STATEMENT ON STANDARDS FOR VALUATION SERVICES (VS SECTION 100)

Why Issued

Businesses, business ownership interests, securities, and intangible assets (generally referred to as business valuations in this Foreword) may be valued for a variety of reasons, including the following:

1. Acquisitions, mergers, leveraged buyouts, initial public offerings, employee stock ownership plans and other share-based schemes, partner and shareholder buy-ins or buyouts, and stock redemptions are all examples of transactions (or potential transactions).
2. Marital dissolution, bankruptcy, contractual disputes, owner disagreements, dissenting shareholder and minority ownership oppression cases, and employment and intellectual property disputes are all examples of litigation (or pending litigation).
3. Financial reporting and tax matters such as company reorganizations, S corporation conversions, income, estate, and gift tax compliance, purchase price allocations, and charitable contributions are examples of compliance-oriented engagements.
4. Planning oriented engagements for income tax, estate tax, gift tax, mergers and acquisitions,
5. and personal financial planning

The need for business valuations has risen dramatically in recent years. Performing an engagement to evaluate value necessitates a unique set of skills and knowledge.

The AICPA Consulting Services Executive Committee has created this standard to improve the uniformity and quality of practice among AICPA members executing business valuations, given the growing number of members performing business valuation engagements or some part thereof. When performing engagements to estimate value that result in the expression of a conclusion of value or a calculated value, AICPA members will be obliged to adopt this standard.

The AICPA Council has appointed the Consulting Services Executive Committee to develop professional standards under the AICPA Code of Professional Conduct’s (the code) “General Standards Rule” (ET sec. 1.300.001 and 2.300.001) and “Compliance with Standards Rule” (ET sec. 1.310.001 and 2.310.001). 

.01: This statement establishes standards for AICPA members (hereinafter referred to as members) who are engaged to estimate the value of a business, business ownership interest, security, or intangible asset (hereinafter collectively referred to as subject interest) or as part of another engagement (hereinafter referred to as subject interest). Not-for-profit businesses or activities are included in the definition of a business for the purposes of this statement.

.02: The term “engagement to estimate value” refers to any engagement (for example, a tax, litigation, or acquisition-related engagement) that involves assessing the value of a subject interest, as defined in this statement. A value estimation project ends with the statement of either a value conclusion or a computed value (see paragraph 21). In this statement, a member who performs an engagement to estimate value is referred to as a valuation analyst.

.03: Any governmental regulations and other professional standards applicable to the engagement, including the code and the Statement on Standards for Consulting Services (SSCS) No. 1, Consulting Services: Definitions and Standards (CS sec. 100), and the extent to which they apply to engagements to estimate value, should be known to valuation analysts. The valuation analyst is in charge of ensuring compliance.

.04: The valuation analyst employs professional judgment and implements the valuation processes and procedures described in this statement when assessing value as part of an engagement. Estimating value necessitates the application of professional judgment.

.47: The conclusion of value or the computed worth of the subject interest is contained in a valuation report, which is a written or oral communication to the customer. This reporting criterion does not apply to reports produced for the purposes of certain dispute resolution actions (see paragraph .50).

.48: The following are the three sorts of written reports that a valuation analyst can use to communicate the outcomes of a value estimation engagement: For a valuation engagement, either a detailed or a summary report; for a calculation engagement, a calculation report:          

1. Valuation Engagement (detailed report): This report should only be used to convey the outcomes of a valuation engagement (value conclusion); it should not be used to communicate the outcomes of a calculation engagement (value computed) (paragraph .51).
2. Valuation Engagement (summary report): This report should only be used to convey the outcomes of a valuation engagement (value conclusion); it should not be used to communicate the outcomes of a calculation engagement (value computed) (paragraph .71). The amount of reporting detail agreed upon by the valuation analyst and the client determines whether a detailed report or a summary report is prepared for a valuation engagement.
3. Calculation Engagement (calculation report): This type of report should only be used to communicate the results of a calculation engagement (calculated value), not the results of a valuation engagement (conclusion of value) (see paragraph.73).

.49: The constraints on the use of the report (which may include restrictions on the users of the report, the uses of the report by such users, or both) should be noted in the valuation report by the valuation analyst (paragraph .65d).

.79: This statement is applicable to value estimation engagements accepted on or after January 1, 2008. It is recommended that you apply as soon as possible.

.80: A summary of assumptions and limiting criteria under which the engagement was completed should be included in the valuation report or calculation report. An example set of assumptions and limiting circumstances that may apply to a business valuation can be found in this appendix.

1. The conclusion of value (or computed value) reached above is only valid as of the valuation date for the given purpose.
2. Except as specifically noted herein, financial statements and other related information provided by [ABC Company] or its representatives during this engagement have been accepted without verification as fully and accurately reflecting the enterprise’s business conditions and operating results for the respective periods. We offer no audit opinion or other kind of assurance on the financial information submitted to us because [Valuation Firm] has not audited, reviewed, or produced it.
3. We acquired public information, as well as industrial and statistical data, from sources we believe to be trustworthy. However, we provide no guarantee as to the truth or completeness of such material, and we have not conducted any procedures to verify it.
4. We cannot guarantee that the results forecasted by [ABC Company] will be achieved because events and circumstances frequently do not unfold as planned; differences between actual and expected results may be significant; and achievement of the forecasted results is contingent on management’s actions, plans, and assumptions.
5. The conclusion of value (or calculated value) reached herein is based on the assumption that the current level of management expertise and effectiveness would be maintained, and that the enterprise’s character and integrity would not be materially or significantly changed as a result of any sale, reorganization, exchange, or diminution of the owners’ participation.
6. This report and the value conclusion (or computed value) reached within are for the sole and specific use of our client for the purposes stated herein. They may not be utilized for any other reason or by any third party. Furthermore, the author’s report and conclusion of value (or computed value) are not intended to be investment advice in any way and should not be considered as such by the reader. The stated valuation is [Valuation Firm’s] regarded conclusion of value (or computed value) based on information provided by [ABC Company] and other sources.
7. Neither the entire contents of this report, nor any part of it (especially the conclusion of value [or the calculated value], the identity of any valuation specialist(s), the firm with which such valuation specialists are associated, or any reference to any of their professional designations) should be disseminated to the public through advertising, public relations, news media, sales media, mail, direct transmittal, or any other means of communication without the prior written permission of the valuation specialist(s).
8. Future services related to the subject matter of this report, such as testimony or court appearances, will not be expected of [Valuation Firm] unless prior written arrangements have been made.
9. [Valuation Firm] is not an environmental consultant or auditor, and it disclaims any and all liability for actual or foreseeable environmental problems. Anyone who is entitled to depend on this report and wants to know if there are any such obligations, as well as the breadth and impact on the property’s value, should have a professional environmental assessment. [Valuation Firm] does not conduct or provide environmental assessments, and the subject property has not received one.
10. [Valuation Firm] has not independently assessed whether or not [ABC Company] is subject to any current or future environmental obligations (including, but not limited to, CERCLA/Superfund liability), nor the scope of any such liabilities. Except to the extent that such liabilities have been reported to [Valuation Firm] by [ABC Company] or an environmental consultant working for [ABC Company], and then only to the extent that the liability has been reported to us in an actual or estimated dollar amount, [Valuation Firm valuation]’s does not take such liabilities into account. If there are any such issues, they are stated in the report. [Valuation Firm] has relied on such information without verification to the degree it has been reported to us and makes no warranty or representation as to its accuracy or completeness.
11. [Valuation Firm] has not conducted a detailed compliance study or analysis of the subject property to determine whether it is subject to, or in compliance with, the American Disabilities Act of 1990, and this valuation does not take noncompliance into account.
12. [Example language to use if the jurisdictional exception is used.] As a result of public governmental, judicial, or accounting authority, the conclusion of value (or estimated value) in this report differs from the Statement on Standards for Valuation Services.
13. Anyone other than [Valuation Firm] may not change any item in this report, and we will not be held liable for any such unauthorized change.
14. Unless otherwise noted, no effort has been taken to establish the potential impact, if any, of future Federal, state, or local laws, including any environmental or ecological matters or interpretations thereof, on the subject business.
15. If management-approved prospective financial information was used in our work, we did not evaluate or assemble the prospective financial information and hence do not provide an audit opinion or any other form of assurance on the prospective financial information or related assumptions. Events and circumstances rarely unfold as planned, and there will almost always be discrepancies between projected financial data and actual results, some of which may be significant.
16. We conducted interviews with then current management [ABC Company] to learn about the company’s past, present, and future operating results.
17. Except when clearly stated to the contrary in this report, we have relied on the representations of the owners, managers, and other third parties concerning the valuation and useable condition of all equipment, real estate, investments used in the business, and any other assets or liabilities. We haven’t checked to see if the business’s assets are free and clear of liens and encumbrances, or if the entity has proper title to all of its assets.

The following associations and organizations have approved the definitions for the terminology included in this glossary in order to improve and maintain the quality of company valuations for the benefit of the profession and its clients.

Business valuation services demand a high level of ability, and the valuation professional has a responsibility to convey the valuation process and result in a straightforward and non-misleading manner. This responsibility is furthered by the use of terminology with well-defined definitions that are applied uniformly throughout the profession.

If a company valuation professional believes that one or more of these terms must be used in a way that differs materially from the enclosed definitions, the term should be defined as it is used within that valuation engagement.

This glossary was created to aid company valuation practitioners by memorializing the body of knowledge that goes into the competent and thorough calculation of value, and, more importantly, the explanation of how that value was arrived at.

Deviation from this vocabulary is not meant to provide a basis for civil liability and should not be construed as evidence of a breach of any duty.

American Institute of Certified Public Accountants

American Society of Appraisers

Canadian Institute of Chartered Business Valuators

National Association of Certified Valuation Analysts

The Institute of Business Appraisers

Adjusted Book Value Method—a method within the asset approach whereby all assets and liabilities (including off-balance sheet, intangible, and contingent) are adjusted to their fair market values. {NOTE: In Canada on a going concern basis}

Adjusted Net Asset Method —see Adjusted Book Value Method.

Appraisal—see Valuation

Appraisal Approach—see Valuation Approach.

Appraisal Date—see Valuation Date.

Appraisal Method—see Valuation Method

Appraisal Procedure—see Valuation Procedure.

Arbitrage Pricing Theory—a multivariate model for estimating the cost of equity capital, which incorporates several systematic risk factors.

Asset (Asset-Based) Approach—a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities.

Beta—a measure of systematic risk of a stock; the tendency of a stock’s price to correlate with changes in a specific index.

Blockage Discount—an amount or percentage deducted from the current market price of a publicly traded stock to reflect the decrease in the per share value of a block of stock that is of a size that could not be sold in a reasonable period of time given normal trading volume.

Book Value—see Net Book Value.

Business—see Business Enterprise.

Business Enterprise—a commercial, industrial, service, or investment entity (or a combination thereof) pursuing an economic activity.

Business Risk—the degree of uncertainty of realizing expected future returns of the business resulting from factors other than financial leverage. See Financial Risk.

Business Valuation—the act or process of determining the value of a business enterprise or ownership interest therein.

Capital Asset Pricing Model (CAPM)—a model in which the cost of capital for any stock or portfolio of stocks equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the stock or portfolio.

Capitalization—a conversion of a single period of economic benefits into value.

Capitalization Factor—any multiple or divisor used to convert anticipated economic benefits of a single period into value.

Capitalization of Earnings Method—a method within the income approach whereby economic benefits for a representative single period are converted to value through division by a capitalization rate.

Capitalization Rate—any divisor (usually expressed as a percentage) used to convert anticipated economic benefits of a single period into value.

Capital Structure—the composition of the invested capital of a business enterprise; the mix of debt and equity financing.

Cash Flow—cash that is generated over a period of time by an asset, group of assets, or business enterprise. It may be used in a general sense to encompass various levels of specifically defined cash flows. When the term is used, it should be supplemented by a qualifier (for example, “discretionary” or “operating”) and a specific definition in the given valuation context.

Common Size Statements—financial statements in which each line is expressed as a percentage of the total. On the balance sheet, each line item is shown as a percentage of total assets, and on the income statement, each item is expressed as a percentage of sales.

Control—the power to direct the management and policies of a business enterprise.

Control Premium—an amount or a percentage by which the pro rata value of a controlling interest exceeds the pro rata value of a non-controlling interest in a business enterprise to reflect the power of control.

Cost Approach—a general way of determining a value indication of an individual asset by quantifying the amount of money required to replace the future service capability of that asset.

Cost of Capital—the expected rate of return that the market requires in order to attract funds to a particular investment.

Debt-Free—we discourage the use of this term. See Invested Capital.

Discount for Lack of Control—an amount or percentage deducted from the pro rata share of value of 100% of an equity interest in a business to reflect the absence of some or all of the powers of control.

Discount for Lack of Marketability—an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.

Discount for Lack of Voting Rights—an amount or percentage deducted from the per share value of a minority interest voting share to reflect the absence of voting rights.

Discount Rate—a rate of return used to convert a future monetary sum into present value.

Discounted Cash Flow Method—a method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate.

Discounted Future Earnings Method—a method within the income approach whereby the present value of future expected economic benefits is calculated using a discount rate.

Economic Benefits—inflows such as revenues, net income, net cash flows, etc.

Economic Life—the period of time over which property may generate economic benefits.

Effective Date—see Valuation Date.

Enterprise—see Business Enterprise.

Equity—the owner’s interest in property after deduction of all liabilities.

Equity Net Cash Flows—those cash flows available to pay out to equity holders (in the form of dividends) after funding operations of the business enterprise, making necessary capital investments, and increasing or decreasing debt financing.

Equity Risk Premium—a rate of return added to a risk-free rate to reflect the additional risk of equity instruments over risk free instruments (a component of the cost of equity capital or equity discount rate).

Excess Earnings—that amount of anticipated economic benefits that exceeds an appropriate rate of return on the value of a selected asset base (often net tangible assets) used to generate those anticipated economic benefits.

Excess Earnings Method—a specific way of determining a value indication of a business, business ownership interest, or security determined as the sum of a) the value of the assets derived by capitalizing excess earnings and b) the value of the selected asset base. Also frequently used to value intangible assets. See Excess Earnings.

Fair Market Value—the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. {NOTE: In Canada, the term “price” should be replaced with the term “highest price.”}

Fairness Opinion—an opinion as to whether or not the consideration in a transaction is fair from a financial point of view.

Financial Risk—the degree of uncertainty of realizing expected future returns of the business resulting from financial leverage. See Business Risk.

Forced Liquidation Value—liquidation value, at which the asset or assets are sold as quickly as possible, such as at an auction.

Free Cash Flow—we discourage the use of this term. See Net Cash Flow.

Going Concern—an ongoing operating business enterprise

Going Concern Value—the value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems, and procedures in place. Goodwill—that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.

Goodwill Value—the value attributable to goodwill.

Guideline Public Company Method—a method within the market approach whereby market multiples are derived from market prices of stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market.

Income (Income-Based) Approach—a general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount.

Intangible Assets—nonphysical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities, and contracts (as distinguished from physical assets) that grant rights and privileges and have value for the owner.

Internal Rate of Return—a discount rate at which the present value of the future cash flows of the investment equals the cost of the investment.

Intrinsic Value—the value that an investor considers, on the basis of an evaluation or available facts, to be the “true” or “real” value that will become the market value when other investors reach the same conclusion. When the term applies to options, it is the difference between the exercise price and strike price of an option and the market value of the underlying security.

Invested Capital—the sum of equity and debt in a business enterprise. Debt is typically (a) all interest-bearing debt or (b) long-term, interest-bearing debt. When the term is used, it should be supplemented by a specific definition in the given valuation context.

Invested Capital Net Cash Flows—those cash flows available to pay out to equity holders (in the form of dividends) and debt investors (in the form of principal and interest) after funding operations of the business enterprise and making necessary capital investments.

Investment Risk—the degree of uncertainty as to the realization of expected returns.

Investment Value—the value to a particular investor based on individual investment requirements and expectations. {NOTE: in Canada, the term used is “Value to the Owner.”}

Key Person Discount—an amount or percentage deducted from the value of an ownership interest to reflect the reduction in value resulting from the actual or potential loss of a key person in a business enterprise.

Levered Beta—the beta reflecting a capital structure that includes debt

Limited Appraisal—the act or process of determining the value of a business, business ownership interest, security, or intangible asset with limitations in analyses, procedures, or scope.

Liquidity —the ability to quickly convert property to cash or pay a liability.

Liquidation Value—the net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced.”

Majority Control—the degree of control provided by a majority position.

Majority Interest—an ownership interest greater than 50% of the voting interest in a business enterprise.

Market (Market-Based) Approach—a general way of determining a value indication of a business, business ownership interest, security, or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold.

Market Capitalization of Equity—the share price of a publicly traded stock multiplied by the number of shares outstanding.

Market Capitalization of Invested Capital—the market capitalization of equity plus the market value of the debt component of invested capital.

Market Multiple—the market value of a company’s stock or invested capital divided by a company measure (such as economic benefits, number of customers).

Marketability—the ability to quickly convert property to cash at minimal cost.

Marketability Discount—see Discount for Lack of Marketability.

Merger and Acquisition Method—a method within the market approach whereby pricing multiples are derived from transactions of significant interests in companies engaged in the same or similar lines of business.

Mid-Year Discounting—a convention used in the Discounted Future Earnings Method that reflects economic benefits being generated at midyear, approximating the effect of economic benefits being generated evenly throughout the year.

Minority Discount—a discount for lack of control applicable to a minority interest.

Minority Interest—an ownership interest less than 50% of the voting interest in a business enterprise.

Multiple—the inverse of the capitalization rate.

Net Book Value—with respect to a business enterprise, the difference between total assets (net of accumulated depreciation, depletion, and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder’s Equity). With respect to a specific asset, the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise.

Net Cash Flows—when the term is used, it should be supplemented by a qualifier. See Equity Net Cash Flows and Invested Capital Net Cash Flows.

Net Present Value—the value, as of a specified date, of future cash inflows less all cash outflows (including the cost of investment) calculated using an appropriate discount rate.

Net Tangible Asset Value—the value of the business enterprise’s tangible assets (excluding excess assets and nonoperating assets) minus the value of its liabilities.

Nonoperating Assets—assets not necessary to ongoing operations of the business enterprise. {NOTE: in Canada, the term used is “Redundant Assets.”}

Normalized Earnings—economic benefits adjusted for nonrecurring, noneconomic, or other unusual items to eliminate anomalies and/or facilitate comparisons.

Normalized Financial Statements—financial statements adjusted for nonoperating assets and liabilities and/or for nonrecurring, noneconomic, or other unusual items to eliminate anomalies and/or facilitate comparisons.

Orderly Liquidation Value—liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received.

Premise of Value—an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation; for example, going concern, liquidation.

Present Value—the value, as of a specified date, of future economic benefits and/or proceeds from sale, calculated using an appropriate discount rate.

Portfolio Discount—an amount or percentage deducted from the value of a business enterprise to reflect the fact that it owns dissimilar operations or assets that do not fit well together.

Price/Earnings Multiple—the price of a share of stock divided by its earnings per share.

Rate of Return—an amount of income (loss) and/or change in value realized or anticipated on an investment, expressed as a percentage of that investment.

Redundant Assets—see Nonoperating Assets.

Report Date—the date conclusions are transmitted to the client.

Replacement Cost New—the current cost of a similar new property having the nearest equivalent utility to the property being valued.

Reproduction Cost New—the current cost of an identical new property.

Required Rate of Return—the minimum rate of return acceptable by investors before they will commit money to an investment at a given level of risk.

Residual Value—the value as of the end of the discrete projection period in a discounted future earnings model.

Return on Equity—the amount, expressed as a percentage, earned on a company’s common equity for a given period.

Return on Investment—See Return on Invested Capital and Return on Equity.

Return on Invested Capital—the amount, expressed as a percentage, earned on a company’s total capital for a given period.

Risk-Free Rate—the rate of return available in the market on an investment free of default risk.

Risk Premium—a rate of return added to a risk-free rate to reflect risk

Rule of Thumb—a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.

Special Interest Purchasers—acquirers who believe they can enjoy post-acquisition economies of scale, synergies, or strategic advantages by combining the acquired business interest with their own.

Standard of Value—the identification of the type of value being utilized in a specific engagement; for example, fair market value, fair value, investment value.

Sustaining Capital Reinvestment—the periodic capital outlay required to maintain operations at existing levels, net of the tax shield available from such outlays.

Systematic Risk—the risk that is common to all risky securities and cannot be eliminated through diversification. The measure of systematic risk in stocks is the beta coefficient.

Tangible Assets—physical assets (such as cash, accounts receivable, inventory, property, plant and equipment, etc.).

Terminal Value—See Residual Value.

Transaction Method—See Merger and Acquisition Method.

Unlevered Beta—the beta reflecting a capital structure without debt.

Unsystematic Risk—the risk specific to an individual security that can be avoided through diversification.

Valuation—the act or process of determining the value of a business, business ownership interest, security, or intangible asset.

Valuation Approach—a general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more valuation methods.

Valuation Date—the specific point in time as of which the valuator’s opinion of value applies (also referred to as “Effective Date” or “Appraisal Date”).

Valuation Method—within approaches, a specific way to determine value.

Valuation Procedure—the act, manner, and technique of performing the steps of an appraisal method.

Valuation Ratio—a fraction in which a value or price serves as the numerator and financial, operating, or physical data serve as the denominator.

Value to the Owner—see Investment Value

Voting Control—de jure control of a business enterprise.

Weighted Average Cost of Capital (WACC)—the cost of capital (discount rate) determined by the weighted average, at market value, of the cost of all financing sources in the business enterprise’s capital structure.

assumptions and limiting conditions. Parameters and boundaries under which a valuation is performed, as agreed upon by the valuation analyst and the client or as acknowledged or understood by the valuation analyst and the client as being due to existing circumstances. An example is the acceptance, without further verification, by the valuation analyst from the client of the client’s financial statements and related information.

business ownership interest. A designated share in the ownership of a business (business enterprise).

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.

calculation engagement. An engagement to estimate value wherein the valuation analyst and the client agree on the specific valuation approaches and valuation methods that the valuation analyst will use and the extent of valuation procedures the valuation analyst will perform to estimate the value of a subject interest. A calculation engagement generally does not include all of the valuation procedures required for a valuation engagement. If a valuation engagement had been performed, the results might have been different. The valuation analyst expresses the results of the calculation engagement as a calculated value, which may be either a single amount or a range.

capital or contributory asset charge. A fair return on an entity’s contributory assets, which are tangible and intangible assets used in the production of income or cash flow associated with an intangible asset being valued. In this context, income or cash flow refers to an applicable measure of income or cash flow, such as net income, or operating cash flow before taxes and capital expenditures. A capital charge may be expressed as a percentage return on an economic rent associated with, or a profit split related to, the contributory assets.

capitalization of benefits method. A method within the income approach whereby expected future benefits (for example, earnings or cash flow) for a representative single period are converted to value through division by a capitalization rate.

comparable profits method. A method of determining the value of intangible assets by comparing the profits of the subject entity with those of similar uncontrolled companies that have the same or similar complement of intangible assets as the subject company.

comparable uncontrolled transaction method. A method of determining the value of intangible assets by comparing the subject transaction to similar transactions in the market place made between independent (uncontrolled) parties.

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.

control adjustment. A valuation adjustment to financial statements to reflect the effect of a controlling interest in a business. An example would be an adjustment to owners’ compensation that is in excess of market compensation.

engagement to estimate value. An engagement, or any part of an engagement (for example, a tax, litigation, or acquisition-related engagement), that involves determining the value of a business, business ownership interest, security, or intangible asset. Also known as valuation service.

excess operating assets. Operating assets in excess of those needed for the normal operation of a business.

fair value. In valuation applications, there are two commonly used definitions for fair value:

(1) For financial reporting purposes only, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Source: Financial Accounting Standards Board Accounting Standards Codification glossary.

(2) For state legal matters only, some states have laws that use the term fair value in shareholder and partner matters. For state legal matters only, therefore, the term may be defined by statute or case law in the particular jurisdiction.

guideline company transactions method. A method within the market approach whereby market multiples are derived from the sales of entire companies engaged in the same or similar lines of business.

hypothetical condition. That which is or may be contrary to what exists, but is supposed for the purpose of analysis.

incremental income. Additional income or cash flow attributable to an entity’s ownership or operation of an intangible asset being valued, as determined by a comparison of the entity’s income or cash flow with the intangible asset to the entity’s income or cash flow without the intangible asset. In this context, income or cash flow refers to an applicable measure of income or cash flow, such as license royalty income or operating cash flow before taxes and capital expenditures.

normalization. See Normalized Earnings in appendix B, “International Glossary of Business Valuation Terms.” (see paragraph .81).

pre-adjustment value. The value arrived at prior to the application, if appropriate, of valuation discounts or premiums.

profit split income. With respect to the valuation of an intangible asset of an entity, a percentage allocation of the entity’s income or cash flow whereby (1) a split (or percentage) is allocated to the subject intangible and (2) the remainder is allocated to all of the entity’s tangible and other intangible assets. In this context, income or cash flow refers to an applicable measure of income or cash flow, such as net income or operating cash flow before taxes and capital expenditures.

relief from royalty method. A valuation method used to value certain intangible assets (for example, trademarks and trade names) based on the premise that the only value that a purchaser of the assets receives is the exemption from paying a royalty for its use. Application of this method usually involves estimating the fair market value of an intangible asset by quantifying the present value of the stream of market–derived royalty payments that the owner of the intangible asset is exempted from or “relieved” from paying.

residual income. For an entity that owns or operates an intangible asset being valued, the portion of the entity’s income or cash flow remaining after subtracting a capital charge on all of the entity’s tangible and other intangible assets. Income or cash flows can refer to any appropriate measure of income or cash flow, such as net income or operating cash flow before taxes and capital expenditures.

security. A certificate evidencing ownership or the rights to ownership in a business enterprise that (1) is represented by an instrument or by a book record or contractual agreement, (2) is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment, and (3) either one of a class or series or, by its terms, is divisible into a class or series of shares, participations, interests, rights, or interest-bearing obligations.

subject interest. A business, business ownership interest, security, or intangible asset that is the subject of a valuation engagement.

subsequent event. An event that occurs subsequent to the valuation date.

valuation analyst. For purposes of this statement, an AICPA member who performs an engagement to estimate value that culminates in the expression of a conclusion of value or a calculated value.

valuation assumptions. Statements or inputs utilized in the performance of an engagement to estimate value that serve as a basis for the application of particular valuation methods.

valuation engagement. An engagement to estimate value in which a valuation analyst determines an estimate of the value of a subject interest by performing appropriate valuation procedures, as outlined in the AICPA Statement on Standards for Valuation Services, and is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances. The valuation analyst expresses the results of the valuation engagement as a conclusion of value, which may be either a single amount or a range.

valuation service. See engagement to estimate value.