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Valuation Definitions

Valuation – The Determining Factor in the Appraisal Purpose

Depending on your appraisal requirements, a particular definition of value may be applied to your possessions representing their estimated value. The following definitions - as supplied by the Appraisers Association of America - and valuation may help in determining and defining your appraisal needs.

Replacement Value: Insurance Scheduling, Relocation, Damage & Loss Claims; The amount it would cost to replace an item with one of similar and like quality purchased in the most appropriate marketplace within a limited amount of time. [Replacement Value is also defined as: The highest price in terms of cash or other precisely revealed terms that would be required to replace a property with another of similar age, quality, origin, appearance, provenance, condition within a reasonable length of time in an appropriate and relevant market]

Fair Market Value: Estate Tax & Planning, Charitable Contribution; Donations; Fair Market Value (FMV) is the price that property would sell for on the open market between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. (IRS Pub 561) If you put a restriction on the use of property you donate, the FMV must reflect that restriction.

This succinct definition is stated in several IRS rules and regulations and publications. However, application of Fair Market Value has been specified and modified by various court decisions. For a complete discussion of these decisions see Art Law: The Guide for Collectors, Investors, Dealers and Artists.

Marketable Cash Value: Resale, Marital Dissolution / Divorce Proceedings; The value realized, net of expenses, by a willing seller disposing of property in a competitive and open market to a willing buyer, both being reasonably knowledgeable of all relevant facts, and neither being under constraint to buy or sell.

It is implicit in this definition that the sale takes place within an agreed upon time period, with a specified method of payment, in the best available marketplace, with sufficient time allowed to advertise properly.

Liquidation Value: Orderly & Forced Liquidation under time constraints; Bankrupcy Proceedings; The price realized in a sale situation under forced or limiting conditions and under time constraints. This action may be initiated by the owner or the crediting institution. It is implicit in this definition that Liquidation Value will generally be lower than other types of valuation.

Valuation Approaches

Market Data Comparison Approach: This is the primary valuation approach used in almost all personal property appraisals. The valuation method used to determine the price which one would pay for another copy of a multiple or of a unique work of equal value by the same artist or one whose reputation is considered to be on the same level.

The approach involves the compilation of appropriate comparables and the analysis of why these comparables would be considered in the valuation of the object.

It also involves the determination of the most appropriate market in which these comparables would be sold - e.g. public auction, private galleries, trade among collectors.

Cost Approach: This is the valuation method used to determine a value for an object based on the cost of manufacturing or recreating the identical piece.

This method is never applicable to fine arts where the cost of creation never determines the value of the piece - e.g. the cost of the canvas & paint has no influence on the value of a painting; the cost of charcoal, pencil, paper does not determine the value of a drawing; the cost of printing and paper does not determine the value of a fine art print; the cost of stone and carving does not determine the value of a sculpture.

It is however, applicable in certain cases when dealing with decorative arts when the cost of creating an object has a strong influence upon its sale.

Exception: In certain cases of fine arts, such as motion pictures or photographs, a recently made work may be worth more than an already existing vintage copy in poor condition or in a situation when no vintage copy exists at all. In this case, the appraiser may choose to utilize the cost approach (i.e. laboratory costs and copyright considerations) in determining value, factoring in considerations of scarcity, demand and public opinion of value.

Income Approach: This is the valuation method used to ascribe a value to an object which will be used to generate income at a future date.

It is only applicable when the subject art is being either leased or rented as a business practice by a firm, an institution or an individual who is in the business of leasing or renting art.
Exception: An exception must be made when an image of a work of art is being used to create a tax depreciable value - i.e. a tax shelter.

Definition and Clarification: Generally speaking all fine art is considered to be appreciable art. It has the potential of becoming more valuable, depending upon the artist's future reputation. Depreciable art is usually the work of either unknown artists or those who are described as being of non-museum quality or whose work has no secondary market and consequently will be expected to depreciate in value when offered for resale.

Example: An image of a Picasso painting is used to create a set of lithographs and other commercial products such as scarves, posters, ash trays, etc. In this case, the vehicle bearing the image (e.g. plate, screen, photo), the master is the object which is being valued. In this case the income approach would be applied. It should be noted however, that the master object has a depreciable life since the handling and use to create new images from the master will lessen its value through wear and tear on the object and through exposure.

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