Florida Business Valuation Group: Business appraisals, valuation reports

"What is your business worth? The answer depends on the method of
vaulation and the purpose of the valuation. Not all value is the same."

Appraisal Reports

By Marcie D. Bour, CPA/ABV, CVA, CFE, BVAL, CFFA

Valuation reports can take different forms based on the desire of the client, the intended user and the purpose of the report. In the case of valuation reports to be used for gift tax or estate tax purposes, the appraiser must not only comply with the appraisal standards of any of the societies to which he belongs, but also comply with Internal Revenue Service (IRS) regulations and rulings regarding appraisals for such purposes. In most cases, a formal appraisal report will be used when the report is being submitted to the IRS with a gift or estate tax return.

There is no standardized language that describes a business appraisal report. Both the Statement on Standards for Valuation Services, No. 1 (SSVS 1) issued by the American Institute of Certified Public Accountants and Professional Standards issued by the National Association of Certified Valuation Analysts provide for a detailed report, a summary report and a calculation report. Uniform Standards of Professional Appraisal Practice (USPAP) Standard 10-2 identifies two types of business valuation reports: Appraisal Report and Restricted Use Appraisal Report. USPAP refers to a "summary report" in Standard 2-2 to describe real property appraisals and accordingly has no defined meaning in a business appraisal context. Within the Institute of Business Appraisers Standards, there are three types of reports identified: an oral report, a letter form written report and a formal written report.

To be in compliance with appraisal standards, a report must meet minimum disclosure requirements, and presents the appraiser's findings and conclusions in a manner that an informed reader can replicate the appraisal process and arrive at appraised value. Appraisal standards include: SSVS 1 of the American Institute of Certified Public Accountants; Business Appraisal Standards and Code of Ethics of the Institute of Business Appraisers; the Professional Standards of the National Association of Certified Valuation Analysts; and the Uniform Standards of Professional Appraisal Practice. These various standards provide for similar minimum disclosures. Florida, as well as some other states, have adopted SSVS 1 into their Board of Accountancy Rules, mandating that all CPAs who provide valuation services do so in compliance with SSVS 1.

In addition to the requirements of professional appraisal standards, Treasury Regulation Section 301.6501( c)-1 provides that the adequate disclosure for transfers reported as gifts require that the report contain a description of the appraisal process, assumptions, hypothetical conditions, limiting conditions and restrictions, information considered, the appraisal procedures followed, methods used, and reasoning and rational of the appraiser in arriving at a fair market value of the asset transferred. These requirements are similar to those of the various appraisal societies. All of the appraisal societies either specifically or generally recognize the required elements of Revenue Ruling 59-60 which include:

“The nature of the business and the history of the enterprise from its inception.
The economic outlook in general and the condition and outlook of the specific industry in particular.
The book value of the stock and the financial condition of the business.
The earning capacity of the company.
The dividend-paying capacity.
Whether or not the enterprise has goodwill or other intangible value.
Sales of the stock and the size of the block of stock to be valued.
The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.”

The work necessary to complete and reach an opinion of value is the same for an Appraisal Report that provides the required information in great detail, as that of a report that provides a more abbreviated presentation. The distinction between what some call a summary report and a full appraisal report has to with the length and detail of the narrative discussion of the description of the company, its environment, the economy, the industry and the procedures performed. A report to be attached to a gift or estate tax return must contain the required information as outlined in the Treasury Regulations so that when the return is reviewed, it will provide the reviewer with sufficient information to reach the same conclusion as the appraiser. It is sometimes difficult for the beneficiaries of an estate or a donor to appreciate that a well through out and well written report can same them time and additional fees by averting an audit.

Appraisal Services:

The American Institute of Certified Public Accountants and the National Association Valuation Analysts provide for different levels of valuation services:

Conclusion of value is defined in SSVS 1 as “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 on those procedures.” A conclusion of value is common referred to as an opinion of value.
Calculation of value is defined in SSVS 1 as “An estimate s 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.” A calculation of value does not reach a conclusion or opinion.

A calculation of value generally does not include all the procedure that would be completed in arriving at a conclusion of value. Accordingly, calculation reports have a caveat that “If I were to consider other methodology other than what was agreed upon with the client, the resulting value could be materially different.”

Depending upon the purpose of the engagement, a specific level of service may be appropriate. The following are some examples:

Estate or gift tax reporting– conclusion of value
Litigation (Shareholder dispute, bankruptcy, divorce, etc.) – conclusion of value
Internal planning purposes – either conclusion of value or calculation of value
Financial reporting - conclusion of value
Transfer of ownership – either conclusion of value of calculation of value, depending upon the user

For more information regarding the appropriate level of service in your circumstance, please contact us.

Additional Resources