Changes in International Valuation Standards (IVS)
Neeraj Agarwal
I Neeraj Agarwal, am a Fellow Member of ICAI, practicing under the banner of M/s AAN & Associates LLP, a firm based out of Banglore Mumbai.
I am also registered under Insolvency and Bankruptcy Board of India as a Registered Valuer for valuation of Security or Financial Assets (Passed in Feb 2020)
I am also holding Bachelor of Commerce (B. Com) degree from Calcutta University (Passed in 2011).
I have corporate working experience in Wipro. After working in Wipro for a short period I started my practice in late 2013 and have been in practice so far for the last 10 years. I have also completed a Certificate Course by ICAI on IND-AS in 2020. I have also cleared Social Auditor Exam conducted by NISM.
I have been inducted as a Special Invitee to the Sustainability Reporting Standard Board, ICAI for the FY 2023-24.
Introduction:
Each part of IVS 200 to IVS 500 applies to specific categories of assets and liabilities, which are subject to the corresponding Asset Standards. The following are the main changes to asset standards:
- Modifications to the Business Valuation Standards to align with changes made to the General Standards.
- Plant, Equipment, and Infrastructure under IVS 300 comply with the General Standards. It explains foundational valuation principles and methodologies.
- IVS 400, Real Property Interests, complies with the General Standards. The scope of work has been revised to clarify the depth of the inquiry.
- IVS 410 Development Property complies with the General Standards. The updated bases of value highlight certain valuation risks.
- Inclusion of Financial Instruments as a new chapter within IVS 500.
Business Valuation Standards (IVS 200, IVS 210, IVS 220, and IVS 230):
- Alignment with the General Standards: IVS updated the references to the General Standards and made certain adjustments to the company valuation rules to bring them into compliance with the revisions to the General Standards.
- Valuers must now explicitly state in IVS 200, Businesses and Business Interests, how much of the interest is valued and how that affects the valuation.
- To enhance conceptual clarity, specific examples and recommendations regarding Intangible Asset Economic Lives in IVS 210 were removed.
- IVS 220 Non-Financial Liabilities and IVS 230 Inventory modifications involved minor textual simplification and clarification, with little change to the standard’s core content.
Plant, Equipment and Infrastructure (“PEI”) (IVS 300): IVS 300 now specifically covers infrastructure:
In line with updates to the General Standards, IVS has introduced significant adjustments. These include the addition of new sections under (i) Data and Inputs (Section 100), which guarantees the optimal use of pertinent and observable data, and (ii) Valuation Models (Section 110), which must be appropriate for the valuation’s intended use and consistent with appropriate inputs.
Bases of value (Section 50): When determining the liquidation value of an asset, it’s crucial to specify whether it must be removed (ex-situ) or valued in its current location (in-situ). Valuers should consider the scenario that maximizes the gross return, whether selling assets collectively or individually. It should be noted that removal costs (ex-situ)—including those for foundations, piping, shipping, installation, and commissions—may not be fully recoverable.
Real Property Interests (IVS 400):
- IVS has updated its General Standards with key adjustments to Data and Inputs (Section 100), emphasizing the use of pertinent and observable data. Revisions to Valuation Models (Section 110) ensure appropriateness for the valuation’s intended use and consistency with inputs. Lastly, enhancements to Documentation and Reporting (Section 120) aim for clearer and more comprehensive reporting.
- Work scope (Section 40): IVS requires valuers to conduct a thorough investigation of the land, accounting for area, soil, productivity factors (fertility, vegetation, crops), environmental aspects, and any legal restrictions impacting property use.
Development Property (IVS 410):
- By the General Standards updates, IVS has made significant adjustments. These include adding new sections to Data and Inputs (Section 120) to guarantee the best possible use of pertinent and observable data, requiring that Valuation Models (Section 130) be appropriate for the valuation’s intended use and consistent with appropriate inputs, and adding Documentation and Reporting (Section 140).
- Bases of value (Section 50): When assessing development property, valuers should consider the intended use as well as the likelihood that any contracts may be void or that a contractual obligation may materially affect the market value. It is essential to highlight the risks a lender may face when a potential buyer of the property does not have access to the benefits of an existing building contract, pre-leases, pre-sales, and any related warranties and guarantees if the borrower defaults.
- Section 100: Residual Method: IVS explained that the residual method usually combines the market, income, and cost approaches. Valuers should note that statutory fees and contingencies are now considered essential factors that should be taken into account when applying the residual approach.
Financial Instruments (IVS 500) (new chapter):
IVS has added a new chapter called IVS 500 Financial Instruments. It provides examples of how the General Standards are applied to the valuation of financial instruments, as well as other requirements. Since these standards cover the valuation needs of businesses of various sizes and types (such as banks, asset managers, insurance companies, or any corporation with financial instruments on the balance sheet) worldwide, the chapter offers broad guidelines that apply to the valuation of financial instruments.
By including more information about financial instruments in Quality Control Overview (Section 140), Characteristics of Appropriate Quality Control (Section 150), Application of Quality Control (Section 160), Review and Challenge (Section 170), and Valuation Control Framework (Section 180), IVS 500 has also enhanced the IVS 100 Valuation Framework.
Section | Title | Key Requirements / Details |
40 | Data and Inputs | The valuer must understand and assess the data, assumptions, and adjustments used; ensure they are fit for valuation using professional judgment. |
50 | Characteristics of Data and Inputs | The valuer must evaluate data based on accuracy, completeness, timeliness, and transparency before use. |
60 | Selecting Inputs | Inputs must be consistently applied across similar assets/liabilities; alternative proxies to be used when direct inputs are unavailable. |
70 | Using Data and Inputs | Quality control procedures must be applied to both internal and external data, assumptions, and inputs. |
80 | Documentation of Data and Inputs | Documentation should allow another valuer to understand the scope, work done, and conclusions based on professional judgment. |
Conclusion:
In summary, preserving the accuracy and dependability of valuation results depends on the application of these models and quality control procedures. Valuers must ensure that their models are clear, transparent, and well-documented, and that their assumptions, limitations, and methods are all well-documented. To maintain standards and guarantee accuracy, quality control that is customized to each valuation’s unique requirements must be strictly implemented and often reviewed.
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