The Key aspect of Valuation is the approach or method that is taken for Valuation of Assets.  Depending on the type of Asset and purpose of Valuation the right method or approach of Valuation should be adopted at arriving the Valuation of Assets.  All approaches of valuation includes different, detailed methods of application and it is important for the valuer to use the right method. The three approaches shown here are all based on the economic principles of price equilibrium, anticipation of benefits or substitution. 

  • Market approach - The market approach provides an indication of value by comparing the asset with identical or comparable (that is similar) assets for which price information is readily available. 
  • Income approach - The income approach provides an indication of value by converting future cash flow to a single current value. Under the income approach, the value of an asset is determined by reference to the value of income, cash flow or cost savings generated by the asset. 
  • Cost approach - The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction. The approach provides an indication of value by calculating the current replacement or reproduction cost of an asset and making deductions for physical deterioration and all other relevant forms of obsolescence. 

How to Select Method of valuation 

The goal in selecting valuation approaches and methods for an asset is to  find the most appropriate method under the particular circumstances. No one method is suitable in every possible situation. The selection process should consider, at a minimum: 

(a) the appropriate basis(es) of value and premise(s) of value, determined by the terms and purpose of the valuation assignment, 

(b) the respective strengths and weaknesses of the possible valuation approaches and methods, 

(c) the appropriateness of each method in view of the nature of the asset, and the approaches or methods used by participants in the relevant market, and 

(d) the availability of reliable information needed to apply the method(s). 

Can we use more than One Approach 

  • Generally it is not required to use more than One Method of Valuation of an Asset especially if they have confidence on the approach they used and the data they obtained.  
  • Valuers should consider the use of multiple approaches and methods and more than one valuation approach or method should be considered and may be used to  arrive at an indication of value, particularly when there are insufficient factual or observable inputs for a single method to produce a reliable conclusion.  
  • Where more than one approach and method is used, or even multiple methods within a single approach, the conclusion of value based on those multiple approaches and/or methods should be reasonable and the process of analysingand reconciling the differing values into a single conclusion, without averaging, should be described by the valuer in the report. 
  • It is generally not possible to perform all three approaches of Valuation on the same asset type