Statement on Standards for Valuation Services Explained

The Statement on Standards for Valuation Services (SSVS) provides foundational guidelines for Certified Public Accountants (CPAs) in the United States. Issued by the American Institute of Certified Public Accountants (AICPA), the standard was developed to bring consistency and quality to valuation services performed by its members. The primary purpose of SSVS is to provide a clear framework for CPAs when determining the value of a business, an ownership stake, a security, or an intangible asset. The standard mandates a disciplined approach to protect the public interest by ensuring that valuations are reliable, well-documented, and based on established methodologies, thereby enhancing the credibility of the final work product.

Applicability of the Standard

The Statement on Standards for Valuation Services is a mandatory set of rules for all AICPA members hired to estimate the value of a business, a share of ownership, a security, or an intangible asset like a patent or trademark. This requirement applies regardless of the reason for the valuation. The standard governs a CPA’s work whether the valuation is for a potential merger or acquisition, for estate and gift tax filings with the IRS, or for financial reporting purposes under Generally Accepted Accounting Principles (GAAP). Common scenarios that trigger SSVS include determining a company’s value for a buy-sell agreement between partners, establishing the worth of stock for an employee stock ownership plan (ESOP), or providing a value for marital dissolution proceedings.

There are specific, narrowly defined circumstances where a CPA is exempt from SSVS. For instance, an exemption exists for litigation-related services focused exclusively on calculating economic damages, like lost profits, that do not require a formal valuation of the business itself. The standard also does not apply to internal consulting work where a CPA might assist management in developing their own valuation estimates without issuing a formal valuation report. Another key exemption involves certain calculations performed for tax compliance that do not require a full valuation, such as allocations of purchase price immediately following an acquisition.

Types of Valuation Engagements

The SSVS framework establishes two distinct types of engagements that a client can request: a “Valuation Engagement” and a “Calculation Engagement.” A Valuation Engagement represents the more exhaustive of the two services. In this type of engagement, the CPA has the professional freedom and responsibility to apply any and all valuation approaches, methods, and procedures that they deem appropriate to arrive at a conclusion of value. This comprehensive approach means the CPA will conduct in-depth analysis, including a thorough examination of the subject entity, its industry, and the economic environment. The result of a Valuation Engagement is a formal “conclusion of value,” which is the CPA’s professional opinion on the worth of the asset. This type of engagement is typically required for situations involving third parties, such as transactions or tax reporting, where a high degree of assurance is needed.

A Calculation Engagement offers a more limited and specific scope of work. In this arrangement, the CPA and the client agree in advance on the particular valuation approaches and procedures that will be performed. The CPA’s work is restricted to executing only these agreed-upon steps. Consequently, the final result is not a conclusion of value but a “calculated value.” Clients often choose a Calculation Engagement for internal decision-making, such as preliminary strategic planning or exploring a potential transaction price range.

The Valuation Process and Approaches

Under SSVS, the valuation process is a structured undertaking that begins with a clear understanding of the engagement. The CPA must first define the asset being valued, the specific date of the valuation, the purpose of the valuation, and the standard of value being used, such as “fair market value” or “fair value.” Following the initial planning, the CPA embarks on an information-gathering phase, which involves collecting and scrutinizing data, including historical financial statements, business plans, and non-financial information such as the strength of the management team and the company’s competitive position.

SSVS recognizes three core approaches to determining value, and a CPA is required to consider all three, though one or more may be excluded if deemed not applicable.

• The Income Approach is forward-looking and focuses on the economic benefits the subject asset is expected to generate. Common methods include the Discounted Cash Flow (DCF) method, where future cash flows are projected and discounted to their present value, and the Capitalization of Earnings method, which converts a single period of stable earnings into a value.
• The Market Approach provides an indication of value by comparing the subject asset to similar assets for which price information is available. One method is the Guideline Public Company Method, where the analyst identifies similar publicly traded companies and analyzes their valuation multiples. A second method, the Guideline Transaction Method, involves examining the sale prices of entire companies that are comparable to the subject business.
• The Asset Approach, sometimes referred to as the Cost Approach, determines value based on the principle of substitution. This approach is often used for holding companies or capital-intensive businesses. The most common method is the Adjusted Net Asset Method, where the fair market value of all of the company’s assets, both tangible and intangible, is determined and then the fair market value of all its liabilities is subtracted.

Reporting the Valuation Conclusion

The final step in a valuation engagement is issuing a written report communicating the analyst’s findings, with requirements tailored to the engagement type. For a Valuation Engagement, the CPA can issue either a Detailed Report or a Summary Report. A Detailed Report is the most comprehensive option, providing an extensive narrative that explains the scope of the work, the valuation methodologies applied, and the reasoning behind the conclusion of value. It includes sections describing the business, the industry, and the economic outlook.

A Summary Report is a more condensed version that presents the same conclusion of value with significantly less narrative. This report is often used when the intended recipients are already familiar with the subject company.

For a Calculation Engagement, the deliverable is a Calculation Report. This report does not contain a conclusion of value. It presents the “calculated value” and must state that the analysis was limited to the specific procedures agreed upon with the client, and that a full Valuation Engagement could have produced different results.