Effective for engagements accepted on or after January 1, 2008, members of the American Institute of Certified Public Accountants (AICPA) will be required to follow Statement on Standards for Valuation Services No. 1 (SSVS No. 1), which provides detailed principle-based guidance for CPAs performing valuation services. The Standards are not intended to be used as a how-to guide, but rather to offer meaningful guidance for CPAs to comply with in practice.
One of the purposes of the Standards is to improve the consistency and quality of business valuation practice among AICPA members. The Standards apply to any engagement to estimate value of a business, business ownership interest, security or intangible asset when the analyst applies valuation approaches and methods and uses professional judgment. The Standards provide guidance regarding the development of value estimates and the reporting of those estimates.
The Standards are presented in five sections: Introduction and Scope, Overall Engagement Considerations, Development, The Valuation Report and Effective Date. A brief overview of each section is provided below.
Introduction and Scope
Services which require compliance with the Standards include any engagement to estimate value of a business, business ownership interest, security or intangible asset when the analyst applies valuation approaches and methods and uses professional judgment. The services which do not require the use of professional judgment, including, but not limited to, mechanical computations and an estimation of value as part of an attest engagement are exempt from the Standards.
Overall Engagement Considerations
Under the AICPA Code of Ethics, AICPA members may provide only those services they can complete with professional competence. The Standards provide guidance to the valuation analyst regarding how to determine if they have the professional competence to provide the service, including consideration of the subject entity and its industry, the subject interest, the valuation date, the scope of the engagement and any governmental regulations that apply. It is recommended that an understanding regarding the nature of the engagement to be performed be established between the valuation analyst and the client, preferably in writing. For attest clients, the business valuation engagement letter must be in writing.
Development
Within the Standards, there are two types of valuation services—a valuation engagement and a calculation engagement. The valuation engagement results in a conclusion of value, whereas a calculation engagement results in a calculated value. In the valuation engagement, the analyst uses professional judgment to determine the appropriate valuation methods for the specific circumstances. In the calculation engagement, the analyst and the client agree on the valuation approaches to be used. The calculation engagement does not include all of the procedures required in a full valuation engagement.
The Standards discuss the financial, non-financial and ownership information that should be considered when performing a valuation engagement, including, but not limited to, the following:
- Nature of the subject interest
- Scope of the valuation engagement
- Valuation date
- Intended use of the valuation
- Applicable standard of value and premise of value
- Assumptions and limiting conditions
- Nature, background and history of the subject entity
- Facilities
- Organizational structure and management team
- Equity structure, including the classes of ownership interests
- Products or services provided by the entity
- Economic, geographic and industry conditions
- Key customers and supplies
- Competition and business risk.
The three most commonly used valuation approaches (income, asset and market) and the commonly used methods under each approach are outlined, including some of the specific considerations required in each method. The information obtained and analyzed, procedures performed, valuation approaches and methods considered and used and the conclusion of value should be documented in the analyst’s work papers.
The Valuation Report
For a valuation engagement there are two types of reports—a detailed report and a summary report. The detailed report is designed to provide the intended user with sufficient information to understand the information and analysis supporting the valuation analyst’s conclusion of value. The detailed report should include the following sections:
- Letter of transmittal
- Table of contents
- Introduction
- Sources of information
- Analysis of subject entity
- Valuation approaches and methods considered
- Valuation approaches and methods used
- Valuation adjustments
- Non-operating assets or liabilities
- Representation of the valuation analyst
- Reconciliation of estimates and conclusion of value
- Qualifications of the valuation analyst
- Appendices and exhibits.
A summary report does not need to contain the same level of detail as what is in the detailed report, although there are minimum disclosure requirements for the summary report.
For a calculation engagement, there is only one permitted report—the calculation report. Minimum requirements as well as sample language for the concluding paragraph of this report are provided in the Standards.
An oral report is permitted for both a valuation engagement and a calculation engagement. The substance of the oral report as communicated to the client should be documented in the valuation analyst’s work papers.
Effective Date
The Standards apply to engagements accepted on or after January 1, 2008, although early adoption is encouraged.
By improving the consistency and quality of valuations performed by AICPA members, clients and other third parties should benefit from increased consistency and comparability between different analysts’ reports.
In the Pension Protection Act of 2006, the Internal Revenue Service was granted new authority over appraisal reports and appraisers. These Standards provide AICPA members with a set of generally accepted appraisal standards which will assist them in complying with the new Internal Revenue Service requirements. IBI
