The New Proposed Statement on Standards for Valuation
Services No. 1
W. James Lloyd,
CPA/ABV, CBA, McWilliams & Company, PLLC,
Knoxville, TN
Kurt A. Myers, CPA/ABV, CBA, Horne Valuation & Litigation
Services, Knoxville, TN
Published in Tennessee CPA Journal 2004
As CPA's, we are often called upon to assist clients with determining
the value of their business. The circumstances requiring valuation
services vary widely and include buying, selling or merging a business,
transferring ownership of the business to the next generation,
helping resolve shareholder disputes and property settlements in
connection with a divorce. Although other business appraisal organizations
such as the American Society of Appraisers (ASA) and the Institute
of Business Appraisers (IBA) have developed standards for their
members, CPAs who are not associated with one of these other organizations
have been without specific standards to follow when providing business
valuation services for their clients. To eliminate this often criticized
void, a task force, which includes some of the top business appraisers
in the country, has been diligently working to develop comprehensive
business valuation standards for CPAs working on these types of
engagements.
The AICPA is expected to release Proposed Statement on Standards for Valuation
Services No. 1 during the first quarter of 2004 and the final version soon
thereafter. When effective, the new standards will apply to all AICPA members
providing business valuation services. This article is based on a draft
of the Statement that was reviewed and discussed by its authors during
the 2003 AICPA National Business Valuation Conference and is intended to
give TSCPA members a working knowledge of the new rules.
The primary objective of the new Statement is to establish standards
and provide guidance to CPAs in the performance of an engagement
to develop and/or report on the valuation of a business, business
ownership interest, security, or intangible asset. The Proposed
Statement contains General Standards, Development Standards and
Reporting Standards.
General Standards
The general standards address several key issues that are often
encountered in a business valuation practice such as records retention,
contingent fees, engagement letters, disclosures regarding financial
information relied upon and clarification about the use of prospective
financial data. These are all important issues that practitioners
involved in business valuation engagements deal with on a regular
basis. The following three key definitions are included in the
general standards and provide insight as to the comprehensiveness
of the Statement.
- Valuation analyst - A valuation analyst is an AICPA member
who performs a valuation engagement in accordance with the requirements
of this Statement.
- Valuation engagement - A valuation engagement is an engagement
that results in development of a conclusion or an indication
of value of a business, business ownership interest, security,
or intangible asset for purposes of conveying that conclusion
to a client or third party.
- Valuation report - A valuation report is a written or oral
communication containing a conclusion or an indication of value
of a business, business ownership interest, security, or intangible
asset.
Since many valuation engagements are related to some type of litigation,
it is important for practitioners to properly document their analysis
and conclusions. The standard dealing with records retention suggests
that supporting documentation be retained for a minimum of five
years after issuance of the conclusion of value, or a minimum of
two years after final disposition of any judicial proceeding in
which the value conclusion was used, whichever is later, or a longer
time period if required by law.
The issue of including the subject entity's financial statements
in valuation reports has been a matter of controversy among CPA
valuation practitioners for some time. The general standards clarify
under what conditions the Statements on Standards for Accounting
and Review Services (SSARS) applies and requires the documentation
and disclosure of the types of financial information relied upon
during the course of the engagement. As an example, if the tax
returns were prepared or if the financial statements were audited,
reviewed or compiled by a related firm, any direct or indirect
relationship the valuation analyst has to accountant or firm issuing
the financial statements or tax returns must be disclosed. The
general standards also clarify that prospective financial information
contained in valuation report or in supporting documentation when
the valuation analyst has been engaged to perform a valuation service
is not subject to the attestation standards because the member
has not been engaged to audit or compile the prospective financial
information.
Development Standards
The development standards provide the valuation analyst with specific
guidance about factors and considerations that should be taken
into account during a valuation services engagement. Probably the
most significant of the development standards is the identification
of three distinct levels of valuation service. The three levels
of service include a (1) Valuation Analysis, (2) Limited Valuation
Analysis, or (3) Calculation and Consultation.
A valuation analysis is the level of service that would generally
be referred to by valuation practitioners as a full or complete
valuation engagement. In order to provide the valuation analysis
level of service, the valuation analyst must not have experienced
significant data or scope limitations. A limited valuation analysis,
on the other hand, is where there are limitations in the data,
analyses, procedures, or scope or where the valuation analyst and
the client agree that certain procedures and/or data, that would
normally be included in the valuation analysis, are not necessary
to determine a value conclusion. A calculation and consultation
is referred to as the act or process of preparing an indication
of value based on assumptions, approaches, and procedures agreed
upon with the client. The calculation and consultation level of
service will normally involve specific scope limitations and be
for a restricted and limited purpose.
As stated above, the development standards are intended to provide
the valuation analyst with specific guidance about factors that
should be considered when involved in a valuation services engagement.
The specific factors that should be taken into account depend upon
the level of valuation service being provided.
Reporting Standards
The purpose for having reporting standards is to establish some
minimum requirements that a valuation analyst must comply with
to properly address the important elements of a valuation engagement.
There are three classifications of reports permitted under the
proposed standards: (1) a Detailed Report, (2) a Summary Report,
and (3) an Other Report. Additionally, reports may be oral or written
depending upon the engagement.
As mentioned previously, there are three levels of valuation engagements
(valuation analysis, limited valuation analysis, and a calculation
and consultation). The valuation analysis and a limited valuation
analysis may be reported under any of the three permitted report
forms. A calculation and a consultation analysis are reported under
the "Other Reports" category since the specific engagement will
determine the details of the report.
The following table exhibits which types of reports may be used
for specific types of engagements.
| Types of Valuation Engagements |
| Detailed Report |
Yes |
Yes |
No |
| Summary Report |
Yes |
Yes |
No |
| Other Report |
Yes |
Yes |
Yes |
The Detailed Report is intended to provide sufficient information
to permit knowledgeable individuals to adequately understand the
data, reasoning, and analyses underlying the valuation analyst's
conclusion of value. As shown in the table above, the Detailed
Report is used when performing a Valuation Analysis or a Limited
Valuation Analysis. One of the strengths of the proposed Statement
is that it includes a detailed list of the elements necessary for
each reporting level. The reporting standards are very specific
as to the sections that should be included in a Detailed Report.
Additionally, the proposed Statement includes lists of some of
the items that may be included in each section. They don't extend
themselves to require certain elements in a particular section.
However, the items listed are elements that are normally included
in a comprehensive valuation report. The reporting standards are
comprehensive from the standpoint that each section recommended
by the Statement includes a description of the type of information
that may be included in that section.
As with the Detailed Report, a Summary Report is appropriate when
performing either a Valuation Analysis or a Limited Valuation Analysis.
The Summary Report will generally contain less information than
a Detailed Report. The standards don't contain as much guidance
on the information that should be included in a Summary Report.
However, they do include a list of items that, at a minimum, the
Summary Report should contain. The reporting standards also state
that the Summary Report should contain the same description of
the type of analysis being presented as in a Detailed Report.
The guidance available from the proposed reporting standards regarding
Other Reports is limited. The reason for the limited guidance by
the Statement is, "from a practical standpoint, [the reporting
standards] cannot contemplate every possible report that may be
required by the facts and circumstances of each valuation engagement.
There may be, for example, specific-purpose engagements for which
a Detailed Report or a Summary Report is not appropriate or desired
by the client." In other words, the engagement agreement will determine
the elements necessary for an Other Report. An Other Report may
contain some, but not all of the items included in a Detailed Report.
An Other Report is appropriate for reporting any of the three
levels of valuation engagement. Other Reports may be written or
oral depending upon the terms of the valuation engagement. An Other
Report should contain the same description of the type of analysis
being presented as in a Detailed Report.
The effective date of the Statement on Standards for Valuation
Services No. 1 applies to valuation engagements accepted six months
or more after the Statement publication date.
Conclusion
As mentioned previously, the Statement on Standards for Valuation
Services No. 1 applies to all AICPA members providing valuation
services. It does not apply to just CPAs who have earned the Accredited
in Business Valuation (ABV) designation. It does not just apply
to CPAs who practice full-time in the business valuation area.
It applies to all AICPA members who perform any valuation services.
CPAs who are members of other appraisal organizations (ASA, IBA,
NACVA, etc.) have been complying with valuation standards for years.
Application of the AICPA's new valuation standards will not substantially
change the reporting for those individuals. Most of the elements
included in the proposed Statement already exist in the standards
of these other appraisal organizations. However, the proposed Statement
provides certain details that are not included in other standards
or are only applicable to CPAs. The proposed Statement gives us
guidance on General Standards, Development Standards, and Reporting
Standards. There are some differences in the Reporting Standards,
but they are clearly explained. The Statements also address the
question that many CPAs have asked for years regarding our responsibility
for financial statements presented in a valuation report.
Whether a CPA performs one valuation per year or thirty, the proposed
Statement on Standards for Valuation Services No. 1 applies. The
comment period for the proposed Statement is expected to be very
short. It is important that CPAs, who perform any amount of valuation
services, comment to the AICPA on the effect of such standards.
We need standards to assist with ensuring that reports prepared
by CPAs meet the same standard of quality as those prepared by
non-CPAs who are members of other appraisal organizations. It is
our responsibility to shape the standards that we will expect each
other to follow when we perform valuation engagements.
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