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Int. J. Critical Accounting, Vol. 10, No. 6, 2018 1
Copyright © 2018 Inderscience Enterprises Ltd.
Fair value in the professional valuation: concept and
Andrey I. Artemenkov
The International Valuation Centre,
The State University of Management (GUU),
22D, Hazait St., Haifa, 3522357, Israel
Abstract: The paper addresses value measurement bases used in
professional valuation. We, specifically, consider semantic and
methodological features of equitable/fair value as a sui generis basis of
Professional valuation. As used in the field of professional valuation,
equitable/fair value is the logically necessary basis for estimating values-
in-exchange for illiquid assets traded on the markets where the operations of
“the law of one price” are very weak. Its logical relevance is demonstrated
with the aid of a proposed tool based on Venn-diagrammatic approach
(VDA). Then we analyse equitable/fair value estimating techniques
resulting from V. Galasyuk’s and the transactional asset pricing approaches
(TAPA). The contribution of the paper is in analysing the main aspects of
existing equitable/fair value estimation theories in terms of where they fall
in the normativist/positivist continuum of economic analysis. It is hoped this
paper will help provide a new perspective enriching wider debates on fair
value in the accounting measurements world.
Keywords: accounting measurements; equitable (fair) value;
Venn-diagrammatic approach to valuation-bases; the international
valuation standards; IVS; the European valuation standards; professional
valuation; transactional asset pricing approach; TAPA; Galasyuk fair value
Reference to this paper should be made as follows: Artemenkov, A.I., Lodh, S.
and Nandy, M. (2018) ‘Fair value in the professional valuation: concept and
models’, Int. J. Critical Accounting, Vol. 10, No. 6, (2018) pp. 1-10
2 A.I. Artemenkov
Biographical notes: Andrey I. Artemenkov is a specialist in the area
of Economic Measurements and Professional Valuation and teaches
online courses on these subjects at the State University of Management
(GUU), where he holds a position of a Research Fellow. He is also the
Head of Financial Analysis Unit at the International Valuation Centre Ltd.
He holds a PhD in Economics from the State University of Management
and is a member of the Royal Institution of Chartered Surveyors (RICS). He
is an author of more than 30 research publications on Investment Analysis,
Accounting Measurements and Professional Valuation.
1 Introduction
There is a diverse body of literature exploring the concept of fair value, as used in the
accounting measurements specialism. In recent times, this concept has been consolidated
in the international financial reporting standard (IFRS) 13 ‘fair value measurements’, and
the associated USGAAP standard erstwhile known as FASB 157. As an accounting basis
of measurement, fair value enjoys some prominence in the theoretical debates about its
pro-cyclicality (e.g., see Courtois, 2010; Biondi, 2011; Donatien and Edimo, 2015; Xie,
2016; Uzma, 2017), and historical context (Georgiou and Jack, 2011). But in the
Professional Valuation sense, this accounting concept of value is more often referred to
and conceptualised as the ‘market value’, e.g., in the international valuation standards
(IVSs) editions (IVSC, 2017; Dorchester, 2011). What professional valuers
internationally come to mean under the fair value is a differing notion, the discussion and
treatment of which is presented throughout this paper and which might be interesting for
accountants (accounting measurements experts) to get to grips with, including in order to
impart new critical perspectives on the debate about the effects of fair value measurement
system in the accountancy world and its possible alternatives. The consensus of
professional valuation specialism worldwide has now for a score of years been embodied
in such formal documents as national and IVS. On the international level, the IVS (IVSC,
2017), published since late 1990s by the organisation now known as the international
Fair value in the professional valuation 3
valuation standards council (IVSC), represent the foundational standards document for
the field of professional valuation globally and in them is also found distilled the current
state of the fundamental body of knowledge within the valuation profession. From early
2000s, the IVSC has unanimously promoted the fair value agenda and in that had a
support from the international accounting standards board (IASB) (a respective
cooperation memorandum between the two bodies has been in effect for quite a while
now). Over the years, this has resulted in a convergence of views being expressed about
the fair value (in the accounting measurements world) and the market value (in the
professional valuation sense) – to the point of harmonising these similar bases of
measurement in use across the two economic measurements specialisms (IVSC, 2014).
Such was the achieved consistency of the views that when valuers were to have been
engaged by accountants to report on Fair value for accounting needs, the prescribed IVS
basis of measurement that had to be used for that should have been the market value
(IVSC, 2011; Deaconu and Buiga, 2010). However, since the IVS 2007 edition valuation
methodologists at IVSC are looking beyond their infatuation with fair and market values
in an attempt to advance reputational standing of the professional valuation and innovate
its techniques, which were heavily criticised immediately following the 2008–2009
economic crisis as being too mechanistic and too pro-cyclically tied to the market to have
any independent, or fundamental, public utility dimension. This dissatisfaction with the
professional valuers’ role to act just as a ‘speaking market’ has resulted in a lot of
soul-searching among the valuation methodologists, including their urge to advance
forward the valuation methodology along the lines of ‘something behavioural’ (Courtois,
2010), or something more fundamental than the Market value as a foundational
measurement objective for the profession (e.g., developing measurements of such
fundamental, or long-term, value spin-offs as the ‘mortgage lending value’ (MLV)
concept becomes a priority in the evolution of the profession [see RICS, (2017),
The promotion of equitable/fair value to the status of an IVS-recognised valuation
basis going on since 2007 is a sign of such aspirations – as this paper will show, illustrate
and develop the point, including providing a review of its fast-evolving measurement
techniques. It is hoped that the following discussion will be found to be of some
relevance in promoting further critical perspectives related to the accounting fair value
One note on the terminology, confusingly disparate as between the accounting
measurements and professional valuation worlds, is in order: what in professional
valuation from 2007 onwards (and, occasionally, still) is widely referred to as ‘fair value’
is anything but fair value in the accounting measurements sense. The IVS-recognised
basis of valuation first introduced in their 2007 edition and designated as ‘fair value’ has
been imbued with a meaning almost opposite to its more popular and long-used
homonym in the field of accounting measurements . In that sui generis sense, fair value
has caught on in the professional valuation practice, with its sui generis definition also
being carried over to subsequent editions of the European valuation standards (EVSs
2009, 2012, 2016). To avoid the confusion that subsequently developed between fair
value as used in the accounting measurements sense and fair value as used in the
professional valuation sense, in the current edition of the IVS (IVS 2017), the fair value
basis has been renamed as ‘equitable value’. On the one hand, through such renaming, it
can be conjectured, IVSC emphasises, and quite rightly in our view, a substantial
4 A.I. Artemenkov et al.
economico-ethical connotation implicit in the concept, and, on the other hand, saves it
from the constant confusion and mixing up with fair value in the accounting
measurements sense under IFRS, as explained below.1
2 The fair value homonym
As is known, the broad field of economic measurements comprises a wide spectrum of
microeconomic measurement practices (Artemenkov et al., 2008). Of primary interest to
us in the context are, of course, the professional valuation and the accounting
measurements. Under the professional valuation, in accordance with the standard use of
this term in the IVS standards (IVSC, 2007, 2017) is commonly understood a distinct,
professionally recognised and regulated field of economic measurements associated with
the development of valuation estimates primarily in respect of (rather heterogeneous)
asset classes with low-to-medium liquidity that are traded on less-than-efficient markets,
where the economic ‘law of one price’ is not fully operational (Artemenkov et al., 2008).
In this regard, in terms of its methodological orientation, the professional valuation
occupies an intermediate ground in the continuum of economic measurement practices
between the assessment of the efficiency of investment projects (‘projects’-as a category
of planned activities that are non-tradeable and illiquid by definition) and the investment
– financial valuation (i.e., valuation of fungible and liquid assets, such as publicly traded
shares and financial instruments, which circulate on the markets with apparent spot
efficiency, where the law of one price prevails, but where the inter-temporal efficiency
aspects are called into question [e.g., see Damodaran (2012) for the review of this field of
economic measurements].
The related field of accounting measurements (as it is known in the IFRS context and
that we also mention under the same name)ties in with value-based economic
measurements and treats of the valuation of different asset/liability classes with different
liquidities – but having the prime regard to the underlying methodological accountancy
conventions; The practice of accounting measurements often, therefore, amalgamates the
elements from the above pure types of value-based economic measurements.2
The IVSs, published by the international valuation standards council (IVSC), and the
European Valuation Standards [The Blue Book published by TEGoVA (EVSs)] are the
reputed global standards for professional valuation developed with the macro-economic
import of harmonising valuation practices and applicable methodology in order to limit
unfair cross-border arbitrage opportunities attendant on national differences in
valuation/pricing of property (the TEGOVA’s EVS standards) or as between other asset
classes (the IVSC standards). The IVSC standards used to provide best practice interfaces
with the contiguous professional economic measurement practices, such as for
IFRS-compliant accounting measurements, (e.g., ‘valuations for financial reporting’
application standard in IVS 2003–2011 editions), but this attempt to build interfaces
through standards with the contiguous areas of economic measurements has been
unfortunately abandoned in the latest IVSC standards edition (IVS 2017), with the
retirement of all previously-issued Application Standards.
So with the explicit reference to the pronouncements in the earlier editions of IVSC
standards (IVSC, 2007) it shall be noticed that, while in the field of Accounting
measurements the accepted notion of ‘fair value’ implies practically the same as what
appraisers from the field of Professional valuation are more wont to call ‘market value’3,
Fair value in the professional valuation 5
i.е., the measurement basis aimed at the best reflection of the prevailing level of market
prices in respect of an asset under consideration, – equitable/fair value4, as used in the
professional valuation sense, now takes on a particular distinct meaning as a valuation
basis associated with the values-in-exchange and used for structuring transactions, where
the asset, on the contrary, is not exhibited on a broad market (if any market at all), and
the valuation is conducted with a view to reflecting and reconciling, in the best way
possible, the interests of each of the specific transacting parties in question. In other
words, In Professional valuation, equitable/fair value is the basis of valuation that is
particularly relevant for the work of appraiser acting as a consultant when structuring
transactions. Acting in such a role, the appraiser has the obligation not so much to reflect
any external observable market artefacts, or their central tendencies, available in relation
to the asset under consideration (such as market prices, average yields on the market,
etc.), as to explicitly reflect and incorporate in the estimate developed by him/her the
interests of the specific parties to a prospective transaction with the asset under
consideration (of course, the appraiser, in the process of structuring such a fair value
estimate, shall reflect all the market data related to the asset in question, but only to the
extent this is deemed appropriate for the context of valuation). In this respect,
equitable/fair value could also be a natural valuation basis of choice in the circumstances
where the market for the asset in question is not efficient, such that the operation of the
economic ‘law of one price’ is imperfect or in other words, under circumstances when it
is difficult to understand what the ‘market value’ is, because It is not clear what the
‘market’ is, or if it exists at all.
Example: Municipality N is meaning to transfer a kindergarten building that is in its
full ownership on the terms of ‘market value’ to the current kinder garden operator
company, with the easement obligation for the latter to continue using the kindergarten
building for its intended purpose. A general practice for valuing specialised properties for
this purpose in the jurisdiction in question is based on the replacement cost, and such a
practice would certainly satisfy the seller, but the buyer-operator, approaching the
kindergarten valuation , as it were, under the ‘accounts/profits method’, will not be able
to fund such an estimate, as it would have the effect of catastrophically raising the
contributions of parents to the kindergarten in order to cover the costs of the building
buyout. A potential ‘spread’ of the valuation estimates for the property on the part of the
buyer and the seller is too great, and the valuer does not risk taking the position of either
side (if he were to take the buyer’s side (i.e., use the ‘accounts/profits method’), then
there would be a significant risk of being accused of undervaluing the government
property). The valuer refuses to participate in the preparation of such a valuation report,
as the objective criteria for estimating the ‘market value’ is not at all clear in such a case.
The deal fell through. The kindergarten operator refused to continue using the property.
However, application of the equitable/fair value basis, if such a basis were to have been
provided for in the legislation/scope of work document, could in this case have facilitated
the task of the valuer, reducing his risks to an acceptable level in order to be able to
undertake such an assignment.
The IVSs 2017 provide the following definition for the equitable/fair value concept5:
“Equitable Value is the estimated price for the transfer of an asset or liability
between identified knowledgeable and willing parties that reflects the
respective interests of those parties”.
6 A.I. Artemenkov et al.
P. 50.2 of IVS standard 104 further states that equitable value calls for an estimate of “the
price that is fair between two specific, identified parties considering the respective
advantages or disadvantages that each will gain from the transaction. In contrast, market
value requires any advantages or disadvantages that would not be available to, or incurred
by, market participants generally to be disregarded.”
Thus, equitable/fair value occupies an intermediate position between the investment
value and the market value. It would seem that one can successfully apply ‘Occam’s
Razor’ and not introduce a new entity into the valuation bases ‘pantheon’, instead using
the investment value in such cases. But this view is erroneous. We must understand the
fundamental dichotomy that exists in the general economic value theory (both classical
and neoclassical) between value-in-use and value-in-exchange. The investment value is a
value-in-use category, while structuring any transaction and developing an estimate of
price in the context of such a transaction would require, by the definition of the task
itself, the use of a valuation basis that is a value-in-exchange. Of course, the investment
value, by definition being a value-in-use, is not logically suitable for these purposes. At
the same time, equitable/fair value, projected on the basis of the investment values of
each of the transacting parties, would ideally satisfy the requirements of the task.
3 Equitable/fair value in the context of Venn-diagrammatic presentations
for professional valuation bases of value
The Venn-diagrammatic approach (VDA) to illustrating the interrelationships between
different valuation bases globally used in the professional valuation (outlined below)
would be handy here in illustrating the point – as applied to some abstract market that
does not have a full spot efficiency (i.e., where the economic ‘law of one price’ is not
operational to the full extent). See the basis-of-value interrelationship on the tableau
(Figure 1).
Analysing the diagram presented in Figure 1 and inspired by the method of
presentation of logical relations called ‘Venn-diagrams’6, one can notice that it is
comprised of two ‘hemispheres (or axes) of value’ – in line with the traditional division
of valuation bases between values-in-use and values-in-exchange (still evident in IVS
2007–2013 editions, but presently dropped). On the bottom axis of the diagram (Axis 1),
subjective valuations (i.e., ‘investment values’ as a sole type of the genus of values-in-
use, for the purposes of this exposition) with which the set of market participants at a
particular market endow a particular object of exchange (asset) are ranked in an
ascending order. For example, the bottom axis in Figure 1 illustrates a situation of an
asset market with five participants, with participant A endowing the subject asset with the
lowest valuation [investment value IV(A)], and participant E – with the highest
[investment value IV(E)]; participant’s C subjective valuation/investment value is in the
middle of the distribution (IV(C)).7 Such subjective valuations have a lot to do with the
prospective uses for the asset envisaged by the participants – in general, most participants
would have subjective valuations clustered in the middle of the bottom-axis distribution
and corresponding to highest-and-best (HABU) uses8 as evidenced on the market.
However, the IVS and EVS standards also allude to super-efficient uses as well – such as
those implicit in synergistic/special values, the buying party to implied transactions in
which correspondingly envisages for the asset uses more efficient than HABU. Needless
to say, on weakly efficient markets for which the satisfaction of the law of one price
Fair value in the professional valuation 7
remains an unattainable goal (such are the markets for non-standard property and
specialised or illiquid assets with which the professional valuation often deals), there are
also found ‘left-leaning’9 participants with suboptimal uses which are not completely
jostled out of the market on account of the competition. Such participants, under the
circumstances just mentioned, could also be a factor in the market pricing mechanism and
should not therefore be discounted out of hand in our analysis.
Figure 1 Venn-diagrammatic representation of the logically complete set of valuation bases (see
online version for colours)
Source: Authors’ presentation
The above distributional discussion of participant’s investment values is logically ‘prior
to exchange’, i.e., is one of the starting position of the market participants before any of
the (spot) transactions in the market take place. Now we move up the diagram into the
‘hemisphere of exchange’, i.e., to the upper axis (Axis 2) on which the
values-in-exchange which can result from the interaction of investment values of market
participants (depicted, as just discussed, on the bottom axis – ‘the use hemisphere’) are to
be plotted. To clarify, numeric magnitudes of value appearing on the upper
‘exchange-values’ axis (Axis 2) are aligned to match those on the bottom ‘investment
values’ axis (Axis 1) and both axes are unidirectional.
The necessary condition for market participants to transact in subject asset and form
transaction prices on the free market is that the buyer’s (B) investment valuation with
which they endow the subject asset should be higher than the seller’s (S) investment
8 A.I. Artemenkov et al.
valuation: IV(B) > IV(S). Otherwise, both parties would lack an inducement to transact.
The difference between both valuations, IV(B)-IV(S) , is often referred to in economics
literature as a ‘gain-from-trade’.10
Often the gain is split/shared in some proportion between the transacting parties. If
the gain is to be shared equitably/equally in an exchange transaction, then the principle of
Isosceles triangulation, as depicted on the diagram, will be the mechanism of
transcription of values from the hemisphere of values-in-use to the hemisphere of
values-in-exchange (see below under the heading of ‘normative theories for estimating
equitable/fair values’ –for a more thorough discussion of this principle). For example, a
negotiation of the investment values of participants C and D, IV(C) and IV(D), recorded
on Axis 1,into transaction price T(CD) recorded on the values-in-exchange axis (Axis 2),
as shown with the aid of the isosceles triangle IV(C)-TC(D)-IV(D) straddling both
‘hemispheres’, would represent a transaction between participants C and D, in which the
gains-from-trade have been split in equal proportions. On the other hand, negotiation of
the transaction between ‘sub-optimal’ participants A and B on the diagram into exchange
price T(AB) manifests an ‘unfair’ split of gains-from-trade between both participants,
where participant A gets most of the benefits (‘economic effect’) from executing the
transaction (the IV(A)-T(AB)-IV(B) triangle is non-isosclesic and visibly slants to the
Obviously, on the evolved more-or-less efficient markets with some transaction
regularity, most of transactions between market participants in the values-in-exchange
‘hemisphere’ will be clustered in terms of the recorded transaction prices in the region
corresponding to the modal/central tendency/HABU uses on the values-in-use Axis 1
(say, illustratively, will be clustered in the region M1-M2 on Axis 2). That is, the region
delineated by vertical lines passing through M1 and M2 points on Axis 2 and
encompassing the bulk of participants’ values-in-use distribution on Axis 1 will
notionally represent a region of transactions the prices in which are deemed by market
participants and observers, according to their evolved heuristics and market experiences,
to be ‘to a market level’ and generally correspond to the HABU uses for the subject asset.
Such a cluster, or cloud, of representative ‘market prices’ will have some central
tendency, which in professional valuation is discussed under the rubric of ‘market
value’.11 The more efficient the market, the narrower is the ‘cloud’, in other words, on
efficient markets the particular recorded market prices are tightly clustered and deviate
less from their central tendency regarded as the market value.
What about other values-in-exchange bases? Obviously, given the arrangement of
investment values of market participants on values-in-use Axis 1, nothing precludes
‘suboptimal’ participants A and B to transact mutually, even though a price attainable in
the transaction between them cannot be to a ‘market level’ delineated by the interval
M1-M2 on Axis 2. Under the circumstances, the price T(AB) on the diagram is feasible
albeit it will not be representative of the market level of prices and, generally, the seller A
will have greater incentive to transact with more use-efficient participants than B.12 On
the other hand, consider participant D on the right margin of HABU distribution and a
super-efficient (synergistic) participant E. Obviously; it will make little sense for
participant D to sell his asset at the ‘market prices’, because the in-use utilisation of the
asset by them will yield greater benefits, according to their reckoning. However, the
participant D might be eager to sell the asset for a higher than market price to a
synergistic buyer E, who endows the asset with even a superior value-in-use. Again, if
the market is generally thin or inefficient a transaction between them priced at T(DE) has
Fair value in the professional valuation 9
a chance of succeeding, even though, given a greater efficiency of the market, the
synergistic buyer E will still be motivated to transact with the (fungible) asset at its
market price level (e.g., by triangulating a transaction with seller-participants B or C with
reference to M1-M2 range on Axis 2).
A valuer can be called to advise on the ‘draft prices’ in projected transactions
between the participants on both ‘polarities’ of Axis 1 distribution (i.e., to advise to A–B,
D–E participant sets). Obviously, one basis of valuation (s)he can employ to develop
such an advice would be called ‘fair’ (in EVSs 2016) or ‘equitable’ (in IVSs 2017) value,
which can be other than the market value, numerically. We see that, logically and
distributionally, the notion of equitable/fair value is broader than the notion of market
value, the latter dealing with, or aimed at, the aggregation of price data in the M1-M2
range, while the former spanning the entire length of Axis 2 (F1-F2 range). But on pure
logical (albeit not economic!) terms, the market value is, indeed, but a subset of
equitable/fair value (F1-F2 range subsuming, as it were, the M1-M2 range). The
Standards also operate with the notion of synergistic or special values (which are
obviously species of value within the values-in-exchange genus). Our analysis makes it
clear that special or synergistic values are logically also a subset of equitable/fair values
to the right of M1-M2 distribution, while the range of equitable/fair values to the left of
M1-M2 distribution is bereft of any reference term, though ‘price-drafting’ to the left of
the region can occur in the valuation practice as well.
The distinctions made in the diagram for the (spot, but not intertemporal13) bases of
value in Professional Valuation obviously form a logically complete self-contained set. It
is hoped that the presented diagram will be an immediately useful tool for valuers to find
where they ‘stand’ in solving the problem incidental to their particular valuation
assignment. Additionally, the diagram itself, based as it were on the ‘sublimation’ of
values-in-use into values-in-exchange, which is the basis of all thinking in the Austrian
and neo-classical schools of economics, also makes manifest the dangers of referring to
diverse costs as ‘values’14, thus multiplying species of values beyond those logically
justified by a neoclassical analysis. If one were to perfect the now-defunct classification
of valuation bases incidental to the IVSs 2007–2013 sets, it would also be three-fold:
1 values-in-use
2 values-in-exchange, and, on separate classificational grounds
3 cost-based bases of valuation – to wit, substituting as #3 class there a vague legalistic
category of ‘statutorily defined’ bases of valuation.15
The use of the diagram underscores as well the specificity of professional valuation as a
specialism within economic measurements. The employment of the equitable/fair value
concept makes sense only for markets with imperfect efficiency, where the law of one
price is liable to a breakdown that is the area, indeed, where professional valuers have the
primary involvement. Valuers primarily involved in the investment-financial valuation
specialism have little need for the concept, since they deal with markets at least with the
spot efficiency (e.g., markets for quoted financial instruments), but with the ones where
the inter-temporal efficiency is sometimes in question. Therefore, for such valuers the
concepts of fundamental values/MLV have some topicality, which is less relevant in the
Professional Valuation specialism.
10 A.I. Artemenkov et al.
4 Theories for estimating the equitable/fair value
Having discussed the notion of equitable/fair value in relation to other bases of valuation,
we will move on to discuss the theories for its estimation existing as of today. The
contribution of this paper is in proposing to analyse/differentiate each theory of
equitable/fair value in terms of the approach it takes within the normativist-positivist
continuum of economic analysis (e.g., see Blaug, 1992).
4.1 Normative theories for estimating equitable/fair values
The logical analysis of equitable/fair value discussed so farhints at the possibility of its
direct estimation based on the respective estimates of investment values for each of the
parties to a transaction. Indeed, head-on derivation of equitable/fair value can proceed on
this basis. Important input data to the problem would then be the magnitudes of
investment values of a particular buyer and seller in a specific planned transaction. These
values can be, in turn, determined both on the basis of elements of the income approach
(i.e., the use of the DCF analysis for values-in-use calculations purposes), and the
elements of the cost approach (for example, the reproduction/replacement cost will be a
relevant input for calculating the investment value to the seller of a reproducible asset).
Furthermore, an important prerequisite for the transaction at fair value shall be the
condition that the investment value to the buyer (IVb) exceeds the investment value to the
seller (IVs): IVb > IVs. Without this premise, a seller with the title to the subject of
valuation will simply not have enough motivation to make a deal, since it will not be
advantageous for him/her to give up the title at a price less than their own investment
value estimate. If this condition is met, the appraiser’s task will be to offer a just/fair
division of the resulting ‘gains-from-trade’ (IVbIVs) between the parties to the
transaction. From the need to somehow split these gains between the parties in an
acceptable/fair manner the (still common) name for this basis of valuation is derived, i.е.,
fairness here is indeed understood primarily in the ethical sense (fair = equitable), plus
the appraiser contributes in the formation of this normative aspect of fairness/justice.
Neither IVS, nor EVS professional valuation standards pronounce on how to
implement the normative aspect16 of fairness in estimating the Equitable/fair value (i.e.,
how to divide the ‘gains from trade’). Here, and in conformity with the set of possibilities
for isoscelestic or non-isoscelestic principles of triangulation depicted in Figure 1, two
points of view are possible: first, the gains-from-trade, as a general principle, should be
divided equally between the parties, or, as a second option, in some other, but fair
proportion.17 It may be interesting to note that the first principle (of dividing the
gains-from-trade by half) goes back to Aristotle, who first attempted to build a normative
theory of value/bargaining, which lasted for almost two millennia, passed on through the
scholastics, and only in the most recent times, starting from Cantillon, came to be so
successfully substituted by the positivist theory of value (Artemenkov, 2009):
“Therefore the equal is intermediate between the greater and the less, but the
gain and the loss are respectively greater and less in contrary ways; more of the
good and less of the evil are gain, and the contrary [to this] is loss; intermediate
between them is…, the equal, which we say is just; therefore corrective justice
will be the intermediate between loss and gain”.18
Fair value in the professional valuation 11
In the context of professional valuation, a noteworthy development of the Aristotelian
theory of ‘bargaining’ (or catallactics19) relying on the use of modern tools of economic
analysis has been occasioned in recent monographs by Galasyuk relating to the
decision-making theory (Galasyuk, 2016, 2018), in which he also proposes the use of the
principle of equal division of gains-from-trade (‘economic interests’) in the transaction.
The monographs present a neat way to reconstruct the theory of decision-making and
valuation based on four logically possible types of decisions to be made by a two
economic agents in each transaction. The investment value in this case is based on the
decision type R11To continue exercising control over the object to be exchanged’. The
value of each type of the decision is considered endogenising the benefits and costs,
including the possible costs of transacting incidental to the transacting agents/parties
(transaction costs).
From the theory of ‘fair exchangeable value’ proposed in Galasyuk (2016, 2018), the
following formula for determining the equitable/fair value, based on the investment
values (the values of the R11 type decisions, in the terminology of the author) of each
party to the transaction and their expected transaction costs, results20:
=FV (1)
FV equitable/fair value for the subject property in the transaction
IVs seller’s investment value
IVb buyer’s investment value
TCs seller’s transaction costs
TCb buyer’s transaction costs.
As seen, this formula endogenises transaction costs of the parties and is based on the spit
of gains-from-trade between them in equal proportions (i.e., it makes the ‘economic
interests’ of the buyer and the seller equal to each other). Thus, the important difference
between equitable/fair value and the market value is that in Equitable/fair value models
the transaction costs of the parties should be made endogenous (incorporated explicitly
into the model in order to be able to reflect the respective interests of the parties most
closely). Quite on the contrary, the international (and many domestic) conventions for
estimating the market value (as well as fair value in the accounting measurements sense)
assume that the market value shall be determined without having regardt o any
transaction costs of the transacting parties (e.g., see p.5.11.3. of standard 1 in EVS 2016
edition). At the same time, the estimation of Equitable/Fair value, as can be seen in
formula (1), depends not so much on absolute amounts of the transaction costs of the
parties as, rather non-trivially, on the difference between the transaction costs of the seller
and the buyer: only accounting for the difference in such costs in equitable/fair value
helps to balance the economic interests of the parties to the transaction. It appears that
focusing on transaction costs in valuation methodology is not a seemingly minor
preoccupation, but is an important manifestation of incorporating transactional
‘behavioural frictions’ into the valuation practices and bases used.
12 A.I. Artemenkov et al.
In common with the market value, equitable/fair value is a spot basis for valuation; at
the same time, it should be assumed that, in the context of determining equitable value,
any consideration of the exposure period factors is not appropriate: a particular buyer and
particular seller, being specific parties, have already ‘found each other’. Quite similar, but
in some ways different from this state of affairs, the market value, as defined in IVS
2017, is still nominally determinable on the assumption that ‘The exposure period occurs
prior to the valuation date’, i.e., that the exposure period has already passed, as it were,
on the valuation date, and, like the water under a mill, is therefore irrelevant for valuation
as it had ceased to affect any prior liquidity of the asset [see IVS 104, paragraph 30.2 (g),
in IVSC (2017)]. However, in spite of this definition of the Market Value in the IVS
standard 104, the IVS Standard 105 still recommends that valuers take into account
discounts for lack-of-liquidity (DLOMs), at least when applying the market approach to
valuation [paragraph 30.17 (a), IVS 105]. Therefore, it follows from this state of affairs
that the thesis that exposure period precedes the date of valuation in determining the
market value is not an absolute rule. But one of the most fundamental differences
between the equitable/fair value and the market value bears repeating: the equitable value
is more tied to specific estimated economic interests of the parties to the transaction,
while the market value relates to recent price evidence on the market in the
neighbourhood of its central tendency.
The division of gains-from-trade by half, implicit in the above formula (including due
to a ‘2’ in the denominator of the formula for equitable/fair value, and not, for example,
some weighing factor of the investment values of the parties), as has been mentioned, is a
normative principle that is not explicitly contained in the IVS. In principle, the
gains-from-trade can be split by appraisers in some other (but contextually and ethically
fair!) proportion in the process of developing equitable/fair value estimates. The
corresponding result, if justified, will also be called equitable/fair value (although, if the
international standards allowed, it would have been better to simply call such a result a
‘draft price’ or, as Galasyuk (2016, 2018) does, call it ‘exchange value’ (distinct from
‘fair exchange value’). Even so, any normative theory of dividing the gains-from-trade
based on the amounts of the investment values/values of the decisions of each of the
transacting parties is handicapped by some unavoidable limitations as to what shall be
considered ‘fair’, or ‘not very fair’, and how to prove that the investment values of each
of the parties are reflected correctly in the resulting valuation, etc. – obviously the valuer
will have to assume his entire responsibility in these respects. This is certainly not a very
convenient and practicable state of affairs from the point of view of practicing
professional valuers.
Would it be possible to formulate a theory of estimating equitable/fair value in a more
positivist manner – without any allusion to the need to ‘divide anything’?
4.2 Positivist theories for estimating equitable/fair value
Indeed, fundamental proposals for formulating a more positivist-oriented (or, specifically
in our context, a less ‘divisive’) theory for estimating equitable/fair values are available.
In particular, the transactional asset pricing approach (TAPA), developed by Michaletz in
a series of publications that appeared over the last decade (Michaletz, 2005, 2007;
Michaletz and Artemenkov, 2018), deserves a wider recognition as an instrument for
estimating the equitable/fair values of assets, as well as the market value of less liquid
assets (Andrews, 2011).
Fair value in the professional valuation 13
TAPA model is a dynamic model that directly considers equitable/fair value as a
value-in-exchange, without its decomposition into the corresponding value-in-use
elements (i.e., investment values of the parties to the transaction). Instead of explicitly
dividing the gains-from-trade [as in model (1)], this model is based on the principle of the
lack of ‘super-interest’ for any of the parties to the transaction, namely, it builds upon a
transactional principle that the capital incorporated in a transaction at an equitable/fair
value must grow in the economic and investment environment of both the buyer and the
seller at an equal rate –so that in each period n, following the valuation/transaction date
zero and during the life of the subject asset, the following balance is fulfilled, which
encapsulates the principle of a fair transaction according to TAPA:
SS= (2)
S Amount of capital in the investment portfolio of the seller in the period/year n
following the placement of proceeds21 from the sale of subject asset at equitable
value (PV) into their investment portfolio (seller’s investment portfolio):
SPV ri
where rs(i) – is an accumulative rate of return in the seller’s investment portfolio:
generally, it is time-variant and specific for each period i (i = 1 … n); 0-period of
S Amount of capital in period/year n following the completion of an equitable/fair
value transaction with the subject asset accumulated in the investment portfolio of
the buyer due to placing into it the stream of net operating income receipts from the
use of subject asset (NOIi) generated in periods from 0 ton, plus the reversionary net
realisable value of the subject asset for the buyer at the end of period n(Sres):
()( )()
bb b
bb b
bb b
NOI r i S
NOI r r r n
NOI r r r n
NOI r i r i r n NOI S
=⋅+ ⋅+ ⋅+ +
+⋅+ ⋅+ + +
+⋅+++++ ++ +
where rb(i) – is an accumulative rate of return in the buyer’s investment portfolio:
generally, it is time-variant and specific for each period i (i = 1 … n); 0-period of
Substituting into (2) expressions (3) and (4) and then solving it for the period 0
equitable value (PV) variable (i.e., as at the date of valuation/transaction), enables to
obtain the following expression (Michaletz, 2007; Michaletz and Artemenkov,
14 A.I. Artemenkov et al.
() ()
1() 1()
ri ri
Expression (5) is a generic formula for estimating equitable/fair value under the TAPA
dynamic model, which, as we see, is based on the general principles of the discounted
cash flow (DCF) analysis modulated by the dynamic principle of transactional fairness
[formula (2)].23 A distinctive feature of this model is in accounting for the investment
characteristics of transacting parties via the parameter of cumulative rates (rates of return)
in their investment portfolio (these parameters are assumed time-variant in the general
TAPA model). The dynamics of growth in investment portfolios, therefore, can be
different for the buyer and seller, and it is through this parameter that the individual
investment characteristics/interests of the parties to the transaction are reflected, the
Equitable/fair value being a parameter equalising the capital gain of each of the parties
due to their transaction with the subject asset. Thus, the general TAPA model for
estimating equitable/fair values (5) has much in common with the standard DCF analysis
(for example, the one used in calculating the investment values), except that it does not
use a single rate of return (discount rate), but dual rates – rs(i), rb(i) – reflecting the
forecast cumulative dynamics (rates of return) on the seller’s and buyer’s investment
portfolios, respectively. Thus, instead of reconciling the explicit spot variables
(investment values) into an equitable/fair value estimate [as in model/formula (1)], in the
TAPA model [formula (5)] this reconciliation is mediated indirectly through reconciling
the dynamic/forecast variables (prospective returns on investment portfolios of the parties
to the transaction) – clearly, it is nowhere explicitly required ‘to divide anything in half’,
therefore the appraiser’s responsibilities are better hedged by the analysis of
‘second-order’ variables.
At the same time, it is also possible to simplify model/formula (5) by introducing into
it a number of simplifying assumptions; for example, assuming that the return dynamics
in the investment portfolios of the parties to the transaction were to be equal, rs(i) = rb(i)
= r(i), leads to the following reduction for (5):
(1 ( )) (1 ( ))
ri ri
However, unlike in the ‘DCF market analysis’, the uniform rates of return/discount
should not be based on any presumed overall market models let alone any normative
market models, such as the CAPM model (Sharpe, 1964), but should reflect specific
expectations of the returns on investment portfolios of the parties to the transaction –
whereas such portfolios can be structured on principles other than the normative
principles of portfolio diversification implicit in the modern portfolio and financial
theories, and can also easily include illiquid assets, as they usually do (Pagliari, 2017;
Anglin and Gao, 2011; Chu, 2010); also see Gallimore and Gray (2002) for the role of
sentiment in the portfolio selection process).24 In this respect, the TAPA theory, also
approaching the valuation of assets on the basis of the portfolio principle, just like the
modern portfolio theory (MPT) does, imposes far fewer normative restrictions on the
Fair value in the professional valuation 15
specifics of structuring the investment portfolios of the transacting parties (and,
moreover, it is explicitly a multi-period model, unlike standard Sharpe’s-Lintner’s
CAPM). Given that the rates of return on investment portfolios are time-variable and may
be different for different periods, the ‘general’ and diverse ‘partial’25 TAPA approach
formulas for forecasting portfolio-level rates of return/discount rates can be applied by
appraisers in the context of equitable/fair value estimations under formulas (5), (6). In
particular, a convenient formula for forecasting discount rates that now also began to find
application in actuarial practice (Andrews, 2011) is the following one:
(1 ( ))
() ()
(1 (1))
vi R
ri vi
+ (7)
which is based on the assumption that the portfolio-level rates of change in income u(i)
and the capital gain rate sv(i) in the investment portfolios of the transacting parties are in
sync for each period i (i= 0 … n): v(i) = u(i)). In this formula, R denotes the
portfolio-level yield in an investment portfolio comprised of n assets (i.e., period 1
portfolio-level current yield):
where summations in the numerator and denominator above are the summations of
first-period net income and current (date-of-valuation) values, respectively, for the assets
making up the investor’s portfolio in question.
To save appraisers implementation time, joint use of formulas (6) and (7) has now
been programmed for easy spreadsheet applications in excel (see
/file/d/0B8hVnKfTz9_2NldEYnRlX21DMk0/view.), so applying TAPA principles is
easy, provided one uses it with the full understanding of its assumptions (see Michaletz,
2007; Michaletz and Artemenkov, 2018).
The TAPA theory also provides for the uses of some additional simplifying
assumptions regarding (6) and (7), which are not covered here, but can be utilised by
appraisers in some cases of estimating equitable/fair values. In particular, under a number
of assumptions, formulas (6) and (7) reduce to even simpler and more well-known direct
capitalisation formulas, Gordon, Hoskold, Inwood, – endowing these formulas with a
special meaning and peculiar assumptions when applied to the determination of
equitable/fair value (Michaletz, 2007).
As a result, as we see, the application of the dynamic principle of transactional
fairness [formula (2)] in TAPA allows us to develop a theory for estimating equitable/fair
values in a more positivistic key, and avoid using, in this epoch of positivist economics,
any blatantly normativist principles that do not fit in well with the tenor of neoclassical
value theory.
16 A.I. Artemenkov et al.
5 Conclusions
Our analysis in the paper shows that, almost simultaneously with the recognition of the
equitable/fair value basis in the international standards of professional valuation,
convenient and practical theories have been developed in the field of economic
measurements to enable carrying out equitable/fair value appraisals. These theories are
now actively entering the body of knowledge for professional valuation specialists
required to practice both on international and national levels. At the same time, national
appraisal legislation and standards, especially in developing countries, is still being very
conservative in recognising this valuation basis, which was also previously vitiated by the
almost universal confusion of fair values in the professional valuation and accounting
measurements senses. In Section 3, we showed with the aid of the VDA tool that
equitable/fair value is a logically necessary and consistent basis of valuation in the field
of professional valuation related to the valuation of less-than-perfectly-liquid assets
traded in markets, where the ‘law of one price’ fails to manifest its effects in full. This
valuation basis would allow to easily tackle valuation problems arising in the field of
professional valuation that relate to the structuring of transactions and their pricing issues
(i.e., the role of appraiser/valuer acting as a consultant), as well as problems related to the
market valuation of less-liquid or specialised assets. It may seem that such problems do
not arise or rarely arise in the field of regulated professional valuation (e.g., eminent
domain appraisals), but the example given by us involving the valuation of a municipal
kindergarten for the purposes of its privatisation (transfer to the operator) shows that this
is far from being the case. Since the recognition of equitable/fair value in IVSs, EVSs as
well as in the draft IVSC professional standards, the theory of equitable/fair value
estimation is becoming an indispensable element in the training of professional appraisers
– both internationally, and in national jurisdictions. Accounting measurements experts
may heed this process going on in the neighbouring specialism of professional valuation
and probably draw some lessons and develop new perspectives in order to facilitate a
move away from the theoretical near-monopoly of the accounting fair value in their field.
As explained, in the professional valuation this move away from the parallel concept of
market value is already in evidence through the incorporation, evolution and promotion
of the equitable/fair value concept in the IVSs (IVSs 2017, EVSs 2016). In particular, we
believe that equitable/fair value, by explicitly incorporating transactional perspectives of
economic agents, represents a way forward for the aspiration to incorporate ‘behavioural
aspects’ into value measurements, without also bringing in any baggage of the
‘irrationalities’ (with eliciting which the behavioural economics research is sometimes
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1 In order to avoid such mixing of connotations, we refer to the concept in its professional
valuation sense as ‘equitable/fair value’ throughout the text, thus also making it clear that the
‘fairness’ adjective is used in the sense of ‘equity’, not that of ‘marketness’, which latter
connotation Is obviously generally presumed in the accounting fair value sense [e.g., as in
‘village fair’ (fair = market); thus, conceptually, fair value in the accounting measurements
sense = market value in the professional valuation sense].
2 With often disproportionate borrowings from the investment-financial valuation viewpoints –
for which the IFRS 13 ‘fair value measurement’ standard has been often criticised (Biondi,
3 As was mentioned, in the accounting measurement sense, fair value is understood more in a
sense the word ‘fair’ is used in such contexts as ‘village fair’ (i.e., village bazaar, or market,
i.e., synonymous with the market value), but not fair in a sense of any explicit fairness, or
normative equity/justice per se. This always poses an issue for translating the accounting
expression ‘fair value’ into indigenous languages, such as Slavic languages or Hebrew, where
the explicit connotation of fairness as equity almost always pops up unwittingly.
4 To this day, TEGoVA’s European valuation standards (EVSs 2016) have not changed the
nomenclature for fair value in the professional valuation sense and continue using the
homonym of fair value to designate this valuation basis, while the IVSC standards (IVSs
2017) have switched to calling it ‘equitable value’. This again prompts our again explains our
somewhat clumsy hyphenated reference to equitable/fair value throughout this text, where a
room for doubt still arises as to what meaning to attach to this professional valuation basis of
5 The TEGoVA’s EVS 2016 fair value definition in the professional valuation context is also
consonant to the one cited here.
6 A Venn diagram (also called primary diagram, set diagram or logic diagram) is a diagram that
shows all possible logical relations between a finite collections of different sets.
7 If there are more than several participants on the market, then it is possible to draw a
distribution curve for the participants in respect of their subjective value distributions, say, a
bell-shaped Gaussian curve – as attempted in the diagram on Figure 1 – suggesting that most
Fair value in the professional valuation 19
participants on the market endow the subject asset with the ‘middling’ subjective
valuations/investment values.
8 HABU use is yet another infelicitously named concept in professional valuation over which
the debates have been raging at least since the incorporation in the 1930s of the appraisal
profession in the US – which has resulted in the popularisation of this formal term, for which
such a nominal use of the superlatives is certainly unguarded.
9 In terms of the bottom axis on the diagram.
10 Elsewhere known as the magnitudes of transacting parties’ ‘economic interest’ (Galasyuk,
11 And in the accounting measurements area is often described as the ‘fair value’ (in the IFRS 13
accounting sense).
12 Except where the market is so inefficient and thin that the notions of market prices and market
value on it would make little experiential sense.
13 Such as long-term bases of value, e.g., fundamental value, or its particular specie, the MLV in
the EVS 2016 standards.
14 E.g., insurable value, replacement value, etc.
15 Deplorably, the hollow, purely legalistic distinction between valuation bases defined in the
professional valuation standards, and values ‘defined elsewhere’ – now forms the crux of
taxonomic effort in the current edition of IVSs (IVSs 2017).
16 Under the normative aspect we imply the normative-ethical aspect (as in a philosophical split
between normativist and positivist theories of some phenomenon), not normative in a sense of
‘being required by some legal pronouncement’, although the valuer can be additionally
empowered to exercise the ethical presumption by means of the signed Terms of engagement
delegating him to take up the assignment on behalf of both transacting parties.
17 There is nothing unusual in thinking that numerically/monetarily equivalent gains-from-trade
may have a different utility for different parties, cf. St-Petersburg paradox in the
decision-making theory.
18 Aristotle, ‘Nicomachean ethics’, Book 5, paragraphs. 2–5, See The Basic Works of Aristotle,
edited by Richard McKeon, Random House, New York, 1941, 1966, pp.1005–1010.
19 The latter being a term (meaning ‘of exchange’) which a prominent Victorian philosopher and
economist J. Ruskin favours in his series of economics essays ‘Unto the Last’ https:// (1910 ed.).
20 This formula represents a modification of the formula contained in the Galasyuk monograph
(Galasyuk, 2016, 2018). All there spective changes in notation being made, it follows from the
fair value formula developed by Galasyuk given the additional assumption that the value of
the prospective buyer’s decision Rj{00}i ‘to continue with control unvested in the object’ is
equal to zero. Otherwise, the value of such a decision should also be deducted from the
numerator of the formula. Galasyuk (2016) develops one of the techniques to estimate the
value of the buyer’s decision Rj{00}i (which in a general case, given the presence of alternatives
on the market, is other than zero) on the basis of the ‘principle of reversivity of the cashflows’.
21 Since the word ‘proceeds’ is used it represents a net component of receipts to the seller in a
transaction at fair value, i.e., net of transaction costs. Same is valid for determining the
residual net realisable value of subject asset Sres [see formula (4)].
22 Thus, instead of exponential compounding (i.e., rate of return serving as functional exponent),
formula (3) [as well as (4)] uses chain multiplication, expressed through the chain
multiplication sign (П).
23 As such, TAPA model can be viewed as an extension to the conventional DCF analysis, which
came of age with the works of Fisher (1930): the latter providing an investor-specific pricing
angle, and the former – a transactional-based pricing angle.
24 Only in the context of determining the market value do the IVS standards indicate that, as a
part of the application of the income approach, ‘investors can only expect to be compensated
for systematic risk (also known as ‘market risk’ or ‘undiversifiable risk’)’ (paragraph 40.5,
20 A.I. Artemenkov et al.
IVS 105). On the other hand, in the context of determining fair value, this cannot be held to be
a valid general recommendation.
25 i.e., obtained under specific simplifying assumptions in Michaletz (2007).
... Notes: Obviously, since the table is for illustrational purposes only, the EM continuum presented here excludes some other well-established pure fields of Economic measurements, e.g. the field of mass assessments (principally of property assets), as consolidated in the IAAO Assessment standards. It also excludes some mixed types of Economic measurements, such as the accounting measurements specialism (see Artemenkov et al. (2018) for a more extensive discussion of the subject) Table I. 258 JPIF 37,3 economic import of such transactional equilibrium principles is more extensively described elsewhere (see Galasuyk, 2018;Artemenkov, 2017;Artemenkov et al., 2018). Section 3 reviews the logic and mechanics of the discount rate analysis under the TAPA framework and provides rate of return/discount rate forecasting models for the multi-period analysis context. ...
... Notes: Obviously, since the table is for illustrational purposes only, the EM continuum presented here excludes some other well-established pure fields of Economic measurements, e.g. the field of mass assessments (principally of property assets), as consolidated in the IAAO Assessment standards. It also excludes some mixed types of Economic measurements, such as the accounting measurements specialism (see Artemenkov et al. (2018) for a more extensive discussion of the subject) Table I. 258 JPIF 37,3 economic import of such transactional equilibrium principles is more extensively described elsewhere (see Galasuyk, 2018;Artemenkov, 2017;Artemenkov et al., 2018). Section 3 reviews the logic and mechanics of the discount rate analysis under the TAPA framework and provides rate of return/discount rate forecasting models for the multi-period analysis context. ...
... By marking the discount rate in (26) as r instead of r(i) we stress the fact that the benchmark discount rate is expected to be constant over the entire interval of 1…i periods (such an assumption is indeed the most common one in conventional DCF modeling practices). Thus, we have presented a TAPA framework to determine discount rate expectations, which is suitable for establishing the market/equitable values of various income-producing assets, including commercial property, under the income approach (see Michaletz et al., 2007;Artemenkov et al., 2018). ...
Purpose The purpose of this paper is to present a methodology based on the transactional asset pricing approach (TAPA) and to illustrate the application of TAPA within the context of professional property valuation. Design/methodology/approach The TAPA is a novel analytical valuation methodology recasting the traditional derivations of the income approach techniques, including DCF, from a transactional perspective based on the principle of inter-temporal transactional equity, instead of the conventional investor-specific view originating from I. Fisher (1907, 1930). Findings The authors present DCF analysis as a specific case of a more general TAPA approach to valuation under the income method. This also leads to novel analytical derivations of the Direct income capitalization, Gordon, Inwood, Hoskold and Ring models. Based on the TAPA framework, the authors also research the value-enhancing effects of benchmark market volatility on the subject property value and conclude that such effects can be statistically significant depending on the DCF analysis period. Research limitations/implications The research has a direct bearing on time-variable discount rate forecasting capabilities, as it uses a time-variant structure for the discount rates. Practical implications Using the US Case-Shiller and BLS rental indices as a valuation benchmark, the paper contains an example of applying the general TAPA framework to value a notional property under a TAPA’s DCF version. Such property valuations can be easily replicated in practice – especially in the context of equitable/fair value determination under the International Valuation Standards Council valuation standards. Social implications TAPA is a deductive principles-based theory of asset valuation especially fit for the transactional and illiquid asset valuation contexts – thus enabling a more efficient pricing for such assets in a sense of reflecting the transactional interests of the parties more closely than achievable under the conventional valuation methods. Originality/value TAPA is an original filiation of research with roots going as far back as Aristotelian Catallactics. It contains analytical formalizations of certain transactional equity principles.
... Notes: Obviously, since the table is for illustrational purposes only, the EM continuum presented here excludes some other well-established pure fields of Economic measurements, e.g. the field of mass assessments (principally of property assets), as consolidated in the IAAO Assessment standards. It also excludes some mixed types of Economic measurements, such as the accounting measurements specialism (see Artemenkov et al. (2018) for a more extensive discussion of the subject) Table I. 258 JPIF 37,3 economic import of such transactional equilibrium principles is more extensively described elsewhere (see Galasuyk, 2018;Artemenkov, 2017;Artemenkov et al., 2018). Section 3 reviews the logic and mechanics of the discount rate analysis under the TAPA framework and provides rate of return/discount rate forecasting models for the multi-period analysis context. ...
... Notes: Obviously, since the table is for illustrational purposes only, the EM continuum presented here excludes some other well-established pure fields of Economic measurements, e.g. the field of mass assessments (principally of property assets), as consolidated in the IAAO Assessment standards. It also excludes some mixed types of Economic measurements, such as the accounting measurements specialism (see Artemenkov et al. (2018) for a more extensive discussion of the subject) Table I. 258 JPIF 37,3 economic import of such transactional equilibrium principles is more extensively described elsewhere (see Galasuyk, 2018;Artemenkov, 2017;Artemenkov et al., 2018). Section 3 reviews the logic and mechanics of the discount rate analysis under the TAPA framework and provides rate of return/discount rate forecasting models for the multi-period analysis context. ...
... By marking the discount rate in (26) as r instead of r(i) we stress the fact that the benchmark discount rate is expected to be constant over the entire interval of 1…i periods (such an assumption is indeed the most common one in conventional DCF modeling practices). Thus, we have presented a TAPA framework to determine discount rate expectations, which is suitable for establishing the market/equitable values of various income-producing assets, including commercial property, under the income approach (see Michaletz et al., 2007;Artemenkov et al., 2018). ...
... Notes: Obviously, since the table is for illustrational purposes only, the EM continuum presented here excludes some other well-established pure fields of Economic measurements, e.g. the field of mass assessments (principally of property assets), as consolidated in the IAAO Assessment standards. It also excludes some mixed types of Economic measurements, such as the accounting measurements specialism (see Artemenkov et al. (2018) for a more extensive discussion of the subject) Table I. 258 JPIF 37,3 economic import of such transactional equilibrium principles is more extensively described elsewhere (see Galasuyk, 2018;Artemenkov, 2017;Artemenkov et al., 2018). Section 3 reviews the logic and mechanics of the discount rate analysis under the TAPA framework and provides rate of return/discount rate forecasting models for the multi-period analysis context. ...
... Notes: Obviously, since the table is for illustrational purposes only, the EM continuum presented here excludes some other well-established pure fields of Economic measurements, e.g. the field of mass assessments (principally of property assets), as consolidated in the IAAO Assessment standards. It also excludes some mixed types of Economic measurements, such as the accounting measurements specialism (see Artemenkov et al. (2018) for a more extensive discussion of the subject) Table I. 258 JPIF 37,3 economic import of such transactional equilibrium principles is more extensively described elsewhere (see Galasuyk, 2018;Artemenkov, 2017;Artemenkov et al., 2018). Section 3 reviews the logic and mechanics of the discount rate analysis under the TAPA framework and provides rate of return/discount rate forecasting models for the multi-period analysis context. ...
... By marking the discount rate in (26) as r instead of r(i) we stress the fact that the benchmark discount rate is expected to be constant over the entire interval of 1…i periods (such an assumption is indeed the most common one in conventional DCF modeling practices). Thus, we have presented a TAPA framework to determine discount rate expectations, which is suitable for establishing the market/equitable values of various income-producing assets, including commercial property, under the income approach (see Michaletz et al., 2007;Artemenkov et al., 2018). ...
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This Paper attempts to explore the building blocks of the Modern Portfolio Theory (MPT) and show their natural limitations associated with the neoclassical 'more heat than light' paradigm. By treating some investment and valuation aspects and consequences of MPT, it raises concerns over the self-fulfillment (performativity) of MPT. MPT regards socially-driven pricing processes occurring on the capital markets as if those were sterling naturally occurring stochastic processes. Thus instead of substantive economic description of the underlying reality it concentrates on only its numerical representation and, then, proceeds to provide normative implications from this one-sided view. While such research paradigm (MPT) has a rightful degree of validity and (perhaps buoyed by its performativity effects) has proven itself fruitful in the context of liquid capital markets, past decades have witnessed its dramatic over-extension to other investment fields where its mechanistic-laden statistics-intensive aspects are clearly inapplicable and beside the point (particularly in respect of illiquid assets). This resulted in gross mispricings of such assets during their securitization with the ramifications of it leading toward the current financial crisis. While it is the practical abuses of MPT paradigm (and not the theory itself) that can be laid at the door of the current toxic assets and mispricings debacle, the worldview on which the MPT theory is built is deemed to be a much-overlooked impersonal contributant (to the point that the capital markets crisis we are experiencing is not so much a crisis of institutions or instruments, as a crisis of primary finance-theoretical vision). As we argue, MPT worldview is neither right nor wrong, so much as it is applicable to some investment situations and inapplicable to most, and we make a contention that MPT-based valuation and investment theory henceforward should not hold the monopoly over pricing processes in the markets other than immediate liquid capital markets (For example, it is not appropriate for valuing illiquid (private) business equity, finding enterprise (as opposed to liquid equity) value etc). Since many investment researchers are in the mode of thinking that MPT is the only available investment and valuation perspective, this Paper also briefly describes attempts to develop and institutionally implement other valuation paradigms stemming from neoclassical and Keynesian Economics. It urges their continuation and real world applications as a promising remedy for current breakdown in capital pricing processes.
Conference Paper
A precise and justified assessment of assets plays an important role for successful investments in the real estate market. A significant influence on the result of the market cost is provided by the capitalisation ratio, which is used in the direct capitalisation method and to determine the cost of reversion in the method of discounting cash flows. The article considers the hypothesis about the possibility of predicting the capitalisation ratio, which is topical for reducing uncertainty in making managerial decisions. Authors developed a model that allows effectively predict the capitalisation ratio. The study has the inspection of the received model using objects of office real estate of St. Petersburg and a simulation modelling. Moreover, the article has comparison of the market capitalisation ratio of St. Petersburg and other major cities of the world. Next, the study analysed the influence of the chosen model technique of calculating the capitalisation ratio on the result of the valuation with a review of the main advantages and disadvantages of such model techniques. In order to determine the validity of using model techniques for real estate appraisal the cost of a hypothetical office building based on retrospective data of the St. Petersburg market in accordance with each model was calculated. The study presents comparison of the obtained results with a real dynamic row of the cost. In addition, it provides an alternative model for the calculation of value within the income approach to valuation, which gives results that are more accurate. The results of the study are the model for predicting the capitalisation ratio with a probability of 95% and recommendations for the effective use of model techniques for calculating the capitalisation ratio.
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The transactional assets pricing approach within valuation theory (TAPA) reviewed in this paper and developed by the authors, now more than a decade ago (MICHALETZ, ARTEMENKOV A. & ARTEMENKOV L., (2007), has found many applications in professional valuation practices dealing with illiquid assets (Leyfer 2006; Andrews 2011)). Consequently, challenges have arisen to ascertain its performance and develop tools, on its basis, which can be employed by valuers in their everyday practice and which are aligned as much as possible with the income approach tools used by them in their professional work. This paper proposes modifications to the standard direct income capitalization technique to align it as closely as possible with the results derivable under the applications of the TAPA basic pricing formula. The authors develop the respective adjustments using the Taylor series expansion and then, using a simulation technique, outline the performance of the resulting modified (“quick”) income capitalization model against the TAPA benchmark. The findings indicate that such a modified (“quick”) income capitalization approach has reasonable accuracy, which makes it amenable to direct usage in valuation practice, given the described assumptions.
This article examines real estate's role in institutional mixed-asset portfolios using both private- and public-real estate indices, as a means of examining varying real estate-related risk/return opportunities. In so doing, this article also examines the effects of: (1) increasing the investment horizon, (2) placing constraints on the maximum allocation to any one asset class, and (3) varying the risk preferences of investors. The empirical results suggest—using infinite-horizon returns and all of the caveats that accompany such a perspective—that real estate allocations of approximately 10–15% of the mixed-asset portfolio represent an upper bound for most investors. For those investors preferring low-risk portfolios, (unlevered) private real estate is the vehicle serving this allocation preference; for those investors preferring high-risk portfolios, public real estate (with its embedded leverage of 40–50%) is the vehicle serving this allocation preference—with such vehicles serving as substitutes for a variety of noncore real estate strategies. In some sense, the distinction between private and public real estate is more about the use of leverage. For those investors preferring moderate-risk portfolios, an intermediate-leverage approach seems optimal.
This study investigates whether fair value accounting contributes to the procyclicality of bank lending. Using banks' approval/denial decisions on residential mortgage applications to capture banks' supply of credit, I find no evidence that fair value accounting has procyclical effects on bank lending over the past two business cycles. I further identify two reasons for this result. First, the main accounting item distinguishing fair value accounting from historical cost accounting-unrealized gains and losses on available-for-sale securities-does not affect lending decisions. Second, unrealized gains and losses on available-for-sale securities are not procyclical, as the risk-free interest rate rises during some expansionary periods, resulting in unrealized losses, while the risk-free interest rate (and sometimes the default spread) falls during some recessionary periods, resulting in unrealized gains. © 2016 The Accounting Research Center at the University of Chicago Booth School of Business
Purpose The study aims to measure the fair value (FV) regulation convergence and to present its determinant factors and effects. Design/methodology/approach An empirical approach is used based on the content analysis of the accounting and valuation referentials, and of the similarity and dissimilarity measures. Findings The study attests the materialisation of the IASB and FASB objective regarding the FV accounting convergence and underlines certain dissimilarities concerning the guidance quality and the application extent of FV. In comparison with some theses in the literature on the quality of the fair value measurement, it states that certain measurement solutions, especially the focus on exit value and the preference for the seller's perspective, cannot cover all the situations that imply FV accounting and discriminate the users of accounts in favour of the financial statement providers. As to the relation between accounting standards and valuation standards, a smaller convergence degree was determined, namely in the case of IASB FV exposure draft. The main causes of this dissimilarity are related to the insufficient adaptation of IVS to the financial reporting requirements for measurement details and for FV disclosure. Practical implications In addition to some recommendations for the accounting standard setters, the paper draws attention to the need to improve the collaboration between IASB and IVSC by developing a joint document regarding technical guidance. Originality/value The study undertakes a comparative analysis of the accounting and valuation standards on fair value, based on an empirical approach, discusses the causes and suggests improvement measures for referentials including the atypical cases concerning elements of the financial statements, the market and the economies.
Purpose – This paper seeks to consider a significant market misconception and related errors commonly made by valuers, financial decision makers, and other users of valuation services. Its purpose is to focus on the importance of relating the explicit requirements of market value and fair value definitions to the evidence required for a supportable opinion of either. Design/methodology/approach – The paper provides conceptual foundations for the terms “market value” and “fair value” and reviews their meanings and applications in a historical context. Business cycles and the recent recession are used as foundations for illustrating how prices, such as for real estate, vary with cycles, but are not always directly indicative of either market value or fair value. The latter term has a long history, but has undergone recent definition and revision by the US Financial Accounting Standards Board (FASB) that are shown to closely align fair value with market value. A current controversy over the use of transactions as prima fascie, or perhaps the only indication of market value is discussed and the “market” of “market value” is examined. Findings – The paper offers a new look at market evidence concepts that are time‐honored, yet have been largely lost or forgotten. The principal finding is that duress is not consistent with conventional definitions of market value or fair value, yet significant market evidence exists that duress is often ignored or improperly considered in valuations and financial decisions. The paper also concludes that the FASB's focus on “market participants” (sellers and buyers) as the prime source of Fair Value evidence is akin to the rules which have applied to market value for many decades. The paper concludes with a discussion of why transactions may be evidence of “a market,” but are not necessarily representative of the “market” or of fair value. Originality/value – Market Value is a market protection against fraud, misrepresentation, and misunderstanding. Valuations must be performed in accordance with that definition – not as it is interpreted for personal gain or for any other interpretations of convenience, misunderstanding, or special purpose.