The American Institute of Certified Public Accountants (AICPA) recognizes a "calculation of value,” also known as a “value calculation." From 2005 to 2008, the AICPA developed the "Statement on Standards for Valuation Services No. 1 (SSVS No. 1): Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset." The purpose of SSVS 1 is to improve the consistency and quality of practice among AICPA members providing valuation services. Specifically, the standard provides guidance to CPAs when they perform engagements to estimate value that culminate in the expression of a conclusion of value or a calculated value.
Uses for a Calculation of Value Report
A calculation of value is NOT an appraisal because the appraiser is not coming to a conclusion of value, but merely a calculation of value based on a limited amount of investigation and due diligence. Although a calculation of value does not meet the Uniform Standards of Professional Appraisal Practice (USPAP) or Institute of Business Appraisers (IBA) standards, it can be a very valuable tool for business owners or professionals. Typical uses are as follows:
- Use of values provided by the client or a third party
- Internal use assignments from employers to employee members not in the practice of public accounting
- Engagements that are exclusively for the purpose of determining economic damages and that do not include an engagement estimate value
- Engagements where it is not practical or reasonable to obtain or use relevant information; therefore, the member is unable to apply valuation approaches and methods described in SSVS 1
- Assisting an owner or broker to establish an initial asking price for the potential sale of a business
- Business planning
- Developing a preliminary value for litigation matters
- Any matter where an initial or calculation of value is acceptable
In a calculation of value report the valuation methods to be used in determining value are discussed and agreed upon beforehand between the client and the valuation analyst. Another aspect of this report is that there are reduced development and reporting requirements compared to a conclusion of value engagement. Also, the valuation analyst does not opine of the value of the business or business interest; rather, the valuation analyst applies the valuation methodologies agreed upon with the client. Generally, this type of report is not defensible in litigation proceedings because the valuation analyst is not offering an opinion of value; rather, the analyst calculates a value based on methods agreed upon with the client. However, because the valuation analysts are limited to the approaches, methods and procedures that are applied, this does not mean that it limits the appraiser’s judgment in the approaches, methods and procedures he/she is limited to.
A calculation of value report typically costs less than a conclusion of value and has been found to be useful in divorce situations in which a spouse will obtain a calculation of value to aid in the settlement process. If a settlement is not reached, the engagement can then escalate to a conclusion of value so that the valuation analyst can opine on a value and defend it in court, if needed.
Calculation of Value Report Disclaimer
The calculation of value report should have a disclaimer. An example of an excellent one is by Rod Burkert, CPA, ABV, CVA and is as follows:
Under the respective standards of the American Institute of Certified Public Accountants and the National Association of Certified Valuation Analysts, the scope of my work constitutes a “Calculation Engagement,” whereby I estimated the fair market value of the Subject Interest using the agreed-upon methodology outlined on page X.
A Calculation Engagement does not include all the steps required for a “Valuation Engagement” as that term is defined by the above-referenced standards. However, the scope of work I performed is intended to produce a credible result in order to estimate the relevant range of the fair market value of the Subject Interest for the purpose and intended use of this report. But the result could change if additional procedures were performed, and the extent of change may be material.
Formal Valuation Reports
A complete appraisal, summary report, comprehensive valuation report and/or formal written report are formal presentations of the value of a business in a self-contained written report. If a valuation has the potential to go to court, or if the report needs to be reviewed by others, such as the IRS for tax implications, this type of report explains in full detail how the value was derived.
The USPAP and the American Society of Appraisers (ASA) address only a single format for written reports as a “Comprehensive, Written Business Valuation Report.” The IBA addresses this as a “Formal Written Report.”
In these reports, the appraiser is required to consider all three valuation methods (asset-based, income-based and market-based), and detailed development and reporting requirements must be adhered to, making the engagement more time consuming than a calculation of value.
These reports are typically required for instances in which the valuation analyst will need to defend his/her findings and report (i.e. in litigation). In addition, the valuation analyst opines on the value of the business or business ownership interest.
Choose the Right Valuation Service for Your Needs
In summary, all valuations are not created equal. For business owners, as well as their attorneys and other advisors, it is important to be aware of these levels of valuation services offered so that the appropriate type of report is obtained. Naturally, everyone wants to save money, but the wrong appraisal for your purpose can cost significantly more when scrutinized by the IRS or does not hold up in litigation. You should discuss the purpose of the valuation you need with the appraiser in detail so that he/she can provide the appropriate level of service for the assignment.