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What Do Business Valuation Standards Mean to Business Owners?
The purpose and need for the "Statement on Standards for Valuation Services" is, "... to improve the consistency and quality of practice among AICPA members performing business valuations.AICPA members will be required to follow this standard when they perform engagements to estimate value that culminate in the expression of a conclusion of value or a calculated value."-- Foreword to VS Section 100: Valuation of a Business, Business Ownership, Security, or Intangible AssetValuation services are one of the highest growth areas for CPA firms. Clients need to know the value of businesses, business interests and intangible assets for many reasons, including sales transactions, financing, taxation, financial reporting and litigation. When an appraiser follows professional standards, it reassures business owners about the quality and consistency of his or her methods and conclusions.
VS Sections 100 and 9100
Nearly six years in the making, the AICPA's Statement on Standards for Valuation Services No. 1 (SSVS 1) was finally issued in June 2007. It became effective for engagements accepted after January 1, 2008. Effective December 15, 2014, SSVS 1 was codified into the AICPA's professional standards as Valuation Services (VS) Sections 100 and 9100.
Important Note: The sole difference between SSVS 1 and VS Sections 100 and 9100 is to how the standard is organized in the AICPA Professional Library.
During their development, the AICPA's valuation standards came under intense scrutiny by almost every major sector of the accounting community, including auditors, tax professionals, litigation specialists, financial planners and other constituencies. Each major constituency ultimately signed off on the finished product.
So, what does this process mean for business owners?
First, it offers peace of mind, knowing that the AICPA has more than 100 years of experience in developing and writing standards, such as audit and tax standards. The same level of diligence was applied in the development of VS Sections 100 and 9100.
It also means that if a CPA performs a valuation for a business, business ownership interest, or intangible asset, it will be done in compliance with the VS Section 100. This results in consistent practices among CPAs.
More specifically, the CPA performing a valuation must meet the following criteria:
"...A member shall 'undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence'.
Performing a valuation engagement with professional competence involves special knowledge and skill. A valuation analyst should possess a level of knowledge of valuation principles and theory, as well as a level of skill in the application of such principles that will enable him or her to identify, gather, and analyze data, consider and apply appropriate valuation approaches and methods, and use professional judgment in developing the estimate of value (whether in a single amount or a range)."
Remember: The conclusion of value or calculated value is based on the valuator's professional judgment. It is comforting to a business owner to know that the valuation analyst has a set of rules (VS Section 100) to follow and that the valuation analyst is qualified -- through his or her professional skills and knowledge -- to provide such a conclusion of value or calculated value.
Other Appraisal Standards
There are other standards within the appraisal community, such as the Uniform Standards of Professional Appraisal Practice (USPAP) issued by the Appraisal Standards Board of the Appraisal Foundation and the standards issued by the National Association Of Certified Valuators and Analysts (NACVA). Some appraisers in a CPA firm might also follow USPAP or NACVA's standards. Often appraisal standards overlap and complement each other.
Business owners should have a basic understanding of appraisal standards before they hire experts to value their businesses, business interests or intangible assets. Credentialed experts who follow established appraisal standards give business owners greater peace of mind that their methods are consistent and their conclusions are reliable.
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