Working Toward a Solution to Simplify, Clarify and Harmonize Valuation Standards

10/22/2010 14:59

Working Toward a Solution to Simplify, Clarify and Harmonize Valuation Standards Which Valuation Expert Can You Trust? This is the unsettling question that rests in the minds of the public now that the valuation profession is being guided by a myriad of valuation standards published by multiple professional bodies. Serving the public interest is the basis of the RICS charter and also the foundation on which the RICS Americas Valuation Council was formed. The Valuation Council considers its work with assessing valuation standards to be one of the most important elements of serving the public interest. The Valuation Council comprising eight Boards--Real Property, Personal Property, Public Sector, Natural Resources, Plant and Equipment, Business Valuation as well as a Standards and Principles Board is well positioned to work with domestic and international standards setters in the Americas and across the globe. It can offer perspective on standards from every valuation discipline and draw from the extensive experience of its members. The Council agrees on three points that set the stage for their role in advising on standards. The Uniform Standards of Professional Appraisal Practice (USPAP) serve valuation practice in the United States; International Valuation Standards serve as an umbrella for worldwide valuation standards; and the RICS Red Book sets a framework for best practice in the execution and delivery of valuations around the world. The Council's attempt to create new or different standards would be a disservice to the public. And so, it was determined by former members of the U.S. Appraisal Foundation's Appraisal Standards Board, two former world chairmen of the International Valuation Standards Council (IVSC), and multiple presidents of each of the three leading valuation organizations in the U.S., along with other recognized valuers in the U.S. and Canada that what's needed is clarification and harmonization--in short, fewer standards rather than more. They and their Council members are able to fill this need by serving in the role of an advisor on simplifying, clarifying and synchronizing standards--not to be confused with setting standards. Catalyst for a Standards Board The Valuation Council organized a Standards Board whose goals and vision are to advise on standards and also help the public better understand what the standards are, why they are so important, and which ones are most appropriate for each of the diverse aspects of valuation. Don Dorchester FRICS CRE MAI, Chair of the RICS Americas Valuation Council played an instrumental role in bringing this vision to life. His insight on the coordination of valuation standards and unifying valuation practice stems from his more than 60 years of experience in valuation and financial economics, including being a founder of the IVSC. "The frequency of change, the stereotypical format of standards, and the inability of the public to understand them are issues that sorely bear attention even today. Even professionals disagree on their meanings and applications. Of utmost importance, standards are only documents until they are understood and applied by the practitioners to whom they apply, with enforcement processes that assure that the public interest is protected," according to Don. To help steer standards in this new direction, Don reports that an important task for the Council and Standards Board is, "responding to the world condition in which accounting standards encounter major changes, valuation standards within RICS undergo far reaching responses to regional differences around the world, and the IVSC solidifies its role as the global voice for valuation standards." The first task at hand was responding to an exposure draft on new International Valuation Standards proposed by the IVSC. W. David Snook FRICS FASA, Chair of the Valuation Council's Standards Board led the initiative on commenting on the exposure draft. David's broad background in educating on appraisal standards, a six-year term of service with The Appraisal Foundation's Appraisal Standards Board (ASB), and his position as Chair of the ASB Board in 1996 and 1997 demonstrates his strong ability to discern composition and substance of needed standards. In commenting on the IVSC's standards David says, "the Board's role is to help make the standards more easily recognizable and understandable to valuers and the public." Four additional members of the Board who have considerable experience in vetting valuation standards collaborated to create the comment paper for the IVSC, including Carla Glass FASA CFA a specialist in the valuation of business interests and intangible assets, Richard Marchitelli FRICS CRE MAI, real estate appraiser for the private and public sector, Paul Welcome FRICS ASA CAE RMA, County Appraiser for Johnson County, Kansas, and James "Nardie" Vine FRICS CRE ARA, a specialist in rural and agricultural property as well as water rights and minerals. The Board members are well versed in assessing appraisal standards on account of their past leadership positions with the primary appraisal associations and also The Appraisal Foundation. Each member brings a unique viewpoint to valuation standards based on their expertise in a valuation discipline. To complement their points of view on the IVSC's proposed new international standards, information and opinions were also sought by the more than 50 senior valuation professionals who comprise the RICS Valuation Council and are members of the Council's eight discipline-specific Boards. The comment paper outlined many recommendations for the IVSC. There are four recommendations that the Valuation Council and Standards Board judge as most critical. 1) Differentiate standards and guidance. "The standard" should be clearly and concisely stated, and any clarifying guidance and/or rationale should be included either in a separate but linked document or by clearly recognizable format differences (indenting, text style, etc.). According the Standards Board, standards are about what must or must not be a result while guidance is about how one should or could accomplish something. Furthermore, a standard must be clear, concise, and absolute (prescriptive). To the contrary, guidance is permissive, leaving room for variations in how one goes about whatever they do to meet a standard. Overall, the new standards should make clear which parts are: 1) the standard versus 2) rationale versus 3) elaboration or guidance on a standard. 2) Distinguish "Fair Value for use in Financial Reporting" and "Fair Value for use in Other than Financial Reporting". The standards should separate the subject of "Fair Value for Financial Reporting" that addresses Fair Value in the International Financial Reporting Standards (IFRS) context. It should include the definition of fair value in IFRS as well as how it's distinguished from market value. In a different subject heading, "Fair Value for other than Financial Reporting", information should be listed, including the definition of fair value (non-IFRS context), an explanation that fair value is a broader concept than market value, and examples of the use of fair value such as estimating a price that is fair for shareholding in a non quoted business and estimating the price that would be fair between a lessor and lessee for a permanent transfer of a leased asset or cancellation of a lease liability. 3) Qualify the difference between "Value in Exchange" and "Value in Use". Understanding the differences between the terms is critical because they drive the valuer's decisions about which basis of value to apply in a valuation and how to go about developing a meaningful as well as credible opinion, given the intended use of the opinion. Don Dorchester explains the origins of these groups of terms, including "investment value". "In the 1970s, as a response to valuation abuses and/or misunderstandings associated with real estate syndication, the term 'investment value' was created and defined. Investment value was defined as a value of property to a particular owner for that owner's own investment reasons. It was not a market based concept. Similarly, valuers frequently used the concept of 'value in use,' meaning the value of property to its owner for continued use in a specific business enterprise. It too was not a market based concept, but one related to the use being made in the business of a given enterprise. In valuing real estate held as part of a syndication, valuers frequently reported their opinion as 'market value,' but based their opinion upon the price (or aliquot price) paid for the security, not the individual real estate parcels. Because market value of a real estate parcel applies to the real property rights owned in that parcel, the use of the term market value in the syndication was both improper and misleading." 4) Establish the requirement for the valuer to correctly identify the property right to be valued, including a clear distinction between private property rights and government held property rights. Types of real property interests are defined and regulated by state (national) law and are usually further controlled by local jurisdictions. A clear understanding of the relevant legal framework that affects the interest being valued is essential before undertaking the valuation of a real property interest. It is also essential to properly identify the interest being valued as to its ownership characteristics. An ownership interest that is held in full may be the entire bundle of rights available to a private owner of property (e.g., without limitation, a freehold interest in some jurisdictions or a fee simple absolute in other jurisdictions) or a portion of the bundle of rights, commonly called a partial interest. One example is in the valuation of historic property. The classification "valuation of historic property" should include language before it that identifies it's "a real property interest". This standard relates to valuations of a real property ownership interest held as private property, not the valuation of a real property interest held by government or quasi-government entities. Another example is in the valuation of natural resources. Don Dorchester articulates that confusions between real property, personal property and business property interests in valuations of minerals interests is an issue that has also been identified by the Valuation Council's Natural Resources Board. "The Board has identified such confusion as a significant public issue, one involving billions of dollars or more in potential waste or abuse in the United States alone." He continues that, "although valuation standards are important to the performance of natural resource valuations, the frequent existence of multiple property interests too often blurs the lines between the property types and their related disciplines." A Principles Board is Key to Advising on Standards The issue of distinguishing property interests is just one important issue that precipitated the Valuation Council to develop a Principles Board that serves as an advisor to the Council's Standards Board. The Principles Board is charged with one of the most fundamental and necessary tasks of the valuation profession: determining whether Generally Accepted Valuation Principles (GAVP) are being properly expressed in valuation standards and whether the standards themselves are achieving their intended purpose. As such, the Principles Board is an independent examiner/monitor of standards and a voice of the Valuation Council in organizational and public inquiries regarding professional valuation and related standards. Joseph Vella FRICS CRE MAI is Chair of the Principles Board. The Board is privileged to have someone of his experience that includes nine years of service with the IVSC and a Chair position with the International Valuation Standards Committee. Since standards are based upon GAVP, broad knowledge of both are required to develop competent, relevant, and credible value opinion, which makes Joe well suited to the leadership role. Keeping Their Eye on the Prize--Fostering and Protecting Public Trust The Valuation Council and its Boards are committed to advising on standards because they believe the valuation profession and the public should expect, and receive, nothing less than detailed and comprehensive attention to comprehensible and true value opinions. The examples of the Council's work cited in this article illustrate this. Subsequent to commenting to the IVSC on the proposed new International Valuation Standards, the Council including, the Standards Board, Principles Board, and six valuation discipline specific Boards are collaborating to comment to national and international professional bodies on additional standards and principles, valuer certification requirements, and best practice. Demonstrate Your Commitment to High Standards and Professionalism with RICS. RICS maintains and promotes the usefulness of the profession for the public advantage by establishing professional standards, advising best practice and providing knowledge on key business issues for practitioners, society and governments worldwide. Appraisers across all valuation disciplines achieve a prestigious RICS designation to evidence their professionalism, enhance their visibility and receive critical knowledge to guide their practice.