Long Arm of the Law: When Business Valuation Standards Apply to Tax Practice

By F. Gordon Spoor, CPA, PFS

The AICPA has issued Statement on Standards for Valuation Services (SSVS) No. 1 effective for all engagements accepted on or after Jan. 1, 2008.  The new standards apply to any AICPA member, or a nonmember CPA practicing in a state that has adopted SSVS No. 1, who is engaged to estimate the value of a business, business ownership interest, security or intangible asset.

The Florida Board of Accountancy (BOA) traditionally has looked to the standards imposed by the AICPA to represent the best practices and define minimum technical standards of competence.  As currently written, Rule 61H1-22.011 of the Board of Accountancy, in defining Florida’s Standards for Business Valuation, adopts AICPA Consulting Services Practice Aid 93-3 (a no longer published practice aid that is superseded by SSVS No. 1) to apply to all valuation engagements performed by a Florida CPA, unless the practitioner informs the client in writing that such standards will not be followed. The BOA currently is updating all references within its rules to current AICPA standards. Once the board completes its update to the rules, these standards will apply to all Florida CPAs, regardless of AICPA membership.

In the interim, practitioners who perform valuation services and who do not comply with the new standards may be subject to later criticism or encounter difficulty while defending their valuation because of their noncompliance with the “best practices” of their profession. The standards reach beyond valuation engagements in their application. The statement applies to any engagement that includes an estimate of value including tax, litigation or acquisition-related engagement. 

Prior to determining the applicability of SSVS No. 1 to a particular engagement, an understanding of the terms used in SSVS No. 1 is essential.

The standards apply to the valuation of a subject interest defined as a business, business ownership interest, security or intangible asset. The standard recognizes two types of engagements to estimate value: a valuation engagement and a calculation engagement. The valuation engagement results in a conclusion of value. The calculation engagement results in a calculated value (SSVS No. 1, paragraph 21). An AICPA member or otherwise covered CPA who performs the estimate of value is a valuation analyst. SSVS No. 1 provides guidance in the performance of both valuation and calculation engagements. At the conclusion of a valuation engagement, the valuation analyst must issue a written or oral report that contains the conclusion of value of the subject interest.

Tax practitioners often are called upon to use a value of a subject interest in the course of their practice. SSVS No.1 will affect how such a value is determined and how the use of such a valuation is communicated to the client. 

For example: Your clients, John and Mary Q. Public, have engaged you to assist them in developing their estate plan. As a part of the engagement, you are asked to determine their current estimated estate tax liability as a starting point of their estate planning. One of their major assets is a closely held corporation owned 100 percent by them. In order to compute their current estimated estate tax liability, you will need to use a value for this closely held business interest.  When will SSVS No. 1 apply to this engagement?  Consider each of the following circumstances:

• The client provides you with a value to be used for purposes of your estimate. SSVS No. 1 does not apply when the value of the subject interest is provided to the member by the client or a third party, and the member does not apply valuation approaches and methods (SSVS No. 1, paragraph 6).
• The client asks you to calculate the value of the subject interest by applying a long accepted “rule of thumb” to the financial information he or she has provided. This type of engagement is covered by SSVS No. 1 as a “calculation engagement.” A valuation analyst performs a calculation engagement when 1) the valuation analyst and the client agree on the valuation approach, methods the valuation analyst will use and the extent 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 compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value.  The calculated value is expressed as a range or a single amount (SSVS No. 1, paragraph 21b). The analyst should communicate with the client, preferably in writing, the conclusions reached and the methods used in reaching those conclusions. Any hypothetical conditions affecting the subjecting interest may be required and should be disclosed in the calculation report (SSVS No. 1, paragraph 22).
• The client asks you to estimate the value of the subject interest. SSVS No. 1 applies to this as a valuation engagement. A valuation analyst performs a 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 and is free to apply the valuation approaches he or she deems appropriate in the circumstances.  The valuation analyst expresses the results of the valuation as a conclusion of value. The conclusion may be either a single amount or a range (SSVS No. 1, paragraph 21a).

SSVS No. 1 contains some general exceptions to its application:

• Attest Engagement:  SSVS No. 1 is not applicable to a CPA who participates in 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, e.g., as part of an audit, review or compilation engagement (SSVS No. 1, paragraph 5).
• Valuation Approaches and Methods Not Applied: When the value of the subject interest is provided to the CPA by the client or a third party and the CPA does not apply any valuation approaches and methods (SSVS No. 1, Paragraph 6).
• Internal Use Assignment to Employee:  SSVS No. 1 is not applicable to internal use assignments from employers to employee members not in the practice of public accounting, as that term is defined in the AICPA Code of Professional Conduct (SSVS No.1, paragraph 7).
• Determination of Economic Damages: SSVS No. 1 does not apply to an engagement exclusively for the purposes of determining economic damages (i.e., lost profits) unless the determination also includes an engagement to estimate value (SSVS No.1, paragraph 8).
• Mechanical Computations: SSVS No. 1 does not apply to mechanical computations that do not rise to the level of an engagement to estimate value — that is, when the member does not apply valuation approaches and methods and does not use professional judgment (SSVS No. 1, Paragraph 9a).
• Application Not Practical or Reasonable:  SSVS No. 1 does not apply when it is not practical or not reasonable for the CPA to obtain or use relevant information. As a result, the CPA is unable to apply valuation approaches and methods (SSVS No. 1, Paragraph 9b).

SSVS No. 1 has a very broad reach across many areas of practice. To assist you in determining the application of this new standard to areas of tax practice, the AICPA has published a practice aid: “AICPA Statement on Standards for Valuation Services No. 1, Nonauthoritative Implementation Guidance Toolkit, Implementation Guide No. I.” The section titled “Application of SSVS No. 1 to Various Illustrative Client Engagement Situations” lists 53 types of engagements where SSVS No. 1 does not apply and 52 engagements where SSVS No. 1 does apply.  This practice aid can be downloaded, along with several other practice aids and the text of the standards themselves, at the AICPA Forensic and Valuation Services Web site, http://fvs.aicpa.org.