Convergence of valuation standards

Citation

Sayce, S. and Connellan, O. (2002), "Convergence of valuation standards", Property Management, Vol. 20 No. 4. https://doi.org/10.1108/pm.2002.11320daa.001

Convergence of valuation standards

Convergence of valuation standards

Never has the need to establish world-wide accepted standards of professional practice been greater. Not only do cases such as the collapse of Enron bring the valuation of corporate assets into sharp focus; the decline in world stock-market values places pressure on both profits and the value of the asset base.

But the issue is not new. For some years we have been studying the moves towards convergence of valuation standards, with a particular emphasis on owner-occupied properties. This Issue is contained in our paper "From existing use to value in use: time for a paradigm shift?", which is a culmination of much of our work in the area.

The theme emerging from the research is the need to revise the approach to the valuation of fixed assets for balance-sheet purposes. In this paper we have debated the key concepts of "market value", "fair value", "value in use" and "existing use value", as they appear in the various professional body regulatory and advisory frameworks, and draw the fundamental conclusion that changes are needed.

We argued particularly for the abandonment of EUV in UK and European standards, to fall in line with international standards; further, our contention was that EUV should be dropped in favour of using market value and value in use, with a plea for a re-examination of the concept of "going-concern value".

Since writing our latest paper, the UK Accounting Standards Board (ASB) have proposed the UK adoption of a revised International Accounting Standard, IAS 16, "Property, plant and equipment", and IAS 23, "Borrowing costs", in place of Financial Reporting Standard, FRS 15, "Tangible fixed assets": and it is worth recalling that it was the latter FRS 15 that adopted the "value to the business" model and re-confirmed the EUV basis in the RICS Red Book . If this now goes, as it seems likely, EUV will disappear in favour of market value and value in use, which incidentally should bring the UK into line with the European Union's stated intention of requiring EU-listed companies to adopt International Accounting Standards by 2005.

So where does this leave the RICS and its Red Book? Over the past few months there has been a re-write exercise in two parts. The first exercise in January 2002 was the circulation of a consultation draft (Part 1) for comment on’Sections 1 and 2 of the Red Book re-write. This draft concentrates on implementing the stated RICS policy of adopting and supporting International Valuation Standards (IVS) and, where applicable, regional standards such as the European Valuation Standards (EVS). Accordingly the draft included International Practice Statements (IPS) and International Guidance Notes (IGN). By way of explanation the Foreword to the consultation draft states that:

The existing Manual (Red Book) recognizes International and European Standards only to the extent that they are regarded as acceptable alternatives to the Red Book that can be adopted in specific circumstances. The fundamental change in the new Manual is that these standards are no longer regarded as alternatives. The IPS have been drafted to adopt the principal valuation bases in the International Valuation Standards (IVS) and to provide a regulatory framework for their application. There is also a requirement to apply IVS for specific purposes, unless there is a more specific National Practice Statement. Similarly, there is a requirement to follow European Valuation Standards (EVS) where these relate to pan-European matters, e.g. valuations that are subject to European Directives or Regulations.Whilst it is the RICS's objective to promote the adoption of global valuation standards, there will always be a need for National Practice Statements to reflect the law of the state in question or the specific requirements of national regulatory authorities or client groups. In the UK the RICS has already developed a significant body of such standards. In other states, the RICS National Association is to be actively encouraged either to develop its own or, if there is an existing standard that it believes suitable, to specify that this be adopted by members within its territory.

The second and final part of the Red Book re-write exercise, covering Section 3 of the new Manual, was circulated for comment in March 2002 and contained UK Practice Statements (UKPS) and UK Guidance Notes (UKGN).

We made observations on both consultation drafts covering a number of points on which we took issue. However, our main concern centred on the clear dichotomy in the re-write between the International standards in Sections 1 and 2 and the UK standards in Section 3 on the issue of reporting values for financial statements, particularly the role and treatment of EUV.

UKPS 1.3, which deals with EUV in the UK, confirms that there is no equivalent provision in the IPS, as the IVS do not recognize EUV. Interestingly, the original draft UKPS 1.3 was replaced in May 2002, apparently as a result of representations made by the Property Valuation Forum. The commentary, accompanying this revised draft, explains the rationale for the latest changes:

Whilst the definition of EUV has changed from that published in previous editions of the Manual, the underlying principles have not. The previous definition was based on the OMV definition, which has now been removed from the Manual. The new one uses the MV definition and the additional provisions have been reworded to define more precisely requirements of the accounting standard. For the avoidance of doubt, an EUV provided under both the new and the old definition should produce exactly the same to define more precisely the requirements of the accounting standard result.

Our view of this latest drafting is that it can only be considered as a stopgap measure. The above explanation refers to the need "to define more precisely the requirements of the accounting standard" but, as the profession is well aware, significant changes are obviously well under way to those accounting standards. These are planned to drive valuation standards in the same direction, namely to the complete abandonment of EUV, and reliance on the IVS of market value, fair value and value in use.

We contend that such an incremental approach is inappropriate. We would urge the RICS to take decisive action to pre-empt the demise of this worn-out standard by heralding how it proposes to move towards the relevant international standards concerned with financial reporting.

In this connection we note with interest the announcement in the April edition of the RICS Valuation Faculty Bulletin that:

The ASVB (Assets Standards Valuation Board) has commissioned a detailed comparison of RICS valuation standards and International Valuation Standards (IVS) 2001. The results of this work will facilitate future RICS consultation on international standards. It will also serve as a basis to proffer a clear statement on the relationship between RICS standards and IVS to be inserted into the revised Red Book.

We also note that TEGoVA have already completed and published the same sort of exercise, comparing and contrasting its EVS with IVS.

Finally, we trust that the outcome of these comparisons and the analyses in our own paper will help move the issue of EUV on from the debating forum into the practicalities of valuers working on both the national and the international stages.

Sarah Sayce and Owen ConnellanKingston University, Kingston upon Thames