US, Global Property Valuation Standard-Setters Coordinate Requirements

WASHINGTON, DC—The locally-based Appraisal Foundation and the International Valuation Standards Council, which is based in London, are working on converging as much as possible their respective standards. While this news would ordinarily fall in the category of inside baseball -- that is, of interest only to the immediate players -- the changes in the industry and global markets has drawn a crowd of interested onlookers, cheering on the harmonization.

Namely, the global capital real estate capital flows has led to an increased need for greater coordination between these two usually distinct and very separate agencies. "There are relatively few deals in which an appraiser would have to comply with both sets of standards for the same deal," John S. Brenan, director of Appraisal Issues at The Appraisal Foundation told GlobeSt.com.

"But when a deal does require it, it tends to be very large, it tends to have a high dollar amount, it tends to be a portfolio transaction that is located in several countries including the US." If the buyer is a publicly-owned entity answerable to shareholders or investors, it is easier to explain the value of a deal in metrics that they understand, Brenan says.

However even the smaller, one-off transactions that buyers from China, Europe and Canada make would benefit from a convergence of sorts -- the comfort level of being able to value a property using familiar standards could mean a lot in such transactions.

What Convergence Means to the Valuation Profession

Convergence, though, in this case bears little resemblance to the convergence projects that have been underway for years between the Financial Accounting Standards Board and the International Accounting Standards Board.

Rather, what the Appraisal Foundation and the International Valuation Standards Council hope to accomplish is to streamline their respective requirements and documents so an appraiser can more easily value a building using both standards at the same time.

"We envision having two drafts," Brenan says. "One is a check list for an appraiser of what he has to do additionally if he is appraising a building to our standards, the Uniform Standards of Professional Appraisal Practice (USPAP)." Ditto for the second draft: it would provide a checklist of additional steps an appraiser working off of IVSC's International Valuation Standards would have to take.

Prior to the end of this year, one preliminary draft should be ready and the second one -- if that is ultimately the path the two entities take -- will be ready by early 2016, Brenan says.

The Expanding Use of Valuations

There is another reason why this work is being watched with greater interest than it might have received at one time. Determining valuations have become far more complicated now as their use in business transactions have expanded.

"Valuation now goes well beyond traditional real estate appraisal to include valuations of businesses, intangible assets and intellectual property," said Steven Napier, partner at Ernst & Young's Transaction Advisory Services, Valuation & Business Modeling, in a prepared statement.

"And the uses for these valuations also have expanded, such as to support a host of tax and financial reporting requirements, for traditional corporate planning and development efforts, and in fact for a wide range of transactions, including mergers, divestiture, financing or restructuring."

In short, improving the quality of valuations will make it easier to evaluate the end work product and verify the quality of the methodology and underlying data. Best case scenario, or one of them at least: Harmonized valuation standards will lessen the risk that a poorly performed appraisal with incomplete data creates an issue in an international transaction.

Investor confidence would be increased by the transparency and comparability between the standards, says Royal Institution of Chartered Surveyors managing director for the Americas Neil Shah, "especially at a time when transactions are often becoming more complex and more regulated."

Indeed, even the folks grappling with the far more complicated and nuanced work of the world's accounting standard-setters, FASB and IASB, would welcome some clarity in this space. "The current differences between IVS, US valuation standards and US GAAP have created unnecessary confusion in the valuation and accounting professions," said Jeannette Koger, vice president, member specialization and credentialing of the American Institute of CPAs (AICPA), in a prepared statement. "The AICPA supports the convergence of valuation standards, and we are optimistic that these efforts will be a step towards reconciling these differences and more closely unifying the valuation profession."