Report of the Financial Stability Forum

Running head: VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 1
Valuation for Bridgeford Street Enterprises Ltd.
Student’s Name
Institutional Affiliation

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 2
Introduction
The office is situated in Manchester City. The property in which the office is located at
Bridgeford Street in Manchester City. The primary purpose of the valuation of this property is to
establish the market value of the property they propose to purchase to occupy for the business.
The office is situated in a large complex which contains five other similar offices. All the
partition categories of this building are identical in size and design. For example, all offices have
similar dimensions and plans. The building contains twelve offices, eight visitor rooms, five
executive rooms, and four rooms set for operations and maintenance.
The valuation method I would utilize in valuing the building is the sales approach. This
method is also referred to as the market approach. It relies heavily on the most updated sales data
from the comparable properties, for example, other office buildings within the Manchester City.
Bridgeford Street Enterprises Ltd would ascertain the fair market value of the premises situated
within the city to know the estimated market value of the entire building and not just an office.
The method is applicable because it does not have multiple drawbacks, unlike other methods.
The Factors Affecting the All Risk Yields and Market Rents for this Property
The All Risk Yield is a metric used to evaluate the capital value of an investment. It
comprises both net and gross yields. It is utilized when determining the probable risks of an
investment. The metric is also used to assess the market value of a property. ARY is computed
by dividing annual rental income by the value of the property and multiply the results by 100%
(Shapiro, Mackmin & Sams, 2019).
Demographics
Demographics refers to the composition of the population, such as gender, income, age,
race population growth as well as patterns of migration (Shapiro, Mackmin & Sams, 2019).

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 3
These factors are vital when it comes to the determination of real estate or property. Significant
shifts in the demographic status of a country have a massive impact on the trend in the value of
the property located within a specific area.
Therefore, the market rent for the property would be affected by various factors affecting
the demand for properties in Manchester City. In the recent period, there has been a massive
influx of small and medium scale investors in the city. This situation has resulted in rising in
demand for properties, leading to an upward shift in prices. Therefore, the market prices for the
rental offices current is almost double the amount that was charged ten years ago. If demand
continues to rise, the price would probably rice higher in the future.
Interest Rate
The interest rates usually have a high impact on the value of the property. If Bridgeford
Street in Manchester wants to utilize a mortgage to purchase the office, it has to consider the cost
of the loan. The cost of the loan is highly dependent on the interest rate. If the interest rate is low,
then the cost of borrowing is small. A mortgage with a low price is desired because the firm
would service it quickly (Shapiro, Mackmin & Sams, 2019). However, the loan with a high-
interest rate is expensive. Therefore, the firm has to inquire about the current interest rates so that
it can come up with an informed decision on how to service the loan. Also, in case the cost of
building the complex was high because of high bank rates, the rental rates are likely to be
elevated to cover these costs.
The Economy
The overall health of the economy affects the value of a property to a great extent. This
factor can be measured using economic indicators like the gross domestic income of a country,
unemployment report, price of commodities, and the current manufacturing activities. Even

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 4
though offices are not affected by the economic downturn because of the longer term of the
lease, purchasing a full building would be primarily affected by the financial status of the
country.
Government Policy or Subsidies
Government policies have a sizeable impact on property prices. Government with good
policies like tax credits, grants, and deductions can temporarily impact the value of the property
positively. The company would pay less to acquire the property if the government subsidies the
construction of such premises (Shapiro, Mackmin & Sams, 2019). Also, grants boost real estate
companies to construct more houses. The increase in the supply of buildings leads to a reduction
in demand, resulting in lower prices. Therefore, government policies would principally
determine the market value of the buildings situated in Manchester City.
The Uncertainty Associated With My Valuation
The market approach has various downsides or difficulties, just like any other approach.
Sometimes even though there are known and recent transactions in the market, the properties
may not be identical to the current building. Probably, the other transactions involved buildings
of different sizes, shapes, or different locations, which are valued based on land prices and cost
of construction in such areas. One may not be sure whether he would get a completely identical
property sold in the recent period to compare with. This situation makes the market approach
method complex.
In addition, the method can lead to a significantly large error in the amount of the value
of the object. The fact is that assessing the building's market value at the end of the forecast
period is much more difficult than assessing its building at the date of the assessment, since there
is no reliable basis for this. Therefore, the forecast of the reverse value of the object is very

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 5
inaccurate. With a short duration of the forecast period, the share of this component in the value
of the object reaches 75-95%, which can lead to serious errors in the assessment of the market
value of the property.
The G20 Declaration on Strengthening the Financial System, published in April 2009,
called for improved standards to reflect uncertainties in determining fair value. The reason for
the increased attention to this problem from the leading countries of the world was the report
presented by the Forum on Financial Stability in Markets, which noted that the result of any
methods of assessing market value is always accompanied by some inevitable uncertainty that
must be realized in order not to create market participants have the false impression that the cost
is determined exactly (Taub, 2009).
At the same Forum, which took place in the context of the crisis that began (2008), it was
noted that well-known approaches to valuation (primarily comparative) are based on data on
sales of objects in an active market comparable to the valuation object. However, during market
turmoil (we are talking about the 2008 crisis), due to the lack of demand and active trading
activity, the liquidity of many assets decreased. It became clear that even for facilities whose
quality was maintained the same, in a crisis, market participants demand a liquidity premium,
which has become significantly higher than in the years preceding the crisis. (Note that the
requirement of a premium for low liquidity reduces the cost of low liquid real estate.) In this
regard, according to the authors of this document, when markets cease to be active, Other
evaluation methods, in particular modeling methods, are required. The need to account for
liquidity premiums has become a serious problem in real estate valuation and a significant
additional factor in the uncertainty of the valuation result, therefore, the document emphasizes
the importance of finding ways to establish the degree of such uncertainty. This is important so

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 6
as not to give a false impression of the accuracy of the evaluation result in order to protect
market participants from a false sense of security. At the same time, a correctly performed
modeling process does not remove uncertainty, but helps to understand and manage complex
risks, as well as analyze their consequences. therefore, the paper notes the importance of finding
ways to ascertain the degree of such uncertainty. This is important so as not to give a false
impression of the accuracy of the evaluation result in order to protect market participants from a
false sense of security. At the same time, a correctly performed modeling process does not
remove uncertainty, but helps to understand and manage complex risks, as well as analyze their
consequences. therefore, the paper notes the importance of finding ways to ascertain the degree
of such uncertainty. This is important so as not to give a false impression of the accuracy of the
evaluation result in order to protect market participants from a false sense of security. At the
same time, a correctly performed modeling process does not remove uncertainty, but helps to
understand and manage complex risks, as well as analyze their consequences.
The Guide prepared by the Basel Committee in 2009 indicates that the uncertainty
associated with determining the fair value of a financial instrument should be considered as an
integral characteristic of the valuation process (Basel Committee Banking Supervision, 2009).
Moreover, as the factors determining the existence of this uncertainty, the same document
indicates both the characteristics of the asset itself and the characteristics of the trading
environment, primarily the level of market activity that affects its liquidity. The document under
discussion noted that there is a close relationship between the level of uncertainty of the
valuation result and the financial risks associated with specific assets. In other words, the
uncertainty of the assessment result provokes the risk associated with the adoption of decisions
based on the assessment results.

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 7
Given the importance of accounting for estimation uncertainties, this paper states that
further work is needed to describe the estimation uncertainty. It also states that the Basel
Committee plans to issue a Guide aimed at improving the reliability of estimates. In addition to
general recommendations for improving the reliability of estimates, this Guideline should
include recommendations for accounting for liquidity when establishing the level of uncertainty
in the results of estimates (IASB 2009). Particularly important is the recommendation to the
bodies that control the work of the bank, without fail to identify uncertainties for all assets. This
requires a methodology that could provide not only a qualitative analysis of the degree of
estimation uncertainty, but also a determination of its level in a quantitative form. Qualitative
and quantitative estimates of the level of uncertainty should be included in the assessment reports
, as well as in general reports containing risk analysis of the credit institution as a whole. It is
very important that this information is taken into account by the relevant structures that make
investment decisions and manage risks, including senior management and advice (Lefebvre,
Simonova and Scarlat, 2009).
The subject of measurement uncertainty has occupied an important place in the work of
the Council on International Financial Reporting Standards (IASB). In 2009, the Council began
work on draft ED / 2009/5, which outlined the conceptual framework for measuring fair value
(Johnson, 2009). According to this project, to determine the fair value of assets, it is assumed to
use valuation methods adopted in valuation practice to determine their market value, that is,
methods within one of three approaches - comparative (market), profitable or costly (property).
These and other refinements bring the concept of "fair value" closer to the concept of "market
value", therefore, when discussing the uncertainty of assessing market value, it is useful to

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 8
familiarize yourself with the position of the International Council on Accounting Standards
(International Accounting Standards Board 2009).
Work on a document on the conceptual framework for measuring fair value was
completed by the development and entry into force in 2013 of the International Standard for
Financial Reporting (IFRS 13) “Measurement of Fair Value”.
The position of the International Council on Accounting Standards regarding the
disclosure of uncertainties in determining fair value is sufficiently clear in the draft standard
“Report on the analysis of the error in determining (measuring) fair value (ED / 2010/7), sent for
discussion to interested organizations.
As follows from this project, the International Accounting Standards Board and the
Financial Accounting Standards Board have made a preliminary decision to require companies to
conduct an uncertainty analysis for fair value measurements that are classified as part of level 3
of the fair value hierarchy, and apply valuation techniques based on unobserved market data.
Thus, in accordance with this project, the uncertainty analysis is primarily subject to fair value
measurements associated with a high level of uncertainty due to the lack of market data on actual
transactions.
In addition, this document states that when calculating the value of an asset, other issues
should be reflected that are directly related to the uncertainty of the valuation, in particular, the
liquidity of the valued asset, as well as expectations of possible changes in the amount or timing
of future cash flows that the company expects to receive from the asset (Financial Accounting
Standards Board 2009).

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD 9
When discussing the uncertainty of determining fair value for accounting purposes, it is
necessary to mention the new concept of confidence (confidence), proposed in a joint document
of the Association of Chartered Certified Accountants (ACCA), Royal Institute securities,
investment and finance (the Chartered Institute for Securities & Investmentand Long Finance -
CISI) and the organization "Long Money" (Long Finance). By fiduciary accounting, the authors
of this concept understand the accounting method, according to which the numerical values
appearing in the balance sheet, profit and loss statement and cash flow statement, should be
expressed not by point (discrete) values, but by probability distributions. It should be noted that
the term confidence accounting, which we translated as "trust accounting" (similar to the term
confidence interval) was introduced in 2000 to replace, as we see it, the more understandable
term - "probabilistic accounting" (Jensen, 2009).
The proposed concept of fiduciary accounting reflects the position of the authors of the
concept that accounting based only on point (discrete) values of the value of assets and liabilities
is insufficient for an objective assessment of the financial condition of the company and the
associated uncertainties and risks (Platin et al 2007). The paper notes that there are many
potential sources of uncertainty in the value of assets and liabilities that make it impossible to
accurately determine “true value”. This problem resembles a similar measurement error problem.
In this regard, within the framework of the proposed accounting, all lines of the balance sheet
and the profit and loss statement are proposed to be kept in the form of probability distributions.
Histograms or confidence intervals can also be used (Novoa et al 2009).
To sum up, uncertainty is based on the probabilistic nature of the market. The fact is that
even transactions with identical and completely replaceable assets, carried out at the same time
and under the same conditions, can be carried out at different prices. In this case, price variability

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD
10
may not be related to the features of the transaction and even to the market (Laux and Leuz,
2009). It may be due to the different goals of market participants, the difference in their
awareness, the motivation of the parties and other subjective factors. The most probable
transaction price determined during the valuation process generally does not coincide with the
actual transaction price; therefore, the estimation result always has some uncertainty to some
extent.
The following table summarizes the types of risks associated with the valuation
Type of risk Essence of risk
Market risk The risk that the value of an asset will fluctuate in the
future due to changes in market conditions
Liquidity risk The risk that the company will not be able to receive cash
or cash equivalents for an asset on a particular day
Risk of uncertainty The risk of loss from the difference between the valuation
and the sale price of an asset or liability
Amount of assets at risk Assessment of the expected maximum loss for an asset
or portfolio of assets at a given level of confidence and
interval based on an analysis of historical trends in price,
volatility and correlation
Estimation uncertainty The possibility that the estimated value may differ from
the price at which the transaction with the asset or liability
is made at the same time, on the same conditions for
which the valuation was performed, within the same
market environment

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD
11
The Investment Value of the Property
The whole house that Bridgeford Street Enterprises Ltd wants to but can be compared
with two other features within the Manchester city. The current building from which the office is
situated contains twelve offices, eight visitor's rooms, five administrative rooms and four rooms
for operation and maintenance. By using the comparable approach or the market valuation
approach, it can be compared to two similar buildings which were recently sold within the
Manchester city.
Comparable
The two commercial buildings were sold in the year 2019, and both are located within the
Manchester city. The following table shows their specifications and market value at which each
of them was sold. The value of each space is also recorded in the table.
Number of
offices
Visitor
support
spaces
Administrative
support space
Operational
maintenance
space
Price
sold
10 4 6 2 £158000
4 2 3 1 £72,000
Value of
office
space
Value of
visitor
space
Value of
administrative
space
Amount of
operation
maintenance
space

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD
12
7000 5000 8000 10000
The value of the first comparable is calculated as
(10*7000)+ (4*5000) + (6*8000) + (2*10,000)
=70 000+20 000+48000+20000=£158000
The value of the second comparable can be computed as;
(4*7000)+ (2*5000) + (3*8000) +1*(10000)
28000+10000+24000+10000=£72000
Therefore, using the market value for the two comparable properties, we can easily compute the
value of the office building.
The estimated value of the building would be;
(Number of offices*comparable value of an office)+ (number of visitor’s room*comparable
value of visitor’s room) + (number of administrative rooms*comparable value of administrative
room) + (number of operational maintenance space*comparable value of operation maintenance
space)
(12*7000)+ (8*5000) + (5*8000) + (4*10000)
84000+40000+40000+40000=204000
The property value, in this case, would be approximately £204000
Conclusion
The building which Bridgeford Street Enterprises Ltd wants to purchase is situated in
Manchester City. It is a vast complex containing offices, visitor’s rooms, executive rooms as
well as operation and maintenance rooms. The property is valued using the market approach. The

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD
13
approach is applied because it indicates the fair market value of the property. It utilizes the
valued of the recently sold properties within the same locality to come up with the estimated
market value of the property. However, in some cases, it is a complicated method because one
may fail to get a similar property sold recently within the same locality.

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD
14
References
Basel Committee Banking Supervision, (2009). Supervisory guidance for assessing banks'
financial instrument fair value practices, Bank for International Settlements, Available at <
https://www.bis.org/publ/bcbs153.pdf>
Financial Accounting Standards Board (2009). Fair Value Measurements and Disclosures (Topic
820) – Improving Disclosures about Fair Value Measurements, Exposure Draft, August 28,
2009.
IASB (2009), IASB Exposure Draft ED / 2009/05: Fair Value Measurement (Draft ED / 2009/5
Fair Value Measurement). Available at < https://www.iasplus.com/en/news/2009/May/news5162>
International Accounting Standards Board (2009). Fair Value Measurements. Exposure Draft,
ED/2009/05.
Jensen, R.E. (2009), ‘Fair Value Accounting in the USA’. Available at:
http://www.cs.trinity.edu/~rjensen/Calgary/CD/FairValue/21-Jensen-chap21.pdf
Johnson, S. (2009). Simplified Reporting: Forgotten in the Crisis? CFO Magazine, August 12,
2009. Available at http://www.cfo.com/article.cfm/14209682/1/c_2984368?f=search
Laux, C. and Leuz, C. (2009). The Crisis of Fair Value Accounting: Making Sense of the Recent
Debate, The University of Chicago, Booth School of Business, Working Paper No. 33.
Lefebvre, R., Simonova, E., and Scarlat, M. (2009), Fair Value Accounting: The Road to Be
Most Travelled. Available at < https://core.ac.uk/download/pdf/6500036.pdf>
Novoa, A. et al (2009). Procyclicality and Fair Value Accounting, International Monetary Fund,
Working Paper No. WP/09/39.

VALUATION FOR BRIDGEFORD STREET ENTERPRISES LTD
15
Platin, G. et al (2007). Marking-to-Market: Panacea or Pandora’s Box? 2007 Journal of
Accounting Research Conference, p. 26-27
Shapiro, E., Mackmin, D., & Sams, G. (2019). Modern methods of valuation. Estates Gazette.
Financial Stability Forum, Report of the Financial Stability Forum on Enhancing Market and
Institutional Resilience, April 7, 2008.
Taub, S. (2009). Survey: Boards are Often Blind to Major Risks, CFO Magazine. Available at
http://www.cfo.com/article.cfm/12454618?f=search