When we start using different values depending on whom we
are representng these objects to I begin the think of the CPAs that
are working for the publicly owned companies that are representing
the books of such companies with conflicting values. If you are
running a business, you had better know which set of books is the
Bruce, I think you’re missing part of the point. You’re quite
correct that an object has really on one appraised value, IF WE ARE
TALKING ABOUT ONLY ONE MARKET, AND THE SAME ACTUAL OBJECT. But
neither of the above cases is always true. Part of the problem is
that appraisals are quite frequently not intended to represent the
actual current real value (fair market value) of an item. For
example, If I give you to appraise, my mother’s engagement ring
which she’s worn for 51 years…
there are a number of possible reasons for the appraisal.
One very common one is insurance replacement. Here, there are two
possible appraised values. One is the actual value of the ring
itself, offered for sale by a knowlegeable seller to a knowleable
buyer, with neither being under pressure or compulsion to either
complete or reject the transaction. that’s the fair market value,
and is what you’ve correctly described. It’s best determined by an
average of recent auction sales of such items, or similar means of
determining such types of transactions.
Some policies, however, don’t just contract to reimburse the fair
market value of a lost item, but instead offer to replace it with
identical goods, rather than just goods of equivalent value. The
insured isn promised that in case of loss, they well be “made whole"
not just in terms of money value, but in terms of having a duplicate
or equivelent item. This is similar to homeowners fire insurance
which is based not on the property value, but the cost of rebuilding
the home if it burns down. That is an available, and more costly
insurance option. If this is the case for the ring, then the
appraiser must determine if such items can reasonably be found in the
"used” market, or whether the most likely course that would need to
be taken in case of loss would be either the purchase of a new stock
item (the most common route), or even the custom manufacture of a
new, identical item. In these cases, the value might be “fair market
value”, or it might be the usual retail for a similar item, or it
might even be the higher cost of custom making an item which
originally was an off the shelf commercial item, but which is not now
available in that way.
And that is just insurance appraisals. The IRS, of course, is
almost always interested in the true, fair market value of an item,
since it’s usually the actual item that’s being transferred in a
gift, estate, or was lost, or in some other way affects tax law.
Here, it’s relatively simple. It’s fair market value, as
approximately defined above. But even here, though the aim is that
one true value, keep in mind that even with this precise definition,
appraising is a subjective field, so different appraisers will
reasonably differ a bit on that valuation. Just look at how often
pre-sale estimates in a auction can vary from what actually happens.
Pretty much the same thing is at work here.
And there are other valid values too. It can be quite reasonable,
after an estate files it’s taxes with the fair market values of
items, to then need to know what to expect if items are converted to
cash. In some cases, the requirement of a willing seller, willing
buyer, with neither under any compulsion to act simply cannot be met.
The sellers, for example, may have financial pressures or time
limits within which to sell the item, and may be forced to liquidate
items quickly. In these cases, they may well not expect to recieve
the fair market value for the items. The so called liquidation
values are lower, but just as valid a market level that an appraiser
may be called upon to estimate. Examples might consist of jewelry
items that might be saleable but only with some effort, being broken
apart for metal and stones, and sold that way, simply to be done with
it. This too, is a valid valuation that may be required, can be
estimated, and is easily demonstrated every time a pawn dealer buys
an item, or a jeweler buys something from a customer for scrap value
because he/she cannot resell it, even if somewhere, someone might
pay fair market value for it.
The key to this is that each of these values or estimated prices
that can be assigned to a single ring has a distinct, well defined
market level and purpose for the appraisal. They are not just
random, varying choices that an appraiser can make when appraising an
item. Any time an appraiser writes an appraisal, if it’s at all
valid, it MUST state the purpose of the appraisal, which is to
describe the type of valuation that’s been determined, and for what
purpose. There is no such thing as a valid appraisal that says “this
is valued as x”, unless it also says where, why, and in what
situation. If it doesn’t qualify itself in that matter, then for all
practical purposes, it’s worthless.
Hope that helps.
Peter Rowe G.G.