SSVS 1: dealing with the impact of the new business valuation standards.

by Andersen, James A.

California CPA • August, 2007 • Statement on Standards for Valuation Services No. 1

After nearly five years of arduous work, the AICPA has issued its much anticipated business valuation standard--Statement on Standards for Valuation Services No. 1 (SSVS 1).

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Because of the AICPA's close ties to the financial community's rule makers--and to the IRS through its members' tax services to clients--the need for specific AICPA business valuation standards has been recognized for some time.

There has been a need to provide clear guidance in the valuation arena, particularly in regards to practitioners who perform valuations on a part-time basis. The AICPA Consulting Services Executive Committee wrote this standard to improve the consistency and quality of practice for all AICPA members performing business valuations. AICPA members will be required to follow this standard when they perform engagements to estimate value that culminate in the expression of a conclusion of value or a calculated value.

THE BV ENGAGEMENT

To begin, we need to understand the various types of client engagements that may require business valuation services:

* Transactions, or potential transactions, such as acquisitions, mergers, leveraged buyouts, initial public offerings, employee stock-ownership plans and other share-based plans, partner and shareholder buy-ins or buyouts, and stock redemptions;

* Litigation matters, such as marital dissolution, bankruptcy, contractual disputes, owner disputes, dissenting shareholder and minority ownership oppression cases, and employment and intellectual property disputes;

* Compliance-oriented engagements, including financial reporting and tax matters such as corporate reorganizations; S corporation conversions; income, estate and gift tax compliance; purchase price allocations; and charitable contributions; and

* Planning-oriented engagements for many of the above-mentioned matters.

DEFINING THE TERMS AND SERVICES

Next, we need to understand the scope of the statement and what some of the basic terms for valuation mean. The term "engagement to estimate value" refers to an engagement or any part of an engagement (for example, a tax, litigation or acquisition-related engagement) that involves estimating the value of a subject interest.

An engagement to estimate value culminates in the expression of either a "conclusion of value" or a "calculated value." A member who performs an engagement to estimate value is referred to as a "valuation analyst." All valuation analysts need to be aware of any governmental regulations and other professional standards, as well as various statements issued by the AICPA, that deal with objectivity, independence and other code of conduct issues.

After understanding the scope of the statement, it's important to understand what client services do not come under the rules of SSVS No. 1:

* Estimating the value of a subject interest as part of performing an attest engagement defined by Rule 101 of the AICPA Code of Professional Conduct;

* Accepting a value for a subject interest from the client or a third party not applying any valuation approaches or methods;

* Internal use assignments from employers to employee members of the AICPA who are not in the practice of public accountancy as defined in the AICPA Code of Professional Conduct;

* Economic damage or lost profit calculations that do not include an assignment that requires an assignment to estimate value; and

* Mechanical computations that do not rise to the level of an engagement to estimate value or where a member does not apply valuation approaches and methods and does not use professional judgment in determining value.

WHY ANOTHER SET OF STANDARDS?

Many CPAs doing business valuations have been following the Uniform Standards of Professional Appraisal Practice or other standards issued by other valuation organizations.

So why the new standards? The answer is simple: there are nearly 350,000 AICPA members, of which an estimated 4,700 have gone through the Accredited in Business Valuation credential certification program and participate significantly in business valuation matters. "Significant participation" means performing valuation services on more than a casual basis; being involved with the various valuation groups at either a state or national level; and having received accreditation by one or more of the various organizations: the AICPA (ABV credential), National Association of Certified Valuation Analysts (CVA credential), IBA (CBA credential) or the American Society of Appraisers (ASA credential).

In essence, this new standard helps to provide guidance and a future policing mechanism for all AICPA members who choose to perform valuation services in any fashion.

Much of the AICPA standard is very similar to requirements of USPAP or the above-mentioned organizations' standards, such as NACVA and the American Society of Appraisers.

However, the AICPA standard is different in that, previously, only AICPA members who were also members of one of the other organizations were obligated to adhere to the valuation standard of that other organization. The AICPA standard now requires all its members who are involved in business valuations to follow its newly issued standard.

Will practitioners need to significantly change the way they calculate value? The answer is no. Valuation theories and principles have been relatively constant for years. This standard is merely a guideline for performing quality valuation services for all practitioners.

SOME ADVICE

Moving forward, AICPA members should consider the following:

If you are among the 95 percent to 98 percent of members who are just casual valuation professionals, step it up and do quality work. It starts with being informed; get a copy of the standard from the AICPA (www.aicpa.org) and read it thoroughly.

After digesting the standard, make a commitment to get competent and qualified to perform business valuations, which can be done by getting in touch with the various organizations mentioned above and taking a number of rigorous valuation courses. CalCPA has two excellent three-day courses in valuation that are given every July and August in California. The AICPA also has a five-day valuation school in New York and Texas. NACVA, the IBA and the American Society of Appraisers also all have programs for training valuation analysts.

The new standard re-emphasizes all of the previously issued standards regarding professional competence, objectivity and conflicts of interest. It is imperative that you take all of this to heart.

It's important to remember that all AICPA members performing valuations will be held accountable by this newly issued standard, which becomes effective Jan. 1, 2008. It's recommended that everyone adhere to it as soon as possible.

After reading the 74-page standard, pay particular attention to the last section of the publication, starting on Page 55. This section gives examples and interpretations of the various sections of the new standard and provides illustrations on what is and is not a valuation engagement for all areas of valuation, with particular emphasis on litigation and tax-related engagements. SSVS 1 also has a broader applicability when it comes to financial reporting, decision making and regulatory issues.

This is an outstanding document that will be followed by the various governmental regulatory groups, such as the IRS, and our court systems, and will be of great assistance to practitioners in outlining the do's and don'ts in the valuation arena.

James A. Andersen CPA, ABV, ASA is the founding partner of Andersen & Company LLP in Santa Rosa and is a member of the CalCPA Litigation Sections Steering Committee and AICPA Business Valuation Committee. You can reach him at jandersen@aandco.com.

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BY JAMES A. ANDERSEN, CPA