Question

SSVS 1 applies when an AICPA member performs an engagement that estimates the value of a business, a business interest, security or intangible asset.

Please outline the good and bad of SSVS 1. Focus on any ambiguities.

Answer 1

The purpose of SSVS 1 is to improve the consistency and quality of practice among AICPA members providing valuation services. Specifically, the standard provides guidance to CPAs when they perform engagements to estimate value that culminate in the expression of a conclusion of value or a calculated value. The standards contained in SSVS 1 apply to all AICPA members who perform an engagement that estimates the value of a business, business interest, security, or intangible asset for purposes such as sales transactions, financing, taxation, financial reporting, mergers and acquisitions, management, financial planning, and litigation. Because of the increasing number of CPAs providing business valuation services, and the fact that SSVS 1 provides professional guidance as to generally accepted best practices within the valuation and business communities, it is imperative that CPA valuation analysts become familiar with SSVS 1’s requirements.

Scope of SSVS 1

SSVS 1 provides guidance for the practitioner in determining when an engagement is deemed to be a valuation engagement. It also identifies previously issued AICPA standards that all CPAs who provide valuation services should observe.

Business valuations are required for a variety of purposes (see Exhibit 1). SSVS 1 indicates that in instances where a CPA is required to apply valuation approaches and methods, and use professional judgment in applying those approaches and methods, the CPA is subject to the AICPA’s special valuation standards contained in SSVS 1. Furthermore, the valuation standards apply even when estimating value is only a part of a larger engagement. For example, CPAs are frequently required to provide estimated value for certain assets involved in tax, litigation, or acquisition-related engagements.

To further assist CPAs in determining whether a particular service falls within the scope of SSVS 1, the statement specifically identifies services that are excluded:

• Audit, review, and compilation engagements;
• Use of values provided by the client or a third party;
• Internal-use assignments from employers to employee members not in the practice of public accounting;
• Engagements that are exclusively for the purpose of determining economic damages and that do not include an engagement estimate value;
• Mechanical computations that do not rise to the level of an engagement to estimate value;
• Engagements where it is not practical or reasonable to obtain or use relevant information and, therefore, the member is unable to apply valuation approaches and methods described in SSVS 1; and
• Engagements meeting the jurisdictional exception.

SSVS 1 establishes that any CPA involved in an engagement to estimate value is identified as a valuation analyst. Such individuals are expected to possess special skills and knowledge specifically for valuation engagements. The SSVS recommends that a CPA analyst have a fundamental awareness of the professional standards contained in the AICPA Code of Professional Conduct and the Statement on Standards for Consulting Services (SSCS) 1, Consulting Services: Definitions and Standards. The CPA must understand the extent to which such professional standards apply to valuation engagements. The CPA should also be aware of other AICPA standards that, depending on the circumstances, may or may not be applicable to a valuation engagement, but that the CPA needs to consider when providing valuation services. Such standards relate to the following:

• Standards on reporting on historical financial information;
• Standards on financial forecasts and projections; and
• Quality-control standards.

Good and Bad of SSVS 1:

Benefits to Members
SSVS No. 1 benefits all AICPA members, particularly those performing valuation engagements, as well as clients of CPAs, courts, government agencies, regulators and others who rely on valuation services.

Other benefits to AICPA members include:
The Standard provides professional guidance as to generally accepted “best practices” within the valuation and business communities
The Standard reduces member uncertainty as to what type of analyses and/or what content of reports is appropriate
In defending the valuation work during a contrarian challenge, the member will have the assurance that his/her analysis and report are prepared in accordance with SSVS No. 1
Members and clients benefit from a common vocabulary. The Standard adopts a glossary and a set of valuation terminology that should allow members to more effectively and efficiently communicate with (1) each other, (2) other (non-CPA) valuation analysts, (3) clients and (4) other parties who rely on valuation reports
Members may rely on SSVS No. 1 for professional guidance with regard to what are considered generally accepted valuation approaches
Members may rely on SSVS No. 1 for professional guidance with regard to the type of documents and documentation (both financial and non-financial) that should be considered in the valuation process

A restriction or limitation on the scope of the valuation analyst’s work, or the data available for
analysis, may be present and known to the valuation analyst at the outset of the valuation
engagement or may arise during the course of a valuation engagement. Such a restriction or
limitation should be disclosed in the valuation report.

Although the two engagements represent two different types of service performed by
valuation analysts, the possibility exists. If, in the course of a valuation engagement, restrictions, or
limitations on the scope of the valuation analyst’s work or the data available for analysis are so
significant that the valuation analyst believes that he or she cannot, even with disclosure in the
valuation report of the restrictions or limitations, adequately perform a valuation engagement leading
to a conclusion of value, the valuation analyst should determine whether he or she has the ability to
adequately complete the engagement as a calculation engagement or should consider resigning
from the engagement.