STATEMENT ON STANDARDS FOR VALUATION SERVICES (VS SECTION 100)

Foreword

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). 

Introduction and Scope

.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.

1. Exceptions from This Statement

.05: This statement does not apply to a member who assists in assessing the value of a subject interest as part of an attest engagement under the code’s “Independence Rule” (ET sec. 1.200.001). (for example, as part of an audit, review, or compilation engagement).

.06: This statement is not applicable when the value of a subject interest is provided to the member by a client or a third party, and the member does not use the valuation procedures and methods specified in this statement.

.07: Internal use assignments from employers to employee members that are not in public practice, as that word is defined in the code, are not covered by this statement (ET sec. 0.400.42). Illustrations 24 and 25 (VS sec. 9100 par..78–.81) of Valuation Interpretation No. 1, “Scope of Applicable Services” (VS sec. 9100).

.08: This statement does not apply to engagements only for the purpose of calculating economic damages (for example, lost earnings), unless those decisions also involve a value estimation engagement. Interpretation No. 1, images 1, 2, and 3 (VS sec. 9100 par..06–.11) are also available.

.09: This statement does not apply to mechanical computations that do not rise to the level of an engagement to estimate value, i.e. where the member does not use valuation methodologies and procedures or professional judgment. See Illustration 8 in Interpretation No. 1 (VS sec. 9100 par. 20–23).

This statement is not applicable when obtaining or using necessary information is impractical or unreasonable; as a result, the member is unable to apply the valuation procedures and methods stated in this statement.

3. Professional Competence

.11: A member must “undertake only those professional services that the member or the member’s firm can reasonably anticipate to be done with professional competence,” according to the code’s “General Standards Rule” (ET sec. 1.300.001 and 2.300.001). Performing a valuation assignment with professional competence necessitates a unique set of skills and knowledge. A valuation analyst should have a level of knowledge and skill in the application of valuation principles and theory that allows him or her to identify, gather, and analyze data, consider and apply appropriate valuation approaches and methods, and use professional judgment in developing a value estimate (whether a single amount or a range). This statement does not include an in-depth examination of valuation theory and principles, as well as how and when to apply them.

.12: The valuation analyst should examine the following, at a minimum, when deciding whether he or she can fairly expect to execute the valuation engagement with professional competence:

  1. Subject entity and its industry
  2. Subject interest
  3. Valuation date
  4. Scope of the valuation engagement
  5. Purpose of the valuation engagement
  6. Assumptions and limiting conditions expected to apply to the valuation engagement (see paragraph .18)

iii. Applicable standard of value (for example, fair value or fair market value) and the applicable premise of value (for example, going concern)

  1. Type of valuation report to be issued (see paragraph .48), intended use and users of the report, and restrictions on the use of the report
  2. Governmental regulations or other professional standards that apply to the subject interest or to the valuation engagement
5. Objectivity and Conflict of Interest

.14: All professional services, including valuation activities, must be performed objectively, according to the code. Objectivity is a mental state. The need to be impartial, intellectually honest, disinterested, and devoid of conflicts of interest is imposed by the principle of objectivity. When a potential conflict of interest exists, a valuation analyst must disclose it and seek consent, as required by the “Conflicts of Interest” interpretation (ET sec. 1.110.010 and 2.110.010) of the “Integrity and Objectivity Rule” (ET sec. 1.100.001 and 2.100.001).

7. Establishing an Understanding with the Client

.16: The valuation analyst should reach an agreement with the customer, preferably in writing, about the scope of the assignment. If the value analyst has an oral comprehension, he or she should document it with suitable annotations or notations in the working papers. (The “General Requirements for Performing Nonattest Services” interpretation [ET sec. 1.295.040] of the “Independence Rule” [ET sec. 1.200.001] requires the engagement understanding to be in writing if it is performed for an attest client.) Regardless of whether the understanding is written or oral, the value analyst should alter it if circumstances arise throughout the engagement that necessitates doing so.

.17: The agreement with the client eliminates the risk of either the valuation analyst or the client misinterpreting the other’s needs or expectations. The nature, purpose, and objective of the valuation engagement, the client’s responsibilities, the valuation analyst’s responsibilities, the applicable assumptions and limiting conditions, the type of report to be issued, and the standard of value to be used should all be included in the understanding.

9. Scope Restrictions or Limitations

.19: A restriction or limitation on the scope of the valuation analyst’s work, or the data available for analysis, may be present and known to the valuation analyst at the start of the valuation engagement, or it may occur during the engagement. In the value report, such a constraint or limitation should be indicated (see paragraphs .52m, .68e, and .71n).

2. Jurisdictional Exception

.10: If any part of this statement contradicts published governmental, judicial, or accounting authority, or such authority specifies valuation development or valuation reporting procedures, the valuation analyst should follow the applicable published authority or stated procedures with respect to that part applicable to the valuation in which the member is engaged. The rest of this statement (Interpretation No. 1 [VS sec. 9100 par..01–.89]) remains in full force and effect.

4. Nature and Risks of the Valuation Services and Expectations of the Client

.13: The valuation analyst should evaluate the matters in paragraph.12, as well as, at a minimum, the following when determining the nature and risks of the valuation services to be offered and the client’s expectations:

  1. The proposed terms of the valuation engagement
  2. The identity of the client
  3. The nature of the interest and ownership rights in the business, business interest, security, or intangible asset being valued, including control characteristics and the degree of marketability of the interest
  4. The procedural requirements of a valuation engagement and the extent, if any, to which procedures will be limited by either the client or circumstances beyond the client’s or the valuation analyst’s control
  5. The use of and limitations of the report, and the conclusion or calculated value
  6. Any obligation to update the valuation
6. Independence and Valuation

.15: If a valuation analyst or valuation analyst’s firm performs an attest engagement for a client (as defined by the code’s “Independence Rule”), the valuation analyst must comply with the requirements set forth in the interpretations of the “Nonattest Services” subtopic (ET sec. 1.295) under the “Independence Rule” (ET sec. 1.200.001) so that the member’s independence with respect to the client is not jeopardized.

8. Assumptions and Limiting Conditions

.18: Valuation discussions are rife with assumptions and limiting factors. Appendix A, “Illustrative List of Assumptions and Limiting Circumstances for a Business Valuation,” contains examples of typical assumptions and limiting conditions for a business valuation (par. .80). The valuation report should include the assumptions and limiting criteria (see paragraphs.52l,.68g, and.71m).

10. Using the Work of Specialists in the Engagement to Estimate Value

.20: The valuation analyst may rely on the work of a third-party specialist when completing an engagement to evaluate worth (for example, a real estate or equipment appraiser). The level of responsibility, if any, assumed by the valuation analyst for the work of the third party specialist should be noted in the assumptions and limiting conditions. The written report of the third-party specialist may be included in the valuation analyst’s report at the valuation analyst’s discretion.

Development
1. Types of Engagement

.21: A valuation engagement and a calculation engagement are the two sorts of engagements used to evaluate value. The valuation engagement necessitates a greater number of steps than the calculation engagement. The valuation engagement concludes with a value conclusion. A calculated value is the result of the computation engagement. The form of engagement is determined by the client’s agreement (see paragraphs.16 and.17):

  1. Valuation Engagement: When (1) the engagement calls for the valuation analyst to estimate the value of a subject interest and (2) the valuation analyst estimates the value (as outlined in paragraphs.23–.45) and is free to use the valuation approaches and methods he or she deems appropriate in the circumstances, the valuation analyst performs a valuation engagement. The valuation analyst expresses the outcomes of the valuation as a value conclusion, which might be a single figure or a range of figures.
  2. Calculation Engagement: When (1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use, as well as the scope of procedures the valuation analyst will perform in the process of calculating the value of a subject interest (these procedures will be more limited than those of a valuation engagement), and (2) the valuation analyst calculates the value in accordance with the agreement, the valuation analyst performs a calculation engagement. The results of these operations are expressed as a computed value by the valuation analyst. The result can be expressed as a range or as a single number. The steps required for a valuation engagement are not included in a calculation engagement (see paragraph .46).
3. Valuation Engagement

.23: The valuation analyst should conduct the following when performing a valuation engagement:

  • Analyze the subject interest (paragraphs .25–.30)
  • Consider and apply appropriate valuation approaches and methods (paragraphs .31–.42)
  • Prepare and maintain appropriate documentation (paragraphs .44–.45)

.24: Despite the fact that the list in paragraph.23 and some of the standards and guidelines in this statement suggest a sequential valuation process, valuations are a continuous activity of acquiring, updating, and assessing data. As a result, the value analyst may choose to execute the standards and suggestions in this statement in a different order.

5. Non- Financial Information

.27: The valuation analyst should gather adequate nonfinancial information to enable him or her to comprehend the subject entity, as available and appropriate to the valuation engagement, including the following:

  • Nature, background, and history
  • Facilities
  • Organizational structure
  • Management team (which may include officers, directors, and key employees)
  • Classes of equity ownership interests and rights attached thereto
  • Products or services, or both
  • Economic environment
  • Geographical markets
  • Industry markets
  • Key customers and suppliers
  • Competition
  • Business risks
  • Strategy and future plans
  • Governmental or regulatory environment
7. Financial Information

.29: Financial information on the subject entity, such as the following, should be obtained by the valuation analyst where applicable and available:

– Historical financial information (including annual and interim financial statements and key financial statement ratios and statistics) for an      appropriate number of years

               – Prospective financial information (for example, budgets, forecasts, and projections)

– Comparative summaries of financial statements or information covering a relevant time period

– Comparative common size financial statements for the subject entity for an appropriate number of years

– Comparative common size industry financial information for a relevant time period

– Income tax returns for an appropriate number of years

– Information on compensation for owners including benefits and personal expenses

– Information on key man or officers’ life insurance

– Management’s response to inquiry regarding the following

  • Contracts that are profitable or detrimental
  • Assets and liabilities that are contingent or off-balance-sheet.
  • Information about previous stock sales by the firm

.30: The valuation analyst should read and assess the data to ensure that it is reasonable for the engagement’s aims.

9. Asset Approach and Cost Approach

.34: The adjusted net asset technique is a commonly utilized asset approach method. When evaluating a business, a business ownership interest, or a securities using the adjusted net asset approach, the valuation analyst should take into account the following facts linked to the premise of value:

 – Identification of the assets and liabilities

– Value of the assets and liabilities (individually or in the aggregate)

– Liquidation costs (if applicable)

.35: When using the cost approach to value intangible assets, the valuation analyst should take into account the type of cost to be used (for example, reproduction cost or replacement cost), as well as the appropriate forms of depreciation and obsolescence, and the intangible asset’s remaining useful life.

11. Valuation Adjustments

.40: The valuation analyst should assess whether valuation adjustments (discounts or premiums) should be made to a pre-adjustment value during the course of a valuation engagement. A discount for lack of marketability or liquidity, as well as a discount for lack of control, are examples of valuation adjustments for a firm, business ownership interest, or securities. Obsolescence is an example of a value adjustment for an intangible asset.

.41: The value of any non-operating assets, non-operating liabilities, or excess or deficient operating assets should be excluded from the computation of the value based on the operating assets and added to or deleted from the value of the operating entity when valuing a controlling ownership interest using the income approach. The value of any non-operating assets, non-operating liabilities, or excess or deficient operating assets may or may not be used to adjust the value of the operating entity when valuing a non-controlling ownership interest under the income approach, depending on the valuation analyst’s assessment of the influence exercisable by the non-controlling interest. Non-operating assets, non-operating liabilities, and surplus or inadequate operational assets may not need to be considered separately in the asset-based or cost approach.

13. Subsequent Events

.43: The valuation date is the date on which the valuation analyst calculates the worth of the subject interest and comes to a conclusion on that assessment. In general, the valuation analyst should only evaluate circumstances that existed at the time of the valuation and events that occurred prior to the valuation date. A subsequent event is an occurrence that occurs after the valuation date and has the potential to alter the value of the asset. Following occurrences are suggestive of conditions that were unknown or unknown at the time of valuation, such as conditions that developed after the valuation date. These occurrences or conditions would not be reflected in the appraisal. Furthermore, a valuation is completed as of a certain moment in time—the valuation date—and the occurrences stated in this subparagraph, which occurred after that date, are irrelevant to the value estimated as of that date. When a valuation is relevant to the intended user beyond the valuation date, the occurrences may be of such kind and importance that they should be disclosed (at the valuation analyst’s discretion) in a distinct section of the report to keep consumers informed (see paragraphs .52p, .71r, and .74). Such disclosure should make it clear that the information about the occurrences is offered solely for educational reasons and has no bearing on the value decision as of the indicated valuation date.

15. Calculation Engagement

.46: At a minimum, the value analyst should consider the following when executing a computation engagement:

  1. Identity of the client
  2. Identity of the subject interest
  3. Whether or not a business interest has ownership control characteristics and its degree of marketability
  4. Purpose and intended use of the calculated value
  5. Intended users of the report and the limitations on its use
  6. Valuation date
  7. Applicable premise of value
  8. Applicable standard of value
  9. Sources of information used in the calculation engagement
  10. Valuation approaches or valuation methods agreed upon with the client
  11. Subsequent events, if applicable (see paragraph .43)

Furthermore, the value analyst must follow the documentation standards outlined in paragraphs.44 and.45. The number, kind, and content of documents are all questions of professional judgment for the value analyst.

2. Hypothetical Conditions

.22: In some cases, hypothetical conditions impacting the subject of interest may be required. When a valuation analyst employs hypothetical conditions during a valuation or calculation engagement, he or she should explain why the conditions were included and disclose them in the valuation or calculation report (see paragraphs .52n, .71o, and .74).

4. Analysis of the Subject Interest

.25: The valuation analyst will use the subject interest analysis to explore, evaluate, and apply various valuation approaches and methods to the subject interest. The kind and scope of the data required for the analysis will be determined by, at a minimum, the following:

  • Nature of the subject interest
  • Scope of the valuation engagement
  • Valuation date
  • Intended use of the valuation
  • Applicable standard of value
  • Applicable premise of value
  • Assumptions and limiting conditions
  • Applicable governmental regulations or other professional standards

.26: The valuation analyst should evaluate both financial and nonfinancial data while examining the subject interest. The nature, availability, and importance of such data varies depending on the subject of interest.

6. Ownership Information

.28: To enable him or her to value the subject interest, the valuation analyst should gather ownership information, if applicable and available.

  • determine the type of ownership interest being valued and ascertain whether that interest
  • exhibits control characteristics
  • analyze the different ownership interests of other owners and assess the potential effect on the value of the subject interest
  • understand the classes of equity ownership interests and rights attached thereto.
  • understand the rights included in, or excluded from, each intangible asset.
  • understand other matters that may affect the value of the subject interest, such as the following:
    • For a business, business ownership interest, or security: Owners and the subject interest are bound by shareholder agreements, partnership agreements, operational agreements, voting trust agreements, buy-sell agreements, loan covenants, restrictions, and other contractual responsibilities or restrictions.
    • For an intangible asset: Development rights, marketing or exploitation rights, and other contractual duties are all covered by legal rights, licensing agreements, sublicense agreements, nondisclosure agreements, and other contractual requirements.
8. Valuation Approaches and Methods

.31: The valuation analyst should examine the three most prevalent valuation methodologies when generating the valuation:

 – Income (income-based) approach

– Asset (asset-based) approach (used for businesses, business ownership interests, and securities) or cost approach (used for intangible assets)

– Market (market-based) approach

.32: The valuation analyst should apply the proper valuation methodology and procedures to the valuation engagement. The paragraphs.33–.41 provide general information on the use of approaches and techniques, but comprehensive advise on specific valuation approaches and methods and their applicability is outside the scope of this statement.

.33: Income Approach: The capitalization of benefits technique (for example, earnings or cash flows) and the discounted future benefits method are two often used valuation methods under the income approach (for example, earnings or cash flows). When using these methodologies, the valuation analyst should take into account a number of criteria, including but not limited to:

  1. Capitalization of benefits (for example, earnings or cash flows) method. The valuation analyst should consider the following:
  2. Normalization adjustments
    1. Nonrecurring revenue and expense items
    2. Taxes
    3. Capital structure and financing costs
    4. Appropriate capital investments
    5. Noncash items
    6. Qualitative judgments for risks used to compute discount and capitalization
    7. rates
    8. Expected changes (growth or decline) in future benefits (for example, earnings
    9. or cash flows)
  3. Discounted future benefits method (for example, earnings or cash flows). In addition to the items in item a, the valuation analyst should consider the following:
  4. Forecast or projection assumptions
  5. Forecast or projected earnings or cash flows

iii. Terminal value

  1. When valuing an intangible asset, the valuation analyst should also consider the following factors:
    1. Remaining useful life
    2. Current and anticipated future use of the intangible asset
  • Rights attributable to the intangible asset
  1. Position of intangible asset in its life cycle
  2. Appropriate discount rate for the intangible asset
  3. Appropriate capital or contributory asset charge, if any
  • Research and development or marketing expense needed to support the intangible asset in its existing state
  • Allocation of income (for example, incremental income, residual income, or profit split income) to intangible asset
  1. Whether any tax amortization benefit would be included in the analysis
  2. Discounted multi-year excess earnings
  3. Market royalties
  • Relief from royalty
10. Market Approach

.36: The following are three commonly used market approach valuation methods for valuing a business, business ownership interest, or security:

 – Guideline public company method

– Guideline company transactions method

– Guideline sales of interests in the subject entity, such as business ownership interests or securities

The following are three commonly used market approach valuation methods for intangible assets:

– Comparable uncontrolled transactions method (which is based on arm’s-length sales or licenses of guideline intangible assets)

– Comparable profit margin method (which is based on comparison of the profit margin earned by the subject entity that owns or operates the intangible asset to profit margins earned by guideline companies)

– Relief from royalty method (which is based on the royalty rate, often expressed as a percentage of revenue that the subject entity that owns or operates the intangible asset would be obligated to pay to a hypothetical third-party licensor for the use of that intangible asset)

The valuation analyst should assess the subject intangible asset’s remaining useful life compared to the remaining useful life of the guideline intangible assets, if available, when using methodologies incorporating guideline intangible assets (for example, the comparable profit margin method).

.37: The valuation analyst should keep the following in mind when using the methodologies indicated in paragraph.36 or other approaches to determine valuation pricing multiples or metrics:

– Qualitative and quantitative comparisons

– Arm’s-length transactions and prices

– The dates and, consequently, the relevance of the market data

.38: The justification and support for the value procedures employed should be stated in the report by the valuation analyst (see paragraph .47).

.39: Rules of Thumb: Some valuation experts utilize rules of thumb or industry benchmark indicators (hence, collectively referred to as rules of thumb) in a valuation engagement, despite the fact that this is technically not a valuation approach. A rule of thumb is normally used to verify the reasonableness of other approaches and should not be used as the sole way for estimating the value of a subject interest.

12. Conclusion of Value

.42: The valuation analyst should consider the following factors before arriving at a value conclusion:

  1. correlate and reconcile the results obtained under the different approaches and methods used.
  2. assess the reliability of the results under the different approaches and methods using the information gathered during the valuation engagement.
  3. determine, based on items a and b, whether the conclusion of value should reflect
  4. the results of one valuation approach and method, or
  5. a combination of the results of more than one valuation approach and method.
14. Documentation

.44: Documentation is the primary record of information gathered and assessed, procedures carried out, valuation methodologies and methods considered and implemented, and the value conclusion. The number, kind, and content of documents are all questions of professional judgment for the value analyst. The following items may be included in the documentation:

– Information gathered and analyzed to obtain an understanding of matters that may affect the value of the subject interest (paragraphs .25–.30)

– Assumptions and limiting conditions (paragraph .18)

– Any restriction or limitation on the scope of the valuation analyst’s work or the data available for analysis (paragraph .19)

– Basis for using any valuation assumption during the valuation engagement

– Valuation approaches and methods considered

– Valuation approaches and methods used including the rationale and support for their use

– If applicable, information relating to subsequent events considered by the valuation analyst (paragraph .43)

– For any rule of thumb used in the valuation, source(s) of data used, and how the rule of thumb was applied (paragraph .39)

– Other documentation considered relevant to the engagement by the valuation analyst

.45: The valuation analyst should keep the documentation for as long as is required by relevant legal, regulatory, or other professional records retention obligations.

The Valuation Report

.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).

1. Reporting Exemption for Certain Controversy Proceedings

.50: A valuation made for a court, arbitrator, mediator, or other facilitator, or a matter in a governmental or administrative procedure, is excluded from the reporting requirements of this statement. Whether the case goes to trial or is settled, the reporting exemption applies. The exception solely applies to the statement’s reporting provisions (see paragraphs.47–.49 and.51–.78). When the valuation analyst provides a conclusion of value or a determined value (Interpretation No. 1 [VS sec. 9100 par..01–.89]), the statement’s developmental provisions (see paragraphs.21–.46) still apply.

3. Introduction

.52: This section should give a general overview of the valuation project. The material in this section should be sufficient to allow the report’s intended user to comprehend the nature and scope of the valuation engagement, as well as the work completed. The following information could be included in the introduction section:

  1. Identity of the client
  2. Purpose and intended use of the valuation
  3. Intended users of the valuation
  4. Identity of the subject entity
  5. Description of the subject interest
  6. Whether the business interest has ownership control characteristics and its degree of marketability
  7. Valuation date
  8. Report date
  9. Type of report issued (namely, a detailed report) (paragraph .51)
  10. Applicable premise of value
  11. Applicable standard of value
  12. Assumptions and limiting conditions (alternatively, these often appear in an appendix) (paragraph .18)
  13. Any restrictions or limitations in the scope of work or data available for analysis (paragraph .19)
  14. Any hypothetical conditions used in the valuation engagement, including the basis for their use (paragraph .22)
  15. If the work of a specialist was used in the valuation engagement, a description of how the specialist’s work was relied upon (paragraph .20)
  16. Disclosure of subsequent events in certain circumstances (paragraph .43)
  17. Any application of the jurisdictional exception (paragraph .10)
  18. Any additional information the valuation analyst deems useful to enable the user(s) of the report to understand the work performed in the valuation report.
5. Analysis of the Subject Entity and Related Nonfinancial Information

.57: A description of the relevant nonfinancial facts described and discussed in paragraph.27 should be included by the valuation analyst.

7. Valuation Approaches and Methods Considered

.59: The valuation analyst should say in this part that he or she has evaluated the value methodologies discussed in paragraph.31.

9. Valuation Adjustments

.63: This section should (a) list each valuation adjustment considered and found to be applicable, such as a discount for lack of marketability, (b) explain why the adjustment was used and the factors considered in determining the amount or percentage used, and (c) list the pre-adjustment value to which the adjustment was applied (see paragraph .40).

11. Representation of the Valuation Analyst

.65: The value analyst’s opinion should be included in every written report. The value analyst summarizes the elements that led his or her work during the engagement in the representation portion of the report. The following are some examples of these factors:

  1. The valuation report’s analyses and conclusions of value are subject to the defined assumptions and limiting criteria (see paragraph.18), and they are the valuation analyst’s personal analyses and conclusions of value.
  2. The economic and industry data in the valuation study came from a variety of printed and electronic reference sources that the valuation analyst believes are trustworthy (any exceptions should be noted). To substantiate that data, the value analyst has not done any confirming processes.
  3. The valuation was completed in line with the Statement on Standards for Valuation Services of the American Institute of Certified Public Accountants.
  4. The parties to whom the valuation report’s information and use are restricted are named; the valuation report is not meant for and should not be utilized by anyone else (see paragraph .49).
  5. The analyst’s pay is either fee-based or contingent on the valuation’s conclusion.
  6. During the valuation engagement, the value analyst enlisted the help of one or more outside experts. (An outside specialist is someone who is not a member of the value analyst’s firm.) If a specialist’s work was used, the specialist should be identified. A statement describing the extent of responsibility, if any, that the valuation analyst assumes for the specialist’s work should be included in the valuation report.
  7. The valuation analyst is under no responsibility to revise the report or the conclusion of value if new information comes to light after the report’s publication date.
  8. The valuation analyst and, if applicable, the person(s) assuming responsibility for the valuation should sign the representation in their own name(s). It is necessary to identify those who provide significant professional support.
13. Qualifications of the Valuation Analyst

.67: The report should include information about the value analyst’s qualifications.

15. Appendixes and Exhibits

For required material or information that supplements the detailed report, appendices or exhibits may be used. The valuation analyst’s portrayal, as well as the assumptions and limiting criteria, are frequently included as appendices to the detailed report.

17. Calculation Report

.73: A calculation report is the only report that should be used to report the results of a calculation engagement, as stated in paragraph.48. It should be stated in the report that it is a calculating report. The value analyst’s depiction, similar to that in paragraph.65, but tailored for a calculation engagement, should be included in the calculation report.

.74: Any hypothetical conditions utilized in the calculation engagement should be identified in the calculation report, along with the reason for their use (paragraph.22), any use of the jurisdictional exemption (paragraph.10), and any assumptions and limiting restrictions that apply to the engagement (paragraph .18). If the valuation analyst employed a specialist’s work (paragraph.20), the valuation analyst should explain how the specialist’s work was used and what amount of responsibility, if any, the valuation analyst is taking on for the specialist’s work in the calculation report. In some cases, the computation report may additionally include a disclosure of following occurrences (paragraph .43).

.75: For needed material (paragraph.72) or information that supports the computation report, appendices or exhibits may be used. The assumptions and limiting criteria, as well as the value analyst’s depiction, are frequently included in the calculation report’s appendices.

.76: A section summarizing the determined value should be included in the calculation report. The following (or similar) remarks should be included in this section:

  1. The identity of the subject of interest and the calculation date were among the procedures carried out.
  2. Detail the calculation procedures and scope of work that were conducted, or point to the section(s) of the calculation report that describe the calculation procedures and scope of work.
  3. Describe the calculation operations’ purpose, including the fact that they were performed solely for that purpose and that the calculated value produced should not be used for any other purpose or by any other party for any purpose.
  4. The computation was done in accordance with the American Institute of Certified Public Accountants’ Statement on Standards for Valuation Services.
  5. A summary of the features of the business interest, including whether the subject interest exhibits control characteristics, as well as a declaration about the subject interest’s marketability.
  6. A calculated value is an estimate of value coming from a calculation engagement.
  7. A general description of a computation engagement is provided, which includes the following information.
  • A calculation engagement does not include all of the procedures required for a valuation engagement, and it does not include all of the procedures required for a valuation engagement.
  • The outcomes could have been different if a valuation engagement had been conducted.
  • The calculated value is described as a single amount or a range.
  • The valuation analyst’s or valuation analyst’s firm’s signature appears on the report.
  • The valuation report’s date is specified.
  • The valuation analyst is under no responsibility to revise the report or the value calculation if new information comes to light after the report’s publication date.

.77: The following is an example of report language that could be used in reporting a calculation engagement but is not required:

We completed a calculating engagement, as defined by the American Institute of Certified Public Accountants’ Statement on Standards for Valuation Services (SSVS). As of [calculation date], we completed various calculations on [DEF Company, GHI business ownership stake in DEF Company, GHI security of DEF Company, or GHI intangible asset of DEF Company]. Our calculation report’s paragraphs [reference to paragraph numbers] outline the specific calculation techniques. The calculation methods were carried out purely to aid in the [purpose of valuation operations], and the resulting value calculation should not be used for any other purpose or by any other party. The SSVS was followed throughout this entire engagement. A calculated value is an estimate of value that results from a calculation engagement.

The valuation analyst and the client agree on the specific valuation methodologies and methods the valuation analyst will employ, as well as the scope of valuation processes the valuation analyst will execute to estimate the worth of the subject interest, in a calculation engagement. The methods necessary in a valuation engagement, as described in the SSVS, are not included in a calculation engagement. The outcomes might have been different if a valuation engagement had been conducted.

The resulting calculated value of [DEF Company, GHI business ownership interest of DEF Company, GHI security of DEF Company, or GHI intangible asset of DEF Company] as of [valuation date] was [calculated value, either a single amount or a range] based on our calculations, as described in this report, which are solely based on the procedures agreed upon as previously referred to. The Statement of Assumptions and Limiting Conditions in [reference to applicable section of valuation report] and the Valuation Analyst’s Representation in [reference to applicable section of valuation report] apply to this computed value. We are under no duty to update this report or our value calculations if new information comes to our attention after the report’s publication date.

[Signature]

[Date]

2. Detailed Report

.51: The thorough report is laid down in such a way that intended consumers may comprehend the data, logic, and analyses that lead to the valuation analyst’s judgment of worth. A detailed report should include, as appropriate, the sections below, with titles that are similar in content to those shown:

  – Letter of transmittal

– Table of contents

– Introduction

– Sources of information

– Analysis of the subject entity and related nonfinancial information

– Financial statement or financial information analysis

– Valuation approaches and methods considered

– Valuation approaches and methods used

– Valuation adjustments

– Non-operating assets, non-operating liabilities, and excess or deficient operating assets (if any)

– Representation of the valuation analyst

– Reconciliation of estimates and conclusion of value

– Qualifications of the valuation analyst

– Appendixes and exhibits

The sections of the report stated above, as well as the comprehensive material in the areas provided in the following paragraphs. The valuation analyst may choose to include 52–.77 in the body of the report or elsewhere in the report.

4. Sources of Information

.53: The relevant sources of information used in executing the valuation engagement should be identified in this section of the report. It could include, for example, the following:

  1. For valuation of a business, business ownership interest, or security, whether and to what extent the subject entity’s facilities were visited
  2. For valuation of an intangible asset, whether the legal registration, contractual documentation, or other tangible evidence of the asset was inspected
  3. Names, positions, and titles of persons interviewed and their relationships to the subject interest
  4. Financial information (paragraphs .54 and .56)
  5. Tax information (paragraph .55)
  6. Industry data
  7. Market data
  8. Economic data
  9. Other empirical information
  10. Relevant documents and other sources of information provided by or related to the entity

.54: The valuation report should disclose this fact as well as the type of report issued if the financial information includes financial statements that were reported on (audit, review, compilation, or attest engagement performed under the Statements on Standards for Attestation Engagements [SSAEs] [AT sec. 20–701]) by the valuation analyst’s firm. If the valuation analyst or the valuation analyst’s firm did not audit, review, compile, or attest to the financial information under the SSAEs (AT sec. 20–701), the valuation analyst should state so, as well as the fact that the valuation analyst bears no responsibility for the financial information.

.55: The valuation report should disclose this fact as well as the type of report issued if the financial information includes financial statements that were reported on (audit, review, compilation, or attest engagement performed under the Statements on Standards for Attestation Engagements [SSAEs] [AT sec. 20–701]) by the valuation analyst’s firm. If the valuation analyst or the valuation analyst’s firm did not audit, review, compile, or attest to the financial information under the SSAEs (AT sec. 20–701), the valuation analyst should state so, as well as the fact that the valuation analyst bears no responsibility for the financial information.

.56: The valuation report should accomplish the following if the financial information was generated from financial statements prepared by management that were not the subject of an audit, review, compilation, or attest engagement done under the SSAEs:

                – Identify the financial statements

– State that, as part of the valuation engagement, the valuation analyst did not audit, review, compile, or attest under the SSAEs (AT sec. 20–710) to the financial information and assumes no responsibility for that information

6. Financial Statement or Financial Information Analysis

.58: A description of the important facts indicated in paragraph.29 should be included in this section. The following are examples of such a description:

  1. The rationale underlying any normalization or control adjustments to financial information
  2. Comparison of current performance with historical performance
  3. Comparison of performance with industry trends and norms, where available
8. Valuation Approaches and Methods Used

.60: The valuation analyst should identify the valuation methods utilized in each valuation approach, as well as the justification for their use, in this section.

.61: This section should additionally include the following information for each of the three approaches (if applicable):        

  1. Income Approach:

– Composition of the representative benefit stream

– Method(s) used, and a summary of the most relevant risk factors considered in selecting the appropriate discount rate, the capitalization rate, or both

– Other factors as discussed in paragraph .33

  1. Asset-Based Approach or Cost Approach:

– Asset-Based Approach: Any modifications to the relevant balance sheet data made by the valuation analyst

– Cost Approach: The type of cost used, how it was calculated, and, if applicable, the types of and prices related with depreciation and obsolescence employed under the technique, as well as how those costs were estimated

  1. Market Approach

                – For the guideline public company method:

  • The companies chosen as guideline companies and the process used to choose them
  • The pricing multiples that were used, how they were used, and why they were chosen. If the pricing multiples were changed, what was the rationale behind it?

 

– The sales transactions and pricing multiples utilized, how they were used, and the rationale for their selection for the guideline company transactions technique; if the pricing multiples were altered, the rationale for such alterations

– The sales transactions used, how they were used, and the reasons for finding that these sales are typical of arm’s length transactions for the guideline sales of interests in the subject entity method.

.62: When a rule of thumb is combined with other methodologies, the valuation report should state the data source(s) and how the rule of thumb was applied (see paragraph .39).

10. Non-Operating Assets and Excess Operating Asset

.64: If the subject interest is a firm, a business ownership interest, or a security, the valuation report should note any non-operating assets, non-operating liabilities, or surplus or deficient operational assets, as well as their impact on the valuation (see paragraph .41).

12. Representations Regarding Information Provided to the Valuation Analyst

.66: It is a matter of discretion for the valuation analyst whether or not to get written representations regarding information that the subject entity’s management delivers to the valuation analyst for purposes of the letter.

14. Conclusion of Value

.68: This section should show a comparison of the valuation analyst’s estimate with other estimations of the subject interest’s worth. This part should include the following or equivalent assertions, in addition to an explanation of the rationale underpinning the judgment of value:

  1. The subject interest and the value date were both included in the valuation engagement.
  2. The analysis was carried out just for the purpose of this report, and the value estimate that resulted should not be utilized for any other purpose.
  3. The valuation was completed in line with the American Institute of Certified Public Accountants’ Statement(s) on Standards for Valuation Services.
  4. A declaration that a valuation engagement’s assessment of worth is expressed as a conclusion of value.
  5. The scope of work or data available for analysis, as well as any limits or limitations, are described (see paragraph .19).
  6. A statement that describes the value conclusion, either as a single sum or as a range.
  7. The valuation analyst’s portrayal, as well as the assumptions and limiting circumstances (see paragraph.18), influence the conclusion of value (see paragraph .65).
  8. The valuation analyst’s or valuation analyst’s firm’s signature appears on the report.
  9. The value report’s date is included.
  10. The valuation analyst is under no responsibility to revise the report or the conclusion of value if new information comes to light after the report’s publication date.

.69: When reporting the results of a valuation engagement, the following is an example of report wording that could be used, but is not required:

We performed a valuation engagement of [DEF Company, GHI business ownership interest of DEF Company, GHI security of DEF Company, or GHI intangible asset of DEF Company] as of [valuation date], as defined by the American Institute of Certified Public Accountants’ Statement on Standards for Valuation Services (SSVS). This valuation was conducted solely for the purpose of [purpose of the valuation]; the resulting estimate of value should not be used for any other purpose or by any other party for any other purpose. The SSVS was followed throughout this valuation engagement. A conclusion of value is the estimate of value that follows from a valuation engagement.

[If appropriate] The scope of our investigation or the data available for analysis was constrained or limited in the following ways: [describe constraints or limitations].

The estimated worth of [DEF Company, GHI business ownership stake in DEF Company, GHI security of DEF Company, or GHI intangible asset of DEF Company] as of [valuation date] was [value, either a single number or a range] based on our analysis, as indicated in this valuation report.

This conclusion is subject to the [reference to applicable section of valuation report] Statement of Assumptions and Limiting Conditions, as well as the [reference to applicable section of valuation report] Valuation Analyst’s Representation. For information that comes to our attention after the date of this report, we have no obligation to update this report or our judgment of value.

[Signature]

[Date]

16. Summary Report

A summary report is designed to present a condensed version of the information included in a thorough report, and as a result, it does not need to be as detailed as a detailed report. A summary report should, at the very least, include the following:

  1. Identity of the client
  2. Purpose and intended use of the valuation
  3. Intended users of the valuation
  4. Identity of the subject entity
  5. Description of the subject interest
  6. The business interest’s ownership control characteristics, if any, and its degree of marketability
  7. Valuation date
  8. Valuation report date
  9. Type of report issued (namely, a summary report) (paragraph .48)
  10. Applicable premise of value
  11. Applicable standard of value
  12. Sources of information used in the valuation engagement
  13. Assumptions and limiting conditions of the valuation engagement (paragraph .18)
  14. The scope of work or data available for analysis including any restrictions or limitations (paragraph .19)
  15. Any hypothetical conditions used in the valuation engagement, including the basis for their use (paragraph .22)
  16. If the work of a specialist was used in the valuation (paragraph .20), a description of how the specialist’s work was used, and the level of responsibility, if any, the valuation analyst is assuming for the specialist’s work
  17. The valuation approaches and methods used
  18. Disclosure of subsequent events in certain circumstances (paragraph .43)
  19. Any application of the jurisdictional exception (paragraph .10)
  20. Representation of the valuation analyst (paragraph .65)
  21. The report is signed in the name of the valuation analyst or the valuation analyst’s firm
  22. A section summarizing the reconciliation of the estimates and the conclusion of value as discussed in paragraphs .68 and .69
  23. A statement that the valuation analyst has no obligation to update the report or the conclusion of value for information that comes to his or her attention after the date of the valuation report

.72: For mandatory information (see paragraph.70) or information that supplements the summary report, appendices or exhibits may be used. The assumptions, limiting conditions, and value analyst’s portrayal are frequently included in the summary report’s appendices.

18. Oral Report

.78: In a valuation or computation engagement, an oral report may be employed. To avoid misunderstandings between the valuation analyst and the oral report recipient, an oral report should include any information the valuation analyst considers is essential to communicate the scope, assumptions, constraints, and conclusions of the engagement. The substance of the oral report delivered to the customer should be documented in the working papers.

Effective Date

.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.

Appendix A: Illustrative List of Assumptions and Limiting Conditions for a Business Valuation

.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.

Illustrative List of Assumptions and Limiting Conditions
  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.
Appendix B: International Glossary of Business Valuation Terms

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.

Appendix C: Glossary of Additional Terms

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.