Asset valuation

Valuers have been required to provide valuations for company purposes for many
years.

The purposes vary between:

• Values to be incorporated in the balance sheet or other accounts
• Values of a company’s property assets to be incorporated in a prospectus
when the company is going public
• Values of a company’s property assets when it is the subject of a takeover bid
• Values of property bonds

The demand for such valuations has grown over recent years with the increase in the
number of public listed companies, take-over/and mergers and unitization of property
in some markets.

Until 1974 there were few guidelines for valuers as to how to approach such
valuations. In 1974 the Royal Institution of Chartered Surveyors set up an Asset
Valuation Standard Committee to examine the matter and in 1976 the first Guidance
Notes were produce. Over the years they have been regularly extended and amended.

The International Valuation Standards (IVS) also provide guidance for Asset
valuations. The demand for valuation prepared under the IVS is being driven by;
• The rapid adoption around the world of these standards,
• The growing influence of International Public Sector Accounting Standards
• And the increasing need for users of valuation reports to have a consistent and
comparable measurement of assets wherever they may be.

Until 1976 the approach tended to be either open market value or ongoing concern
value. However, the going concern method was rejected by the Committee.

The underlying principle is that the value should be open market value. The Open
Market value is intended to mean the best price at which an interest in property
might reasonably be expected to be sold by private treaty at the date of valuation
assuming:

1. a willing seller
2. a reasonable period within which to negotiate the sale, taking into account
the nature of the property and the state of the market.
3. that values remain static throughout the period
4. the property will be freely exposed to the market
5. no account be taken of any additional bid by a special purchaser.

The valuation may arrive at either the existing use value- meaning the value
assuming the use of the property for the same purpose as before the time of valuation
or alternative use value meaning the value allowing for the prospects of an
alternative use.
 o In certain instances, the valuation may be of premises rarely if ever sold
separately from the business operating the firm, for example oil refineries,
chemical plants etc.
o For this reason the only realistic approach to the valuation is to adopt the
contractors method whereby the present day estimated cost of acquiring the
site is taken with the written down cost of replacing the premises (building,
equipment, machinery etc).
o Such approach is termed the Depreciated Replacement Cost

Where the valuation is to be incorporated in the company’s accounts the alternative

use basis will not be employed since accounts postulate the continuance of the
business.

The alternative use basis will be relevant in assessing the overall performance of the
company or in a valuation of the assets in contemplation of a takeover or merger.