Valuation of Plant & Machinery - IV : Page 1 of 62
Contents of Course
Contents
1. Overview of Indian Accounting Standard (Ind AS 16 – PPE)
2. Study of guidance notes and accounting practice for revaluation of fixed assets
3. Valuation of specialized machinery or property
4. Elementary study of docks and harbors
5. Salient features of Land Acquisition Act, 1894
6. Study of International Valuation Standards published by International Valuation
Standards Committee
7. Manual of Valuation/Guidance notes in relation to valuation of plant and
machinery published by Royal Institution of Chartered Surveyors
8. Study of Case laws - affecting valuation of plant and machinery
9. Valuer’s role, functions and responsibilities & Code of ethics for valuer
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Ind AS
16 - PPE
Objective:
1. The objective of this standard is to prescribe the accounting treatment
for Property, Plant and Equipment (PPE), so that users of the financial
statements can differentiate information about an entity’s investment
in its property, plant and equipment and the changes in such investment.
2. The principal issues in accounting for property, plant and equipment are
the recognition of the assets,
3. The determination of their carrying amounts and the depreciation
charges and impairment losses to be recognized in relation to them.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Ind AS
16 - PPE
This Standard does not apply to:
1. PPE classified as held for sale in accordance with Ind AS 105, Non-current
Assets Held for Sale and Discontinued Operations,
2. Biological assets related to agricultural activity other than bearer plants. This
Standard applies to bearer plants but it does not apply to the produce on bearer
plants (Ind AS 41),
3. The recognition and measurement of exploration and evaluation assets (Ind
AS 104),
4. Mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Definition
Property, Plant and Equipment are class of tangible items that:
a) Held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes; and
b) Expected to be used during more than one period.
Carrying Amount is the amount at which an asset is recognized after
deducting any accumulated depreciation and accumulated impairment
losses.
Cost is the amount of cash or cash equivalents paid or the fair value of
the other consideration given to acquire an asset at the time of its
acquisition or construction.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Definition
Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life.
Depreciable Amount is the cost of an asset, or other amount substituted for
cost, less its residual value.
Carrying Amount is the amount at which an asset is recognized after
deducting any accumulated depreciation and accumulated impairment losses.
Entity - Specific Value is the present value of the cash flows an entity
expects to arise from the continuing use of an asset and from its disposal at
the end of its useful life or expects to incur when settling a liability.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Definition
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.
Impairment Loss is the amount by which the carrying amount of an
asset exceeds its recoverable amount.
Recoverable Amount is the higher of an asset’s fair value less costs to
sell and its value in use.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Definition
Residual Value of an asset is the estimated amount that an entity
would currently obtain from disposal of the asset, after deducting the
estimated costs of disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.
Useful life is:
a) The period over which an asset is expected to be available for
use by an entity; or
b) The number of production or similar units expected to be obtained from the asset by an entity.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Accounting
Treatment
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE) : Elements of Cost
Measurement
at
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Measurement
at
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Measurement
at
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Measurement
at
Recognition
1. The cost of an item of PPE is the cash price equivalent at the
recognition date.
2. The difference between the cash price equivalent and the total
payment is recognized as interest over the period of credit unless
such interest is capitalized in accordance with Ind AS 23
3. The cost of exchanged non-monetary assets of PPE is measured at
Fair Value.
4. The cost of an item of PPE held by a lessee under a finance lease is
determined in accordance with Ind AS 17.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Measurement
after
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Measurement
after
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Measurement
after
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Measurement
after
Recognition
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Depreciation
Each part of an item of property, plant and equipment with a cost that
is significant in relation to the total cost of the item shall be
depreciated separately, means of Componentization Approach.
For example, it may be appropriate to depreciate separately the
airframe and engines of an aircraft.
The depreciation charge for each period shall be recognized in profit
or loss unless it is included in the carrying amount of another asset.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Basis of
Componenti-
zation
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Depreciable
Amount &
Depreciation
Period
Depreciable Amount of an asset shall be allocated on a systematic
basis over its useful life,
Residual Value and the useful life of an asset shall be reviewed at least
at each financial year-end,
Depreciation is recognized even if the fair value of the asset exceeds its
carrying amount, as long as the asset’s residual value does not exceed
its carrying amount,
Depreciable Amount of an asset is determined after deducting its
residual value,
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Depreciable
Amount &
Depreciation
Period
The residual value of an asset may increase to an amount equal to or
greater than the asset’s carrying amount,
Depreciation of an asset begins when it is available for use,
Close down when held for sale under Ind AS 105 or de-recognition, not
while idle
Land & Building are accounted separately
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Useful Life
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Residual
Value
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Depreciation
Method
1. Depreciation method used shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity,
2. Depreciation method applied to an asset shall be reviewed at least at each
financial year-end,
3. Depreciation methods include the straight-line method, the diminishing
balance method and the units of production method,
4. A depreciation method that is based on revenue that is generated by an
activity that includes the use of an asset is not appropriate.
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Example of Componentization - Depreciation without componentization
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Estimation of Depreciation with componentization
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
Estimation of Depreciation with componentization
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Overview of Indian Accounting Standard (Ind AS 16 – PPE)
De -
recognization
1. on disposal; or
2. when no future economic benefits are expected from its use or
disposal.
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Elementary Study of Harbors & Docks
Harbors &
Docks
Harbor: The sheltered (protected) area of the sea in which vessels could be
launched, built or repaired, or could seek refuge during storm time and provide
loading and unloading facilities of cargo and passengers.
Dock: The enclosed area provided for berthing ships to keep them afloat at a
uniform level to facilitate loading and unloading.
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Elementary Study of Docks & Harbors
Harbor &
Docks
Classification of Harbor:
Natural Harbor, Semi Natural Harbor, Artificial Harbor, Harbor of Refuge,
Commercial Harbor, Fishery Harbor, Military Harbor or Naval Base Harbor
Classification of Dock:
1. Wet Docks: used for berthing of ships or vessels to facilitate the
loading and unloading of passengers and cargo
2. Dry Docks: used for built & repairs of ships or vessels
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Elementary Study of Docks & Harbors
Dry
Docks
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Elementary Study of Docks & Harbors
Wet
Docks
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Elementary Study of Docks & Harbors
Horbor
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Elementary Study of Docks & Harbors
Terms
Berth: The space where cargo is unloaded or loaded into a vessel
Apron: The open space left immediately in front of a berth of a ship
Approach Channel: The dredged clear channel through which ships
proceed from the open sea to the harbor basin
Breakwaters: The protective barriers constructed to enclose harbors and keep the harbor waters undisturbed by the effect of heavy and strong seas
Basin: The water area formed in a port on the sea coast protected by an out laying breakwater
Jetty: A piled solid or open type structure built out from the shore to deep
water to berth vessels along side
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Elementary Study of Docks & Harbors
Terms
Navigational Aids: the devices such as lights, signals used to guide and
warn safe, efficient, economic and comfortable travel of ships in rivers,
oceans and harbors
Piers: The structures constructed perpendicular or oblique to the shore of
the sea or river to provide bathing facilities
Quays: The platforms constructed parallel to the shore to allow ships to
berth along sides these platforms for loading and unloading purposes
Wharves: The landing platforms or places in the form of walls built near
the shore for vessels to berth
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Valuation of Specialized Machinery or Property
Jigs &
Fixtures
Jigs & Fixtures are production tools used to accurately manufacture
duplicate and interchangeable parts. Jigs and fixtures are specially
designed so that large numbers of components can be machined or
assembled identically, and to ensure interchangeability of components.
Jigs: It is a work holding device that holds, supports and locates the work
piece and guides the cutting tool for a specific operation.
Fixtures: It is a work holding device that holds, supports and locates the
work piece for a specific operation but does not guide the cutting tool.
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Valuation of Specialized Machinery or Property
Press
Tools,
Mould & Die
Press Tools are commonly used in hydraulic, pneumatic, and mechanical
presses to produce components at high volumes & are categorized such
as blanking, piercing, bending, forming, forging, trimming etc.
Mould or Mold is a hollowed-out block that is filled with a liquid like plastic, glass, metal, or ceramic raw materials. The liquid hardens or sets
inside the mold & adopting its shape.
Die is a specialized tool used in manufacturing industries to cut, shape
and form a wide variety of products and components.
Pattern is made of wood or metal, is a replica of the final product and is
used for preparing mould cavity.
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Valuation of Specialized Machinery or Property
Cost of
Production
of
Specialized
Machinery
(SM)
Cost of production shall consist of Material Consumed, Direct Wages and
Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research
and Development Cost, Packing cost, Administrative Overheads relating to
production.
To arrive at cost of production of goods dispatched for captive consumption,
adjustment for Stock of work-in-Process, finished goods, recoveries for
sales of scrap, wastage etc. shall be made.
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Valuation of Specialized Machinery or Property
Cost of Material Consumed shall consist of cost of material, duties and taxes, freight
inwards, insurance, and other expenditure directly attributable to procurement. Trade
discount, rebates and other similar items will be deducted for determining the cost of
materials. Cenvat credit, credit for countervailing customs duty, Sales Tax set off, VAT,
duty draw back and other similar duties subsequently recovered/recoverable by the
enterprise shall also be deducted.
Direct Wages and Salaries shall include overtime, leave encashment and incentive
payments made to employees directly engaged in the manufacturing activities.
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Valuation of Specialized Machinery or Property
Direct Expenses are cost of utilities such as fuel, power, water, steam & other,
technical assistance/knowhow fees, job charges, charges for a particular product
designing etc.
Works Overheads Expenses are consumable stores and spares, repair and
maintenance of plant and machinery, drawing and designing department cost, service
department cost such as tool room, engineering & maintenance, etc.
Quality Control Cost is the expenses incurred relating to quality control activities for
adhering to quality standard.
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Valuation of Specialized Machinery or Property
Research and Development Cost incurred for development and improvement of the
process or the existing product shall be included in the cost of production.
Administrative Overheads need to be analyzed in relation to production activities and
other activities. Administrative overheads in relation to production activities shall be
included in the cost of production.
Refer: Cost Accounting Standard on Cost of Production for Captive Consumption (CAS – 4)
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Valuation of Specialized Machinery or Property
Valuation
of
Specialized
Machinery
(SM)
Valuation of Plant & Machinery - IV : Page 44 of 62
RICS Valuation – Professional Standards
Plant & Equipment usually Included in Valuations of the Property Interest
This will include;
1. items associated with the provision of services (gas, electricity, water,
drainage, fire protection and security) to the property
2. equipment for space heating, hot water and air conditioning not integral to any
process and
3. structures and fixtures that are not an integral part of process equipment, for
instance, chimneys, plant housings and railway tracks
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RICS Valuation – Professional Standards
Plant & Equipment Separately Valued
Plant and equipment valued separately from the property interest can be divided into broad
categories of Fixed Asset.
Examples of ‘fixed assets’ include;
process and production plant and machinery
fixtures and fittings
office equipment, including computers
office furniture
vehicles and transport infrastructure and
mobile plant
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RICS Valuation – Professional Standards
Plant & Equipment Separately Valued
Borderline items that may not always be regarded as ‘fixed assets’ include:
product-dedicated items (e.g. moulds, jigs and dies)
spare parts
operating software, licences and consents
stocks (inventory)
materials-in-trade
stores and
work in progress.
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RICS Valuation – Professional Standards
Plant & Equipment Separately Valued
Examples of intangible assets include;
commercial and administration records, drawings, designs and technical data
licences and consents
software
licences, operating systems, goodwill, know how, patents, trademarks, brand names and
other intellectual property.
Although intangible assets fall outside the definition of plant and equipment, the two asset classes often
operate in concert, which may have an impact on their discrete and or composite values. In such cases the valuer should establish appropriate assumptions in this regard (preferably at the engagement stage) and prior to reporting a valuation. Valuers should also be aware of the fact that the definition of intangible
assets may vary relative to statute, local practices and accounting convention.
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RICS Valuation – Professional Standards
Encumbered Assets
It is common for plant and equipment to be subject to lease or financing arrangements. Such
asset backed or based arrangements vary from a simple hire/lease purchase agreement through
to complex, cross-border financing agreements.
Valuers will need to establish the reporting basis and any special assumptions at the time of
engagement, or agree and document the assumptions as the engagement progresses.
National and International Financial Reporting Standards and lending regulators’ rules regarding
the treatment of leased/financed assets are subject to regular review and change.
Valuers should clearly set out the basis and extent of their proposed work relative to such rules and
standards, to ensure that the resulting valuation advice is appropriate to the particular reporting
circumstances.
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RICS Valuation – Professional Standards
Material Considerations
When valuing plant and equipment on the basis of market value, it requires an indication of whether the valuation
assumes that the assets will remain in their working place, or are valued for removal (as a whole or as individual items). Further assumptions may also be required, depending on the purpose of the valuation.
Examples include:
how the property is to be offered for sale (e.g. as a whole or as individual items)
the assumed method of sale
environmental issues
any restriction on sale method (e.g. lease conditions prevent sale by auction)
whether the purchaser or vendor is to bear the costs of decommissioning or removal an
whether allowance is made for any cost of reinstatement following removal and, if so,
who will bear the cost.
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RICS Valuation – Professional Standards
Material Considerations
The valuer first needs to establish matters such as the type, specification, capacity and
purpose of the items, then consider matters such as age, efficiency, condition, functional
and economic obsolescence, and estimated total and remaining useful economic working
life.
The extent of the investigations, and any assumptions reflected in the valuation, will
have to be agreed with the client at the time of engagement and included in the later
report.
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RICS Valuation – Professional Standards
Regulatory Measures
The valuer must investigate the nature of the plant and activity, as well as the purpose of
the valuation and its extent, in determining how far the regulatory measure can, or
might, affect the valuation.
Where there is doubt about compliance with any regulations affecting the value of plant
and equipment, the valuer should discuss the matter with the client and any related
advisers and refer to the outcome in the report.
This should be done either by agreeing to make assumptions in the report, or to
compliance undertakings as advised by the client and any related advisers.
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IVS 300: Plant and Equipment
Overview
Items of plant and equipment (sometimes referred to as personal property) are
tangible assets that are held by an entity for use in the production or supply of
goods or services, for rental by others or for administrative purposes and that
are expected to be used over a period of time.
Intangible assets fall outside the classification of plant and equipment assets.
However, an intangible asset may have an impact on the value of plant and
equipment assets. For example, the value of patterns and dies is often
inextricably linked to associated intellectual property rights.
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IVS 300: Plant and Equipment
Overview
Operating software, technical data, production records and patents are further
examples of intangible assets that can have an impact on the value of plant and
equipment assets.
Valuations of plant and equipment are often required for different purposes
including secured lending, sales of real property, taxation, litigation, insolvency
proceedings and financial reporting.
Consideration of a range of factors;
1. Asset related
2. Environment related
3. Economic related
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IVS 300: Plant and Equipment
Overview
Assumptions that may be appropriate in different circumstances include;
1. that the plant and equipment assets are valued as a whole, in place and as part of
the business, considered as a going concern,
2. that the plant and equipment assets are valued as a whole, in place but on the
assumption that the business is closed, and
3. that the plant and equipment assets are valued as individual items for removal
from their current location.
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IVS 300: Plant and Equipment
Basis of Value
Using the appropriate basis of value and associated premise of value is
particularly critical in the valuation of plant and equipment because differences
in value can be pronounced depending on whether an item of plant and equipment
is valued under an ‘in use’ premise, orderly liquidation, or forced liquidation.
The value of highly specialized equipment is particularly sensitive to different
premises of value.
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IVS 300: Plant and Equipment
Valuation Approaches
Market Approach
Income Approach
Cost Approach
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IVS 300: Plant and Equipment
Financing Arrangements
The value of an asset is independent of how it is financed. However, in some
circumstances the way items of plant and equipment are financed and the stability
of that financing may need to be considered in valuation.
An item of plant and equipment may be subject to a financing arrangement.
Accordingly, the asset cannot be sold without the lender or lessor being paid any
balance outstanding under the financing arrangement
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Code of Ethical Principles for Professional Valuers
Integrity:
The principle of integrity imposes an obligation on all professional valuers to be straightforward
and honest in all professional and business relationships. Integrity also implies fair dealing and
truthfulness.
contains statements or information that are materially false or misleading or that are
made recklessly; or
omits or obscures information required to be included where such omission or obscurity
would be misleading
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Code of Ethical Principles for Professional Valuers
Objectivity:
The principle of objectivity imposes a responsibility on the professional valuer not to
compromise their professional or business judgment because of bias, conflict of interest or the
undue influence of others.
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Code of Ethical Principles for Professional Valuers
Competence:
1. to act in accordance with applicable technical and professional standards when
providing professional services;
2. to maintain professional knowledge and skill at the level required to ensure that clients
or employers receive competent professional service
The maintenance of professional competence requires a continuing awareness and an
understanding of relevant technical, professional and business developments. Continuing
professional development enables a professional valuer to develop and maintain the capabilities
to perform competently within the professional environment
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Code of Ethical Principles for Professional Valuers
Confidentiality:
1. disclosing outside the firm or employing organization confidential information acquired
as result of professional and business relationships without proper and specific
authority or unless there is a legal or professional right or duty to disclose; and
2. using confidential information acquired as a result of professional and business
relationships to their personal advantage or the advantage of third parties.
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Code of Ethical Principles for Professional Valuers
Professional Behavior:
The principle of professional behavior imposes a responsibility on all professional
valuers to act carefully in the service of their clients and to ensure that the service
provided is in accordance with all legal, technical and professional standards that
are applicable to either the subject of the valuation, the purpose of the valuation or
both.
Professional behavior includes acceptance of a responsibility to act in the public
interest