IBA GUIDELINES ON RELISABLE VALUE-PAGE NO-28 OF Handbook on Policy, Standards and Procedures for Real Estate Valuation by Banks and HFIs in India, November 2009.
Fair Value is normally equated to Market Value. For other purposes, Fair Value can be distinguished from Market Value. Fair Value requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction. Fair Value is a broader concept than Market Value. Although in many cases, the price that is fair between two parties will equate to that obtainable in the general market, there will be cases where the assessment of Fair Value will involve taking into account matters that have to be disregarded in the assessment of Market Value.
A common application for Fair Value is for assessing the price that is fair for the shareholding in a business, where particular synergies between two specific parties may mean that the price that is fair between them is different from the price that might be obtainable in the wider market. In contrast, Market Vlaue requires any element of Special Value, of which Synergistic Value is an example to be disregarded.
Special Value can arise where an asset has attributes that make it more attractive to a particular buyer or to a limited category of buyers than to the general body of buyers in the market.
These attributes can include the physical, geographic, economic or legal characteristics of an asset. Market Value requires the disregard of any element of Special Value because at any given date, it is only assumed that there is a willing buyer, not a particular willing buyer.
Synergistic Value can be a type of Special Value that specifically arises from the combination of two or more assets to create a new asset that has a higher value than the sum of the individual assets. When Special Value is reported, it should always be clearly distinguished from Market Value.
A bases of valuation should not be confused with assumptions that may also be required to clarify the application of the basis to a specific situation. Some terms that are often used to describe a valuation are not distinct bases of value as they describe the state of the asset or the circumstances under which it is assumed to be exchanged, rather than the underlying measurement objective. The value may be measured on one of the bases defined above at 2.3 (c) or on the basis of Market Value defined in Standard 1. Examples of such terms that are in common use include :
– Going Concern Value
– Liquidation Value(orderly liquidation and forced liquidation )
– Salvage Value
Each of these are further explained hereunder :
Going Concern Value – This describes the situation where an entire business is transferred as an operation 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 the situation where a group of assets employed together in a business are offered for sale separately, usually following a closure of the business. Although often associated with forced sale, these terms have distinct meanings. There is no reason why assets cannot be liquidated by an orderly sale following proper marketing.
Orderly Liquidation Value ( Realisable Value ) – it is the estimated gross amount expressed in terms of money, that could be typically realized from a liquidation sale, given a reasonable period of time to find a purchaser(s) with the seller being compelled to sell on an as is where is basis as of a specific date.
Forced Liquidation Value ( Distressed Value ) – is the estimated gross amount expressed in terms of money that could be typically realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as is where is basis as of a specific date.
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 alternative use or for recycling.
IN SIMPLE WORDS
The definition of forced sale value, Liquidation value (orderly liquidation value & forced liquidation value) & realisable value are given here.
1. Forced Sale value :
It is an estimate of the property’s price (including running or closed down unit) realised in open market on “as is where is basis” in shortest possible time. The forced sale is conducted by the authority by personal negotiations amongst limited group of buyers or by public auction but it is conducted with the sense of utmost urgency (say within a period of 3 months to 6 months). The sale of the assets is conducted by the authority (Court / Bank) to recover legal dues from the owner of the property. It is the case of an unwilling seller in urgent need of money to meet with his legal obligations. In fact, the seller is compelled and forced to sell the property to liquidate it in terms of money to clear his debt. Auction sale of Non Performing Assets by Banks is one such example. Sale of property by borrower of bank loan by finding out prospective buyer by private negotiations is also an instance of forced sale value.
Normally buyer brought by borrower by private negotiations offer better price than that is likely to be realised under auction sale by the bank.
This forced sale value is very similar to liquidation value, with the difference that in liquidation value there is no scope for private negotiations. It is purely a case of sale by public auction under the supervision of the court.
2. Liquidation value :
It is an estimate of the price that would be realised by putting up the property of an enterprise or an individual, for auction sale in the market on “as is where is” basis. In short, it is an auction value. The enterprise may be a running unit or a closed unit. Normally the auction is carried out under order of the court and is also supervised by the court.
Though the sale under Public Auction is carried out after proper advertisement and due publicity, the sale cannot be said to be with reasonable market exposure. Only limited persons out of all prospective buyers available in the market participate in the auction.
When sufficient time period is given (say 3 to 6 months) for the auction / sale to liquidate the assets it is called ‘Orderly Liquidation Value’.
When the assets are auctioned as quickly as possible (say less than 3 months time) with very little market exposure within a specified and very short time period it is called a ‘Forced Liquidation Value’. There is no negotiated sale but an auction sale. However, the concept of legal compulsion to sale exists in both case.
3. Realisable value :
This term in common parlance would mean net money likely to be realised by owner by sale of the property. It can be defined as the estimated selling price of the property in the open market less the estimated cost of completing the sale transaction (Disposal cost). It is thus net amount left in the hands of the seller after payment of expenses like advertisement cost, legal and brokerage charges, property tax arrears, auction expenses etc.
REF-Handbook on Policy, Standards and Procedures for Real Estate Valuation by Banks and HFIs in India, November 2009.
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