Legal News

Business Valuations: Types of Engagements and Reports

By Brian Harris

By Terry Silver
Special to the Legal

Business valuations are governed by professional standards. Organizations such as the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), the National Association of Certified Valuation Analysts (NACVA), and the American Institute of Certified Public Accountants (AICPA) promulgate these standards. Federal regulators have asked that the valuation profession speak with one voice using one set of standards. The NACVA and the IBA recently agreed to unify theirs. The Uniform Standards of Professional Appraisal Practice (USPAP), overseen by the Appraisal Foundation, can also come into play in valuations.

In 2007, the AICPA issued its Statement on Standards for Valuation Services (SSVS-1), which applies to all CPAs and became effective Jan. 1, 2008. The rest of this article specifically addresses SSVS-1.

The statement defines two types of valuation engagements: calculation and valuation. A calculation engagement arises when the client and the CPA "agree on the valuation approaches and methods" to be used, whereupon the CPA "calculates the value in compliance with the agreement" with the client. A calculation report costs less, but the underlying work is not comprehensive. In fact, SSVS-1 requires the analyst to declare that the calculation is "not a valuation" which, if undertaken, might render a different result. A valuation, on the other hand, requires a breadth and depth of work to be done and results in a "conclusion of value."

SSVS-1 also provides for three types of written reports: a detailed report, a summary report and a calculation report. The first two apply to valuation engagements only; the substance differs only in the degree of explication. In our firm, the difference is manifested in the report writing -- including risk assessment. The economic modeling found in either the detailed report or the summary report is the same.

A detailed report tends to be necessary in tax matters because the IRS must be able to replicate the analysis and conclusion of value the analyst reached. Because of its transparency, a detailed report can be an excellent choice in high-stakes litigation. A summary report provides an abridged version of the information provided in a detailed report. SSVS-1 also permits an "oral communication to the client" for either type of engagement. Because of the potential for misunderstanding, we don't typically offer oral reports.

SSVS-1 exempts from its reporting provisions work done "for a matter before a court, an arbitrator, a mediator or other facilitator, or a matter in a governmental or administrative proceeding." However, SSVS-1's developmental provisions apply in all cases, including litigation.

Under SSVS-1, the choice of work engagements (valuation or calculation) and of report type (detailed, summary or calculation) is up to you. As valuation professionals, we are advocates for our report, not for our client. The lawyer is the client?s advocate. Understanding these choices will enable you to select the engagement and report type that meet your needs and fit your budget.

Terry Silver is a Certified Public Accountant, Certified Valuation Analyst and Certified in Financial Forensics, for Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia, where he is a partner with more than 33 years of experience as an accountant and auditor. He focuses his practice on business valuation and financial forensic services, expert testimony and matrimonial actions. He can be reached at tsilver@citrincooperman.com or 215-545-4800.

Full post as published by The Legal Intelligencer Blog on March 09, 2011 (boomark / email).