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Principal aims and purpose

The principal aims of the standards contained in the RICS Valuation - Professional Standards(the Red Book) are set out in paras. 1.1 to 1.3 of the introduction:

'1.1 The purpose of the RICS standards is to provide users of valuation services withconfidence that a valuation provided by an RICS qualified valuer has been undertaken incompliance with the highest professional standards. It also assures users that the valuationis independent, objective and consistent with internationally recognised standards set by theInternational Valuation Standards Council (IVSC ...).

1.2 The standards set out procedural rules and guidance for valuers within the RICS Rulesof Conduct. They also set a framework for best practice in the execution and delivery ofvaluations for different purposes but do not instruct valuers on how to value in individualcases. There is a mandatory obligation placed on the individual valuer or firm registered forregulation by RICS to follow these standards and an effective sanction if there is a materialbreach.

1.3 These standards require and define:

- appropriate qualification of the valuer for the task, judged against clear criteria; - independence and objectivity in the valuer's approach; - clarity regarding conditions of engagement, including matters to be addressed and

disclosures to be made; - clarity regarding basis of value, including any assumptions or material

considerations to be taken into account; - minimum standards regarding content of valuation reports; and - proper and adequate disclosure of relevant matters where valuations may be relied

on by a third party.'

While the standards are not designed to deal with or instruct valuers on how to value inindividual cases, there are a number of stand-alone RICS guidance notes and informationpapers that discuss and deal with the approach to issues that may arise in the subjects towhich they apply. Examples include the valuation of petrol filling stations, rural property,development land, etc. These publications are listed in the Red Book and are available free toRICS members on the RICS website. See also the practice standards on isurv.

International Valuation Standards (IVS)

RICS is not the only body that issues Valuation Standards. The International ValuationStandards Council (IVSC) - of which RICS is a sponsor - publishes, and periodically reviews,the International Valuation Standards (IVS). The IVS set out internationally accepted,high-level valuation principles and definitions. They have been adopted, supplemented (whereappropriate) by RICS and reflected in successive Red Book editions as part of RICS' overallframework of standards, backed by a comprehensive scheme of regulation to ensure effectiveimplementation and delivery. For the first time the whole of the IVS is published together with the RICS standards. Whilesome RICS standards are occasionally presented in a different way from the IVS, theprinciples, objectives and defined terms are the same. Thus, RICS considers that a valuationthat is undertaken in accordance with the Red Book will also be compliant with the IVS. An important change introduced by the IVS 2011 is the extension of its application to all typesof asset, with the word 'asset' also being deemed to include 'liability' where appropriate (seeIVS 2011, Introduction, for further details). These RICS standards are primarily directed at thevaluation of real estate (land, buildings and interests therein), personal property, and plant andequipment, and so the word 'property' has been retained in preference to 'asset' where it isnecessary for clarity. Members undertaking business valuations or valuations of intangible assets are reminded that

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they should follow IVS 200 or 210, as well as complying with other general requirements of theRICS standards. RICS expects to issue further guidance in relation to these specific classes ofasset over time. The RICS standards incorporate the full publication IVS 2011, that became effective from 1January 2012. Any amended or new standards that become effective after January 2012 willbe available on the IVSC website. It is strongly recommended that the reader looks at the IVS appended in the Red Book. Theyare laid out differently from the Red Book, as evident in the following structure:

IVS Definitions

IVS Framework

General Standards - IVS 101 to 103

Asset Standards - IVS 200 to 250

Valuation Applications - IVS 300 and 310 Although they are set out differently from the Red Book, there is a correlation between thecontents of the two. Appendix 9 in the Red Book gives a comparison between RICS Valuation- Professional Standards and the IVS. This comparison can also be found in Appendix B of thisguide.

Structure of the Red Book

The standards in the Red Book are divided into valuation standards (VS), appendices andguidance notes. All members of RICS and IRRV, and firms regulated by RICS are required tocomply with VS1 when undertaking any instruction that requires a written valuation (VS 1.1). Each valuation standard is in bold type and is followed, as appropriate, by a commentary thatexplains how the standard is applied in practice. The commentary should be considered tohave mandatory status when it requires the member to take a specified action (for example,para.3 of VS 1.5). On the other hand, appendices that amplify the standard or commentary are advisory unlessindicated to be mandatory in the valuation standard (for example, Appendix 4.1). Theseappear in the appendices section. The guidance notes explain how the valuation standards should be applied in particularsituations. They are not mandatory but they do represent what is regarded as best practice. Inany litigation a valuer would be at a disadvantage if it could be shown that he or she had notfollowed best practice as indicated in a guidance note. The Red Book structure distinguishes between fundamental standards that apply to charteredsurveyors undertaking valuations anywhere in the world and those that are peculiar to aspecific country. Following an introduction is a glossary, which contains a number of usefuldefinitions (defined terms are in italics throughout the Red Book). The Global Red Book is thenarranged in the following categories:

Valuation standards

VS 1 Compliance and ethical requirementsVS 2 Agreement of terms of engagementVS 3 Bases of valueVS 4 ApplicationsVS 5 InvestigationsVS 6 Valuation reports

Appendices

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Guidance notes

UK standards

International Valuation Standards 2011 The appendices contain supporting information referred to in the commentaries in thevaluation standard. They are advisory. Guidance notes are not mandatory but are designed tohelp the valuer with the application of the valuation standard. The valuation standards follow the sequence of a typical instruction - from the initial instructionfrom the client through to the delivery of the final report. One hard copy version of the Red Book is available, that is RICS Valuation - ProfessionalStandards, Global and UK edition (March 2012) - this publication includes UK valuationstandards and UK guidance notes. In addition, the Global and India versions are available (in English) online to RICS membersthrough the RICS website. Translations are available on the RICS website in simplifiedChinese, Dutch, French, German, Italian, Russian, Hungarian, Greek, European Portuguese,Brazilian Portuguese, Spanish and Polish. See also RICS practice standards on isurv. The versions differ in having local valuation standards (for example, UKVS), guidance notes(for example, UKGN) and appendices, relevant to the national requirements. NationalAssociation valuation standards are available for Hong Kong, Ireland, the Netherlands andFrance, as well as the UK. This guide will concentrate on the Global and UK standards.

To which valuations does it apply - exceptions

The best starting-off point is to assume that the entire Red Book applies to all writtenvaluations since, as stated previously, all members of RICS and IRRV and firms regulated byRICS are required to comply with VS 1; this sets out the compliance and ethical requirements. Do not assume that the Red Book only applies to valuations of property (real estate) as itsscope now includes valuation of chattels, plant and equipment, business and businessinterests, intangible assets and financial instruments. In a limited number of exceptions, VS 2 to VS 6 do not apply (although the principles of thesevaluation standards should still be followed wherever practicable). Some valuation procedures may be subject to statutory procedures where it would not bepractical to follow the standards. Even so, it is good practice to comply with the standardswhere possible and appropriate and remember that the Rules of Conduct still apply, includingthe all-important need to confirm terms of engagement in writing and disclose potentialconflicts. There are five valuation procedures which are listed as exceptions from the Red Book (see VS1.2(5)) when VS 2 to VS 6 are not mandatory, including where:

1. the advice is expressly in preparation for, or during the course of negotiation orpossible litigation;

2. the valuer is performing a statutory function or has to comply with prescribedstatutory or legal procedures;

3. the valuation is provided solely for internal purposes; 4. the valuation is provided in connection with certain agency or brokerage work; 5. a replacement cost figure is provided for insurance purposes, whether separately

or within a valuation report.

The exemption of advice in preparation for or during negotiations (a) above is to cover advicegiven on the probable outcome of current or impending negotiations or figures to be quoted insuch circumstances. In contrast, the agency and brokerage exemption (d) above covers the

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position where advice is given in connection with the anticipated price achievable or payableincluding advice on whether a particular offer should be accepted or made. This covers estateagency but the situation is different if a purchase report is required that contains a valuation, inwhich case the Red Book applies. Valuations by internal valuers are those solely for internal use by their organisation and whereno part of the report, including the valuation figure, is to be seen by or communicated to anythird party. Valuers undertaking internal valuations should ensure that the valuation is keptwithin the walls of their organisation, particularly in the increasing climate of disclosure andtransparency in the public sector. The replacement cost figure for insurance is a recent addition to the list. There may be circumstances when there is a requirement to comply with IVS even though thepurpose of the valuation falls under one of the above exceptions. In such circumstances it isnecessary to confirm that it complies with IVS even though the application of VS 2 to VS 6 maynot be mandatory.

Compliance and interaction with RICS Rules of Conduct

VS 1.2 now reads as follows:

‘All RICS and IRRV members undertaking valuations, whether practising individually orwithin an RICS regulated or a non-regulated firm, are required to comply with thesestandards.

Valuers who are members of RICS must also comply with the requirements of the RICSValuer Registration Scheme (VRS) where VS 2 to VS 6 are of mandatory application.’

As a reminder Standards 3, 4 and 5 (revised 2011) of the Rules of Conduct are of particularrelevance to valuers:

‘Ethical behaviour

3. Members shall at all times act with integrity and avoid conflicts of interest and avoid anyactions or situations that are inconsistent with their professional obligations.

Competence

4. Members shall carry out their professional work with due skill, care and diligence and withproper regard for the technical standards expected of them.

Service

5. Members shall carry out their professional work in a timely manner and with properregard for standards of service and customer care expected of them.’

There are similar standards required of firms registered for regulation by RICS.

Departures

A departure is defined in the glossary as:

‘Special circumstances where the mandatory application of the valuation standards may beinappropriate or impractical, or where the valuer may be required to comply with standardsoutside the Red Book.’

It is difficult to think of any specific instances of departures, but given the many uses forvaluations, the Red Book (VS 1.2) covers this eventuality. In practice it is more likely that adeparture will be dealt with by a ‘special assumption’. The rule in VS 1.2 is that:

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‘(4) Where the valuer has departed from these standards a clear statement to that effectmust be included in the terms of engagement and the report.

(5) If there are special circumstances where the application, in whole or part, of a specificvaluation standard is considered to be inappropriate, this must be confirmed and agreedwith the client as departures before reporting.’

There is however a ‘health warning’ in that a member who makes a departure may be requiredto justify the reasons for it and if found deficient may face disciplinary proceedings. Clearly thecircumstances must be agreed with the client as a specific departure before reporting and setout in the terms of engagement (VS 2.1(6)).

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