Red Book Specific Flashcards
Proper name of the Red Book
RICS Valuation - Global Standards 2021
Structure of the Red Book
Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards (PS)
Part 4 - Valuation Technical and Performance Standards (VPS)
Part 5 - Valuation Applications (VPGA)
Part 6 - The International Valuation Standards (IVS)
What is Section 1 of Red Book?
Introduction
What is Section 2 of Red Book?
Glossary
What is Section 3 of Red Book?
RICS Professional Standards
What are the two sections under Part 3 of Red Book?
PS1 - Compliance with Standards and practice statements where a written valuation is provided
PS 2 - Ethics, competency, objectivity and disclosers
What are the 5 Exceptions under PS1?
- Advice for negotiation or litigation
- Valuer is performing statutory function in a statutory return to a tax authority
- Valuation with for internal purposes with no 3rd party reliance
- Valuation is part of agency work
- Valuation is provided in anticipation of giving evidence as an expert witness
What is the name of Part 4 of the Red Book?
Valuation Technical & Performance Standards VPS
What comes under Part 4 of the Red Book
VPS 1 Terms of Engagement
VPS 2 Inspections, Investigations and Records
VPS 3 Valuation Reports
VPS 4 Bases of Value
VPS 5 Valuation Approaches and Methods
What should be listed according VPS 1?
Terms of Engagment.
Should be confirmed prior to commencing Red Book Valuation
- Identification and status of valuer
- identification of client
- Identification of any other intended users
- The asset to be valued
- Currency
- Purpose of valuation
- Basis of valuation
- Valuation date
- Extent of investigation
- Nature and source of the information to be relied upon
- Assumptions and special assumptions to be made
- Format of the report
- Restrictions for use, distribution and publication
- Confirmation of Red Book / IVS Compliance
- Fee basis
- CHP
- Statement that valuation may be subject to compliance by RICS
- Limitation on liability agreed
What comes under VPS 2?
Inspections
- Valuer must take steps to verify necessary information being relied upon for a valuation to ensure the information is professionally adequate for its purpose
Restricted Info (Desk Top vals)
- If you can’t do physical inspection you must consider
1. nature of restriction and agree these in writing on TOE
2. Possible valuation implications of restriction confirmed in writing before value is reported
3. Valuer should consider whether restriction is reasonable with regard to purpose of valuation
4. Restriction must be referred to in report
Revaluation (without re-inspection)
- Can’t be undertaken unless valuer is satisfied no material changes to property
- Must be confirmed in TOE and in valuation report
Record
- Proper record of inspection / investigations and other key inputs
- Note ESG and Sustainability
What should be listed under VPS 3
Valuation Reports
- Identification and status of valuer
- Client and any other intended users
- Purpose of valuation
- Identification of asset to be valued
- Basis of value
- Valuation date
- Extent of investigation
- Nature & source of information relied upon
- Assumptions and special assumptions
- Restrictions on use, distribution and publication
- Instruction undertaken in accordance with IVS standards
- Valuation approach and reasoning
- Valuation figures
- Date of valuation report
- Comment on market uncertainty
- Statement setting out any limitations on liability that have been agreed
What does VPS 3 say about draft valuation advice?
- Must be marketed as draft
- For internal purposes only
- Cannot be relied upon and on no account can it be published or disclosed
- Draft report provided to client must state it’s draft and subject to completion of final report
- Can be discussed with client but valuer can’t be influenced by the client in any way in respect of final valuation figure stated in report
- Any changes to preliminary valuation must be noted on file
- additional information supplied by client as result of discussion regarding draft report must be stated in the report
What is VPS 4
Bases of value
What are the 6 bases of value under VPS 4
- Market value
- Market rent
- Fair value
- Investment value
- Equitable value
- Liquidation value
What is the definition of Market Value?
The estimated amount for which an asset of liability should exchange
- On valuation date
- Between willing buyer and willing seller
- In an arms length transaction
- After proper marketing
- Where parties had acted knowledgeably, prudently and without compulsion
What is the definition of Market Rent?
The estimated amount for which an interest in real property should be leased
- On valuation date
- Between willing lessor and willing lessee
- On appropriate lease terms
- in an arms length transaction
- After proper marketing
- When parties had acted knowledgeably, prudently and without compulsion
What is the definition of Fair Value?
RICS view is that definition is generally consistent with definition of Market Value
The price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date
What is the definition of investment value?
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
What is the definition of Equitable value?
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interest of those parties
(Not used in UK)
What is liquidation value?
This basis of value can be used for a group of assets sold in piecemeal basis considering the costs of getting the assets into a saleable condition
(Not used in UK)
When is Fair Value required?
If the International Financial Reporting Standards have been adopted by the client
When is Investment Value used?
As a measure of worth to reflect the value against the clients own investment criteria
What is VPS 5?
Valuation Approaches and Methods
What comes under VPS 5?
Valuers are responsible for choosing and justifying their valuation approach and use of model
Some cases more than one approach may be appropraite
What comes under Part 5 of the Red Book?
Valuation Applications (VPGAs)
What are the key VPGAs
VPGA 1 - Valuation for inclusion in financial accounts
VPGA 2 - Valuation for secured lending
VPGA 8 - Valuation of real property interests
VPGA 10 - Matters that may give rise to material valuation uncertainty
What comes under VPGA 1 (expand)
Valuation for inclusion in financial accounts
- Fair value will be adopted for all IFRS adopted accounts
- Prescribed ‘performance standards’ must be adhered to
What comes under VPGA 2 (expand)
Valuations for secured lending
Dealing with conflicts of interest for secured lending valuations
- Any previous, current or future involvement with prospective borrower or the property to be valued must be declared to the lender
- ‘Previous involvement’ is defined as normally being within past ‘two’ years
- if the valuer or client consider the involvement creates conflict that can’t be avoided then instruction should be declined
Provide examples of VPGA 2
Loan Security
- Having longstanding professional relationship with prospective borrower or owner
- When valuer will gain a fee from introducing the transaction to the lender
- If there is a financial interest in property holding or prospective borrower
- When valuer is retained to act in disposal or letting of the completed development on the subject property
What other information is required when reporting (other than set out in TOE) for Secured Lending Purposes (VPGA 2)
Additional information must be reported to give the lender more info regarding instruction to advise whether to agree to the loan
- Disclosure of any involvement identified in terms of engagement, or any arrangements agreed for avoiding the conflict of interest. OR a statement that the valuer is not involved
- Valuation methodology adopted, supported where appropriate or requested with the calculation
- Where a recent transaction on the property has occurred or a provisionally agreed price has been disclosed, the extent to which that information has been accepted as market value
- Where the enquiry does not reveal any information the valuer will make a statement to that effect in the report
- Comment on any environmental consideration
- Comment on any suitability of the property for mortgages purposes
- Any circumstances of which the valuer is aware that could affect the price
- Any other factor that potentially conflicts with the definition of market value or its underlying assumptions
What is VPGA 8?
Valuation of real property interest
What does VPGA 8 cover?
ESG (Valuation of real property interests)
Covers inspections and investigations, with particular emphasis on ESG and environmental / sustainability issues
Identifies ESG and Sustainability issues including the need to consider:
1. Direct valuation factors (storm and flood risk)
2. Indirect valuation factors (resilience or carbon emissions)
3. Physical risks (through heat or wildfire)
4. Transition risks (regulatory change or carbon emissions)
What is VPGA 10?
Matters that may give rise to material valuation uncertainty
What comes under VPGA 10?
Overriding requirement that valuation report must not be misleading
valuer should clearly draw attending to, and comment on, any issues resulting in material uncertainty in the valuation on the specified date relating to risk surrounding the valuation of the asset
Standard caveat should not be used
What comes under Part 6 - International Valuation Standards 2017?
General Standards - TOE, approaches / bases / methods of valuation
Asset Standards - real or development property
What is the UK Red Book
Global Standards (UK National Supplement) 2018
What is the purpose of the UK National Supplement?
Sets out specific clarification for valuations in the UK. Sits alongside Red Book Global Standards, doesn’t substitute it
What are the key changes in the UK National Supplement 2018
- Easy to read / more user friendly with clear advice on what is and not mandatory
- Makes clear UK National Supplement augements the Red Book Global for valuations that are subject to UK jurisdiction
- Not a substitute, just advice for UK valuations
- New UK VPGAs have been included for valuation of central government assets, local authority assets and registered social housing providers assets
- For financial reporting valuations, greater differentiation between UK GAAP and IFRS requirements
- New section on valuation for commercial lending
What is the structure of the UK National Supplement
Introduction
Glossary of technical terms
1 UK Professional Standards (UK PS
2 UK Valuation Technical and Performance Standard (UK VPS)
3 UK Valaution Practice Guidance (UK VPGAs)
What sections of UK National Supplement are advisory or mandatory
Mandatory: Part 1 - UK Professional Standards
Mandatory: Part 2 - UK Valuation Technical and Performance Standards
Advisory: Part 3 - Valuation Practice Guidance Applications
What are the UK VPGAs
VPGA 1: Valuation for financial reporting
VPGA 2 - Valuations for other regulated purposes
VPGA 7: Valuation for registered social housing providers assets for financial statements
VPGA 8: Valuation of charity assets
VPGA 10: Valuation for commercial secured lending purposes
VPGA 11: Valuation for residential mortgage purposes
VPGA 14: Valuation of registered social housing for loan security purposes
VPGA 15: Valuation for CGT, Inheritance Tax, SDLT and ATED
What are the key changes of the UK National Supplement 2024?
The UK supplement has been updated to enact changes in valuation standards and in the legislative and regulatory valuation frameworks
One of the most significant changes to the UK supplement is a direct response to the valuation review’s recommendations.
The new governance rules introduce additional requirements in relation to the length of time a valuation engagement can be undertaken by a valuer or a valuation firm, often referred to as a rotation. The new rotation requirements are as follows:
- A maximum period of ten years before the rotation of a valuation firm; this might include multiple engagements
- A maximum single engagement period of five years
- A maximum period of five years before the rotation of an individual responsible valuer
- A minimum three-year break after rotating off an engagement
- A transition policy to allow that a smooth transition to the new arrangements has been incorporated, allowing two years before the new rules will be enforced.
