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.

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.

Below, we’ll explore 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:

1. Provide members with professional guidance related to “best practices” in valuation services.

2. Allow members who provide tax-related valuations to comply with “generally accepted appraisal standards” as required by the Pension Protection Act of 2006.

3. Improve the quality and consistency of valuation practices.

4. Enhance the transparency and replicability of valuation analyses and reports.

5. Encourage the standardization of valuation analysis data gathering and valuation report content and formats.

6. Recognize what are (and are not) generally accepted valuation approaches and methods.

7. Enhance the reliance on the valuation process by clients, judicial finders of fact, the investment community and others.

8. Encourage a clear, documented understanding between members and clients as to (a) the level of valuation service and (b) the type of valuation report.

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:

• 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.

• The member calculates value as part of an audit or review engagement.

• Internal use assignments from employers to employee members who are not in the practice of public accounting.

• Engagements that are exclusively for the purpose of determining economic damages (unless such determination is used to estimate the value of a subject interest).

• 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).

• 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.

• A jurisdictional exemption, when the statement differs from published governmental, judicial or accounting authority.

[READER NOTE: Read full article with useful tables and practical tips here.]

Engagement Considerations

In determining professional competence to perform a potential valuation engagement, the statement requires the member to consider:

1. The subject entity and subject industry.

2. The subject interest.
3. The valuation date.
4. 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.

5. 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.

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.

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:

1. Determine the type of ownership interest and whether it is a controlling, majority or minority interest.

2. Analyze the ownership interests of other owners and the impact of that ownership on the value of the subject interest.

3. Understand the classes of ownership interest and the rights assigned to each.

4. Understand the rights included in — or excluded from — each intangible asset.

When concluding on the value in a valuation engagement, a member should:

1. Correlate, reconcile and assess the reliability of the results from the different valuation approaches and methods.

2. 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:

1. The identity of the client.
2. The identity of the subject interest.
3. Any ownership control and/or marketability elements of the subject interest.
4. The purpose and intended use of the calculated value.
5. The intended users of the report and the limitations on the report use.
6. The valuation date.
7. The applicable standard of value.
8. The applicable premise of value.
9. The sources of information used.
10. Any valuation approaches and methods agreed on with the client.
11. The disclosure of any subsequent events.

[READER NOTE: Read full article with useful tables and practical tips here.]

Robert F. Reilly, CPA/ABV, is managing director, Willamette Management Associates, Chicago, and is a member of the AICPA Business Valuation Committee.