What Is Highest and Best Use?

The principle of asset evaluation is to regulate the relationship between the client of asset evaluation, the proprietor of the evaluation business and the relevant parties in the asset business in the evaluation of assets, and to standardize the evaluation behavior and business standards.

Asset valuation principles

Right!

The principle of asset appraisal is to adjust the relationship between the client of asset appraisal, the appraisal business proprietor, and the relevant stakeholders in the asset business in asset appraisal.

Asset valuation principles are norms that regulate the behavior and business of asset valuation, including working principles and economic and technological principles. ^[1]

Working principle

The working principles of asset appraisal refer to the basic principles that appraisal agencies and appraisers should follow in the practice process, mainly including the principle of independence, the principle of objectivity and scientificity.

(A) the principle of independence

The principle of independence means that the appraisal agency should always adhere to the position of a third party and not be affected by the interests of the parties to the asset business. The appraisal agency shall be an independent social justice agency, and shall not be owned by or affiliated with any party in the asset business. Following this principle can guarantee the organization from the interference of stakeholders and the intention of the client.

(B) the objective and impartial principle

The objective fairness principle requires that the evaluation results be based on sufficient facts. This requires the assessor to collect relevant data and information in a fair and objective manner during the assessment process, and requires that subjective judgments such as predictions and projections in the assessment process are based on the market and reality. In addition, in order to ensure the fairness and objectivity of the assessment, in accordance with international practice, the labor costs charged by asset appraisal agencies should only be related to the workload and not linked to the value of the assets being evaluated.

(3) Scientific principles

The scientific principle means that in the process of asset appraisal, it is necessary to select applicable value types and scientific methods according to specific purposes, and formulate a scientific appraisal plan to make the asset appraisal results accurate and reasonable. In the entire evaluation work, subjective evaluation and objective observation calculation, static analysis and dynamic analysis, qualitative analysis and quantitative analysis must be combined to make the evaluation work scientific, reasonable, and authentic.

Economic and technical principles of asset valuation

Although the working principles of asset evaluation have repeatedly emphasized that appraisers should adopt an objective and fair attitude in the prediction of future returns of assets and the selection of market information and data, because the asset evaluation itself has a scientific side of accurate calculations, There is also an aspect of appraisal art, and appraisal appraisal art is embodied by the appraiser's experience, creative, and logical plan, so the result of asset appraisal is more or less subjective. There have been textbooks of foreign asset valuations that point out that even if two equally qualified appraisers evaluate the same asset, their valuations may not be completely equal. This requires appraisers to follow the principles of asset pricing, or the economic and technological principles of asset appraisal, in order to ensure that the appraisal results are relatively fair and reasonable.

The economic and technological principles of asset evaluation refer to the principles of specific technical treatment in the process of asset evaluation. It is formed on the basis of summing up asset evaluation experience, international practices, and market-acceptable evaluation criteria. It mainly includes: the principle of expected returns, the principle of substitution, the principle of best utility, and the principle of contribution.

(I) Expected income principle

The principle of expected income means that in asset evaluation, the value of an asset may not be determined based on its past costs or purchase prices, but it must fully consider the economic benefits it may bring to its controllers in the future. The market price of an asset is mainly determined by its future usefulness or profitability. The greater the future utility, the greater the valuation. On the contrary, although an asset costs a lot of money when acquired, it currently has little utility. The evaluation value will not be high. The expectation principle requires that in the evaluation, the asset's future profitability and the effective period of obtaining profitability must be reasonably predicted.

(B) the principle of supply and demand

The principle of supply and demand in economics refers to the law of the impact of supply and demand on commodity prices under the premise of other conditions being unchanged. The law of supply and demand also applies to the pricing of assets, and requires appraisers to fully consider the supply and demand conditions of the assets being evaluated in the market at the time of pricing.

(Three) the principle of substitution

The principle of substitution is a general rule of commodity exchange, that is, the homogeneous commodity with the lowest price is substitutable for other homogeneous commodities. According to this principle, the replacement principle of asset evaluation means that when facing different prices of several identical or similar assets in the evaluation, the lower value should be taken as the evaluation value, or the evaluation value should not be higher than the price of the substitute. This principle requires appraisers to conduct asset appraisals from the perspective of the purchaser, because the appraisal value should be the price that the potential purchaser of the asset is willing to pay.

(IV) Contribution Principle

The contribution principle means that the value of a single asset or a component of an asset depends on its contribution to the value of other related assets or the overall value of the asset, rather than determining its assessment value in isolation based on its own value; In the absence of it, the appraisal value is determined by the degree of influence on the decline in the value of the relevant asset or asset.

The various pricing principles of asset evaluation are interconnected and complementary organic wholes. We cannot unilaterally emphasize one aspect and ignore the other.

(V) Timing principle of assessment

The market is changing, and the value of assets will change continuously as market conditions change. In order to make the asset evaluation work, and at the same time to ensure that the results of the asset evaluation can be tested by the market, it must be assumed that the market conditions are fixed at a certain point in time, that is, the evaluation base date.

(Six) the highest best use principle

This principle is based on the principle of value theory, emphasizing that when commodities are exchanged, their value should be realized with the best use and utilization. As the use of commodities, especially assets, is restricted by market conditions, the determination of the highest optimal use generally requires consideration of the following factors:

1. In response to legal requirements, legal restrictions on the use of the asset must be considered;

2. To determine whether the use is technically possible, it must be a use that market participants consider reasonable;

3. To determine the financial feasibility of the use, it must be considered whether the use of the asset can generate sufficient income or cash flow when legally permitted and technically possible, so as to compensate the cost of the asset for the use After that, it is still able to meet the investment returns required by market participants.

(VII) Externality Principle

The extrinsic principle in asset evaluation refers to that "externality" will bring additional gains or losses beyond the relevant factors to the relevant rights subjects, thereby affecting the value of the asset and directly affecting the transaction price of the asset. Asset evaluation should pay full attention to the loss or gain caused by the "externality" to the assessed assets and the impact of such losses or gains on the value of assets.