ClarityBV Blog

Each of the major business valuation standards describes valuation engagements and reports using different terminology and requirements. This leads to plenty of confusion for consumers and providers of valuation services!

The AICPA and the American Society of Appraisers are prominent business valuation standard setters. Appraisers who are members of both organizations are subject to the following three standards.

1. AICPA Statement on Standards for Valuation Services (SSVS) No. 1
2. ASA Business Valuation Standards (BVS)
3. The Uniform Standards of Professional Appraisal Practice (USPAP)

Following is an overview of the project and report types under each. For those familiar with these standards, feel free to skip down to “Final Thoughts.”

AICPA Statement on Standards for Valuation Services (SSVS) No. 1

SSVS No. 1 describes two types of engagements:

1. In a valuation engagement, the valuation analyst estimates the value and is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances.
2. In a calculation engagement, the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest (these procedures will be more limited than those of a valuation engagement).

SSVS No. 1 then provides for three types of reports:

1. The detailed report is structured to provide sufficient information to permit intended users to understand the data, reasoning, and analyses underlying the valuation analyst’s conclusion of value.
2. A summary report is structured to provide an abridged version of the information that would be provided in a detailed report, and therefore, need not contain the same level of detail as a detailed report.
3. A calculation report is the only report that should be used to report the results of a calculation engagement. It should state that (1) a calculation engagement does not include all of the procedures required for a valuation engagement and (2) had a valuation engagement been performed, the results may have been different.

Key Points: While a summary report may not include all the verbiage of a detailed report, the underlying analysis should be the same! Anything less than an unrestricted analysis is a calculation and should include appropriate disclaimers about its limited scope.

ASA Business Valuation Standards (BVS)

BVS describes three types of engagements:

1. The objective of an appraisal is to express an unambiguous opinion as to the value of a business, business ownership interest, security or intangible asset which opinion is supported by all procedures that the appraiser deems to be relevant to the valuation.
2. The objective of a limited appraisal is to express an estimate as to the value of a business, business ownership interest, security or intangible asset. The development of this estimate excludes some additional procedures that are required in an appraisal.
3. The objective of a calculation is to provide an approximate indication of value of a business, business ownership interest, security or intangible asset based on the performance of limited procedures agreed upon by the appraiser and the client.

BVS discusses one specific type of report:

1. The comprehensive written business valuation report must clearly communicate pertinent information, valuation methods and conclusions in a logical progression, and must incorporate the other specific requirements of this Standard, including the signature and certification provisions.

Key Points: The standards note that, “a business valuation report may be less comprehensive in content provided that the report complies with the minimum content required by Standard 10.2 of USPAP.” BVS also provides an exception for “preliminary communications of results to a client, reporting on valuation calculations, or reporting on engagements that do not result in conclusions of value.”

The Uniform Standards of Professional Appraisal Practice (USPAP)

USPAP Standard 9 addresses one type of engagement:

1. In developing an appraisal of an interest in a business enterprise or intangible asset, an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete the research and analyses necessary to produce a credible appraisal.

USPAP Standard 10-2 provides for two types of reports:

1. When the intended users include parties other than the client, an Appraisal Report must be provided.
2. When the intended users do not include parties other than the client, a Restricted Use Appraisal Report may be provided.

Key Points: The minimum content required by Standard 10.2 of USPAP is similar to that of a summary report under SSVS No. 1. If the intended users include anyone other than the client, such as auditors, taxing authorities, or a court of law, a restricted use report would be inappropriate. Anything less than an independent, unrestricted appraisal, such as a calculation, is outside the scope of USPAP and should clearly be labeled as such to avoid misleading users of the analysis.

Final Thoughts

A process of elimination results in the following types of business valuation engagements and reports.

1. The results of an unrestricted appraisal/valuation engagement may be reported in one of three ways: (1) comprehensive, detailed appraisal report, (2) summary appraisal report, or (3) restricted use summary appraisal report.
2. A calculation or other limited analysis performed outside the scope of USPAP is not an appraisal/valuation and should be clearly identified as such to avoid misleading the client and intended users.

Note: Members of the IBA and NACVA, two other organizations that issue valuation standards, may have other terms and requirements to reconcile.

For Further Study: The CPA Journal had an in-depth article on this topic in January 2008 entitled, “Will the Real Business Valuation Standards Please Stand Up?“

I just found a neat tool (wordle.net) for making word clouds out of any batch of text. (Hat tip to Carolyn Elefant)

Sadly, my brain leapt right to making word clouds out of business valuation standards…

AICPA SSVS No. 1 Wordle

ASA Business Valuation Standards Wordle

IRS Revenue Ruling 59-60 Wordle

Observations: It seems Revenue Ruling 59-60 has the most balanced word cloud. The AICPA standards appear to be narrower and emphasize reporting. Finally, the ASA standards seem to stress the appraisal expert and general methodology.

Anyway, Wordle is fun and could be handy for presentations too!

Additional Resources: Just in case you stumbled on this post looking for the actual standards mentioned above, following are relevant links.

• AICPA Valuation Standard and Implementation Toolkit
• ASA Business Valuation Standards
• IRS Revenue Ruling 59-60 (pdf)

It’s amazing how many valuation questions can be answered by IRS Revenue Ruling 59-60, which is available as a free download in PDF format from BVResources.com. At only six pages long, it is required reading for preparers of valuations and users of valuations for gift and estate tax reporting.

Recently, I’ve had several people ask questions along the lines of…

1. When valuing a business, do you apply as many methods as possible and average the results?
2. Is there a standard multiple of average earnings to value my business?

Revenue Ruling 59-60 succinctly addresses these questions.

1. Because valuations cannot be made on the basis of a prescribed formula, there is no means whereby the various applicable factors in a particular case can be assigned mathematical weights in deriving the fair market value. For this reason, no useful purpose is served by taking an average of several factors (for example, book value, capitalized earnings and capitalized dividends) and basing the valuation on the result. Such a process excludes active consideration of other pertinent factors, and the end result cannot be supported by a realistic application of the significant facts in the case except by mere chance. [Section 7] [Emphasis Added]
2. Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five-or-ten-year averages without regard to current trends or future prospects will not produce a realistic valuation. [Section 4.02(d)] [Emphasis Added]

To paraphrase — appraisers should not substitute arithmetic for professional judgment!

Definitions of Dabble:

1. to be involved in an activity in a superficial way
2. to splash (one’s toes or fingers) in water [probably from Dutch dabbelen]

Two recent articles highlight the pitfalls of doing business valuation on a part-time basis.

Are you reading enough?

“Business Valuation has become so complex that most practitioners find that they must specialize in this area to keep up. It has become very difficult for an accountant to do valuation work part time and still keep abreast of all the standards, journals, and texts that must be read to be on top of the profession. That means that BV folks tend to be reading all the time!” – Eva Lang

I couldn’t agree more.

It is a challenge to keep up with the new literature in the profession – not to mention all the relevant works in the fields of accounting, economics, and finance, among many others. Valuation truly requires a multidisciplinary approach.

Creating Joint Ownership: Avoiding the Tax Traps and Other Pitfalls

“If the property is investment property, a business interest or even a personal residence, you need to be wary of those “quickie” one-page valuation reports that were commonly accepted under the old rules.” [emphasis added] - Thomas J. Stemmy

It is surprising how many accountants are still preparing proposals that do not specify under what standards a valuation will be performed. All CPA’s should be aware of and comply with the requirements of the AICPA’s Statement on Standards for Valuation Services (SSVS) No. 1.

An article in The CPA Journal contained an exhibit (pdf) that summarizes the reporting requirements under different valuation standards. If a potential appraiser is not familiar with these standards, run, don’t walk, to find one that is!

The Appraisal Standards Board (ASB) recently issued its Third Exposure Draft of Proposed Changes to the 2010–11 Edition of the Uniform Standards of Professional Appraisal Practice (USPAP). Following are a couple items of note from the Ethics Rule.

Disclosure of prior assignments

• If known prior to accepting an assignment, and/or if discovered at any time during the assignment, an appraiser must disclose to the client, and in the subsequent report certification:
  • any current or prospective interest in the subject property or parties involved; and
  • any services regarding the subject property performed by the appraiser within the three year period immediately preceding acceptance of the assignment, as an appraiser or in any other capacity.

If an appraiser agreed with a client not to disclose that they appraised a property, the appraiser must decline all subsequent assignments that fall within the three-year period!

Disclosure of commissions or fees

• An appraiser must disclose that he or she paid a fee or commission, or gave a thing of value in connection with the procurement of an assignment.

The rule notes that a disclosure must appear in the certification and in any transmittal letter in which conclusions are stated. However, disclosure of the amount paid is not required.