“ Market Value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.” (IVS 1)
Supported by Conceptual Framework in IVS
Definition well tested and now becoming established in regulation international – e.g. EU Directive on Solvency Ratios
“ estimated amount” excludes any element of special value – ie synergy gains available from a specific party have to be disregarded.
a “willing buyer” is motivated but not compelled to buy
a “willing seller” is neither over eager or forced but motivated to sell at whatever price is available in current market
“ proper marketing” means property has been exposed to market in most appropriate manner
Definitions of Value The Valuers’ View Market Value FAIR VALUE may be represented by Current Cost (Net) Realisable Value (price in exchange) Value in Use to the Entity Reproduction Cost Recoverable Amount (higher of above values) Replacement Cost (can be same at NRV) Deprival Value (lower of above values)
Fair Value and Market Value overlapping concepts but are NOT synonymous
FASB had proposed in include in its Fair Value definition a direct comparison to a “ reference market”.
Also clear from Canadian paper that entity specific considerations should normally be disregarded.
Is not obvious solution to stipulate that MV as defined in IVS as appropriate measure for financial reporting?
Practical Issues Is asset measured under going concern concept?
IAS 1 stipulates that accounts prepared on going concern basis – unless intention is to liquidate
Measurement takes place at asset level not entity level
Assets (or liabilities) can have markedly different market values depending on which assumption made:
that they are part of a transfer of the whole operation or,
that they are sold away from the enterprise as a separate item
Practical Issues Is asset measured under going concern concept? - 2
Potential conflict between IAS 16 and IAS 36
Is Fair Value under revaluation option supposed to be the same as Fair Value in impairment test?
Intention of IAS 36 appears to be to establish minimum carrying amount by comparing ViU of holding asset with net proceeds of liquidation (FV less costs)
Same FV (without costs deduction) might be thought to be carrying amount under IAS 16. However, this figure then used to calculate depreciation under same standard, which assumes asset continuing useful life to entity.
An entity may construct a building that is specialised for its operation – includes buildings that are otherwise conventional but that are of abnormal size or in an abnormal location
If valued on assumption that transfer of real estate interest is as part of transfer of whole entity the estimated price will reflect need of purchaser for that facility
If valued without regard to going concern, ie as if surplus, there may be no identifiable purchaser at all, and price will reflect costs of redevelopment or reconfiguration for uses that would be in demand.
Practical Issues Real Estate Measurement Questions - 2