The Depreciated Replacement Cost Method of Valuation for Financial Reporting Valuation Information Paper 10
Produced in association with
Valuation Information Paper No. 10 The DRC Method of Valuation for Financial Reporting
Acknowledgements RICS would like to thank Kingston University School of Surveying for their help in preparation of this Paper. Extracts from the ‘International Valuation Standards 2007’ are reproduced in this publication with the permission of the International Valuations Standards Committee which holds the copyright. This Valuation Information Paper is effective from 1 July 2007.
Published by The Royal Institution of Chartered Surveyors under the RICS Books imprint Surveyor Court Westwood Business Park Coventry CV4 8JE UK www.ricsbooks.com No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in this publication can be accepted by the author, publisher or RICS. ISBN 978 1 84219 329 7 © The Royal Institution of Chartered Surveyors (RICS) June 2007. Copyright in all or part of this publication rests with RICS, and save by prior consent of RICS, no part or parts shall be reproduced by any means electronic, mechanical, photocopying or otherwise, now known or to be devised. Typeset in Great Britain by Columns Design Ltd, Reading
RICS Information Papers 1 2 3 4 5 6 7 8 9 10 11 11 Introduction What is DRC? When is DRC used? Valuer qualifications Settling the terms of engagement Assessing replacement cost The site value of a specialised property Calculating the cost of the buildings and site improvements of a specialised property Assessing depreciation Other considerations Final reconciliation Reporting Appendix A – Checklist Appendix B – PS 5.4, 5.5 and 5.6 iv 1 2 3 5 6 7 8 10 13 18 19 20 21 23
EFFECTIVE FROM 1 JULY 2007
VALUATION INFORMATION PAPER NO. 10
RICS Information Papers
This is a Valuation Information Paper. Valuation Information Papers are intended to provide information and to outline current practice for RICS members. The function of this paper is to give an indication on the approach to issues that may arise in the subject to which it relates. It is, however, relevant to professional competence to the extent that valuers should be up-to-date and should have informed themselves of Valuation Information Papers within a reasonable time of their promulgation. When an allegation of professional negligence is made against the valuer, or disciplinary action is taken, the valuer will need to confirm that Valuation Information Papers have been considered. No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in this publication can be accepted by the author, publisher or RICS.
iv | VALUATION INFORMATION PAPER NO. 10
EFFECTIVE FROM 1 JULY 2007
1.1 The purpose of this Valuation Information Paper is to provide supplementary information on the use of the depreciated replacement cost approach (DRC) described in IVS GN 8, The Cost Approach to Financial Reporting – (DRC) . The ‘Cost Approach’ and depreciated replacement cost (DRC) are regarded as synonymous terms; both are in common use around the World to describe a method of valuation of all types of assets. This information paper also highlights the reporting requirements in the RICS Appraisal and Valuation Standards that are particularly relevant when the DRC method has been used. This Paper has been written specifically with regard to practice in the United Kingdom. However, valuers operating in other states may find the principles discussed helpful and capable of adaptation to their local circumstances. Section 4 of GN 8 identifies the relevant international accounting standards that permit the use of a DRC approach. In the UK, private sector entities may follow International Financial Reporting Standards (IFRS),...