Concepts and Principles

The definitions from the International Valuation Standards, eighth edition (2007) are reproduced with the permission of the International Valuation Standards Council who owns the copyright. No responsibility is accepted by the IVSC for the accuracy of information contained in the text as republished, the English version of the IVSC Standards as published by the IVSC from time to time being the only official version of the IVSC Standards.

Property Valuers, Asset Valuers, and Appraisers are those who deal with the special discipline of economics associated with preparing and reporting valuations. As professionals, Valuers must meet rigorous tests of education, training, competence, and demonstrated skills. They must also exhibit and maintain a Code of Conduct (ethics and competency) and Standards of professional practice and follow Generally Accepted Valuation Principles (GAVP).

Real estate is land and all things that are a natural part of the land, e.g., trees and minerals, as well as things that are attached to the land by people, e.g., buildings and site improvements. All permanent building attachments such as plumbing, heating and cooling systems; electrical wiring; and built-in items like elevators, or lifts, are also a part of real estate. Real estate includes all attachments, both below and above the ground.

Real property is all the rights, interests, and benefits related to the ownership of real estate. Real property is a legal concept distinct from real estate, which is a physical asset. There may also be potential limitations upon ownership rights to real property. Personal property is a legal concept referring to all rights, interests, and benefits related to ownership of items other than real estate. Items of personal property can be tangible, such as a chattel, or intangible, such as a debt or patent. Items of tangible personal property typically are not permanently affixed to real estate and are generally characterized by their moveability.

Assets are a resource owned or controlled by an entity as a result of past events and from which some future economic benefit(s) can be expected to flow to the entity. Ownership of an asset is itself an intangible. However, the asset owned may be either tangible or intangible. International Financial Reporting Standards (IFRS) differentiates between physical (tangible) and non-physical (intangible) assets:

  • Current assets. Assets not intended for use on a continuing basis in the activities of the entity such as stocks, obligations owed to the entity, short-term investments, and cash in bank and in hand. In certain circumstances real estate, normally treated as a fixed asset may be treated as a current asset. Examples include improved real estate held in inventory for sale.
  • Non-current assets: Tangible and intangible assets, which fall into two broad categories, namely property, plant and equipment, and other non-current assets.
    • Property, plant and equipment. Tangible assets, other than realty, that: a.) are held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purpose; and b.) are expected to be used over a period of time.
      • Plant. Assets that are inextricably combined with others and that may include specialized buildings, machinery, and equipment.
      • Machinery. Individual machines or a collection of machines. A machine is an apparatus used for a specific process in connection with the operation of the entity.
      • Equipment. Other assets that are used to assist the operation of the enterprise or entity.
    • Other non-current assets. These are assets that will not be utilised on a continuing basis with regards to the activities of an entity but is expected to be held in long-term ownership. For example, long-term investments, receivable, goodwill, expenditure carried forward, patents & trademarks.
  • Depreciation: In the context of asset valuation, depreciation refers to the adjustments made to the cost of reproducing or replacing the asset to reflect physical deterioration and functional (technical) and economic (external) obsolescence in order to estimate the value of the asset in a hypothetical exchange in the market when there is no direct sales evidence available. In financial reporting, depreciation refers to the change made against income to reflect the systematic allocation of the depreciable amount of an asset over its useful life to the entity. It is specific to the particular entity and its utilisation of the asset, and is not necessarily affected by the market.

Price relates to the exchange of a commodity, good or service. Price is the amount asked, offered, or paid for the item. Once the exchange has been transacted, the price, whether disclosed or undisclosed, becomes an historic fact. The price paid represents the intersection of supply and demand.

Cost is the price paid for goods or services and becomes its cost to the buyer. Cost is a production-related concept, distinct from exchange. Once the good is completed or the service is rendered, its cost becomes an historic fact.
Value is the price most likely to be concluded by the buyers and sellers of a good or service that is available for purchase. Value establishes the hypothetical or notional price that buyers and sellers are most likely to conclude for the good or service. Thus, value is not a fact, but an estimate of the likely price to be paid for a good or service available for purchase at a given time.

supply-demand-curveFundamentals of value are the relationship of four factors which creates and sustains value for all products and services. These factors are utility, scarcity, desire and purchasing power. The relationship these hold towards one another is interpreted in supply and demand conditions. The supply factors are generally considered to be utility and scarcity while demand factors are desire (consumer preferences) and purchasing power. A Market refers to a place where goods and services are traded between interested parties (buyers & sellers) via a price mechanism. With the price mechanism as key it is then noted the price of a good or service is inversely related to the supply of that item and directly with demand. Supply would represent the quantity of property interest available for sale or lease at varying prices at a given time, all other things being equal (ceteris paribus). Demand would represent the number of potential buyers or renters (i.e. individuals, households, firms and government) of various properties and property prices at a given time, all other things being equal (ceteris paribus).