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Valuations of businesses, wineries interests, securities and intangible assets are needed for the business purposes outlined above. The American Institute of Certified Public Accountants (CPA), noting the increasing number of its members that are engaged in business valuation engagements, wrote the Statement on Standards for Valuation Services 1 (SIVA) in order to promote uniformity in the practice of business valuations performed by its members.
Section 2 Scope of Statement on Standards for Valuation Services 1 (SIVA) SIVA establishes standards that should be followed by CPA members who are engaged to estimate the value of a business, security or intangible asset. The engagement would be any, in part or whole, that involves estimating the value of a subject/business of interest and results in the expressing of a concluded value or a calculated value.
Wherein there exists any governmental regulation or other professional standards that are applicable to the client, the valuation analyst should ensure she/he is aware of the extent to which these regulations or other standards apply to the engagement to estimate the value of the business, security or intangible asset.
Where there are differences between the standards outlined within SIVA and the documented governmental regulation or other professional standards, the valuation analyst is expected to follow the applicable documented authority or stated procedures as they are applicable to the part of the valuation in which the valuation analyst is engaged. The valuation analyst is expected to exhibit professional competence as outlined in Rule 201 A, Professional Competence, of the CPA Code of Professional Conduct.
Furthermore, in additional to professional competence, the valuation analyst is expected to follow the rules of engagement that are mandated by the CPA for all engagements. These additional rules include; understanding and communicating the nature and risks of valuation services to be provided and understanding the expectations of the client, maintaining professional objectivity in performance of professional service, maintaining independence in real form and appearance, understanding scope-of-work restrictions and limitations, and communicating analyst’s understanding and scope of engagement to client.
SIVA indicates that there are two types of engagements to estimate value. These two engagement-types are the valuation engagement and the calculation engagement. The valuation engagement calls for the valuation analyst to estimate the value of a subject of interest AND the valuation analyst estimates the value and is free to apply valuation approaches, methods and techniques as she/he sees fit in the client’s circumstances. The valuation analyst expresses the results of the valuation as a conclusion of value.
The calculation engagement, on the other hand, requires the valuation analyst and the client to agree on the specific valuation approaches, ethos and techniques that would be used in arriving at a value for the subject of interest. The valuation analyst calculates the value, as per the agreement, and expresses or report the value arrived at as a calculated value. The SIVA provides general guidance regarding the valuation approach to be employed by the valuation analyst.
No specific methods or approaches are suggested in the statement – it is expected that the valuation analyst would utilize self judgment and assess quantitative and qualitative factors in deciding what suggested method and approach is required for the business/client being valued. Source: CPA July 2007; Statement on Standards for Valuation Services 1) Section 3 Valuation Approaches and Methods When the valuation analyst develops the valuation, SIVA suggests that the analyst considers the three most common valuation approaches.
These three valuation approaches are the Income (Income-Based) Approach; the Asset (Asset-Based) Approach; and the Market (Market-Based) Approach. Under the Income Approach, two more commonly used valuation methods are the Capitalization of Benefits method (earnings or cash flows) and the Discounted Future Benefits method (earnings or cash flows).
SIVA suggests that in applying these methods, the valuation analyst must consider a number of factors which include: normalization adjustments, taxes, capital structure and financing costs, and non cash items (under the capitalization of benefits method); the projection/forecasting assumptions, projected earnings or cash flows and terminal value (under the discounted future benefits method). Under the Asset Approach, the Adjusted Net Asset method is a commonly used valuation method. SIVA suggests that the valuation analyst, when applying the
Adjusted Net Asset method, considers factors related to the premise of the value including: the identification of the assets and liabilities, the value of the assets and liabilities (individually or in the aggregate), and liquidation of costs (if applicable). Under the Market approach, SIVA indicates that there are three commonly used valuation methods for valuing a business, business ownership interest or security and they include the Guideline Company Transactions method, the Guideline Public Company method and the Guideline Sales of Interest in the Subject Entity.
SIVA suggests that the valuation analyst considers, when applying valuation methods under the Market approach, additional factors which include qualitative and quantitative comparisons, arms-length transactions and prices, and the dates and relevance of the market data. Irrespective of what valuation approach is applied, SIVA suggests that the valuation analyst must consider valuation adjustments (discounts or premiums) and whether there is a need for these adjustments to be applied to the pre-adjustment values derived.
After the valuation approach and methods have been applied, the valuation analyst just communicate the final business valuation derived. SIVA provides guidance on the form the communication of the concluded value should take – as discussed in Section 4). Section 4 The Valuation Report SIVA provides guidance for the documentation of information obtained and analyzed, procedures performed in the valuation process, valuation approaches and methods used and or considered, and the concluding value.
These are all included in the valuation report. The valuation report is the written or oral communication to the client containing the included value (valuation engagement) or the calculated value (calculation engagement). SIVA indicates that there are three types of written reports that may be used by the valuation analyst when communicating the final results of the business valuation process to the client.
These reports are the detailed report and summary report (for valuation engagements) and calculation report (for calculation engagements). Note that the distinguishing factor that differentiates the detailed report from the summary report is the amount of reporting detail agreed to by the valuation analyst and the client. Conclusion The review and summary of the Aspic’s Statement on Standards for Valuation Services 1 (SIVA) focuses on the key concepts, as outlined within Statement.