EXECUTIVE SUMMARY
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CPAs perform
valuation services for numerous
purposes, including transactions,
financings, taxation planning and
compliance, intergenerational wealth
transfer, ownership transition, financial
accounting, bankruptcy, management
information, and planning and litigation
support .
SSVS1 applies to all
members and is effective for engagements
to estimate value accepted after Jan. 1,
2008. Earlier adoption is
encouraged. The statement is expected to
provide benefits to members, to members’
valuation clients, to third parties who
rely on valuation reports, and to the
general business valuation community.
The statement allows
for two types of engagements: the
valuation engagement and the
calculation engagement.
The statement allows for several
types of valuation reports. For a
valuation engagement, two types of reports
are permitted: a detailed report and a
summary report. For a calculation
engagement, one type of report is
permitted: a calculation report. For all
engagements, oral reports are permitted.
The statement applies
to engagements to estimate value when
the member (1) applies valuation
approaches and methods and (2) uses
professional judgment in that
application. Based on years of
deliberation and debate encompassing
numerous groups within the AICPA, the
statement provides members, clients and
parties who rely on member valuation
services with professional guidance,
structured valuation service levels and
well-defined valuation reporting options.
Robert F. Reilly,
CPA/ABV, is managing director, Willamette
Management Associates, Chicago, and is a
member of the AICPA Business Valuation
Committee. |
PAs perform valuation services for
numerous purposes, including transactions,
financings, taxation planning and compliance,
intergenerational wealth transfer, ownership
transition, financial accounting, bankruptcy,
management information, and planning and
litigation support. In June, the AICPA Consulting
Services Executive Committee issued the
Institute’s first professional guidance to members
who provide valuation services, Statement on
Standards for Valuation Services (SSVS) no. 1,
Valuation of a Business, Business Ownership
Interest, Security, or Intangible Asset .
This article summarizes the content and intent of
the statement related to valuation engagement
considerations, valuation development guidance and
valuation reporting requirements. It also outlines
the practical application (and practical
implications) of the statement. The
statement, which is effective for valuation
engagements accepted after Jan. 1, 2008, is
expected to:
- Provide members with professional guidance
related to
“best practices” in valuation
services.
- Allow members who provide tax-related
valuations to comply
with “generally
accepted appraisal standards” as required
by the Pension Protection Act of 2006.
- Improve the quality and consistency of
valuation practices.
- Enhance the transparency and replicability of
valuation
analyses and reports.
- Encourage the standardization of valuation
analysis data
gathering and valuation
report content and formats.
- Recognize what are (and are not) generally
accepted valuation
approaches and methods.
- Enhance the reliance on the valuation process
by clients,
judicial finders of fact, the
investment community and others.
- Encourage a clear, documented understanding
between
members and clients as to (a) the
level of valuation service and (b) the
type of valuation report. Exhibit
1 presents the “Top 10” expected benefits.
WHEN THE STATEMENT DOES (AND DOES NOT)
APPLY
The statement applies to any engagement to
estimate the value of a business, business
ownership interest, security or intangible asset
(collectively the “subject interest”). It
does not apply in the following situations:
n The value of the subject interest
is provided to the member by the client or a third
party and the member (1) does not apply valuation
approaches and methods and (2) does not report on
the value of the subject interest.
n The member calculates value as part
of an audit or review engagement.
n Internal use assignments from
employers to employee members who are not in the
practice of public accounting.
n Engagements that are exclusively
for the purpose of determining economic damages
(unless such determination is used to estimate the
value of a subject interest).
n Mechanical computations that do not
rise to the level of an engagement to estimate
value (that is, where the member does not apply
valuation approaches and methods or use
professional judgment).
n Where it is not practical or
reasonable for the member to obtain or use
relevant information and the member is unable to
apply valuation approaches and methods.
n A jurisdictional exemption, when
the statement differs from published governmental,
judicial or accounting authority.
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Business Valuation Standard
Writing Task Force The
Business Valuation Committee began this
project in 2003 under the chairmanship of
Tom Hilton. It has since been supported by
the subsequent committees under the
leadership of Michael Crain. The members
of the Business Valuation Standards
Writing Task Force included Edward Dupke,
CPA/ABV, chairman; Jim Alerding, CPA/ABV,
ASA, CVA; Jim Hitchner, CPA/ABV, ASA; and
Greg Forsythe, ASA. Special thanks are
extended to Robert Reilly, CPA/ABV, CFA,
ASA, CBA, for his assistance with
intellectual property issues and to each
of the AICPA members and leaders of other
organizations who took the time to offer
constructive comments during the drafting
process. — Edward Dupke
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ENGAGEMENT CONSIDERATIONS
In determining professional competence to
perform a potential valuation engagement, the
statement requires the member to consider:
- The subject entity and subject industry.
- The subject interest.
- The valuation date.
- The scope of the valuation engagement,
including:
The purpose of the engagement.
Any assumptions and limiting
conditions.
The applicable standard of value.
The type of report to be issued.
The intended use and users.
Any restrictions on the use of the
report.
- Any governmental regulations or other
professional standards that apply to the
engagement.
Before accepting the
engagement, the valuation analyst should establish
an understanding with the client, either oral
(with workpaper documentation) or written. Any
scope restrictions on the valuation analyst’s work
or on data availability should be disclosed in the
valuation report. The valuation analyst may rely
on third-party specialists (such as real estate or
equipment appraisers) in the valuation. The
statement requires the valuation analyst to
disclose the level of responsibility of the work
of any third-party specialists in the assumptions
and limiting conditions. As with all
professional services, the valuation analyst must
comply with the AICPA Code of Professional Conduct
Rule 201A regarding professional competence. The
Code of Professional Conduct requires objectivity
in all professional services. In addition, with
regard to valuation services for attest clients,
the member must comply with Rule 101 of the Code
of Professional Conduct related to independence.
Exhibit 1 | Expected Benefits
Associated With the Statement
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Expected Client Benefits
- Clients can reach a
clear understanding with the valuation
analyst regarding the level of valuation
service to be performed. The statement
provides for well-defined alternative
types of valuation development analyses.
- Clients can reach a clear
understanding with the valuation analyst
regarding the type of valuation report
(that is, engagement deliverable). The
statement provides for several
well-defined types of valuation reports.
- As it is described in the valuation
report, the valuation analysis should be
replicable. That is, the client (or
other report reader) should be able to
(1) replicate the valuation approaches,
methods and procedures and (2) duplicate
the value conclusion.
- There should be transparency in the
valuation analysis and in the valuation
report. This transparency should
increase the client’s confidence in the
valuation process and in the value
conclusion.
- Clients should benefit from both
increased consistency and comparability
between different analysts’ valuation
reports.
Expected Member Benefits
- The statement
provides professional guidance as to
generally accepted “best practices”
within the valuation community.
- In defending the valuation work during
a contrarian challenge (for example, by
the IRS, a regulatory agency, an
opposing expert witness or a litigation
cross-examination), the member will have
the assurance that his or her analysis
and report are prepared in accordance
with the statement.
- Members may rely on the statement for
professional guidance with regard to
what are (and are not) considered
generally accepted valuation approaches.
- Members may rely on the statement for
professional guidance with regard to the
type of documents and documentation
(both financial and nonfinancial) that
should be considered in the valuation
process.
- The Pension Protection Act of 2006
requires members who perform certain
tax-related valuations to comply with
“generally accepted appraisal
standards.” Compliance with the
statement allows the member to meet the
IRS requirements.
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TWO TYPES OF ENGAGEMENTS
The statement describes two types
of engagements: a valuation engagement
and a calculation engagement. In
a valuation engagement, the valuation analyst is
free to apply the valuation approaches and methods
he or she deems appropriate. The results are
expressed as a conclusion of value
—either as a single amount or as a range of
values. In a calculation engagement, the
valuation analyst and the client agree on the
valuation approaches and methods to use and the
extent of procedures the analyst will perform to
calculate the value of the subject interest. The
results are expressed as a calculated
value—either as a single amount or as a range
of values. A calculation engagement does not
include all of the procedures of a full valuation
engagement, and the resulting value may be
different.
SSVS1 is expected to benefit:
- All members.
- All valuation clients of members.
- The general business valuation
profession.
- Third parties who rely on business
valuations.
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VALUATION ENGAGEMENTS
The minimum information that a
member needs to analyze in a valuation engagement
will depend on: - The nature of the
subject interest.
- The scope of the valuation engagement.
- The valuation date.
- The intended use of the valuation.
- The applicable standard of value.
- The applicable premise of value.
- The assumptions and limiting conditions.
- Any applicable government regulations or other
professional standards.
Professional guidance is provided on the types
of financial information and nonfinancial
information that the valuation analyst should
consider in the engagement. The valuation
analyst should obtain and analyze ownership
information to: - Determine the type
of ownership interest and whether it is a
controlling, majority or minority interest.
- Analyze the ownership interests of other
owners and the impact of that ownership on the
value of the subject interest.
- Understand the classes of ownership interest
and the rights assigned to each.
- Understand the rights included in—or excluded
from— each intangible asset.
When
concluding on the value in a valuation engagement,
a member should: - Correlate,
reconcile and assess the reliability of the
results from the different valuation approaches
and methods.
- Determine whether the value conclusion should
be based on one valuation method or on a
combination of valuation methods.
A subsequent event is defined as an
event that occurs subsequent to the valuation date
but prior to issuance of the valuation report. The
valuation analyst should distinguish between two
types of subsequent events. In the first type of
subsequent event, the analyst should consider in
the valuation analysis only those events that are
indicative of conditions that were known or
knowable on the valuation date. In the second type
of subsequent event, the analyst should not
consider in the valuation analysis (but the
analyst may disclose in the report) a subsequent
event that is not indicative of conditions that
were known or knowable on the valuation date.
CALCULATION ENGAGEMENTS The
analyst’s calculation engagement considerations
should include: - The identity of the
client.
- The identity of the subject interest.
- Any ownership control and/or marketability
elements of the subject interest.
- The purpose and intended use of the calculated
value.
- The intended users of the report and the
limitations on the report use.
- The valuation date.
- The applicable standard of value.
- The applicable premise of value.
- The sources of information used.
- Any valuation approaches and methods agreed on
with the client.
- The disclosure of any subsequent events.
VALUATION APPROACHES AND METHODS
The valuation analyst should use all
valuation approaches and methods that are
appropriate to the engagement and consider all
three generally accepted valuation approaches. For
the valuation of a business, business ownership
interest or security, the member should consider:
- The income approach.
- The market approach.
- The asset-based approach.
For
the valuation of an intangible asset, the member
should consider: - The income
approach.
- The market approach.
- The cost approach.
The statement
says a “rule of thumb” is not an appropriate
valuation method. However, a rule of thumb can be
used as a reasonableness check in a valuation
analysis but should not be the only method used to
value the subject interest. In a business
or security valuation, the valuation analyst
should consider whether valuation adjustments
should be made to the pre-adjustment value
indication, including: - A discount
for lack of marketability,
- A discount for lack of ownership control, or
- A premium for ownership control.
The valuation analyst should also consider the
existence of non-operating assets, non-operating
liabilities, and any excess/deficient operating
assets. In addition, the valuation analyst should
consider the impact of the lack of ownership
control on the value of such assets/liabilities.
MULTIPLE TYPES OF VALUATION
REPORTS A valuation report is a
communication to the client containing the value
conclusion or the calculated value of the subject
interest. Valuation reports may be either written
or oral. There is an exemption from the reporting
provisions in the statement for certain
controversy proceedings. For a valuation
engagement resulting in a conclusion of value,
there are two types of reports: - A
detailed report, which provides sufficient
information to permit the report reader to
understand the data, reasoning and analyses
underlying the value conclusion. The statement
describes the 14 disclosures that should be
included in a detailed report.
- A summary report presenting information that
would otherwise be provided in a detailed
report. The statement describes the 22
disclosures that should be included in a summary
report.
For a calculation
engagement resulting in a calculated value, there
is only one type of report: a calculation report.
Of course, the report should state that it is a
calculation report. It should identify:
- Hypothetical conditions used.
- Any jurisdictional exception.
- Assumptions and limiting conditions.
- A description of any specialist’s work relied
on and the level of responsibility the valuation
analyst assumes for the specialist’s work.
- A disclosure of any subsequent events.
In addition, the calculation report
should summarize the calculated value. The
statement describes the 11 disclosures that should
be included in a calculation report. Oral
reports may be used in either a valuation
engagement or a calculation engagement. An oral
report should include all information necessary to
relate the scope, assumptions, limitations and
results of the engagement. It should be conducted
in such a manner as to limit any misunderstanding
between the valuation analyst and the oral report
recipient. The valuation analyst should document
the substance of the oral report in the engagement
workpapers.
STATEMENT APPENDICES The
statement includes four appendices: 1) Appendix A: an
illustrative list of assumptions and limiting
conditions for a business valuation.
2) Appendix B: an international glossary of
business valuation terms. 3)
Appendix C: a glossary of statement-specific
valuation terms. 4) SSVS1, Interpretation
no. 1, “Scope of Applicable Services.” |