As the prospect of a double-dip recession rears its head in global markets, the launch of a new set of international valuation standards is highly significant. Two years in the making, the standards were launched in July this year by the International Valuation Standards Council (IVSC).

The 2008 global financial crisis provided a key impetus for the new standards because it raised awareness of the importance of valuation. As valuation provides an essential underpinning to the global financial system, the IVSC has been thrust into the forefront to come up with better tools that will reduce the chances of another crisis.

The crisis revealed a number of systemic weaknesses in the practices of financial institutions and governments, leading to calls for greater transparency, accountability and consistency.

This was not news to Asia where the 1997 financial crisis led to similar worries. Efforts to improve national valuation standards in Thailand, for instance, took off after that crisis.

The difference is that now the world has a set of global standards that are designed to be much more in tune with current conditions. Adopting these standards may have a big impact on asset values in some areas.

First, let's look at some background. The IVSC was founded in 1981 but in recent years has grown significantly in stature and importance. It has the task of setting valuation standards that can apply globally in much the same way as the International Accounting Standards Board sets accounting standards.

The IVSC is an independent, not-for-profit private-sector organisation acting in the public interest. It does this by offering standards to capital market organisations, regulators and market participants, promoting strong ethical values, encouraging quality practices and supporting the development of a competent valuation profession around the world.

The Thai Valuers Association is one of 67 members of the IVSC from 50 countries. The IVSC does not set national standards, but many countries adopt all or part of its standards on a national level.

For instance, the Royal Institution of Chartered Surveyors (RICS), the leading global body for the property profession, writes valuation standards for its members in its renowned Red Book. The Red Book explicitly adopts IVS, which it states "set out internationally accepted, high-level valuation principles and definitions".

In 2008, the IVSC underwent a major restructuring and now comprises three boards that bring together leading figures from the financial world and senior valuation professionals. The IVSC's Standards Board (IVSB) compiled the new standards.

The IVSB published an "exposure draft" for the new standards in June last year and solicited comments from organisations and individuals around the world. Most of the key issues were thrashed out in IVSB meetings and in open forums held in London, New York and Hong Kong in late 2010. Following consultation with other stakeholders, the board approved the new IVS in March of this year and they were published in July.

CONFIDENCE BUILDING

The key objective of the new edition of the IVS is to boost confidence in the valuation process for business owners, investors, lenders and others who rely on the valuations for investment and other financial decisions. The standards aim to bring consistency and transparency to the key input assumptions, models and processes involved in valuation. This is what global markets increasingly demand and is vital to restoring investor confidence.

The new standards are divided into three series. The first, the 100 series, covers the overall framework which sets out generally accepted concepts and principles that underlie valuation. Topics covered include independence and objectivity; price, cost and value; markets, market activity and market participants; valuation bases, additional assumptions and special assumptions; and valuation approaches.

The 100 series also includes three general standards that lay down procedures that should be common to all valuations - things that need to be agreed in the scope of work with the client, things that need to be done when actually conducting the valuation and things that need to be reported.

Some of the requirements may seem obvious, but often at least some are omitted, which can lead to serious issues. For instance, in the fast-moving world of finance, it is not always possible to agree to all items in the scope of work upfront, but it is vital that this is done before the valuation is complete.

The 200 series comprises five asset standards that focus on specific supplementary issues that need to be considered when valuing specific assets.

The series currently includes standards on valuing businesses, intangible assets, plants and equipment, real property and financial instruments. The last is a completely new addition for the standards and fills an important gap in the market.

There are various projects under way to add to this list, including possible new standards on extractive industries, forestry and liabilities.

Finally, the 300 series currently has two application standards that focus on valuation for specific applications: financial reporting and real property for secured lending. The first of these is directed at IFRS and may be appropriate for other accounting standards.

WHAT'S IN THE WORKS?

While the IVSB continues to work on new standards, particularly new asset standards, the focus now shifts to its sister professional board (IVPB), which is compiling technical papers and best-practice guidance that go beyond standard-setting to deal with some of the critical issues raised in the standards.

Guidance is now in various stages of preparation dealing with, among others, the thorny topics of depreciated replacement cost, discounted cash flow, investment property under construction, fairness opinions and financial instrument valuation methods.

Both boards cooperate closely on all these projects to ensure consistency of approach as well as cross-fertilisation of ideas. Other important projects that the boards are working on include a paper on valuation uncertainty and on valuer/auditor guidance.

With its full and growing programme, the work of the IVSC will continue to be of great importance to financial markets and economies around the world - as well as to all those involved in owning, occupying, trading and advising on the world's assets.