Appraisers' Free Forum

Jim Plante · by **Jim Plante** on Thu Aug 16, 2007 9:52 am

As for "fair market value", doesn't it leave off exposure?

As far as I remember it does. I can't find my stinkin' definition for some reason.[/quote]

Edd Gillespie · by **Edd Gillespie** on Thu Aug 16, 2007 11:10 am

Jim Plante wrote:
As for "fair market value", doesn't it leave off exposure?
As far as I remember it does. I can't find my stinkin' definition for some reason.

[/quote]

Well, I think so too, So until we know better, where do I find support for no exposure adjustments to the prices of sales? I know, no-where, so what assumptions do you make and how do explain them and try to make them look like real fact?

Steve Owen · by **Steve Owen** on Thu Aug 16, 2007 11:53 am

This is what I use:

Fair Value Defined

Fair value is 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. (footnote #1)

The Financial Accounting Standards Board (FASB) Statement No. 157 has 158 pages, therefore, complete description is impossible in this document. However, most significantly, the statement says:

“A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date. 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). The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the objective of a fair value measurement is to determine the price that would be received to sell the asset or paid to transfer the liability at the measurement date (an exit price). (footnote #2)”

The definition includes the following logical assumptions about market participants, that they are:

a. Independent of the reporting entity; that is, the are not related parties
b. Knowledgeable, having a reasonable understanding about the asset or liability and the transaction based on all available information, including information that might be obtained through due diligence efforts that are usual and customary
c. Able to transact for the asset or liability
d. Willing to transact for the asset or liability; that is, they are motivated but not forced or otherwise compelled to do so. (footnote #3)

What this means is that the definition assumes the principal or most advantageous market and assumes that the buyer and seller are typically motivated. It also assumes that both parties are well informed or well advised, and acting in what they consider their best interests. In other words it is an orderly, cash equivalent sale, uninfluenced by special conditions.

Footnote #1: Statement of Financial Accounting Standards No. 157, Fair Value Measurements, Financial Accounting Standards Board of the Financial Accounting Foundation, Financial Accounting Series NO. 284-A, September 2006, Found at http://www.fasb.org/st/index.shtml#fas157, Measurement, Definition of Fair Value, Paragraph 5, Page 2.

Footnote #2: Statement of Financial Accounting Standards No. 157, Fair Value Measurements, Financial Accounting Standards Board of the Financial Accounting Foundation, Financial Accounting Series NO. 284-A, September 2006, Found at http://www.fasb.org/st/index.shtml#fas157, Measurement, Definition of Fair Value, The Price, Paragraph 7, Page 3.

Footnote #3: Statement of Financial Accounting Standards No. 157, Fair Value Measurements, Financial Accounting Standards Board of the Financial Accounting Foundation, Financial Accounting Series NO. 284-A, September 2006, Found at http://www.fasb.org/st/index.shtml#fas157, Measurement, Definition of Fair Value, Market Participants, Paragraph 10, Page 4.

You can spend days cruising around the FASB site looking at this stuff. Makes my head hurt... spending all that time with accountants....

Jim Plante · by **Jim Plante** on Thu Aug 16, 2007 1:10 pm

Steve, thanks for posting that one. But for estate appraisals where IRS is an intended user, and the report will be used to help calculate the tax, you want to use the IRS's definition of "Fair Market Value," and that's the one I can't find my primary source for, and I don't have time right now to go digging thru IRS regs to find it. When I get time to think about it, I'm going to find a place on the forum to Sticky the various definitions and their sources; the one you provided will make a good addition.

Pina Colada · by **Pina Colada** on Thu Aug 16, 2007 5:39 pm

Steve, thanks for posting that one. But for estate appraisals where IRS is an intended user, and the report will be used to help calculate the tax, you want to use the IRS's definition of "Fair Market Value,"

I would agree that definition is the most appropraite. However, you might get an argument on the IRS being an intended user.

Jim Plante · by **Jim Plante** on Thu Aug 16, 2007 5:55 pm

...you might get an argument on the IRS being an intended user.

How so? The client intends to let them use it. Am I missing something subtle again?

Pina Colada · by **Pina Colada** on Thu Aug 16, 2007 7:06 pm

Jim Plante wrote:
...you might get an argument on the IRS being an intended user.
How so? The client intends to let them use it. Am I missing something subtle again?

Don't know if its subtle or obvious, what are they using it for?

Related question: When you appraise for a bank, are the FDIC, OCC and OTS intended users?

Edd Gillespie · by **Edd Gillespie** on Thu Aug 16, 2007 7:24 pm

Pina Colada wrote:Related question: When you appraise for a bank, are the FDIC, OCC and OTS intended users?

You know what, they actually probably are since it is one or more of those agencies via regulation that requires the appraisal in the first place. And I have heard examiners actually look for them. Isn't that a use, thereby making the examiner who looks a user? Some loan officers, perhaps the yodamilt among them, call them file stuffers, which indicates the use the bank puts them to. That lender would fall in the cetegory of file stuffer user, and the examiner who requires an appraisal be present is a file stuffer finder user.

Has anybody got a plug in for SOW that sounds good for the intended use of file stuffer?

Steve Owen · by **Steve Owen** on Fri Aug 17, 2007 10:54 am

This is the def IRS used to require for donations:

"The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts."

The necessity of using that definition caused me (and probably other apprisers) to point out that several things were missing. There is no mention of exposure or marketing time in the def, there is no discussing of financing or being a cash sale, and, although it is implied, there is no specific prohibition of influence from related parties.

I wrote a rather lengthy letter to an attorney describing the economic necessity of such considerations, and that, together with other comments from other appraisers, may have been what prompted the ASB to write AO-8 (now retired). My understanding was that the reason they retired AO-8 was because the IRS adopted the FASB definition. Did I miss something?

I have never heard that the IRS required the above def for estate stuff. (I'm pretty sure that the IRS does not actually know what they require... and the answer may be different on different days.) In the past, I always used MV for estate work, but a couple of years ago, I started using the FASB def because that is what I was told to do. I've never had one of these come back, but then who knows? It might just depend on which IRS reviewer you draw.

Intended user:

I always include the IRS as an intended user. They are going to physically recieve a copy of the report (unlike the banking regulators, who will only see it if the audit the bank). Similarly, for divorce work, I include the court of jurisdiction. Basically, I think anyone you know is going to get a copy and rely on the report should be an intended user. IMHO, including FDIC would be overkill.

Jim Plante · by **Jim Plante** on Fri Aug 17, 2007 11:06 am

Piña wrote:Related question: When you appraise for a bank, are the FDIC, OCC and OTS intended users?

Nope. They may see the report, but none of those entities will be making a mortgage lending decision with it, which is the intended use for a mortgage appraisal. They may check for the presence of an appraisal, and check the value opinion to be sure it complies with whatever rates/ratios apply, but they won't be using the report for its intended use.

In contrast, IRS will actually use the report, check the data, examine the reasonableness of the value conclusions, and base tax decisions on the contents of the report. That's what the client said he wanted the report to do, so IRS is an intended user in this particular case.

IRS would definitely be an intended user if you were appraising a conservation easement in support of a tax deduction, so in my view they should be intended users for estate tax situations, too.

Edd Gillespie · by **Edd Gillespie** on Fri Aug 17, 2007 11:30 am

Jim Plante wrote:Nope. They may see the report, but none of those entities will be making a mortgage lending decision with it, which is the intended use for a mortgage appraisal. They may check for the presence of an appraisal, and check the value opinion to be sure it complies with whatever rates/ratios apply, but they won't be using the report for its intended use.

Where did you get the support for defining intended users in the context of the intended use? That would make common sense, but I'm not sure it obtains in our fuzzy vernacular.

Jim Plante · by **Jim Plante** on Fri Aug 17, 2007 11:50 am

Edd,
The intended user and intended use comes from the SOW, which is reached by agreement with the client or his agents--the lawyer or CPA. So in the case of one recent estate appraisal, I asked the CPA if the report would be used by IRS. He said it would, so I showed them as intended users.

Pina Colada · by **Pina Colada** on Fri Aug 17, 2007 2:07 pm

In contrast, IRS will actually use the report, check the data, examine the reasonableness of the value conclusions, and base tax decisions on the contents of the report.

It's possible. However, I used to prepare tax returns and never include an appraisal report with the return. I also have declared charitable deductions, like the "value" of old t-shirts to the salvantion army. Never included an appraisal report. Although it might be something they look for in an audit (kind of like the federal bank regulators). You might do an appraisal for a property owner who thinks he's overassessed, that doesn't automatically make the assessor an intended user either.

Jim Plante · by **Jim Plante** on Fri Aug 17, 2007 2:26 pm

I agree with most of your points. I think the determinant is the agreed SOW. What does the client (or his agent) tell you he wants to do with the report? Mine's CPA said, "Send to IRS with estate tax return." So IRS is an intended user in that case.

In the donated property used as deduction, I wouldn't list them. The HO will probably use it to substantiate his deduction, and IRS won't see it unless he's audited. And in audits, the question is asked by the auditor, "Why did you deduct this much for old T-shirts?" The taxpayer responds, "Because I had'em appraised. Here's the report that I relied on."

In my case, the CPA *knows* the IRS is going to scrutinize the report. In your personal property scenario, there's an outside chance that they'll see it, and even then, it won't be actually USED by IRS to calculate the tax, as it will in an estate situation.

Pina Colada · by **Pina Colada** on Fri Aug 17, 2007 3:19 pm

What does the client (or his agent) tell you he wants to do with the report?

AND, do you believe them?

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Estate stuff

Here's your def

What you are probably looking for is this...

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