ValuAdder Business Valuation Blog

Business valuation tips, updates and advice. Pick up a few suggestions on how to value a business. Feel free to browse the contents or share your thoughts by leaving a comment.

If there is one professional endeavor that has a lot of proverbial moving parts, it is business valuation. Small wonder you face a number of standards that govern how you should do your business appraisal.

The accountant’s standard – AICPA SSVS No 1

A relative new comer to the field is the Statement on Standards for Valuation Services or SSVS No 1 for short. Published by the American Institute of CPAs (AICPA), the standard is very detailed and yet provides great flexibility in how you can handle your valuation projects.

Two ways to run your appraisals

One key feature that sets SSVS No 1 apart is the so-called Calculation Engagement format. It is unique in that it allows the client and their appraiser to agree up front on the scope and extent of valuation analysis.

And you have more choices unlike in other standards, such as the venerable USPAP and International Valuation Standards (IVS). For instance, under the SSVS No 1 framework you can outline the scope of business value analysis together with the client.

Why this level of latitude? In times past, the business appraiser had the sole discretion in deciding which valuation approaches and methods to use. The client would provide the needed business information and leave the rest in the hands of their trusted appraiser. The appraiser would transmit the finished report to the client detailing the scope of work and the business value conclusion.

This changed with the advent of the SSVS No 1. Now the client and appraiser could limit the scope, time, and expense of business valuations by resorting to the concise Calculation Engagement format.

But both sides must agree at the outset on what needs to be done. Moreover, they should accept the implications of taking this shorter route.  As a result, you should have no unpleasant surprises.

A word of caution on calculation engagements

Even so, the SSVS No 1 cautions against getting carried away with calculation engagements. The standard language alerts you right away this is not a typical business valuation. Importantly, the report work product is called a calculation report. Instead of the usual conclusion of value, you must report your result as the ‘calculated value’.

In addition to stating the intended audience of the report, the appraiser is encouraged to limit its use. For example, you may read that the calculation report is for the client’s eyes only. For example,  the management should use it for its information purposes and nothing else.

Now limiting the number of valuation methods and approaches may miss some hidden gotchas. So your calculation report should spell this out by stating this risk. In particular, let the client know that you could have used the more comprehensive valuation engagement format. And you could have come up with a different valuation result.

In other words, alert your client that your analytic shortcuts could produce less accurate results than the full scope business valuation.

Interestingly, the IVS standard frowns on such shortcuts. Instead, it suggests that client’s requests to limit the analysis should be discouraged. Moreover, if you can’t convince your client of the need to go through business valuation in sufficient detail, you should decline the project altogether.

Unsurprisingly, opting to run a Calculation Engagement pretty much means that you forgo compliance with either the USPAP or IVS standards. If you are doing a valuation project outside the USA, this will not work as these two major standards will likely prevail internationally.

No Comments

Leave a Reply

Your email address will not be published. Required fields are marked *