NACVA Standards Board

Litigation and Non-Litigation FAQ Interpretations Initiative

Business valuation/appraisal standards are promulgated by different business appraisal organizations. The NACVA’s Standards Board was formed to continually review the organizations standards and to ensure that the NACVA’s Professional Standards remain up to date, relevant, and relatively consistent with the standards of the other professional organizations. This article contains the first published Litigation and Non-Litigation FAQ Interpretations.

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NACVA’s Professional Standards

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Business valuation/appraisal standards are promulgated by different business appraisal organizations. The NACVA’s Standards Board (SDB) was formed to continually review the organizations standards and to ensure that the NACVA’s Professional Standards remain up to date, relevant, and relatively consistent with the standards of the other professional organizations. As part of this mandate, the NACVA’s SDB needed to clarify its Professional Standards to its members. A few of the categories included in the Professional Standards are general and ethical, scope of services, development, and reporting, just to name a few. One of the processes that emanated over time was the SDB’s ability to field and answer questions from its members in a timely and efficient manner. Specifically, the SDB has historically received questions from members regarding interpretations of the NACVA’s Professional Standards. Generally, the process consisted of questions being posed to the NACVA board, the question was then forwarded to the SDB followed by a SDB member contacting the question’s composer to discuss the issue. Over time, it was apparent that many of the same questions were being asked. As a result, it was decided that a written frequently asked questions (FAQs) document would be useful in clarifying many of the issues repeatedly addressed. Accordingly, the SDB is in the process of preparing answers to these FAQs as well as providing interpretations for the questions in a written format: the FAQ Interpretations Document. This document is expected to be a “living” file which will be regularly updated as new information is received. In addition to the FAQ Interpretations Document, NACVA is creating a Standards Hotline that will connect members with professionals on the SDB.

The FAQ Interpretations Document will be separated into two sections: one that deals with questions in a litigation context and one in a non-litigation context. This is an important distinction as the answers depend on the context and ultimate user of the services provided. Additionally, each FAQ will have a question, answer, and interpretation. It is necessary for all three elements of the FAQ Interpretations Document to be read and considered together. If any elements are utilized in isolation or if an FAQ from an incorrect section is relied upon, it is possible for the FAQ Interpretations Document to be misinterpreted and misused.

The first Litigation FAQ Interpretation that has been published is as follows:

Question: Are there situations in a litigation setting where a calculation engagement (calculation report) may not be appropriate in lieu of a valuation?

Answer: Yes. The decision to perform and disclose the results of a calculation engagement via written and/or oral testimony may not be appropriate in certain contested dispute/litigation settings. Some courts may attribute less weight to a calculation of value as compared to a conclusion of value for the same business since the nature of a calculation engagement is more limited in the scope of the of procedures to be performed and therefore the value determined may be different had a valuation engagement been performed (Section V, C.3.g.). Any real or perceived benefits to a member’s client should not be the sole reason for a member choosing to perform a calculation engagement.

Interpretation: A unilateral decision to disclose the results of a calculation engagement in a contested dispute/litigation setting may not be appropriate absent legitimate restrictions preventing both the member and opposing expert from performing a conclusion of value. A member must avoid bias in the development of a calculated value, and the application of a self-imposed scope limitation, even by agreement, may be perceived by the court as bias(ed) if the self-imposed scope limitation is seen as preventing a member from objectively considering an approach or relevant data.

This FAQ Interpretation addresses the viability of using a Calculation of Value report in a litigation setting. It is important to note that this FAQ Interpretation does not preclude a member from preparing calculations of value in a litigation context; however, it does require that a member be prepared to prove the reasoning for a calculation to be used and was not related to advocate on behalf of the member’s client. Additionally, the member should be able to establish that the calculation of value does not exclude approaches or methods that would result in the best indicators of value for the subject company. Furthermore, the FAQ Interpretation discusses the appropriateness of using a calculation as well as the potential weight the court may give to a calculation that is performed in a litigation context. Although, as stated previously, this FAQ Interpretation does not discourage the use of calculation reports in a litigation context as long as the member can provide reasonable justification why this was the best option.

The first Non-Litigation FAQ Interpretation that has been published is as follows:

Question: Can spreadsheets be prepared that are not part of either a calculation report or a conclusion of value report?

Answer: If a member prepares a mathematical computation, it may be considered “Other Services” under Section III, C. However, if valuation approaches and professional judgment are utilized, the member should follow Development Standards (Section IV) and Reporting Standards (Section V) for a Conclusion of Value or a Calculated Value (Section III, B). Other Services should be in compliance with General and Ethical Standards (Section II). Member should provide a disclaimer when appropriate in the judgment of member.

Interpretation: Scope of Services can be found in Section III of the NACVA Professional Standards. “Members shall comply with these Development and Reporting Standards” when performing Valuation Services as either a Conclusion of Value or a Calculated Value (Section III, B). Services that do not utilize the member’s professional judgment are classified as Other Services (Section III, C).

This FAQ Interpretation arose due to requests to provide simple mathematical calculations or answer hypothetical questions. There was confusion regarding which part of the NACVA Professional Standards applied to members when these requests were made. In some cases, members are not requested to utilize professional judgment, but rather their knowledge of valuation theory and its application, as necessary. For example, if a client wanted to know a hypothetical value of their company and the member was asked to assume a set amount of cash flow and a specific capitalization rate, a member would be allowed to perform this mathematical computation under the NACVA Professional Standards for Other Services. The member would be able to utilize their knowledge of how a capitalization of earnings method is employed, but they are relying on assumptions that were provided, so professional judgment is not necessary. Although this would in theory result in an indication of a hypothetical value, it would not be the opinion of the member so does not fall under the development standards as a valuation or calculation has not been performed. It is an important distinction when a member is simply preparing a mathematical computation rather than using professional judgment to provide valuation services. As mentioned above, to the extent the member is asked to perform the calculation and was provided facts to assume, the service performed is categorized in the Other Services section of the NACVA Professional Standards and would not be subject to the development and reporting standards for valuations and calculations.

As part of the Standards Board’s FAQ Interpretations initiative, we are still requesting members to submit questions through the historic process or to utilize the Standards Hotline, which will be available on the Standards Board page of the NACVA website. However, we will continue to prepare and present additional FAQ Interpretations when available. As these FAQ Interpretations are published, the SDB will discuss the new additions in the Around the Valuation World broadcast as well as in QuickRead articles explaining the new FAQs. Further, the SDB has prepared both Domestic and International Standards Comparison Charts for membership review. These will be helpful for members that belong to multiple organizations and need to understand the differences and similarities related to standards they are required to follow.

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Robert W. Carter, CPA, CVA, is the Partner in Charge of the Forensic & Valuation Services group at Hertzbach & Company, P.A. and has been performing valuation services for over a decade. He provides expert opinions regarding business valuations, performs forensic accounting and fraud investigations, and serves as a financial expert witness in legal matters. He has held influential positions within his area of expertise as the former President of the Maryland/DC Chapter and the current Chair of the Standards Board of the National Association of Certified Valuators and Analysts. In addition to these professional organizations, he is an adjunct professor for Stevenson University and the University of Baltimore.

Mr. Carter can be contacted at (410) 363-3200 ext. 1427 or by e-mail to rcarter@hertzbach.com.