International Valuation Standards Update

Adam Smith
Interim Technical Director of Business Valuation Standards

OIV International Business Valuation Conference

January 16, 2017

INTERNATIONAL VALUATION STANDARDS COUNCIL

IVS Goal and Vision
The objective of the IVS is to increase the confidence and trust of
users of valuation services by establishing transparent and
consistent valuation practices. A standard will do one or more of
the following:
• identify or develop globally accepted principles and definitions,

• identify and promulgate considerations for the undertaking of

valuation assignments and the reporting of valuations,

• identify specific matters that require consideration and methods

commonly used for valuing different types of asset or liability.
IVSC Organizational Review Summary
In 2015, an independent group performed an
organizational review of the International
Valuation Standards Council.
Some key findings included:
 IVSC lacks credibility
 Insufficient quality of Technical Standards
(content, depth and process)
 IVS should clearly define mandatory and non-
mandatory elements.
 Lack of clear purpose and mission
 Stakeholder engagement lacking
IVS 2017 Objectives

• Expand the depth of the IVSs to meet the

expanding needs of IVSC stakeholders

• Increase stakeholder outreach

• Improve transparency of the standard-setting

process
BV Stakeholder Outreach Summary
1. Not clear how IVS can be followed when performing
business valuations
• IVS defines things differently from
authorities/regulators (e.g. fair value, goodwill, etc.)
• Do “commentary” sections need to be followed?
• Do Technical Information Papers need to be
followed?

2. Following IVS was not seen as a meaningful statement on

the quality of a business valuation.
Making IVS 2017 Easier to Follow
• Clarify that all of IVS is mandatory (to state compliance
with IVS)

• Clearly define when valuers may depart from IVS

(“departures”)

• Remove “commentary” label

• Incorporate Technical Information Papers into standards

(when relevant)

• Use consistent, defined language related to requirements

(“may”, “must”, and “should”)
Departures

A departure is a circumstance where legislative, regulatory

or other authoritative requirements must be followed that
differ from some of the requirements within IVS.
Departures are mandatory in that a valuer must comply with
legislative, regulatory and other authoritative requirements
appropriate to the purpose and jurisdiction of the valuation to
be in compliance with IVS. A valuer may still state that the
valuation was performed in accordance with IVS when there
are departures.
IVS 200 (2013) – Non-Commentary Portions
REQUIREMENTS
1. The principles contained in the General Standards apply to valuations of businesses and business
Interests. This standard only includes modifications, additional requirements or specific examples of how the
General Standards apply for valuations to which this standard applies.
Scope of Work (IVS 101)
2. To comply with the requirement to identify the asset or liability to be valued in IVS 101 para 2(d), the
specific interest in the business to be valued shall be recorded. This will include items such as specifying the
legal structure of the business, whether it is a whole or partial interest, whether it is confined to or
excludes certain assets or liabilities and the class or classes of shares involved.
3. Typical assumptions or special assumptions that may need to be stated to comply with IVS 101 para 2(i)
when valuing a business or business interest include: in the case of a partial interest, an assumption
clarifying whether the owner or owners of the remaining interest(s) are either intending to sell or retain
their holdings, whether certain assets or liabilities owned by the business are to be disregarded.
Implementation (IVS 102)
4. If the valuation is of an interest that has the ability to liquidate the assets of the business, consideration
shall be given as to whether the total value of the assets sold individually following liquidation would
exceed their combined value as a going concern.
Reporting (IVS 103)
5. There are no additional requirements for businesses and business interests other than inclusion of
appropriate references to matters addressed in the scope of work in accordance with paras 2 and 3 above.
Effective Date
6. The effective date of this standard is 1 January 2014, although earlier adoption is encouraged.
May, Must, and Should

• The new IVS Glossary includes definitions of

these words to help valuers understand the
requirements of IVS

• When possible, the definitions are consistent

with how those terms are used in other
standards (e.g. auditing standards)
May

The word "may" describes actions and procedures that valuers have a
responsibility to consider. Matters described in this fashion require the
valuer's attention and understanding. How and whether the valuer
implements these matters in the valuation engagement will depend on
the exercise of professional judgment in the circumstances consistent
with the objectives of the standards.

Example: IVS 105, 30.3:

If few recent transactions have occurred, the valuer may consider the
prices of identical or similar assets that are listed or offered for sale
provided the relevance of this information is clearly established, critically
analysed, and documented…
Must

The word “must” indicates an unconditional responsibility. The valuer

must fulfill responsibilities of this type in all cases in which the
circumstances exist to which the requirement applies.

Example: IVS 101, 20.3:

A valuer must communicate the scope of work to its client prior to

completion of the assignment…
Should
The word "should" indicates responsibilities that are presumptively
mandatory. The valuer must comply with requirements of this type unless the
valuer demonstrates that alternative actions which were followed under the
circumstances were sufficient to achieve the objectives of the standards.
In the rare circumstances in which the valuer believes the objectives of
the standard can be met by alternative means, the valuer must document why the
indicated action was not deemed to be necessary and/or appropriate.
If a standard provides that the valuer "should consider" an action or
procedure, consideration of the action or procedure is presumptively mandatory,
while the action or procedure is not.

Example: IVS 210, 60.28 (regarding the With-and-Without Method):

The differences in value between the two scenarios should be reflected solely in
the cash flow projections rather than by using different discount rates in the two
scenarios.
Making Compliance Meaningful (Example)
IVS 102 (2013), paragraph 3:

Sufficient evidence shall be assembled by means such as

inspection, inquiry, computation and
analysis to ensure that the valuation is properly supported.
When determining the extent of
evidence necessary, professional judgement is required to
ensure the information to be obtained is
adequate having regard to the purpose of the valuation. As a
matter of practical expediency, it is
normal for limits to be agreed on the extent of the valuer’s
investigations. Any such limits shall be
recorded in the scope of work.
Making Compliance Meaningful (Example)
IVS 102 (2017), paragraph 20.3:

Limits may be agreed on the extent of the valuer’s

investigations. Any such limits must be noted in the scope of
work. However, IVS 105 Valuation Approaches and Methods,
para 10.7 requires valuers to perform sufficient analysis to
evaluate all inputs and assumptions and their
appropriateness for the valuation purpose. If 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 performed in
compliance with IVS.
 Structure of IVS 2017

IVS Glossary
Introduction and Framework
General Standards
•IVS 101 Scope of Work
•IVS 102 Investigation and Compliance
•IVS 103 Reporting
•IVS 104 Bases of Value (NEW)
•IVS 105 Valuation Approaches (NEW)
Asset Standards
•IVS 200 Businesses and Business Interests
•IVS 210 Intangible Assets
•IVS 300 Plant and Equipment
•IVS 400 Real Property Interests
•IVS 410 Development Property
•IVS 500 Financial Instruments
 IVS 101: Primary Changes

• IVS 2017 is more principles-based in nature

• The overarching principle behind the proposed IVS 101
Scope of Work is that it is a valuer’s responsibility to
communicate the scope of the assignment to all parties to
the valuation engagement.
• A written scope of work is the most effective way to
ensure compliance, the Board recognizes that it may not
be feasible or necessary in all circumstances, particularly
in the case of valuers performing valuations for their
employer.
 IVS 102: Primary Changes

• Under IVS 2013: virtually any valuation engagement could

claim compliance with IVS as long as any limitations on
investigations and procedures are disclosed in the scope
of work and report.

• Under IVS 2017: valuers must perform sufficient

procedures to assess the appropriateness of all significant
inputs for use in the valuation. As such, significant
limitations that impair a valuer’s ability to assess the
appropriateness of the inputs and assumptions may lead
to a valuation not being in compliance with IVS.
 IVS 103: Primary Changes

• Clear that there is no one format of report that is required to

comply with IVS.
• Allows the report to take any form, but requires that it set out a
clear and accurate description of:
a) the scope of the work performed, including the elements noted in para 20.3 of
IVS 101 Scope of Work to the extent each is applicable to the assignment,
b) the approach or approaches adopted,
c) the method or methods applied,
d) the key inputs used,
e) the assumptions made,
f) the conclusion(s) of value and principal reasons for any conclusions reached, and
g) the date of the report (which may differ from the valuation date).
• Requirements can be fulfilled by referring to other documents
(engagement letter, internal policies etc.).
 IVS 104: Bases of Value (New Chapter)

Overarching Principle:

Compliance with this mandatory standard requires a valuer

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
this standard (for IVS-defined bases of value) or not (for non
IVS-defined bases of value).
 IVS 104: Bases of Value - Contents
10. Introduction
20. Bases of Value
30. IVS Defined Bases of Value - Market Value
40. IVS Defined Bases of Value - Market Rent
50. IVS Defined Bases of Value – Equitable Value
60. IVS Defined Bases of Value – Investment Value/Worth
70. IVS Defined Bases of Value – Synergistic Value
80. IVS Defined Bases of Value – Liquidation Value
90. Other Basis of Value – Fair Value (IFRS)
100. Other Basis of Value – Fair Market Value (OECD)
110. Other Basis of Value – Fair Market Value (US - IRS)
120. Other Basis of Value – Fair Value (Legal/Statutory)
130. Premise of Value/Assumed Use
140. Premise of Value – Highest and Best Use
150. Premise of Value – Current Use/Existing Use
160. Premise of Value – Orderly Liquidation
170. Premise of Value – Forced Sale
180. Entity Specific Factors
190. Synergies
200. Assumptions and Special Assumptions
210. Transaction Costs
 IVS 105:Valuation Approaches and Methods
(New Chapter)

- Establishes framework for selection and application of

approaches and methods
- Requires that inputs and assumptions be evaluated for
reasonableness in the context of the valuation
- Encourages, but does not require, the use of multiple
approaches/methods
- Requires valuers to maximize the use of observable
market information in all three valuation approaches
(when available).
 IVS 105: Approach selection framework
(example)

20.2 The market approach should be applied and afforded

significant weight under the following circumstances:

(a) the subject asset has recently been sold in a transaction

appropriate for consideration under the basis of value,

(b) the subject asset or substantially similar assets are

actively publicly traded, and/or

(c) there are frequent and/or recent observable transactions

in substantially similar assets.
 IVS 105: Approach selection framework
(example)

20.3. Although the above circumstances would indicate that the market
approach should be applied and afforded significant weight, when the
above criteria are not met, the following are additional circumstances
where the market approach may be applied and afforded significant
weight. When using the market approach under the following
circumstances, a valuer should consider whether any other approaches
can be applied and weighted to corroborate the value indication from
the market approach:

(a) Transactions involving the subject asset or substantially similar assets

are not recent enough considering the levels of volatility and activity in
the market.
 IVS 105: Approach selection framework
(example)

(b) The asset or substantially similar assets are publicly traded, but not
actively.

(c) Information on market transactions is available, but the comparable

assets have significant differences to the subject asset, potentially
requiring subjective adjustments.

(d) Information on recent transactions is not reliable (ie, hearsay, missing

information, synergistic purchaser, not arm’s-length, distressed sale, etc).

(e) The critical element affecting the value of the asset is the price it
would achieve in the market rather than the cost of reproduction or its
income-producing ability.
 Asset Standards

• IVS 200 Businesses and Business Interests

• IVS 210 Intangible Assets

• IVS 300 Plant and Equipment

• IVS 400 Real Property Interests

• IVS 410 Development Property

• IVS 500 Financial Instruments

 Uniform Structure of Asset Standards

• Section 10: Overview

• Section 20: Introduction
• Section 30: Bases of Value
• Section 40:Valuation Approaches and Methods
• Section 50: Market Approach
• Section 60: Income Approach
• Section 70: Cost Approach
• Section 80 (and thereafter): Special Considerations
IVS 200 (2017) – Overview
 10. Requirements
 20. Overview
 30. Bases of Value
 40. Valuation Approaches and Methods
 50. Market Approach
 60. Income Approach
 70. Cost Approach
 80. Special Considerations for Businesses and Business Interests
◦ 90. Ownership Rights
◦ 100. Business Information
◦ 110. Economic and Industry Considerations
◦ 120. Operating and Non-Operating Assets
◦ 130. Capital Structure Considerations
 IVS 210 (2017) - Overview
10. Requirements
20. Overview
30.Valuation Approaches and Methods
40. Income Approach
50. Income Approach Methods
60. Excess Earnings Method
70. Relief-from-Royalty Method
80. Premium Profit Method or With-and-Without Method
90. Greenfield Method
100. Distributor Method
110. Market Approach
120. Market Approach Methods
130. Cost Approach
140. Cost Approach Methods
150. Special Considerations for Intangible Assets
160. Discount Rates/Rates of Return for Intangible Assets
170. Intangible Asset Economic Lives
180. Tax Amortisation Benefit (TAB)
Potential Future Projects
•Analysis of Commercial
Lease Transactions
•Art and Antiques
•Commercial Forests
•Contracts
•Credit/Debit Valuation
Adjustments
•Deferred Revenue
•Depreciated Replacement
Cost Method of Valuation for
Financial Reporting
•Derivative Valuations
•Discount Rates
•Discounts and Premia
•Early Stage/Development
Stage Valuations
•Expected Cash Flow
•Extractive Industries
•Funding Valuation
Adjustments
•Inspections and Material
Considerations
•International/Multinational
Valuations
•Inventory
•Liabilities
•Preferred Stock
•Valuation of Residential
Properties
•Valuations for Taxation
purposes including taxes and
tax flow-through Entities
•Recovery and Resolution
•Specialised Public Service
Assets
•Stock Options
•Trade Related Property
•Valuation of Individual Trade-
Related Properties
•Valuation in Markets
Susceptible to Change:
Certainty and Uncertainty
•Valuation of Personal
Property including Art and
Antiques.
•Valuation of Portfolios,
Collections, and Groups of
Properties/Assemblage Value
 Thank you

Input regarding any of the above topics for future consideration by the Standards Board is encouraged via communication
with the following:
Adam Smith, Interim Technical Director of Business Valuation Standards Contact: amsmith@ivsc.org
Alexander Aronsohn, Interim Technical Director of Real Estate Valuation Standards Contact: aaronsohn@ivsc.org
Peter Melvin, Interim Technical Director of Financial Instruments Standards
Contact: pcmelvin@ivsc.org

www.ivsc.org