Premise and Standard
of Value
When invited to provide an
opinion on the value of an entity
or asset, expert valuers need to
understand the purpose of the
valuation before they can decide
the most appropriate standard
and premise of value to adopt.
In this article, we look at the
differences between standards
of value.
‘Value’ is generally defined as:
“…an economic concept referring to
the monetary relationship between
goods and services available for
purchase and those who buy and sell
them.”1
Premise of value means an
assumption regarding the most likely
set of transactional circumstances
that may be applicable to the subject
valuation2. The premise of value takes
two primary forms:
Going concern: the entity will
continue to operate in its current form
after the valuation date; or
Liquidation or break-up: the
entity will cease to operate post
valuation date.
The majority of valuations are prepared
on a going concern basis. Where an
entity is not generating sufficient profits
or there is an intention to wind up the
business, the liquidation premise of value
may be appropriate.
If the entity is to be valued on a going
concern basis, the valuer usually adopts
one of the following standards of value:
Market Value;
Fair Value;
Fair Market Value;
Special Value;
Value to Owner; or
Value in Use.
Each of these standards of value are
explained in more detail below.
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October 2012
Market Value, Fair Value and
Fair Market Value – What’s the
Difference?
The terms Market Value, Fair Value and
Fair Market Value are widely viewed as
being synonymous.
Market Value is the most objective or
quantitative approach, however using
Market Value may understate the real
value of an asset if it has strategic
importance to particular buyers.
The current tax law does not define
Market Value in any general provision. It
is defined in the ‘Definitions’ section of
the Income Tax Assessment Act 1997
(ITAA 1997), but not in a way that fixes
its meaning in all contexts (section 9951). The Australian Taxation Office refers
to case law as the primary source of a
definition for a valuer when assessing
Market Value unless a specific statutory
definition exists.
Market Value in Australia is generally
defined using the Spencer v
Commonwealth of Australia (1907) HCA
70 definition containing the following
elements:
the willing but not anxious vendor and
purchaser;
a hypothetical market;
the parties being fully informed of
the advantages and disadvantages
associated with the asset being
valued (in the specific case, land); and
both parties being aware of current
market conditions.
International Valuation Standards: General valuation concepts and principles 4.5
Accounting Professional and Ethical Standards Board: APES 225 Valuation Services
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What is ‘Value’ and ‘Premise of Value’?
Tax law specifically defines Market Value
in the context of:
shares and rights for employee
share schemes (ESS) – Subdivision
F of Division 13A of the Income Tax
Assessment Act 1936; and
superannuation – subsection 10(1)
of the Superannuation Industry
(Supervision) Act 1993.
Where a statutory definition is provided
for a particular context, it must be
used. The Australian Taxation Office
also requires that when assessing
Market Value, the ‘highest and best
use’ of an asset should be recognised.
This takes into account potential for
use that may be higher than the current
use of that asset.
Fair Value means the amount for which
an asset could be exchanged, or a
liability settled, between knowledgeable
willing parties in an arm’s length
transaction3.
Fair Value requires the assessment
of price that is fair between two
specific parties, taking into account
the respective advantages and
disadvantages that each will gain from
the transaction4. For example, synergies
between two parties may mean that the
price that is fair between them is higher
than the price that might be obtainable
on the wider market5. Therefore, Fair
Value is often interpreted as a form of
Special Value.
International accounting and valuation
standards bodies have adopted Fair
Value for financial reporting purposes as
a means of relating financial statements
to market-based values:
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‘…the amount for which an asset
could be exchanged between
knowledgeable, willing parties in an
arm’s length transaction6’.
The Fair Value definition is most often
used in valuing property, plant and
equipment in financial statements.
According to the Australian Taxation
Office, Fair Value can be measured with
reference to the following:
Quoted market price in an active
and liquid market, if available (for
example, listed company shares);
Current or recent market prices for
the same asset or similar assets (for
example, comparable property sales
in the same geographical area);
Net present value (if an established
cash flow can be identified), also
referred to as the sum of the
discounted future net cash flows;
and
Depreciated replacement cost (DRC)
– for specialised assets that are not
traded in an active and liquid market.
Fair Market Value (used synonymously
with Fair Value by International
Accounting Standards) is the value
of the asset or equity interest on the
basis of what a hypothetical prudent
purchaser, who is a willing but not
anxious buyer, would be prepared to
pay to a vendor, who is willing but not
anxious to sell, in circumstances where
both buyer and seller are fully informed
of all operational and financial details7.
On the surface the two definitions
appear one and the same. However, it
is important to note that implicit in any
definition that includes the term “market”
is that a hypothetical market exists with
ready and willing buyers and sellers of
the asset being valued. There is also
sufficient time to properly market the
asset being sold8 and the term “market”
assumes that there are no restrictions on
the asset being transferred.
The Courts both in Australia and
overseas have drawn a distinction
between Fair Value and Fair Market
Value, particularly where the former is
defined as the value of the shareholder’s
proportionate interest in a going concern
rather than the market price of shares9.
Special Value
Special Value refers to an extraordinary
additional element of value over and
above Fair Market Value10 in that the
potential purchaser may obtain a unique
benefit from purchasing an asset or
equity interest in an entity. Additional
elements of value can include such
factors as potential economies of
scale, reduction in competition and
the securing of a source or outlet for
products11. The existence of special
value means that the purchaser may
be prepared to pay a consideration
over and above the value that other
purchasers are willing to pay.
Value in Use
Value in Use represents the discounted
present value of the future cash flows
expected to arise from:
the continuing use of an asset; and
from its disposal at the end of its
useful life12.
International Accounting Standard 32 Financial Instruments: Presentation
International Valuation Standards Committee IVS2 Para. 6.3
International Valuation Standards Committee IVS2 Para. 6.3
Australian Accounting Standards Board, 116 – Property, plant and equipment
Spencer v Commonwealth of Australia (1907) HCA 70. Abrahams v Commissioner of Taxation (Cth) (1945) 70CL
“The Valuation of Businesses, Shares and Other Equity” 4th Edition, Wayne Lonergan, 2003
Geoffrey Alan Holt & Anor v Robert Hedley Cox SCNSW (1994) DLC 456
International Valuation Standards Committee IVS2 Para. 3.8
“The Valuation of Businesses, Shares and Other Equity” 4th Edition, Wayne Lonergan, 2003
AASB 136 Impairment of Assets Para 6
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Premise and Standard of Value
For Further Information
Please contact your local advisor:
Lauren Cusack
Principal, Corporate Finance
Tel +61 2 9619 1895
lauren.cusack@crowehorwath.com.au
Bill Jansen
Consultant, Corporate Finance
Tel +61 2 9619 1867
bill.jansen@crowehorwath.com.au
Deanna Chiang
Senior Manager, Corporate Finance
Tel +61 2 9619 1962
deanna.chiang@crowehorwath.com.au
Courtney Barros
Analyst, Corporate Finance
Phone: +61 2 9619 1613
courtney.barros@crowehorwath.com.au
Value in Use is the value a specific asset
has for a specific use to a specific user
and is therefore not-market related.
Value in Use focuses on the value that
specific property contributes to the entity
of which it is a part, without regard to
the amount that might be realised upon
its sale in an open market13.
Value to Owner
It is common to adopt a “value to
the owner” approach in Family Law
disputes. Although not considered to
be a valuation standard, it is generally
interpreted to mean the value that the
owner of an asset would pay to retain
the asset rather than be deprived of it14.
For example, where a minority interest
is held in a family company, a regular
and substantial dividend stream to
this minority shareholder could have a
much higher value to the owner as a
family member than to a hypothetical
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third party purchaser who is unable
to influence the parent to declare a
dividend in their favour due to a lack
of control.
Conclusion
Regardless of the premise and standard
of value adopted, Australian Professional
and Ethical Standards Board (APES)
225 Valuation Services requires that a
valuation expert set out the valuation
approach, methodology and procedures
adopted in determining the estimate of
value in their report
When instructing a valuer or reading a
valuation report, care should be taken
to ensure that the correct standard of
value has been adopted by the valuation
expert. Adoption of a standard of
value that does not fit the purpose of
the valuation could lead to a material
difference in the valuation of an asset.
International Valuation Standard 2: Valuation Bases Other Than Market Value
Harrison & Harrison (1996) FLC 92-682
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