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AICPA toolkit helps build stronger business
valuations
Earlier
this year, the American Institute of Certified Public Accountants (AICPA)
posted a preliminary draft of its proposed practice aid Valuation of
Privately-Held-Company Equity Securities Issued in Other Than a Business
Combination. This 129-page toolkit exists to help accountants and other
business valuation (BV) professionals value minority interests in privately
held companies. While several other texts and articles on this subject
already exist, only time will tell how authoritative the AICPA’s toolkit
truly is.
No doubt attorneys and other private business stakeholders will also find
this toolkit informative and useful — especially when evaluating a CPA
valuator’s work product. This practice aid’s final version is anticipated
next year, but you can currently download a preliminary draft at AICPA’s Web
site at www.aicpa.org.
The purpose
The AICPA designed its toolkit for two main reasons. First, recent accounting
debacles forced the organization to standardize and control the consulting
services CPAs provide to their clients. The AICPA targeted business
valuations because more accountants are performing them, especially since the
adoption of Statements of Financial Accounting Standards (SFAS) 141, 142 and
144.
These new standards are somewhat ambiguous regarding valuation mechanics and
terminology; hence, many practitioners are turning to the AICPA for technical
guidance.
As a result, the AICPA’s task force drafted its practice aid, intended to
equip CPAs and other valuation professionals with a toolkit of business
valuation best practices. The practice aid attempts to clarify valuation
terminology and methods, as well as achieve greater conformity among CPA
valuators’ work products.
Today, the AICPA’s toolkit leans toward valuing minority interests but also
contains useful information for professionals valuing an entire private
enterprise, as well as those valuing private companies for business
combinations.
Key elements
If the practice aid’s final version resembles the draft, it will likely become
an important reference for business valuation basics. Although the guide’s
scope is too broad to encompass in this brief article, the following list
outlines several useful portions of the BV toolkit:
Clarification of "fair value." Throughout the practice aid
(and in SFAS 141, 142 and 144), the AICPA refers to the term "fair
value." According to the toolkit, fair value is defined as "the
amount at which a minority common stock interest in a privately held
enterprise could be bought or sold in a current transaction between unrelated
willing parties, that is, other than in a forced or liquidation sale."
In Appendix A, the toolkit equates its definition of "fair value"
with the term "fair market value" as defined by the International
Glossary of Business Valuation Terms and IRS Revenue Ruling 59-60.
Hierarchy of valuation alternatives. According to the AICPA, valuators
should first look to quoted market prices and prior arm’s length transactions
(to the extent they are truly comparable). If neither source is available,
the AICPA recommends using an independent (unbiased) valuation specialist,
who will employ the cost, market and income approaches using his or her
professional judgment.
Using a nonindependent valuator (such as a company manager) is the lowest
level on the AICPA’s hierarchy, regardless of the individual’s
qualifications. (Based on the draft’s "Request for Comments," the
final version of this practice aid should more definitively address valuator
independence.)
This section also compares contemporaneous and retrospective valuations.
Contemporaneous valuations are prepared as proximate to a valuation’s
"as of" date and consider conditions that exist at the valuation
date. Alternatively, retrospective valuations are prepared after the fact.
The greater the time span between a valuation’s "as of" date and
the report’s completion date, the greater the risk that the valuator will
consider post-valuation events.
Because of hindsight’s potential effects, contemporaneous valuations are
preferred over retrospective ones. However, the AICPA considers using an
independent valuator more important than this secondary consideration.
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