Bases of Value Flashcards
(14 cards)
What is market value?
- Between a willing buyer and a willing seller
- In an arms length transaction
- After proper marketing
- Where the parties had acted knowledgeably, prudently and without compulsion
What is market rent?
- Between a willing lessor and a willing lessee
- On appropriate lease terms
- In an arms length transaction
- After proper marketing
- Where the parties had acted knowledgeably, prudently and without compulsion
When is Fair Value used?
Where financial statements are being prepared under International Financial Reporting Standards
What is Fair Value?
The amount for which an asset could be exchanged, a liability settled or an equity instrument granted between knowledgeable, willing parties in an arm’s length transaction
What is Investment value, or worth?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
How is investment value different from market value or fair value?
It hypothetically reflects the value to an individual and so would only be used in specific cases.
E.g. establishing a potential performance of an investment reflecting personal requirements against the value that would generally prevail in the market.
What needs to be included in a valuation providing market rent?
Appropriate lease terms that the market rent reflects
Why use Investment Value?
Can be better described as worth.
An owner or purchaser may wish to analyse the potential performance against certain investment criteria, for example, a target rate of return as opposed to those generally prevailing in the market.
Using Investment Value - example
Client may request a valuation based on an overall return rate of 11%. This can be calculated using a discount rate of 11% and the DCF method. The rest of the market may consider a return rate of 9% sufficient, in which case, they would be willing to pay more for the investment.
The client may consider selling if the market considers it to have a higher value. If they are trying to purchase the investment, they are likely to be outbid by the rest of the market.
What is Equitable Value?
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.
It requires the assessment of the price that is fair between two specific identified parties, considering the respective advantages or disadvantages that each will gain from the transaction. Often involves a potential special purchaser.
Examples of using Equitable Value
(a) Determination of a price that is equitable (fair and just) for a shareholding in a non-quoted business, where the holdings of two specific parties may mean that the price that is equitable between them is different from the price that might be obtainable in the market.
(b) Determination of a price that would be equitable between a lessor and lessee for either the permanent transfer of the leased asset or the cancellation of the lease liability.
What is synergistic value (marriage value)?
The result of a combination of two or more assets or interests where the combined value is more than the sum of the separate value.
If the synergies are only available to one specific buyer, then Synergistic Value will differ from Market Value.
Example of a Synergistic Value
A landlord purchasing the reversionary leasehold interest from their tenant may result in increase in the value of the freehold due to having a higher rent sooner. The increased value would be known as the marriage value.
What is Liquidation Value?
The amount that would be realised when an asset or group of assets are sold on a piecemeal basis. Liquidation Value should take into account the costs of getting the assets into saleable condition as well as those of the disposable activity.
