5.04: Assumptions Used in Valuators’ Reports
Assumptions, whether based on instructions to the valuator or based on the valuator’s judgment, are important in that they help to define the parameters by which the report is prepared. Reports will generally make better sense once the reader understands the assumptions on which the report was based. A different set of assumptions could well lead to a different valuation conclusion. In all cases the valuator is responsible to ensure that the assumptions are reasonable and suitable in the circumstances. Weak or unsupported assumptions will undermine the credibility of the conclusion.
A valuation conclusion is only as good as the assumptions on which it is based.
There are two types of assumptions that are relevant in valuators’ reports:
The first type of assumption is built into the instructions to the valuator. In the appointment the valuator may be told to base the calculations on certain assumed facts or considerations. There may also be issues that the valuator is instructed to expressly ignore.
The other type of assumption is the type that the valuator needs to make to simplify or clarify the basis of the report. The degree to which this type of assumption can be made depends on the scope of the valuator’s report. A calculation valuation report allows the valuator to make more assumptions on – say – the reliability of information than an estimate valuation report where a greater level of corroboration of information is expected. The valuator may also make certain assumptions about the business environment going forward.
Contact MVI at the outset of a valuation exercise if there are any assumptions that need to be built into the calculations.