Valuation Engagements

Question 1

What standards do we CPA’s use for valuation engagements?

Answer 1

Statements on Standards for Valuation Services (SSVS), issued by AICPA

Question 2

What are the types of valuation services we can provide to our clients and what is the main difference between them?

Answer 2

Valuation engagements and Calculations engagements - both can produce a single number or as many valuation figures per the scope

Valuation = CPA the valuator is free to use any valuation approach of method deemed to be professionally appropriate.

Calculation = CPA and client agree on the specific valuation methods or approaches to use

Question 3

Cost valuation approach is best for…

Answer 3

Cost valuation approach is also known as the asset valuation approach.

Best for when the business is:

• going into liquidation
• has going concern issues (facing bankruptcy, etc)
• company’s value is basically tied to value of its assets
• no income in recent years
• can’t predict future streams of income

Question 4

Valuation approaches

Answer 4

MIC

Market-based
Income-based
Cost-based (really asset-based)

Question 5

When do we use market based approach in valuation?

Answer 5

When there is relevant guideline (comparative) data are available

Question 6

What is used for the income based approach in valuation?

Answer 6

The company has:

• income streams projections of its cash flow or income
• projected future benefit streams will be significantly different than in the past (like a small start up company that is expanding rapidly and acquiring more business than before)
• has substantial goodwill (typical for mergers and acquisitions)

Question 7

Rule of Thumb in valuation services

Answer 7

It is a practice where the CPA comes up with a method to determine a business valuation such as a percentage of revenues or units (e.g. square footage). Using the “Rule of Thumb” in coming up with the method is simply to show additional support for the valuation estimate that the CPA came up with.

Serves as a reasonableness check on a business valuation estimate.

Note that the Rule of Thumb is NOT the method for determining value. The methods are MIC.

Also, Rule of Thumb is NOT a best practice under SSVS 1. Can’t uphold in litigation in court. Have to find some other means.