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Business Valuation

50 Examples of When to Apply SSVS1

By John R Gilbert
september 2008

  

 
 
 

 

SSVS1 applies to any AICPA member who performs “an engagement to estimate value.” According to the statement, any member who performs such an engagement is called a valuation analyst .

The statement applies to any engagement to estimate value when the valuation analyst (1) “applies valuation approaches and valuation methods” and (2) “uses professional judgment.” According to the statement, “the use of professional judgment is an essential component of estimating value.” Even with this guidance with regard to SSVS1 implementation, some members may be concerned as to when they should apply the statement. Since the statement is new, some members may be uncertain as to what professional services are encompassed by SSVS1. Therefore, this discussion will provide some examples of common client engagement situations to which the statement does—and does not—apply.

Members should carefully consider when the statement applies to a client engagement. Unless a particular engagement is specifically excluded by the statement, SSVS1 applies to any engagement to estimate value. In determining the scope and requirements of the engagement, a member should consider (1) the needs of the valuation client and (2) the requirements of any third party for whom the valuation is intended. Such third parties may include governmental and regulatory agencies, judicial finders of fact, and accounting or legal professionals. Of course, a member should also consider all other AICPA professional standards that may apply to the valuation engagement.

The following several pages include 50 examples of general fact patterns related to various client services and indicate whether the statement applies under those circumstances.

Item
50 Examples

SSVS1 Applies

1
Preparation of a business valuation for gift or
estate tax purposes where the member applies
the provisions of Revenue Ruling 68-609 and no
other procedures
Yes
2
Valuation of a business goodwill for income tax
purposes only where the member applies the
provisions of Revenue Ruling 68-609 and no
other procedures
Yes
3
Valuation of a family-owned business included
in a marital estate, for family law purposes
Yes
4
Engagements to estimate value for litigation
support or expert testimony purposes
Yes
5
Lost profits economic damages computations for
litigation support purposes
No
6
Economic damages computations that
incorporate a terminal value
No
7
Economic damages calculations related to the
lost value of a business or intangible asset for
litigation support purposes
Yes
8
Mechanical calculations of value (for example,
using actuarial tables), where valuation
approaches and methods are not used and
professional judgment is not required
No
9
Valuing a relatively small block of publicly
traded stock (relative to the total amount of the
corporation stock outstanding) when the
per-share price is readily ascertainable
No
10
Preparing a tax return using a valuation of a
business that was provided by a third-party
appraiser or by the client
No
11
Calculating the cash “hold back” requirements
for tax contingencies
No
12
Valuing for any purpose (including gift or estate
tax return preparation) a block of publicly
traded stock if the analysis includes consideration
of a discount for blockage, lock-up, or other
contractual or marketability/transferability
restrictions
Yes
13
Valuing stock that is not publicly traded
Yes
14
Computing the fair market value of assets in a
charitable remainder trust (CRT) if the analysis
requires the application of valuation approaches
and methods and the use of professional
judgment
Yes
15
Valuing non-publicly traded limited partnership
interests
Yes
16
Providing advice for planning purposes (such as
estate planning, personal financial planning, or
merger and acquisition planning) without reference
to value
No
17
Providing advice for planning purposes (such as
estate planning, personal financial planning, or
merger and acquisition planning) where the
member calculates a value
Yes
18
Determining the income tax deductibility of
interest under a non-recourse loan
No
19
Compliance filings that require an estimate of
the value of a company and the analysis requires
the application of valuation approaches and
valuation methods and the use of professional
judgment
Yes
20
Compliance filings that require an estimate of
the value of a company and the client or a third-party appraiser provides the value of the subject
interest
No
21
Compliance filings that require an estimate of
the value of a company and the state (or other
government agency) follows a formula rule
where the application of valuation approaches or
methods is not necessary
No
22
Purchase price allocations where the purchase
price is allocated to the subject interest (that is, a
business, business ownership interest, security, or
intangible asset) and the client or a third party
did not provide the member with the asset values
Yes
23
Purchase price allocations where (after the
allocation of the purchase price to cash,
receivables, inventory, and tangible assets), the
residual amount is allocated to goodwill or going
concern value
No
24
Purchase price allocations where the member
allocates a residual amount to specific intangible
assets (such as to various customer-based or
supplier-based intangibles) and that allocation is
based on the asset’s relative value
Yes
25
Computing the fair market value of an interest
in a family limited partnership (FLP) for gift or
estate tax purposes, without applying any
valuation discounts
Yes
26
Computing the fair market value of assets in, or
computing the required distribution of, a
charitable remainder trust (CRT) where the CRT
holds assets, such as an interest in a limited
liability corporation (LLC)
Yes
27
Computing the fair market value of assets in,
or computing the required distribution of, a
charitable remainder trust (CRT) where the CRT
only holds publicly traded stock with a readily
ascertainable value
No
28
Asset value assignments under IRC § 704(c)
where (1) one or more of the assets is a business,
business ownership interest, security, or
intangible asset and (2) the client or a third party
does not provide the valuation
Yes
29
Cost segregation study to allocate the costs of
building a structure between the real property and
personal property components of the structure
No
30
Planning for income from discharge of indebtedness
under IRC § 108 where (1) the company
must rely on the insolvency provisions of IRC §
108, (2) one or more of the assets for which value
is relevant under IRC § 108 is a subject interest
(that is, a business, business ownership interest,
security, or intangible asset), and (3) the company
or a third party does not provide the valuation
Yes
31
Valuing a partnership interest where the client
and the member agree that the member will
apply an “average” valuation discount that the
member will determine based on the results of
published discount for lack of marketability
studies and published case law
Yes
32
Informal conversations or written communications
with a client regarding the alternative tax
consequences of gifting versus selling a business
using a presumption of a specific value of the
business
No
33
An IRC § 482 transfer pricing study that
involves the use of specific methodologies, data,
terminology and documentation requirements
that are provided in the IRS regulations and
procedures (where methodologies and
documentation requirements differ from those
contained in SSVS1)
No
34
Settlements or negotiations of value in
offers-in-compromise or tax disputes
No
35
Determining the value of accounts receivable
No
36
Determinations of value by a member employed
in industry, government, or education who
“moonlights” as a valuation expert witness
Yes
37
Assignments from an employer to an employee
member not in public practice to prepare a valuation for internal financial reporting purposes
No
38
Personal financial planning services that include
estimating the proceeds from a hypothetical
future sale of the client’s business interest
No
39
Personal financial planning services that include
estimating the proceeds from a hypothetical
future sale of the client’s business interest
No
40
Personal financial planning services that include
(1) estimating the proceeds from a hypothetical
future sale of the client’s business interest and (2)
the client or another party provides the current
value
No
41
Personal financial planning services that include
estimating the proceeds from a hypothetical future
sale of a client’s business interest, including
a general discussion with the client of valuation concepts or industry pricing multiples based on
the member’s industry knowledge, where the
discussion assists the client in determining a
hypothetical or assumed value
No
42
Preparing a personal financial plan that includes
an estimate of the future proceeds from a sale of
the business interest at retirement, where the
member estimates the future proceeds based on
a current business value estimated by applying a
rule of thumb multiple for the subject industry—
but the member does not consider the risk
factors of the subject interest or exercise other
professional judgment in applying the rule of
thumb multiple
No
43
Valuation of a not-for-profit business to be
purchased by a for-profit client, for private
inurement purposes
Yes
44
Estimation of the fair value of a debtor’s assets
to determine solvency or insolvency in a
bankruptcy matter
Yes
45
Valuation of purchased goodwill for FASB 142
intangible asset impairment testing
Yes
46
Valuation of purchased franchise agreements for
FASB 144 long-lived asset impairment testing
Yes
47
Estimation of a trademark or patent fair,
arm’s-length royalty rate for intellectual
property infringement purposes
No
48
Valuation of a going concern business unit for
state or local ad valorem property tax appeal
purposes
Yes
49
Valuation of a shareholder’s stock purchase
price based on the buy/sell provisions of a
shareholders’ agreement
No
50
Valuation of a law firm partner’s capital account,
based on application of the partnership agreement
buy-in/buy-out formula, for family law purposes
No

John R. Gilbert , CPA, ASA, is managing director of The Financial Valuation Group, Great Falls, Mont. His e-mail address is jgilbert@fvginternational.com .

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