthesubjectreal estate in the reportsfortheLenders’reference.

The building insurance replacement cost isdefinedastheestimatedcostoferectingthesamereal estateoramodernsubstitutereal estatehavingthesameareaastheexistingone at the relevant date, which includesfees, finance costs and other associatedexpensesdirectlyrelatedtotheconstructionofthereal estate.CoverageforlossofrentandotherdisturbanceswillnotbeincludedunlessspecificallyrequestedbytheLender.

In producing the building insurancereplacement cost in the report, shouldthe valuer consider himself not a qualifiedprofessional to give an accurate buildinginsurance replacement cost of the subjectreal estate, he should reach an agreementwith the Lender prior to the issue ofthe report on the source of the buildinginsurancereplacementcosttobereferencedandthewaytousesuchbuildinginsurancereplacementcost,andtodisclosethesameinthe report.Toavoiddoubt,theHKISconsiders

that thequalifiedprofessional inproducingthe building insurance replacement costshould be a professional quantity surveyor,a firm of professional quantity surveyorsin Hong Kong or other individual / firm of equivalent professional qualification inother jurisdictions who is competent andexperiencedintherelevantmatters.Shoulda valuer require the assistance from otherprofessional on the building insurancereplacement cost, he should notice therequirementsunderparagraph 2.2.2 of VS 2 and section 3.4.0 of VS 3 ofthe Standards.

7. THE VALUER’S RECORD

7.1 The valuer should keep a record of thesource of information quoted in the report and tomake and retain legible notes as tohis findings and, particularly, the limits ofinspection and the circumstances underwhichitwascarriedout.

7.2 The valuer shouldalsokeeparecordofthecomparable transactions and/or valuationstowhichhehashadregardinarrivingathisvaluation.

8. INDEPENDENCE, OBJECTIVITY AND CONFLICTS OF INTEREST

8.1 Valuers must at all times actwith integrity,independence and objectivity, and avoidconflicts of interest and any actions orsituations that are inconsistent with theirprofessionalobligations.Members mustalsodeclare any potential conflicts of interest–personal or professional – to all relevantparties.

8.2 The Lender may specify additional criteriaforindependenceforavaluationforsecuredlending.Intheabsenceofspecification,theadditionalcriteriashallbedeemedtoincludea stipulation that the valuer has had noprevious,currentoranticipatedinvolvementwiththeborrower,orprospectiveborrowerthe asset to be valued or any other partyconnectedwithatransactionforwhichthelending is required. ‘Previous involvement’would normally be anything within theperiodof24monthsprecedingthedateofinstructionordateofagreementoftheterms of engagement (whichever is earlier), but aspecificlongerperiodmaybeprescribedoradoptedinindividualjurisdictions.


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8.3 Any previous or current involvement withtheborrowerortherealpropertyorasset to bevaluedmust be disclosed to the Lenderprior to the acceptance of the instruction.Disclosure should also extend to anyanticipatedfutureinvolvement.(Referencesto ‘borrower’ include a prospectiveborrower or any other party connectedwith the transaction forwhich the lendingis required). Examples of such involvementthat may result in a conflict of interestinclude situations where the valuer or hisfirm:

• has a long-standing professionalrelationship with the borrower or theowneroftherealpropertyorasset

• is introducing the transaction to theLenderortheborrower,forwhichafeeispayabletothevaluer orhisfirm

• hasafinancial interest intheasset or in theborrower

• isactingfortheowneroftherealpropertyor assetinarelatedtransaction

• isacting(orhasacted)fortheborroweron thepurchaseof the real property or asset

• isretainedtoactinthedisposalorlettingof a completed development on thesubjectrealpropertyorasset

• hasrecentlyactedinamarkettransactioninvolvingtherealpropertyorasset

• has provided fee earning professionaladvice on the real property or asset to current or previous owners or theirlendersand/or

• isprovidingdevelopmentconsultancyforthecurrentorpreviousowners.

8.4 The valuer must consider whether anyprevious,currentoranticipatedinvolvementwith either the real property or asset or relatedpartiesissufficienttocreateaconflictwith the valuer’s duty to be independentandobjective.Matterssuchasthequantumof any financial interest in a connectedparty,thescopeforthevaluerorhisfirm to benefitmateriallyfromaparticularvaluation outcomeandthe leveloffeesearnedfromanyconnectedpartyasaproportionoftotalfeeincomemayallbematerial.

8.5 Ifthevaluerconsidersthatanyinvolvementcreatesanunavoidableconflictwithhisdutytothepotentialclient,theinstructionshould bedeclined.

8.6 If the client considers that any disclosedinvolvement does create a conflict, thevaluer should decline the instruction. If thevaluerandtheclientagreethatanypotentialconflict can be avoided by introducingarrangementsformanagingthe instruction,those arrangements must be recorded inwriting,includedintheterms of engagement,ifany,andreferredtointhereport.

8.7 Althoughavaluer maytakeintoaccounttheviews of the prospective client in decidingwhether a recent, current or anticipatedinvolvementcreatesaconflict,itremainsthevaluer’sprofessionalresponsibilitytodecidewhether or not to accept the instructionhavingregardtotheprinciplesoftheCodesof Conduct and VS 3 of the Standards. Ifthe instruction is accepted wherematerial involvement has beendisclosed, thevaluer may be required to justify this decisionto HKIS. If a satisfactory justification isnot provided, HKIS may take disciplinarymeasures.

9. COMPLIANCE WITH THE GUIDANCE NOTES

All valuations forsecuredlendingshouldbemadeinaccordancewiththisguidancenotes.Incasesofanydeparturefromthisguidancenotes, the valuer must note the disclosurerequirements as denoted inSections 1.3.0 and 1.5.0 of VS 1ofthe Standards and should notify the Lender, or be notified by theLender,inwriting.Suchdeparture shouldbeclearlystatedinthevaluation report,and,ifpossible,intheterms of engagement.

Valuers are reminded toobserve theirdutyof care to the Lenders in performing theirvaluations,andtheextentofliabilityoftheirvaluation reportstotheLenders.


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It have long been a common practice for theLenderstorequestapreliminaryindicationofvalueof the intended subject of valuation before formalengagement. In the past, it was called “verbalvaluation” which was conducted wholly orally toprovideapreliminary indicationonthevalueofanasset, but as time evolves, Lenders nowadaysmayrequest for a record in writing. A member should alert the Lender that the preliminary indication isapreliminaryadvice(seeparagraph 3.2.19 of VS 3)onlyandmuststatethat:

1. The opinion is provisional and subject tocompletionofthefinalreport;

2. Theadvice isprovided for theLender’s internalpurposesonly;and

3. Any draft is on no account to be published ordisclosed.

HKISwouldrecommendtousetheterm“PreliminaryIndication of Value” or in short “PreliminaryIndication”orinChinese“初步參考值”foravoidanceofdoubt.


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Appendix to VGN 4:Guidance on Providing Preliminary Indication of Value


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It is recognized that thepreliminary indication isnotnecessarilyconductedbyaqualifiedvaluer and it isperfectlyproperforavaluertodesignatesuitablytrainedstaffunderhissupervisiontoprovideapreliminaryindication.Asabestpractice,avaluer shouldconsidertheknowledge,experience,reliabilityandabilityofhisstaffinanysuchdesignation.

For avoidance of doubt, nomatterwhether a preliminary indication is provided orally or inwriting, theprinciplessetoutinthe Standards shouldstillbeobservedtothefullestextentpossible.MembersareremindedthatthemerefactthatHKISconsidersapreliminaryindicationaspreliminaryadvicedoesnotmeanthatthepreliminaryindicationisthereforeprovidedwithoutliability–thevaluer’sresponsibilitiesandobligationswillalwaysdependonthefactsandcircumstancesoftheindividualcase.


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總辦事處 Head Office

香港上環干諾道中 111號永安中心 12樓 1205室Room 1205, 12/F Wing On Centre,111 Connaught Road Central, Sheung Wan, Hong KongTelephone: (852) 2526 3679 • Facsimile: (852) 2865 4612Email: [email protected] • Web Site: www.hkis.org.hk

北京辦事處 Beijing Office

中國北京市海淀區高樑橋斜街 59號院 1號樓中坤大廈 6層 616室（郵編：100044)Room 616, 6/F, Zhongkun Plaza, No.59 GaoliangqiaoxiejieNo.1 yard, Haidian District, Beijing, China, 100044Telephone: 86(10) 8219 1069 • Facsimile: 86 (10) 8219 1050Email: [email protected] • Web Site: www.hkis.org.hk

VALUATION Standards 2017

HKISFOR RATIFICATION PURPOSE

(HKIS AGM 2017)

the hong kong institute of surveyors - 冰匠吉 吉兆同划冰 … · 2017. 11. 23. · 111...

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the hong kong institute of surveyors - 冰匠吉吉兆同划冰 … · 2017. 11. 23. · 111...