What are the differences between valuation and calculation engagements?
The American Institute of Certified Public Accountants’ (“AICPA”) Statements on Standards of Valuation Services (“SSVS”) identifies two types of engagements to estimate value:
- 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 (as outlined in SSVS) 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 as a conclusion of value; the conclusion may be either a single amount or a range.
- Calculation engagement – A valuation analyst performs a calculation engagement when (1) the valuation analyst and the client agree on the valuation approaches and 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, which is expressed as a range or as a single amount. A calculation engagement does not include all of the procedures required for a valuation engagement.
A valuation analyst may also perform more limited services under a consulting engagement, which is governed by the AICPA’s Statement on Standards for Consulting Services (“SSCS”). This type of engagement does not express an opinion or estimate of value. The nature and scope of work are determined solely by the agreement between the analyst and the client. Generally, the work is performed only for the use and benefit of the client.
The two main organizations that often require valuation services, the Internal Revenue Service (in the case of estate and gift tax valuations) and the Securities and Exchange Commission (in the case of fair value valuations for public company financial reporting), generally prefer that a full valuation be performed when determining the value of an entity. In addition, an attorney might require a full valuation when preparing an analysis for a litigation matter.
A consulting or calculation engagement is normally appropriate when it is not likely that the value will be reviewed by an outside party (e.g., the IRS or SEC) or be subject to litigation. Examples of when a consulting or calculation engagement might be appropriate include:
- Helping clients understand the value of their company, to determine whether an offer to purchase their company is reasonable;
- Helping clients calculate a value for a potential acquisition target, in order to make a successful purchase offer; or
- Helping clients understand the value of their company for various corporate planning purposes (and the value will not be shared with outside parties).
A consulting or calculation engagement can be time-saving alternatives to a full valuation; however, deciding which option is appropriate depends on the individual situation and should be discussed with your attorney and/or valuation analyst before you make a decision.
Schneider Downs has significant experience providing business valuation services for a wide range of purposes. For more information, please contact Nick Lombardo ([email protected]) or Steve Thimons ([email protected]) of our Business Advisory Group.
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