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IVSC issues exposure draft on depreciated replacement cost

  • IVSC (International Valuation Standards Council) (lt green) Image

16 Feb 2011

The International Valuation Professional Board, an independent technical body of the International Valuation Standards Council (IVSC), has released for comment an exposure draft of Technical Information Paper 2 'Depreciated Replacement Cost'.

Technical Information Papers (TIPs) are designed to provide technical guidance for valuation professionals on generally accepted best practice, but do not provide valuation training or instruction.

The objective of the exposure draft is to provide guidance on the application of the 'Depreciated Replacement Cost' (DRC) method of valuation, the most common valuation method under the cost approach. The cost approach estimates value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction. It can be applied to a wide range of asset types and is frequently used when there is either very limited or no evidence of sales transactions (such as the valuation of specialised assets arising in business combinations).

The exposure draft:

  • is proposed to replace the current IVSC Guidance Note GN8 "The Cost Approach for Financial Reporting - (DRC)", but extend the guidance on DRC to a wider variety of circumstances
  • identifies depreciated replacement cost as the most common method of valuation under the cost approach, but asks whether DRC is the only method of applying the cost approach
  • proposes to replace 'external obsolescence' with 'economic obsolescence' as one of the three main types of deduction for obsolescence when applying the DRC approach (the others being physical deterioration and functional obsolescence).

Comments on the exposure draft close on 31 May 2011. Click for IVSC press release (link to IVSC website).

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