PROFCOR7&10.MIDTERM.LECTURE3.pptx

P h i l i p p i n e Va l u a t i o n Standards Guidance Notes  Table of Contents  Real Property Valuation  Valuation of Lease Interests  Valuation of Plant, Machinery and Equipment  Valuation of Intangible Assets Intangible Property. The Rights and Privileges Gran...

P h i l i p p i n e Va l u a t i o n Standards Guidance Notes  Table of Contents  Real Property Valuation  Valuation of Lease Interests  Valuation of Plant, Machinery and Equipment  Valuation of Intangible Assets Intangible Property. The Rights and Privileges Granted to the Owner of Intangible Assets  Valuation of Personal Property  Business Valuation  Consideration of Hazardous and Toxic Substances in Valuation  The Cost Approach for Financial Reporting – DRC  Discounted Cash Flow – (DCF) Analysis for Market Valuations and Investment Analysis Real Property Valuation The Valuation Properties, as illustrated in the next slide, as it is applied in many countries. The process reflects Generally Accepted Valuation Principles and approximated in virtually all countries, whether or not the particular steps are explicitly followed. The principle from which this process derives are common to all countries. Although the process may be used for either Market value or application solely on the basis of market data. Definition of the Assignment The definition of the assignment includes: an identification of the real estate involved in the valuation; an identification of the property rights to be valued; the intended use of valuation, and any related limitations; the identification of any subcontractors or agents and their contribution; a definition of or the basis of the value sought; the date as of which the value estimate will apply; and the date of the intended report; an identification of the scope/extent of the Preliminary Analysis and Data Collection and Selection In performing the steps of preliminary analysis, and data selection and collection, the value becomes familiar with the general market and subject property, thereby proceeding to a position from which more specific analyses can be made. General economic data are collected at the neighborhood, city, regional, and even national and international levels, depending on the property involved. Social, economic, government, and environmental factors that may have bearing on value are examined to better understand the particular Property-specific data, or data more directly relevant to the property being valued and to comparable properties are also gathered and examined. Supply and demand data characteristics of the most probable market for the property are analyzed to develop an inventory of properties that compete with the subject property for market share. The concepts of Highest and Best Use (HABU) is used based on the notion that although two or more parcels of real estate may have physical similarities and closely resemble one another, there may be significant differences in how they can be used. How property can be optimally utilized is a foundation for determining its Market value. In many, countries three valuation approaches are recognized in the Valuation Process: 1. Sale Comparison or Market Data Approach Each approach is based, in part, on the Principle of Substitution, which holds that when several similar or commensurate commodities, goods or services are available, the one with the lowest price attracts the greatest demand and widest distribution. The Value or Appraiser to must consider each approach. The Sale Comparison or Market Data Approach recognizes that property prices are determined by the market. Market Value can, therefore, be calculated from a study of market prices for properties that compete with one another for market share. When data are available, the sale comparison approach is the most direct and systematic The Income Capitalization Approach is based on the same principles that apply to other valuation approaches. In particular, it perceives value as created by the expectation of future benefits (income stream). The income capitalization approach is particularly important for properties that are purchased and sold on the basis of their earnings capabilities and characteristics and in institutions where there is market evidence to support the various elements incorporated into the analysis. Reconstructed operating statements specify that the income projection is subject to the assumption that the property is run by a reasonably efficient operator or average competent management. The Cost Approach, also known as the contractor’s method, is recognized in most countries. The Cost Approach establishes value by estimating the costs of acquiring land and building a new property with equal utility. The cost of land is added to the total cost of construction. (where applicable, an estimate of entrepreneurial incentive, or developer’s profit/loss, is commonly added to construction costs.) The Cost Approach establishes the upper limit of what the market would normally pay for a given property when it is new. The use of the cost approach can be appropriate when properties are new or of relatively new construction, provide estimates of items such as land value and depreciation are validated by market evidence. In depressed markets, economic or external obsolescence must be factored into the indication of value derived from the cost approach. The three approaches to value are independent of one another even though each approach is based on the same economic principles. All three approach are intended to develop an indication of value, but the final value conclusion depends on consideration of all data and process employed and the reconciliation of the  Valuation of Lease Interest Lease interest are a form of real property, arising from the contractual relationship between a lesson, one who owns the property leased to another, and a lessee, or tenant, one who typically receives a non-permanent right to use the leased property in return for rental payments or other valuable economic consideration. A piece of real state may comprise one or more property interests, each of which will have a Market Value provided it is capable of being freely exchanged. Leasehold or Lease Interest are valued on the same general principles as freeholds, but with recognition of the differences created by the lease contract In on circumstances is it considered proper to value different property interests in the same pieces of real estate separately and then to aggregate their values as an indication of the real estate’s total value. Lease contracts establish unique legal estates that are different from fee simple, or freehold, ownership. Each legal interest in a property shall be valued as a separate entity and not treated as though merged with another interest.  Valuation of Plant, Machinery and Equipment Plant, machinery and equipment assets have particularly characteristics that distinguish them from most types of real property and that influence both the approach to hand reporting their value. Plant, machinery and equipment are normally capable of being moved or relocated and often will depreciate at a significantly faster rate than real property. Frequently, the value will differ notably depending on whether an item of plant, machinery or equipment is Valuation of plant, machinery and equipment can be carried out using any of the following approaches: Sales Comparison Approach. In the Philippines due to the lack of direct sales evidence the use of the sales comparison approach is often limited to individual free - standing machines such as lathes and generators, and motor vehicles. Income Capitalization Approach. Current practice in the Philippines does not adopt this approach in the valuation of machinery and equipment. It is recognize that it is rarely possible to identify an income stream and allocate it to individual assets. Cost Approach (Depreciated Replacement Cost) In the Philippines machinery and equipment valuations are usually carried out using the Depreciated Replacement Cost Approach to reach a valuation conclusion. In the absence of direct market evidence depreciated replacement cost is regarded as an acceptable method of determining value and since the publication of the IVS seventh edition (2005) depreciated replacement cost is recognized as a market – based Methodology. Where the depreciated replacement cost method has Such statements should include that the valuation conclusion is subject to the test of adequate profitability, in Accordance with GN8 5.10. Plant machinery and equipment are valued as a whole, in – situ (in place) and as part of the business as a going concern. This equates to Value for Continued Use in the Philippines, which assumes the property to be in continued use the purpose for which the property was designed and built, or to which it is currently adapted. Implicit in the application of this premise is: Both buyer and seller contemplate retention of the  The values are not intendent to represent the amount that might be realized from piecemeal disposition of the property in the marketplace. Plant, machinery and equipment are valued in-situ but on the assumption that the business is closed; or that the plant, machinery and equipment is valued as individual items for removal from their current location. This equates to ‘Liquidation Value’ in the Philippines. Valuation of Intangible Assets Intangible Property. The rights and privileges granted to the owner of intangible assets. In general, the concepts, process, and methods applied in the valuation of intangible assets are the same as those for other types of valuations. Care Assets and going concern considerations, including those encountered in the valuation of real property interests. An example of the latter is evaluation of trade related property. Valuations of intangible assets may be required for a number of possible uses including acquisitions and dispositions Of business or part of business, mergers, sale of an intangible assets, financial reproving and the like. Valuer's of intangible assets must frequently rely on information received from a client or from client’s representative. The source of any such data relied upon must be cited by the Valuer in Written reports, and the data shall be reasonably verified wherever possible. Factors to be considered by the Intangible Assets Valuer include: The rights, privileges, or conditions that attach to the ownership interest Remaining economic life and/or legal life of the intangible assets. The earnings capacity of the intangible assets The nature and history of the intangible assets The economic outlook that may affect the subject intangible assets, Intangible value may also be contained in undifferentiated assets, often called goodwill. Prior transaction in ownership interest of the subject intangible assets Intangible asset valuation approaches: Market (sales comparison) approach to intangible asset valuation The market approach compares the subject to similar intangible assets or intangible asset ownership interests and securities that have been sold in the open market. The two most common sources of data used in the market approach are markets in which ownership interests of similar intangible assets are traded and prior transaction in the ownership of the subject intangible assets.. Income capitalization approach to intangible asset valuation The income approach estimates the value of an intangible asset or of intangible asset ownership interests by calculating the present value of anticipated benefits. The two most common income approach methods are (direct) capitalization of income and discounted cash flow analysis (DCF). In (direct) capitalization of income, a representative income level is divided by a capitalization rate or multiplied by an income multiple ( capitalization factor ) to convert the income into value. In (DCF) analysis and/or divided method, cash receipts are estimated for each of several future periods. These receipts are converted to The cost approach, often called the cost to recreate, is also known as the adjusted asset approach. A cost-based approach is founded on the principle of substitution, i.e., an asset is worth no more that it would cost to replace all of its constituent parts. In the execution of the cost approach, the cost of each item in the creation of the assets, including developer’s profit, must be estimated using the knowledge possessed of the valuation date. Valuation of Personal Property The objective of the Guidance Note(GN) is to improve the consistency and quality of personal property valuations for the benefit of users of personal property valuation services. Personal property valuations are commonly sought and performed on the Market Value basis of valuation, applying the provision of PVS 1. Where other basis of valuation are used, the provisions of PVS 2 are applied, subject to proper disclosure and explanation. Care should be taken by Valuers and users of valuation services to distinguish among the market components and corresponding Market Values of personal properties. One example of such differentiation is the Market value of properties sold at auction vs. that of properties sold by or Another example would be the Market Value of personal property sold wholesale vs. the Market value of the same item(s) sold retail. Steps shall be taken by the Valuer to assure that all data sources relied upon are reliable and appropriate to the valuation undertaking. Personal Property Valuers must frequently rely upon information received from a client or from a client’s representatives. The source of any such data relied upon shall be cited by the Valuer in written reports, and the data shall be reasonably verified wherever possible. Although many of the principles, methods, and techniques of personal property valuation are similar to those in other fields of valuation, personal property valuations require Factors to be considered (but not necessarily reported) by the Personal Property Valuer include: 1.Right privileges, or conditions that attach to the ownership of the subject property 2.The nature of the property and history of its ownership(provenance) Previous sales or transfers of the property 3.The economic outlook that may affect the subject property, including political outlook and government policy 4.The condition and outlook of a market specific to the trade of personal properties that may affect the subject property Personal property valuation performed by means of the Sales Comparison Approach The sales comparison approach compares the subject property to similar properties and/or property ownership interests that have been sold/offered in open markets. The two most common source of data used in the comparison approach are published auction results and transactions reported by firms regularly engaged in the trade of similar properties. Factors property valuation performed by means of the Sales Comparison Approach The sale comparison approach compares the subject property to similar properties and\or property ownership interest that have been sold/offered in open market. The two most common sources of data used in the sale comparison approach are published auction results and transactions reported by firms regularly in the trade of similar properties. Factors to be considered in whether a reasonable basis for comparison exists include: 1. Similarity to the subject property in terms of qualitative and quantitative descriptive characteristics. 2. Amount and verifiability of data on the similar property. 3. Whether the price of the similar property represent an arm’s-length transaction. Personal property valuation performed by means of the income capitalization approach The income Capitalization Approach to value considers income and expense data relating on the property being valued and estimates value through a capitalization process. The application of the income capitalization approach may be appropriate in the valuation of furniture, fixtures, and equipment (FF&E) essential to the operation of properties such as hotels, furnished apartments and care facilities. FF&E may be subject to heavy use and, therefore, require periodic replacement to maintain the attractiveness and utility of the facility. Personal property valuation performed by means of the Cost Approach The cost approach considers as a substitute for the purchase of a given item of personal property, the possibility of creating another item equivalent to the original or one that could furnish equal utility with no undue cost resulting from delay. The application of the cost approach is especially appropriate in valuation of personal property such as manufactured products or items for which multiple copies exist, e.g., prints, porcelain figures, or products turned out by mint. Over time some items of personal property that do not suffer physical depreciation may appreciate since current cost to replace or reproduce such items typically outpaces in Personal property valuation performed by means of the Cost Approach 1.The Valuer’s estimate is based on reproduction or replacement cost of the subject property or asset. 2.Replacement cost refers to one might expect to pay for an object of similar age, size, color, and condition. Generally, it seeks to establish the cost of an alternative example or of a replica, or copy, of the original item, as near as possible to the original in terms of nature, quality, and age of materials but 3.Created by means of modern construction methods. 4.Reproduction cost refers to one might expect to pay for a facsimile, or exact copy, of the original item, created with materials of closely similar nature, quality and age 5. The value conclusion shall also be based on value estimates from the valuation methods performed. 6. The selection of an reliance on the appropriate approaches, method, and procedures depend on the judgement of the valuer. 7. The Valuer must use judgement when determining the relative weight to be given to each of the value estimates during Valuation Process. 8. The Valuer should be provide the rationale and justification for the valuation methods used and for the weighting of the method relied on in reaching the value reconciliation when requested. Business Valuation In general the concepts, process and method applied in the valuation of business are the same as those for other types of valuations. Care should be taken by Valuers and users of valuation services to distinguish between the value of a business entity or trade related property, the valuation of assets owned by such entity, and various possible application of business or going concern considerations encountered in the valuation of real property interests. Business valuation may be required for a number of possible uses, including acquisition and disposition of individual business, mergers, valuation of shareholder owning. Factors to be considered in the valuation of a business include: 1. The rights privileged, or condition that attach to the ownership interest, whether held in corporate form, partnership from, or proprietorship. 2. The nature of the business and history of the business. 3. The economic outlook that may affect the subject business, including political outlook and government policy 4. The condition and outlook of the specific industry that may affect the subject business.. 5. The asset, liabilities, and dividend paying capacity of the business. 7. Factors to be considered in the valuation of business Income capitalization approach to business valuation The income capitalization approach estimates the value of a business, business ownership interest or security by calculating the present value of anticipated benefits. he two most common income approach methods are 1. Capitalization of income; and 2. discounted cash flow analysis or dividends method. In (direct) capitalization of income, a representative income level is divided by a capitalization rate or multiplied by an income multiple to convert the income into value. In discounted cash flow analysis and/or dividends method, cash receipts are estimated for each of several future periods. These receipts are converted to value by the application of a discount rate using present value techniques. Asset-based business valuation approach In business valuation the asset-based approach may be similar to the coast approach used by valuers of different types of assets. The asset-based approach is founded on the principle of substitution, i.e.., an asset is worth no more than it would cost to replace all of its constituent parts. In the execution of the asset-based approach, the cost basis the asset-based approach should not be the sole valuation approach used in assignments relating to operating businesses appraised as going concerns unless it is customarily used by sellers and buyers. Reconciliation processes The value conclusion shall be based upon the definition of value; the purpose and intended use of the valuation; and all relevant information as of the valuation date necessary in view of the scope of the assignment. Consideration of Hazardous and Toxic Substances in Valuation The objectives of this Guidance Note (GN) is to assist Valuers in preparing valuation when specific hazardous or toxic substances may influence property values. Hazardous and toxic substances are included among a number of possible environmental factors that, when appropriate, are specifically considered by valuers. Fundamental to the application of this GNB are the Valuer’s adherence to Market-based valuations, objectivity, and full disclosure of relevant matters. This GN also provides for proper treatment and disclosure of hazardous and toxic substance issues when valuing Hazardous or toxic substances involve specific materials that, by their presence or proximity, may have adverse effect on property value because of their potential to cause harm to life-forms. Such materials may be incorporated into improvements to or on the site, or they may be found in or on the land. They may also be offsite, but nearby. Although the value effects of hazardous or toxic substances are derived from the market in a Market Value assignment, such effects may not be as readily discerned when valuing property for which a Depreciated Replacement Cost method is appropriate. To comply with IVA 1 when applying the DRC method, Valuers should apply the principles of this GN to the extent possible and Some hazardous or toxic substances can have material effect on property values. However, as Valuers normally deal with Market Values, it is the market’s reaction to these substances that is at issue in Market Value engagements. Valuers are expected to the correctly apply those recognized methods and techniques that are necessary to comply with this Guidance. When valuing property subject to some hazardous or toxic substance that adversely influences property value, the Valuer should apply those process necessary to adequately reflect any such value losses, taking care to neither over-or understate the value effects. In Market Value engagement, it is the valuer’s responsibility to reflect the market effect of the particular condition or circumstance. Engagements may require valuation of the affected property under an assumption that any value effect of the hazardous or toxic substances is excluded from the Reported value. Such engagements are acceptable, provided that the resulting valuation is not misleading, that the client is informed of and agrees to this limiting assumption, and that the Valuation Report clearly sets forth the limitation and the reasons therefore. The Cost Approach for Financial Reporting –DRC The purpose of this Guidance Note (GN) is to assist user and prepares of Valuation Reports in the interpretation of the meaning and application of Depreciated Replacement Cost (DRC) for financial reporting purposes. DRC is an application of the cost approach that may be used in arriving at the value of specialized assets for financial reporting purposes. DRC may be the more applicable approach when comparable sales data is insufficient but sufficient market data exists concerning costs and accrued depreciation. As an application of the cost approach, it is based on the principle of substitution. Depreciated Replacement Cost The current cost of replacing an asset with its modern equivalent asset less deduction for physical deterioration and all relevant forms of obsolescence and optimization. The Depreciated Replacement Cost (DRC) is commonly known as Reproduction Cost New Less Depreciated (RCNLD) In the absence of sufficient direct market evidence, DRC is regarded as an acceptable method of arriving at the value of specialized assets but must incorporate market observations by the Valuer with regard to current costs and depreciation rate. The Valuer estimates the cost of a modern equivalent asset at the relevant valuation date. The Valuer then estimate depreciation by comparing the modern equivalent asset with the asset being valued. Depreciation rates may be all-encompassing or analyzed separately for: Physical deterioration Function obsolescence External obsolescence In estimating the physical deterioration of the actual asset resulting from wear and tear over time, including any lack of maintenance, different valuation methods may be used for estimating the amount required to Functional obsolescence can be caused by advances in technology that result in new assets being capable of a more efficient delivery of goods and services. The application of optimization process will account for many elements of functional obsolescence. Obsolescence resulting from external influences may affect the value of assets. External factors include change economic conditions, which affect the supply of an d demand for good and services produced by the assets or the cost of operation. External factors also include the cost and reasonable availability of raw materials, utilities, and labor. In the application of depreciated replacement cost, the Valuer shall ensure that the key elements of a market transaction have been considered. These include; An understanding of the asset, its function and its environment; Research and analysis to determine the remaining physical life (to estimate physical deterioration) and the economic life of asset; Knowledge of in changes in references, technical innovations, and/or market standard that may affect the asset (to estimate functional obsolescence);  An analysis of potential external changes that may affect the asset (to estimate functional obsolescence); Familiarity with class of property through access to available market data; Knowledge of construction techniques and materials (to estimate the cost of a modern equivalent asset); and Sufficient knowledge to determine the impact of external obsolescence on the value of the improvements.. Discounted Cash Flow (DCF) Analysis for Market Valuations and Investment Analysis Discount Cash Flow (DCF) Analysis is a financial modeling technique based on explicit assumptions regarding the prospective income and expenses of a property or business. is one of the accepted methodologies within the income capitalization approach to valuation. is applied in valuations of real property, business and intangible assets; in investment analysis; and as an accounting procedure to estimate value in use. DFC Analysis Involves the projection of a series of periodic cash flows either to an operating property, a development property, or a business. an appropriate, market-derived discount rate is applied to establish an indication of the present value of the income stream associated with the property or business. the rate reflects both the return on the invested capital and the return of the original investment, which are basic considerations of potential investors. DFC for Operating Real Properties in the case of operating real properties, periodic cash flow is typically estimated as gross income less vacancy and collection looses and less operating expenses/outgoings. The series of periodic not operating incomes, along with an estimate of the reversion value/exit value, anticipated at the end of the value/exit value, anticipated at the end of the projection period, is the discounted. DFC for Development Properties In the case of development properties, estimate of capital outlays, development costs, and anticipated sale income are estimated to arrive at a series of net cash flows that are then discounted over the projected development and marketing periods. DCF for Businesses In the case of a business, estimate of periodic cash flows and the value of the business at the end of the projection period are discounted. Valuation of Agricultural Properties Lands devoted to agricultural use are thus a principal subjects of valuation services for a multitude of reason including private and public transfer of ownership, taxation, determination of collateral for financing, and economic, land-use, and investment studies. Reliable valuation of agricultural land are essential to ensure the availability of capital necessary to support the continuity of the economic base, to promote the productive use of the land, to maintain the confidence of capital markets, and to meet the needs for general financial reporting. Providing a reliable and accurate valuation service for agricultural properties requires that the Valuer have a sound knowledge and understanding of the physical and economic elements that effect the productive capacity of agricultural lands and the value of the commodities produced thereon. The physical and environments in degree of importance. THANK YOU