1. Steven Gottlieb, Robert Meulmeester, and Matthew Bohlin, “Will FASB 157 Achieve a Higher and Better Use?” Journal of Accountancy (January 2009): 53.
Incorporating Highest
and Best Use into
Accounting Standards
Expands Opportunities
for Appraisers
by I. Richard Johnson, PhD, CPA, K. Edward Atwood, PhD, CPA,
and Larry Walther, PhD, CPA
T
he preparation of financial statements is governed by the accounting profession’s complex network of principles and rules. Collectively, this network is known as generally accepted accounting principles, or simply GAAP. In the United States, the Financial Accounting Standards Board (FASB) is the primary private sector body that establishes specific financial accounting rules. Globally, the International Accounting Standards Board (IASB) plays a similar role. Indeed, these two bodies are working diligently toward a single, converged set of standards. In addition to GAAP, when an accountant conducts an audit of financial reports, there is a duty to follow generally accepted auditing standards (GAAS). The GAAS comprises systematic guidelines to ensure accuracy, consistency, and verifiability of audit reports.In 2007, the FASB issued a new financial accounting standard: FASB Statement no. 157, Fair Value Measurements (FAS 157). This standard articulated a highest and best use concept that is familiar to appraisers but new to many accountants. The fair value accounting ruling opens up new venues of appraisal services, as foretold in a leading accounting journal:
In some cases the help of a real estate valuation specialist who has an understanding of highest and best use and its relation to Statement no. 157 may be needed to confirm that a company’s real property assets are properly valued, and those valuations comply with the new standard.1
abstract
Never before have politi-cians and accounting rule makers focused so much attention on the concept of fair value. this fast-moving and evolving area of financial reporting establishes a need to value real property as well as the more-often discussed security investment portfolios. appraisers familiar with the current and developing valua-tion standards of the accounting profession, and the differences with current appraisal rules, are positioned to provide much-needed real property valuation services. this article explores and explains these developments and describes how real estate appraisers may benefit from them.
On July 1, 2009, the FASB issued its Accounting Standards Codification (ASC), which became the single source of authoritative nongovernmental U.S. GAAP. The codification reorganized the thousands of U.S. GAAP pronouncements into approximately ninety topics. Under the new codification, FAS 157 is now ASC Topic 820, Fair Value Measurements and Disclosures.
This article will explain why and how this rule opens up new opportunities for appraisers to provide professional services in support of accountants and auditors. The discussion will provide useful techni-cal information that an appraiser must understand before accepting an accounting-related fair value valuation engagement. Appraisers need to understand the professional duties that an auditor must discharge in engaging and relying on the work of an outside expert such as an appraiser. Knowing this important aspect of GAAS will facilitate communication and work flow on a specific task, and increase the odds that an accountant will reengage the appraiser time and time again, as fair value accounting is predicted to become ever-more prominent in the application of U.S. and global GAAP.
Fair Value Standards
Accounting measurements are often viewed as being entirely based on historical costs that derive from some specific exchange transaction. This misperception is easily dispelled by noting that approximately sixty accounting pronouncements include a reference to fair value measurement. For example, the Business Combinations standard (ASC 805) stipulates that an acquirer of another business must recognize the assets acquired and liabilities assumed at their fair values as of the acquisition date. Obviously, many of the assets that transfer in a typical business combination are real property assets. The standard on Impairment or Disposal of Long-Lived Assets (ASC 360-10-35) is another example of an accounting pronouncement that relies heavily on fair values.
Before FASB issued FAS 157, the perception of fair value resided in the eye of the beholder. The numerous pronouncements that addressed fair value included limited guidance for application and sometimes alluded to different concepts of fair value, even within the same pronouncement. For instance, before FAS 157 was issued, FAS 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, referred to
highest and best use in describing the accounting for real estate project amenities. However, FAS 67 went on to define fair value as “the amount in cash or cash equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller (i.e., selling price), that is, other than in a forced or liquidation sale.” This particular choice of words seemed to tie value to an anticipated selling price. In retrospect, it seems remarkable that the accounting profession took so long to understand the need for a precise and consistent interpretation and application of fair value concepts.
First and foremost the purpose served by adop-tion of FAS 157 was to define fair value, establish a framework for measuring fair value, and expand disclosures about such measurements. Table 1 com-pares the treatment of key concepts before FAS 157 and after FAS 157 was adopted. FASB’s directives involv-ing fair value elicited a response from the appraisal rule makers. The Appraisal Standards Board retired Advisory Opinion 8, “Market Value vs. Fair Value in Real Property Appraisals,” after FASB adopted addi-tional standards providing for use of fair value and clarifying the definition of fair value.
Defining Concepts
The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”2 For real estate assets, this
definition entails an understanding of highest and best use. Specifically, the standard notes that a fair value measurement assumes the highest and best use of the asset by the market participants.3 While
this concept is quite familiar to those engaged in real estate appraisals, it represents an attitudinal shift by the accounting profession. Historically, valuation of real property was based on an entity’s intended use of the property. However, because fair value is a market-based measurement and not an entity-specific measurement, under ASC 820 the property should be valued at its highest and best use to a typical market participant.
The measurement process to assess highest and best use to a typical market participant is necessarily tied to a comprehensive assessment of alternative uses for a property, which in turn may drive the specific valuation techniques used. Simply stated, this is outside 2. ASC 820-10-20, Glossary; previously adopted as FAS 157.
of an accountant’s area of expertise, but solidly within the domain of the work of real estate appraisers.
For instance, an appraiser is typically acquainted with the Appraisal Institute definition of highest and best use. Under this definition, real estate is assessed based on
the reasonably probable and legal use of vacant land or an improved property that is physically possible, reason-ably permissible, appropriately supported, financially feasible, and that results in the highest value.4
This definition, on the surface, appears to be quite congruent with the highest and best use lan-guage now incorporated into FASB’s codification,
A fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permis-sible, and financially feasible at the measurement date. Highest and best use is determined based on the use of the asset by market participants, even if the intended use of the asset by the reporting entity is different.5
and in the FASB definition of highest and best use, In broad terms, the use of an asset by market participants that would maximize the value of the asset or the group of assets within which the asset would be used.6
This concept of fair value measurement clearly assumes that values are to be determined based on the assumptions that market participants would use in pricing the asset in an orderly transaction. The idea of basing measurements on an orderly transaction is explicit throughout ASC 820. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities;
it is not a forced transaction (for example, a forced liquidation or distress sale).7 The FASB codification
also states that it is assumed that “the transaction to sell the asset or transfer the liability is a hypotheti-cal transaction at the measurement date.”8 This is an
important concept, as there is no express or implied expectation of an actual intent to market or dispose of the asset(s).
One additional point requires clarification. Notice that the FASB definition of fair value refers to valu-ations that are tied to a highest and best use that is “legally permissible.” This raises an interesting issue when comparing the FASB’s definition of highest and best use to the Appraisal Institute’s definition, which uses “reasonably permissible” rather than “legally permissible.”
Suppose a company holds a tract of land that is zoned agriculture, and the only legally permissible use is farming. Further assume that this tract of land has freeway frontage and is surrounded by valuable retail property, so it is reasonable to anticipate that the tract could be successfully rezoned and converted to retail use. Interpretive guidance within the FASB standards suggests that the retail use valuation would be more reflective of fair value. The FASB’s choice of “legally permissible” is not to be so rigidly construed as to ignore value components that are probably available for capture via a zoning change. This view is supported by discussions with several valuation experts in large accounting firms. Their near consensus is that market participants may consider the possibility that legal restrictions, such as zoning ordinances, may change in the future and adjust the pricing of an asset accordingly. The fair value measurement, however, should take into account the risk of uncertainty that legal restrictions 4. The Appraisal of Real Estate, 13th ed. (Chicago: Appraisal Institute, 2008), 277–278.
5. ASC 820-10-35-10. 6. ASC 820-10-20, Glossary. 7. Ibid.
8. ASC 820-10-35-3.
Table 1 comparison of Key concepts before and after Fas 157
concept before Fas 157 after Fas 157
Fair value definition Generally based on price paid Based on sales value considering highest
and best use
Perspective Entity-specific Market based
Transaction costs Included in asset value Not included in asset value
Disclosures Minimal transparency of approach and
may change and the cost a market participant would incur to transform the asset.
Most of the valuation experts contacted also agree that the Appraisal Institute and FASB definitions of highest and best use are consistent. The Appraisal Institute has commented on the zoning change issue in The Appraisal of Real Estate, 13th edition, noting that the probability of the zoning change may not be 100%. Thus, the appraiser is dealing with an extraordinary assumption or hypothetical condi-tion that could affect property value significantly. It would be necessary for the appraiser to clearly disclose that the assignment is based on a hypotheti-cal condition in order to satisfy the requirements of the Uniform Standards of Professional Appraisal Practice (USPAP). This and similar issues that could significantly affect value and appraisal results should be fully discussed between the appraiser and client when the assignment involves a fair value appraisal assignment.
A related point pertains to assigning value based on the principal (or most advantageous) market. FASB ASC 820-10-35-5 states,
A fair value measurement assumes that the transaction… occurs in the principal market for the asset…[or,] in the absence of a principal market, the most advantageous market for the asset…”
The principal market is the one with the greatest level of volume and activity, and the one in which the reporting entity would normally sell an asset. The most advantageous market is the market that results in price maximization. This distinction is not as sig-nificant for real estate as it is for other assets such as marketable securities, which may trade in multiple markets having alternative levels of trading volume, activity, and schedules. However, in the unlikely event there is deemed to be a principal market for a real estate asset, the fair value measurement is the price in that market even if the price in a different market is potentially more advantageous.
For example, a real estate asset may be subject to sale via a broker-driven marketing effort at higher costs, or via an Internet listing that may generate fewer/lower offers but at lower fees. If the broker-led marketing is viewed as the principal market, then that would establish the valuation premise, no matter which approach generates the most advantageous price (net of fees). The appraiser should note that the principal (or most advantageous) market should also be considered from the perspective of the reporting
entity, thereby allowing for differences between and among entities with different activities.
Interfacing Accounting Requirements
with Appraisal Assignments
In an assignment, the real estate appraiser will be challenged to determine if a principal market exists for the asset. If one does exist, all other potential uses for the asset must be disregarded, even if those other uses would produce a higher value. In the absence of a principal market, the reporting entity must assess and determine the highest and best use for the asset based on its use by market participants, even if the reporting entity intends a different use.
Under the provisions of ASC 820, the fair value of an asset is based on the use of the asset by market par-ticipants that would maximize its value. Transaction costs are considered in determining the most advan-tageous market, but the fair value of the asset is not adjusted for those costs. Transaction costs are not attributes of the asset, but rather are specific to the transaction. Investment value and use value are not appropriate as measures of fair value because they are value concepts that relate specifically to the ownership entity; fair value is an indication of the exchange value for the asset. Although there is no specific guidance from the Appraisal Standards Board at present, retired Advisory Opinion 8 distinguished market value from fair value. In many cases, fair value and market value as defined by USPAP might be the same; however, that will not always be the case. Therefore, fair value and market value are not necessarily synonymous terms.
The fair value of the asset is to be determined based on the assumptions that market participants would use in pricing the asset. Market participants are those who are independent, knowledgeable, and will-ing and able to undertake the transaction. Although the reporting entity need not specify specific market participants, it should identify characteristics that dis-tinguish market participants generally, considering factors specific to (1) the asset, (2) the principal (or most advantageous) market for the asset, and (3) mar-ket participants with whom the reporting entity would transact in that market. The specific information required by the reporting entity should be provided by the appraiser as part of the final report or in such manner that satisfies the requirements of the scope and reporting requirements of the assignment.
There are alternative paradigms under which real property valuation may be considered. For
example, assume that a small medical clinic is located in a downtown area. The area has become prime property for construction of high-rise office buildings. The medical clinic will have a value based upon the income stream associated with its ongoing business activity. In the alternative, it may command a different value based on what a potential buyer would pay to obtain the property as a high-rise construction site. FASB ASC 820-10-35-10 addresses these alternatives by referring to in-use
and in-exchange valuation concepts.
Under the FASB standards, the highest and best use of the real estate is in-use if the asset would pro-vide maximum value as a clinic (i.e., through its use in combination with other assets). Or, the highest and best use of the asset is in-exchange if the asset would provide maximum value if sold to a high-rise developer (i.e., on a stand-alone basis). Thus, the highest and best use of the asset is determined con-sidering the assumptions that market participants would logically use in pricing the asset to maximize the value potential of the property.
The accounting literature’s use of the term in-use should not be confused with the appraisal term interim use. The accounting term in-use simply describes the current state of the asset. For example, the manufacturing facility of a company would be considered in-use as a manufacturing facility. The appraisal term interim use, on the other hand, con-notes a transitional or temporary use. Following the ASC 820 guidelines, an asset’s highest and best use will either be in-use or in-exchange. The appraisal term interim use may be the optimal use for the interim period, but the fact that the use is interim implies there is another use after the interim period that will become the asset’s new highest and best use. However, an interim use value could be based on the remaining lease term(s) of tenants in the medical clinic that will be transitioning to a high-rise office. At any given point in time during the leased fee occu-pancy, the value of the interim use property can be determined. This value is an interim use value until the lease expires.
The requirements of ASC 820 do not relieve the appraiser from the obligation to perform an appropriate highest and best use analysis, including consideration of the interim use, as the basis for the results to be used for financial reporting purposes. To the contrary, the obligation might be more burden-some due to the additional requirement to consider the
asset’s use as part of a group of assets, if that scenario will produce a higher asset value.
A close examination of the valuation premise concept reveals that it is similar to, though not the same as, the traditional focus used by appraisers in determining highest and best use; it is a much broader concept. In a typical market value appraisal, the appraiser analyzes the potential uses of land as though vacant, which is similar to the in-exchange valuation premise. Depending on the circumstances, however, the land value might require consideration of the in-use premise. In addition, the appraiser analyses the highest and best use of the property as improved (assuming that improvements exist), which is similar to the in-use premise. However, the in-use premise requires recognition that the asset might have a higher fair value as part of a group of assets; considering only the land and improvements on the parcel might not be sufficient to satisfy the requirements of ASC 820.
The challenge for the appraiser will be in assist-ing the client/reportassist-ing entity in definassist-ing the scope of the assignment relative to the valuation premise to ensure that the fair value measures produced by the appraiser are consistent with, and satisfy, the requirements of ASC 820. The appraiser should be alert to the possibility that the scope of the assignment might require a team of valuation professionals, each providing distinct valuation expertise in such areas as real property, personal property, manufacturing processes, and intangible assets. Defining the group of assets involved in the assignment will be critical.
Two final points are noteworthy. One relates to FASB’s framework for judging market-based assump-tions. Since the market-based assumption forms the primary input for valuation, and there are different observable and unobservable levels of markets, FASB established a hierarchical structure. Under this hier-archy, the appraisal should be tied to the highest level possible under the circumstance. Specifically, Level 1 relates to quoted prices for identical assets. An item of real estate rarely has an identical twin, so valuation normally requires reference to the next level, Level 2, which is based on observable values for similar trans-actions, such as comparable property transactions. Level 2 is quite logical for real estate. Level 3 drops to reliance on subjective and unobservable inputs, such as knowledge, judgment, and experience with the particular market (e.g., use of cost services or cost estimates; discounted cash flow analysis). In perform-ing the appraisal assignment for ASC 820 purposes,
the appraiser remains obligated to consider the three approaches to value: market, cost, and income.
The other final point is that fair value is not to be adjusted for transaction costs (e.g., brokerage fees). Transaction costs might be considered in selecting the principal or most advantageous market, but are not specific to a transaction and do not otherwise cause a reduction in the fair value that is assigned to an asset.
Global Interest in Fair Value Accounting
The FASB’s interest in fair value accounting is mirrored by the international community and the International Accounting Standards Board (IASB). The IASB issues a monthly activity update wherein tentative conclusions of their recent activities are reported. Recently it noted as follows:
The fair value of an asset should reflect its highest and best use. The highest and best use is the use by market participants that would maximise the value of the asset or of the group of assets in which the asset would be used. It considers uses of the asset that are physically possible, legally permissible and financially feasible at the measurement date.9
An IASB exposure draft on highest and best use is under development. It is expected to state that an entity does not need to perform an exhaustive search to find other potential uses on which to base the valuation if there is no evidence to suggest that the current use of an asset is not its highest and best use. Further, when an entity uses an asset together with another asset in a use that differs from their highest and best use, the entity may need to split the fair value into a fair value of the asset assuming its current use and a change of use option, reflecting the entity’s ability to switch the asset to its highest and best use.
Although the IASB’s discussion of highest and best use is similar to FASB’s discussion, there are distinct differences. First, the IASB’s requirements for the determination of the highest and best use and resulting fair value measures are much less rigorous than those of FASB’s ASC 820. Second, the splitting of the value into two values is dissimilar.
There is a significant movement to converge domestic and international accounting rules. As such, appraisers will also need to monitor how the respective standards define and apply the concepts of highest and
best use as it applies to real property. A consensus on the methodology and requirements for the determina-tion of highest and best use is almost certain.
There are also critical differences between the U.S. GAAP and the International Financial Reporting Standards (IFRS) relating to mark-to-market require-ments. Under GAAP, non-financial assets (including real property) are required to be measured at fair value only in specific cases, such as business acquisitions, impairment measurements, and so forth. Under the IFRS, however, an entity is allowed to apply a revalu-ation model that allows an entity to carry all items of property, plant, and equipment of a class at a revalued amount, which is the fair value of the items at the date of the revaluation less any subsequent accumulated depreciation and accumulated impairment losses.10
Due to these differences and the anticipated tran-sition toward a convergence of the standards skewed toward those of the IFRS, the involvement and role of the real estate appraiser in providing information used for financial reporting purposes is expected to expand significantly over the next few years.
Accountants’ Use of Outside Experts
Those entities subject to the new accounting requirements will increasingly need the services of appraisers to help in the identification of the highest and best use of real property and to provide information that satisfies reporting requirements. Furthermore, it is incumbent on those firms’ auditors to provide assurance that the information provided by the appraiser satisfies the new reporting require-ments. In using the work of an outside expert—the real estate appraiser in this case—auditors must comply with auditing standards issued by the American Institute of Certified Public Accountants (AICPA). The Auditing Standards Codification provi-sion on Using the Work of a Specialist stipulates that the expected qualifications of a specialist include
• professional certification, license, or other recogni-tion of the competence of the specialist in his or her field, as appropriate;
• reputation and standing of the specialist in the views of peers and others familiar with the special-ist’s capability or performance; and
• experience doing the work under consideration.11
9. Board Decisions on International Financial Reporting Standards, IASB Update, September 2008. 10. International Accounting Standard 16, par. 31.
Given the requirements of the AICPA standard and the level of expertise required for such an assignment, appraisers providing such services will most certainly also be subject to the requirements of USPAP.
The expected qualifications of the appraiser will vary with the assignment. Many, if not most, SEC reg-istrants requiring a financial audit have international affiliations. An appraiser accepting both domestic and internationally related assignments would be held to both the USPAP standards and International Valuation Standards (IVS). It is incumbent on appraisers to determine if their professional credentials and com-petency are appropriate for the intended appraisal use. The appraiser must realize that audited finan-cial statements are typically intended for finanfinan-cial reporting, and as such will be subject to the extensive rules and scrutiny of the financial reporting require-ments. The appraiser must clearly indicate that the purpose of the appraisal is to develop an opinion of fair value for use in financial reporting and then needs to state the specific definition of fair value used in the appraisal. The appraiser must understand that the scope of the work performed and the work product must be sufficient to meet the requirements of the financial accounting standards for which the appraisal work is being performed.
The auditor is required to obtain an under-standing of the nature of the work performed by a specialist. This understanding should cover the objectives and scope of the specialist’s work, the specialist’s relationship to the client, the methods or assumptions used, a comparison of the methods or assumptions used with those used in the preceding period, and the appropriateness of using the special-ist’s work for the intended purpose.
Given these directives, the real estate appraiser should be prepared to furnish the client and its auditor with the requested materials. In most cases, the information will be provided in the appraisal report. It most certainly should be maintained as part of the appraiser’s work papers in the event the auditor needs to make additional inquiries to satisfy their requirements, as required by USPAP.
The new accounting developments have created the potential for additional work for real estate apprais-ers. Appraisers will be challenged to understand and
satisfy both financial reporting and USPAP require-ments in order to capitalize on that potential.
Highest and Best Use—Appraisal
Perspective
The selection of highest and best use is perhaps the most important decision that is made in any appraisal. Highest and best use is the fulcrum of the appraisal process and report. The resultant value of a property is totally dependent on the results of highest and best use analysis. Although the concept of highest and best use is referenced on numerous occasions within USPAP, the term is noticeably absent in its list of definitions. Given that USPAP has transitioned to be more con-ceptual in nature and is intended to provide guidance to the appraiser as opposed to establishing a method-ological (i.e., rules-based) approach to the valuation process, the absence of a definition is understandable. Yet appraisers are required to “develop an opinion of the highest and best use of the real estate” in develop-ing the appraisal.12 Furthermore, regardless of which
reporting option is used (i.e., a Self-Contained (full narrative) Appraisal Report or a Summary Report), the appraiser is required to describe the support and rationale for an opinion of highest and best use when it is developed.13 Those subject to USPAP must look
beyond its content for developing an understanding of the highest and best use concept for purposes of developing fair value measures.
The current concept of highest and best use as defined by the Appraisal Institute is viewed as being the best economic fit of the subject property and the market area. A close examination of the concept reveals that there are four criteria that must be met: legal permissibility, physical possibility, financial feasibility, and maximum productivity. An underlying caveat is that only potential uses
that are reasonably or highly probable are to be considered. These criteria are often considered sequentially, first eliminating those potential uses that fail to meet the tests of legal permissibility and physical possibility. The remaining potential uses are then tested for financial feasibility, eliminating those that fail the test. The remaining potential uses are then evaluated to determine that use which is maximally productive. The maximally productive test provides that, of the financially feasible uses, 12. Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice (Washington, DC: The Appraisal Foundation, 2010), Standards Rule 1-3(b). 13. Ibid., Standard Rules 2(a)(ix) and 2(b)(ix). Note that a Restricted Use Appraisal Report would not be an appropriate report format for providing fair value
the use that produces the highest value of the real estate is the highest and best use. Appraisers have become accustomed to examining and comparing the current and potential alternate uses relative to these criteria in order to establish the highest and best use and its corresponding value in the develop-ment of market value appraisals.
It is noteworthy that The Appraisal of Real Estate, 13th edition, has greatly expanded the discussion of highest and best use as it relates to market value appraisals. This is an indication of the increased importance for understanding and apply-ing this concept in the valuation process. A separate section of The Appraisal of Real Estate, “Valuation for Financial Reporting,” recognizes that apprais-ers will increasingly be called upon to develop fair value measures for financial reporting purposes and states that the definition of fair value is close to the traditional definition of market value used by real estate appraisers. The definitions, however, are not synonymous. While this resource has given recogni-tion to the in-use and in-exchange valuation premises of ASC 820 discussed previously and indicates that the determination of highest and best use is affected accordingly, no further clarification is provided to the appraiser on the differences between the tradi-tional approach for determining highest and best use for market value appraisals and the approach that the appraiser will be required to follow in order to meet the requirements for developing a fair value appraisal. In most cases, the appraiser will rely on, but modify, the traditional approach in order to produce a credible fair value work product.
Challenges for the Appraiser
During initial discussions, the appraiser and cli-ent will need to address the purpose and scope of the fair value assignment, the intended use of the appraisal, and the impact of current GAAP or IFRS reporting requirements on the final work product. Appraisers must remain compliant with the
require-ments of USPAP in providing appraisals for use in financial reporting, but must also understand
GAAP and/or IFRS requirements in order to provide a competent work product and to eliminate any misunderstandings concerning those requirements. USPAP Standard Rule 1-2 requires that appraisers (a) identify the client and the intended users, and (b) identify the intended use of the appraiser’s opinions and conclusions. Unlike a traditional appraisal where the results are restricted to use by the client, the appraiser needs to understand that the valuation results will become part of the financial statements that will be publicly available. All assumptions, extraordinary assumptions,
hypo-thetical conditions, and limiting conditions used in the assignment must be clearly and accurately disclosed. The appraiser needs to ascertain that the use of hypothetical or limiting conditions and/ or any assumptions are not inconsistent with the financial reporting standards, either GAAP or IFRS, applicable to the appraisal values provided.
USPAP Standard Rule 1-2(c) necessitates that both the appraiser and client develop a clear under-standing of the definition of fair value as indicated in ASC 820 and how it might differ from the definition of market value as used in current appraisal practice. Both the client and appraiser must understand the concept of highest and best use as defined by GAAP or IFRS (which is different from the traditional con-cept of highest and best use related to market value appraisals) and the impact that definition will have on the appraiser’s scope of work, the potential need for appraisers with expertise in areas other than real estate, and the results that will be produced.
Conclusion
Many clients and appraisers will be operating in uncharted waters as appraisers perform valuations for accounting purposes. It is paramount that both become as knowledgeable as possible about the demands that are imposed by the new and evolv-ing financial reportevolv-ing standards. Communication, knowledge, and a mutual understanding of each party’s objectives and requirements will be the keys to a successful voyage.
I. richard Johnson, PhD, cPa, is the Larzette G. Hale Professor of Accounting in the School of Accountancy at Utah State University. He received his doctorate and master’s degrees in real estate from the University of Wisconsin–Madison. He is a member of the American Institute of Certified Public Accountants and the Utah Association of CPAs. His research articles have appeared in many journals including the
Financial Analyst Journal, The CPA Journal, The Real Estate Finance Journal, The Real Estate Appraiser, and
Pension World. contact: i.r.johnson@usu.edu
K. Edward atwood, PhD, cPa, is the Managing Principal of Contemporary Real Estate Research,
a real estate consulting and appraisal firm, in Waunakee, Wisconsin. He received his PhD, with dual majors in accounting and real estate and urban land economics, from the University of Wisconsin– Madison. Formerly he was an accounting and real estate faculty member at the University of Wisconsin– Madison and at the University of Alaska–Anchorage.
He is a certified general appraiser and licensed appraiser in Wisconsin. He has provided consulting and expert testimony services in several states related to assignments in appraisal, investment analysis, feasibility analysis, market analysis, assessment management, and business valuation. He is an Associate member of the Appraisal Institute.
contact: crer@charter.net
Larry Walther, PhD, cPa, cMa, is head of the School of Accountancy at Utah State University. He received his PhD from Oklahoma State University and MPA from The University of Texas at Arlington. He has served as a director and a consultant to a number of public and nonpublic companies. He is the author of numerous accounting textbooks and articles and has published in many major professional journals. He currently devotes a significant amount of time to his Web site, www.principlesofaccounting.com, which is a free online textbook receiving extensive global use.
contact: larry.walther@usu.edu
Web Connections
Internet resources suggested by the Lum Library
American Institute of Certified Public Accountants (AICPA) http://www.aicpa.org/default.aspx
AICPA Auditing Standards
http://www.aicpa.org/Professional+Resources/Accounting+and+Auditing/Authoritative+Standards/ auditing_standards.htm
AICPA Accounting Standards Codification Resources
http://www.aicpa.org/professional+resources/accounting+and+auditing/fasb+accounting+standards+ codification/
AICPA International Financial Reporting Standards (IFRS) Resources http://www.ifrs.com/
Appraisal Standards Board (ASB)
http://www.appraisalfoundation.org/s_appraisal/sec.asp?CID=60&DID=89
Federal Accounting Standards Advisory Board—Generally Accepted Accounting Principles http://www.fasab.gov/accepted.html
Financial Accounting Standards Board (FASB) http://www.fasb.org/home
FASB Accounting Standards Codification (free registration required) http://asc.fasb.org/
International Accounting Standards Board (IASB) http://www.iasb.org
