Appraisal Reports

Summary:

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.

Appraisal Report

• 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 avoided.

• 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 curriculum vitae.

• 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.