The Depreciated Replacement Cost method of valuation (DRC) | Discussion


Kenneth Ray Davies


Registered Professional Valuer (2051/4)

083 327 4405

1.1 Introduction

In June 2005 at the South African Institute of Valuers National Executive Meeting, the 7th Edition of International Valuation Standards (2005) were adopted as the standards of the South African Institute of Valuers.

The primary objective of the International Valuation Standards Council (IVSC) is to “build confidence and public trust in valuation by producing standards and securing their universal adoption and implementation for the valuation of assets across the world. We believe that International Standards (IVS) are a fundamental part of the financial system, along with high levels of professionalism in applying them”. International Valuation Standards IVS, effective 31 January 2022. p.1.

Further, under “Framework”, we note “Compliance with Standards”.

10.1 When a statement is made that a valuation will be, or has been, undertaken in accordance with the IVS, it is implicit that the valuation has been prepared in accordance with all relevant standards issued by the IVSC. p.10.

10.2 In order for a valuation to be compliant with IVS the valuer must comply with all the requirements contained within IVS. p.10.

1.2 Problem Statement

Non-adherence to International Valuation Standards, either wholly or in part, has led to vastly differing values of the same property when applying different approaches to the valuation. It is particularly evident that application of the cost approach/DRC often yields extremely high and unrealistic values compared with values determined by applying the income and market approaches.

This discussion document examines three principle reasons as to why DRC value estimates are so often unrealistically high, and which can be attributed to valuers, not:

  1. Establishing the cost of the Modern Equivalent Asset (MEA)
  2. Identifying and qualifying economic obsolescence
  3. Applying the Test of Adequate Profitability

Guidance on 1-3 above are to be found in the 7th Edition International Valuation Guidance Note No.8: The Cost Approach for Financial Reporting – (DRC) (Revised 2005) – Effective date 31 January 2005, and are comprehensively dealt with in the discussion document below.

Click here to view on the SAIV website.

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