The Institute of Chartered Accountants of Bangladesh (ICAB)

Guide Document On
INTERNATIONAL VALUATION STANDARDS
(WHAT THEY ARE AND WHAT WE SHOULD KNOW)

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Guide Document On International Valuation Standards
(What They are and What We Should Know)
The Institute of Chartered Accountants of Bangladesh

The Study materials have been produced by the Education and Student Affairs Division
of the Institute of Chartered Accountants of Bangladesh.

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Acknowledgment: The Institute of Chartered Accountants of Bangladesh (ICAB)

expresses its sincere appreciation to Sk Md Tarikul Islam FCA (ICAB), ACA (ICAEW), CBV
(Chartered Business Valuator), MBA (Bradford, UK) for his invaluable contribution to the
Guide Document on International Valuation Standards, prepared as an auxiliary resource
for Strategic Business Management and Leadership.
 Contents

INTRODUCTION 4
UNDERSTANDING IVS 4
STRUCTURE OF IVS 5
IVS GLOSSARY 5
IVS FRAMEWORK 8
GENERAL STANDARDS 9
IVS 101 – SCOPE OF WORK 9
IVS 102 – INVESTIGATIONS AND COMPLIANCE 10
IVS 103 – REPORTING 11
IVS 104 – BASES OF VALUE 12
IVS 105 – VALUATION APPROACHES AND METHODS 17
ASSET STANDARDS 21
IVS 200 – BUSINESSES AND BUSINESS INTERESTS 21
IVS 210 – INTANGIBLE ASSETS 26
VALUATION APPROACHES AND METHODS 26
IVS 220 – NON-FINANCIAL LIABILITIES 28
IVS 230 – INVENTORY 30
IVS 300 – PLANT AND EQUIPMENT 31
IVS 400 – REAL PROPERTY INTEREST 32
IVS 410 – DEVELOPMENT PROPERTY 34
IVS 500 – FINANCIAL INSTRUMENT 35
FUTURE CHANGES TO THESE STANDARDS 36
VALUATION AND ETHICAL PRINCIPLES 36
IMPORTANT NOTE ABOUT THIS GUIDE DOCUMENT 37

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 3
 INTRODUCTION
This document is the first publication by The Institute of Chartered Accountants
of Bangladesh (ICAB) with respect to International Valuation Standards (IVS).
The purpose of this publication is to raise awareness and understanding of IVS
among ICAB Members, Registered Students and Corporates. This publication
provides a high level factual overview of the structure of the IVS and the content
therein that is relevant to business valuation.

IVS are a global set of valuation standards promulgated by the International

Valuation Standards Council (IVSC), which is an independent, not-for-profit
global standard setter for the valuation profession headquartered in London
(UK). The IVSC’s goal is to build trust in valuation by establishing one set of
globally consistent, high-quality valuation standards.

The IVSC has more than 130 member organizations from around the world and is
supported by numerous sponsor organizations who are leaders in the valuation
field. The IVSC facilitates collaboration and cooperation among its member
organizations, who are valuation professional organizations (VPOs), valuation
service providers, financial services businesses, regulators, international bodies
and academic institutions. The IVSC is an independent standard setter – it does
not offer training or accreditation to individuals or valuation firms. The IVSC has
different forms of recognition from the UN, World Bank, IMF, European Banking
Authority and IASB, amongst others. Some of the world’s leading regulators
send observers to IVSC meetings, and IVSC also engages at the highest levels to
provide input and understand regulatory issues.

IVSC acts through Board of Trustees (responsible for the governance, strategic
direction and funding of IVSC), Membership & Standards Recognition Board
(responsible for promotion of the valuation profession and for the review of
membership process) and Standards Review Board. Standards Review Board
is responsible for the creation and the revision of the IVS. It follows a process
of public consultation approved by the Board of Trustees but otherwise has
autonomy over its agenda and approval of the standards.

UNDERSTANDING IVS

IVS are developed with the aim of serving as a professional benchmark for
valuers around the world with the “objective to increase the confidence and
trust of users of valuation services by establishing transparent and consistent
valuation practices”.

IVS consist of mandatory requirements that must be followed in order to state

that a valuation was performed in compliance with IVS. IVS are focused on the
whole valuation engagement (i.e. process), not just the valuation report.

4 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
IVS are principles-based multi-disciplinary standards; hence, they include
requirements for multiple asset classes - tangible assets (such as plant &
equipment and real property interests), business valuation, intangible assets
and financial instruments. IVS requirements apply to external as well as internal
valuation engagements.

STRUCTURE OF IVS
This version of International Valuation Standards is published on 31 July 2021,
with an effective date of 31 January 2022. The IVSC permits early adoption
from the date of publication. References hereafter to IVS will be to the IVS 2021
publication. IVS include a glossary, framework and five general standards that
apply to all valuation assignments, as well as eight asset standards that include
requirements related to specific types of assets.

General Standards Assets Standards

· IVS 101 – Scope of Work · IVS 200 – Businesses and Business

· IVS 102 – Investigations and Com- Interests
pliance · IVS 210 – Intangible Assets
· IVS 103 – Reporting · IVS 220 – Non-Financial Liabilities
· IVS 104 – Bases of Value · IVS 230 – Inventory
·IVS 105 – Valuation Approaches and · IVS 300 – Plant & Equipment
Method · IVS 400 – Real Property Interests
· IVS 410 – Development Property
· IVS 500 – Financial Instruments

IVS GLOSSARY
The Glossary does not define basic valuation, accounting or finance terms (such
as asset, liability, or cash flow) as valuers are assumed to have an understanding
of such terms and the definitions of such terms may vary depending on the
purpose of the valuation and the jurisdiction in which it is performed. The terms
included in the Glossary are:

· Asset/Assets – includes assets, groups of assets, liabilities and groups of

liabilities.
· Basis (bases) of Value - The fundamental premises on which the reported
values are or will be based
· Client – refers to both external (third-party) and internal clients (i.e.
valuations performed for an employer).
· Cost(s) (noun) - The consideration or expenditure required to acquire or
create an asset.

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 5
 . Discount Rate(s) - A rate of return used to convert a monetary sum,
payable or receivable in the future, into a present value.
· Equitable Value - This is the estimated price for the transfer of an asset or
liability between identified knowledgeable and willing parties that reflects
the respective interests of those parties.
· Fair Market Value
• The Organization for Economic Co-operation and Development
(OECD) defines “fair market value” as the price a willing buyer would
pay a willing seller in a transaction on the open market.
• For United States tax purposes, Regulation §20.2031-1 states: “The
fair market value is the price at which the property would change
hands between a willing buyer and a willing seller, neither being un-
der any compulsion to buy or to sell and both having reasonable
knowledge of relevant facts”

· Fair Value (International Financial Reporting Standards) - IFRS 13

defines “fair value” as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.

· Jurisdiction – is the legal and regulatory environment in which a valuation

engagement is performed, which may in some cases require the use of a
particular valuation approach (i.e. the relevant jurisdiction may require the
use of only a market approach in a circumstance where IVS would indicate
that the income approach should be used). Jurisdictions also impact
departures from IVS.

. Market Value - The estimated amount for which an asset or liability should
exchange on the valuation date between a willing buyer and a willing
seller in an arm’s length transaction, after proper marketing and where the
parties had each acted knowledgeably, prudently and without compulsion.

· Participant – includes the relevant participants for the basis of value used
in a valuation engagement (i.e. a market participant perspective is required
in an IFRS fair value basis of value).

. Price (noun) - The monetary or other consideration asked, offered or paid

for an asset, which may be different from the value.

· Purpose - is the reason why a valuation is performed, and may include

financial reporting, tax reporting, litigation support, transaction support, or
to support secured lending decisions.

· Significant and/or Material – require professional judgement.

“Materiality” refers to materiality to the valuation engagement. Aspects of
a valuation are considered significant/material if their application and/or

6 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
 impact on the valuation could reasonably be expected to influence the
economic or other decisions of users of the valuation. Judgements about
materiality are affected by the size or nature of the subject asset. In other
words, significance and materiality are tied to the user and their decision.

· Subject or Subject Asset – is the asset(s) valued in a valuation engagement.

. Synergistic Value - The result of a combination of two or more assets or

interests where the combined value is more than the sum of the separate
values. If the synergies are only available to one specific buyer, then
synergistic value will differ from market value, as the synergistic value will
reflect particular attributes of an asset that are only of value to a specific
purchaser. The added value above the aggregate of the respective
interests is often referred to as marriage value.

. Valuation - The act or process of determining an opinion or conclusion of

value of an asset on a stated basis of value at a specified date in compliance
with IVS

. Value (noun) - The opinion resulting from a valuation process that is

compliant with IVS. It is an estimate of either the most probable monetary
consideration for an interest in an asset or the economic benefits of holding
an interest in an asset on a stated basis of value.

· Allocation of Value - Allocation of value is the separate apportionment of

value of an asset(s) on an individual or component basis.

· Valuer - includes an individual, group of individuals, or individual within an

entity, regardless of whether employed (internal) or engaged (contracted/
external), possessing the necessary qualifications, ability and experience
to undertake a valuation in an objective, unbiased and competent manner.

· Valuation Reviewer – is a valuer engaged to review the work of another

valuer. IVS does not have separate standards for a critique of another
valuer’s report. A valuation reviewer is able to provide their own conclusion
of value whilst reviewing another valuer’s work.

· Weight and Weighting – is the amount of reliance placed on a particular

indication of value in reaching a conclusion of value. Weighting refers to
the process of analyzing and reconciling different indications of value,
typically from different methods or approaches, but does not include
averaging of valuations, which is prohibited by IVS.

· May/Must/Should – IVS clarifies that all aspects of the standards are

mandatory; however, some aspects of IVS require a specific action, while
others require only consideration of certain factors. The terms “must”,
“should” and “may” are important, and help to distinguish various aspects
of IVS and provide clarity.

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 7
 · “Must” indicates unconditional responsibility. The valuer must fulfill
responsibilities of this type in all cases in which the circumstances exist
to which the requirement applies.
· “Should” indicates responsibilities are presumptively mandatory.
The valuer must comply with requirements of this type unless they
demonstrate that alternative actions which were followed under the
circumstances were sufficient to achieve the objectives of the stan-
dards (in which case these must be documented). When “should”
is used, it means the valuer should consider an action or procedure
and therefore, consideration of the action or procedure is mandatory,
while the action or procedure itself is not. In other words, “should” is
still a fairly high bar which means that the valuer must comply or else
have documented why the indicated action was not necessary or ap-
propriate. The prevalent use of “should” within IVS has implications for
file documentation.
· “May” describes actions and procedures that valuers have a respon-
sibility to consider; these items require a valuer’s attention and under-
standing, but the valuer must exercise professional judgment in how
and whether the valuer implements these matters.

IVS FRAMEWORK
The IVS Framework consists of general principles with regard to objectivity,
judgement, competence and acceptable departures from IVS. The Framework
also clarifies that when a statement is made that a valuation has been undertaken
in accordance with IVS, it is implicit that it has been prepared in compliance with
all relevant standards issued by the IVSC. The Framework (as well as the IVS
definition of Market Value) specifically state that the standards can be applied
to the valuation of both assets and liabilities and present and future claims on
assets and liabilities

Objectivity
IVS is premised on an unbiased and objective opinion. The valuer must make
impartial judgements as to the reliability of inputs and assumptions in the
process of valuation. This is consistent with the definition of valuer as some-
one who undertakes a valuation in an objective, unbiased and competent
manner. There is a fundamental expectation that controls and procedures are
in place to ensure objectivity in the valuation process.

Competence
Valuations must be prepared by an individual, group of individuals or indi-
vidual within an entity, regardless of whether employed (internal) or engaged
(contracted/external), possessing the necessary qualifications, ability and ex-
perience to execute a valuation in an objective, unbiased, ethical and com-
petent manner and having the appropriate technical skills, experience and

8 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
 knowledge of the subject of the valuation, the market(s) in which it trades and
the purpose of the valuation.

Departures
In some circumstances a valuer may depart from IVS due to legislative, reg-
ulatory or other authoritative requirements and still state that the “valuation
was performed in accordance with IVS”, but must disclose the specific re-
quirements and the significant ways in which they differ from IVS.
In such case, a valuation can still be IVS compliant, however, the Valuer is re-
quired to disclose the limitations transparently. According to IVS 2021, de-
partures that are not a result of legislative, regulatory or other authoritative
requirements are not permitted, and result in valuations that are non-compli-
ant with IVS

GENERAL STANDARDS
The five general standards set forth the requirements for the conduct of
all valuation assignments, including establishing the terms of a valuation
engagement, bases of value, valuation approaches and methods, and reporting.
The general standards are:

· IVS 101 – Scope of Work

· IVS 102 – Investigations and Compliance
· IVS 103 – Reporting
· IVS 104 – Bases of Value
· IVS 105 – Valuation Approaches and Method

IVS 101 – SCOPE OF WORK

Also referred to as the “terms of the engagement”, the scope of work describes
the fundamental terms of a valuation, such as the asset(s) being valued, the
purpose of the valuation and the responsibilities of the parties involved.

IVS 101 applies to a wide spectrum of valuation assignments, including “in-

house” valuations (valuations performed by valuers for their own employers),
“third-party” valuations, and valuation reviews.

The general requirement for the scope of work is that the work undertaken must
be appropriate for the intended purpose. A valuer must also ensure that the
intended recipient of a valuation understands what is being provided, and must
communicate the scope of work to the client before completing the assignment,
including:

· Identity of the valuer, as well as any material connection or involvement with

the subject asset or other parties to the valuation assignment
· Identity of the client(s)

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 9
 · Identity of the intended users
· Asset(s) being valued
· Valuation currency
· Purpose of the valuation
· Basis/bases of value used
· Valuation date
· Nature and extent of the valuer’s work and any limitations thereon
· Nature and sources of information upon which the valuer relies
· Significant assumptions and/or special assumptions
· Type of report being prepared (the format of the report must be described)
· Restriction of use, distribution and publication of the report
· That the valuation will be prepared in compliance with IVS and that the valuer
will assess the appropriateness of all significant inputs.
The scope of work should be established and agreed between the parties prior
to the valuer beginning work. A written scope of work should be prepared. IVS
101 also requires that any changes to the scope of work must be communicated
to the client before the assignment is completed and the valuation report is
issued.

IVS 102 – INVESTIGATIONS AND COMPLIANCE

Investigations
IVS require that sufficient evidence must be assembled (by inspection, inquiry,
computation and analysis) to ensure that the valuation is properly supported,
and professional judgement is required in this regard to ensure the information
obtained is adequate for the purpose of the valuation.

Investigations must be appropriate for the purpose of the valuation assignment

and the basis (es) of value. There may be agreed-upon limits on the extent of
the valuer’s investigations, which must be noted in the scope of work. However,
IVS 105 requires valuers to perform sufficient analysis to evaluate all inputs and
assumptions and their appropriateness for the valuation purpose, regardless of
the source of those inputs and assumptions. If the limitations on investigations
are so substantial that the valuer cannot sufficiently evaluate the inputs and
assumptions, the valuation engagement must not state that it has been prepared
in compliance with IVS. Ultimately, compliance with IVS must be a meaningful
statement on the quality of a valuation and, as such, IVS does not allow any
and all limitations on investigations – rather, significant limitations that impair a
valuer’s ability to take responsibility for the inputs and assumptions result in a
valuation not being in compliance with IVS.

IVS 102 also requires valuers to consider whether information supplied by a party
other than the valuer is credible. In fact, significant inputs provided to the valuer

10 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
by management may require consideration, investigation and/or corroboration.
Where the credibility or reliability of supplied information cannot be supported,
such information should not be used. While a valuer is not required to audit the
information received, he/she must have a reasonable belief that reliance on that
source is appropriate.

Importantly, if during an engagement it becomes clear that the investigations

included in the scope of work will not result in a credible valuation, or information
to be provided by third parties is either unavailable or inadequate, the valuation
assignment will not comply with IVS.

Valuation Record
IVS requires a record to be kept of the work performed and the basis for the
work on which the conclusions were reached for a reasonable period of time.
This record should include:
· Key inputs
· All calculations
· Investigations and analyses relevant to the final conclusion.
· Copy of any draft or final report(s) provided to the client.

IVS 103 – REPORTING

IVS reporting requirements are principles-based and high level – the main
principle the reports must achieve is to communicate relevant information to
clients. IVS does not define a valuation report, but states that a report must
provide the intended users with a clear understanding of the valuation.

General Requirements
There is no one format of report that is required to comply with IVS. The
report must be sufficient to communicate to the intended users the scope of
the valuation assignment, the work performed and the conclusions reached.
However, the report must also contain sufficient detail to allow an appropriately
experienced valuation professional with no prior involvement with the valuation
engagement to review the report and understand the scope of work performed,
the analysis and procedures and the conclusion of value.

As there is no particular format of report that is required within IVS, reports may
range from comprehensive narrative reports to abbreviated summary reports.
However, IVS identify the information that must be conveyed in a valuation
report. The report must set out a clear and accurate description of the scope of
the assignment, its purpose and intended use (including limitations on that use)
and disclosure of any assumptions, special assumptions, significant uncertainty
or limiting conditions that directly affect the valuation. The level of detail
appropriate for the valuation report is determined by:

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 11
 · The purpose of the valuation,
· The complexity of the asset being valued, and
· The users’ requirements.
IVS state that the format of the report should be agreed with all parties as
part of establishing the scope of work. IVS 103 also requires that the scope of
work be clear in the report, and refers to IVS 101 in that regard. The scope of
work undertaken in the preparation of a valuation must be appropriate for the
intended purpose.

IVS also does not differentiate report types by the level of assurance provided.
IVS-compliant engagements are intended to provide the same quality of
valuation, irrespective of the level of detail in the valuation report. The report
ultimately reflects the work undertaken, and the general requirement is that the
work undertaken must be appropriate for the intended purpose and users.

Valuation Reports
Minimum required report disclosures for valuation reports are:

• Scope of work performed (including all 14 Scope of Work items listed in

IVS 101 para 20.3)
• Approach or approaches adopted
• Key inputs used
• Assumptions made
• Conclusion(s) of value and principal reasons for any conclusions reached,
and
• Date of the report.

As part of a general focus on more principles-based standards, IVS 103 also

allows valuers to comply with the reporting requirements by referring to other
documents, such as engagement letters or scope of work documents.

Valuation Review Reports

IVS 103 also specifies the minimum required report disclosures for Valuation
Review Reports.

IVS 104 – BASES OF VALUE

A basis of value describes the fundamental premises on which the reported
values will be based. IVS permit a valuer to select any appropriate value definition,
which could be specific to the purpose of the valuation, the country, local
requirements, statues or regulations, etc. The selected basis (or bases) of value
must be appropriate to the terms and purpose of the valuation assignment, as
a basis of value may influence or dictate a valuer’s selection of methods, inputs
and assumptions, and the ultimate opinion of value.

12 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
A valuer is required to select the appropriate basis (or bases) of value and follow
all applicable requirements associated with that basis of value, whether those
requirements are included as part of IVS (for IVS-defined bases of value) or not
(for non-IVS defined bases of value). The source of the definition of any basis of
value used must be cited or the basis explained.

IVS-defined bases of value:

• Market Value
• Equitable Value
• Investment Value/Worth
• Synergistic Value
• Liquidation Value

“Market Value is the estimated amount for which an asset or liability should
exchange on the valuation date between a willing buyer and a willing seller in
an arm’s length transaction, after proper marketing and where the parties had
each acted knowledgeably, prudently and without compulsion.” (definition from
IVS 104, section 30.1)

“Market Rent is the estimated amount for which an interest in real property
should be leased on the valuation date between a willing lessor and a willing
lessee on appropriate lease terms in an arm’s length transaction, after proper
marketing and where the parties had each acted knowledgeably, prudently and
without compulsion.” (definition from IVS 104, section 40.1)

“Equitable Value is the estimated price for the transfer of an asset or liability
between identified knowledgeable and willing parties that reflects the respective
interests of those parties.” (definition from IVS 104, section 50.1)

“Investment Value is the value of an asset to a particular owner or prospective

owner for individual investment or operational objectives.” (defined in IVS 104,
section 60.1)

“Synergistic Value is the result of a combination of two or more assets or

interests where the combined value is more than the sum of the separate values.
If the synergies are only available to one specific buyer then Synergistic Value will
differ from Market Value, as the Synergistic Value will reflect particular attributes
of an asset that are only of value to a specific purchaser. (defined in IVS 104,
Section 70.1)

“Liquidation Value is the amount that would be realised when an asset or group
of assets are sold on a piecemeal basis. (defined in IVS 104, Section 80.1)

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 13
 IVS makes reference to four bases of value defined by other organizations.
• Fair Value (IFRS): IFRS 13 defines fair value as the price that would be re-
ceived to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
• Fair Market Value (OECD)
• Fair Market Value (US IRS)
• Fair Value (Legal/Statutory) – includes Canadian case law

Valuers must choose the relevant basis or bases of value according to the terms
and purpose of the valuation assignment. The choice of the basis of value should
consider instructions and input received from the client and/or its representatives,
however the valuer should not use a basis of value that is inappropriate for the
intended purpose of the valuation. For bases of value defined by organizations
other than the IVSC, it is the valuer’s responsibility to understand and follow the
regulation, case law and/or other interpretative guidance related to those bases
of value as of the valuation date.

Premise of Value
Different bases of value may require a particular premise of value or allow
consideration of multiple premises of value. IVS 104 describes and defines
some common premises of value, including:

• Highest and best use

• Current use/existing use
• Orderly liquidation
• Forced sale
These premises are commonly, but inconsistently used across markets. IVS
provides high level definitions of these terms to improve understanding and
increase market consistency

14 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
Fair Value and Market Value Compared

Market Value (IVS) Fair Value (IFRS)

• An estimated amount • An estimated amount
• It is time-specific and valid on the • Orderly transaction
valuation date • Not a forced sale
• The buyer is motivated to buy but, • Market based view
not overeager to buy at any price.
• Not an entity specific
• The seller is motivated to sell, but not measurement
forced to sell.
• Active Market
• Arm’s length transaction
• Highest and best use
• The asset has been exposed to
• Principal Market
proper marketing
• Advantageous Market
• Parties to the transaction are
reasonably informed about the • Fair value hierarchy
nature, characteristics and uses of • Current price
assets
• The market for an asset could be an
international market or a local market.
• Does not reflect attributes of an asset
that are valuable to a specific owner
or purchaser
• Disregard any synergies

Bangladesh Context
In Bangladesh “base of value” varies widely:

i. Bangladesh Bank:
FEID Circular No.- 1 (May 06, 2018) -Transfer of shares and repatriation of
sale proceeds of shares in favor of nonresident in private/public limited
companies not listed with stock exchanges:
“In accordance with the Guidelines for Foreign Exchange Transactions-
2018 (GFET) Bangladesh Bank would accept fair value of the shares as
on the date of sale based on appropriate combination of three valuation
approaches (viz. net asset value approach, market value approach and
discounted cash flow approach) depending on the nature of the company.”
As per the Circular, Fair Value shall be determined by Merchant Banker
licensed by BSEC or a Chartered Accountant, for sales/transfer value of
shares exceeding BDT 1.00 (One) million. Fair value has not been defined
by Bangladesh Bank; hence, can be assumed “fair value” definition used
in IFRS.

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 15
 ii. Bangladesh Securities and Exchange Commission
BSEC Notification No. SEC/CMRRCD/2009-193/150/Admin…. (Aug 18,
2013), “The definition and source of the basis of value should be cited”. It says
basis of value should not contradict with applicable accounting standards.
This guideline is for revaluation of assets and “fair value” definition as per
IFRS will be applicable.

iii. Income Tax Ordinance 1984

• Sec 2(30) “Fair market value” means, in relation to capital asset-
(a) the price which such asset would ordinarily fetch on sale in the
open market on the relevant day, and, where such price is not
ascertainable, the price which the Deputy Commissioner of
Taxes may, with the approval in writing of the Inspecting Joint
Commissioner, determine;
(b) the residual value received from the lessee in case of an asset
leased by a financial institution having license from the Bangladesh
Bank on termination of lease agreement on maturity or otherwise
subject to the condition that such residual value plus amount
realized during the currency of the lease agreement towards the
cost of the asset is not less than the cost of acquisition to the lessor
financial institution.
"
(Note that Fair market value” yet to be define under the Income Tax Act 2023)
• According to Sec 233 (1) of the Income Tax Act 2023 arm‘s length
price means a price in a transaction, the conditions (e.g. price, margin
or profit split) of which do not differ from the conditions that would
have prevailed in a comparable uncontrolled transaction between
independent entities carried out under comparable circumstances.

iv. Value Added Tax & Supplementary Duty Act- 2012

According to Sec 2 (58): “fair market price” means—

(a) the consideration for a supply arrived at on the basis of a normal relation
between a buyer and a seller, who are not associated with each other;

(b) if it is not possible to arrive at a fair market price as prescribed in clause

(a) above, it would then be the consideration of a similar supply made
previously under similar circumstances;

(c) if it is not possible to arrive at a fair market price by the above means,
it may be determined by the Board on the basis of an objective
approximation of considerations arrived at in the course of normal
business relations among buyers and sellers, who are not associated
with one another;

16 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
Entity-Specific Factors
IVS 104 includes a discussion of various factors that are specific to a particular
buyer or seller but may not be available to participants generally, and the impact
on the valuation.

Synergies
IVS 104 defines synergies and notes that their consideration depends on the
basis of value.

Assumptions and Special Assumptions

IVS 104 differentiates between “assumptions” and “special assumptions”.
Assumptions are assumed facts that are consistent with or could be consistent
with those existing at the date of the valuation, and special assumptions are
those where the assumed facts differ from those existing at the valuation date or
are different from what a typical participant would make (“hypothetical”). Special
assumptions are so named to highlight to a user that the valuation conclusion
is contingent on a change in the current circumstances, and are commonly
used within the valuation of real property. Assumptions can also be significant
assumptions if they could reasonably be expected to influence the decisions of
users of the valuation.

IVS 105 – VALUATION APPROACHES AND METHODS

The principal valuation approaches are listed as “market”, “income” and “cost”,
and IVS 105 includes information on the detailed methods of application for
each approach. A valuer is required to select the most appropriate method under
the particular circumstances. Valuers are not required to use more than one
method for the valuation, but should consider the use of multiple approaches
and methods when there are insufficient factual or observable inputs for a single
method to produce a reliable conclusion. Where multiple approaches and
methods are used to arrive at a single conclusion, the valuer should analyze and
reconcile the differing values obtained, and should describe within the valuation
report this analysis and reconciliation.

IVS 105 acknowledges that compliance with IVS may require a valuer to use a
method not defined or mentioned in the IVS.

The following approaches and methods are laid out in detail in IVS 105, including
the circumstances when they should be used and key steps in their application:

Market Approach
Market approach provides an indication of value by comparing the asset with
identical or comparable (that is similar) assets for which price information is
available.

Market approach methods include:

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 17
 • Comparable Transactions Method
Within this method, market information is collected from realized transactions
with similar assets, and is combined with comparable evidence in order to
calculate transaction multiples i.e. Units of comparison in business valuation can
refer to: EBIT or EBITDA multiples, earnings multiples, book value multiples, etc.

Note that:

• Market information i.e. transaction prices is generally not available on the

valuation date.
• According to IVS 105, the Valuer should make the following considerations
when selecting comparable transactions:
• a choice of several transactions is generally preferable to a single
transaction,
• transactions with very similar assets provide better indication of value than
transactions with assets that require substantial adjustments,
• transactions closer to the valuation date are more representative; this
depends also on market volatility and industry development
• information on transactions should come from reliable sources and
shouldbe sufficient to understand the background of the transactions
• actual transactions provide better evidence than intended transactions.
• Guideline publicly-traded comparable method
Within this method, market information is collected from publicly-traded
comparable that are the same as or similar to the subject asset. When valuing
businesses, this method combines quoted prices of selected comparable
companies, listed on the stock exchanges, with comparable evidence, in order
to calculate guideline publicly-traded multiples. The units of comparison are
the same as identified within the comparable transactions method.
Under this method, market information, i.e. quoted prices, is available on
the valuation date, and information on quoted companies is viewed as of
higher reliability and availability, i.e. public filings have a certain degree of
transparency, etc.
According to IVS 105, the Valuer should analyze and make adjustments for
any material differences between the subject asset and the guideline publicly
traded comparables, e.g. profitability, realized or expected growth, capital
structure, any relevant restrictions on either the subject asset or on the
comparable assets.

Other market approach considerations

o “rule of thumb”
o discounts for lack of marketability
o control premiums
o blockage discounts

18 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
Income Approach
Income approach provides an indication of value by converting future cash
flows to a single current value. Under the income approach, the value of an asset
is determined by reference to the value of income, cash flow or cost savings
generated by the asset.

Discounted Cash Flow Method

When using the discounted cash flow method, according to IVS 2021 on, the
Valuer should consider the following elements:
• Type of cash flows
• Cash flows to whole asset or a partial interest, e.g. cash flows to equity
• Pre-tax or post-tax cash flows
• Nominal versus real cash flows; real cash flows do not consider inflation
• Currency.

All of the above factors represent a mandatory requirement, set forth in IVS 105,
section 50.5. The Valuer must consider all of the above and, additionally, use the
discount rate appropriate for the defined cash flow.

Explicit forecast period

Is not include mandatory requirements, however, offers guidance on the
selection criteria for explicit forecast period (e.g. life of the subject asset, a
reasonable period for which the data is available, the period in which the asset
reached “normalized level of operation”, investment / business cycle, etc.).

Cash flow forecasts

Cash flow forecasts are prepared on the basis of prospective financial information
(PFI). “Regardless of the source of PFI, according to IVS 105, the Valuer must
perform an analysis to evaluate the PFI, the assumptions underlying the PFI and
their appropriateness for the valuation purpose”.

Terminal value
If the asset is expected to continue beyond the explicit forecast, which is the case
in most business valuations except if valuing the company under a liquidation
assumption, the Valuer, according to IVS 105, must estimate the value of the
asset at the end of that period.

IVS 105 identifies 3 most often used terminal value estimation approaches,
although indicating that the list provided in IVS 2021 is non-exhaustive:
• Gordon growth model;
• Market approach / exit value; and
• Salvage value / disposal value.

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 19
 Discount rate
Is not include mandatory requirements, however, offers guidance on methods
for estimating the discount rate, and indicates factors that, the Valuer should
consider when developing the appropriate discount rate.

Cost Approach
Cost approach provides an indication of value using the economic principle
that a buyer will pay no more for an asset than the cost to obtain an asset of
equal utility, whether by purchase or by construction, unless undue time,
inconvenience, risk or other factors are involved.

Cost approach methods include:

• Replacement cost method

Indicates value by calculating the cost of a similar asset offering equivalent
utility. Replacement costs adjusted for different types of obsolescence.
• Reproduction cost method
Indicates value by calculating the cost to recreating a replica of an asset.
Example: Internally developed software that provides similar functions to
the subject asset is, however, of current design and was developed using
current cost effective techniques and materials.
• Summation method/underlying asset method
Applied for the valuation of businesses and business interests, when valuing
investment companies or entities where value is mostly a factor of the value
of their holdings.
Cost approach methods are primarily used for the valuation of real estate, plant
& machinery and intangible assets. They are rarely applied for the valuation
of businesses, except in above indicated situations. If applied, the summation
method is used.

Is the Valuer required to always use more than one valuation method?
• IVS 105, point 10.4, specifically states that the Valuer is not required to
use more than one valuation method, especially in cases where the Val-
uer has a high confidence in the accuracy and the reliability of a single
method.
• On the other hand, IVS 105 encourages the Valuer to consider the use
of multiple approaches and methods when limitations on factual or
observable inputs referring to selected valuation methods are identified.
Whenever the Valuer uses multiple valuation approaches and/or methods, the
Valuer should form the valuation conclusion based on analyzing and reconciling
different valuation results into a single valuation conclusion (IVS 105 specifically
highlights the above issue).

20 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
What if different valuation approaches and methods result in widely diver-
gent indications of value?
According to IVS 105, the Valuer should perform procedures to understand the
reasons for value indication differences.

Example: The Valuer appraised 100% of the equity of Company A using

the market approach and the DCF, comparable transactions and guideline
publicly-traded comparable methods and arrived at the following values for a
100% equity share i.e. majority and non-marketable: DCF = 1.5 million USD,
comparable transactions method = 5 million EUR, guideline publicly-traded
comparable method = 1.1 million EUR.

Prior to making the final valuation conclusion in the above example, the Valuer
should analyze and review the comparable transaction calculation in order
to understand why it indicates a value that is widely divergent from the DCF
and guideline publicly-traded comparable method, e.g. size of the selected
comparable transactions, arm’s length transactions included, the effect of control
premiums, synergies and other factors.

ASSET STANDARDS
IVS include eight asset standards that apply depending on the type of asset
being valued. The asset standards include requirements related to specific types
of assets, including background information on the characteristics of each asset
type that influence value and additional asset-specific requirements regarding
common valuation approaches and methods used. The asset standards cover:

• IVS 200 – Businesses and Business Interests

• IVS 210 – Intangible Assets
• IVS 220 – Non-Financial Liabilities
• IVS 230 – Inventory
• IVS 300 – Plant & Equipment
• IVS 400 – Real Property Interests
• IVS 410 – Development Property
• IVS 500 – Financial Instruments

THE ABOVE ASSET STANDARDS ARE PRECISELY EXPLAINED BELOW:

IVS 200 – BUSINESSES AND BUSINESS INTERESTS

IVS 200 contains additional requirements that apply to valuations of businesses
and business interests. It is critical for the valuer to clearly define the business
or business interest being valued. The type of value being provided must be
appropriate to the purpose of the valuation and communicated as part of the
scope of the engagement.

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 21
 Business and business interests: The definition of what constitutes a business
may differ depending on the purpose of a valuation. Generally, involves an
organisation or integrated collection of assets engaged in commercial, industrial,
service or investment activity. Generally, a business would include more than
one asset (or a single asset in which the value is dependent on employing
additional assets) working together to generate economic activity that differs
from the outputs that would be generated by the individual assets on their own

The different levels at which value can be expressed are:

• Enterprise value
Total value of equity plus the value of interest bearing debt (debt and / or
debt related liabilities) less cash and cash equivalents.
• Total invested capital value
Value of total assets less current liabilities and cash
• Operating value
Total value of the operations of the appraised business, excluding any value
of non-operating (business non-related) assets or liabilities
• Equity value
Value of business to all equity holders
Controlling or non-controlling interest
The Valuer would need to consider the “ownership rights” pertaining to the
subject of the valuation. Most probably, the Valuer would need to examine the
Articles of Association, Memorandum of Association, Partnership Agreements
and similar documents in order to establish any limitations referring to control.

22 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
Control Premium
A premium for control is required when the engagement is to value a controlling
interest and the valuation yielded a non-controlling value. The International
Glossary of Business Valuation Terms defines a control premium as “an amount
or percentage by which the pro rata value of a controlling interest exceeds the
pro rata value of a non-controlling interest in a business enterprise to reflect the
power of control.”

Minority discounts
Minority discounts relate to the value of a particular shareholding where the
rateable value (which reflects a control position) is discounted to reflect the lack
of control over operations (discount for non-control). A discount for illiquidity
(illiquidity or marketability discount) may also be applicable. The illiquidity
discount generally relates to a minority shareholder position in a private
company. However, when the en bloc value of a private company already
reflects an illiquidity discount, it can be argued that a minority shareholder in
a private company is still less liquid than a controlling position, and therefore
another layer of illiquidity discount is appropriate.

In practice, when calculating fair market value in a notional context, a valuator

normally assumes that a market readily exists for the shares of a private
company, such that liquidity is not in fact an issue on value at the en bloc
value. Discounts for non-control and illiquidity are related as a non-controlling
interest is less marketable than a controlling interest. In practice, these factors
are often combined and reflected in one discount. However, the discount for
non-control relates to the lack of control and reflects the relationship between
the shareholders while the discount for illiquidity relates to the external market
at that time.

Some authors take a more conceptually straightforward approach and consider

minority discounts to be a discount only for non-control, with a separate
discount for illiquidity relating to the lack of available market for the disposal of
private company shares.

VALUATION APPROACHES AND METHODS

IVS 200 provides a discussion of the three principal valuation approaches (market,
income and cost) and how they may be applied to valuation of businesses and
business interests. In addition to requirements already discussed in IVS 105, the
Valuer should pay attention when assessing reasonableness of different factors.

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 23
 Market Approach
Factors that need to be considered may include:
• Qualitative and quantitative business characteristics, e.g. business descrip-
tion, EBIT/EBITDA margins, historical or projected sales growth, capital
structure, quality of management, etc.
• Amount of verifiable data on the similar business
• The price of the similar business at arm’s length, e.g. acquisition between
group companies could probably not be treated as an arm’s length trans-
action
• Adjustments for control / lack of control and marketability

Income Approach
• Enterprise value cash flows (always to be discounted with WACC)
Typically, cash flows before debt servicing.

Enterprise value cash flow

=
NOPAT
+
Depreciation and Amortization
–
CapEx
–
Change in Working capital requirement

• Equity value cash flows (always to be discounted with cost of equity)

Typically, cash flows after debt servicing.

Equity value cash flow

= Net Income +Depreciation and Amortization –CapEx–Change in Working cap-
ital requirement
- Change in Debt levels

IVS 2021 encourages the Valuer to review if adjustments, reflecting differences

between realized historic cash flows and expected and recurring cash flows, are
applicable.
• Revenues / expenses – adjusted to reflect expected continuing operation ad-
justing non-arm’s length transactions to market conditions, e.g. any compen-
sations to employees that are above market norm and any special customer
or supplier contracts

24 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
• Adjusting the impact of non-recurring events, e.g. losses or gains on sale of
company assets, remunerations for employees that were made redundant
and costs needed to start a new plant
• Presenting financial data of subject and comparable companies on consis-
tent basis.
• Adjustments for control / lack of control and marketability
Cost Approach
Cost approach is more often used for real estate, for plant & machinery or for
intangible asset valuations. It is rarely applied when valuing business interests,
except in the following circumstances:

• Valuation refers to investment or holding business using summation method

• Valuation refers to non-going concern business entity and / or its liquidation
value might exceed its going concern value
• Valuing a startup business where cash flow cannot be reliably determined
and comparison to another business under market approach is not reliable.

Special Considerations for Businesses and Business Interests

IVS 200 also includes the following sections of topics (non-exhaustive) relevant
to the valuation of businesses and business interests:

• Ownership Rights – All rights and preferences associated with a subject

business or business interest such as restrictions on transfer of a business in-
terest, multiple classes of stock, controlling Vs non-controlling interests, etc.,
should be considered in a valuation.
• Business Information – A valuer must assess the reasonableness of informa-
tion received from management, representatives of management or other
experts, and evaluate whether it is appropriate to rely on that information for
the valuation purpose.
• Economic and Industry Considerations – Awareness of relevant economic
developments and specific industry trends is essential for all valuations.
• Operating and Non-Operating Assets – It is important to understand which
assets and liabilities are required for use in the income-producing operations
of the business and which ones are redundant or “excess” to the business at
the valuation date.
• Capital Structure Considerations – As businesses are often financed through
a combination of debt and equity, the valuer should generally consider the
allocation of the enterprise value between debt and any types of equity.

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 25
 IVS 210 – INTANGIBLE ASSETS
IVS 210 contains requirements that apply to valuations of intangible assets.
Intangible asset is defined as “a non-monetary asset that manifests itself by its
economic properties. It does not have physical substance but grants rights and
/ or economic benefits to its owner.”

IVS 210 lists the following categories of intangible assets:

• Marketing-related e.g. trademarks, trade names, internet domains etc.

• Customer-related e.g. customer lists, customer contracts, order backlog etc.
• Artistic-related e.g. books, films, plays, music etc.
• Contract-related e.g. licensing, royalty agreements, natural resource rights etc.
• Technology-based e.g. patented & unpatented technology, database, inter-
nally developed software etc.

Goodwill is also addressed and generally defined, although the definition of

goodwill differs depending on the purpose of a valuation. The value of goodwill
can be different when calculated for different purposes, and for some purposes,
goodwill may need to be further divided into transferable goodwill and non-
transferable/ personal goodwill.

The intangible assets that may need to be valued and how those intangible
assets are defined may differ depending on the purpose of the valuation.
The differences in how intangible assets are defined can lead to significant
differences in value. IVS 210 recognizes that intangible assets may be valued
for a variety of purposes, not just financial reporting purposes. It is the valuer’s
responsibility to understand the purpose of a valuation and whether intangible
assets should be valued separately or grouped with other assets.

Intangible assets can be valued for different purposes; however, in practice,

financial reporting is one of the most common reasons, e.g. purchase price
allocation, impairment testing, asset acquisitions, litigation and sales.

VALUATION APPROACHES AND METHODS

IVS 210 refers back to IVS 105 Valuation Approaches and Methods. Under each
approach, IVS 210 provides guidance when each type of approach should be
used, and examples of intangible assets for which the market, income or cost
approaches are commonly used.

Market Approach
Under the market approach, the value of an intangible asset is determined by
reference to market activity (for example, transactions involving identical or
similar assets)

26 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
Income Approach
Under the Income Approach, the following methods are discussed in some
detail in the standard:

• Excess earnings method

Estimates the value of an intangible asset as the present value of the cash
flows attributable to the subject intangible asset after excluding the propor-
tion of the cash flows that are attributable to other assets required to generate
the cash flows (contributory assets).
• Relief-from-royalty method
The value of an intangible asset is determined by reference to the value of the
hypothetical royalty payments that would be saved through owning the asset,
as compared with licensing the intangible asset from a third party.

• Premium profit method or with-and-without method

Indicates the value of an intangible asset by comparing two scenarios: one
in which the business uses the subject intangible asset and one in which the
business does not use the subject intangible asset.

• Greenfield method
The value of the subject intangible is determined using cash flow projections
that assume the only asset of the business at the valuation date is the subject
intangible. All other tangible and intangible assets must be bought, built or
rented.

• Distributor method
Variation of the multi-period excess earnings method sometimes used to value
customer-related intangible assets.

Cost Approach
In most cases when valuing intangible assets under the cost approach, the
replacement cost method will be used. The use of the reproduction cost method
is limited because intangible assets do not have physical form. When applying
the replacement cost method, the Valuers should consider the direct and
indirect costs of replacement, applicable obsolescence and whether to include
profit mark-up.

Special Considerations for Intangible Assets

IVS 210 also includes special considerations for intangible assets as follows
(non-exhaustive list of topics relevant to valuing intangible assets):

• Discount rates/rates of return for intangible assets (the challenges of selecting

discount rates for intangible assets and the factors to consider when assessing
the risks associated with an intangible asset). Benchmark rates to consider in-
clude the following: risk free rates with similar maturities to the life of the subject
intangible, cost of debt borrowing rates with similar maturities to the life of the

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 27
 subject intangible, cost of equity rates or return for participants for the subject
intangible assets, WACC of participants for subject intangible assets or of the
company owning/using the subject intangible asset, IRR, and WARA analysis.
• An important consideration in the valuation of an intangible asset, particularly
under the income approach, is the economic life of the asset. This may be a
finite period limited by legal, technological, functional or economic factors;
other assets may have an indefinite life. The economic life of an intangible
asset is a different concept than the remaining useful life for accounting or tax
purposes. Examples of finite life intangible include Copyright/ Patent etc. and
indefinite life intangible include Trademark, perpetual Franchise etc.
• Tax amortization benefit (TAB) applies only when using income valuation ap-
proach. In the cost and market approaches, the price paid to create or pur-
chase the asset would already reflect the ability to amortize the asset.

IVS 220 – NON-FINANCIAL LIABILITIES

Non-Financial liabilities are defined as those liabilities requiring a non-cash
performance obligation to provide goods or services. It includes: deferred
revenue or contract liabilities, warranties, environmental liabilities, asset
retirement obligations, certain contingent consideration obligations, loyalty
programmes, power purchase agreements, certain litigation reserves and
contingencies, and certain indemnifications and guarantees.

However, certain contingent consideration liabilities may require a non-cash

performance obligation, such liabilities are not included in the scope of IVS 220
Non-Financial Liabilities.

VALUATION APPROACH AND METHODS:

The Market, Income and Cost Approach can all be applied to the valuation of
non-financial liabilities.

Market Approach (Top-Down Method):

Under the market approach, the value of a non-financial liability is determined
by reference to market activity (for example, transactions involving identical or
similar non-financial liabilities). While standalone transactions of non-financial
liabilities are infrequent, valuers should consider relevant market-based
indications of value.

Although such market-based indications may not provide sufficient information

with which to apply the market approach, the use of market-based inputs should
be maximised in the application of other approaches such as:

• Pricing from third parties

• Pricing for warranty policies issued by third parties

28 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
 • The prescribed monetary conversion amount as published by partici-
pants for certain loyalty reward obligations
• The traded price for contingent value rights (CVRs)
• Observed rates of return for investment funds that invest in non-finan-
cial liabilities (eg, litigation finance).

Non-Financial liabilities seldom transact separately from other assets means that
it is rarely possible to find market evidence of transactions

Where evidence of market prices is available, valuers should consider

adjustments to these to reflect differences between the subject non-financial
liability and those involved in the transactions. Such adjustments may only be
determinable at a qualitative, rather than quantitative level.

A method to value non-financial liabilities under the Market Approach is often

referred to as the Top-Down Method.

Top-Down Method: Under the Top-Down Method, valuing non-financial

liabilities is based on the premise that reliable market-based indications of
pricing are available for the performance obligation. A participant could
theoretically price the liability by deducting costs already incurred toward the
fulfilment obligation, plus a mark-up on those costs, from the market price of
services

Income Approach Methods

The primary method to value non-financial liabilities under the Income Approach
is often referred to as the Bottom-Up Method.

Bottom-Up Method: Under this Method, the non-financial liability is measured

as the costs (which may or may not include certain overhead items) required
to fulfil the performance obligation, plus a reasonable mark-up on those costs,
discounted to present value. It may be appropriate to include an assumed profit
margin on certain costs which can be expressed as a target profit, either a lump
sum or a percentage return on cost or value to Determine a reasonable mark-up.
When Determine timing of fulfilment and discount to present value. The discount
rate should account for the time value of money and non-performance risk.

Cost Approach
The cost approach has limited application for non-financial liabilities as
participants typically expect a return on the fulfilment effort.

Special Considerations for Non-Financial Liabilities:

• Discount Rates for Non-Financial Liabilities
• Estimating Cash Flows and Risk Margins

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 29
 • Restrictions on Transfer
• Taxes

Estimating Cash Flows and Risk Margins

Non-financial liability cash flow forecasts often involve the explicit modelling of
multiple scenarios of possible future cash flow to derive a probability-weighted
expected cash flow forecast. This method is often referred to as the Scenario-
Based Method (SBM). The SBM also includes certain simulation techniques
such as the Monte Carlo simulation. The SBM is commonly used when future
payments are not contractually defined but rather vary depending upon future
events. When the non-financial liability cash flows are a function of systematic
risk factors, the valuer should consider the appropriateness of the SBM, and may
need to utilise other methods such as option pricing models (OPMs).

Restrictions on Transfer
Non-financial liabilities often have restrictions on the ability to transfer. Such
restrictions can be either contractual in nature, or a function of an illiquid market
for the subject non-financial liability.

IVS 230 – INVENTORY

Inventory broadly includes goods which will be used in future production
processes (ie, raw materials, parts, supplies), goods used in the production
process (ie, work-in-process), and goods awaiting sale (ie, finished goods).

This standard focuses on valuation of inventory of physical goods that are not
real property. The valuation of real property is covered in IVS 400 Real Property
Interests.

VALUATION APPROACHES AND METHODS:

The three valuation approaches: market approach, cost approach and income
approach can all be applied to the valuation of inventory

Market Approach:
The market approach, ie, reference to market activity involving identical or
similar goods, has only narrow direct application for the valuation of inventory.
Such applications typically include 1) inventory of commoditised products, or
2) inventory in which a market exists for the inventory at an interim stage in the
production process. While the market approach is not directly applicable in
most instances, valuers should consider market-based indications to determine
the selling price as an input for other methods.

Valuers should only apply the market approach to value inventory if both of the
following criteria are met:

30 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
 • Information is available on arm’s length transactions involving
identical or similar inventory on or near the valuation date, and
• Sufficient information is available to allow the valuer to adjust for
all significant differences between the subject inventory and those
involved in the transactions.

Income Approach
The valuation of inventory using the income approach requires the allocation of
profit (value) contributed pre-valuation date versus the profit (value) contributed
post-valuation date.

Cost Approach
The primary method to value inventory is the replacement cost method. Raw
materials inventory is typically valued using the current replacement cost
method.

Current Replacement Cost Method

The current replacement cost method (CRCM) may provide a good indication of
market value if inventory is readily replaceable in a wholesale or retail business
(eg, raw materials inventory).

The market value of raw materials and other inventory may be similar to the
net book value as of the valuation date but certain adjustments should be
considered.

Special Considerations for Inventory

The following sections address a non-exhaustive list of topics relevant to the
valuation of inventory:

• Identification of value-added processes and returns on intangible assets.

• Relationship to other acquired assets.
• Obsolete inventory.
• Unit of account-For purposes of inventory valuation, it is often appropri-
ate to assume inventory is one homogenous set of assets.

IVS 300 – PLANT AND EQUIPMENT

Items of plant and equipment (which may sometimes be categorized as a type
of personal property) are tangible assets that are usually held by an entity for
use in the manufacturing/production or supply of goods or services, for rental
by others or for administrative purposes and that are expected to be used over
a period of time.

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 31
 Although Intangible assets fall outside the classification of plant and equipment
assets but it may have an impact on the value of plant and equipment assets. In
such cases, the valuation process will involve consideration of the inclusion of
intangible assets and their impact on the valuation of the plant and equipment
assets.

VALUATION APPROACHES AND METHODS

The three principal valuation approaches may all be applied to the valuation
of plant and equipment assets depending on the nature of the assets, the
information available, and the facts and circumstances surrounding the valuation.

Market Approach
For classes of plant and equipment that are homogenous, eg, motor vehicles and
certain types of office equipment or industrial machinery, the market approach
is commonly used as there may be sufficient data of recent sales of similar assets

Income Approach
The income approach to the valuation of plant and equipment can be used where
specific cash flows can be identified for the asset or a group of complementary
assets.

However, some of the cash flows may be attributable to intangible assets and
difficult to separate from the cash flow contribution of the plant and equipment.
Use of the income approach is not normally practical for many individual items
of plant or equipment; however, it can be utilized in assessing the existence and
quantum of economic obsolescence for an asset or asset group

Cost Approach
The cost approach is commonly adopted for plant and equipment, particularly
in the case of individual assets that are specialized or special-use facilities.

Cost-to-Capacity Method
Under the cost-to-capacity method, the replacement cost of an asset with an
actual or required capacity can be determined by reference to the cost of a
similar asset with a different capacity

Special Considerations for Plant and Equipment

Generally, the value of an asset is independent of how it is financed. However, in
some circumstances the way items of plant and equipment are financed and the
stability of that financing may need to be considered in valuation.

IVS 400 – REAL PROPERTY INTEREST

A real property interest is a right of ownership, control, use or occupation of
land and buildings. A real property interest includes informal tenure rights for

32 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
communal/community and or collective or tribal land and urban/rural informal
settlements or transition economies, which can take the form of possession,
occupation and rights to use.

Property interests are normally defined by state or the law of individual

jurisdictions and are often regulated by national or local legislation. In some
instances, legitimate individual, communal/community and/or collective rights
over land and buildings are held in an informal, traditional, undocumented and
unregistered manner. Before undertaking a valuation of a real property interest,
a valuer must understand the relevant legal framework that affects the interest
being valued.

There are three main types of interest:

• the superior interest in any defined area of land
• a subordinate interest that normally gives the holder rights of exclusive
possession and control of a defined area of land or buildings for a defined
period, eg, under the terms of a lease contract
• a right to use land or buildings but without a right of exclusive possession
or control, eg, a right to pass over land or to use it only for a specified
activity

VALUATION APPROACHES AND METHODS

The following three valuation approaches can all be applicable for the valuation
of a real property interest.

Market Approach
Property interests are generally heterogeneous (ie, with different characteristics).
Notwithstanding these dissimilarities, the market approach is commonly applied
for the valuation of real property interests.

In order to compare the subject of the valuation with the price of other real
property interests, valuers should adopt generally accepted and appropriate
units of comparison that are considered by participants, dependent upon the
type of asset being valued.

Income Approach
Various methods are used to indicate value under the general heading of the
income approach, all of which share the common characteristic that the value is
based upon an actual or estimated income that either is, or could be, generated
by an owner of the interest.
For some real property interests, the income-generating ability of the property
is closely tied to a particular use or business/trading activity (for example, hotels,
golf courses, etc.). Where a building is suitable for only a particular type of

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 33
 trading activity, the income is often related to the actual or potential cash flows
that would accrue to the owner of that building from the trading activity

Cost Approach
It may be used as the primary approach when there is either no evidence of
transaction prices for similar property or no identifiable actual or notional
income stream that would accrue to the owner of the relevant interest. This
approach is generally applied to the valuation of real property interests through
the depreciated replacement cost method.

IVS 410 – DEVELOPMENT PROPERTY

This standard only includes modifications, additional requirements or specific
examples of how the General Standards apply for valuations to which this
standard applies. Valuations of development property must also follow IVS 400
Real Property Interests.

In the context of this standard, development properties are defined as interests

where redevelopment is required to achieve the highest and best use, or where
improvements are either being contemplated or are in progress at the valuation
date and include:

• the construction of buildings,

• previously undeveloped land which is being provided with infrastructure,
• the redevelopment of previously developed land,
• the improvement or alteration of existing buildings or structures,
• land allocated for development in a statutory plan, and
• land allocated for a higher value uses or higher density in a statutory plan.

VALUATION APPROACHES AND METHODS

There are two main approaches in relation to the valuation of the development
property. These are: the market approach- the residual method, which is a hybrid
of the market approach, the income approach and the cost approach.

Market Approach
Some types of development property can be sufficiently homogenous and
frequently exchanged in a market for there to be sufficient data from recent sales
to use as a direct comparison where a valuation is required. The market approach
may have limitations for larger or more complex development property, or
smaller properties where the proposed improvements are heterogeneous.

Income Approach
Establishing the residual value of a development property may involve the
use of a cash flow model in some markets. The income approach may also be

34 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
appropriate for establishing the value of a completed property as one of the
inputs required under the residual method, which is explained more fully in the
section on the residual method

Cost Approach
Establishing the development costs is a key component of the residual approach.
The cost approach may also exclusively be used as a means of indicating the
value of development property such as a proposed development of a building
or other structure for which there is no active market on completion.

IVS 500 – FINANCIAL INSTRUMENT

A financial instrument is a contract that creates rights or obligations between
specified parties to receive or pay cash or other financial consideration. Such
instruments include but are not limited to, derivatives or other contingent
instruments, hybrid instruments, fixed income, structured products and equity
instruments. A financial instrument can also be created through the combination
of other financial instruments in a portfolio to achieve a specific net financial
outcome.

VALUATION APPROACHES AND METHODS

The various valuation methods used in financial markets are based on variations
of the market approach, the income approach or the cost approach as described
as under:

Market Approach
A price obtained from trading on a liquid exchange on, or very close to, the
time or date of valuation is normally the best indication of the market value of
a holding of the identical instrument. However, it may be necessary to make
adjustments to the price information if the observed instrument is dissimilar to
that being valued or if the information is not recent enough to be relevant.

Income Approach
The value of financial instruments may be determined using a discounted cash
flow method. The terms of an instrument determine, or allow estimation of, the
undiscounted cash flows. it is necessary to establish the appropriate discount
rate.

Cost Approach
In applying the cost approach, valuers must follow the guidance contained in IVS
105 Valuation Approaches and Methods. Broadly, there are three cost approach
methods:
Replacement cost method: a method that indicates value by calculating the
cost of a similar asset offering equivalent utility,

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 35
 Reproduction cost method: a method under the cost that indicates value by
calculating the cost to recreating a replica of an asset, and

Summation method: a method that calculates the value of an asset by the

addition of the separate values of its component parts.

Special Considerations for Financial Instruments

The following sections address a non-exhaustive list of topics relevant to the
valuation of financial instruments.

• Valuation Inputs - Commonly used valuation input sources are broker

quotations, consensus pricing services, the prices of comparable instru-
ments from third parties and market data pricing services
• Credit Risk - Own credit and counterparty risk, credit risk of the instru-
ment, credit risk of the issuer, Subordination, Leverage, Netting agree-
ments, Default protection
• Liquidity and Market Activity -The liquidity of an asset is a measure of
how easily and quickly it can be transferred in return for cash or a cash
equivalent. Market activity is a measure of the volume of trading at any
given time, and is a relative rather than an absolute measure.
• Control Environment - internal governance and control procedures that
are in place with the objective of increasing the confidence of those who
may rely on the valuation in the valuation process and conclusion.

FUTURE CHANGES TO THESE STANDARDS

The IVSC Standards Board intends to continuously review the IVS and update or
clarify the standards as needed to meet stakeholder and market needs. The Board
has continuing projects that may result in additional standards being introduced
or amendments being made to the standards in this publication at any time.

VALUATION AND ETHICAL PRINCIPLES

IVS based valuations require independent, unbiased and reliable valuations,
with ethical conduct at the core of each valuation assignment. Ethical conduct
is in most cases demonstrated through requirements set forth in code of ethical
principles that are generally (depending on the development of the valuation
profession in each country) binding for all professional Valuers.

The Code of Ethical Principles for Professional Valuers is a document prepared

by IVSC (in 2011) and intended to provide guidance and illustrative examples
for potential users (mostly VPOs). The Code of Ethical Principles for Professional
Valuers, discusses 5 ethical principles (“Fundamental principles”) in addition to
threats to a professional valuer’s compliance with the fundamental principles,
safeguards that may be adopted and steps that a professional valuer should
typically take to comply with them.

36 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW
 • Integrity: to be straightforward and honest in professional and business
relationships.
• Objectivity: not to allow conflict of interest, or undue influence or bias
to override professional or business judgment.
• Professional Competence and Due Care: to maintain the professional
knowledge and skill required to ensure that a client or employer
receives competent services based on current developments in practice,
legislation, and techniques; to act diligently and in accordance with
applicable technical and professional standards.
• Confidentiality: to respect the confidentiality of information acquired as
a result of professional and business relationships and not to disclose
such information to third parties without proper and specific authority
(unless there is a legal or professional right or duty to disclose), nor to
use information for the personal advantage of the professional valuer or
third parties.

It refers to the requirement of the Valuer to maintain information received from

the Client or prospective Clients, subjects of valuation and any other valuation
engagement related information, confidential. And to ensure that staff under the
professional valuer’s control and persons from whom advice and assistance is
obtained respect the professional valuer’s duty of confidentiality.

Professional Behavior: to comply with relevant laws and regulations and to

avoid any action that discredits the profession.

IMPORTANT NOTE ABOUT THIS GUIDE DOCUMENT

This Guide Document is limited in scope and may not contain all matters
required for consideration. It is intended to be a helpful tool. Practitioners are
cautioned and reminded of their obligations to read and be familiar with the
latest published version of IVS prior to accepting an engagement or providing
valuation services in accordance with the IVS. IVS-related training is also available
and should be considered by practitioners. IVS website can be accessed at
[Link]

Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW 37
38 Guide Document On INTERNATIONAL VALUATION STANDARDS - WHAT THEY ARE AND WHAT WE SHOULD KNOW