Red Book

Question 1

What is Fair Value (VPS 4)?

Answer 1

The price that would be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants at the
measurement date. (IFRS 13)

Used for valuation for financial reporting

IFRS - strives to achieve uniformity in the financial accounting

Question 2

What is Market Value (VPS 4)?

Answer 2

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion (IVS 104)

Used for loan security work

Question 3

External/Internal Valuer

Answer 3

External Valuer - A valuer who, together with any associates, has no material links with the client, an agent acting on behalf of the client or the subject of the assignment.

Internal Valuer - A valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise’s financial records and/or reports. An internal valuer is generally capable of meeting the requirements of independence and professional objectivity in accordance with PS 2 section 3, but may not always be able to satisfy additional criteria for independence specific to certain types of assignment, for example under PS 2 paragraph 3.4.

Question 4

What is valuation?

Answer 4

An opinion of the value of an asset or liability on a stated basis, at a
specified date. If supplied in written form, all valuation advice given by members is subject to at least some of the requirements of the Red Book Global Standards – there are no exemptions (PS 1 paragraph 1.1). Unless limitations are agreed in the terms of engagement, a valuation will be provided after an inspection, and any further investigations and enquiries that are appropriate, having regard to the nature of the asset and the
purpose of the valuation.

Question 5

How many professional standards (PS) are in the Red Book?

Answer 5

Two. PS are mandatory
PS 1- speaks about compliance with standards
PS 2 - ethics, competency etc

Question 6

What are 5 exceptions when valuation does not have to be Red Book compliant (PS1)?

Answer 6

1. Negotiation and litigation
2. Statutory function (except for return to tax authority)
3. Valuation done for internal purposes
4. Agency and brokerage
5. Expert witness

Question 7

What does PS 2 says?

Answer 7

• Act in accordance with Rules of Conduct and RICS valuer registration scheme
• Must act objectively and independently
• Gives detailed advice on conflict of interest (No member shall advise or represent a client where doing so would involve a conflict of
  interest or a significant risk of a conflict of interest)
• Members must understand client requirements and stick to ToE
• Rotation policy (rotation policy have to be diclosed), RICS recommend to not exceed 7 years

Question 8

How many VPS (Valuation technical and performance standards) are there?

Answer 8

5, they are mandatory
1. ToE
2. Inspection
3. Report
4. Bases of Value, assumptions and special assumptions
5. Valuation approaches and methodologies

Question 9

What does VPS 1 talk about?

Answer 9

Minimum terms of engagement content
1. Name and status of the valuer
2. Name of client and any other intended users
3. Purpose of valuation
4. Identification of the asset
5. Basis of value
6. Valuation date
7. Extent of investigation
8. Source of info to be relied on
9. Assumptions and special assumptions
10. Restrictions to use, distribution and publication
11. Confirmation of Red Book/IVS compliance
12. Description of the report
13. Fee basis
14. Complaint handling procedure
15. Statement that valuation may be investigated by RICS
16. Valuation currency

Question 10

What is assumptions (VPS 1)?

Answer 10

Matters that are reasonable to accept as fact in the context of the
valuation assignment without specific investigation or verification. They are matters that, once stated, are to be accepted in understanding the valuation or other advice provided.

Question 11

What is special assumptions (VPS 1)?

Answer 11

Assumption that either assumes facts that differ from the
actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.
Must be clearly stated in the report and ToE

Question 12

What does VPS 2 talk about?

Answer 12

Inspection and investigation
Inspection - must always be carried in the extent necessary to produce valuation
Desktop valuation - no inspection, but still RICS compliant (unless exempt under PS1)

Question 13

What does VPS 3 talk about?

Answer 13

Valuation Reports
Minimum requirement:
1. Identification and status of the valuer
2. Identification of client and any other intended users
3. Purpose of valuation
4. Identification of the asset
5. Basis of value
6. Valuation date
7. Extent of investigation
8. Source of info to be relied on
9. Assumptions and special assumptions
10. Consent, or any restriction on publication
11. Confirmation that the valuation has been produced in accordance with IVS
12. Valuation approach and reasoning
13. Valuation figure (s)
14. Date of valuation report

Draft report can be shared with the client, but must clearly indicate that it is Draft and can not be relied upon

Question 14

What does VPS 4 talk about?

Answer 14

Bases of value, assumption and special assumptions

Question 15

How many bases of value Red Book defines (VPS 4)?

Answer 15

4:
Market Value
Market Rent
Fair Value
Investment Value (or worth)

Question 16

What is Market Rent (VPS 4)?

Answer 16

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Question 17

What is Investment Value or worth (VPS 4)?

Answer 17

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives

Question 18

What does VPS 5 talk about?

Answer 18

Valuation approaches and methods
There are 3 valuation approaches - market approach, income approach and cost approach (based on the Red Book)

There are 5 valuation methods:
1. Investment (income approach)
2. Residual (income approach)
3. Profits (income approach)
4. Depreciated replacement Cost (DRC) (cost approach)
5. Comparable Method (market approach)

Question 19

How many VPGA are there?

Answer 19

10, they are advisory (not mandatory)
VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 3 – Valuation of businesses and business interests
VPGA 4 – Valuation of individual trade related properties
VPGA 5 – Valuation of plant and equipment
VPGA 6 – Valuation of intangible assets
VPGA 7 – Valuation of personal property, including arts and antiques
VPGA 8 – Valuation of real property interests
VPGA 9 – Identification of portfolios, collections and groups of properties
VPGA 10 – Matters that may give rise to material valuation uncertainty.

Question 20

What does VPGA 1 covers?

Answer 20

Valuation for inclusion in financial statements
- Fair Value

Question 21

What does VPGA 2 covers?

Answer 21

Valuation of interests for secured lending
- Market Value
- Previous involvement - within the period of 24 months, to be disclosed to the lender prior to the acceptance of the instruction
- Red Book gives examples of conflict when instruction should be declined - long standing relationship; valuer gains a fee for introducing transaction to lender etc

Question 22

What are the reporting and disclosure requirements under VPGA 2?

Answer 22

• disclosure of any involvement
• valuation method adopted
• info on the recent transaction of the subject property
• confirmation of suitability for lending purposes
• comment on any circumstances that may affect the price
• any other factor that potentially conflicts with the definition of the basis of value or its underlying assumptions must be noted and its effect explained
• any other relevant normal valuation inquiries undertaken

Sustainability and ESG factors can be a significant market influence and valuations for secured lending should always have appropriate regard to their relevance to the particular assignment.

Question 23

What does VPGA 9 talk about?

Answer 23

Identification of portfolios, collections and groups of properties
- the value of the whole could exceed the sum of the individual parts,
and vice versa

Question 24

What does VPGA 10 talk about?

Answer 24

Matters that may give rise to material valuation uncertainty
Common examples (as defined by Red Book):
1. The asset or liability itself may have very particular characteristics that make it difficult for the valuer to form an opinion of the likely value
2. Information available to the valuer is limited or restricted, either by the client or the circumstances of the valuation, and the matter cannot be sufficiently addressed by adopting one or more reasonable assumptions
3. Markets can be disrupted by relatively unique factors. Such disruption can arise due to unforeseen financial, macro-economic, legal, political or even natural events.