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 available. It uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities, or a group of assets and liabilities, such as a business. It provides an indication of value by comparing the asset with identical or comparable (that is similar) assets for which price information is available.

The market approach is used as the primary basis for a valuation under the following circumstances:

• The asset has recently been sold in a transaction appropriate for consideration under the basis of value.
• The asset or substantially similar assets are actively publicly traded.
• There are frequent or recent observable transactions in substantially similar assets.

Comparable Transactions Method

The Comparable Transaction/Sales Comparison method is the most appropriate for the market approach and follows the below steps:

1. Identify the units of comparison that are used by participants in the relevant market.
2. Identify the relevant comparable transactions and calculate the key valuation metrics for those transactions.
3. Perform a consistent comparative analysis of qualitative and quantitative similarities and differences between the comparable assets and the subject asset.
4. Make necessary adjustments, if any, to the valuation metrics to reflect differences between the subject asset and the comparable assets.
5. Apply the adjusted valuation metrics to the subject asset.
6. If multiple valuation metrics were used, reconcile the indications of value.

Choosing Comparable Transactions

A valuer should choose comparable transactions within the following context:

• Evidence of several transactions is generally preferable to a single transaction or event.
• Evidence from transactions of very similar assets (ideally identical) provides a better indication of value than assets where the transaction prices require significant adjustments.
• Transactions that happen closer to the valuation date are more representative of the market at that date than older/dated transactions, particularly in volatile markets.
• For most bases of value, the transactions should be “arm’s length” between unrelated parties.
• Sufficient information on the transaction should be available to allow the valuer to develop a reasonable understanding of the comparable asset and assess the valuation metrics/comparable evidence.
• Information on the comparable transactions should be from a reliable and trusted source.
• Actual transactions provide better valuation evidence than intended transactions.

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, unless undue time, inconvenience, risk or other factors are involved. 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.

The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

Common cost elements included in the cost approach:

• Direct Costs – Material and Labour
• Indirect Costs – Transport Costs, Installation Costs, Professional Fees, Overheads, Taxes, Finance Costs, Profit Margins

Replacement Cost Method

The replacement cost is calculated as the amount required to reproduce the entire property in like utility and function. It is based on current market prices for materials, labour, equipment, contractor’s overhead, profit, and fees. It does not include provisions for overtime, bonuses, or premiums on materials.

Fair Value: is estimated as the difference between replacement cost and accumulated depreciation caused by obsolescence.

Reproduction Cost Method

The amount required to reproduce a duplicate of the entire property. This is very similar to replacement cost. However, where replacement cost considers like utility and function, reproduction cost considers like kind and materials. The goal would be to replace the structure as an exact replica of the original.

Reproduction cost is appropriate in circumstances such as:

• The cost of a modern equivalent asset is greater than the cost of recreating a replica of the subject asset.
• The utility offered by the subject asset could only be provided by a replica rather than a modern equivalent.

Fair Value: is estimated as the difference between reproduction cost and accumulated depreciation caused by all forms of obsolescence.

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.

The income approach should be used as the primary basis for a valuation under the following circumstances:

• The income-producing ability of the asset is the critical element affecting value from a market participant perspective.
• Reliable projections of the amount and timing of future income are available for the subject asset, but there are few, if any, relevant market comparables.