Philippine Association of Realty Appraisers, Inc.

PARA
CREASA
Comprehensive Real Estate Appraisal Seminar and Training
T
2015

PHILIPPINE VALUATION
STANDARDS

STANDARDS AND APPLICATIONS:

DEVELOPMENT OF THE PHILIPPINE VALUATION STANDARDS

LAND ADMINISTRATION AND MANAGEMENT PROGRAM (LAMP)

The Land Administration & Management (LAM) Program is a 15-20 years commitment of
the Philippine Government to:
 Alleviate poverty by improving the security of land tenure
 Sustain economic growth by fostering efficient land markets in rural &
urban areas
Objectives
A clear, coherent & consistent set of land administration policies & laws
An efficient land administration system supported by a sustainable financing
mechanism
An effective & transparent land valuation system in line with internationally
accepted standards

LAMP FINDINGS: PROBLEMS ON PROPERTY VALUATION

Significant political influence in the valuation system
Multiple, conflicting valuation methodologies
Absence of uniform valuation standards
Outdated, distorted real property values
Limited access to information, use of information technology in the appraisal
process
Limited provisions for formal education & training of assessors/appraisers

APPROACH TO DEVELOPING THE PHILIPPINE VALUATION STANDARDS

Review of existing national, regional & international Standards
• Existing Standards used in the Philippines (private sector)
Uniform Standards of Professional Appraisal Practice (USPAP)
International Valuation Standards (IVS)
• ASEAN Valuation Standards
• Royal Institution of Chartered Surveyors (RICS) ‘Red Book’
• Aus/NZ Professional Practice
• The European Group of Valuers Associations (TEGOVA)

Objectives in Developing Valuation Standards

 To provide consistency and understanding between providers
& users of valuations at national and international levels;
 To raise the quality of public & private sector valuations & reporting;
 To promote transparency and reliability of valuations for disposal of
government assets, financial reporting, secured lending, transfers of
ownership, litigation &
 taxation; and
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 To reduce financial risk for users of valuations

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 The approach adopted by LAMP was to create Philippine Valuation Standards

“based on” International Valuation Standards;
 The process included vigorous technical review by Technical Working Groups
and exposure to stakeholders through Exposure Workshops;
 The development of the national Standards was completed and promulgated
under Department Order 37-09 signed by the Secretary of Finance (DOF) on
October 19, 2009.
 The Standards will be adopted initially by the Public Sector and, by
providing leadership, it is expected that the Private Sector will follow.

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 Philippine Association of Realty Appraisers, Inc. PARA
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Comprehensive Real Estate Appraisal Seminar and Training
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2015

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 Philippine Association of Realty Appraisers, Inc. PARA
CREASA
Comprehensive Real Estate Appraisal Seminar and Training
T
2015
THE PHILIPPINE VALUATION STANDARDS

FUNDAMENTALS

CONCEPTS FUNDAMENTAL TO GENERALLY ACCEPTED VALUATION PRINCIPLES

• there is common worldwide agreement regarding fundamentals that underpin the
valuation discipline
• fundamentals of valuation methods and techniques are generally similar throughout
the world
• it is an objective of the PVS to avow and promote these fundamentals

Land, Real Estate and Property Concepts

• Land is also referred to as real estate
• Real estate is defined as the physical land and those human-made items, which
attach to the land.
• Property is a legal concept encompassing all the interests, rights and benefits
related to ownership
• The ownership of real estate is called real property
• Real property includes all the rights, interests, and benefits related to the
ownership of real estate.
• The combination of rights associated with the ownership of real property is referred
to as the bundle of rights
• Valuation of land is an economic concept .
• Value is created by real estate’s utility, or capacity to satisfy the needs and wants
of human societies.
• Many recognised principles are applied in valuing real estate. They include the
principles of supply and demand; competition; substitution; anticipation, or
expectation; change; and others
• Common to all these principles is their direct or indirect effect on the degree of
utility and productivity of a property.

Price, Cost, Value and Market Concepts

• Price
• is a term used for the amount asked, offered, or paid for a good or service.
• is generally an indication of a relative value placed upon the goods or
services.

• Cost
• is the price paid for goods or services or the amount required to create or
produce the good or service.
• the total cost of a property includes all direct and indirect costs of its
production.
• the costs may or may not be fully reflected in the property’s Market Value.
• a cost estimate for a property may be based on either an estimate of
reproduction cost or replacement cost.

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• Value
• is an economic concept referring to the price most likely to be concluded by
the buyers and sellers
• is not a fact, but an estimate of the likely price to be paid for goods and
services at a given time in accordance with a particular definition of value
• is a hypothetical price, and the hypothesis on which the value is estimated is
determined by the valuation basis adopted

• A market is the environment

• in which goods and services trade between buyers and sellers through a
price mechanism
• the concept of a market implies that goods may be traded among buyers
and sellers without undue restriction on their activities

• A Basis of Value
• a statement of the fundamental measurement principles of a valuation on a
specified date
• defines the nature of the hypothetical transaction, e.g., whether or not there
is exposure to a market, and the assumed motivation and behaviour of the
parties

Market Value is defined as:

“The estimated amount for which a property should exchange on the
date of valuation between a willing buyer and a willing seller in an
arm’s-length transaction after proper marketing wherein the parties
had each acted knowledgeably, prudently, and without compulsion.”

Highest and best use is defined as:

“The most probable use of a property which is physically possible,
appropriately justified, legally permissible, financially feasible, and
which results in the highest value of the property being valued.”

The concept of highest and best use is a fundamental and integral part of
Market Value estimates.

Utility
• land value is established by evaluating its utility in terms of the legal, physical,
functional, economic, and environmental factors that govern its productive
capacity.
• property valuation is governed by the way specific property is used and/or how
it would ordinarily be traded in the market

Valuation Approaches

Economic Principle of Substitution

• This principle holds that a prudent person would not pay more for a good or service
than the cost of acquiring an equally satisfactory substitute good or service.
• The lowest cost of the best alternative, whether a substitute or the original, tends
to establish Market Value.

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1. Sales Comparison Approach.
This comparative approach considers the sales of similar or substitute properties
and related market data, and establishes a value estimate by processes involving
comparison. Listings and offerings may also be considered.

2. Income Capitalization Approach

This comparative approach considers income and expense data relating to the
property being valued and estimates value through a capitalisation process.

3. Cost Approach
This comparative approach considers the possibility that, as an alternative to the
purchase of a given property, one could acquire a modern equivalent asset that
would provide equal utility. In a real estate context, this would involve the cost of
acquiring equivalent land and constructing an equivalent new structure. A
depreciation adjustment is required to the replacement cost to reflect
obsolescence.

PROPERTY TYPES

Valuers or Appraisers often encounter assignments involving property types other than
real property or properties whose value includes several property categories, an
understanding of each property type and its distinguishing characteristics is essential.

1. Real Property
• is an interest in real estate.
• This interest is normally recorded in a formal document, such as a title deed or
lease.
• Absolute ownership subject only to limitations imposed by the country is known as
a fee simple estate, or freehold.
• It is the ownership of the asset that is valued rather than the real estate as a
physical entity.

2. Personal Property
• refers to ownership of an interest in items other than real estate. These items can
be tangible, such as a chattel, or intangible, such as a debt or patent.
• A Valuer must be able to distinguish personal property from real property

3. Business
• is any commercial, industrial, service or investment entity pursuing an economic
activity. Businesses are generally profit-making entities operating to provide
consumers with products or services.
• Business valuations may be based on the Market Value of the business entity. The
Market Value of a business is not necessarily equivalent to the Value in Use of the
business.

4. Financial Interests
in property result from the legal division of ownership interests in businesses and
real property from the contractual grant of an optional right to buy or sell
property (e.g., realty stocks, or other financial instruments) at a stated price

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within a specified period, or from the creation or investment instruments secured
by pooled real estate assets.

CODE OF CONDUCT

Valuations performed in compliance with the Philippine Valuation Standards should be

provided by honest and competent Professional Valuers, free of bias or self-interest, whose
reports are clear, will not mislead, and will disclose all matters essential to the proper
understanding of the valuation.

Valuers should always promote and preserve public trust in the valuation profession.
Private Sector realty services practitioners comprising real estate salesmen, real estate
brokers, real estate appraisers and real estate consultants are currently regulated by the
National Code of Ethics for Real Estate Service Practitioners (NCERESP) which are
complementary to this Code of Conduct.
Valuers comply with these Standards either by choice or by requirement placed upon them
by law or regulation or at the instructions of clients, intended users, and/or national
societies or organizations.

A valuation claiming to be prepared under Philippine Valuation Standards binds the Valuer
to follow this Code of Conduct.

This Code does not have any formal authority in law, neither is it intended to be other than
complementary to the rules, bylaws and regulations of national societies or organizations
controlling or monitoring the activities of the Valuers.

A Valuer is a person who possesses the necessary qualifications, ability, and experience to
execute a valuation. In the Philippines, licensing is required before a person can act as a
Valuer.

The Valuer shall be a person of good repute who:

• has obtained an appropriate degree at a recognized centre of learning, or an
equivalent academic qualification;
• has suitable experience and is competent in valuing in the market and category of
the asset;
• is aware of, understands, and can correctly employ those recognized
• methods and techniques that are necessary to produce a credible valuation;
• is a member of a recognized national professional valuation body;
• pursues a program of professional learning throughout his or her career; and
• follows all the requirements of this Code of Conduct.

Internal Valuer
• a Valuer who is in the employ of either the entity that owns the assets or the
accounting firm responsible for preparing the entity’s financial record and/or
reports.
• is generally capable of meeting all the requirements of independence and
professional objectivity required under this Code of Conduct, but for reasons of
public presentation and regulation may not always be acceptable to fill the role of
independent Valuer in certain types of assignments.

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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.
Ethics
• Valuers should at all times maintain a high standard of honesty and integrity and
conduct their activities in a manner not detrimental to their clients, the public,
their profession, or their respective national professional valuation body.

Integrity
A Valuer
• must not act in a manner that is misleading or fraudulent.
• must not knowingly develop and communicate a report that contains false,
inaccurate, or biased opinions and analysis.
• must not contribute to, or participate in, a valuation service that other reasonable
Valuers would not regard to be ethical or justified.
• must act legally and comply with the laws and regulations of the country in which
he or she practices or where an assignment is undertaken.
• must not claim, or knowingly let pass, erroneous interpretation of professional
qualifications that he or she does not possess.
• should not knowingly use false, misleading or exaggerated claims or advertising in
an effort to secure assignments.
• shall ensure that any staff person or subordinate assisting with the assignment
adhere to this Code of Conduct.

Conflicts of Interest
• A Valuer must not act for two or more parties in the same matter, except with the
written consent of those concerned.
• A Valuer must take all reasonable precautions to ensure that no conflicts of duty
arise between the interests of his or her clients and those of other clients, the
Valuer, his or her firm, relatives, friends, or associates.
• Potential conflicts should be disclosed in writing before accepting instructions.

Confidentiality
• A Valuer must at all times deal with client’s affairs with proper discretion and
confidentiality.
• A Valuer must not disclose sensitive factual data obtained from a client, or the
results of an assignment prepared for a client, to anyone other than those
specifically authorized by the client except when legally required to do so as in
situations where a Valuer must comply with certain quasi-judicial proceedings
within the recognized national professional valuation body of which the Valuer is a
member.

Impartiality
• A Valuer must perform an assignment with the strictest independence, objectivity,
and impartiality, and without accommodation of personal interests.
• A Valuer must not accept an assignment that includes the reporting of
predetermined opinions and conclusions.
• Fees connected with an assignment must not depend on the predetermined
outcome of any valuation or other independent, objective advice contained in the
valuation report.

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• Whether the Valuer’s fee is or is not contingent upon any aspect of the report must
be disclosed.
• A Valuer must not rely upon critical information supplied by a client, or any other
party, without appropriate qualification or confirmation from an independent
source unless the nature and extent of such reliance is specified as a limiting
condition.
• A Valuer should not accept an assignment to report on assumed hypothetical
conditions that are unlikely to be realized in any reasonable timescale.
• Hypothetical conditions that are a reasonable possibility may be reported on
provided they are accompanied by some discussion both of the prospects of
realizing the hypothesis and a consideration of value that reflects the true
situation prevailing, e.g., a situation where a client wants to know what the value
of land will be pending detoxification.
• A Valuer should not use or rely on unsupported conclusions based on prejudice of
any kind or report conclusions reflecting an opinion that such prejudice is
necessary to maintain or maximize value.
• In reviewing another Valuer’s report, a Valuer shall exhibit impartial judgment and
justify his or her reasons for agreeing or disagreeing with the conclusion of the
report.

Competence
• A Valuer must have the knowledge, skill, and experience to complete the
assignment efficiently in relation to an acceptable professional standard.
• Only those Valuers able to conform to the definition of the Valuer set out in this
Standards should undertake work in connection with these Standards.

Disclosures
• Any limitations to the quality of the service that a Valuer is able to offer must be
disclosed whether this is due to externally imposed constraints or peculiar to the
Valuer or the assignment. Where outside assistance has been sought the Valuer
must disclose the identity of the assistants, the extent of reliance on, and the
nature of, such assistance.
• A Valuer must place a restriction against the publication of a valuation or its
conclusion without consent so that the Valuer can keep a measure of control over
the form and context in which his or her valuations are publicly disclosed.
• It is essential that Valuers develop and communicate their analyses, opinions, and
conclusions to users of their services through reports that are meaningful and not
misleading and that disclose anything that might be taken to affect objectivity.
• The valuation report should set out a clear and accurate description of the scope of
the assignment and its purpose and intended use, disclosing any assumptions,
hypothetical scenarios, or limiting conditions that directly affect the valuations
and, where appropriate, indicating their effect on the value.
• A Valuer should disclose any departures from the International Valuation
Standards.
• Standards are devised for the generality of situations and cannot cater to every
eventuality. There will be occasions where departure from Standards is
inescapable. When such situations arise, departure would be unlikely to constitute
a breach of these Standards, provided such departure is reasonable, complies
with the principles of ethics and measures of competence, and a rationale for such
departure is provided in the valuation report.

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VALUATION STANDARDS

PHILIPPINE VALUATION STANDARDS 1 (PVS 1):

MARKET VALUE BASIS OF VALUATION

Objective of this Standard – to provide a common definition of Market Value

Market Value
“The estimated amount for which a property should exchange on the
date of valuation between a willing buyer and a willing seller in an
arm’s-length transaction after proper marketing wherein the parties
had each acted knowledgeably, prudently, and without compulsion.”

“The estimated amount...”

o refers to a price expressed in terms of money, payable for the property. It is the
best price reasonably obtainable by the seller and the most advantageous price
reasonably obtainable by the buyer.

“…a property should exchange…”

o refers to the fact that the value of a property is an estimated amount rather than a
predetermined amount or actual sale price.

“…on the date of valuation…”

o requires that the estimated Market Value is time-specific as of a given date.

“…between a willing buyer…”

o refers to one who is motivated, but not compelled to buy. This buyer is neither
over-eager nor determined to buy at any price.

“…a willing seller…”

o is neither an over-eager nor a forced seller, prepared to sell at any price, nor one
prepared to hold out for a price not considered reasonable in the current market.

“…in an arm’s-length transaction…”

o is one between parties who do not have a particular or special relationship.

“…after proper marketing…”

o means that the property would be exposed to the market in the most appropriate
manner to effect its disposal at the best price reasonably obtainable.

“…wherein the parties had each acted knowledgeably and prudently…”

o presumes that both the willing buyer and the willing seller are reasonably informed
about the nature and characteristics of the property.

“…and without compulsion…”

o establishes that each party is motivated to undertake the transaction, but neither is
forced or unduly coerced to complete it.

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PVS 1 applies to the Market Value of property, normally real estate and related elements.
It requires that the property under consideration be viewed as if for sale on the market, in
contrast to being evaluated for some other purpose.

Market Value is a representation of value in exchange.

The concept of Market Value also presumes that in a market value transaction a property
will be freely and adequately exposed on the (open) market for a reasonable period of
time and with reasonable publicity.

PHILIPPINE VALUATION STANDARDS 2 (PVS 2):

BASES OTHER THAN MARKET VALUE

Objectives of PVS 2
• to identify, explain and distinguish bases of value other than Market Value and to
establish standards for their application.
• alternative valuation basis may be appropriate in specific circumstances. It is
essential that both the Valuer and users of valuations clearly understand the
distinction between Market Value and other bases of valuation
• other bases of valuation require the application of different assumptions, which if
not clearly identified, may result in misinterpretation of the valuation.

PVS 2 defines other valuation bases. These fall into three (3) principal categories:

The first category reflects the benefits that an entity enjoys from ownership of an
asset.
• the value is specific to that entity
• the value reflects the benefits received by holding the asset, and therefore does not
involve a hypothetical exchange; it may or may not be the same as the amount
that could be realized from sale of the asset
• Investment Value, or Worth, fall into this category
• Differences between the value of an asset to a particular entity and the Market
Value provide the motivation for buyers or sellers to enter the market place.

The second category represents price that would be reasonably agreed between
two specific parties for the exchange of an asset.
• Although the parties may be unconnected and negotiating at arm’s length, the
asset is not necessarily exposed in the wider market
• and the price agreed may be one that reflects the specific advantages (or
disadvantages) of ownership to the parties involved rather than the market at
large.
• This category includes Fair Value, Special Value and Synergistic Value.

The third category is value determined in accordance with a definition set out in
a statute or a contract.

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Fair Value.
• the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm’s length transaction.

Investment Value, or Worth.

• the Value of property to a particular investor, or a class of investors, for identified
investment or operational objectives. This subjective concept relates specific
property to a specific investor, group of investors, or entity with identifiable
investment objectives and/or criteria.

Special Value.
• An amount above the Market Value that reflects particular attributes of an asset
that are only of value to a Special Purchaser.

Synergistic Value.
• additional element of value created by the combination of two or more interests
where the value of the combined interest is worth more than the sum of the
original interests.

Going Concern Value:

• this describes a situation where an entire business is transferred as an operational
entity. Alternative valuation scenarios to a going concern could include a transfer
of all the assets as a whole but following the closure of the business, or a transfer
of specific assets currently used in the business as individual items.

Liquidation Value:
• this describes a situation where a group of assets employed together in a business
are offered for sale separately, usually following a closure of business. Although
often associated with a forced sale, these terms have distinct meanings. There is
no reason why assets cannot be liquidated by an orderly sale following proper
marketing.

Salvage Value:
• this describes the value of an asset that has reached the end of its economic life for
the purpose it was made. The asset may still have value for an alternative use or
for recycling.

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PHILIPPINE VALUATION STANDARDS 3 (PVS 3):
VALUATION REPORTING

The Valuation Report is the final step in the valuation process.

The Valuation Report communicates to users and third-party readers

• the value conclusion
• confirms the basis of the valuation, the purpose of the valuation,
• and any assumptions or limiting conditions underlying the valuation.
This Standard sets forth the following as its principal objective:
• To discuss reporting requirements consistent with professional best practice.
• To identify essential elements to be included in Valuation Reports.

The specifications for the valuation assignment include the following 7 elements:
• An identification of the property subject to the valuation and other classes of
property included in the valuation besides the primary property category;
• An identification of the property rights to be valued;
• The intended use of the valuation and any related limitation; and the identification
of any subcontractors or agents and their contribution;
• A definition of the basis or type of value sought;
• The date as of which the value estimate applies and the date of the intended
report;
• An identification of the scope/extent of the valuation and of the report; and
• An identification of any contingent and limiting conditions upon which the valuation
is based.

The Valuation Report shall

• clearly and accurately set forth the conclusions of the valuation in a manner that is
not misleading;
• Identify the client, the intended use of the valuation, and relevant dates;
• the date as of which the value estimate applies,
• the date of the report, and
• the date of the inspection;
• specify the basis of the valuation, including type and definition of value;
• identify and describe the
• property rights or interests to be valued,
• physical and legal characteristics of the property, and
• classes of property included in the valuation other than the primary property
category;
• describe the scope/extent of the work used to develop the valuation;
• specify all assumptions and limiting conditions upon which the value conclusion is
contingent;
• identify special, unusual, or extraordinary assumptions and address the probability
that such conditions will occur;
• include a description of the information and data examined, the market analysis
performed, the valuation approaches and procedures followed, and the reasoning
that supports the analyses, opinions, and conclusions in the report;
• contain a clause specifically prohibiting the publication of the report in whole or in
part, or any reference thereto, or to the valuation figures contained therein, or to

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the names and professional affiliation of the Valuers, without the written approval
of the Valuer;
• include a Compliance Statement that the valuation has been performed in
accordance with PVS, disclose any departure from the specific requirements of the
PVSs and provide an explanation for such departure in accordance with the PVS
Code of Conduct;
• include the name, professional qualifications, and signature of the Valuer.

GUIDANCE

In the Philippines it is accepted practice for External Valuers to stamp their official dry seal
and indicate their license number in a report for security purposes.

In the Philippines it is accepted practice to attach to the valuation report an accompanying

plat/location plan, photographs, and copies of covering title, tax declaration and survey
plan of the property being valued.

When Valuation Reports are transmitted electronically, a Valuer shall take reasonable
steps to protect the integrity of the data/text in the report and to ensure that no errors
occur in transmission.

The presentation of a Valuation Report is decided by the Valuer and the client based on the
instructions or specifications for the assignment.

The type, content, and length of a report depend on the intended user of the report, legal
requirements, property type, and the nature and complexity of the valuation issue or
problem.

For all Valuation Reports, sufficient documentation must be retained in the work file to
support the results and conclusions of the valuation and must be held for a period of at
least five years after completion.

The value conclusion should make reference to the market evidence, and procedures and
reasoning that support that conclusion.

Communicating the answer to the valuation question in a consistent and logical manner
demands a methodical approach that enables the user to understand the processes
followed and their relevance to the conclusion.

The report should demonstrate clarity, transparency, and consistency of approach.

The Valuer should exercise caution before permitting the valuation to be used other than
for the originally agreed purpose.

In any circumstances involving a departure from the reporting of Market Value, the Valuer
should clearly identify that the valuation reported is other than Market Value.

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PHILIPPINE VALUATION APPLICATION 1 (PVA 1):
VALUATION FOR FINANCIAL REPORTING

Objective
• to explain the principles that apply to valuations prepared for use in financial
statements and related accounts of business entities.

Valuers undertaking work of this nature should have an understanding of the accounting
concepts and principles underlying the relevant International Accounting Standards.

The Valuer’s adherence to market-based definitions, objectivity, and full disclosure of

relevant matters within a pertinent and user-friendly format are fundamental to the
requirements of valuation for financial reporting.

IFRSs adopt two models for the recognition of property assets in the balance
sheet:
• a cost model, and
• a fair value model.

Where the fair value model is applied, a current revaluation of the asset is required, and
this Application focuses on these particular circumstances where Market Values are to be
reported.

Market Value

The estimated amount for which a property should exchange on the date of
valuation between a willing buyer and willing seller in an arm’s-length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently, and without compulsion.

Fair Value.
• The amount for which an asset could be exchanged or a liability settled between
knowledgeable willing parties in an arm’s-length transaction.

Value in Use.
• The present value of the future cash flows expected to be derived form an asset or
cash-generating unit.

Financial statements are produced on the assumption that the entity is a going concern
unless management either intends to liquidate the entity or cease trading, or has no
realistic alternative but to do so.

This assumptions therefore underlies the application of fair value to property, plant,
machinery, and equipment, except in cases where it is clear that there is either an
intention to dispose of a particular asset or that option of disposal has to be considered,
e.g., when undertaking an impairment review.

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PHILIPPINE VALUATION APPLICATION 2 (PVA 2):
VALUATION FOR SECURED LENDING PURPOSES

The objective of Philippine Valuation Application 2 (PVA 2) is to provide a framework for

valuations of assets that are to be offered or taken as loan security.

It is important that Valuers consistently apply accepted valuation principles within the
scope of these standards, providing clear, independent and objective opinions that are
relevant to the needs of valuation users.

A valuation prepared for lending purposes will not necessarily be the same as one made
for accounting purposes, particularly one made for financial reporting purposes.

Although a similar base such as Market Value may be applicable, the assumptions on
which the valuation is based may be different.

The underlying principle of many valuations for financial reporting is the presumption that
the entity will continue as a going concern. However, this would not usually be appropriate
for valuations undertaken for lending purposes.

The Valuer
 The nature and scope of the Valuer’s engagement should be clear to the
Valuer and user of the valuation.
 Valuers should be aware of the risk associated with valuations for lending
 purposes where miscommunication, misunderstanding or error may lead to
dispute or litigation between the lender and the Valuer, and financial losses to
the lender.
 In undertaking the valuations for lending purposes, it is particularly
important that the Valuer be independent of the borrower.
 In performing valuations of property for lending purposes, Valuers will normally
 provide the Market Value of such property in accordance with these Philippine
 Valuation Standards.
 At the outset of an assignment, the Valuer must to clearly identify the
property that is to serve as the security.
 The manner in which property would ordinarily trade in the market will determine
 the applicability of the various approaches to valuing Market Value.
 Each relevant valuation method will, if appropriately and correctly applied,
lead to a similar result. All valuation methods should be based on market
observations.

GUIDANCE NOTES

It is common for a seller of property, especially developers of real property, to offer

incentives to buyers. Examples of such incentives include rental income guarantees, or the
supply of personal property such as furnishings or equipment. Market Value ignores any
price inflated by special considerations or concessions.

It may also be appropriate to alert the lender as to the effect that any incentives being
offered have on the actual selling prices achieved.

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Owner-occupied properties valued for lending purposes will normally be valued on the
assumption that the property is transferred unencumbered by the owner’s occupancy, i.e.,
that the buyer is entitled to full legal control and possession.

Specialized properties by definition may have limited marketability and significant value
only as part of a business. For loan security purposes, such properties will normally be
valued on a vacant possession basis and a valuation based on the highest and best use
alternative use is usually applicable.

A valuation may be required of a specialized property where the property is part of a

going-concern business. The lender should be alerted to the valuation being dependent on
the continuing profitability (or otherwise) of the going concern. If the value on a vacant
possession basis is potentially lower, this should be drawn to the attention of the lender.

Certain classes of property, including but not limited to hotels and other trading
businesses, where the property is approved and purpose designed for only that use, are
usually valued based on profitability but excluding Personal Goodwill.

In such cases, the lender should be made aware of the significant difference in value that
may exist between an operating concern and a non-operating concern where the business
is closed, the inventory is removed, licenses (and other intangible assets such as
certificates, franchise agreements, or permits) are removed or are in jeopardy, and any
other circumstances exist that may impair future profitability and value.

If the income from a property is critically dependent on a tenant or tenants from a single
sector or industry or some other factor, which could cause future income instability, the
Valuer should address these factors in the valuation. In certain cases, an assessment of
the value of the property based on an alternative use, assuming vacant possession, may
be appropriate.

Properties held for redevelopment or sites intended for development of buildings should be
valued taking into account existing and potential development entitlements and controls.

Property rental that exceeds the current market or economic rent may constitute a wasting
asset because any value attributable to this factor diminishes as the term of the lease
decreases.

Forced Sales and Limited Marketing or Disposal Periods

Lending institutions may request valuations on a forced, or liquidation, sale basis or

impose a time limit for disposal of the security.

The Valuer should not speculate on a price that could be obtained without either
knowledge of the reasons for the constraint, or the circumstances under which the
property might be offered for sale.

An alternative valuation may be provided based on defined assumptions, but the Valuer
should draw the lender’s attention to the fact that this opinion is valid only at the valuation
date, and may not be relied upon in the event of a future default, when both market
conditions and the sale circumstances may be different.

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PHILIPPINE VALUATION APPLICATION 3 (PVA 3):
VALUATION OF PUBLIC SECTOR ASSETS FOR FINANCIAL REPORTING

Public sector assets are those assets owned and/or controlled by governmental
or quasi-governmental entities to provide goods or services to the general public.

The principles that apply to the valuation of public sector assets are essentially the same
as for any other assets.

The valuation of public sector assets may be undertaken for a range of purposes including
financial reporting, privatization planning, loan origination, bond issuance, and cost-benefit
or economic analyses performed by governments and quasi-government entities either to
determine whether a public sector asset is being used and managed efficiently or to set
pricing for monopoly services.

For some public sector assets, it may be difficult to establish their Market Value because of
the absence of market transactions for these assets. Some public sector entities may
have significant holdings of these assets.
If no market evidence is available to determine the Market Value in an active and liquid
market of an item of property, the fair value of the item may be established by reference
to other items with similar characteristics, in similar circumstances and location.

If there is no market-based evidence of fair value because of the specialized nature of the
item of plant and equipment, an entity may need to estimate fair value using depreciated
replacement cost, or the restoration cost or service units approaches

GUIDANCE NOTES:

Guidance Note 1 (GN1): Real Property Valuation

The Valuation Process, as illustrated in the next slide, as it is applied in many countries.

The process reflects Generally Accepted Valuation Principles and is approximated in

virtually all countries, whether or not the particular steps are explicitly followed.

The principles from which this process derives are common to all countries.

Although the process may be used for either Market Value or applications founded on other
bases of value, Market Value applications require the development of valuations solely on
the basis of market data.

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Definition of the Assignment

The definition of the assignment includes:

• an identification of the real estate involved in the valuation;
• an identification of the property rights to be valued;
• the intended use of the valuation, and any related limitations;
• the identification of any subcontractors or agents and their contribution;
• a definition of or the basis of the value sought;
• the date as of which the value estimate will apply; and the date of the intended
report;
• an identification of the scope/extent of the valuation and of the report; and
• an identification of any contingent and limiting conditions upon which the
valuation is based.

Preliminary Analysis and Data Collection and Selection

In performing the steps of a preliminary analysis, and data selection and

collection, the Valuer becomes familiar with the general market and subject property,
thereby proceeding to a position from which more specific analyses can be made.
General economic data are collected at the neighborhood, city, regional, and even
national and international levels, depending on the property involved. Social, economic,
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governmental, and environmental factors that may have bearing on value are examined to
better understand the particular property.

Property-specific data, or data more directly relevant to the property being valued and
to comparable properties are also gathered and examined.

Supply and demand data characteristic of the most probable market for the property
are analyzed to develop an inventory of properties that compete with the subject property
for market share.

The concept of Highest and Best Use (HABU) is based on the notion that although two
or more parcels of real estate may have physical similarities and closely resemble one
another, there may be significant differences in how they can be used. How a property
can be optimally utilized is a foundation for determining its Market Value.

In many, countries three valuation approaches are recognized in the Valuation Process:
• Sales Comparison or Market Data Approach
• Income Capitalization Approach, and
• Cost Approach

Each approach is based, in part, on the Principle of Substitution, which holds that when
several similar or commensurate commodities, goods or services are available, the one
with the lowest price attracts the greatest demand and widest distribution.

The Valuer or Appraiser to must consider each approach.

The Sales Comparison or Market Data Approach recognizes that property prices
are determined by the market. Market Value can, therefore, be calculated from a
study of market prices for properties that compete with one another for market
share.

When data are available, the sales comparison approach is the most direct and
systematic approach to estimating value.

The Income Capitalization Approach is based on the same principles that apply to
other valuation approaches. In particular, it perceives value as created by the
expectation of future benefits (income streams).

The income capitalization approach is particularly important for properties that are
purchased and sold on the basis of their earnings capabilities and characteristics and in
situations where there is market evidence to support the various elements incorporated
into the analysis.

Reconstructed operating statements specify that the income projection is subject to

the assumption that the property is run by a reasonably efficient operator or average
competent management.

The Cost Approach, also known as the contractor’s method, is recognized in most
countries.

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The Cost Approach establishes value by estimating the costs of acquiring land and
building a new property with equal utility.

The cost of land is added to the total cost of construction. (Where applicable, an estimate
of entrepreneurial incentive, or developer’s profit/loss, is commonly added to construction
costs.)

The Cost Approach establishes the upper limit of what the market would normally pay for a
given property when it is new.

The use of the cost approach can be appropriate when properties are new or of relatively
new construction, provided estimates of items such as land value and depreciation are
validated by market evidence. In depressed markets, economic or external obsolescence
must be factored into the indication of value derived from the cost approach.

The three approaches to value are independent of one another even though each approach
is based on the same economic principles.
All three approaches are intended to develop an indication of value, but the final value
conclusion depends on consideration of all data and processes employed and the
reconciliation of the value indications derived from different approaches into a final
estimate of value.

Guidance Note 2 (GN2): Valuation of Lease Interests

Lease interests are a form of real property, arising from the contractual
relationship between a lessor, one who owns the property leased to another, and
a lessee, or tenant, one who typically receives a non-permanent right to use the leased
property in return for rental payments or other valuable economic consideration.

A piece of real estate may comprise one or more property interests, each of which will
have a Market Value provided it is capable of being freely exchanged.

Leasehold or Lease interests are valued on the same general principles as freeholds,
but with recognition of the differences created by the lease contract encumbering the
freehold interest, which may cause the interest to be unmarketable or restricted.

In no circumstances is it considered proper to value different property interests in the

same piece of real estate separately and then to aggregate their values as an
indication of the real estate’s total value.

Lease contracts establish unique legal estates that are different from fee simple,
or freehold, ownership.

Each legal interest in a property shall be valued as a separate entity and not treated as
though merged with another interest.

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Guidance Note 3 (GN3): Valuation of Plant, Machinery and Equipment

Plant, machinery and equipment assets have particular characteristics that distinguish
them from most types of real property and that influence both the approach to and
reporting their value.

Plant, machinery and equipment are normally capable of being moved or

relocated and often will depreciate at a significantly faster rate than real
property.

Frequently, the value will differ notably depending on whether an item of plant, machinery
or equipment is valued in combination with other assets within an operational unit
or whether it is valued as an individual item for exchange, and whether it may be
considered as either in-situ (in place) or for removal.

Valuations of plant, machinery and equipment can be carried out using any of the following
approaches:

Sales Comparison Approach.

• In the Philippines due to the lack of direct sales evidence the use of the sales
comparison approach is often limited to individual free-standing machines such as
lathes and generators, and motor vehicles.

Income Capitalization Approach.

• Current practice in the Philippines does not adopt this approach in the valuation of
machinery and equipment. It is recognized that it is rarely possible to identify an
income stream and allocate it to individual assets.

Cost Approach (Depreciated Replacement Cost)

• In the Philippines machinery and equipment valuations are usually carried out using
the Depreciated Replacement Cost approach to reach a valuation conclusion.
• In the absence of direct market evidence depreciated replacement cost is regarded
as an acceptable method of determining value and since the publication of the IVS
seventh edition (2005) depreciated replacement cost is recognized as a market-
based methodology.
• Where the depreciated replacement cost method has been used this must be clearly
stated and the valuation conclusion must be reported in accordance with IVS 3,
Valuation Reporting. Such statements should include that the valuation conclusion
is subject to the test of adequate profitability, in accordance with GN8 5.10.

Plant, machinery and equipment are valued as a whole, in- situ (in place) and as part
of the business as a going concern.
This equates to Value for Continued Use in the Philippines, which assumes the
property to be in continued use for the purpose for which the property was
designed and built, or to which it is currently adapted.

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Implicit in the application of this premise is:
• Both buyer and seller contemplate retention of the property at its present location
for continuation of the use for which it was designed and built, or to which it is
currently adapted.
• The values are not intended to represent the amount that might be realized from
piecemeal disposition of the property in the marketplace.

Plant, machinery and equipment are valued in-situ but on the assumption that the
business is closed; or
That the plant, machinery and equipment is valued as individual items for removal
from their current location.
This equates to ‘Liquidation Value’ in the Philippines.

Guidance Note 4 (GN4): Valuation of Intangible Assets

Intangible Property. The rights and privileges granted to the owner of intangible
assets.

In general, the concepts, processes, and methods applied in the valuation of intangible
assets are the same as those for other types of valuations.

Care should be taken by Valuers and users of valuation services to distinguish between the
value of individual, identifiable intangible assets and going concern considerations,
including those encountered in the valuation of real property interests. An example of the
latter is valuations of trade related property.

Valuations of intangible assets may be required for a number of possible uses including
acquisitions and dispositions of business or parts of businesses, mergers, sale of an
intangible asset, financial reporting and the like.

Valuers of intangible assets must frequently rely on information received from a client or
from a client’s representatives. The source of any such data relied upon must be cited by
the Valuer in written reports, and the data shall be reasonably verified wherever possible.

Valuations of intangible assets require special education, training, skills, and experience.

Factors to be considered by the Intangible Asset Valuer include:

• The rights, privileges, or conditions that attach to the ownership interest
• Remaining economic life and/or legal life of the intangible asset.
• The earnings capacity of the intangible assets
• The nature and history of the intangible assets
• The economic outlook that may affect the subject intangible assets,
• The condition and outlook of the specific industry,
• Intangible value may also be contained in undifferentiated assets, often called
goodwill.
• Prior transactions in ownership interests of the subject intangible assets
• The market prices for acquisition of similar intangible assets interests or intangible
assets
•

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Intangible asset valuation approaches

Market (sales comparison) approach to intangible asset valuation

The market approach compares the subject to similar intangible assets or intangible asset
ownership interests and securities that have been sold in the open market.
The two most common sources of data used in the market approach are markets in which
ownership interests of similar intangible assets are traded and prior transactions in the
ownership of the subject intangible assets.

Income capitalization approach to intangible asset valuation

The income approach estimates the value of an intangible asset or of intangible asset
ownership interests by calculating the present value of anticipated benefits.
The two most common income approach methods are (direct) capitalization of income and
discounted cash flow analysis (DCF).

In (direct) capitalization of income, a representative income level is divided by a

capitalization rate or multiplied by an income multiple (capitalization factor) to convert the
income into value.

In DCF analysis and/or dividend method, cash receipts are estimated for each of several
future periods. These receipts are converted to value by the application of a discount rate,
using present value techniques.

The cost approach, often called the cost to recreate, is also known as the
adjusted asset approach.

A cost-based approach is founded on the Principle of substitution, i.e., an asset is worth no

more than it would cost to replace all of its constituent parts.
In the execution of the cost approach, the cost of each item in the creation of the assets,
including developer’s profit, must be estimated using the knowledge possessed as of the
valuation date.

Guidance Note 5 (GN5): Valuation of Personal Property

The objective of this Guidance Note (GN) is to improve the consistency and quality of
personal property valuations for the benefit of users of personal property valuation
services.

Personal property valuations are commonly sought and performed on the Market Value
basis of valuation, applying the provisions of PVS 1. Where other bases of valuation are
used, the provisions of PVS 2 are applied, subject to proper disclosure and explanation.

Care should be taken by Valuers and users of valuation services to distinguish among the
market components and corresponding Market Values of personal properties.

One example of such differentiation is the Market Value of properties sold at auction vs.
that of properties sold by or acquired from private dealers where the negotiated price is
not publicly disclosed.

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Another example would be the Market Value of personal property sold wholesale vs. the
Market Value of the same item(s) sold retail.

Steps shall be taken by the Valuer to assure that all data sources relied upon are reliable
and appropriate to the valuation undertaking.

Personal Property Valuers must frequently rely upon information received from a client or
from a client’s representatives. The source of any such data relied upon shall be cited by
the Valuer in written reports, and the data shall be reasonably verified wherever possible.

Although many of the principles, methods, and techniques of personal property valuation
are similar to those in other fields of valuation, personal property valuations require
special education, training, skill and experience.
Factors to be considered (but not necessarily reported) by the Personal Property Valuer
include:
 Rights, privileges, or conditions that attach to the ownership of the
subject property
 The nature of the property and history of its ownership
(provenance)Previous sales or transfers of the property
 The economic outlook that may affect the subject property, including
political outlook and government policy
 The condition and outlook of a market specific to the trade of personal
properties that may affect the subject property
 Whether or not the subject property has intangible value.

Personal property valuations performed by means of the Sales Comparison

Approach

The sales comparison approach compares the subject property to similar properties and/or
property ownership interests that have been sold/offered in open markets.

The two most common sources of data used in the sales comparison approach are
published auction results and transactions reported by firms regularly engaged in the trade
of similar properties.

Factors to be considered in whether a reasonable basis for comparison exists include:

 Similarity to the subject property in terms of qualitative and
quantitative descriptive characteristics.
 Amount and verifiability of data on the similar property.
 Whether the price of the similar property represents an arm’s-length transaction.

Personal property valuations performed by means of the income capitaliszAtion

approach

The Income Capitalization Approach to value considers income and expense data relating
to the property being valued and estimates value through a capitalization process.

The application of the income capitalization approach may be appropriate in the valuation
of furniture, fixtures, and equipment (FF&E) essential to the operation of properties such
as hotels, furnished apartments and care facilities.

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FF&E may be subject to heavy use and, therefore, require periodic replacement to
maintain the attractiveness and utility of the facility.

Personal property valuations performed by means of the Cost Approach

The cost approach considers as a substitute for the purchase of a given item of personal
property, the possibility of creating another item equivalent to the original or one that
could furnish equal utility with no undue cost resulting from delay.

The application of the cost approach is especially appropriate in valuations of personal

property such as manufactured products or items for which multiple copies exist, e.g.,
prints, porcelain figurines, or products turned out by a mint.
In the case of assets such as valuable antiques or paintings, replacement may be
impractical regardless of the cost.

Over time some items of personal property that do not suffer physical depreciation may
appreciate since current cost to replace or reproduce such items typically outpaces
increases in their current price.

Personal property valuations performed by means of the Cost Approach

 The Valuer’s estimate is based on the reproduction or replacement cost of
the subject property or asset.
 Replacement cost refers to what one might expect to pay for an object of
similar age, size, color, and condition. Generally, it seeks to establish the
cost of an
 alternative example or of a replica, or copy, of the original item, as
near as possible to the original in terms of nature, quality, and age of
materials but
 created by means of modern construction methods.
 Reproduction cost refers to what one might expect to pay for a facsimile, or
exact copy, of the original item, created with materials of closely similar
nature, quality,
 and age and using construction methods of the original period.
 The value conclusion shall also be based on value estimates from the
valuation methods performed.

The selection of and reliance on the appropriate approaches, methods, and procedures
depend on the judgment of the Valuer.

The Valuer must use judgment when determining the relative weight to be given to each
of the value estimates during the Valuation Process.

The Valuer should provide the rationale and justification for the valuation methods used
and for the weighting of the methods relied on in reaching the value reconciliation when
requested.

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Guidance Note 6 (GN6): Business Valuatiion

In general the concepts, processes and methods applied in the valuation of businesses are
the same as those for other types of valuations.

Care should be taken by Valuers and users of valuation services to distinguish between the
value of a business entity or trade related property, the valuation of assets owned by such
entity, and various possible applications of business or going concern considerations
encountered in the valuation of real property interests.

Business valuations may be required for a number of possible uses, including acquisitions
and dispositions of individual businesses, mergers, valuation of shareholder ownings.

Factors to be considered in the valuation of a business include:

• The rights, privileges, or conditions that attach to the ownership interest, whether
held in corporate form, partnership form, or proprietorship
• The nature of the business and history of the business.
• The economic outlook that may affect the subject business, including political
outlook and government policy.
• The condition and outlook of the specific industry that may affect the subject
business.
• The assets, liabilities, and equity and financial condition of the business.
• The earnings and dividend paying capacity of the business.
• Factors to be considered in the valuation of a business include:
• Whether or not the business has intangible value
• Prior transactions in the ownership interests of the subject business.
• The relative size of the ownership interest to be valued
• The market prices of publicly traded stocks or partnership interests, acquisition
prices for business interests, or businesses engaged in the same or similar lines of
business.

Income capitalization approach to business valuation

The income capitalization approach estimates the value of a business, business ownership
interest or security by calculating the present value of anticipated benefits.

The two most common income approach methods are capitalization of income and
discounted cash flow analysis or dividends method.
In (direct) capitalization of income, a representative income level is divided by a
capitalization rate or multiplied by an income multiple to convert the income into
value.

In discounted cash flow analysis and/or dividends method, cash receipts are
estimated for each of several future periods. These receipts are converted to
value by the application of a discount rate using present value techniques.

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Asset-based business valuation approach

In business valuation the asset-based approach may be similar to the cost approach
used by Valuers of different types of assets.

The asset-based approach is founded on the principle of substitution, i.e., an asset is

worth no more than it would cost to replace all of its constituent parts.

In the execution of the asset-based approach, the cost basis balance sheet is replaced
with a balance sheet that reports all assets, tangible and intangible, and all
liabilities at Market Value or some other appropriate current value.

The asset-based approach should not be the sole valuation approach used in assignments
relating to operating businesses appraised as going concerns unless it is customarily used
by sellers and buyers.

Reconciliation processes

The value conclusion shall be based upon

• the definition of value;
• the purpose and intended use of the valuation; and
• all relevant information as of the valuation date necessary in view of the scope of
the assignment.

Guidance Note 7 (GN7): Consideration of Hazardous and Toxic Substances in

Valuation

The objective of this Guidance Note (GN) is to assist Valuers in preparing valuations when
specific hazardous or toxic substances may influence property values.

Hazardous and toxic substances are included among a number of possible environmental
factors that, when appropriate, are specifically considered by Valuers.

Fundamental to the application of this GN are the Valuer's adherence to market-based

valuations, objectivity, and full disclosure of relevant matters.

This GN also provides for proper treatment and disclosure of hazardous and toxic
substance issues when valuing specialised properties and in other situations, which
preclude the application of Market Value concepts.

Hazardous or toxic substances involve specific materials that, by their presence

or proximity, may have adverse effect on property value because of their
potential to cause harm to life-forms. Such materials may be incorporated into
improvements to or on the site, or they may be found in or on the land. They may also be
offsite, but nearby.

Although the value effects of hazardous or toxic substances are derived from the market in
a Market Value assignment, such effects may not be as readily discerned when valuing
property for which a Depreciated Replacement Cost method is appropriate. To comply
with IVA 1 when applying the DRC method, Valuers should apply the principles of this GN

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to the extent possible and should fully disclose the extent of their analysis and the basis
for their conclusions.

Some hazardous or toxic substances can have material effect on property values.
However, as Valuers normally deal with Market Values, it is the market’s reaction to these
substances that is at issue in Market Value engagements.

Valuers are expected to correctly apply those recognized methods and techniques that are
necessary to comply with this Guidance.

When valuing property subject to some hazardous or toxic substance that adversely
influences property value, the Valuer should apply those processes necessary to
adequately reflect any such value losses, taking care to neither over- or understate the
value effects.

In a Market Value engagement, it is the Valuer’s responsibility to reflect the market effect
of the particular condition or circumstance.

Engagements may require valuation of the affected property under an assumption that any
value effect of the hazardous or toxic substances is excluded from the reported value.

Such engagements are acceptable, provided that the resulting valuation is not misleading,
that the client is informed of and agrees to this limiting assumption, and that the Valuation
Report clearly sets forth the limitation and the reasons therefore.

Guidance Note 8 (GN8): The Cost Approach for Financial Reporting - DRC

The purpose of this Guidance Note (GN) is to assist users and preparers of Valuation
Reports in the interpretation of the meaning and application of Depreciated
Replacement Cost (DRC) for financial reporting purposes.

DRC is an application of the cost approach that may be used in arriving at the value of
specialized assets for financial reporting purposes.

DRC may be the more applicable approach when comparable sales data is insufficient but
sufficient market data exists concerning costs and accrued depreciation. As an application
of the cost approach, it is based on the principle of substitution.

Depreciated Replacement Cost

The current cost of replacing an asset with its modern equivalent asset less
deductions for physical deterioration and all relevant forms of obsolescence and
optimization.

The Depreciated Replacement Cost (DRC) is commonly known as Reproduction Cost New
Less Depreciation (RCNLD).

In the absence of sufficient direct market evidence, DRC is regarded as an

acceptable method of arriving at the value of specialized assets but must

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incorporate market observations by the Valuer with regard to current costs and
depreciation rates.

The Valuer estimates the cost of a modern equivalent asset at the relevant valuation
date.

The Valuer then estimates depreciation by comparing the modern equivalent asset with
the asset being valued.

Depreciation rates may be all-encompassing or analyzed separately for:

 Physical deterioration
 Functional obsolescence
 External obsolescence

In estimating the physical deterioration of the actual asset resulting from wear and
tear over time, including any lack of maintenance, different valuation methods may
be used for estimating the amount required to rectify the physical condition of the
improvements.

Functional obsolescence can be caused by advances in technology that result in new

assets being capable of a more efficient delivery of goods and services. The application of
the optimization process will account for many elements of functional obsolescence.

Obsolescence resulting from external influences may affect the value of the asset.
External factors include changed economic conditions, which affect the supply of and
demand for goods and services produced by the asset or the costs of its operation.
External factors also include the cost and reasonable availability of raw materials, utilities,
and labor.

In the application of depreciated replacement cost, the Valuer shall ensure that the key
elements of a market transaction have been considered. These include:
 an understanding of the asset, its function, and its environment;
 research and analysis to determine the remaining physical life (to
estimate physical deterioration) and economic life of the asset;
 knowledge of changes in preferences, technical innovations, and/or market
standards that may affect the asset (to estimate functional
obsolescence);
 an analysis of potential external changes that may affect the asset (to
estimate external obsolescence);
 familiarity with the class of property through access to available market data;
 knowledge of construction techniques and materials (to estimate the cost of a
modern equivalent asset); and
 sufficient knowledge to determine the impact of external obsolescence on
the value of the improvements.

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Guidance Note 9 (GN9): Discounted Cash Flow (DCF) Analysis for Market
Valuations and Investment Analyses

Discounted Cash Flow (DCF) Analysis

 is a financial modeling technique based on explicit assumptions regarding
the prospective income and expenses of a property or business.
 is one of the accepted methodologies within the income capitalization
approach to valuation.
 is applied in valuations of real property, businesses and intangible assets; in
investment analyses; and as an accounting procedure to estimate value in
use.

DCF Analysis
 involves the projection of a series of periodic cash flows either to an
operating property, a development property, or a business.
 an appropriate, market-derived discount rate is applied to establish an
 indication of the present value of the income stream associated with
the property or business.
 the rate reflects both the return on the invested capital and the return of
the original investment, which are basic considerations of potential
investors.

DCF for Operating Real Properties

In the case of operating real properties, periodic cash flow is typically estimated as gross
income less vacancy and collection losses and less operating expenses/outgoings.

The series of periodic net operating incomes, along with an estimate of the
reversion/terminal value/exit value, anticipated at the end of the projection period, is then
discounted.

DCF for Development Properties

In the case of development properties, estimates of capital outlays, development costs,

and anticipated sales income are estimated to arrive at a series of net cash flows that are
then discounted over the projected development and marketing periods.

DCF for Businesses

In the case of a business, estimates of periodic cash flows and the value of the business at
the end of the projection period are discounted.

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Guidance Note 10 (GN10): Valuation of Agricultural Properties

Lands devoted to agricultural use are thus a principal subject of valuation services for a
multitude of reasons including private and public transfer of ownership, taxation,
determination of collateral for financing, and economic, land-use, and investment studies.

Reliable valuations of agricultural lands are essential to ensure the availability of capital
necessary to support the continuity of the economic base, to promote the productive use
of the land, to maintain the confidence of capital markets, and to meet the needs for
general financial reporting.

Providing a reliable and accurate valuation service for agricultural properties requires that
the Valuer have a sound knowledge and understanding of the physical and economic
elements that affect the productive capacity of agricultural lands and the value of the
commodities produced thereon.

The physical and economic characteristics of agricultural lands differ from those of non-
agricultural or urban environments in degree of importance.

In agricultural properties, the soil is the principal agent in production, varying in

its capacity to support a given amount of a particular commodity or class of
commodities.

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For some agricultural properties, the same use may extend over a long duration (e.g.,
forests harvested after 25 years), for others, the economic benefits can vary from year to
year, depending on the commodities the property is capable of producing.

The income stream associated with agricultural property will vary from year to
year, depending on the type of agriculture for which it is used, the commodities produced,
and the cyclical nature of the commodity markets.

Market Value must be recognized as the fundamental basis of valuation (PVS 1).

The Valuer shall arrive at the Market Value for the agricultural property, ensuring that the
valuation is market-derived.

For financial reporting, the Valuer shall apportion the Market Value in accordance with the
requirements of the IAS. For guidance, the reader is referred to PVA 1.

Where other bases of valuation are used, they must be distinguished from the Market
Value basis.

When estimating values other than Market Value as required for financial reporting,
depreciation schedules, or tax purposes, the Valuer must ensure that the distinction is
clearly defined and noted.

The agricultural use of the property may require extensive building improvements, e.g.,
barns, silos, dairy machinery. Such improvements, while requisite to the proper operation
of the property, are frequently secondary to the principal land asset. Their value must be
based on their contribution to the total value of the property regardless of their cost or
other measure.

Guidance Note 11 (GN11): Reviewing Valuations

A valuation review is a review of a Valuer’s work undertaken by another Valuer exercising

impartial judgment.

Because of the need to ensure the accuracy, appropriateness, and quality of Valuation
Reports, valuation reviews have become an integral part of professional practice.

In a valuation review, the correctness, consistency, reasonableness, and completeness of

the valuation are considered.

A valuation review provides a credibility check on the valuation under review, and tests its
strength by focusing upon
 The apparent adequacy and relevance of the data used and enquiries made;
 The appropriateness of the methods and techniques employed;
 Whether the analysis, opinions, and conclusions are appropriate and reasonable;
and
 Whether the overall product presented meets or exceeds Generally Accepted
Valuation Principles (GAVP).

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Administrative (Compliance) Review.
 A valuation review performed by a client or user of valuation service as an
exercise in due diligence when the valuation is to be used for purposes of
decision-making
 such as underwriting, purchasing, or selling the property.
 A Valuer may, on occasion, perform an administrative review to assist a
client with these functions.
 An administrative review is also undertaken to ensure that a valuation meets
or exceeds the compliance requirements or guidelines of the specific market
and, at a minimum, conforms to Generally Accepted Valuation Principles
(GAVP).

Desk Review.
 A valuation review that is limited to the data presented in the report, which
may or may not be independently confirmed.
 Generally performed using a checklist of items. The reviewer checks for
the accuracy of calculation, the reasonableness of data, the
appropriateness of methodology, and compliance with client guidelines,
regulatory requirements, and professional standards.

Field Review.
 A valuation review that includes inspection of the exterior and
sometimes the interior of the subject property and possibly inspection
of the comparable properties to confirm the data provided in the report.
 Generally performed using a checklist that covers the items examined in a
desk review and may also include confirmation of market data, research
to gather additional data, and verification of the software used in
preparing the report.

Technical Review.
 A valuation review performed by a Valuer to form an opinion as to whether
the analyses, opinions, and conclusions in the report under review are
appropriate, reasonable, and supportable.

The Review Valuer shall not consider events affecting the property or market that occurred
subsequent to a valuation, but only information that was readily available in the market at
the time of the valuation.

Reasons for agreement or disagreement with the conclusions of a valuation report should
be fully explained by the Review Valuer.
 Where the Review Valuer agrees with the conclusions of a valuation report,
reasons for such agreement should be fully explained and disclosed.
 Where the Review Valuer does not agree with the conclusions of a valuation
report, the reasons for such disagreement should be fully explained and
disclosed.
 Where the Review Valuer is not in possession of all the facts and information
on which the Valuer relied, the Review Valuer must disclose the limitations
of his or her conclusions.

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Guidance Note 12 (GN12): Valuation of Trade Related Properties

Trade Related Properties (TRPs) are individual properties, such as hotels, fuel stations,
and restaurants that usually change hands in the marketplace while remaining
operational.

These assets include not only land and buildings, but also fixtures and fittings
(furniture, fixtures and equipment) and a business component made up of
intangible assets, including transferable goodwill.

TRPs, are by their nature, specialized assets that are usually designed for a specific
use. Changes in market circumstances, whether structural to the industry or due to the
local competition or another reason, can have a material impact on value.

Valuation of Trade Related Properties

• Valuations of TRPs are usually based on assumptions that there will be a
continuation of trading by a Reasonably Efficient Operator, with the benefit
of existing lisences, trade inventory, fixtures, fittings and equipment, and
with adequate working capital.
• Profit generated, in excess of market expectations that may be attributed
to the manager is not included.
• The valuation conclusion may need to be broken down between the different
asset components for the purposes of financial reporting, for property taxation
or, when required, for property lending purposes.
• TRPs are considered as individual trading concerns and typically are valued
on the basis of their potential Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA), as adjusted to reflect the trading of a reasonably
efficient operator and often on the basis of either DCF methodology or by
use of a capitalization rate applied to the EBITDA.

• The components of TRP entity value are typically:

 land;
 building(s);
 fixtures and fittings (furniture, fixtures and equipment), including software;
 inventory, which may or may not be included (this should be disclosed);
 intangible assets, including transferable goodwill; and
 any licenses and permits required to trade.

Guidance

It is necessary to distinguish between the asset value of a Trade Related Property

and the ownership value of the business.

In order to undertake a valuation of a TRP, a Valuer will require sufficient knowledge of the
specific market sector so as to be able to judge the trading potential achievable by a
Reasonably Efficient Operator, as well as knowledge of the value of the individual
component elements.

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Guidance Note 13 (GN13): Mass Appraisal for Property Taxation

The objective of this Guidance Note is to provide a framework for the performance of
Mass Appraisal assignments for Ad Valorem Property Taxation.

The Guidance Note provides assistance in understanding recognized Mass Appraisal

methods, the design and implementation of property taxation systems and the relationship
of Mass Appraisal

For a property taxation system to be effective, the following elements must be in

place:
1. a legal system and legal infrastructure that define, support and protect
property rights;
2. a recording and inventory system for all parcels of land, which represents the
basis of taxation;
3. sufficient market data from which valuations may be determined;
4. sufficient resources and trained personnel to implement the system;
5. continued maintenance of the inventory and databases to ensure valuations,
and more equitable taxation; and
6. a process for sampling and testing developed models to ensure consistency in
methodology and application.

The Mass Appraisal process includes:

a. identifying properties to be appraised;
b. defining the market area in terms of consistent behavior on the part of property
owners and would-be purchasers;
c. identifying characteristics of supply and demand that affect the creation of
value in the defined market area;
d. developing a model structure that reflects the relationship among the
characteristics affecting value in the market area;
e. calibrating the model structure to determine, among other attributes, the
contribution of the individual property features affecting value;
f. applying the conclusions reflected in the model to the characteristics of the
property(ies) being appraised;
g. validating the adopted mass appraisal process, model, measurements or other
readings including the performance measures, on an ongoing basis and/or at
discrete stages throughout the process;
h. reviewing and reconciling the Mass Appraisal results.

Definitions of Terms

Ad Valorem Property Taxation. A revenue-raising procedure, based on the assessed

value of property related to a scale of charges defined by statute within a specified time-
frame.
Calibration. The process of analysing sets of property and market data to determine the
specific parameters operating upon a model.

Mass Appraisal. The practice of appraising multiple properties as of a given date by a

systematic and uniform application of appraisal methods and techniques that allow for
statistical review and analysis of results.

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Mass Appraisal Process. The procedures applied in mass appraisal assignments for
arriving at assessments and/or indices.

Guidance Note 14 (GN14): Valuation of Properties in the Extractive Industries

The purpose of this Guidance Note (GN) is to provide clarification and guidance on the
valuation of assets or property interests (rights) held by entities involved in the Extractive
Industries.

Extractive Industries comprise the Minerals Industry and Petroleum Industry, but
do not include activities focused on the extraction of water from the earth.

The Minerals and Petroleum Industries are characterized by the extraction from the earth
of natural resources, which may pass through a series of ownership, processing and
measurement stages.

It is important to Valuers and the users of valuation services that distinctions are made
among real property, personal property, and business interests involved in these stages.

Valuations in the Extractive Industries must often rely heavily on information provided by
(a) Technical Expert(s) or other accredited specialist(s) specific to the industry.

A typical characteristic of the Extractive Industries that sets them apart from
other industries or economic sectors is the depletion or wasting of natural
resources, that can be replaced in their original state by natural actions following
extraction only in special cases.

Examples of depleting or wasting natural resources include, but are not limited to:
a. metallic Mineral deposits containing metals such as copper, aluminum, gold, iron,
manganese, nickel, cobalt, zinc, lead, silver, tin, tungsten, uranium, and platinum
group metals;
b. non-metallic Mineral deposits such as coal, potash, phosphates, sulphur,
magnesium, limestone, salt, mineral sands, diamonds and other gemstones;
c. construction materials such as sand, gravel, crushed stone, and dimension stone;
d. petroleum deposits including oil, natural gas, natural gas liquids, other gases,
heavy oil, and oil sands.

The projected net earnings derived or potentially derived from an Extractive

Industry natural resource property is its main source of value. The net earnings
may vary from year to year, depending on the type of natural resource commodity, the
cyclical nature of the commodity markets and prices, and variations in production rate and
costs.

Mineral and Petroleum natural resource properties are valued primarily based on the
presence of Mineral or Petroleum Reserves, and Mineral or Petroleum Resources, or the
potential for discovery of Resources. The quantity and quality of such Reserves/Resources
may vary over time due to changing economic and technical advances, as well as
exploration success. Nevertheless, they are ultimately finite and will deplete over time.

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The property type(s) involved in valuation of Minerals and Petroleum Industry property
must be correctly identified in order to correctly select the applicable PVS, PVAs and GNs.

Naturally occurring in situ Minerals and Petroleum are a part of physical land and
Real Estate. The ownership of such in situ Minerals and Petroleum, an interest in such
natural resources, and the right to explore and extract such natural resources, are Real
Property, except where otherwise defined by statute.

Minerals and Petroleum are Personal Property during transportation and

processing.

The operation of a mine, quarry or petroleum well is a business activity, as is the

transportation and processing of Minerals and Petroleum. Such business activity is
generally conducted by an Extractive Industries business enterprise that owns real
property and personal property assets, and the activity contributes to the Going Concern
Value of the enterprise.

In conducting a Market Valuation, the three Valuation Approaches are generally available
for consideration:

Sales Comparison Approach (termed Market Approach for Business Valuations),

generally by indirect means (Income (Capitalisation) Approach, including market-related
discounted cash flow;

Cost Approach (termed Asset-Based Approach for Business Valuations), including

depreciated replacement cost and equivalent cost analysis.

The method most commonly used by businesses for investment decision-making within the
Extractive Industries is net present value analysis/discounted cash flow analysis
(NPV analysis/DCF analysis).

Guidance Note 15 (GN15): The Valuation of Historic Property

Historic properties are assets that embody a cultural, historic, and/ or

architectural heritage.

Historic properties may have legal or statutory protection because of their

cultural and economic importance. Many governments have enacted measures to
safeguard specific historic properties or to protect whole areas of special architectural or
historic interest.

The valuation of historic properties requires consideration of a variety of factors that are
associated with the importance of these properties, including
• the legal and statutory protections to which they are subject;
• the various restraints upon their use, alteration and disposal;
• and possible financial grants or rate/tax exemption to the owners of such
properties in some jurisdictions.

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The costs to restore and maintain historic properties may be considerable and these costs,
in turn, affect the value of properties.

The assessment of the highest and best use of historic properties will depend on the
specific restrictions that apply to them. In some situations, the use of historic properties is
limited to restoration for non-commercial use whilst in others, adaptation to some other
use, including commercial use is permissible.

The valuation of historic properties involves special considerations dealing with

• the nature of older construction methods and materials;
• the current efficiency and performance of such properties in terms of modern
equivalent assets;
• the appropriateness of methods used to repair, restore, refurbish, or rehabilitate
the properties;
• and the character and extent of legal and statutory protections affecting the
properties.

VALUATION OF HISTORIC PROPERTIES

The sales comparison, cost and income capitalization approaches may be employed
in the valuation of historic properties. The selection of the approach or approaches to be
used depends on the availability of data required to apply that or those approaches.

Sales Comparison Approach

In applying the sales comparison approach, the historic nature of the property may
change the order of priority normally given to attributes of comparable
properties.

It is especially important that the Valuer find comparable properties with historic features
similar to those of the subject.

Criteria for the selection of comparable properties include similarity in location (i.e., in
zoning, permissible use, legal protection, and concentration of historic properties),
architectural style, property size, and the specific cultural or historic associations of the
subject property.

A variety of adjustments may have to be made to the comparable sales. These involve
differences in location, costs of restoration or rehabilitation, or specific encumbrances.

Income Capitalization Approach

Historic properties having a commercial use are often valued by means of the income
capitalization approach.

The distinctive architecture and ambiance of an historic property contribute to its

drawing power under an income-producing use.

The income-producing use is considered to be the highest and best use of the
historic property.

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The income capitalization approach should consider the cost effectiveness of an

income-producing historic property in terms of the rental and/or commercial income the
property is able to generate.

Cost Approach

When applying the cost approach to historic property, the Valuer needs to consider
whether the historic features of a building would be of intrinsic value in the market
for that property.

Some historic buildings will be of value simply because of their symbolic status,
for example a famous art gallery where the building is as, or more, important than the
function it fulfills.

In other words, the service potential of such a building is inseparable from its historic
features.

The modern equivalent of such properties would need to reflect either the cost of
reproducing a replica, or if this is not possible because the original materials or techniques
are no longer available, the cost of the modern building with a similarly distinctive and
high specification.

In many cases the historic features will add no value, or be viewed as an

encumbrance by a purchaser in the market, for example a hospital operating in an
historic building. In such cases the modern equivalent would reflect the cost of a new
building constructed to a conventional modern specification.
In all cases the adjustments for physical deterioration and functional obsolescence
will need to reflect factors such as the higher cost of maintenance associated with
historic property and the loss of flexibility for adapting the building to the
changing needs of an occupier.

The land or site, upon which an historic property stands, may be subject to constraints
upon its use. In turn, any such constraints will affect land and overall property
value.

Historic, or heritage assets, for which there is no reliable or relevant sales evidence, which
have no potential for generating income, and which would or could not be replaced may be
incapable of reliable valuation.

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PVS HIGHLIGHTS

1. Concepts Fundamental to Generally Accepted Valuation Principles (GAVP)

This Section defines and explains basic valuation terms and concepts, including Real
Estate, Real Property, Personal Property, Asset, Market Value, and has a useful
explanation of Price, Cost, and Value as well as Highest and Best Use. It also introduces
the three market-based valuation approaches - the Sales Comparison, Income
Capitalisation, and Cost Approaches.

2. Code of Conduct
This Section addresses the ethical and competency requirements of Valuers in
professional practice which ensures that valuation results are reliable, consistent and
done in an objective manner.

3. Property Types
This Section discusses and distinguishes the four property types, namely: real property,
personal property, businesses and financial interests. It provides further explanation on
Real Property and the ‘bundle of rights’ such as freehold and leasehold interests,
easements, etc.

4. Market Value Basis of Valuation

This is the main ‘Core’ Standard providing the internationally (and inter-professionally)
accepted definition of Market Value, together with a full explanation and discussion of its
use. It is the principal basis of valuation.

5. Bases Other Than Market Value

This is the second ‘Core’ Standard. It deals with three non-market bases (as opposed to
methods) of valuation. The first reflects the benefits that a specific entity enjoys from
ownership of a specific asset, which is known as Investment Value. The second
represents the price that would be reasonably agreed between two specific parties such
as Fair Value, Special Value, Marriage Value, and also defines Going Concern Value and
Liquidation Value bases.

6. Valuation Reporting
This is the third ‘Core’ Standard which describes the critical importance of a Valuation
Report as the final step in the valuation process. While the use of the valuation and the
complexity of the property determine the level of detail appropriate to the Valuation
Report (Code of Conduct Standard, Section 7.2) this Standard sets out minimum
requirements, which are mandatory.

7. Valuation for Financial Reporting

This Section contains direct extracts from the International Accounting Standards (IAS)
and International Financial Reporting Standards (IFRS). It provides definitions and the
categorization of assets (including land and buildings, machinery, etc) for accounting
purposes.

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8. Valuation for Secured Lending Purposes
This Section underlines the requirement for Market Value to be the basis for all
mortgage valuations and is motivated by the need to reduce risk through exposure to
inaccurate valuations used by the banking sector.

9. Valuation of Public Sector Assets for Financial Reporting

This Section defines and explains the requirements for valuing assets owned or
controlled by government or quasi-government bodies. These are directly linked to
International Public Sector Accounting Standards (IPSAS). It provides for ‘measuring’
public assets at either ‘Historic Cost’ (less accounting depreciation) or ‘Fair Value’ (that
is, re-valued to Market Value).

10.Real Property Valuation

This Section has some good definitions of real property. There is also diagram on The
Valuation Process showing the three valuation approaches: Cost; Sales Comparison; and
Income. It also summarizes the appraisal process and the requirements to be complied
with a Valuer to arrive at a reasonable and realistic valuation. Section 5.9 etc provides
discussion on the various methods of land valuation, and 5.24 covers Highest and Best
Use.

11.Valuation of Lease Interest

This Section provides definitions and explanations of leasehold interests and the bundle
of rights, including a good diagram showing the hierarchy of rights which explains the
rights and interest inherent in the leasehold.

12.Valuation of Plant, Machinery and Equipment

This Section provides useful material for this specialize field but it is drafted with
individual ‘full’ valuations in mind rather than statutory valuations or mass appraisals for
taxation purposes.

13.Valuation of Intangible Assets

This Section discusses intangible asset valuation process and definitions on intellectual
property, legal life of intangible asset, goodwill, etc. and provides basis of comparison
with other types of valuations.

14.Valuation of Personal Property

This Section provides further guidance on the definition and valuation of Personal
Property which includes tenant’s fixtures and fittings and plant, machinery & equipment.
This Standard also makes it clear that any of the three main valuation approaches may
be used to value personal property.

15.Business Valuation
This Section covers the valuation of businesses for the purpose of shareholdings,
acquisitions and disposals. Its relevance to property valuation is mainly with regard to
the relationship between the property assets as part of a going concern and the overall
value of the business. All property asset valuers should be generally aware of the

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business valuation process but this Standard is primarily aimed at those providing or
procuring business valuations or providing asset valuations as part of such an exercise.

16.Consideration of Hazardous and Toxic Substances in Valuation

This Section provides useful guidance for situations where environmental conditions may
have an adverse affect on property values. It is an area that is becoming increasingly
relevant. In the Philippines it is particularly relevant to land-fill sites, and residential
areas affected by industrial pollution (and smoke and smells from waste dumps, etc) and
also power transmission lines.

17.The Cost Approach for Financial Reporting – (DRC)

Notwithstanding its reference to financial reporting, this is the basic guidance for DRC
valuations, which provides definitions of physical, functional and external obsolescence.
It also introduces the concepts of ‘subject to adequate profitability’ and ‘service
provision’ (in the case of public buildings).

18.Discounted Cash Flow (DCF) Analysis for Market Valuations and

Investment Analyses
This Section provides the approach in valuing businesses and certain types of
investment properties. It comes with a precaution with regard to the level of expertise
and specialist skill required in undertaking such valuations.

19.Valuation of Agricultural Properties

The Section provides good guidance on categorizing non-realty elements and also on
adopting different valuation approaches for different asset elements.

20.Reviewing Valuations
This Section distinguishes between administrative (compliance), desk, field, technical,
and valuation reviews. It crystallizes the purpose of the review and so it should be a
useful reference point even within government (for example, for senior valuers carrying
out informal reviews of their staff’s work).

21.Valuation of Trade Related Property

This Section relates to valuation of hotels, gas stations (i.e. petrol filling stations),
restaurants etc. It provides that the Profits Method is the ‘normal’ approach adopted for
individual valuations of this category of properties.

22.Mass Appraisal for Property Taxation

This Section discusses the methodology for Ad Valorem Property Taxation, or statistical
and economic studies under government administrative programs. It recognizes that
valuations undertaken for taxation purposes are carried out in compliance with local laws
and regulations, which may result in departure from full compliance with the Standards.

23.Valuation of Properties in the Extractive Industries

This Section differentiates between mineral extraction and the petro-chemical industry in
accordance with the UN Framework Classification and provides a good general
explanation of the industries and terminology used. It also differentiates between four

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categories of properties; exploration, resource, development, and production properties
and stresses the specialist nature of the quantifying reserves, etc.

24.The Valuation of Historic Property

This Section provides guidance on valuing heritage properties and reinforces the use of
the three main valuation approaches as applicable to the type and use of the property
being valued, e.g. functional/income producing, monumental, etc. The main point to
note is the purpose of the valuation, for example, why would you value it if there wasn’t
beneficial occupation.

BENEFITS AND IMPACT

 The valuation standards are envisaged to help LGUs in putting an order to

local revenue generation (largely RPTs) to maximize this by proper and orderly
valuation and to address inequities in taxation. Appropriate property valuation
could increase tax revenues with appropriate property classification (a major
hurdle in most LGUs) and could therefore generate resources to provide
goods and services to their constituents.
 Valuation reforms as exemplified by an improved valuation system and
procedures culminating in the preparation of a Schedule of Market Values that
reflects the real
 property market conditions would have as bottomline effects a positive revenue
impact on both the national and local governments and improved tax equity
among the taxpayers.
 Improved financial governance (LGU and national agencies, confidence in
land markets and inflow of investments are among the expected benefits.
 Sustain consistency and reliability of valuations and reporting.
 Promote competency of practitioners at par with international best practices
through the standards as basis in the development of the valuation course by:

1. enabling stronger linkages between the technical development aspects of

valuation with the contents of the education curriculum;
2. aligning the requirements for new competencies and skills amongst valuation
professionals resulting from the valuation reform with the development of the
curriculum.

The problems cited during the LAMP phase I were the absence of national standards
and multiplicity of methods for valuation coupled with lack of training for valuers in
the absence of formal valuation training in the Philippines has lead to conflicting
methodologies; distorted real property values; politicized application of RPT tax
rates/assessment levels; and limited access to public records and limited use of
information technology in the appraisal process. It is envisaged that the
implementation of the Philippine Valuation Standards will mitigate if not eradicate
these problems.

 Keep abreast with international valuation standards updates and trends.

 Effective regulation of the valuation practice.

Page 79 PHILIPPINE VALUATION STANDARDS