In March 2005, the Business Valuation Committee of the AICPA Consulting Services Executive Committee published an exposure draft of its new standards for valuation services. The proposed Statement on Standards for Valuation Services (SSVS) – Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset – pertains to the valuation of businesses, business ownership interests, securities or intangible assets.

The standard affects many CPAs in a variety of areas: business transactions, tax compliance, financial reporting, litigation and other matters. The comment period on the exposure draft ended on June 15, 2005. Once finalized, the standard is expected to go into effect for engagements accepted after December 31, 2005. The exposure draft is available online.

The proposed standard applies to AICPA members, however, most, if not all state boards of accountancy will likely recognize the standard if it is adopted. CPAs in a variety of practice areas – tax, audit, accounting and consulting – should determine if any of the current work they perform constitutes valuation services that would fall under the proposed standard.

Why Was the Standard Proposed?
The valuation of businesses and other financial assets became common in the 1970s as finance theory developed, which is based largely on modern portfolio theory. Financial valuation has been a high growth area since the 1980s. In the early days, individuals with finance backgrounds commonly conducted business valuations. Now that accountants have expanded their skills and segued into consulting, business valuation (BV) and the valuation of other types of financial assets are prolific service areas for CPAs.

In the very early days, finance professionals published their own sets of valuation standards. Examples include the standards of the American Society of Appraisers and the Institute of Business Appraisers. These standards became widely recognized in the business community and among BV practitioners. When accountants entered the BV area in large numbers, they entered into an already established profession. The AICPA’s SSVS, represents a “catch up” to established valuation practices and standards rather than breaking new ground.

In the late 1990s, the AICPA recognized an increasing growth and interest in valuation and established a specialty credential for BV, the Accredited in Business Valuation (ABV) designation. The AICPA estimates that 25,000 CPAs currently provide business valuation and litigation/forensic services. It is expected that adoption of the proposed standard would improve the quality of business valuation practice in the CPA profession.

How Does Valuation Differ From Accounting
At the risk of oversimplifying, accounting largely classifies financial transactions that have already occurred. While there are some estimates required in accounting, they are few. On the other hand, valuation is based largely on expectations about the future requiring many estimates. This is one reason why finance professionals were the pioneers of BV.

While accounting education and experience provides a good foundation for valuation analysis, many aspects in valuation extend beyond accounting and into finance. The proposed standard attempts to ensure that all of the relevant considerations are made when forming a valuation conclusion.

How the Standard Affects Practitioners
CPAs may not always be clear whether what they do constitutes a valuation service falling under the standard. The SSVS applies when an AICPA member determines the value of a business, business ownership interest, security or intangible asset. The standard defines a valuation engagement, or any part of an engagement, that involves the determination of the value of the interest, applies valuation approaches or methods, and uses professional judgment.

Tax practitioners may wonder if certain aspects of their work are valuation services that fall within the standard. “Appendix A” of the exposure draft includes a series of questions and answers that address many of these types of issues.

For example, if a CPA is preparing a federal estate tax return and places the value of 1,000 shares of Microsoft stock on the return, does the standard apply? No, this is a mechanical computation that does not use valuation approaches or methods.

However, if the value of 1,000,000 shares of Microsoft were to be reported, the standard would apply because valuation discounts apply to a large block of stock that is not easily marketable. The determination of this discount causes the valuation to fall under the standard because valuation methods and professional judgment are used.

If the IRS prescribes a specific procedure, does the standard apply? No, the jurisdictional exception in the standard provides that published governmental authority should be followed. However, any part of the valuation work not covered by published authority should still comply with the standard.

The valuation standards do not apply to assignments from employers performed by employees who are not in the “practice of public accounting” as defined in the AICPA’s Code of Professional Conduct in ET sec. 92.25. If a CPA works for a non-CPA firm who does not serve any clients, the standard does not apply. For example, the standard would not apply when a company is considering buying another company and has an employee who is a CPA perform a valuation analysis. However, if a CPA or their firm serves clients and the CPA has taken action to inform others of his or her CPA status, the standard applies to the valuation services. This applies even if the CPA works for a non-accounting firm.

AICPA Standard Compared to Other Business Valuation Standards
The AICPA valuation standard is largely consistent with other BV standards that are widely recognized in the valuation community. The SSVS primarily consists of an introduction section, a development section and a reporting section. The developmental section covers areas the CPA should consider when performing a valuation analysis. The reporting section covers disclosure guidelines on the results of a valuation. In the tradition of the accounting profession, the proposed standard has some specific disclosure requirements; these may be more detailed than BV standards of other organizations.

Conclusion
The AICPA valuation standard (as do other BV standards published by other organizations) was developed to enhance the consistency and quality of valuation conclusions and reporting. Users of our valuation services benefit from enhanced quality.

The Business Valuation Committee of the AICPA Consulting Services Executive Committee is reviewing the comments received, making necessary modifications and preparing to publish final standards in late summer or early fall. It is anticipated that the final standards will be effective for engagements entered into after December 31, 2005.

About the Authors
Michael A. Crain, CPA/ABV, ASA, CFA, CFE is a managing director with The Financial Valuation Group in Ft. Lauderdale, Florida. He is the chair of the AICPA Business Valuation Committee. He can be reached at mcrain@fvginternational.com.

Edward J. Dupke, CPA/ABV is the practice director of Business Valuation and Litigation Services for The Rehmann Group, a twelve-office Michigan CPA and consulting firm. He is the chair of the AICPA Business Valuation Standards Writing Task Force. He can be reached at edupke@rehmann.com.

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