The Complexity of Valuation Standards: Making Sense of the Acronyms
The various business valuation societies rely on different valuation standards. What are they and how do they impact you?
- The American Society of Appraisers Business Valuation (ASA) business valuation standards are to be used with the Uniform Standards of Professional Appraisal Practice (USPAP), developed by the Appraisal Foundation.
- The American Institute of CPAs (AICPA) valuation standards are the Statement on Standards for Valuation Services (SSVS).
- The International Society of Business Appraisers (ISBA) valuation standards are three sections of USPAP (Standard 3: Appraisal Review, Development and Reporting, Standard 9: Business Appraisal, Development, and Standard 10: Business Appraisal, Reporting).
- The Institute of Business Appraisers (IBA) has developed its own valuation standards.
- The National Association of Certified Valuators and Analysts (NACVA) has developed its own standards.
Although some of these societies have identified their own valuation standards, the one standard that is relied on above all else is USPAP. USPAP is the only standard mentioned by the IRS in its definitions of qualified appraiser and qualified appraisal and is the standard followed in Shenehon Company valuations. That does not discredit the other standards as they are still able to meet IRS requirements for a qualified appraisal; they just are not mentioned by the IRS.
The biggest difference between all of the organizations listed above is the difference in their engagements and reporting. There are two different types of engagements: valuation engagements and calculation engagements. Through these engagements there are different reports that can be prepared. For a valuation engagement, there is the appraisal also known as a detailed report, which is a comprehensive report that provides sufficient information to permit intended users to understand the data, reasoning, and analyses of the valuation analyst’s conclusion of value. Additionally there is a restricted appraisal (USPAP and ISBA) also known as a limited appraisal or summary report. A restricted appraisal is structured to provide an abridged version of the information that would be provided in a full appraisal, and therefore, it does not require the same level of detail as a full appraisal.
For a calculation engagement, there is a calculation report. A calculation report is in some regards similar to a summary report but the valuation analyst and client agree in advance on the approaches and methods that will be used as well as the extent of procedures that will be used to calculate the value of a business or interest, and the valuation analyst must follow that arrangement. Calculation engagements are also required to include the following statement: “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.” This statement shows that a calculation engagement is not a conclusion of value and would not hold up in court. Below is a chart of the all the organizations and the reports they perform.
When it comes to the valuation societies, each society has preference on which engagements are used. For USPAP and ISBA, only valuations are performed and calculation engagements are not used. ASA does a calculation but does not have a full calculation report. AICPA, IBA, and NACVA perform calculation engagements and valuation engagements.
Another key part of a valuation report is its ability to comply with IRS Revenue Ruling 59-60. Revenue Ruling 59-60 is structured as a list of eight factors-to-consider in valuations, followed by a discussion of each factor. USPAP is the best example of including Ruling 59-60 in its standards as USPAP Standard Rule 9-4 is almost verbatim to the IRS definition. The eight factors from Revenue Ruling 59-60 appear in all of the organizations’ standards for a comprehensive or full report although not for a calculation or calculation report.
Some people believe that a valuation based on more than one standard is not valid. Actually that is not the case. Standards of the AICPA, ASA, IBA, NACVA, ISBA and the Appraisal Foundation’s USPAP are quite complimentary. USPAP has more specific requirements than the other sets of standards but they are generally very similar. Additionally, to try and remain consistent across the industry, some of the organizations have adopted a uniform set of definitions and terms that appear in their glossary/appendix; organizations following this practice are: AICPA, ASA, NACVA and IBA.
Valuation standards are a tricky concept to understand, but once you understand the basis of each engagement and report you can quickly identify which report you need. If you are only doing retirement planning or just inquiring about how much your business might be worth, a full appraisal or detailed report is not needed, a restricted appraisal, limited appraisal, or summary report would be sufficient. However, if you are performing estate planning or shareholder dissolution, a more thorough report such as an appraisal or detailed report would be required to hold up in court.