A Standards Committee Update: Calculations of Value

NACVA’s Standards Committee works regularly to ensure that NACVA’s Professional Standards do not create conflicts for our members with the standards of other business valuation organizations or disciplines.  Many NACVA members hold multiple valuation credentials.  This year, the Committee submitted comments to assist in updates being made to USPAP business appraisal standards. The Committee is presently working on a “Standards Maze” that will compare the standards written by Uniform Standards Appraisal Practice (USPAP), the American Institute of Certified Public Accountants (AICPA), and the American Society of Appraisers (ASA) to NACVA’s Professional Standards to assist our members who need to explain the various valuation standards to third parties.  For the most part, all business valuation standards are the same, only written with different words and organized in different ways.

Each year, the Standards Committee fields questions from NACVA’s membership on various standards issues.  The Committee will be submitting articles to QuickRead to share answers to the most common and most critical standards questions. 

Below is an explanation written by Robert Brackett, CPA, CVA, MM, of Crandall & Brackett, Ltd., to compare calculations of value to other services provided by valuators.  Mr. Brackett is a long-time member of the Standards Committee and an instructor of many NACVA courses.

Editor’s comment: Since July 1, 2012, the professional standards of the NACVA and the IBA have been unified. Though each organization maintains its own standards committees, and this article was written by the Standards Committee of the NACVA, many of principles covered apply equally to both organizations. 

Calculations of Value

Ah, where to begin. . .

I have heard the comparison of calculations of value and opinions of value to compilations and audits (reviews being limited scope valuations). Perhaps this is reasonable as a compilation requires things to be in the right place, but we do not dig into the transactions to see if they are coded right. Similarly, a calculation of value does not typically dig in to the “normalizations” as an opinion of value might. Similarly, readers of the compilation often think that the compilation is an audit. Protecting yourself from misunderstanding by the marketplace applies equally to compilations and calculations of value.

USPAP does not address calculations of value other than to point out that:

1. Each written or oral appraisal report . . . must clearly and accurately set forth the appraisal in a  manner that will not be misleading¹
2. Must not use or communicate a report that is known by the appraiser to be misleading or fraudulent²
   
3. Must not knowingly permit an employee or other person to communicate a misleading or fraudulent report³ 

NACVA, AICPA, and the Institute of Business Appraisers (IBA) standards address calculations of value in a very direct manner, spelling out words to be used in the report that attempt to differentiate the calculation of value work product from an opinion of value product.

This Calculation Engagement did not include all the procedures required for a Conclusion of Value.  Had a Conclusion of Value been determined, the results may have been different.⁴

These sound simple enough until one has been a valuator long enough to realize that the client hears the calculation of value results as your opinion of value, and freely communicates that with the firm’s accountant, tax preparer, banker, insurance agent, and attorneys. Then you realize that without careful staging, the calculation analysis is misleading (although not intentionally so).

So when is it a calculation of value and when is it an opinion of value? NACVA, the IBA, and the AICPA agree that it is a calculation of value when:

1. The client and member agree to specific valuation approaches, methods; and
2. The extent of selected procedures and results in a Calculated Value⁵
   

Essentially, anytime that the valuator and client agree that the engagement is a calculation as opposed to an opinion of value, the engagement is a calculation of value.  All the same work may or may not be completed as would be for an opinion of value, but the upfront agreement that the work product is a calculation of value makes it so.  Typically the valuator offers a calculation in response to a request for lower fees by the shareholder/user of the analysis. Such an engagement is ripe for misunderstanding by the user. 

At the other end of the spectrum are projects that do not measure up even a calculation of value, and are titled other services⁶ by NACVA standards.

Any service provided by a member of the NACVA should be done so in an ethical and competent manner that does not negatively impact the valuation profession in general or the NACVA in particular.

NACVA standards are not rules based, thus, there are no hard and fast limits or guidelines to tell the valuator when they have crossed the border from other services to calculation engagements, or from calculation engagements to valuation engagements.

One easy measure to use is acting as an expert witness. When the valuator is called upon to provide an expert opinion, the work product will generally need to be a valuation engagement, because that provides the valuator with unrestricted ability to look at those things considered important and possibly germane to the engagement. The same applies to preparing a valuation report that will be attached to/submitted with a gift tax return or an estate return. The same applies to an engagement to determine impairment or the original allocation for financial reporting. All of these require the opinion of an expert, which is only developed freely and openly in a valuation engagement.

From there it becomes less clearly defined until the engagement is other services. The AICPA considers determination and application of a blockage discount (or lockup, or other contractual or market restrictions) to publicly traded stocks to be a either a calculation or conclusion of value. 

It is difficult for a credentialed business valuator to produce anything in the general area of value that does not meet the minimal test of calculation of value. In most cases, this probably applies to all CPAs as well, as they are professionally tasked with knowing all of the AICPA’s standards whether he or she is an ABV or not, and must, by default, use professional judgment⁷.  The various approaches and methods in the SSVS-1 document are nothing new to accounting, and have been taught by Shannon Pratt, Art Crandall, and others for more than 35 years. They are essentially specific applications of otherwise standard economic and financial classroom materials. Thus, it is probably wise for CPAs and credentialed valuators to consider most value work products as calculations of value unless they are meant to measure up to conclusions of value or opinion of value requirements. Attached are a few checklists of items for a valuator’s work papers (and to communicate to the client) to ensure compliance with industry standards (for calculations of value).

And then there are fairness opinions.  If the valuator is able to avoid discussing ranges of value or specific value, the AICPA, NACVA, and IBA standards clearly do not apply. A major example is a fairness opinion in which the value is not the topic, but rather the work product addresses whether the value proffered by another is fair for the use it is being used. Caution is advised, because if the value or range of value is repeated in the fairness opinion, the report has entered the grey area, and may be subject to industry standards for a calculation or conclusion of value.

Similarly for a review engagement, a service that is the critique of another’s valuation report. If the analysis focuses on the approaches, methods, source documents, determination of strengths and weaknesses, and resulting competency of the analysis, not the answer, the work product is generally considered to not be subject to the AICPA, NACVA, or IBA’s standards. Again, caution is advised, as discussion of increasing (decreasing) by 5 percent, 10 percent, etc., now indicates application of professional judgment and application of methods and approaches in SSVS-1; subjecting the work product to either a calculation or conclusion of value requirements.

Checklist #1
—ACIPCA Work Paper Requirement for Calculations of Value—

At a minimum the Valuator should document:⁸

1.            Identify the client:______________________________________________________________________________________________

2.            Identify the interest valued:⁹_______________________________________________________________________________________

                                                                                              Entity, equity type, and quantity

3.            Identify all restrictions on ownership:¹⁰_______________________________________________________________________________

4.            Identify all agreements:¹¹_________________________________________________________________________________________

                                          (Attach to work papers copies of all shareholder type agreements, board of directors minutes, etc.)

5.            The interest valued has control characteristics:¹²________________________________________________________________________

                                                                                                                                                      Yes/No

6.            Identify the degree of marketability of the interest valued:¹³_________________________________________________________________

                                       (1 is very restricted to 10 which is freely tradable [and trades freely and daily] on the public markets)

7.            Identify the purpose and the use of the value provided:¹⁴____________________________________________________________________

 

8.            Identify the authorized users of the value provided:¹⁵______________________________________________________________________

 

9.            Identify any limitations placed on their uses of the value provided:___________

               ________________________________________________________________

               ________________________________________________________________

10.         Identify the effective date of the value provided:¹⁶________________________

11.          Identify the premise of value:¹⁷_______________________________________

                                                                         (Generally stated as Going Concern, Orderly Liquidation or Forced Liquidation)

12.          Identify the standard of value used in the analysis:¹⁸______________________

                                                    (See attached list of the typical definitions, select appropriate and indicate with full title here)

13.          Identify the sources of information used in the engagement:¹⁹_______________

               ________________________________________________________________

               ________________________________________________________________

14.          Attach the engagement letter identifying the specific approaches or methods to be used by agreement with the client:²⁰          

               ________________________________________________________________

15.          Identify any significant subsequent events and how they were addressed in the engagement.      

               ________________________________________________________________

               ________________________________________________________________

Additionally documentation may include:²¹

16.          Information gathered and analyzed____________________________________

               ________________________________________________________________

               ________________________________________________________________

               ________________________________________________________________

17.          Assumptions and limiting conditions:²² (See Attached List)_________________

18.          Identify any/all scope limitations:²³____________________________________

19.          Basis for any valuation type assumptions used:__________________________

               ________________________________________________________________

               ________________________________________________________________

20.          With respect to rules of thumb:²⁴

               a.  Source of data used:______________________________________________

               b.  How the rule of thumb was applied:_________________________________

                    ______________________________________________________________

                    ______________________________________________________________ 

21.          Identify any reliance upon a third party specialist, such as a real estate  or equipment appraiser, including a description of the reliance and any level of responsibility taken by the valuator.²⁵ 

Additionally NACVA documentation requirements include obtaining and analyzing the fundamental analysis type data:²⁶

22.          The nature of the business:²⁷_________________________________________

23.          The history of the enterprise:²⁸_______________________________________

               ________________________________________________________________

               ________________________________________________________________

               ________________________________________________________________

24.         The economic outlook:²⁹

                                     (obtain and attach an economic outlook article addressing  global, national, local, and industry issues)

               ________________________________________________________________

               ________________________________________________________________

25.          The adjusted book value of the interest to be valued:³⁰_____________________

26.          The financial condition of subject enterprise:³¹ ___________________________

               ________________________________________________________________

               ________________________________________________________________

27.          Identify the earning capacity of the subject enterprise:³²___________________

               ________________________________________________________________

               ________________________________________________________________

28.          Identify the dividend paying capacity of the enterprise:³³__________________

                       (Generally the earning capacity above less reinvestment requirements for capital improvements, working capital, etc.)

               ________________________________________________________________

               ________________________________________________________________

29.          Identify all intangible value (by type) to the subject enterprise:³⁴____________

                                                                                                                  (List each type of intangible asset, including goodwill)

               ________________________________________________________________

               ________________________________________________________________

               ________________________________________________________________

30.          Identify any prior sales of interests of the subject enterprise:³⁵______________

                                                                                                          (Look for support for your value based on prior transfers)

               ________________________________________________________________

               ________________________________________________________________

               ________________________________________________________________

31.          Identify the liquidity characteristics of the interest valued:³⁶________________

               ________________________________________________________________

               ________________________________________________________________

32.          Identify the market price of interests or enterprises engaged in the same of a similar line of business having interests actively traded in a free and open market.³⁷_____________________________________________

                                                                                               (Look for companies in Yahoo finance or other online locations)

               ________________________________________________________________

               ________________________________________________________________

               ________________________________________________________________

33.          Identify all hypothetical conditions/assumptions appropriate for the circumstances:³⁸   

               ________________________________________________________________

               ________________________________________________________________

 

—End of AICPA Work Paper Requirement for Calculations of Value— 

1.            Clearly state that this is a calculation of value report:³⁹____________________

We performed a calculation engagement, as that term is defined in the SSVS-1 of the AICPA. We performed certain calculation procedures on [specific equity interest] of the [specific entity] as of [effective date]. The specific calculation procedures we used were [identify them here] as agreed to in our agreement as of [date]. These calculation procedures were performed solely to assist in the matter of [describe the matter] and the resulting calculation of value should not be used for any other purpose or by any other party for any purpose. This calculation engagement was conducted in accordance with the SSVS-1 of the AICPA. Our results are a calculation of value as opposed to a conclusion or opinion of value, and should not be misunderstood to be such. [AICPA]

This calculation engagement did not include all the procedures required for a conclusion of value. Had a conclusion of value been determined, the results may have been different. [NACVA]

2.            Recite the items on the attached valuator’s representation page and attach:⁴⁰___

3.            Identify any hypothetical assumptions used in the analysis, including the basis for such use:⁴¹ 

               ________________________________________________________________

4.            If any Jurisdictional Exceptions were used, identify those:__________________

               ________________________________________________________________

               ________________________________________________________________

5.            Recite the attached assumptions and limitations and attach:⁴²_______________

6.            If any specialists were used, identify those, how their reports were used, and the reliance placed on such assistance:⁴³

               ________________________________________________________________

               ________________________________________________________________

7.            Disclose and subsequent events and the impact on the calculation of value:⁴⁴___

               ________________________________________________________________

 

8.            Summarize the calculations and the calculated value itself:⁴⁵_________________

               a. Identify the interest analyzed⁴⁶:_____________________________________

(NACVA also requires size, nature, restrictions, and agreements with respect to the interest analyzed)

               b. Identify the subject entity:_________________________________________

               c. Identify the effective date of the calculated value:⁴⁷______________________

               d. Describe the calculation procedures:⁴⁸________________________________

               e. Describe the scope of the work performed:⁴⁹___________________________

               f.  Describe the purpose of the calculation:⁵⁰_____________________________

               g. Remind the client that the calculation may not be used for any other purpose or by any other party.

               h. Remind the client again that the calculation was conducted in accordance

                    with the AICPA (and NACVA if the valuator is a member) standards for

                    valuation engagements:⁵¹__________________________________________

i.  Describe the subject equity interest analyzed including control (or lack of control), and marketability (or lack of marketability):     

               j.  Present the calculated value:________________________________________

                                                                               (as a single number or as a range)

               k.  Describe again a calculation agreement, including:_______________________

                    (1) That a calculation of value is not a conclusion of value:_______________

                    (2) That a calculation of value does not include all the procedures for

                          a conclusion of value:_________________________________________

                    (3) That a conclusion of value engagement might have resulted in a

                          different result:______________________________________________

               l.   Somehow sign an oral report:⁵²_____________________________________

               m. Document the date the oral report was delivered:⁵³____________________

 

n.  Remind the client that you have no obligation to update findings for information that comes to your attention after the delivery of the oral report:_____________________________________________________

______________________________________________________________            

—End of Reporting Outline—

This calculation analysis is subject to the following assumptions and limiting conditions:[54]

• The calculation of value arrived at is valid only for the use of _____ and only where a calculation of value is appropriate. _____ were cautioned that the calculation of value does not represent fair market value which can differ from  the calculation prepared and any actual sale value of observed companies.
• This analysis and report are only valid as of December 31, 2012. The calculation of value may not be used for any other purpose or by any other parties for any purpose.
• Owners and their representatives represented to us that the information they supplied was complete and accurate to the best of their knowledge.
• Information supplied by management and others has been accepted as correct without further verification as fully and correctly reflecting the business conditions and operating results for the respective periods. We did not audit, review, or compile the financial information provided to us, and, accordingly , we express no audit opinion or any other form of assurance on this information.
• Public information and industry and statistical information has been obtained from sources we deem to be reputable; however, we make no representation as to the accuracy or completeness of such information, and have performed no procedures to corroborate the information.
• We do not provide assurance on the achievability of future cash flows or distribution levels because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of such results is dependent on actions, plans, and assumptions of management, as well as the marketplace.
• The calculation of value arrived at herein is based on the assumptions that the current level of management expertise and effectiveness will continue to be maintained, and that the character and integrity of the enterprises though any sale, reorganization, exchange, or diminution of the owners’ participation would not be materially or significantly changed.
• This report and the calculation of value arrived at herein are for the exclusive use of our client for the sole and specific purposes as noted herein. They may not be used for any other purpose. Furthermore the report and conclusion of the value are not intended by the author and should not be construed by the reader to be investment advice in any manner whatsoever. The values represent the considered opinion of _____________________, based on the information furnished to them by management and other sources.
• Neither all, nor any part, of the contents of this report (including the calculated value, the identity of any valuation specialist(s), or the firm with which such valuation specialists are connected, or any reference to any of their professional designations) may be disseminated to the public through advertising media, public relations, news media, sales media, mail, direct transmittal, or any other means of communication.
• Future services regarding the subject matter of this report, including but not limited to testimony or attendance in court, shall not be performed unless additional arrangements are made in writing.
• We are not an environmental consultant or auditor, and we take no responsibility for any actual or potential environmental liabilities. Any person or entity wishing to know whether such liabilities exist, or their scope, and their effect on the value of the property and this business, are encouraged to obtain a professional environmental assessment. We do not conduct or provide environmental assessments and have not performed one for the Meyer entities their real property.
• We have not determined whether the subject equity interest is subject to any present or future liability relating to environmental matters (including but not limited to CERCLA/ Superfund liability), nor the scope of any such liabilities. Our valuation takes no such liabilities into account. We were not made aware of any such liability.
• We have not made a specific compliance survey or any analysis of the subject property to determine whether it is subject to, or in compliance with, the Americans with Disabilities Act of 1990 and this valuation does not consider the effect, if any, of noncompliance.
• No change of any item in this valuation report shall be made by anyone other than us, and we shall have no responsibility for any such unauthorized change.
• No effort has been made to determine the possible effects if any, on the subject entity’s business due to future national, state, or local legislation, including any environmental or ecological matters or interpretations thereof.
• All prospective financial information was provided by management and then included in our work. We have not examined or compiled such prospective financial information and therefore, do not express an audit opinion or any other form of assurance on such information or related assumptions. Events and circumstances frequently do not occur as expected and there will usually be differences between prospective financial information and actual results, and those differences may be material.
• We conducted interviews with management, which consisted of __________, _________________, ______________________, and others as identified within the work papers concerning the past, present, and prospective operating results of the subject entity.
• Except as noted, we have relied on representations concerning the value and useful condition of all assets used in the businesses unless specifically stated to the contrary in this report.
• We have not attempted to confirm whether or not all assets of the business are free and clear of liens and encumbrances or whether the entity has good title to all assets.

 

—End of Assumptions and Limitations—

In accordance with valuation practices, I certify, as the valuation analyst, that to the best of my knowledge and belief: ⁵⁵ 

The statements of fact contained in this report are true and correct.

The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, impartial, unbiased professional analyses, opinions, and conclusions.

I have no present or prospective interest in the businesses that are the subject of this report, and I have no personal interest with respect to the parties involved.

I have performed no prior services, as a valuator or in any other capacity, regarding the businesses that are the subject of this report. 

I have no bias with respect to the businesses that are the subject of this report or to the parties involved with this assignment.

My engagement in this assignment was not contingent upon developing or reporting predetermined results.

My compensation for completing this assignment is not contingent upon the development or reporting of predetermined values or direction in values that favor the cause of the client, the amount of the value opinions, the attainment of a stipulated results, or the occurrence of subsequent events directly related to the intended use of this report. 

This valuation and report meet the Appraisal Foundation’s definition of a complete appraisal report, the National Association of Certified Valuators and Analysts’ definition of a summary report, and the America Institute of Certified Public Accountants’ definition of a summary report. I have not invoked the Appraisal Foundation’s Departure Rule (I have not knowingly omitted any of their required information or disclosures).

My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with standards established by the National Association of Certified Valuators and  Analysts, standards established by the American Institute of Certified Public Accountants, various United States Government standards, as well as the Uniform Standards of Professional Appraisal Practice 2012/2013 edition.

I am the certified valuation professional who conducted this valuation. No one else provided significant business and/or intangible asset appraisal assistance.

My background, experience, education, and professional association memberships (and activity) are presented in my attached vitae and demonstrate my qualification to perform this valuation.

__________________ (EIN 99-99999999) and _______ (PTIN: P99999999) are valuators

  (Firm)                                                                            (Individual)

who regularly perform fair market value valuations. 

____________________(signature)

Typed Name

Valuation Analyst 

—End of Valuator Representation (USPAP Requirements)—

In accordance with valuation practices, I certify, as the valuation analyst, that to the best of my knowledge and belief: ⁵⁶

The statements of fact contained in this report are true and correct.

The reported analyses, opinions, and calculations are limited only by the reported assumptions and limiting conditions, and are my personal, impartial, unbiased professional analyses, and calculations.

The economic and industry data included in the valuation were obtained from various printed or electronic reference sources that we believe to be reliable. We did not perform any corroborating procedures to substantiate that data.

The calculation engagement was performed in accordance with the AICPA’s SSVS-1, NACVA’s Professional Standards (2011 edition), and USPAP 2012/2013 edition.

The parties for which the information and use of the calculation of value may be used are identified. The report is not intended to be and should not be used by anyone other than such parties.

Our compensation is (fee based, contingent on the outcome of the valuation). [select one]

We have no obligation to update the report or the calculation of value for information that comes to our attention after the date of issuance.

____________________(signature)

Typed Name

Valuation Analyst 

—End of Valuator Representation (AICPA Requirements)—

In accordance with valuation practices, I certify, as the valuation analyst, that to the best of my knowledge and belief: ⁵⁷

Identify the client.

Our compensation is (fee based, contingent on the outcome of the valuation). [select one]

Identify limitations on the use of the report and the work results. (repeat from attached assumptions and limitations)

We have (or do not have) a financial interest in the business entity that is the subject of this calculation engagement:________________________________________________

                                                                                (identify any such interest)

We have no obligation to update the report or the calculation of value for information that comes to our attention after the date of issuance.

____________________(signature)

Typed Name

Valuation Analyst 

—End of Valuator Representation (NACVA Requirements)—