The Professional Board of the International Valuation Standards Council (IVSC) yesterday (January 19, 2011) released an Exposure Draft of a Technical Information Paper on the Discounted Cash Flow Method for Real Property and Business Valuations.
The paper is the first of a series of Technical Papers that are being developed to provide international guidance on the principles that should be observed when applying different valuation methods. The objective is to help bring about a greater understanding of common valuation techniques and to promote their consistent application.
Jean-Florent Rerolle, Chairman of the Professional Board explained: "There are many variations of discounted cash flow models in use in different markets around the world. This paper does not attempt to examine or comment upon each one of these but instead sets high-level principles to which developers and users of these models should have regard. Our objective is to promote consistency in the fundamental application of the technique while recognizing that in dynamic markets there has to be room for flexibility."
The use of discounted cash flow models, which use anticipated future net income streams to estimate current value, has become more widespread in recent years, but they are not always well understood by investors or regulators.
Doug McPhee, who chaired the working group responsible for the development of the Technical Paper, believes that it will help improve both consistency of approach and better understanding. Doug comments: "I am confident that fostering better global consistency within the valuation profession will benefit shareholders, management, regulators and other users of formal valuations."
The IVSC is currently undertaking a number of projects to improve and extend the scope of valuation standards and technical guidance to reflect concerns that a poor valuation practice contributed to the global financial crisis.
The Exposure Draft can be accessed on the IVSC's website at www.ivsc.org.