the Real Business Valuation Standards Please Stand Up?
The AICPA’s SSVS Compared
to USPAP and Other Business Valuation Standards
Martin J. Lieberman and David Anderson
- Valuation standards have been around for decades. IRS Revenue
Ruling 59-60, issued in 1959, is considered the seminal work on
the valuation of ownership interests in closely held businesses.
Despite its age, Ruling 59-60 remains a vital document: It is still
legally applicable to federal gift, income and estate tax valuations.
More important, the valuation procedures that it outlines continue
to serve as the template for business valuation assignments of all
types, demonstrating its relevance for the complex business organizations
that exist today.
continuing influence is also evident in the comprehensive business
valuation standards that began to appear in the late 1980s. The
most important of these was the Uniform Standards of Professional
Appraisal Practice (USPAP), issued by the Appraisal Foundation
in 1987, followed by standards from professional associations
such as the American Society of Appraisers (ASA) in 1992, the
Institute of Business Appraisers (IBA) in 1993, and the National
Association of Certified Valuation Analysts (NACVA). The first
edition of USPAP appeared in 1987, published by the then–newly
formed Appraisal Foundation, a nonprofit organization established
by a group of professional appraiser associations. Drafting the
standards began at least a year earlier, through an ad hoc committee.
From the beginning, USPAP was intended to apply to appraisers
in three disciplines: real estate, personal property, and business
valuation. USPAP Standards 9 and 10, which address business valuations,
were last updated in 2006. Also in 2006, the IRS issued general
business valuation standards, applicable to all IRS employees
and to those who provide valuation services or review valuations
for the IRS.
business valuation standards have much in common, both in content
and terminology, including a common dependence on Revenue Ruling
59-60. The ruling is structured as a list of eight factors-to-consider
in valuations, followed by a discussion of each factor in turn.
USPAP Standard Rule 9-4 incorporates, under seven headings, almost
verbatim, the eight factors from Revenue Ruling 59-60, and this
USPAP Standard Rule has remained essentially unchanged from its
first issuance in 1987. The eight factors from Ruling 59-60 also
appear in ASA Standard I–iii; IBA Standards section 5.3;
and NACVA’s Development Standards 3.4; as well as in the
IRS Standards (under “Analyzing”).
In June 2007,
after several years of work, the AICPA issued its Statement on
Standards for Valuation Services 1, Valuation of a Business,
Business Ownership Interest, Security, or Intangible Asset (SSVS),
with the goal of improving the “consistency and quality
of practice among AICPA members performing business valuations”
(SSVS, Foreword). It is effective for engagements accepted on
or after January 1, 2008 (SSVS, para. 68, 79).
moving the AICPA to issue a valuation standard has been the increasing
importance of intangible assets in businesses, and the related
movement toward the reporting of business assets at fair value
(SSVS, Foreword). In 1959, when Revenue Ruling 59-60 appeared,
the concept of intangible assets being the dominant value generator
of an entity was a radical thought. At that time, the book value
of assets closely tracked the stock prices of publicly traded
companies. Generally speaking, the equity section of a typical
New York Stock Exchange–listed company was a good indicator
of market value. It is no surprise that consideration of book
value is prominent among the eight factors in Revenue Ruling 59-60.
or no relationship generally exists between book value and stock
prices. The story of what has happened during the intervening
years has been well chronicled. Since the mid-1980s, the spread
of computers and the Internet, the globalization of trade, and
the deregulation of major industries (see Baruch Lev, Intangibles:
Management, Measurement and Reporting, Brookings Institution
Press, 2001) have made intangible assets a more important component
of value than the hard assets of the industrial age (although
intangible assets are generally not quantified on balance sheets).
Brands, processes, patents, and a host of knowledge-based technologies
have become the modern-day value drivers. Their scalability and
networking effects are not subject to the limits of diminishing
returns associated with physical assets.
did not go unnoticed by the AICPA. It has formally recognized
the existence of business valuation and embraced it: first in
1996 by establishing the Accredited Business Valuator designation;
and in 2007 when the AICPA Consulting Services Executive Committee
produced the SSVS.
and the Other Standards
valuation professionals need more standards is a reasonable question.
Comprehensive standards, reflecting a consistency of approach
and terminology, have been in use since 1987. Moreover, the specific
requirements for the valuation of intangible assets in financial
reporting contexts have been extensively developed by FASB, in
SFAS 157, Fair Value Measurements, and other standards.
(This article distinguishes between “comprehensive business
valuation standards,” such as USPAP and SSVS, and definitions
of specific standards of value, such as fair value for financial
accounting purposes as defined in SFAS 157.) It is reasonable
as well to worry, in light of the innovations in form and terminology
evident in SSVS relative to USPAP and other earlier standards,
that CPAs working in a litigation context will be exposed to aggressive
questioning about the differences and apparent discrepancies between
the AICPA standards and others that may be espoused by opposing
are beyond the scope of this article, which focuses on the related
issue of implementing SSVS at a time when other comprehensive
standards, especially USPAP, have attained considerable authority
and are well established in appraisal practice. For reasons developed
below, the authors believe that most business valuation professionals
who will soon be subject to SSVS are currently performing valuation
assignments in compliance with USPAP and will want to continue
to do so. To the extent that the two sets of standards are not
consistent, this situation creates a problem.
the extent of the problem, the authors considered what the standards
themselves indicate about relations between them and what differences
appear in their preliminary comparison of SSVS with existing standards,
Authority of USPAP
the special authority enjoyed by USPAP, it is useful to return
to events of the late 1980s. In 1989, less than two years after
the first edition of USPAP, the Federal Institutions Reform, Recovery
and Enforcement Act (FIRREA) was enacted in response to the federal
savings and loan scandals. It required that real estate appraisals
used in connection with federally funded projects be conducted
according to generally recognized standards, and specified USPAP
in defining what those standards should be. However, FIRREA explicitly
required adoption only for real estate appraisals. FIRREA Title
IX required that real estate appraisals used in connection with
“federally related transactions” be performed in writing,
in accordance with uniform standards (section 1101). It also required
that these “uniform standards” be “generally
accepted appraisal standards as evidenced by the appraisal standards
promulgated by the Appraisal Standards Board of the Appraisal
Foundation” (section 1110). Thus, the second edition of
USPAP, issued in 1990, appeared with at least a partial blessing
congressional recognition of USPAP was extended to business valuation.
A section of the Pension Protection Act of 2006 (PPA) sought to
address IRS concerns of unreasonable valuations for intangible
property, such as patents, used in claiming charitable deductions.
Here, Congress required that generally accepted valuation standards
be followed in developing fair market values of all tangible and
intangible property in connection with non-cash charitable contributions.
And although the PPA did not mention it by name, USPAP was cited
explicitly in the IRS and U.S. Treasury implementation guidance.
According to IRS Notice 2006-96, “Guidance Regarding Appraisal
Requirements for Non-Cash Charitable Contributions,” section
3.02(2): “[A]n appraisal will be treated as having been
conducted in accordance with generally accepted appraisal standards
… if, for example, the appraisal is consistent with the
substance and principals of the Uniform Standards of Professional
Appraisal Practice (USPAP), as developed by the Appraisal Standards
Board of the Appraisal Foundation.”
to the authority bestowed by federal law and IRS implementation
guidance, the USPAP business valuation standards have been recognized
in federal courts, and increasingly in state courts as well, as
prerequisite to the qualification of a business valuation report.
An example is Kohler et al. v. Comm’r (TC Memo
2006-152; July 25, 2006). In the Kohler decision, the
judge disregarded the report of the expert who had not “prepared
in accordance with all USPAP standards” and had omitted
“the customary USPAP certification” regarding compliance
with those standards. (For more on the general importance of compliance
with standards in expert testimony, see David Laro and Shannon
Pratt, Business Valuation and Taxes: Procedure, Law and Perspective,
Hierarchy of Standards?
Let us briefly
consider how the business valuation standards define their relations
with other standards. USPAP is explicit. Its Supplemental Standards
the common basis for all appraisal practice. Supplemental standards
… may be used. An appraiser and client must ascertain
whether any such published supplemental standards in addition
to USPAP apply to the assignment.
standards cannot, however, diminish the purpose, intent, or content
of the requirements of USPAP. As the Appraisal Standard Board’s
interpretive comment explains: “The purpose of the Supplemental
Standards Rule is to provide a reasonable means to augment USPAP.”
(It should be noted that the Appraisal Standards Board of the
Appraisal Foundation has announced changes in the Supplemental
Standards Rule for 2008.) IRS Revenue Ruling 59-60 and USPAP are
highly succinct; the latter explicitly represents itself as the
minimum standards that must be met. When the professional business
valuation organizations issued standards for their members in
the wake of USPAP, those standards differed somewhat in how they
acknowledged or incorporated these founding documents.
Society of Appraisers’ Business Valuation Standards (most
recent edition 2005; currently being revised) is in closest accord
with the spirit of the “supplemental standards rule”
by incorporating USPAP by reference explicitly and by drafting
standards explicitly “to clarify [USPAP] and provide additional
requirements” (General Preamble II). The NACVA and IBA standards
acknowledged, but did not explicitly incorporate, USPAP. The AICPA’s
SSVS, however, neither defines its relationship to USPAP nor mentions
USPAP, instead letting the valuator decide whether the two sets
of standards are compatible.
not address the question of its place in the universe of existing
standards, except for the following general guidance: “Valuation
analysts should be aware of any governmental regulations and other
professional standards applicable” (para. 2). In this regard,
SSVS resembles the NACVA Professional Standards, which say only:
“[M]embers may also find it necessary to consider guidelines
and/or other requirements established by other organizations or
authorities” (section 5.1). Two questions remain open: Whether
SSVS is consistent with other standards, and whether it acknowledges
any other standards as constituting superior authority.
may create problems for valuation professionals. If the authors
are right in assuming that most appraisers subject to SSVS will
want to continue to present their valuation work as being in accordance
with USPAP, and SSVS does not explicitly define itself as consistent
with or subordinate to USPAP, practitioners must negotiate the
potential differences on their own.
structure of SSVS is not unlike that of preceding standards, in
that it includes, after introductory considerations, rules for
the development of a business appraisal followed by rules for
the written appraisal report.
1–10 describe the scope of the standard, requiring that
all AICPA members “who are engaged to, or as part of another
engagement, estimate the value of a business, business ownership
interest, security or intangible asset” be governed by SSVS.
Exceptions from the statement are also spelled out. The main body
of the standard is divided into three parts: “Overall Engagement
Considerations,” including the definition of the assignment
and the consideration of professional competence and independence
(paras. 11–20); “Development” of the valuation
(paras. 21–46); and “The Valuation Report” (paras.
contains three appendices: Appendix A, an “Illustrative
List of Assumptions and Limiting Conditions,” and a Glossary
(Appendices B and C). The basic Glossary (B) is adopted from the
International Glossary of Business Valuation Terms; the Glossary
of Additional Terms (C) includes an entry on “fair value.”
SSVS is augmented by Interpretation 1-01, which provides helpful
detail on the engagement circumstances in which SSVS is to apply.
This augments the guidance on exceptions, already fairly detailed,
from the statement itself (SSVS, paras. 5–10). These are
issues of particular concern to accounting professionals, and
SSVS is unique among business valuation standards in the attention
paid to them.
general structure are several innovations. For example, unlike
USPAP and other business valuation standards, SSVS does not use
Revenue Ruling 59-60’s eight factors in defining the requirements
for the content of a business appraisal assignment and report.
That is, an appraisal report that lists and addresses the eight
factors may well be consistent with USPAP, but because SSVS does
not use the same terminology, the question must be resolved with
reference to the requirements as they are set out by the standard.
experience working under USPAP and SSVS, practitioners will not
know where conflicts of substance may arise. What is clear at
this point is that practitioners wanting to present work consistent
with both sets of standards will have to pay attention to the
possibility of such conflicts. As an aid to identifying
the differences embedded in the standards of the various valuation
1 shows the various types of reports permitted by each organization’s
standards, and Exhibit
2 outlines the minimum requirements for report content across
but potentially significant difference between SSVS and USPAP
appears early on, in the requirements for defining the standard
of value. USPAP is notoriously precise on this point, requiring
that the appraiser “state the standard (type) and definition
of value and the premise of value and cite the source of the definition”
[Standard Rule 10-2(vi)]. SSVS is less strict, requiring only
that a report “include information” regarding the
standard of value and premise of value (SSVS, para. 52). Thus,
a report according to USPAP would be likely to satisfy the SSVS
requirement, but whether the reverse is true is not self-evident.
set of differences that will certainly require the attention of
practitioners involves the required topics in abbreviated reports.
SSVS describes written reports of three types: a “Calculation
Report,” a “Summary Report,” and a “Detailed
Report” (para. 48). The Calculation Report, as defined,
is not properly a valuation report; it does not require a definition
of the standard of value and many of the other minimum requirements
for a business valuation under USPAP. Therefore,
the comparison is straightforward: A Calculation Report is not
consistent with USPAP. The same comparison with the Summary Report
is more complicated. The Summary Report is recognizable as a form
of business valuation report, but it, too, would seem to have
minimum content requirements (SSVS, paras. 71–72) that are
less demanding than those under USPAP [Standard Rules 9-4 and
10-2(ix)]. As shown in Exhibit 2, the topics that may be omitted
in a Summary Report include, in the company description, the history
of the business, economic conditions, industry review, and ownership
characteristics; and in the financial review, historical financials.
In most circumstances, USPAP would require more, even in a Summary
In this context,
it is important to recognize the fundamental difference in how
the different standards characterize abbreviated report types.
SSVS notes only that the Summary Report is an “abridged
version of the information that would be provided in a detailed
report.” The 2006 edition of USPAP does not use the term
Summary Report, but defines a “Restricted Use Report”
with reference to the concept of “restricted utility.”
This type of report must “state a prominent use restriction
that limits use of the report to the client and warns that the
appraisers’ opinions and conclusions set forth in the report
may not be understood properly without additional information
in the appraiser’s work file.” To be sure, SSVS also
requires disclosure of restrictions on the scope of the valuation
analysis (para. 19), but the concept of restricted utility as
a basis for determining the type of written valuation report is
absent in SSVS.
In sum, whereas
SSVS simply defines a Summary Report as an abbreviation, USPAP
requires that the scope of the valuation analysis for a Restricted
Use Report be defined and justified with reference to the particular
special purpose of the report. Because the newly defined SSVS
Summary Report format will likely be favored by practitioners
in many circumstances, it is important at this juncture that appraisers
review their understanding of the minimum requirements for an
abbreviated format under USPAP, as well as the language required
to justify such an abbreviation.
difference involves the required appendix to a report, known under
USPAP as a “Certification” and under SSVS as a “Representation.”
As the Kohler judge pointed out, USPAP requires that
each appraisal report have a certification by the appraiser. The
form is spelled out in Standard Rule 10-3. On the other hand,
SSVS, para. 66, states that the report should contain a “Representation,”
and offers a rather different list of factors from which to choose
in drafting it.
SSVS uses the term “Representation” because accountants
have traditionally used “certification” in a technical
sense in connection with the accuracy of financial statements
Consequently, the AICPA would not want to imply “certification”
of the financial data in a valuation report. CPA appraisers wanting
to remain consistent with USPAP and SSVS at the same time will
perhaps now adopt a phrase like “Representation in Satisfaction
of the USPAP Certification Requirement” in order to be consistent
with both standards.
do not end there, however. The USPAP certification requires that
the appraiser state that “compensation for completing this
assignment is not contingent upon the development or reporting
of a predetermined value or direction in value that favors the
cause of the client, the amount of the value opinion, the attainment
of a stipulated result, or the occurrence of a subsequent event.”
SSVS, though, requires the business valuation analyst only to
state whether there are fee contingencies; that is, that “the
analyst’s compensation is fee-based or is contingent on
the outcome of the valuation.” There is, then, some possibility
that a report in conformity with SSVS would not be in conformity
Devil Is in the Details
In the final
analysis, because the intent of SSVS is to follow generally accepted
valuation principles, conflict between it and USPAP or other general
business valuation standards should be minimal. However, as always,
the devil is in the details. At some point, it matters how one
valuation standards provide a general template for the construction
of valuation reports. This template has, for most appraisers,
included the language of USPAP. Changing it, or modifying it to
accommodate the newly issued SSVS will require both care and judgment,
based on a close familiarity with the standards involved. The
appearance of SSVS will cause valuation professionals to read
their other business valuation standards more closely in the future.
J. Lieberman, CPA, ABV, ASA, a partner of Weiser LLP, is
a member of the CPA Journal Editorial Board and the NYSSCPA’s
Business Valuation Committee.
David Anderson, ASA, is a manager in the Litigation and
Valuation Group of Amper, Politziner & Mattia.