Valuation Principles, Value Concepts, and Bases of Value
This domain tests whether you can select the correct basis of value, define it accurately, and keep it consistent from scope of work through to the reconciliation. Most marks are lost by importing a definition from the wrong regime.
The recognised bases
- Market value under IVS 104: the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein each party acted knowledgeably, prudently and without compulsion.
- Market rent applies the same logic to the letting of an interest.
- Equitable value sits between market value and investment value, reflecting terms that are fair between specific parties.
- Investment value is entity-specific; synergistic value captures the increment available from combination with another asset.
- Liquidation value is reported on either an orderly or a forced realisation premise.
- IVS 2022 consolidated the list; special value and marriage value are no longer listed as separate bases and are handled inside investment or synergistic value, or as stated assumptions.
Value, price and cost are not synonyms
Price is what was paid, cost is what was incurred, and value is an opinion of the most probable price. Depreciation in the cost approach is an appraiser's estimate of loss in value; depreciation in accounting is an allocation of historical cost.
Worked example
Two bidders chase a quarry. A local operator bids $4.2M; an adjacent cement group bids $5.6M because the site's haul road removes a logistics cost unique to it. Reasoning: market value hypothesises typical market participants, so $5.6M is not market value because it embeds a synergy available to one buyer only. Report $4.2M as market value, and report $5.6M only as investment value to that buyer, or as synergistic value where the synergy itself is the defined basis.
Traps
- Using IFRS fair value (an exit price between market participants under IFRS 13) and US fair market value interchangeably.
- Ignoring highest and best use; market value assumes it even where current use differs.
- Applying a forced-sale discount without stating the premise and the shortened exposure period.
- Blending two bases in one figure, for example adding synergy into a market value conclusion.