A common question posed to business valuation experts who testify in court is: "Did you follow appraisal standards in performing your engagement?" The next question is likely to be: "Which ones?" There are a number of different standards that cover business appraisal practice.
1. Understand and correctly employ recognized methods.
2. Not commit substantial errors.
3. Not be careless or negligent.
4. Identify the:
- Client and intended users,
- Purpose of the appraisal,
- Standard of value,
- Effective date of the appraisal,
- Business interest being valued,
- Scope of work necessary, and
- Assumptions or hypothetical conditions.
5. Consider liquidation value.
6. Use all relevant appraisal approaches.
7. Analyze the:
- Nature and history of the business,
- Financial and economic conditions,
- Past, present and future operations and results,
- Past sales of ownership interests,
- Sales of similar public and private businesses,
- Prices, terms and conditions
of past sales, and
- Economic benefit of intangible assets.
8. Reconcile various approaches to arrive at a value conclusion
One of the most widely recognized standards is the Uniform Standards of Professional Appraisal Practice (USPAP). These standards, published by the Appraisal Standards Board of the Appraisal Foundation, were created in response to the savings and loan crisis and emphasize the appraisal of real estate. But they also cover the appraisal of personal property and businesses.
Many government agencies, professional organizations and client groups in North America have adopted USPAP. In addition, business appraisers who have the ASA (Accredited Senior Appraiser) or AM (Accredited Member) designations are required to follow them.
USPAP requires all appraisers to follow their ethics and competency rules. The ethics rule covers conduct, management, confidentiality and recordkeeping. The competency rule requires that the appraiser have knowledge and experience to complete the assignment competently.
VS Section 100
There are different standards required of valuators who are members of the American Institute of Certified Public Accountants (AICPA). TheStatement on Standards for Valuation Services(VS) Section 100 applies to AICPA members who perform an engagement that estimates the value of a business, business interest, security or intangible asset for numerous purposes. These include:
· Sales transactions,
· Financial reporting,
· Mergers and acquisitions,
· Management, financial planning, and
After several years of research, the AICPA issued the standard for several reasons. An increasing number of CPAs offer valuation services. Valuing intangible assets has become more important. The business community and individuals have become more interested in the process as evidenced by the attention focused on valuation by Congress, government agencies and accounting regulators.
"The standard promotes greater transparency and provides our members with a set of guidelines in the unique context of a CPA practice," according to the AICPA president.
Certified Valuation Analysts (CVAs) must follow the Professional Standards of the National Association Of Certified Valuators and Analysts (NACVA). The NACVA standards combine elements of USPAP and VS Section 100, as well as add guidelines for financial statement adjustments, capitalization and discount rates, and premiums and discounts.
An appraisal report should clearly state which standards were followed. In many cases, more than one set of standards is identified. That may be confusing, but it's acceptable because the various standards generally complement each other.
LOUIS J. CERCONE, JR., CPA, CFE, CFF, ABV, ASA, CVA
Lou is the Managing Director of Brisbane Consulting Group in charge of business valuations, forensic accounting, and litigation support services. He has extensive valuation experience and has served as a financial consultant and expert to attorneys in the economic aspects of matrimonial dissolution. He has been engaged in several forensic accounting cases and has served the judiciary as a court appointed expert and receiver for financially troubled companies. He has testified as an expert witness in State Supreme Court and Federal Court. Lou has also been engaged in the quantification of lost income in determining business interruption claims for insurance adjusters.