Valuation Principles and Professional Standards
The foundation of defensible value
Valuation is a discipline of standards, definitions, and judgment, not a formula exercise. Candidates must know the difference between value definitions: fair market value (a hypothetical, arm's-length transaction between informed, willing parties, neither under compulsion), fair value (an accounting term, often an exit price in an orderly market), investment value (buyer-specific), and intrinsic value (analyst's judgment of worth). A question that says "the price at which property would change hands between a willing buyer and willing seller, both having reasonable knowledge" is describing fair market value, not fair value.
Know the governing frameworks: USPAP's standards and reporting requirements, the IVS general and asset-specific standards, and professional codes of conduct. Key principles include independence and objectivity (no contingent fees based on a predetermined value), competence, confidentiality, scope of work agreed in advance, and adequate documentation. The report must disclose assumptions, limiting conditions, and any departure from typical practice.
Traps: (1) Confusing the value definition with the method - a discounted cash flow does not by itself produce fair market value. (2) Ignoring the "highest and best use" concept, which precedes method selection. (3) Failing to distinguish valuation date from report date. (4) Missing that contingent compensation compromises independence.
Rule of thumb: Before choosing a method, ask three questions - Which value definition applies? What is the valuation date? Is the use hypothetical or existing? A worked example: a client offers a bonus if the appraised value exceeds $5 million. The correct answer is to decline the engagement or the fee arrangement, because independence is compromised regardless of the resulting value.
Reporting and review
Standards require a clear scope, signed certification, and sufficient support for a third-party reviewer to replicate the reasoning.