No Matter What You Call It, Valuation Standards Apply
Since Statement on Standards for Valuation Services No.1 was released in June of 2007, I have received numerous questions about when SSVS No. 1 applies. It is important to note that all AICPA members are required to follow all AICPA standards, and many state boards of accountancy require CPAs to follow AICPA standards as well.
SSVS No. 1 was promulgated for one reason: To protect the public and the reputation of CPAs. Before SSVS No. 1, both CPAs and non-CPAs would tell their clients the value of their business based on what amounted to a rule of thumb measurement. The client would then rely on that number for tax returns, transactions, employee stock ownership plans and many other purposes, sometimes with negative consequences for their own clients.
- Did you use professional judgment? (SSVS No. 1 ¶4)
- Did you apply valuation methods and approaches? (SSVS No. 1 ¶4)
- Did your engagement culminate in a conclusion of value or calculated value? (SSVS No. 1 ¶2)
There is a litigation exception to SSVS No. 1, but it applies only to the reporting requirements. The development standards still apply. Although the three-part test seems straight forward, I continue to get questions on this issue. Let us examine each part of the test in a little more detail.
Did you use professional judgment? Section 50 of the AICPA Code of Professional Conduct defines professional judgment and the responsibilities associated with using professional judgment. Professional judgment is used in many ways for a valuation, including normalizing the balance sheet, coming up with the cost of capital, selecting comparable transactions and determining discounts. Your client has come to you because, as a CPA, you can use your knowledge and experience to apply professional judgment to arrive at the most accurate valuation possible. This is the CPA’s strength and one of the key reasons people select CPAs over other valuation providers.
Did you apply valuation approaches and valuation methods? The International Glossary of Business Valuation Terms, as found in Appendix B of SSVS No. 1, defines valuation approaches as:
- A general way of determining the value indication of a business, business ownership interest, security or intangible asset using one or more valuation methods.
- It goes on to define valuation methods as a specific way to determine value.
Did the engagement culminate in a conclusion of value or calculated value? Appendix C in SSVS No. 1 defines what is encompassed in this expression as:
- Conclusion of value. An estimate of the value of a business, business ownership interest, security or intangible asset, arrived at by applying the valuation procedures appropriate for a valuation engagement and using professional judgment as to the value or range of values based on those procedures.
- Calculated value. An estimate as to the value of a business, business ownership interest, security or intangible asset, arrived at by applying valuation procedures agreed upon with the client and using professional judgment as to the value or range of values based on those procedures.
As I said earlier, the standard is there to ensure that clients of CPAs receive the highest level of service when they are engaged to provide a conclusion of value. CPAs who are bound by SSVS No. 1 risk their reputation and livelihood by not following those standards. I recently heard a story about a person who tried to get out of following SSVS No. 1 by calling it an “opinion of value” as opposed to a “conclusion of value.” While this might sound good at the time, the courts will look at the substance over form and see that in reality a conclusion of value was provided. While clients may not want to pay the cost of a business valuation, the risks of not following SSVS No. 1 outweigh any potential rewards.
If you ever have a question about whether SSVS No. 1 applies to your engagement or not, you can always contact me directly. The AICPA established an SSVS Toolkit to provide non-authoritative guidance on developing engagement letters and reports in accordance with SSVS No.1. Visit aicpa.org/fvs to learn more about the valuable resources offered to FVS members.
Eddy Parker, CPA, CGMA, Senior Technical Manager – FVS, American Institute of CPAs. Eddy leads the AICPA’s Forensic and Valuation Services section, which issues the ABV and CFF Credentials.