Summary of Key Concepts
of the American Institute of Certified Public Accountants’ (AICPA)
Statement on Standards for Valuation Services 1 (SSVS1).
The Need for Business Valuation
Noting the number of transactions (mergers, acquisitions, initial public offerings (IPOs), etc.), litigations (contractual disputes, bankruptcies, intellectual property right disputes, etc), and engagements (compliance-oriented – financial reporting, and planning-oriented – income tax) present in the business and accounting world, the need for business valuation has never been greater. Valuations of businesses, ownership interests, securities and intangible assets are needed for the business purposes outlined above.
The American Institute of Certified Public Accountants (AICPA), noting the increasing number of its members that are engaged in business valuation engagements, wrote the Statement on Standards for Valuation Services 1 (SSVS1) in order to promote uniformity in the practice of business valuations performed by its members.
Scope of Statement on Standards for Valuation Services 1 (SSVS1)
SSVS1 establishes standards that should be followed by AICPA 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 SSVS1 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 201A, Professional Competence, of the AICPA 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 AICPA 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.
SSVS1 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, methods 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 SSVS1 provides general guidance regarding the valuation approach...
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