International Valuation White Paper - ICJCE - IASB... · International Valuation Standards, Sixth Edition International Valuation White Paper Valuation in Emerging Markets This White

International Valuation White Paper

Valuation in Emerging Markets 347

International Valuation Standards Committee

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International Valuation Standards, Sixth Edition

International Valuation White Paper

Valuation in Emerging Markets

This White Paper should be read with particular reference toInternational Valuation Standards 1 and 2, International ValuationApplications 1 and 2, and the Code of Conduct.

1.0 Introduction

1.1 Owing to the importance of property markets and capital markets toeconomic growth, standards for the valuation of all property types,capital assets, and securities bought and sold in these markets are ofcritical importance. The introduction and implementation of valua-tion standards are essential to the consolidation of property and cap-ital markets in developing economies. One of the three objectivesthat the International Valuation Standards Committee has set foritself, therefore, is “to provide Standards of valuation that meet theneeds of emerging and newly industrialised countries.”

1.2 The purpose of the IVSC in issuing a White Paper on Valuation inEmerging Markets is twofold. The White Paper is intended to:

1.2.1 provide specific guidance to Valuers in emerging markets;and

1.2.2 contribute to the efforts of international, regional, andnational development banks and institutions in restructuringand/or strengthening financial systems in emerging markets.

1.3 The special economic, legal, and institutional characteristics ofemerging markets pose particular problems for Valuers working inthese markets. Some of these characteristics may be also evident inmore developed markets, but would tend to be more prevalent inemerging markets and include:

1.3.1 A poor or inadequate legal framework that does not allow forthe efficient functioning of the property market.

White Paper, Valuation in Emerging Markets 347


A comprehensive legal framework, including a compendiumof property laws, is essential to a functioning property mar-ket. For example in many emerging markets, ownership,whether defined as a specific right (“right to use”), or a groupof rights and interests, or the full “bundle of rights”, may notbe guaranteed by law.

Land use planning is a particularly important example as it isessential for Valuers to undertake highest and best use(HABU) analyses (see definition in Glossary of Terms) thatrepresent the foundation for forming an opinion of MarketValue. For a property to meet the criterion of legal permissi-bility, its use must conform to planning laws or zoning codes.

1.3.2 The lack of published information or difficulty in obtaininginformation regarding transactional as well as other data req-uisite for proper valuations.

Valuers in emerging markets may find that reliable transac-tional and other relevant market data are insufficient eitherbecause publication of such data is not yet the establishednorm or people are more conservative about publicly dis-closing such information.

1.3.3 Greater volatility of property markets

In emerging markets, both internal factors, such as poor col-lection and dissemination of information about the market,and external factors, such as susceptibility to sudden capitalflows, may lead to economic volatility.

1.3.4 Lack of adequately trained professional Valuers

The analyses of professional Valuers are essential to supportthe decision making of market participants. In the absence ofreliable valuations, property markets cannot operate effi-ciently. The central role of professional Valuers in the effi-cient functioning of the property market needs to be betterunderstood and appreciated by users of valuation services,the regulators, the government, and the general public.

348 White Paper, Valuation in Emerging Markets


1.3.5 Outdated National Valuation Standards

In some emerging markets, national valuation standards maycurrently be undergoing revision. Although considered pro-visional, these national standards are also recognised aslegally valid. When such a situation exists, it should be dis-closed and the national valuation association should makeevery effort to ensure that the new national standards rein-force best valuation practice as reflected in the IVS.

1.3.6 External pressure

On account of weak or absent regulation of valuation mattersby supervisors of the capital and financial markets and of thevaluation profession itself, Valuers are sometimes subject toundue and/or excessive pressure from interested parties suchas institutions and clients to value other than in accordancewith Generally Accepted Valuation Principles (GAVP).

1.3.7 Excessive or insufficient government intervention

Governments may interfere in the economic, legal, and insti-tutional frameworks that underlie the property market insuch a way as to impede its efficient functioning. The long-term effects of such interference may include a misallocationof resources or disequilibrium and distortions in the proper-ty market. On the other hand, lack of government under-standing or the absence of a supportive role may impede theefficient functioning of the property market.

1.3.8 Growing importance of intangible property

In formerly planned or command economies, many intangi-ble property rights were not fully recognised. Theseeconomies are now in transition to becoming marketeconomies, and intangible property rights have assumed spe-cial importance as a recognised category of property.



2.0 Definitions

2.1 Emerging Market. A market growing in size and sophistication andfound in a national economy, which is in transition to becoming moredeveloped, and market-based. An emerging market may be a finan-cial market with a short operating history and/or a low level of capi-talisation. Characteristics common to emerging markets may includesignificant structural changes in the national economy; rapid devel-opment of the political, legal, and institutional frameworks; and tran-sitioning from a planned or command economy to a market-basedeconomy. As a result emerging markets are becoming increasinglyglobalised.

2.2 Legal Framework. A comprehensive body of enforceable laws pre-scribing the rights and interests associated with the ownership ofproperty as well as the powers exercised by the government overproperty.

2.3 Land Use Planning. The proposed programme set forth by a localauthority for the future development of an area in accordance with aparticular land use or land uses. Land use planning, which representsa form of police power exercised by government, provides the basisfor zoning.

3.0 Discussion

3.1 At the outset it must be stated that while this White Paper recognis-es the special circumstances of emerging markets, Valuers workingin such markets must not use this White Papert to circumvent coreconcepts and principles of GAVP.

3.2 Market Value Basis

3.2.1 The fundamental basis of valuation in International ValuationStandards is Market Value. Any Market Value estimate iscontingent upon the assumption that an active and function-ing market exists to some extent. The extent to which anemerging market is operative depends on its relative size,maturity, and sophistication.



3.2.2 While in some emerging economies active property marketsmay provide Valuers with sufficient transactional and otherrelevant data to estimate Market Value, in others, marketinformation may not be easy to obtain. Basic informationabout a property may be unavailable or the quality of the dataobtained may not reflect the market. Given the limited mar-ket, the Valuer may need to expend greater efforts in study-ing the market circumstances that have impacted the transac-tional data selected for use as comparable data. Suitableadjustments to the data should be supported by logical andconsistent analyses. An unreasonable size or number ofadjustments, however, precludes the use of such data as com-parable data.

3.2.3 Where a Valuer cannot conduct a valuation based on marketinformation or where only part of the valuation can be sup-ported by market evidence, the Valuer must disclose this lim-itation to the user of the valuation and identify any part there-of based on data other than that obtainable in the market. Anyassumptions made in the valuation must also be disclosedand the potential impact on the value reported should bespecified.

3.2.4 In emerging markets, land use planning laws may not beexplicitly promulgated or enforceable by planning authori-ties. Determination of highest and best use (HABU) (see def-inition in Glossary of Terms), therefore, may be difficult orat best subjective. Valuers need to exercise special judgmentin justifying a HABU conclusion. HABU is time-specific.Therefore, it is necessary to specify when and how HABUtakes effect. Where HABU analyses cannot be performed orwhere such analyses are predicated upon an unreasonablenumber of assumptions, the Valuer must make this circum-stance known.

3.3 Bases other than Market Value

3.3.1 International Valuation Standards 1 and 2 draw a clear distinc-tion between valuations based on Market Value and valuationsbased on values other than Market Value. Valuation bases



other than Market Value may be used to estimate, for example,value in use or the value a specific property has for a specificuse to a specific user, as opposed to value in exchange, whichis the foundation for valuations based on Market Value.

3.3.2 Because of a lack or insufficiency of transactional and otherrelevant data requisite to market-based valuations, Valuers inemerging markets sometimes arrive at estimates of valueother than Market Value without providing adequate clarifi-cation that those value estimates are indeed non-marketbased valuations. Under Standard IVS 2, it is required thatnon-market valuations, wherever undertaken, be clearlyidentified as non-market based valuations.

3.3.3 The Depreciated Replacement Cost or DRC methodology forvaluation, which may not be fully supported by market data(see the chart illustrating the Continuum between Market andNon-Market Values in IVS 2), is considered an acceptablemethodology to arrive at a surrogate for the Market Value ofspecialised property or property with a limited market. Theresult is, however, a non-market estimate. DRC is a particu-larly helpful method in emerging markets where transaction-al data is scarce and where information on construction costsmay be more readily available. However Valuers must clear-ly identify the limitations of an estimate derived from DRCmethodology. Careful consideration has to be given to theprinciple of consistent use when the valuation is based onDRC, especially where the information available is a mix orcombination of market and non-market data. (See GN 8,Depreciated Replacement Cost.)

3.4 Valuations for Financial Reporting

3.4.1 In valuations for financial reporting (International ValuationApplication 1), Valuers in emerging markets are required totake into account the concepts and principles set out in theInternational Accounting Standards and to understand the dif-ferences between those accounting standards and the nationalaccounting standards of the country in which the valuation iscarried out. Normally, national accounting standards take



precedence over international standards because nationalstandards are upheld by and enforceable under the nationallaw. The reporting needs of the client are critical because thefinancial report is generally tailored to these needs.

3.5 Valuations for Lending Purposes

3.5.1 In valuation for lending purposes (International ValuationApplication 2), Valuers in emerging markets may be subjectto particular pressure from clients. Valuers should work withregulatory authorities to ensure that regulations are clearlylaid down, enunciated, appreciated, and fully enforced.

3.5.2 Lenders need to distinguish between valuations done for res-idential mortgages and valuations done for larger projects.Because of the developing nature of emerging markets, com-mercial and residential projects tend to be large-scale, andvaluations for projects require market and feasibility studiesprior to the estimate of value.

3.6 Code of Conduct

3.6.1 The IVS Code of Conduct in paragraph 2.3 states that “Inthose countries where the infrastructure does not yet exist fora trained and regulated profession of valuation, primaryresponsibility lies with the client users to satisfy themselvesas to the suitability of Valuers to undertake the task.”Nevertheless Valuers in emerging markets must at all timesadhere to the provisions of the IVS Code of Conduct andthere can be no departure from that Code.

3.6.2 The IVS Code of Conduct in paragraph 5.0 contains the IVScompetence provisions. Notwithstanding the need to upholdthese provisions in their generality, it is recognised that thedefinition of Valuer in paragraph 3.3 of the Code of Conductmay not always conform to the situation in an emerging mar-ket where there may be neither appropriate qualification nora body of sufficiently trained or experienced Valuers.

3.6.3 Finally paragraph 6.8.1 of the IVS Code of Conduct is worthreiterating:




“Standards are devised for the generality of situations andcannot cater to every eventuality. There will be occasionswhere departure from Standards is inescapable. When suchsituations arise, departure would be unlikely to constitute abreach of these Standards, provided such departure is rea-sonable, complies with the principles of ethics and measuresof competence, and a rationale for such departure is provid-ed in the valuation report.”

4.0 Recommendations

Pursuant to the two objectives of this White Paper the recommenda-tions are directed to Valuers who carry out valuations in emergingmarkets with advice to commercial banks and other lenders as wellas international, regional, and national development banks and insti-tutions that oversee any restructuring and/or strengthening of finan-cial systems in emerging markets.

4.1 Recommendations to Valuers:

4.1.1 The Market Value basis must be recognised as the funda-mental basis of valuation.

4.1.2 Where other bases are used they must be distinguished fromthe Market Value basis.

4.1.3 In valuations for financial reporting Valuers must understandthe relationship between valuation and accounting standardsand between International Accounting Standards and nation-al accounting standards.

4.1.4 In valuations for lending purposes Valuers should performtheir assignments independently while also working withregulatory authorities to resist client pressure by promotingand supporting clear and enforceable regulations.

4.1.5 At the outset of any valuation, the conditions of engagementand instructions for the assignment should be clearly speci-fied in writing.


4.1.6 Observance of the IVS Code of Conduct is incumbent uponall Valuers who work in emerging markets.

4.1.7 Each International Valuation Standard, Application, andGuidance Note includes sections on disclosure and depar-ture. In market circumstances where departure fromStandards is inescapable, the International ValuationStandards call for disclosure of all departures and the ration-ale for such departures.

4.2 Advice to commercial banks and other lenders:

4.2.1 Banks and other financial institutions that lend for residentialmortgages as well as commercial and residential projects mustensure compliance with International Valuation Application 2,Valuation For Lending Purposes. Valuers must beIndependent/External Valuers as only Independent/ExternalValuers can provide adequate professional liability to the lend-ing institution. In cases where Internal Valuers are used, it isrecommended that the valuation function be independent ofthe credit/loan approval function and that the independent sta-tus of the Valuer be disclosed.

4.2.2 When retaining Valuers to undertake an assignment, lendinginstitutions should clearly specify in writing the conditionsof engagement and instructions for the assignment at the out-set.

4.3 Advice to international, regional, and national development banksand institutions:

4.3.1 Development banks and institutions should recognise theimportance of valuations undertaken by professionally qual-ified Valuers who comply with International ValuationStandards and this White Paper.

4.3.2 The need for valuation standards should be viewed within theframework of promoting policies that minimise imbalancesin the property market and of restructuring and strengtheningproperty markets and financial systems in emerging markets.




4.3.3 Users of valuations prepared for financial reporting, i.e., forinclusion of asset values in the books of accounts, mustensure compliance with International Valuation Application1, Valuation for Financial Reporting. Valuers must carry outtheir assignments in an independent capacity.

4.3.4 Institutions with regulatory functions over the valuation pro-fession should ensure adequate opportunity for its develop-ment as this profession is central to the proper functioning ofthe property market and by extension the economy.

5.0 Date of Issue

This International Valuation White Paper was issued 1 July 2001.

Documents

International Valuation White Paper - ICJCE - IASB... · International Valuation Standards, Sixth Edition International Valuation White Paper Valuation in Emerging Markets This White