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A valuer's guide to the VFR Valuation Advisories

The Appraisal Foundation publishes Valuations in Financial Reporting (VFR) Valuation Advisories as voluntary best-practice guidance on recurring issues in fair value work. They are not standards and do not override IFRS, US GAAP or USPAP, but auditors and regulators widely use them as a benchmark for purchase price allocations and impairment testing.

• Advisory 1 · 2010

• Advisory 2

Contributory assets

Customer-related assets

Identifies the assets that support an intangible and explains how to calculate contributory asset charges, the returns on and of those assets, when the multi-period excess earnings method is used.

Covers the fair value of customer relationships in business combinations, asset acquisitions, impairment testing and fresh-start accounting, including attrition and alternatives such as the distributor method.

• Advisory 3 · 2017

• Advisory 4 · 2019

Acquisition premiums

Contingent consideration

Explains how to measure and support a market participant acquisition premium, the premium a buyer would pay for control, by linking it to cash flow benefits rather than generic premium studies.

Sets out best practice for valuing earn-outs and other contingent consideration, including scenario-based and option pricing methods and risk adjustment. Its treatment of options applies more widely.

• Practice point 1 of 4 · Status

• Practice point 2 of 4 · Contributory charges

Cite it as best practice

Avoid double counting

State in the report which advisory you followed as best practice. Where you depart from it, explain why, since reviewers will compare your work with the advisory.

Charge each contributory asset once, at a market participant rate of return, and check that the returns on all assets reconcile with the weighted average cost of capital.

• Practice point 3 of 4 · Attrition

• Practice point 4 of 4 · Earn-outs

Support the attrition rate

Match payoff and method

Base customer attrition on historical data for the acquired customers where possible, and explain how new customers are excluded from the existing relationships.

Scenario-based methods suit payoffs that move in line with the underlying metric; option pricing methods suit non-linear payoffs such as caps, floors and thresholds.

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Read the official text, then go deeper

This guide is Valuvix’s independent summary of The Appraisal Foundation’s VFR Valuation Advisories 1 to 4. Valuvix is not affiliated with The Appraisal Foundation. Rely on the official advisories, and compare with our IFRS fair value guide and our IVS 2025 guide.