Basis of Value
Definition
Basis of value is the fundamental assumption about the transaction and parties that a valuation measures - in effect, the precise question the valuer is answering. Under the International Valuation Standards the basis of value is a formal statement (renumbered to IVS 102 in the 2025 edition, previously IVS 104) that must be selected and disclosed before any figure is produced, because the same intangible asset can carry very different values depending on which basis is chosen. Market value, fair value and investment value are distinct bases, and each answers a different question: what a willing buyer would pay in an arm's-length exchange, what the asset is worth to a specific party, or what accounting standards require. For IP-backed lending the choice is decisive. A going-concern basis reflecting the asset's value inside a thriving business is unsuitable for collateral, because a lender realises security precisely when the business is failing. Consequently a credit-standard valuation pairs an appropriate basis of value with a conservative premise - typically orderly-liquidation - so the resulting figure represents what the IP would fetch on a default, not on a good day. This distinction protects both sides. A UK founder seeking to borrow against a patent portfolio benefits from understanding early that the basis of value driving the facility limit is deliberately cautious, avoiding disappointment when the appraised collateral figure sits below the marketing valuation. For the accountant or broker packaging the deal, stating the basis of value explicitly - and confirming it aligns with what the lender's credit team expects - is a prerequisite for a report that will actually support a facility. IVS 210 governs the intangible-asset methods applied once the basis is fixed, but the basis is chosen first.
Complementary Terms
Concepts that frequently appear alongside Basis of Value in practice.
Premise of value is the assumption about the circumstances in which an asset is exchanged - in particular whether it is sold as part of a continuing business or realised on its own, and how much time the seller has. Where the basis of value fixes which question the valuer answers, the premise of value fixes the conditions under which the exchange is assumed to occur, and the two together determine whether a figure is appropriate for lending.
A liquidation premise is the valuation assumption that an asset is sold on its own, over a defined timescale, rather than valued within a continuing and profitable business. It is the premise of value that the RICS Red Book and VPGA 6 direct valuers to adopt when an intangible asset is being appraised as loan collateral, because it mirrors the situation a lender actually faces on enforcement: the borrower has failed and the IP must be realised separately from the enterprise it once supported.
IVS 210 is the International Valuation Standards asset standard that governs how intangible assets are valued, and it is the framework a credible IP valuation for lending must follow. When a lender advances against patents, trade marks or other intangibles, it relies on a valuation prepared to a recognised standard so that the figure supporting the loan-to-value can withstand credit scrutiny, and IVS 210 intangible assets is that standard.
The RICS Red Book is the professional framework, formally the RICS Valuation – Global Standards, that governs how RICS-regulated valuers carry out and report valuations. It sits alongside the International Valuation Standards and adds mandatory professional requirements, and for IP-backed lending its Valuation Practice Guidance Application 6 (VPGA 6) and the accompanying guidance on the valuation of intellectual property rights are the reference points.
VPGA 6 is the RICS Red Book Valuation Practice Guidance Application that governs the valuation of intellectual property rights, including the specialist scenario of intangible assets pledged as loan collateral. It sits within the RICS Valuation - Global Standards (Red Book) and works alongside the RICS professional standard "Valuation of intellectual property rights" (2020) and the International Valuation Standards, so that vpga 6 intangible assets work is delivered to a consistent, auditable credit standard rather than an informal estimate.
The process of determining the fair value of assets pledged as security for a loan, specifically adapted for the requirements of lending rather than accounting or tax purposes. Collateral valuation for intangible assets differs from standard intangible asset valuation in several important ways: it emphasises liquidation value rather than value-in-use, it considers the transferability of the asset to a hypothetical buyer in a forced-sale scenario, and it applies conservative assumptions reflecting the lender's need for downside protection.
Related FAQ
What valuation standard does a lender need, IVS or RICS?
Both. Lenders expect a valuation prepared under IVS 210 for intangible assets and delivered to the RICS Red Book, whose VPGA 6 and Appendix A set out how to value IP for debt financing.
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