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THE INTERNATIONAL VALUATION STANDARDS
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FOR IMMEDIATE RELEASE 22 SEPTEMBER 1999
CHAIRMAN’S ADDRESS
AGM - BEIGING
By Greg McNamara - Chairman-elect
- IVSC
It is an honour and privilege to be part of this International Forum
in Beijing. The China Appraisal Society should be proud of the efforts
of Ms Liu Ping, Wang Chungjen and others in the organisation of this Valuation
Forum which I feel certain, will be a great success.
The 1st October is of special significance for China, being the 50th Anniversary
of the Peoples Republic. It is indeed, a memorable occasion to be in Beijing
City at this time.
For us at this Forum, as professional people in property economics, particularly
as we approach the year 2000, it is an appropriate occasion to stop and
reflect what has been, not to dwell but rather to guide us into the future.
The experiences of the past have been very much influenced by the economic
rationalism of our own particular countries. My country, Australia, for
example is a young economy which has struggled with the efforts of isolation
and low population. China on the other hand, has the largest population
in the world but lacks financial discipline. As outlined by your Premier
Zhu Rongji at the opening of the National People's Congress in March this
year, he said, there are "formidable obstacles to reform". This is true
of all countries but what is certain, is that in the new millennium -
our countries will reform together. The economic boundaries of the old
world, have now been removed.
If we are to reform together, we must be guided by similar regulations
and or controls. In the property sense that means Standards and hence
the importance of the IVSC and its commitment to providing international
guidance to the property sector of our economies. The property sectors
of our nations need to be able to talk to one another in a common economic
order.
A good example is in the banking and financial areas where non-performing
real estate loans have been at the epicentre of banking problems in every
country in recent years. Problems arising from loan security valuations
were under review in the USA in the late 1980s following the Savings and
Loans crisis, in much of Europe following the recession in the late 80s/early
90s, and now in countries in Asia following the recent crisis. But the
core lessons of the crises in the US and Europe were ignored outside of
their own country. They were seen as a purely domestic issue without systemic
interest elsewhere. Monetary authorities, bank supervisors, financial
managers, and industry people continued to behave as if their national
real estate economy was still a local, non-traded sector where foreign
factors were of limited significance.
Not any more. The increased volume and volatility of capital flows has
exposed critical problems in the domestic and international financial
systems that will need to be dealt with. The frequency of financial sector
problems in a range of countries have underscored the need for countries
to move quickly to adopt international best practices in financial supervision
and regulation. Moreover recent events have reminded us that these are
not issues for individual countries alone. A country, for example like
China, that receives a large volume of capital inflows and does not make
the necessary reforms and institutional improvements may not only fail
to reap the full benefits of inflows and risk damage to the living standards
of its people, by increasing its own vulnerability; it may also become
the epicentre of contagion effects that can have significant adverse effects
on other countries. Thus these are not just matters of domestic policy
interest but are of concern for the international community as a whole.
What then, is the IVSC doing to harmonise not only in the loan security
area but also real estate asset reporting and other related property matters
throughout the world? The short answer is the publication of written standards
together with the fostering and participation of international forums
like us here today in Beijing. Another important role of IVSC is to represent
our property profession to other related international organisations such
as the International Accounting Standards Committee, World Bank, International
Monetary Fund, World Trade Organisation and many others.
My role here today, is to discuss Valuation Standards both current and
for the future. Before doing so, I must point out a very important pre-requisite
that is presumed by IVSC. You should recall that IVSC consists of the
main professional organisations/association in each of some 50 states
worldwide. The pre-requisite is that the first step towards establishing
Standards, is to develop a Code of Ethics. "Ethics" simply call for a
practice of morality, doing "what is right", not what is expedient, profitable,
advantageous, beneficial, convenient or accommodating. Before we consider
what Standards are or should be, let us make sure that our National organisations
insist that each of their professional valuers/appraisers follow a moral
code. Don't declare anyone a "professional" member of CAS unless they
have demonstrated they are highly moral real estate valuers and don't
permit anyone to remain a professional member if they demonstrate that
they have lost that morality.
AN OUTLINE OF CURRENT IVSC STANDARDS AND RELATED
MATERIALS
The following information is provided in the published Standards Document
(white book):-
1. The Chairman's Letter
2. The Table of Contents
3. Preface Materials
A. Introduction
B. General Valuation Concepts and Principles
4. Appraisal Standards
A. Standard 1 - Market Value Basis of Valuation
B. Standard 2 - Valuation Bases other than Market Value
C. Standard 3 - Valuations for Financial Statements and Related Accounts.
D. Standard 4 - Valuations for Loan Security, Mortgages, and Debentures
5. Application and Performance Guidance
A. APG 1: Going Concern Concept of Valuation
B. APG 2: Consideration of Hazardous and Toxic Substances in Valuation
C. APG 3: Valuation of Plant, Machinery, and Equipment
D. APG 4: Business Valuation
The original Document was reprinted in July 1997 and now has the addition
APG 4: Business Valuation.
Written Comments and Positions have additionally been published by IVSC
including the recent Commentary Number 2 - Guidance to Valuers required
to report under International Accounting Standard (IAS) 16. These position
papers and commentaries are required to react to immediate issues that
have worldwide implications.
THE CONCEPT OF "MARKET VALUE"
The fundamental notion in IVSC material for property valuation is the
implication of Market Value. This is consistent with the regime of current
cost accounting methods as opposed to historical cost accounting.
Historical cost relies upon the recording of asset value at the date of
acquisition (purchase) with an arbitrary annual adjustment. These original
dates will typically be different for various assets and thus it can be
argued that historic cost financial statements lack the significance of
comparability, not only between different companies at any given time
but even between different assets owned by the same company. In addition,
historical cost accounting allows companies to "massage income", that
is to understate or overstate asset value and to select when to sell assets
to realise profits or losses.
Market Values have the advantage of relevance to the current state of
the business - an attribute that this lacking in historic cost accounting.
No banker should ever make a secured loan to a customer based on the historical
cost of the property. Rate of return measures (yield on capital) and balance
sheet measures (gearing ratios) are widely employed by users of financial
statements. Obviously and critically, these measurements must be in terms
of current values rather than historic cost. Current values are more likely
to be comparable in reflecting economic conditions at a particular time
and will be understandable by the general public who can relate more readily
to current prices.
In terms of real property asset statistics, it must be stressed that to
report other than market value is a distortion of the facts. The excuse
by accountants and economists that historic cost has been widely practised
over a long period of time and hence is familiar to preparers of financial
statements, is no longer acceptable in a transparent global economic environment.
The determination of market value by professionally qualified valuers
as the added advantage in most states, that its accuracy is protected
by their liability at law.
Under the IVSC Standards, Market Value is defined as:-
"Market value is the estimated
amount for which an asset should exchange on the date of valuation between
a willing buyer and a willing seller in an arms length transaction, after
proper marketing, wherein the parties had each acted knowledgeably, prudently
and without compulsion."
CURRENT VALUATION STANDARDS And now,
a brief look at the existing Standards:- Standard
1 - Market Value Basis of Valuation à Importance of "Market Value"
à Distinct from other types à Market Value definition à Relationship to
accounting terms/concepts à Disclosure, competency, objectivity à Importance
of full understanding: valuer, client, third-parties Standard
2 - Valuation Bases other than Market Value
Value types that are distinctly different from Market Value à Examples:
Format is standard
Standard 3 - Valuations for Financial Statements and
Related Accounts
-
Extraordinary importance
-
"Market Value for the Existing Use" - changing
concept
-
Highest and Best Use
-
Why this Standard is important
-
Relationship to accounting terms and concepts
-
Other elements
Standard 4 - Valuations for Loan Security, Mortgages,
and Debentures
-
Why this Standard
-
Topics include:
FUTURE STANDARDS
To set the scene, some relevant quotations:-
"In an effort to bring order to the unruly, fast-paced
international markets, financial leaders agree that we need to quicken
efforts to establish international standards and codes of good practice…..These
efforts will now be stepped up and broadened to cover other important
areas, such as……asset valuation….."
Alassane D Ouattara, Deputy Managing Director of the
International Monetary Fund at the Bank Lyonnaise and European Geopolitical
Observatory Conference - 10 November 1998
"…power to control the language of business is important.
Standard setters will come to a head as the world grows smaller, and economic
interdependence is no longer an option but a reality. So it happens that
today a good observer can see the battle preparations for the control
of the international language of business slowly unfold…."
Jules W Muis, Vice-President and Controller, The World
Bank Conference - 12 April 1999.
The challenges facing the appraisal/valuation profession result from significant
global changes in recent years. The most important of these are:-
(a) A new international financial architecture
Need to strengthen the design of the international financial system as
a consequences of poor accounting, regulatory and supervisory standards.
The shift from a closed domestic, relationship-based financial system
to one with a strong foreign presence. Today's capital markets are international,
yet they are supervised and regulated largely on a national basis. In
boom times, this discrepancy does not seem to matter but financial crisis
exposes deficiencies.
(b) International Capital Markets
At present, financial reports prepared for shareholders and other users,
involve principles and procedures that can vary widely from country to
country, and sometimes even within a country. The need for a single set
of rules by which assets, liabilities and income are recognised and measured,
is urgent.
(c) Developing and newly industrialised countries
Need for relevant and reliable financial and other performance information
both in countries in transition from planned economies to market economies
and in developing and newly industrialised economies. Financial flows
to developing and transition countries in the 1970s and 1980s was a total
net capital amount to this group, averaging at around $10 - $20 billion
a year which rose to $280 billion in 1997, before falling back to $234
billion in 1998 in the wake of financial crisis in a number of emerging
markets.
(d) Globalisation of business
Barriers to trade in goods and services have been lowered through the
efforts of global organisations such as the World Trade Organisation.
(e) Reducing power of national decision making
There is a decline in the power of national governments to act independently
and a continuing shift towards regional and international decision making.
(f) Globalisation of the property industry
National firms of property consultants became first international and
now global and are seeking to develop services aimed not at differences
between clients but at what they have in common - no matter where they
are. Growth of real estate investment trusts - securitisation.
In reaction to the demand of global markets, the IVSC Management Board
will propose a Business Plan to the 1999 Annual General Meeting, here
in Beijing. The Business Plan will be used to attract greater resource
to the work of the IVSC. The four key objectives of the project are:
OBJECTIVE ONE
"To publish a comprehensive set of high quality standards and guidance
by the year 2002 that require the disclosure of material, significant,
reliable, relevant, transparent and comparable information which will
help participants in capital markets and others to make economic decisions."
OBJECTIVE TWO
"To strengthen communications with member associations and regional bodies,
as well as those that rely on or regulate the services of the international
valuation profession, so that the IVSC can deal promptly and forcefully
on issues relevant to the profession, public and international business
and financial community."
OBJECTIVE THREE
"To continue to identify and support those developing nations who need
the assistance of the IVSC in developing a national valuation profession
that effectively serves the public interest."
OBJECTIVE FOUR
"To seek adequate resources - human and financial - so that the IVSC is
in a position to achieve its objectives".
Objective One is of particular relevance to my topic
today and to achieve this, the IVSC must:
"To publish a comprehensive set of high quality standards
and guidance by the year 2002 that require the disclosure of material,
significant, reliable, relevant, transparent and comparable information
which will help participants in capital markets and others to make economic
decisions."
To achieve this, the IVSC must:
(1) accelerate work already in hand and agree new areas where standards/guidance
might be needed.
(2) ensure that International Valuation Standards are of high quality
and are acceptable to the users and preparers of valuation reports by
(i) creating specialist working groups to develop
standards and guidance, including the use of experts from outside the
valuation profession
(ii) enhancing the process of consultation on exposure drafts.
(3) achieve greater speed in production of standards and guidance and
consistency in style by appointing technical writer(s) and/or editor.
(4) achieve endorsement of international valuation standards by other
international organisations with priority being formal recognition of
IVS within International Accounting Standards.
(5) encourage harmonisation by working towards convergence between national
valuation standards and IVS with the aim of global uniformity by
(i) reminding IVSC member associations of their
commitment to support the Standards and guidance published by the Committee
and to use their best endeavours to secure recognition of the Standards
in their respective Member States;
(ii) undertaking research to publicise differences between national
valuation standards and between national and international valuation
standards;
(iii) establishing a closer relationship with national standard
setters in those countries where standard setting is not a function
of the member association of IVSC.
(6) reach clear agreement with IVSC member associations on the way in
which regional influence can help achieve international harmonisation.
The issue of regional standard setting is under debate. If globalisation
is a reality, is it wise to perpetuate regional standards? IVSC recommends
the adoption of IVS and the development of specific local or regional
requirements as supplements. The international community also recognises
an increasingly important role for surveillance of international standards
by regional bodies.
It is difficult to predict Valuation Standards for the rapidly changing
global market in the new millennium. Some subjects that have already been
identified, include:-
(a) Valuation of Intangible Assets
(b) Valuation of Specialised Trading Properties
(c) Valuation of Public Sector Assets
(d) Valuation of Investment Properties
(e) Global Investment Performance Standards
(f) Code of Conduct
(g) Guidance on Disclosure Statements
(h) Glossary of Terms for International Valuation Standards
(i) Guidance on Valuation of Lease Interests
(j) Guidance on Valuation for Insurance Purposes
(k) Guidance on Valuation in Emerging Markets
(l) Guidance on Valuation in a rapidly Changing Market
(m) Standard on Valuation of Real Property
(n) Valuation for Bank Security Purposes
(o) Standardisation of Measurement
(p) Establishment of Property Indices
(q) Real Estate Investment Trusts
(r) Limited Scope Valuations
(s) Compulsory Acquisition
These are but a few of the topics that are likely to be developed into
Standards by IVSC in the relatively immediate future.
Governments are increasingly acknowledging that a viable valuation profession
and the legal and regulatory framework in which it can be fostered, is
crucial to economic development. This framework includes the development
mandatory standards.
Greg McNamara
9 October 1999
The Author is a director of McNamara Taplin & Associates
Proprietary, Independent Valuers, Hobart, Australia. He was the inaugural
chairman of the Australian Valuation & Property Standards Board, a former
national president of the Australian Property Institute and that Institute's
delegate to IVSC.
page updated
17-Nov-2008
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