IVSC issues exposure draft on real property and business valuations

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19 Jan, 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 1 The Discounted Cash Flow (DCF) Method – Real Property and Business Valuations.

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 describe the discounted cash flow (DCF) method and its application for the valuation of businesses and real property interests. It describes best practice in performing and reporting valuations using the DCF method. It also considers the different inputs that are appropriate for valuations where market value is the objective and those where investment value is required.

The exposure draft concludes:

  • the DCF method can provide an appropriate measure for either market value or investment value if properly applied
  • the DCF method may be more applicable than other methods if the asset or business is experiencing significant growth, has yet to reach a mature level of operations, or where the asset will have a defined life such as the case with assets and businesses in the energy and natural resource sector
  • if a minority interest in a business is being valued (as can arise under IFRS 3 Business Combinations (2008)), the possible applicability of a discount to the pro-rata value per share to reflect the lack of control and/or liquidity should be considered, if not already taken into account in the cash flows. In certain circumstances a Dividend Discount Model (DDM), which is a variant of the DCF method, may be a more applicable method to value a minority interest in an asset or business.

Comments on the exposure draft close on 30 April 2011. Click for access to the exposure draft (link to IVSC website).

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