• Elements of a good valuation

    The following elements should be apparent in any properly conducted valuation process, in accordance with valuation industry practice:

    We expect this information to be included in a valuation report or to appear clearly in the valuer's working papers.

    Description of asset

    When you value an asset, you should specify it with sufficient certainty that there can be no mistake about its identity. In particular, you need to be sure that you have not overlooked items such as separately identifiable intangibles and goodwill.

    Purpose and context of valuation

    You need to specify the reason for the valuation and the provisions of the law under which the market valuation is required.

    A market valuation is a valuation that applies the definition of market value for tax purposes, as described in this guide.

    Date of valuation

    The valuation report and supporting documents should specify the valuation date (that is, the date to which the valuation relates) as well as the dates the valuation was started and completed. This will allow us to determine whether the valuation and valuation documents are contemporaneous.

    If you value an item before or after the relevant date or event, you may be influenced by factors that should not have been taken into account. For this reason, we prefer valuations that are contemporaneous with the valuation date.

    Method or methods used

    A valuation is unique to the asset and the point in time. Valuations may vary in the component parts (information and assumptions) used in the valuation calculation. You should explain the method or methods you used in sufficient detail to enable another valuer to repeat and assess your valuation.

    There are generally accepted valuation methods for different classes of assets. These are specified in the relevant standards, guidelines and text books, and are applied by valuers in making valuation determinations.

    Reasons for methods used

    You need to explain the reasons behind your choice of method so that we can determine whether it is the most appropriate for the asset concerned.

    In every case, you should use the most appropriate methodology based on the facts and circumstances of the valuation, valuation principles and industry standards. If you use an inappropriate method, the valuation may be flawed and we may require a new valuation to ascertain the market value.

    Your method needs to be aligned with the intent and framework of the legislation under which the valuation is required.

    In most instances, where there is a market for the asset being valued, you should use the comparable sales method (see Comparison approach). In this case, you should clearly define the market, including:

    • a description of the market
    • the market history
    • the breadth, depth and location of the market
    • an evaluation of the market, that is, supply and demand for the asset.

    Discounted cash flow valuation reports

    Where a valuation is based on the discounted cash flow approach the report should include the following information:

    • Income projections and growth rates.
    • The future income flows and market growth rates you have assumed. You should also outline the projected consumer price index rates for the same years.
    • Discount rate.
    • The rate you select for discounting projected future income streams and your reasons for your selection.
    • Leasing allowances/renewal probabilities.
    • The allowances you made for future vacancies and leasing costs.
    • Capital expenditure allowances.
    • The allowances you made for capital expenditure on the property throughout the cash flow period.
    • Outgoings/expenses.
    • Any other future outgoings or expenses you have allowed for, and your assumptions about the rate of growth in these outgoings.
    • Terminal value assumptions.
    • The method you used to determine the terminal value (or selling price) of the asset at the end of the cash flow period. You would usually include the terminal capitalisation rate adopted, and the net income figure adopted.
    • Transaction expenses.
    • The transaction expenses you allowed for in the cash flow period, such as acquisition costs and selling expenses. These items are usually expressed as a percentage of the purchase or selling prices.
    • Discounted cash flow valuation results.
    • The value you arrived at, following sensitivity analysis, using the discounted cash flow approach, based on the inputs outlined above.

    Specific value

    Tax legislation requires the specific market value to be ascertained. Where your method leads to a range of possible values, you need to explain why you have adopted the specific market value that you finally nominated.

    Information relied on

    You should clearly specify the information upon which you have relied, as well as its source.

    Evaluation of information

    You should confirm that any information used to arrive at the market value is reliable. This is particularly necessary where the client is the source of the information. You should make available any empirical evidence that you relied on.

    Assumptions relied on

    You should outline any assumptions you relied on in the valuation process, and the reasons for making them.

    Evaluation of assumptions

    You should evaluate each assumption for its reliability and reasonableness, particularly assumptions given by a third party.

    Material risks

    If you identify material risks underpinning the valuation, for instance, where a business valuation is dependent on the success of a commercial initiative by that business, you should describe these risks in sufficient detail to show that they have been given due consideration and weight.

    Use of previous valuations

    If you seek to rely on a previous valuation for current purposes, difficulties are likely to arise if the previous valuation was compiled for a different purpose. The current valuation should:

    • explain how the earlier valuation is relevant to the current valuation, with a particular focus on the purpose of the original valuation compared to the purpose of the current one
    • confirm that the information and assumptions pertaining to the original valuation are still relevant
    • declare how any adjustments and changes have been made to comply with any statutory requirements associated with the valuation.

    Explanation of material differences

    You should quantify and explain any material differences from previous relevant valuations or values. This includes known historical costs, earlier revaluations, and valuations with a similar or proximate valuation date.

    Expert reports and the use of experts

    When relying on an expert in the valuation process, you should include sufficient detail to confirm the expert's:

    • competency in the field
    • use of assumptions and methods seem reasonable and sources of data appear appropriate
    • independence or, if not independent, disclose the dependency and justification for it.

    It would also be expected that that any expert's report would contain details similar to those required generally in valuation reports.

    Terms of engagement

    As part of your report we would expect you to specify the terms on which you have been engaged by your client. We also would expect you to include any special instructions relating to the valuation, and whether they were written or oral. In particular, the report should disclose any instructions that have affected, or are likely to affect, the valuation process.

    Your client should be able to demonstrate that they provided you in advance with instructions, preferably in writing, that clearly:

    • set out the scope and purpose of the report
    • ensured your independence in writing the report and in drawing your own conclusions
    • recognised your right to refuse to provide an opinion or report if they did not provide you with the information and explanations you need
    • granted you access to their premises and the necessary records
    • ensured you would be provided with all the help needed to complete the report
    • established that any fee payable was independent of the outcome of the report.

    Relationship between valuer and client

    You should outline any relationship you have to the client or any conflict of interest, in sufficient detail to enable us to assess your independence.

    Working papers

    When your client relies on the market value for tax purposes, they need adequate records to explain the basis of the market value.

    These records should not only confirm that a valuation was undertaken, but should also contain sufficient detail to enable the valuation process to be replicated. If the working papers are your property, you should ensure that you keep them, unless the valuation report contains sufficient detail to enable replication.

    If you fail to maintain detailed reports and working papers, this may affect the credibility of your valuation. In addition, if your valuation report does not give sufficient information to allow another valuer to replicate the valuation, it may not meet the statutory record-keeping requirements. In such a case, your client will be unable to demonstrate that the market value has been ascertained in accordance with accepted valuation principles.

    Where a valuation is straightforward, or the asset's value is relatively low or can be determined objectively, your report and associated records may be relatively brief.

    Disclaimers and indemnities

    If there are any disclaimers or indemnities that affect the valuation process or the market value you should identify them and explain their effect.

    Valuer's details

    Your report should contain your name and the following details about you:

    • qualifications
    • work experience, including specialisations
    • any licences or registrations
    • relevant professional memberships.
      Last modified: 01 Jul 2015QC 21245