calculation engagements

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Calculation Engagements

BRENT MCDADE – [email protected]

Business Valuation

Litigation Support

Transaction Advisory

Decosimo Advisory Services

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

What We Will Cover Today


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Standards that Apply to Valuation Work

AICPA

IBA

NACVA

ASA

The Appraisal Foundation

Standards

Applies to multiple appraisal disciplines

Longest standing set of standards we have

Applies to all appraisal practice

USPAP

Jurisdictional exception rule

Scope of work rule

Competency rule

Ethics rule

Standard 9

Standard 10

“I don‟t have to follow USPAP”

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

ASA Standards

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

AICPA, IBA, NACVA

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

When does SSVS 1 apply?

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

SSVS No 1 Engagement Types


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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.”


“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.”



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What is a Calculation Engagement?

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

Calculation Engagement 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

Calculation Report per SSVS 1

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”

Calculation Report Required Statements

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

Calculation Engagement per ASA


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What is a Valuation Engagement?

1. Engagement calls for analyst to estimate the value

of a subject interest

2. Analyst is free to apply valuation approaches and

methods he or she deems appropriate in the

circumstances

3. Sounds a whole lot like USPAP “appraisal”

Valuation Engagement per AICPA SSVS 1

Detailed Report

Pretty close to BVS-VIII

Compliant with Standard 10

Summary Report

Not compliant with BVS-VIII

Probably compliant with Standard 10

Valuation Engagement Documentation

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

Calculation Report vs Summary Report


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Back to the 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

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


“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


“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



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Group Discussion

Brent McDade, ASA, CBA

423.266.5212

[email protected]

On LinkedIn:

www.linkedin.com/in/brentmcdade

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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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