This Glossary is produced to help promote consistency in the usage of words and terms that are common in valuation assignments of different types. Some of the definitions appear in the International Valuation Standards, in Technical Information Papers or in other IVSC publications, but others commonly occurring words and terms used in valuation practice are included.
The definitions included meet the following criteria:
- The Glossary should only include words or terms that either:
- have a meaning when used in a valuation context that either differs from, or is more specific than, their meaning in everyday usage,
- are technical, ie they may not be familiar to a reader who has a reasonable level of business knowledge and sophistication, or that have proved difficult in translation into languages other than English, or
- are definitions used in the International Valuation Standard, a Technical Information Paper or other IVSC publication.
- Definitions should be concise – ideally no more than a short sentence, although there are some exceptions allowed.
- The Glossary should not include words or terms that may be relevant to understanding or describing a particular asset type but that do not directly relate to the valuation process.
- The Glossary should generally avoid accounting or legal definitions unless these are directly relevant to valuation and widely used in valuation practice.
- The Glossary should avoid words or terms that are specific to a particular state when there is a suitable internationally recognised equivalent.
- The Glossary contains only the definition of the word or term, not an explanation of its application in practice.
The definitions in this glossary are those recommended by the IVSC, but other definitions and terms exist. Users of this Glossary are advised to check whether the IVS definition was intended before relying on a definition it contains to interpret any document. The International Valuation Standards Council, the authors and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise.
The IVSC keeps this Glossary under review and any updates are made on 1 January and 1 July each year. It welcomes suggestions for either additional definitions or amendments to an existing definition. If suggesting a new definition please have regard to the criteria noted above. The final decision on whether to accept a recommendation rests with the IVSC Standards Board. The IVSC cannot enter into correspondence over any decisions made in respect of this Glossary.
Glossary updated: 1 January 2014.
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All Risks Yield
The reciprocal of the Capitalisation Factor, usually expressed as a percentage.
A series of annual payments made or received at intervals either for life or for a fixed number of periods.
Arbitrage Pricing Theory
A multivariate model for estimating the cost of equity capital, which incorporates several systematic risk factors.
Asset Based Approach
A method of indicating the value of a business, business or business interest based on a summation of the net value of the individual assets and liabilities. Since each of the assets and liabilities will have been valued using either the market, income or cost approaches, it is not a distinct valuation approach.
See IVS Framework ; see also Summation Method
Basis of Value
A statement of the fundamental measurement assumptions of a valuation.
A measure of systemic risk of a stock; the tendency of a stock’s price to correlate with changes in a specific index.
An amount or percentage that would be deducted by market participants from the current market price of a publicly traded stock to reflect the decrease in the value per share of a block of stock that is of a size that could not be sold in a reasonable period of time given normal trading volumes.
See: Carrying Amount
Business (Business Enterprise)
A commercial, industrial, service, or investment entity (or a combination thereof) pursuing an economic activity.
The degree of uncertainty of realising expected future returns of the business resulting from factors other than financial leverage.
Capital Asset Pricing Model (CAPM)
A model in which the cost of capital for any stock or portfolio of stocks equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the stock or portfolio.
The composition of the invested capital of a business enterprise; the mix of debt and equity financing.
- the conversion of a periodic income to an equivalent capital value,
- the Capital Structure of a business entity, or
- the recognition of expenditure in a Financial Statement as a capital asset rather than a periodic expense.
The multiple applied to a representative single period income to convert it into a capital value.
The return represented by the income produced by an investment, expressed as a percentage.
The amount at which an asset is recognised in the financial statements of an entity after deducting any accumulated depreciation and any accumulated impairment losses.
See also: Book Value
Cash that is generated over a period of time by an asset, group of assets, or business enterprise. Usually used with a qualifying word or phrase.
The rent specified in a lease. May differ from the market rent.
See also: Market Rent
Contributory Asset Charges
A charge to reflect a fair return on or return of Contributory Assets used in the generation of the cash flows associated with the intangible asset being valued.
Any tangible or intangible assets used in the generation of the cash flows associated with the intangible asset being valued.
See also: Contributory Asset Charges
An amount or a percentage by which the pro rata value of a controlling interest exceeds the pro rata value of a non-controlling interest in a business enterprise, to reflect the power of control.
A valuation approach based on the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction.
Cost of Capital
The expected rate of return that the market requires in order to attract funds to a particular investment.
The risk that one party to a contract will cause a financial loss for the other by failing to discharge an obligation.
Cash and assets that are reasonably expected to be converted into cash within one year in the normal course of business.
See also: Current Liabilities
Debts or obligations that are due within one year.
See also: Current Assets
The likelihood of a counterparty not honouring its obligations.
Depreciated Replacement Cost Method
A method under the cost approach that indicates value by calculating the current replacement cost of an asset less deductions for physical deterioration and all relevant forms of obsolescence.
Discount for Lack of Control
An amount or percentage deducted from a pro-rata share of the value of 100 percent of an equity interest in a business, to reflect the absence of some or all of the powers of control.
See also: Control Premium.
A rate of return used to convert a future monetary sum or cash flow into present value.
Discounted Cash Flow Method
A method within the income approach in which a discount rate is applied to future expected income streams to estimate the present value.
The total period of time over which an asset is expected to generate economic benefits for one or more users.
See also: Useful Life
A loss of utility caused by factors external to the asset, especially factors related to changes in supply or demand for products produced by the asset, that results in a loss of value.
The total value of the equity in a business plus the value of its debt or debt-related liabilities, minus any cash or cash equivalents available to meet those liabilities.
See also: Invested Capital
Entity Specific Factors
Factors that are specific to an entity and not available to market participants generally.
See IVS Framework.
The owner’s interest in an asset or business after deduction of all liabilities.
Any contract that creates a residual interest in the assets of an entity after deducting all of its liabilities.
Equity Risk Premium
A rate of return added to a risk-free rate to reflect the additional risk of equity instruments over risk free instruments (a component of the cost of equity capital or equity discount rate).
The value of a business to all of its shareholders
That amount of anticipated economic benefits that exceeds an appropriate rate of return on the value of a selected asset base (often net tangible assets) used to generate those anticipated economic benefits.
Excess Earnings Method
A method of estimating the economic benefits of an intangible asset by identifying the cash flows associated with the use of the asset and deducting a charge reflecting a fair return for the use of contributory assets.
Expected Negative Exposure
The discounted payments and unrealised losses an entity expects to pay to a counterparty.
Expected Positive Exposure
The discounted receipts and unrealised gains an entity forecasts will be recieved from a counterparty
A loss of utility caused by economic or locational factors external to the asset that results in a loss of value.
A valuer who is not employed by the owner or manager of an asset.
- The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. For use in financial reporting under International Financial Reporting Standards, fair value has a different meaning:
ii. In IFRS 13 “Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The distinction between these two definitions and their usage is discussed in the IVS Framework paras 39-43 and IVS 300, paras G1-G2
An opinion on whether the financial terms of a proposed corporate transaction are fair to the equity holders of an entity involved.
A contract that creates rights or obligations between specified parties to receive or pay cash or other financial consideration, or an equity instrument.
Financial Reporting Standards
Any recognised or adopted standards for the preparation of periodic statements of an entity’s financial position. These may also be referred to as accounting standards.
The degree of uncertainty of realizing expected future returns of the business resulting from financial leverage.
A periodic statement of an entity’s financial position
Free Cash Flows to Equity
Cash flows available to pay out to equity owners after funding operations of the business, making necessary capital investments, and increasing or decreasing debt financing.
See also: Free Cash Flows to the Firm
Free Cash Flows to the Firm
Cash flows available to pay out to equity holders and debt investors after funding operations of the business enterprise and making necessary capital investments.
See also: Free Cash Flows to Equity.
A loss of utility resulting from inefficiencies in the subject asset compared to its replacement that results in a loss of value.
A business enterprise that is expected to continue operations for the foreseeable future.
Any future economic benefit arising from a business, an interest in a business or from the use of a group of assets which is not separable.
A method of valuing an intangible asset that deducts the cost of buying or creating contributory assets from the cash flows associated with the use of that asset.
Highest and Best Use
The use of an asset that maximises its potential and that is physically possible, legally permissible and financially feasible.
A loss in the future economic benefits, or service potential of an asset, over and above the systematic recognition of the loss of the asset’s future economic benefits or service potential through depreciation or amortisation.
A valuation approach that provides an indication of value by converting future cash flows to a single current capital value.
The initial income from an investment divided by the price paid for the investment expressed as a percentage.
A non-monetary asset that manifests itself by its economic properties. It does not have physical substance but grants rights and economic benefits to its owner.
Internal Rate of Return
The discount rate at which the present value of the future cash flows of the investment equals the acquisition cost of the investment.
International Financial Reporting Standards
Standards and interpretations adopted by the International Accounting Standards Board (IASB). They comprise:
- International Financial Reporting Standards,
- International Accounting Standards, and
- Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC)
The sum of equity and debt in a business enterprise. Debt can be either (a) all interest-bearing debt or (b) long-term, interest-bearing debt. When the term is used, it should be supplemented by the appropriate qualifying words.
See also: Enterprise Value
A valuation method under the Income Approach that capitalises expected future income or utility as a basis for estimating value.
Property that is land or a building, or part of a building, or both, held by the owner to earn rentals or for capital appreciation, or both, rather than for:
- use in the production or supply of goods or services or for administrative purposes, or
- sale in the ordinary course of business.
The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
An agreement whereby a lessor grants the right to use an asset for an agreed period of time to a lessee in return for a payment or series of payments.
A person or corporate entity to entitled to use an asset under the terms of a lease.
A person or corporate entity that grants another the rights to use an asset under the terms of a Lease in return for the receipt of a payment or series of payments.
The beta reflecting a capital structure that includes debt.
See also: Beta
The net amount that would be realized if a business is discontinued and its assets are sold individually. The appropriate bases of value and any appropriate additional qualifying assumptions should also be stated.
See IVS Framework.
A measure of the ease with which an asset may be converted into cash. A highly liquid asset can be easily converted into cash; an illiquid asset is difficult to convert into cash.
Loss Given Default
The percentage amount that a party expects to lose if the counterparty defaults
The degree of control provided by a majority position.
An ownership interest greater than 50% of the voting interest in a business enterprise.
A valuation approach which provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available.
The whole body of individuals, companies or other entities that are involved in actual transactions or who are contemplating entering into a transaction for a particular type of asset.
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion
Risk that affects an entire market and not just specific participants or assets. Market Risk cannot be diversified.
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
A discount for lack of control applicable to a minority interest.
An ownership interest less than 50% of the voting interest in a business enterprise.
Modern Equivalent Asset
An asset which provides similar function and equivalent utility to the asset being valued, but which is of a current design and constructed or made using current materials and techniques.
Multi-Period Excess Earnings Method
A method of estimating the economic benefits of an intangible asset over multiple time periods by identifying the cash flows associated with the use of the asset and deducting a periodic charge reflecting a fair return for the use of contributory assets.
Net Book Value
- In relation to a business enterprise: The difference between total assets (net of accumulated depreciation, depletion, and amortization) and total liabilities as they appear on the balance sheet.
- In relation to a specific asset: The capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise.
Net Present Value
The value, as of a specified date, of future cash inflows less all cash outflows (including the cost of investment) calculated using an appropriate discount rate.
See also: Present Value
Nominal Cash Flows
Cash flows expressed in monetary terms in a given period or series or periods.
Assets that are held long term and intended for use by an enterprise in the production of goods or the delivery of services.
See also: Current Assets
Classes of assets that are not essential to the operations of a business, but may still generate income or provide return on investment.
Economic benefits adjusted for non-recurring, non-economic, or other unusual items to facilitate comparisons.
A loss of utility of an asset caused by either physical deterioration, changes in technology, patterns of demand or environmental changes that results in a loss of value.
A loss of utility due to the physical deterioration of the asset or its components resulting from its age and normal usage that results in a loss of value.
Plant and Equipment
A class of tangible asset that is:
- held by an entity for use in the production or supply of goods or services, for rental by others or for administrative purposes AND
- expected to be used over a period of time.
Plant and Machinery
See Plant and Equipment
An assemblage of various assets or liabilities held or managed by a single entity.
Premium Profits Method
A method that indicates the value of an intangible asset by comparing an estimate of the profits or cash flows that would be earned by a business using the asset with those that would be earned by a business that does not use the asset.
The value, as of a specified date, of a future payment or series of future payments discounted to the specified date (or to time period zero) at an appropriate discount rate.
See also: Net Present Value.
Price / Earnings Ratio
The price of a share of stock divided by its earnings per share.
Prospective Financial Information
Forecast financial data used to estimate cash flows in a discounted cash flow model.
Rate of Return
An amount of income (loss) and/or change in value realised or anticipated on an investment, expressed as a percentage of that investment.
Real Cash Flows
Nominal cash flows adjusted to exclude the effect of price changes over time.
Land and all things that are a natural part of the land, eg, trees and minerals, things that have been attached to the land, eg, buildings and site improvements, all permanent building attachments, eg, mechanical and electrical plant providing services to a building, that are both below and above the ground.
All rights, interests and benefits related to the ownership of real estate.
Relief from Royalty Method
A method that estimates the value of an intangible asset by reference to the value of the hypothetical royalty payments that are saved through owning the asset, as compared with licensing it from a third party.
See also: Royalty
The current cost of a similar asset offering equivalent utility.
See also: Modern Equivalent Asset.
A valuation method under the Cost Approach typically used for valuing financial instruments that provides an indication of the current value of an instrument or portfolio by reproducing or “replicating” its risks and cash flows in a hypothetical, or synthetic, alternative.
The current cost of creating a replica of the asset
Residual Value 1. The anticipated value of an asset at the expiration of its useful life.See also: Salvage Value2. IFRS definition (IAS16): “The estimated amount that an entity would currently obtain from disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.”
The application of the IFRS definition is described in IVS 300 Valuations for Financial Reporting.
The estimated value of an investment property at the end of a period during which the rental income is either above or below the market rent.
See also: Terminal Value
The anticipated yield from an Investment Property once a the Reversionary Value is attained.
Risk Free Rate
The rate of return available in the market on an investment free of default risk.
A rate of return added to a risk-free rate to reflect risk.
A payment made for the use of an asset, especially an intangible asset or a natural resource.
See also: Relief from Royalty Method.
Sale and Leaseback
Simultaneous transactions in which the buyer becomes the Lessor and the seller becomes the Lessee.
The value of an asset that has reached the end of its economic life for the purpose it was made. The asset may still have value for an alternative use or for recycling.
See also: Residual Value.
The capacity of an asset to continue to provide goods and services in accordance with the entity’s objectives.
An assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.
A particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market.
An amount that reflects particular attributes of an asset that are only of value to a special purchaser.
A property that is rarely if ever sold in the market, except by way of sale of the business or entity of which it is part, due to uniqueness arising from its specialised nature and design, its configuration, size, location or otherwise.
See also: Trade Related Property
A valuation method that provides an indication of the value of an entire asset by the addition of the separate values of its component parts.
See also: Asset Based Approach.
An additional element of value created by the combination of two or more interests where the value of the combined interest is worth more than the sum of the original interests.
Risk that affects an entire market and not just a specific company or asset. Systematic Risk cannot be diversified.
The risk of damage to a system arising from the failure or collapse of a component element of that system.
Assets with a physical manifestation. Examples include land and buildings, plant and machinery, fixtures and fittings, tools and equipment, and assets in the course of construction and development.
Tax Amortisation Benefit
Tax relief available on amortisation of the capitalised asset.
The value at the end of an explicit forecast period of all remaining projected cash flows.
See also: Reversionary Value
Trade Related Property
Any type of real property designed for a specific type of business where the property value reflects the trading potential for that business.
See also: Specialised Property
Unit of Account
IFRS Definition (IFRS 13): The level at which an asset or a liability is aggregated or disaggregated in an IFRS for recognition purposes.
The application of the IFRS definition is described in the guidance section of IVS 300 Valuations for Financial Reporting
Unit(s) of Comparison
A common basis of comparison used to analyse differences between assets. It may be based on a physical characteristic, eg a price per square metre or square foot, or an economic characteristic eg the ratio of a asset’s sale price to its net income.
A risk that is specific to a company or asset. Can be diversified.
IFRS Definition from IAS 16:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an entity.
See also: Economic Life
An expression of the degree of an asset’s usefulness.
(1) The process of establishing the value of an asset or liability;
(2) The amount representing an opinion or estimate of value
See also: Appraisal
One of three principal ways of estimating value. Each valuation approach includes different methods that may be used to apply the principles of the approach to specific asset types or situations.
The date on which the opinion of value applies. The valuation date shall also include the time at which it applies if the value of the type of asset can change materially in the course of a single day.
Data and other information that is used in a valuation method. Inputs may be actual or estimated.
A specific technique or model used to estimate value. All valuation methods fall within a valuation approach.
See also: Valuation Approach
A report that communicates a valuation opinion and relevant associated matters to its intended recipient. The matters to be addressed in a valuation report are set out in IVS 103 Reporting.
The act or process of considering and reporting on a valuation undertaken by another party, which may or may not require the reviewer to provide their own valuation opinion.
Value at Risk
The maximum loss that could be expected to be incurred over a nominated time period as a result of movements in identified risk parameters, within a specified level of probability based on statistical analysis of historical price trends and volatilities.
Value in Use
IFRS Definition from IAS 36: “The present value of the future cash flows expected to be derived from an asset or cash-generating unit.”
Assets which in real terms will generally depreciate in value over time.
Weighted Average Cost of Capital
A discount rate estimated by the weighted average, at market values, of the cost of all financing sources in a business enterprise’s capital structure.
The amount by which current assets exceed current liabilities.
The return on an investment. Usually expressed annually as a percentage based on an investment’s cost, its current market value or its face (par) value. Often used with a qualifying word or phrase.
Yield to Maturity
The annual rate of return anticipated on a bond if it is held until the maturity date taking into account the current market price, the par value, coupon interest rate and the time to maturity.