The revisions in the 2006 Edition of USPAP are the result of two major Appraisal Standards Board (ASB) initiatives: (1) examination of the proper role of the scope of work and departure concepts in the appraisal process; and (2) specific review of STANDARDS 9 and 10. The ASB formally adopted the 2006 USPAP on October 28, 2005 based on testimony presented at public meetings, responses to three Concept Papers, six Exposure Drafts, and extensive deliberation by the ASB over a two-year period. The effective date of the 2006 USPAP is July 1, 2006.
KEY CHANGES IN USPAP AND ADVISORY OPINIONS
CONCEPTUAL CHANGE: USPAP now identifies a minimum set of standards that apply in all appraisal, appraisal review and appraisal consulting assignments. While this conceptual shift required significant revisions to USPAP, these revisions did not change the appraiser’s obligations in the development process.
The importance of problem identification and the scope of work determination in the appraisal process are emphasized in the new SCOPE OF WORK RULE. The appropriate scope of work (type and extent of research and analyses) continues to be based on what is required to produce credible assignment results. The scope of work appropriate for a given assignment under the 2005 USPAP continues to be appropriate under the 2006 USPAP. The changes for 2006 do not permit a scope of work that was not appropriate under the 2005 USPAP. The requirement to report the scope of work takes on greater significance because intended users rely on this disclosure to understand the type and extent of research and analyses performed in the assignment, rather than relying on the simple (and potentially misleading) labels, Complete Appraisal and Limited Appraisal.
ITEMS REMOVED: The DEPARTURE RULE and associated defined terms (Complete Appraisal, Limited Appraisal, Binding Requirement, and Specific Requirement) were removed. Statement No. 7, Permitted Departure from Specific Requirements in Real Property and Personal Property Appraisal Assignments, and Advisory Opinion 15, Using the DEPARTURE RULE in Developing a Limited Appraisal, were retired. These actions were taken to resolve misunderstandings related to departure, enhance public trust in appraisal practice, and improve USPAP clarity.
The scope of work decision drives the full range of activities in the development process. In contrast, the DEPARTURE RULE only applied to portions of the development process governed by Specific Requirements. Having two overlapping processes caused confusion.
Further, departure addressed only a single dimension of appraisal development (the application of a specific requirement) while scope of work addresses both the application and extent of development. For example, development of an approach may have been excluded by invoking departure, but the scope of work analysis addresses both the decision to develop an approach and the determination of the appropriate technique and what constitutes appropriate and sufficient data and analyses to support the conclusion.
In communicating assignment results, the emphasis of the DEPARTURE RULE on the use of associated labels (Complete Appraisal and Limited Appraisal) was potentially misleading and may have been insufficient for intended users to make informed decisions.
The DEPARTURE RULE requirement for client agreement “that the performance of a limited appraisal service would be appropriate” has been removed. The SCOPE OF WORK RULE acknowledges that appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work. Further, the Rule states that communication with the client is required to establish most of the information necessary for problem identification. Finally, the requirement to develop credible assignment results in the context of the intended use links the appropriate scope of work to the use or uses of the assignment results as identified by the client. Thus, the role of the client in shaping the full range of the appraiser’s scope of work decision is recognized, but the need for client approval of the narrow band of items addressed by the DEPARTURE RULE has been removed.
Advisory Opinion 8, Market Value vs. Fair Value in Real Property Appraisals, was retired. Since this Advisory Opinion was created and revised, the Financial Accounting Standards Board (FASB) has issued additional Statements of Financial Accounting Standards that require use of the “fair value” type of value. Additionally, FASB has proposed clarification of its definition of fair value. For these reasons, the ASB retired AO-8 with the possibility of issuing a revision after FASB finalizes its Statement of Financial Accounting Standards addressing the definition of fair value.
DEFINITIONS: The definitions of Scope of Work and Appraiser’s Peers were edited for clarity. The term Credible was defined because it is a central concept in USPAP.
PREAMBLE & ETHICS RULE: The PREAMBLE and the Record Keeping section of the ETHICS RULE were edited to reflect the removal of the DEPARTURE RULE and the addition of the SCOPE OF WORK RULE.
SCOPE OF WORK RULE: The SCOPE OF WORK RULE was added to emphasize the requirements for problem identification, determining the appropriate scope of work, and disclosure of the scope of work that was performed in appraisal, appraisal review, and appraisal consulting assignments.
STANDARD 1 & STANDARD 2: References to the DEPARTURE RULE and associated terminology were removed, and the Standards were edited to establish consistency with the new SCOPE OF WORK RULE.
The obligation to determine the scope of work required in an appraisal assignment was relocated to the end of Standards Rule (SR) 1-2 (resulting in renumbering subsections of SR 1-2). This places the scope of work determination in its proper sequence in the appraisal process.
The portion of the Comment to SR 1-2(e) addressing assignment conditions that limit research opportunities was moved to the SCOPE OF WORK RULE.
The language in 2005 USPAP SR 1-2(f) addressing the acceptability of the scope of work was moved to the SCOPE OF WORK RULE.
SR 1-4(g) was edited to clarify that opinions of value of portions of the overall subject property that are not real property are appraisals and must be performed by appraisers with the appropriate competence.
The 2005 USPAP SR 1-4(h) was deleted and the requirement for the identification of relevant characteristics in the appraisal of proposed improvements was relocated to SR 1-2(e).
In the reporting options of STANDARD 2, the requirement to disclose departure was removed, however the requirement to explain the exclusion of the sales comparison approach, cost approach, or income approach was retained in SR 2-2 (a)(viii), (b)(viii) and (c)(viii).
STANDARD 3: References to the DEPARTURE RULE and associated terminology were removed, and the Standard was edited to establish consistency with the new SCOPE OF WORK RULE. The Standard was also edited to improve clarity.
STANDARD 4 & STANDARD 5: References to the DEPARTURE RULE and associated terminology were removed, and the Standards were edited to establish consistency with the new SCOPE OF WORK RULE. The Standards were also edited to improve clarity.
The obligation to determine the scope of work required in an appraisal consulting assignment was relocated to the end of Standards Rule 4-2 (resulting in renumbering subsections of SR 4-2). This places the scope of work determination in its proper sequence in the appraisal process.
The language in 2005 USPAP SR 4-2(f) addressing the acceptability of the scope of work was moved to the SCOPE OF WORK RULE.
The requirements in SR 5-2 were reorganized to mirror their order in STANDARD 4.
STANDARD 6: References to the DEPARTURE RULE and associated terminology were removed, and the Standard was edited to establish consistency with the new SCOPE OF WORK RULE. The Standard was also edited to improve clarity and consistency.
The obligation to determine the scope of work required in a mass appraisal consulting assignment was relocated to the end of SR 6-2 (resulting in renumbering subsections of SR 6-2). This places the scope of work requirement in its proper sequence in the appraisal process.
Standards Rule 6-3 was created from the portions of SR 6-2 that address highest and best use analysis. This serves to separate the requirements related to problem identification (new SR 6-2) and those related to highest and best use analysis (new SR 6-3). This edit also resulted in the renumbering of subsections of the Standards Rules.
The 2005 USPAP SR 6-5(e) was deleted and the requirements related to the identification of relevant characteristics for proposed improvements were relocated to renumbered SR 6-2(e).
In the reporting options of SR 6-8, the requirement to disclose any departures was removed, but the requirement to explain the exclusion of the sales comparison approach, cost approach, or income approach was retained in SR 6-8(j).
STANDARD 7 & STANDARD 8: References to the DEPARTURE RULE and associated terminology were removed, and the Standards were edited to establish consistency with the new SCOPE OF WORK RULE.
The obligation to determine the scope of work required in an appraisal assignment was relocated to the end of SR 7-2 (resulting in renumbering subsections of SR 7-2). This places the scope of work requirement in its proper sequence in the appraisal process.
Those portions of the Comment to SR 7-2(e) addressing assignment conditions that limit research opportunities were moved to the SCOPE OF WORK RULE.
The language in 2005 USPAP SR 7-2(f) addressing the acceptability of the scope of work was moved to the SCOPE OF WORK RULE.
SR 7-4(g) was edited to clarify that opinions of value of portions of the overall subject property that are not personal property are appraisals and must be performed by appraisers with the appropriate competence.
The 2005 USPAP SR 7-4(h) was deleted and the requirements for the identification of relevant characteristics for proposed improvements were relocated to SR 7-2(e).
In the reporting options of STANDARD 8, the requirement to disclose any departures was removed, however the requirement to explain the exclusion of the sales comparison approach, cost approach, or income approach was retained in SR 8-2 (a)(viii), (b)(viii) and (c)(viii).
STANDARD 9 & STANDARD 10: Periodically, the Appraisal Standards Board performs a detailed examination of the form and content of a portion of USPAP. The 2006 USPAP reflects the results of such a process for STANDARDS 9 and 10. The extensive modifications are summarized below.
The Standards were edited to clarify that the subject of an appraisal assignment is the ownership interest in a business enterprises and other intangible asset. This change increases clarity about the appraisal process by recognizing that what is being appraised is an interest in the asset, not the asset itself.
The concept of marketability/liquidity was incorporated.
Concepts for business valuation and the appraisal of other intangible assets were better distinguished.
STANDARDS 9 and 10 were edited to incorporate terminology used in this area of practice, where appropriate.
The Standards were edited to improve clarity and consistency.
References to the DEPARTURE RULE and associated terminology were removed, and the Standards were edited to establish consistency with the new SCOPE OF WORK RULE.
The obligation to determine the scope of work required in an appraisal assignment was relocated to the end of SR 9-2. This places the scope of work requirement in its proper sequence in the appraisal process.
The language in 2005 USPAP SR 9-2 addressing the acceptability of the scope of work was moved to the SCOPE OF WORK RULE.
STATEMENTS ON APPRAISAL STANDARDS and ADVISORY OPINIONS: References to the DEPARTURE RULE and associated terminology were removed, and the Statements and Advisory Opinions were edited to establish consistency with the new SCOPE OF WORK RULE.
STATEMENT 9: SMT-9, Identification of the Intended Use and Intended Users, was revised because of the importance of both intended use and intended users in determining the appropriate scope of work for an assignment. References to the DEPARTURE RULE and associated terminology were removed, and the Statement was edited to establish consistency with the new SCOPE OF WORK RULE.
STATEMENT 10: SMT-10, Assignments for Use by a Federally Insured Depository Institution in a Federally Related Transaction, was edited to remove references to the DEPARTURE RULE and associated terminology, and establish consistency with the new SCOPE OF WORK RULE. The majority of the changes are in Section C (formerly titled “Departure Issues” and now re-titled “Scope of Work Issues”) and Section E. 1. Additionally, in response to comment from the federal financial institutions regulatory agencies (FDIC, FRB, OCC, OTS), the reference to residential tract development in Section E. 4 was removed.
ADVISORY OPINION 2: AO-2, Inspection of Subject Property, was expanded to apply to both real property and personal property and was revised to improve clarity and better illustrate the guidance.
ADVISORY OPINION 28: AO-28, Scope of Work Decision, Performance, and Disclosure, was added to illustrate the requirements of the SCOPE OF WORK RULE related to problem identification, determination of an appropriate scope of work, and disclosure of the scope of work that was performed. Specific illustrations clarify the application of these procedures.
ADVISORY OPINION 29: AO-29, An Acceptable Scope of Work, was added to offer advice regarding the measures of acceptability for the scope of work and to illustrate the application of the SCOPE OF WORK RULE in the performance of assignments.
NOTE: USPAP and the Advisory Opinions were edited for conformity with the adopted changes. Administrative edits were also made to improve consistency.
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