For an appraisal to be respected by the IRS or a court
the report should meet a host of requirements. Some of these are listed below.
This checklist can be used to evaluate a report you intend on using in a
divorce, tax plan or other matter.
- The report should comply with any appropriate
standards such as USPAP which are general standards endorsed by many. Other standards of specific
organizations include ASA, IBA, and AICPA standards. For example, The
American Institute of Certified Public Accountants (AICPA) issued
SSVS Number 1 to provide
guidance and standards for CPAs performing valuations. Other standards
include: The Uniform Standards of Professional Appraisal Practice (USPAP),
National Association of Certified Valuation Analysis (NACVA), or the
American Institute of Certified Public Accountants (AICPA), etc. This
checklist focuses on SSVS 1.
- A statement as to whether the report is a
"calculation report" or a "valuation report"? SSVS No. 1, §901. A
valuation report contains a conclusion as to value based on the CPAs
selection of methodologies deemed most appropriate. In contrast, a
calculation report is the application of a valuation methodology selected
by the CPA and client.
- A statement as to whether the report is a
"detailed report" or a "summary report" under SSVS 1.
- Discussion of any limiting conditions.
- If the appraiser did not prepare the financial
statements for the business being appraised it should state this and that
it does not assume any responsibility for the financial information.
- The report details should include discussion
of: ◙ Sources of information. ◙ Assumptions and facts upon which the
report is based. ◙ History of the business and entity.
Description of the entity (or asset). ◙ Formation of the entity, legal
structure, governing legal documents. ◙ Operations
of the business (customers, suppliers, personnel, competition, customers, seasonality,
etc.). ◙ Analysis of non-operating assets and liabilities (e.g.,
loan to shareholder). ◙ Analysis of nonfinancial
information relevant to the appraisal. ◙ Management.
◙ Equity interest (classes of equity, rights of different
classes, etc.). ◙ Entity's expectations. ◙ Conditions and expectations (general economic
circumstances, etc.). ◙ Analysis of company financial data
and other information. ◙ Valuation adjustments (e.g.,
normalization of earnings for unusual years, adjustment of key shareholder's
salary). ◙ Discounts. ◙ Valuation
approaches and methods considered. ◙ Valuation methodologies and
procedures actually used. ◙ Analysis,
reasons and justification for the conclusions reached. This should include
a reconciliation of the various estimates and conclusions of value (e.g.,
if three different valuation methodologies were applied they could be
reconciled to a single figure).
- Details are vital. The report should evaluate market
size and economic information and their relation to growth potential. An appraisal of a local tire shop
may quote data about Goodyear and Firestone, but must also address the
local situation. If market
data is relevant, the report must analyze the data to show what type of
growth rates are sustainable. The report should explain how the
methodologies were implemented and the basis for any assumptions. Adjustments to the discount rate,
historical sales growth rates, changes in profit margins, cash flow,
should all be clearly explained.
When market methods are used there should be a clear list of
possible choices, presentation of criteria for exclusion/inclusion,
support for how value drivers were determined, and specifics as to how
value was actually determined based on the guideline companies. Weighting in reconciliation of
value must be supported and justified. Boilerplate and unsubstantiated conclusions should be
- Representations of the appraiser.
- Calculations. The report should enable a
reader to replicate the appraiser's analysis.
- The report should reach the conclusions
required to meet the stated objective.
- Specialists. If another person or firm was
employed by the appraiser assuming primary responsibility for the report,
that other specialist should be identified (e.g., an appraiser values 40%
of an LLC owning an interest in a shopping center and relies on an
independent MAI for the value of the property, the MAI must be disclosed).
- Certification of the appraiser.
- Signature of the person primarily responsible
for the report.
- Appraiser's qualifications including a
- Exhibits. These might include financial
statements or tax returns for the entity, and the analysis of them. Data
for comparable (guideline) businesses, or comparable data for whichever
methodology was used.