VALUE BASIS & VALUATION – INTERNATIONAL VALUATION STANDARD 1
Standard should be read in the context of the background material and
implementation guidance contained in General Valuation Concepts and
The objective of this Standard is to provide a common definition of
Market Value. This Standard also explains the general criteria
relating to this definition and to its application in the valuation
of property when the purpose and intended use of the valuation calls
for estimation of Market Value.
Market Value is a representation of value in exchange, or the
amount a property would bring if offered for sale in the (open)
market at the date
valuation under circumstances that meet the requirements of the
Market Value definition. To estimate Market Value, a
Valuer must first determine highest and best use, or most
probable use (see International Valuation Standards [IVS],General
Valuation Concepts and Principles, para. 6.3, 6.4, 6.5).
use may be for continuation of a property’s existing use or for
some alternative use. These determinations are made from market
Market Value is estimated through application of valuation
methods and procedures that reflect thenature of property and the
circumstances under which given property would most likely
in the market. The most common methods used to estimate Market
Value include the sales comparison approach, the income
capitalisation approach, including discounted cash flow
the cost approach.
All Market Value measurement methods, techniques, and
procedures will, if applicable and if appropriately and correctly
applied, lead to a common expression of Market Value when
based on market-derived criteria. Sales comparisons or other market
comparisons should evolve from market observations.
income capitalisation approach, including discounted cash
flow analysis, should be based on market-determined cash flows
and market-derived rates of return. Construction costs and
be determined by reference to an analysis of market-based
estimates of costs and accumulated depreciation. Although data
availability and circumstances relating to the market or the property
itself will determine which valuation methods are most relevant and
appropriate, the outcome of using any of the foregoing procedures
must be Market Value if each method is based on market-derived
The manner in which property would ordinarily trade in the market
distinguishes the applicability of the various methods or procedures
of estimating Market Value. When based on market information,
each method is a comparative method. In each valuation situation one
or more methods are generally most representative of (open) market
The Valuer will consider each method in every Market Value
engagement and will determine which methods are most appropriate.
2.1 IVS 1 applies to the Market Value of property, normally
real estate and related elements. It requires that the property under
consideration be viewed as if for sale on the market, in contrast to
being evaluated as a part of a going concern or for some other purpose.
Market Value is defined for the purpose of these
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
The term property is used because the focus of these Standards
is the valuation of property. Because these Standards encompass
financial reporting, the term asset may be substituted for
of the definition. Each element of the definition has its own
“The estimated amount...” refers to a price expressed in
terms of money (normally in the local currency), payable for the
property in an
market transaction. Market Value is measured as the most
probable price reasonably obtainable in the market on the date of
valuation in keeping with the Market Value definition. It is
the best price reasonably obtainable by the seller and the most
advantageous price reasonably obtainable by the buyer. This estimate
an estimated price inflated or deflated by special terms or
circumstances such as atypical financing, sale and leaseback
arrangements, special considerations or concessions granted by anyone
associated with the sale, or any element of Special Value (defined
in IVSC Standard 2, para. 3.8).
“...a property should exchange...” refers to the fact that
the value of a property is an estimated amount rather than a
predetermined amount or actual sale price. It is the price at which
the market expects a transaction that meets all other elements of the
Market Value definition
be completed on the date of valuation.
“...on the date of valuation...” requires that the estimated
Market Value is time-specific as of a given date. Because
markets and market conditions may change, the estimated value may be
incorrect or inappropriate at another time. The valuation amount will
reflect the actual market state and circumstances as of the effective
as of either a past or future date. The definition also assumes
simultaneous exchange and completion of the contract for sale without
any variation in price that might otherwise be made.
a willing buyer...” refers to one who is motivated, but not
compelled to buy. This buyer is neither over-eager nor determined to
buy at any price. This buyer is also one who purchases in accordance
with the realities of the current market and with current market
expectations, rather than in relation to an imaginary or hypothetical
market that cannot be demonstrated or anticipated to exist. The assumed
buyer would not pay a higher price than the market requires.
present property owner is included among those who constitute “the
market.” A Valuer must not make unrealistic assumptions about
market conditions nor assume a level of market value above that which
is reasonably obtainable.
“...a willing seller...” is neither an over-eager nor a
forced seller, prepared to sell at any price, nor one prepared to
hold out for a price not considered reasonable in the current market.
The willing seller is motivated to sell the property at market terms
for the best price attainable in the (open) market after proper
marketing, whatever that price may be. The factual circumstances of
the actual property
are not a part of this consideration because the ‘willing seller’
is a hypothetical owner.
“...in an arm’s-length transaction...” is one between
parties who do not have a particular or special relationship (for
example, parent and subsidiary companies or landlord and tenant) that
may make the price level uncharacteristic of the market or inflated
because of an element of Special Value (see IVS 2, para.
3.8).The Market Value transaction
presumed to be between unrelated parties, each acting independently.
“...after proper marketing...” means that the property would
be exposed to the market in the most appropriate manner to effect its
at the best price reasonably obtainable in accordance with the Market
Value definition. The length of exposure time may vary with
market conditions, but must be sufficient to allow the property to be
brought to the attention of an adequate number of potential
purchasers. The exposure period occurs prior to the valuation date.
“...wherein the parties had each acted knowledgeably and
prudently...” presumes that both the willing buyer and the
willing seller are reasonably informed about the nature and
characteristics of the property, its actual and potential uses, and
the state of the market as of the date of valuation. Each is further
presumed to act for self-interest with that knowledge, and prudently
to seek the best price for their
positions in the transaction. Prudence is assessed by referring to
the state of the market at the date of valuation, not with benefit of
hindsight at some later date. It is not necessarily imprudent
a seller to sell property in a market with falling prices at a price
that is lower than previous market levels. In such cases, as is true
for other purchase and sale situations in markets with changing
prices, the prudent buyer or seller will act in accordance with the
best market information available at the time.
“...and without compulsion...” establishes that each party is
motivated to undertake the transaction, but neither is forced or
unduly coerced to complete it.
Market Value is understood as the value of an asset estimated
without regard to costs of sale or purchase and without offset for
any associated taxes.
3.4 Highest and Best Use (HABU).The most probable use of a
property, which is physically possible, appropriately justified,
legally permissible, financially feasible, and which results in the
highest value of the property being valued.
Relationship to Accounting Standards
Valuation for financial reporting, which is the focus of
International Valuation Application 1 (IVA 1), should be read in
conjunction with this standard.
IVA 1,Valuation for Financial Reporting, provides guidance to
Valuers, Accountants, and the Public regarding valuation standards
Fair Value of fixed assets is usually their Market Value
(see General Valuation Concepts and Principles, para. 8.1).
There are numerous examples of terms used interchangeably by Valuers
and Accountants. Some lead to misunderstandings and possible
Standards abuses. IVS 1 defines Market Value and discusses
for establishing Market Value. Other important terms are
defined in IVS 1 and 2 and contribute to the more specific
in IVA 1,Valuation for Financial Reporting.
Statement of Standard
perform valuations that comply with these Standards and Generally
Accepted Valuation Principles (GAVP), it is mandatory that Valuers
adhere to all sections of the Code of Conduct pertaining to Ethics,
Competence, Disclosure, and Reporting (sections 4, 5, 6, and 7).
In performing and reporting a Market Value estimate, the
completely and understandably set forth the valuation in a manner
that will not be misleading;
ensure that the estimate of Market Value is based on
ensure that the estimate of Market Value is undertaken
using appropriate methods and techniques;
provide sufficient information to permit those who read and rely
on the report to fully understand its data, reasoning, analyses, and
comply with the requirements of IVS 3 in reporting the valuation.
Accordingly, the Valuer shall:
define the value being estimated and state the purpose and
intended use of the valuation, the effective date of valuation, and
the date of the report;
clearly identify and describe the property and property rights or
interests being valued;
describe the scope/extent of the work undertaken and the extent
to which the property was inspected;
state any assumptions and limiting conditions upon which the
valuation is based;
fully and completely explain the valuation bases/approaches
applied and the reasons for their applications and conclusions; and
include a signed Compliance Statement (Certification of Value)
attesting to the Valuer’s objectivity, professional contributions,
non-contingency of professional fees or other compensation,
well as Standards’ applicability, and other disclosures.
The Market Value concept and definition are fundamental to all
valuation practice. A brief summary of essential economic and
procedural foundations is presented in General Valuation Concepts and
Principles and Code of Conduct, the documents upon which these
Standards are predicated.
The concept of Market Value is not dependent on an actual
transaction taking place on the date of valuation. Rather, Market
Value is an estimate of the price that should be realised in a
sale at the
date under conditions of the Market Value definition. Market
Value is a representation of the price to which a buyer and
at that time under the Market Value definition, each
previously having had time for investigation of other market
and notwithstanding the fact that it may take some time to prepare
formal contracts and related closing documentation.
The concept of Market Value presumes a price negotiated in an
open and competitive market, a circumstance that occasionally gives
rise to the use of the adjective open before the words Market
Value. The words open and competitive have no
absolute meaning. The market for one property could be an
international market or a local market.
market could consist of numerous buyers and sellers, or could be one
characterised by a limited number of participants. The market in
which the property is exposed for sale is not a definitionally
restrictive or constricted market. Stated conversely, the omission of
the word open does not indicate that a transaction would be
private or closed.
Market valuations are generally based on information regarding
comparable properties. The Valuation Process requires a Valuer to
conduct adequate and relevant research, to perform competent
analyses, and to draw informed and supportable judgements.
this process,Valuers do not accept data without question but should
consider all pertinent market evidence, trends, comparable
transactions, and other information. Where market data are limited,
essentially non-existent (as for example with certain specialised
properties), the Valuer must make proper disclosure of the situation
and must state whether the estimate is in any way limited by the
inadequacy of data. All valuations require exercise of a Valuer’s
judgment, but reports should disclose whether the Valuer bases the
Market Value estimate
on market evidence, or whether the estimate is more heavily based
upon the Valuer’s judgement because of the nature of the property
and lack of comparable market data.
Because changing conditions are characteristic of markets,Valuers
must consider whether available data reflect and meet the criteria
for Market Value.
Periods of rapid changes in market condition are typified by
rapidly changing prices, a condition commonly referred to as
disequilibrium. A period of disequilibrium may continue over a
and can constitute the current and expected future market condition.
In other circumstances, rapid economic change may give rise to
erratic market data. If some sales are out of line with the market,
the Valuer will generally give them less weight. It may still be
possible for the Valuer to judge from available data where the
realistic level of the market is. Individual transaction prices may
not be evidence of Market Value, but analysis of such market
data should be taken into consideration in the Valuation Process.
In poor or falling markets there may or may not be a large number
of “willing sellers.” Some, but not necessarily all, transactions
may involve elements of financial (or other) duress or conditions
or eliminate the practical willingness of certain owners to sell.
Valuers must take into account all pertinent factors in such market
conditions and attach such weight to individual transactions that
they believe proper to reflect the market.
and receivers are normally under a duty to obtain the best price in
asset disposals. Sales, however,may take place without proper
marketing or a reasonable marketing period. The Valuer must judge
such transactions to determine the degree to which they meet the
requirements of the Market Value definition and the weight
that such data should be given.
During periods of market transition characterised by rapidly
rising or falling prices, there is a risk of over- or under-valuation
if undue weight is given to historic information or if unwarranted
assumptions are made regarding future markets. In these circumstances
Valuers must carefully analyse and reflect the actions and attitudes
of the market and take care that they fully disclose the results of
their investigations and findings in their reports.
The concept of Market Value also presumes that in a market
value transaction a property will be freely and adequately exposed on
the (open) market for a reasonable period of time and with reasonable
This exposure is presumed to occur prior to the effective date of
value. Markets for fixed assets typically differ from those available
for stocks/shares, bonds, and other current assets. Fixed assets tend
be unique. They are usually sold less frequently and in markets which
are less formal and more inefficient than, for example, markets for
Further, fixed assets are less liquid.
these reasons, and because fixed assets do not commonly trade on a
public exchange, the application of the concept of Market Value
requires the use of assumptions such as adequate market exposure
over a reasonable time period to allow for proper marketing, and
completion of negotiations.
Revenue producing properties held as long-term investments by a
property company, pension (or superannuation fund), property trust,
or similar type of owner are typically valued on the basis of
individual asset disposal pursuant to an orderly plan. The aggregate
value of such assets viewed or treated as a portfolio or as an
assembled group of
could exceed or could be less than the sum of the Market Value of
each asset individually.
All valuations should refer to the purpose and intended use of the
valuation. In addition to other reporting requirements, the Valuer
should make it abundantly clear into which class each asset has been
placed if the function of the valuation is related to the preparation
of financial statements.
6.9 In exceptional circumstances Market Value may be expressed
as a negative amount. Situations include certain leasehold properties,
some specialised properties, obsolete properties with demolition costs
exceeding land value, some properties affected by environmental
contamination, and others.
Valuation Reports must not be misleading.
conducted for the purpose of estimating and reporting Market Value
shall meet the requirements of section 5 above. Reports
contain a specific reference to the definition of Market Value as
set forth in this Standard, together with specific reference as to
has been viewed in terms of its utility or its highest and best
use (or most probable use) and a statement of all substantive
In making Market Value estimates the Valuer shall clearly
identify the effective date of valuation (the date at which the value
purpose and intended use of the valuation, and such other criteria as
are relevant and appropriate to ensure adequate and reasonable
of the Valuer’s findings, opinions, and conclusions.
Although the concept, use, and application of alternative expressions
of value may be appropriate in certain circumstances, the Valuer
shall ensure that if such alternative values are estimated and
reported, they should not be construed as representing Market
7.4 When valuations are made by an Internal Valuer, i.e., one who is in
the employ of either the entity that owns the assets or the accounting
firm responsible for preparing the entity’s financial records and/or
reports, there shall be a specific disclosure in the Valuation Report
or Certificate of the existence and nature of any such relationships.
8.1 In following this Standard any departures must be in accordance
with directions provided in IVS 3, Valuation Reporting.
This International Valuation Standard became effective 31 January