Practice Briefing: Towards a disclosure guide for Monte Carlo valuation

Purpose
The purpose of this briefing is to propose a disclosure guidance for Monte Carlo simulation in valuation. Valuation standards permit, and increasingly require, simulation without requiring the valuer to disclose the assumptions it rests on – chiefly the probability distribution and correlation structure supplied for each input – and this briefing sets out what such disclosure should require.

Design/methodology/approach
The briefing examines the RICS, IVS and USPAP frameworks, draws on published evidence that distributional choice is material to reported uncertainty and compares valuation with four fields that already require distributional disclosure.

Findings
Valuation is unusual among simulation-using fields in leaving these choices undisclosed, and the gap grows as the IVS move to mandate the method. The remedy is disclosure rather than prescription: the valuer states the assumptions; the standard does not dictate them.

Practical implications
Draft guidance is offered, requiring the valuer to record the distribution assigned to each input, its bounds, the correlations assumed between inputs and the basis for the selection.

Originality/value
This is the first statement of what a disclosure guidance for valuation simulation should require.