Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Calculations vs. Appraisal Opinion in Business Valuation for Marital Dissolutions

There has been much discussion in the valuation community regarding whether a calculation engagement (i.e., a calculation of value of a business) can be used in a marital dissolution in Arizona (and other jurisdictions) and whether a “calculation report” is appropriate in that context. Currently there is little guidance on this matter in Arizona. Should a “calculation of value” be used in the context of a marital dissolution action? I have long maintained that it is generally not appropriate if offered as evidence in that context.

The term “Calculation Engagement” has a specific meaning in the valuation literature and standards. A calculation engagement is defined in the AICPA valuation standards as follows:

“A valuation analyst performs a calculation engagement when (1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will perform in the process of calculating the value of a subject interest (these procedures will be more limited than those of a valuation engagement) and (2) the valuation analyst calculates the value in compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value. The calculated value is expressed as a range or a single amount. The calculation engagement does not include all of the procedures required for a valuation engagement…”  (*)

On the other hand, a “Valuation Engagement” is defined in the AICPA valuation standards as follows:

“A valuation analyst performs a valuation engagement when (1) the engagement calls for the valuation analyst to estimate the value of a subject interest and (2) the valuation analyst estimates the value…and is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances. The valuation analyst expresses the results of the valuation as a conclusion of value; the conclusion may be either a single amount or a range.” (**)

In a business valuation engagement, the analyst considers all relevant data, and applies all relevant valuation procedures and methods in arriving at an opinion of value. In a calculation engagement, the data considered and the valuation procedures and methods applied are limited based on the agreement of the analyst and the client.

In a recent Arizona case in which I provided testimony, the opposing expert offered a “calculation report” to the Court as evidence of value. The Court ruled that the investigation and determination of the necessary facts by the opposing expert was not thorough and complete, his opinions were not supported by reliable principles regarding business valuation, and he did not reliably apply the principles and methods regarding business valuation to the facts of the case. It remains to be seen whether this case will be submitted to the Court of Appeals.  Stay tuned for this and for a more complete article on this topic in our next newsletter.

Steve Koons, CPA, ABV, ASA, CFF

*Statement on Standards for Valuation Services No. 1, issued by the AICPA Consulting Services Executive Committee in June 2007,