INTERNATIONAL VALUATION STANDARDS COUNCIL

International Valuation Standards Update

Adam Smith

Interim Technical Director of Business Valuation Standards

OIV International Business Valuation Conference

January 16, 2017

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.

IVS Goal and Vision

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

• Expand the depth of the IVSs to meet the

expanding needs of IVSC stakeholders

• Increase stakeholder outreach

• Improve transparency of the standard-setting

process

IVS 2017 Objectives

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.

BV Stakeholder Outreach Summary

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)

•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

Potential Future Projects

www.ivsc.org

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