Calculation Engagements

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Brent McDade presented this presentation at the TSCPA Forensic & Valuation Services Conference.

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Calculation Engagements

  1. 1. A Global Reach with a Local Perspective www.decosimo.comCalculation EngagementsBRENT MCDADE – BRENTMCDADE@DECOSIMO.COM
  2. 2. Decosimo Advisory Services Business Valuation Litigation Support Transaction Advisory
  3. 3. What We Will Cover Today The standards that apply to valuation work The engagement types these standards define Myths about calculation engagements Truths about calculation engagements Differences between calculations and other types of reports Group discussion / best practices
  4. 4. A Global Reach with a Local Perspective www.decosimo.comStandards that Apply to Valuation Work
  5. 5. Standards AICPA IBA NACVA ASA The Appraisal Foundation
  6. 6. USPAP Applies to multiple appraisal disciplines Longest standing set of standards we have Applies to all appraisal practice
  7. 7. “I don‟t have to follow USPAP” Jurisdictional exception rule Scope of work rule Competency rule Ethics rule Standard 9 Standard 10
  8. 8. ASA Standards Apply to members of the ASA Define 3 acceptable scopes of work  Appraisal  Limited appraisal  Calculations Development standard very general Reporting standard defines comprehensive written business valuation report Incorporates USPAP
  9. 9. AICPA, IBA, NACVA IBA and NACVA standards very similar to AICPA Intent to move to a single set of standards If you comply with AICPA, you substantively comply with IBA and NACVA
  10. 10. When does SSVS 1 apply? AICPA members performing valuation services EXCEPT:  Value provided by the client or a third party AND  Member does not apply valuation approaches and methods AND  Member does not report on the value of the subject interest  Value part of an audit, review, or compilation  Members not in public accounting for their employer  Damages engagements (unless value is the measure)  Mechanical computations  Jurisdictional exception
  11. 11. SSVS No 1 Engagement Types Valuation engagement  Conclusion of value  More procedures  Engagement calls for analyst to estimate value  Analyst free to apply appropriate approaches and methods Calculation engagement  Calculated value  Client and analyst agree on approaches and methods  Analyst performs calculations consistent with agreement  Consistent with ASA definition
  12. 12. A Global Reach with a Local Perspective www.decosimo.comCommon Calculation Report Myths
  13. 13. Common Calculation Report Myths “A calculation engagement is a step towards full appraisal.” “A calculation gets to the same conclusion as a full appraisal – just with less verbiage.”
  14. 14. Common Calculation Report Myths “A good engagement strategy in litigation support is to begin with a calculation engagement and then „upgrade‟ to a full report later.” “The incremental expense of a full appraisal is in the writing of the report.”
  15. 15. A Global Reach with a Local Perspective www.decosimo.comWhat is a Calculation Engagement?
  16. 16. Calculation Engagement per SSVS 1 Must at least consider:  Identity of client  Identity of subject interest  Interest’s ability to control and marketability  Purpose and intended use of calculation  Intended users and limitations on use  Valuation date  Standard and premise of value  Sources of information  Agreed-upon approaches and methods  Subsequent events, if applicable
  17. 17. Calculation Report per SSVS 1 Must state it is a calculation report Must include a representation by appraiser (adapted) Identify any hypothetical or limiting conditions Any application of the jurisdictional exception How work of an outside specialist used Disclosure regarding subsequent events
  18. 18. Calculation Report Required Statements Certain calculation procedures performed, identify subject interest and calculation date Description of calculation procedures/scope of work Purpose of calculation & non-use for other purposes Identify compliance with SSVS of AICPA Identify level of value, valuation date Description of calculation:  Does not include all procedures of valuation  Were valuation performed, results may be different No obligation to update, signature of appraiser/firm Resulting number is a “calculated value”
  19. 19. Calculation Engagement per ASA Based on the performance of limited procedures agreed upon by the appraiser and client May be based on consideration of only limited relevant information Appraiser collects limited information and performs limited analysis May be based upon conceptual approaches agreed upon with the client
  20. 20. A Global Reach with a Local Perspective www.decosimo.comWhat is a Valuation Engagement?
  21. 21. Valuation Engagement per AICPA SSVS 11. Engagement calls for analyst to estimate the value of a subject interest2. Analyst is free to apply valuation approaches and methods he or she deems appropriate in the circumstances3. Sounds a whole lot like USPAP “appraisal”
  22. 22. Valuation Engagement Documentation Detailed Report  Pretty close to BVS-VIII  Compliant with Standard 10 Summary Report  Not compliant with BVS-VIII  Probably compliant with Standard 10
  23. 23. Calculation Report vs Summary Report Paras 71-77 of SSVS No. 1 Additional requirements for summary report:  Identify client (perhaps implicit in calculation report due to “any other party…” requirement)  Intended users (perhaps implicit in calculation report due to “any other party…” requirement)  Specify valuation date  Specify premise of value  Specify standard of value  List sources of information
  24. 24. A Global Reach with a Local Perspective www.decosimo.comBack to the Myths
  25. 25. Revisiting Calculation Myths “A calculation engagement is a step towards full appraisal.”  Calculation engagements follow agreed-upon procedures, approaches, and methods  Those agreed-upon with the client may not be those the appraiser would have used in a full appraisal
  26. 26. Revisiting Calculation Myths “A calculation gets to the same conclusion as a full appraisal – just with less verbiage.”  May not use same valuation procedures  Reporting requirements not all that different from a summary report on a valuation engagement  Reporting of industry and economic conditions not all that much more work than researching
  27. 27. Revisiting Calculation Myths “A good engagement strategy in litigation support is to begin with a calculation engagement and then „upgrade‟ to a full report later.”  Initial agreement on procedures can create perception of lack of independence  Seems oddly coincidental that an ultimate conclusion would be exactly the same
  28. 28. Revisiting Calculation Myths “The incremental expense of a full appraisal is in the writing of the report.”  Compared to a summary report, a calculation report is not all that much less effort
  29. 29. A Global Reach with a Local Perspective www.decosimo.comGroup Discussion
  30. 30. CONNECT WITH ME Brent McDade, ASA, CBA 423.266.5212 brentmcdade@decosimo.com On LinkedIn: www.linkedin.com/in/brentmcdade The contents and opinions contained in this article are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals or specific situations.

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