From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘Appraisal Foundation

Comments to the Appraisal Foundation Strategic Plan

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Appraisal standards and licensure qualification in the U.S. are promulgated by the Appraisal Foundation in Washington, D.C., a private organization which receives oversight from the Congressionally-established, inter-agency Appraisal Subcommittee.

This summer the Foundation issued a request for comments on a sweeping update to their strategic plan.  I, along with many others, have submitted comments to the proposed updates, and my comments will soon be published on the Foundation’s website.  I’m also presenting my comments here, verbatim, for discussion and input from colleagues and friends (see below).


Comments to Appraisal Foundation Strategic Plan

Written by johnkilpatrick

October 12, 2012 at 8:54 am

Posted in Real Estate, Valuation

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International Financial Reporting Standards

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I know I’m sounding like an overly technical geek on these subjects, but as we know from the recent (current?) economic malaise, seemingly back-page issues can have major impacts on large segments of the economy.

Buried deep inside Friday’s issue of the Wall Street Journal (OK, page C1, but that’s pretty deep) was news that the SEC will once again delay implementation of the International Financial Reporting Standards (“IFRS”) for U.S. regulated businesses (from a practical standpoint, essentially all of them).  For those who aren’t up on their accounting theory, U.S. accounting standards — generally referred to as “Generally Accepted Accounting Practices” or “GAAP” for short — have been developed over time from essentially three sources:  “best practices” which have evolved literally over the centuries, pronouncements of the Financial Accounting Standards Board, or “FASB”, and its predecessors, and adaptations to conform with U.S. tax practice.  IFSR is more of a top-down approach, and governs accounting practices pretty much anywhere in the developed world EXCEPT for the U.S.   (One might argue, and with some validity, that recent accounting problems among Chinese businesses reveal real problem with IFRS compliance, and one wouldn’t be altogether wrong.  That’s a topic for a different day, though.)

American businesses dealing in global commerce (as nearly all big ones do, now-a-days) have been anxious for a unifying accounting paradigm for many years.  Indeed, the differences between IFRS and GAAP are significant, and in fact adoption of IFRS in the U.S. may cost many businesses quite a bit in tax penalties, since IFRS doesn’t recognize certain tax avoidance strategies (e.g. — last-in-first-out inventory accounting) that are common in the U.S.  Nonetheless, American businesses are willing to suffer the tax pain in order to get a common accounting language globally.

From an accounting perspective, this delay by the SEC is a royal pain in the neck, but that too is a topic for another day.  The reason I bring it up today is the implicit impact on real estate appraisal standards.  I’ve noted, with some interest, that appraisal standards are increasingly derivative of accounting practices.  Back when America’s Uniform Standards of Professional Appraisal Practice (“USPAP”) was developed, accountants could barely care about appraisal standards.  Today, a close examination of the International Valuation Standards Council (IVS) reveals a substantial degree of input from the accounting and banking fields, much more than we saw 25-ish years ago when USPAP was first codified.

In my own observation, this SEC delay gives the appraisal profession another year or so to decide if they want a top-down or bottoms-up approach to appraisal standards in the U.S.  Do appraisers want to be driving the truck or riding in the back?  I’ve observed that the three constituent “regulatory” bodies (the professional organizations, such as the Appraisal Institute and RICS, the Appraisal Foundation, and the state and federal regulators) seem to be of three different minds on the subject.  The constituent bodies seem to be more proactive and ready to move forward with IVS adoption.  The Foundation seems to have been constantly playing damage control in the past couple of years over the mortgage market meltdown and the resultant sturm-and-drang from the Federal regulatory bodies.  None of those regulatory bodies seemed to have a dog in this hunt, so haven’t appeared to care.  I will say, however, that proposed changes to USPAP 2014, which are currently being circulated in draft form, are very forward-looking, albeit with baby steps.

Finally, state regulators are almost 100% reactive.  Some are very good at reacting, and some are very bad.  Currently, they are all overwhelmed with the double-whammy of very real budget cuts and very real appraisal standards violations problems emanating from the mortgage market meltdown.  As such, a major paradigm shift in appraisal standards will be difficult for them to swallow.

This all seems to be back-page stuff, but in fact these issues have very real implications for the way “business does business”, particularly in the real estate valuation world.  We’ll keep you posted.

Written by johnkilpatrick

July 8, 2012 at 4:43 am

Appraisal and Financial Reporting

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Real estate appraisers are, by and large, behind the curve as far as International Financial Reporting Standards are concerned. IFRS is already the norm in most of the world, and will integrate in the U.S. with our accounting rules in the very near future. The Appraisal Foundation recognizes that many (most?) appraisers lack the knowledge and training to compete in the this new realm, and is taking proactive steps to address the problem.

The “ying and the yang” of this — implementation of the IFRS, particularly following the real estate meltdown, will focus considerable attention on asset values rather than asset costs. This has become known as the “mark to market” phenomenon. In an era when everyone basically THOUGHT that asset values gallopped upward non-stop, reporting historical costs-less-depreciation was the norm, and a conservative one at that. However, in an era when real asset values have actually declined, the conservative approach is to mark these values to market. This necessitates regular appraisals. All well and good for appraisers, right?

Not so fast, bucko. There’s nothing in the IFRS that requires an appraiser, per se, and in fact appraisers are so out-of-touch with financial reporting standards that CPAs (who are ultimately responsible for the reporting) may be loathe to use appraisers for these assignments. At best, CPAs are described as “skeptical” on the contribributions to be made by appraisers.

One change will be the migration from “market value” (as is commonly preached to and by appraisers) to “fair value” which is enculcated in Statement of Financial Accounting Standards NO. 157. IFRS will converge Fair Value guidance with US Generally Accepted Accounting Principals with the pending issuance of IFRS 13.

Other changes include new thinging about “market participants”, “highest and best use”, and a concept totally foreign to appraisers, “levels of valuation input.” This latter creates a hierarchy: Level 1, Level 2, and Level 3.

Yesterday, the Appraisal Foundation sponsored a webinar featuring some great thinkers on this subject. Rather than get “down in the weeds”, they were good enough to keep the topic at 20,000 feet and thus cover a wide array of implications in a very short time. Clearly, there’s a lot of education and re-education needed if appraisers are going to have a role to play in this. In the meantime, appraisers can begin familiarizing themselves with the salient information at the IFRS web site,

Written by johnkilpatrick

March 17, 2011 at 8:32 am

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