Standards Though the Eyes of a Practitioner

Reconciling compliance with multi-agency valuation standards

While standards exist to uphold the integrity of business valuation, multi-credentialed professionals can face a daunting task when trying to compare and comply with all guidelines across the spectrum of issuing agencies. This article seeks to root out possible conflicts and create clarity among standards so valuators may perform with less effort and more accuracy.

Business valuation standards provide an important role in ensuring base levels of quality in the conduct of this work. In that way, these standards serve to protect the user community from receiving, and depending upon, substandard work that may result in incorrect results.

Professional business valuation standards were created to provide useful guidance to the respective members of the American Institute of Certified Public Accountants (AICPA), Institute of Business Appraisers (IBA), American Society of Appraisers (ASA), the National Association of Certified Valuators and Analysts (NACVA), and other professionals performing valuation services. Further, each organization provides outstanding guidance to its members through its specific standards documents. However, for the multi-credentialed practitioner, compliance with multiple business valuation standards can appear to be daunting, if not overwhelming.

As a long-standing instructor for NACVA and member of the NACVA Standards Committee, I receive many questions from accredited NACVA members on how to apply both NACVA’s Professional Standards, as well as the AICPA’s Statement on Standards for Valuation Services (SSVS No. 1), in their practice. Since many accredited NACVA members are also CPAs with membership in the AICPA, they are required to adhere to both sets of valuation standards, which may provide some inherent confusion to accredited NACVA members in implementing these standards in practice. However, the primary principles underlying NACVA’s Professional Standards and the AICPA’s SSVS No. 1 are the same, as explained in this article.

The NACVA Professional Standards total 21 pages in length, consisting of seven pages of general and ethical, development, and reporting standards. The remaining 14 pages include the title page, the table of contents, and an appendix for the International Glossary of Business Valuation Terms.

SSVS No. 1 totals 76 pages in length, consisting of 30 pages that discuss the scope of valuation engagements, overall engagement considerations, development and reporting standards. The remaining 46 pages include the title page, the copyright page, contents of statement, foreword, and appendices for the Illustrative List of Assumptions and Limiting Conditions for a Business Valuation, the International Glossary of Business Valuation Terms, Glossary of Additional Terms, Interpretation No. 1-01, Scope of Applicable Services of SSVS No. 1, and a list of those involved in drafting the standards.

Let me be clear. I believe both documents are outstanding. Further, I believe both documents were drafted in a manner to best serve the individual members of each respective organization.

I recall making a presentation in Chicago to approximately 350 CPAs on the topic of SSVS No. 1 and the NACVA Professional Standards shortly after SSVS No. 1 was released. I was discussing the principles on the use of approaches and methods as discussed in both standards documents. I saw 350 people looking at me as if I was speaking another language. I stopped and asked the attendees a question: “How many of you here have been exposed to formal business valuation training?” A show of hands indicated that only about 10 to 15 percent had any formal business valuation training. At that moment, I believe I grasped the insight the authors of SSVS No. 1 must have had when they wrote it.. SSVS No. 1 provides further guidance and explanatory material in order to be more understandable to those members who may have little or no formal business valuation training as well as to improve the consistency and quality of practice among AICPA members performing business valuation services.

Alternatively, as one of many authors of the NACVA Professional Standards, the provisions promulgated were directed to CVAs with formal business valuation training. The detailed guidance underlying the general principles outlined in NACVA’s Professional Standards are found in the NACVA members’ training materials. This factor allowed us to condense NACVA’s Professional Standards to seven pages. Yet, I believe that the underlying principles are the same under both sets of standards.

Let me explain this by comparing the underlying principles of both sets of standards and the topics covered by SSVS No. 1 and the NACVA’s Professional Standards:

• Approaches and Methods
• Documentation

Approaches and Methods

Under Section F, “Approaches and Methods of the Development Standards,” the NACVA Professional Standards state:

Valuation methods are commonly categorized into the asset-based, market, income, or a combination of these approaches. Professional judgment is used to select the approaches and the methods that best indicate the value. Rules of thumb are acceptable as reasonableness checks, but should not be used as a stand-alone method.

In SSVS No. 1, Paragraphs 31, 32, and 39 of the Development Standards state the following:

Valuation Approaches and Methods

31. In developing the valuation, the valuation analyst should consider the three most common valuation approaches:

• Income (Income-based) approach

• Asset (Asset-based) approach (used for businesses, business ownership interests, and securities) or cost approach (used for intangible assets)

• Market (Market-based) approach

32. The valuation analyst should use the valuation approaches and methods that are appropriate for the valuation engagement. General guidance on the use of approaches and methods appears in paragraphs 33–41, but detailed guidance on specific valuation approaches and methods and their applicability is outside the scope of this Statement.

39. Rules of Thumb. Although technically not a valuation method, some valuation analysts use rules of thumb or industry benchmark indicators (hereinafter, collectively referred to as rules of thumb) in a valuation engagement. A rule of thumb is typically a reasonableness check against other methods used and should generally not be used as the only method to estimate the value of the subject interest.

The underlying principles under “Valuation Approaches and Methods” and “Rules of Thumb” are identical. NACVA stated the principle in one paragraph while SSVS No. 1 stated the same principle in three short paragraphs. However, paragraphs 33-41 of SSVS No. 1 provide additional guidance and explanation of the three valuation methods, but this further guidance and explanation may not be necessarily required for someone formally trained in business valuation. However, as further stated in paragraph 32, it is important to note that SSVS No. 1 goes on to explain that even further detailed guidance on specific valuation approaches and methods and their applicability is outside the scope of this Statement. This informs the analyst that paragraphs 33–41 give the user general guidance on the principles outlined in paragraph 31, but it is the professional judgment of the analyst to apply the specific approaches and methods used on a specific valuation engagement.

Documentation

Under Section I, “Documentation of the Development Standards,” the NACVA Professional Standards state, “Quantity, type, and content of documentation are matters of the member’s professional judgment. Members should retain documentation for a sufficient time period to comply with legal, regulatory, and professional requirements.”

In SSVS No. 1, “Documentation” is covered in Paragraphs 44 and 45 and states the following:

44. Documentation is the principal record of information obtained and analyzed, procedures performed, valuation approaches and methods considered and used, and the conclusion of value. The quantity, type, and content of documentation are matters of the valuation analyst’s professional judgment (emphasis added). Documentation may include:

• Information gathered and analyzed to obtain an understanding of matters that may affect the value of the subject interest (paragraphs 25-30)

• Assumptions and limiting conditions (paragraph 18)

• Any restriction or limitation on the scope of the valuation analyst’s work or the data available for analysis (paragraph 19)

• Basis for using any valuation assumption during the valuation engagement

• Valuation approaches and methods considered

• Valuation approaches and methods used including the rationale and support for their use

• If applicable, information relating to subsequent events considered by the valuation analyst (paragraph 43)

• For any rule of thumb used in the valuation, source(s) of data used, and how the rule of thumb was applied (paragraph 39)

• Other documentation considered relevant to the engagement by the valuation analyst

45. The valuation analyst should retain the documentation for a period of time sufficient to meet the needs of applicable legal, regulatory, or other professional requirements for records retention.

Again, the underlying principles for documentation are identical under both sets of standards, but SSVS No. 1 also defines “documentation” and provides examples of documents that may be included.

Independence and Valuation

One paragraph in SSVS No. 1 not addressed in NACVA’s Professional Standards deals with the topic of independence while performing an attest engagement. Paragraph 15 of SSVS No. 1 states:

15. If valuation services are performed for a client for which the valuation analyst or valuation analyst’s firm also performs an attest engagement (defined by Rule 101 of the AICPA Code of Professional Conduct), the valuation analyst should meet the requirements of Interpretation No. 101-3, “Performance of Nonattest Services,” under Rule 101, Independence (AICPA, Professional Standards, vol. 2, ET sec. 101.05), so as not to impair the member’s independence with respect to the client.

As a practitioner, I review both sets of standards documents in their entirety in the same manner as presented above when performing a business valuation assignment. I suggest you do the same for those valuation standards with which you are required to adhere. In general, I have found no material conflicts in the underlying principles when complying with SSVS No. 1 and NACVA’s Professional Standards in performing my valuation assignments. However, it is important for each individual practitioner to identify appropriate guidance (i.e., valuation standards) and compare principles across these applicable sets of valuation standards when appropriate. In your review, you should pay special attention to the words must, should, and may as they will give you more specific direction as to action.

Mark G. Kucik, CPA, CVA, CFF, CM&AA, is with Kucik Valuation Group, LLC, based in Chicago, IL. He can be reached at kucik@kucikvg.com.

Portions of this article are based upon Jim Hitchner’s “Do You Know…” Issue 5, December 2013, a free electronic periodical from Valuation Products and Services.